Analyst Note
| David Swartz |In November, narrow-moat Nordstrom announced that it had engaged a consultant to, among other things, consider ways to improve the performance of its off-price Rack segment. After suffering massive sales declines due to the pandemic in 2020, Rack has yet to recover to prepandemic sales levels in 2021, and Nordstrom’s management has expressed frustration with the segment. Now, Bloomberg reports that the consultant, AlixPartners, is evaluating options that could include separating Rack from the full-price business. We view a spin-off of Rack as unlikely for several reasons. For one, such a move would represent a radical departure, as Nordstrom has often noted the importance of Rack in bringing new customers to the full-price business and has been working to integrate its full- and off-price operations as much as possible. For example, Nordstrom highlighted that one third of next-day Nordstrom.com orders in the third quarter were picked up at Rack locations. Moreover, from a practical perspective, a spin-off of Rack would probably require a new management structure, separate financial reporting, and a host of other complications. No-moat Gap discovered this the hard way two years ago when it attempted and, eventually, abandoned a spin-off of Old Navy. Also, it is unclear how separating Rack would transform it into a stronger business. Nordstrom’s management has discussed changes at Rack, such as selling lower-priced items in lower-income areas, that could be done as part of an integrated company. While Rack’s merchandising is different than that of narrow-moat competitors like Ross, TJX, and Burlington (which buy products in bulk and sell them at deep discounts), we do think its higher-end merchandise and association with the Nordstrom brand is a draw to shoppers who do not normally patronize discount stores.