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The Nordstrom Way: Retailer Gets Aggressive About Expansion

Nordstrom has generated solid results, thanks to major changes as it aggressively goes after real estate and merchandise categories.

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SEATTLE — Blake Nordstrom, president of Nordstrom Inc., likes to keep the family profile low.

“We are just a bunch of shoe people,” he told the crowd last week at the Grand Hyatt in New York, where he accepted the American Image Award from the American Apparel and Footwear Association on behalf of the company, not himself, in a rare Manhattan public appearance. “We’re retailers, not manufacturers.”

His simple message and clean-cut demeanor contrasted with other award recipients, such as Betsey Johnson and Simon Doonan. Then again, Nordstrom, both the family and its Seattle-based chain, has roots in tradition and Northwestern reserve, not in hanging with the fashion crowd or being in the limelight.

Founded as a modest shoe store here in 1901, the company has grown into a $7.7 billion, 99-unit chain, and is stepping out. Nordstrom is generating solid results stemming from a battery of major changes in the last three years, and is aggressively going after real estate as well as merchandise categories where the presentation has been lacking. Store merchants are forming new collaborations with luxury designers, but initiatives also are focused on wear-to-work clothes, children’s apparel and layering in men’s businesses, such as sunglasses, grooming, fragrance and watches, to capitalize on strengths in shoes and clothing.

There’s more centralized buying that facilitates tailoring the selections to local tastes, and a stronger infrastructure. New technology for assortment planning, replenishment and markdown optimization has led to better buying and merchandise flow. Those coveted personal client books as of the second half of 2004 are stored on point-of-sale registers, increasing the efficiency of the service by sales associates.

Officials say the company is getting more sales out of less inventory. In certain areas, millions of dollars in inventory have been shaved off. For example, tuxedos had an overabundance of labels, but several have been dropped in favor of stronger suit labels, such as Canali, which has been beefed up.

Productivity, at $369 a square foot in 2005 compared with $347 the year before, is second only to Neiman Marcus among department stores and large-format fashion specialty chains considered competition. Nordstrom’s same-store sales rose 6 percent in 2005, while Federated Department Stores increased 1.3 percent.

“We turn a lot faster now and we keep improving, though we have a long way to go,” said Pete Nordstrom, president for merchandising, during an interview at the flagship here. The company reported net earnings of $551.3 million for 2005, a 40.1 percent hike over the year before. And it continued to do well in the first quarter, on Thursday reporting a 25.6 percent leap in net profits.

Perhaps the most significant change is that the business is back in the hands of the Nordstrom family, which, in the Nineties, relinquished control to some outside managers and saw the retailer tumble.

In addition to Pete, his brother Erik and a second cousin, Jamie, also serve as presidents, with Erik overseeing stores and technology and Jamie, the direct business, including catalogues and the Internet. There are other presidents who are not Nordstroms running such units as credit and the Nordstrom product group. Pete, Erik and Jamie are also executive vice presidents of the corporation.

On Tuesday, a new chairman will be announced at the chain’s annual meeting, succeeding the brothers’ father, Bruce Nordstrom, who is the grandson of the founder John W. Nordstrom.

It’s a sign of a new era and a new mentality that the fourth generation of Nordstroms has brought to the business, now that the fundamentals and the business model seem firmly in place. On the agenda, as outlined by Pete Nordstrom and other executives, is:

  • Continued aggressive, opportunistic expansion seizing upon real estate coming available through industry consolidation. Fifteen new full-line stores and four relocations are planned through 2010, but more could be announced as Nordstrom picks up what other retailers sell off. “Federated Department Stores has created opportunities we would never have anticipated,” Pete Nordstrom said, referring to Federated’s acquisition of May Co. last year and its ongoing disposition of about 80 stores and Lord & Taylor.

  • Shoring up women’s apparel, which accounts for about a third of Nordstrom’s volume, with heightened focus on designer partnerships across women’s clothes, cosmetics, accessories and shoes. Labels such as Chanel, Prada, Balenciaga and Oscar de la Renta are being targeted. In career, another area of focus, Theory, Garfield, Lafayette 148, Barry Bricken and Classiques Entier, a private label, will grow in importance.

