Nordstrom Plans Rack Store in Texas - Analyst Blog

Nordstrom Inc. (JWN) plans to open a 35,455 square foot new Rack discount store at The Market at Town Center in Sugar Land, Texas in fall 2011. This follows Nordstrom’s first 31,000 square foot Rack location in Houston at The Center at Post Oak, which opened on February 25, 2010.

Rack stores are an off-price retail format, which sell Nordstrom's own off-season and clearance goods from its mall stores and Nordstrom.com at 50-60% off original Nordstrom prices. Rack also showcases apparel, accessories and shoes that are specifically purchased for the stores at 30-70% off original prices. Racks have been specially designed for customers who appreciate the brand but cannot afford its steep prices.

In the recently reported second quarter, Nordstrom Rack’s same-store sales declined 0.9% from the year-ago period. The Rack stores were generating positive results until March, with same-store sales of 5.3%, 2.3% and 4.7% in January, February and March, respectively. However, same-store sales turned negative in April at 1.8% and showed the same trend in May at 1.1%. Same-store sales turned positive again in June to 0.6% but turned negative at 2.5% in July.

However, full-line stores helped to mitigate this softness by delivering positive comps. We believe that with the economy on the verge of a recovery, customers’ pockets may warrant higher prices at full-line stores, which have led to the eventual decline in Racks same-store sales. 

During the second quarter, the company opened one Nordstrom Rack store in Manhattan (Union Square). As of July 31, 2010, Nordstrom operated 114 full-line stores, 76 Nordstrom Rack stores, two Jeffrey boutiques and one clearance store. Nordstrom is slated to open 9 Rack Stores in the third quarter — 2 each in Virginia, Florida and California and one each in North Carolina, Missouri and Illinois. For the third quarter, Nordstrom also plans to relocate a Rack store to Spokane Valley Plaza in Spokane Valley, Washington.

We believe that Racks provide a good opportunity for bargain buyers who look for valuable brands at lower prices. We believe management’s focus on expanding the store network coupled with a flexible variable cost-based business model bodes well for future operating performance. However, intense competition from other established players and exposure to seasonal fluctuations undermine the company’s future growth prospects. This leaves limited space for above-market performance of the company. We maintain our Neutral rating on Nordstrom supported by a Zacks #3 Rank (‘Hold’).

Nordstrom Inc. is a leading fashion specialty retailer in the U.S., offering high quality apparel, shoes, cosmetics and accessories for men, women and kids. The company offers both branded and private label merchandise, which are positioned in the upscale segment of the industry and targeted at the aspiring middle class. Moreover, the company also offers a private label card, two Nordstrom VISA credit cards and debit cards for Nordstrom purchases.