Dive Brief:

• Nordstrom reported late Thursday​ that first quarter sales rose 2.7% to $3.3 billion, from $3.2 billion in the year-ago period, but its 0.8% same-store sales decline sent shares down in after-hour trading. Q1 net earnings were $63 million or 37 cents per share, and earnings before interest and taxes ("EBIT") was $151 million, (or 4.6% of net sales), compared to net earnings of $46 million or 26 cents per share and EBIT of $106 million in the year-ago period, (or 3.3%) of net sales a year ago. 

• Q1 net sales in the flagship unit fell 1.7% as same-store sales fell 2.8% percent. In U.S. full-line stores and the Nordstrom website, men's and women's apparel were the top-performing categories. The Nordstrom Rack and HauteLook websites are on track to be Nordstrom’s fastest-growing business to reach $1 billion, co-president Blake Nordstrom told analysts on Thursday, according to a transcript from Seeking Alpha.

• Off-price sales were hotter: Q1 net sales at Nordstrom Rack, including Rack stores as well as the Nordstrom Rack and HauteLook websites, rose 8.7% and same-store sales rose 2.3% percent. Margins were hit by markdowns on slower-moving items.

Dive Insight:

Nordstrom didn’t escape the cloudy first quarter hanging over department stores, though its off-price Rack unit continued to provide some welcome sunshine. But even Rack faces fierce competition, slower consumer spending and other challenges. 

Speaking to analysts Thursday, Blake Nordstrom said that the company views some financial measures, like same-store sales, as less relevant in an era of blurred lines between channels. “As we continue to head in this direction, we're increasingly looking at our business as full-price and off-price, inclusive of stores and online, to better capture the synergies of having a physical and digital presence,” he said. Fellow co-president Erik Nordstrom told analysts that the company is increasingly looking at a store’s impact on digital sales when it decides to, say, invest in a store re-model.

But well-performing Rack, worryingly for the company, is seeing a slowdown, according to GlobalData Retail analyst Carter Harrison. “Although overall sales in the off-price division increased by 8.7%, most of this was driven by new store openings. Underlying comparable sales were up by a more modest 2.3% — the slowest rate of increase in a year,” Harrison said in an email to Retail Dive.

Harrison called Rack “the engine of the Nordstrom business,” which, like Gap Inc.’s Old Navy and J. Crew’s Madewell, helped lift overall results as flagships deteriorated. What’s troublesome is that Rack’s slowdown seems to be more than the natural consequence of Rack’s maturity and growth. GlobalData Retail’s research found a growing reticence to spend in the early part of the first quarter.

Compounding all that is the growing competition in off-price retail. For example, Macy’s two years ago launched its Backstage effort, Kohl’s is trying out the model and TJX Companies is expanding. That means Rack can’t rest on its laurels.

“[W]ith Nordstrom Rack coming up against some tougher prior-year growth rates, there is a real risk that, while Rack will remain Nordstrom's star, its glow will become a little less bright,” Harrison said. “We still believe that Rack has something unique to offer the market, but it will need to work much harder over the rest of this year to communicate its proposition and to drive customers to stores and online.”

Ironically, Rack’s slowdown might also be a result of improved inventory management at Nordstrom’s full-line operations, according to Harrison. That improvement helped steady margins, but may be tamping down inventory available for the off-price stores. “While less than 20% of Rack's product assortment comes from full-lines stores, the quality of those products is likely to weaken as Nordstrom cuts back on over-buying,” he said, adding that it’s too early to know how much of a problem that is, but that Nordstrom should keep an eye on it.

Unlike much larger rival Macy’s (and other retailers), store closures don’t factor much into its overall growth strategy. Co-president James Nordstrom Thursday called the company’s 120 full-line stores “a healthy fleet.” “While there may be opportunities to close underperforming stores, that's not really part of our strategy. We don't have a closure strategy. We have a market share strategy,” he told analysts. “There might be opportunities to look at the numbers of stores we have in a given market. But what we're not going to look at is just simply the four-wall economics of that store. We're going to look at how good of a job we're doing using and leveraging those stores to drive the overall market sales.”

Similarly, Blake Nordstrom added, the company is pleased with the size of its Rack fleet, which was 215 stores at the end of the year. “We've talked about in the past that we could, over time, have approximately 300,” he said, adding that, as with the full-line operations, digital sales are a major consideration. “We ended last year with Nordstromrack.com and HauteLook with $700 million in sales…. So we're particularly excited, from an off-price point of view, of what's possible in digital. Very similar to what's happening in full-price.”

Meanwhile, the company’s online concierge effort, Trunk Club, is going in the opposite direction, adding more brick-and-mortar showrooms and services after the January departure of founder Brian Spaly. Nordstrom took a $197 million write-down on Trunk Club — more than half of the $350 million Nordstrom paid to purchase the startup in 2014. Since then, Chicago Business Journal reports, Nordstrom has moved to feature specific designers, including Zachary Prell, John Varvatos and Jeremy Argyle, in brick-and-mortar showrooms in Chicago and New York, and to bring the best of old-school department store-style customer service — perhaps Nordstrom’s best differentiator.

Overall, while Nordstrom is not immune from the difficulties of its battered department store sector, it remains “the best of a bad bunch,” Harrison said. “This should allow it to make some modest progress over the remainder of this year."