  • While casual and contemporary areas have been strong, premium denim offerings will continue to build. Nordstrom says it is the nation’s number-one seller of L.A.M.B. and Robert Rodriguez.

  • Seeking strength in kids’ apparel. “We do really well in kids’ shoes. We haven’t had the same growth in kids’ apparel. Shoes can be the catalyst,” Nordstrom said.

  • The Rail, a men’s premium denim and contemporary sportswear department, is viewed as another growth vehicle.

  • Building stores with enhanced decor and display, a more luxurious look and greater demarcation between departments.

  • Improved Internet service. The goal is to have a “seamless approach” with consistent service and merchandise across selling channels.
“Nordstrom is on a very good trajectory because it has combined traditional strengths — service and dominant assortments — with all of the necessities of 21st-century retailing,” said Arnold Aronson, managing director of retail strategies for Kurt Salmon Associates. These necessities include “better technology; sophisticated logistics; centralized operations to economies of scale; moving into different channels of distribution, meaning Internet and specialty businesses, and greater participation in a market that’s really become the most profitable — luxury and aspiring luxury,” he continued. “That’s where the big growth is.”

The store also is “inviting contemporary customers without alienating more traditional customers,” and without doing anything revolutionary, Aronson said, adding that Baby Boomers and those with incomes of at least $75,000 are Nordstrom’s sweet zone.

“Nordstrom is well positioned to continually perform to both its own operational effectiveness as well as its positioning that should allow it to further benefit on changes occurring in the traditional department store environment,” said Jennifer Black, president of Jennifer Black Associates, in a research report this month. “On the real estate front, we expect Nordstrom to become increasingly important as a mall anchor and therefore be faced with more attractive real estate offers.”

Black said the stock should trade up into the mid-$40 range in the near term and over $50 in the longer term. On Friday, Nordstrom shares closed at $35.28.

It also should trade up on the selling floor, with designers with very restricted distribution. “We would love to carry Prada,” said Pete Nordstrom. The company does a big business with Prada shoes and sunglasses. As far as the ready-to-wear and handbags: “Not yet … not yet,” he said, with a suggestion in his tone that Prada will be a bigger part of Nordstrom’s future.

Designer labels are becoming more prevalent in Nordstrom doors generally. Balenciaga handbags will be added this fall, a Gucci handbag boutique opened in the Bellevue store near Seattle and two more are opening in Topanga, Calif., and the Seattle flagship. Chanel boutiques are being added in Topanga and Minneapolis for fall, and there are Chanel boutiques for rtw and accessories in the Seattle flagship. Needless to say, in shoes, designer labels are prevalent.

“We are not trying to become Neiman Marcus,” Nordstrom said. “But our bread and butter is really fashion. That’s where we have the most success.” By that he means merchandise that’s “updated and modern” and reflects newness.

“Our designer strategy is not a 99-door strategy,” he explained. The focus is on about 25 doors building designer presentations so that many of the same labels are represented in ready-to-wear, accessories, cosmetics and shoes. It is probable the 25 doors will be situated in about 12 major markets, with certain areas such as Los Angeles and northern California having three or four locations with a stronger designer presence, Nordstrom said.

But it won’t be easy. There is intense competition from Neiman Marcus, Saks Fifth Avenue and Barneys New York, and many designer brands, as Nordstrom indicated, have limited capacity. “They are not large companies. They want to maintain their cachet by not being [sold] everywhere. They are looking for long-term commitments, almost a courtship,” he said.

Nordstrom is receiving help from Jeffrey Kalinsky. The retailer bought the Jeffrey business last year, which included two designer stores in Atlanta and Manhattan’s Chelsea neighborhood, and also acquired the services of Kalinsky. It wasn’t as if Nordstrom was seeking an entry to high fashion.

“We didn’t need introductions. We do business with most people [designers] already, but his presence helps bring confidence to the designer market,” Nordstrom said. “He’s a great partner — literally shoulder to shoulder with our buyers on writing appointments,” getting involved in discussions covering topics such as the timing of deliveries, colors and the flow of merchandise — but technically not a buyer. Kalinsky also has been visiting Nordstrom stores, addressing salespeople about the art of selling.

