(Bloomberg) -- With its buyout plans on hold, Nordstrom Inc. is under intense pressure to find answers to the department-store slump.
Key to that effort is reviving what was once a long-time bright spot for the chain: Nordstrom Rack. The discount stores had been helping the company cope with a slowdown at its full-price formats, but now they are in need of their own jump-start. Same-store sales and traffic have stalled at Nordstrom Rack this year.
The job of shoring up Nordstrom Rack falls to longtime Nordstrom executive Karen McKibbin, who is debuting the chain’s latest store this week in New York City’s Herald Square neighborhood, just blocks from the iconic Macy’s Inc. The location features gender-neutral fitting rooms and mobile checkout via an updated app -- an attempt to make convenience a centerpiece of the brand.
“We’re doubled down on speed and experience,” McKibbin said in an interview. “We really see it as complementary.”
The 47,000 square-foot location, which sprawls over three floors, comes ahead of the crucial holiday shopping period and as department stores fight for a shrinking base of customers that are increasingly focused on value.
The company is reassessing its options after the controlling members of the Nordstrom family suspended efforts to take the company private as lenders sought interest rates that were about twice what similarly rated, non-retail businesses pay. If the company wants to revive the idea of going private, improved performance will be needed.
Nordstrom shares rose as much as 2.8 percent today to $42.69 in New York trading. The shares have fallen about 12 percent so far this year.
With foot traffic in malls and Nordstrom’s full-line department stores still declining, the burden may fall increasingly to the Rack, which already generates about a third of the company’s revenue. Two-thirds of all consumers shop off-price, according to an NPD Group study released in 2016. Last quarter, the combined off-price division brought in almost $1.2 billion in net sales, $990 million of which came from the Rack stores.
“They’ve got a good website and then they’ve got the brand name which means something,” said Bridget Weishaar, an analyst at Morningstar. If Nordstrom seeks a buyout again in 2018, the Rack should help, she said. “This is a really valuable asset they bring to the table.”
The chain has evolved since 1973, when Nordstrom wheeled its off-price offerings into the basement of its first department store in Seattle on a rolling rack. (Hence the chain’s name.) Customers responded, but struggled to build entire wardrobes, so the company started adding some closeout products to round out the assortment.
Nordstrom began opening freestanding Rack stores in 1983 and by the end of this year, there will be 232 locations around North America. The company may one day aim for as many as 300 Rack stores, Co-President Blake Nordstrom said in May.
In the past 20 years, off-price shopping has grown significantly. T.J. Maxx entered the market in 1976 and is now seen as the dominant player, competing with apparel retailers of every kind. For Nordstrom, the format has drawn in new customers as well as boosting sales -- McKibbin said Rack has generated about 6 million new shoppers in 2016.
But as off-price demand has surged, so has competition. The Rack contends with rivals from Burlington Stores and Ross Stores to Saks Off 5th and Macy’s Backstage. Shoppers are savvier than ever and understand how to find value in the off-price game, said Ed Yruma, an analyst at KeyBanc Capital Markets.
“You’re in a spot now where the secular growth for off-price isn’t as favorable as it once was, it’s more hand-to-hand combat,” Yruma said. “It feels like a great value the first time you buy it, but if you keep seeing it, maybe that sense of urgency is a little dampened.”
Along with increased competition, full-price apparel retailers and brands are offering less merchandise in an effort to control inventories and reduce the number of products that ultimately get marked down or go to off-price stores.
The recent results haven’t been stellar. Comparable-store sales at the Rack have declined in seven of the last 10 quarters, including the last three. In the same period, online sales have surged. Some of those sales and new stores, like the new Manhattan location, could be cannibalizing older Rack locations, Yruma said.
Part of the Rack’s appeal is the designer brands it carries. The store sells 48 of Nordstrom’s 50 best-selling brands, McKibbin said. But its relatively premium pricing could be part of the problem, said Jan Kniffen, founder of the consulting firm J. Rogers Kniffen Worldwide Enterprises in New York.
Other high-end department stores have stumbled in their value-focused offerings. Hudson’s Bay blamed declining traffic for falling comparable sales at its off-price banners last quarter. In September, Neiman Marcus announced it would close more than 25 percent of its outlet stores to focus more on full-price sales.
“There’s reason to believe there’s a sector issue, that off-price growth is slowing some,” Kniffen said “The Rack is relatively expensive -- it’s better stuff, but they’re a higher price point and that’s not where the consumer is.”
Still, Kniffen said he doesn’t expect the Rack to change its strategy.
As a whole, comparable sales at Nordstrom’s off-price business including online has grown by more than 2.3 percent for the last six quarters. The segment posted comparable sales that increased 3.1 percent last quarter, compared with a 3 percent gain at TJX Cos.
McKibbin said the company is taking a holistic view of off-price performance that includes multiple channels.
“We think there’s a lot of positive things taking place like attracting new customers and opening our latest store in New York City,” she said.
©2017 Bloomberg L.P.