“He’s a fantastic salesperson. It’s great to get a new voice,” Nordstrom continued. “People [in the stores] regard it as refreshing to not have another guy in a suit instructing them.”

Nordstrom knew about Kalinsky and his business long before buying it. “I just called him up and said, ‘I don’t know what I am proposing, but it would be great if we could work together.” Nordstrom said it was Kalinsky’s idea to invest in his business. Asked if additional Jeffrey stores are in the cards, he replied: “At this time, no. Certainly, it’s something we would be open to considering.”

Nordstrom discounted the possibility of a bigger acquisition. “We are not interested in running someone else’s nameplate. The only thing we are interested in is real estate” for the Nordstrom nameplate.

He also stressed that Nordstrom’s agenda is not all about Jeffrey and the designer world. “We can serve women better in career,” he said. There also is more to be done with premium denim, though he said it’s been doing well. “We can do more.”

Considering only 99 full-line stores are operating, including just 20 on the East Coast down to North Carolina, Nordstrom can spread out, with greater coverage in places such as the Boston and Houston metro areas, as well as Florida. The 100th Nordstrom will open in Natick, Mass., in 2007, marking the retailer’s entry into the Boston vicinity. Three others in the market are slated. The company also operates 49 Nordstrom Racks for clearance and lower-priced merchandise, five Façonnable boutiques in the U.S. and 34 in Europe, one shoe store, nordstrom.com and catalogues. For every two full-line stores that open, one Rack gets opened.

The retailer is frank about its intentions to operate in Manhattan. “It’s a terrific retail opportunity. It makes us very envious,” Nordstrom said. He said a Manhattan site would have to have at least 100,000 square feet in an area that’s proven fertile for retailing and that the company would be flexible in its format for Manhattan, perhaps creating a site that’s more vertical than most Nordstroms. “We don’t want to be a pioneer.”

The company could look uptown at Trump Tower, which Donald Trump said could be reconfigured for a 65,000-square-foot department store. The L&T flagship on 38th Street makes more sense, considering its size, but Federated, which owns the site, may not want Nordstrom as a neighbor to Macy’s. In Naples, Fla., Nordstrom is planning a store with about 80,000 square feet for a fall 2008 opening, though, Nordstrom noted: “Naples stands alone. Eighty thousand square feet was all we could get.”

In the future, he said, smaller formats could be a possibility for certain markets, such as Los Angeles, where there are already big Nordstrom stores.

“There is not a never-ending list of places we could go, but opportunities keep presenting themselves,” Nordstrom said. “There will be a point where we have to look at a new way to expand. We could decide to have a store in Canada. We could do a new format, but this is not an immediate issue.”

That’s because of the traditional mall opportunities that keep arising and that often are unexpected. “We could have never anticipated [moving into] Aventura or Cherry Creek,” both former Lord & Taylor locations in Florida and Denver, respectively. Nordstrom also took over L&T sites in Dadeland in Miami and Phipps Plaza in Atlanta. In addition, “we still have a wonderful opportunity to grow same-store sales.”

As far as the sales breakdown, shoes — displayed right at entrances and spread through several locations in men’s and women’s and children’s — account for 21 percent of the chain’s volume, while cosmetics and accessories combined contribute 19 percent of the revenues.

“We continue to build on our heritage of shoes,” said Nordstrom. “We are purposeful about that. We need to have an identity and part of it is our heritage in shoes.”

The Nordstrom model also is based on service, as well as creating distinctively spacious stores that have an airier atmosphere with wide aisles, open-sell cosmetics departments and lighter inventories. There’s also a consistent taste level that runs from better to designer prices, restrained markdowns and infrequent promotions. Coupons are anathema and there is still a piano in every store. There’s also an avoidance of vendor shops in favor of lifestyle merchandising, with just a few exceptions, such as Chanel.

Management is collaborative, Nordstrom noted. “Blake, Erik and I literally make all strategic decisions. It makes for better decisions. While we are brothers, we do have our own points of view.”

They’ve become less rigid, or, as Nordstrom said, “less prescriptive” on several fronts, whether it’s private label growth as a percentage of total volume growth, or women’s overall. In that regard, Pete Nordstrom’s main message is that the company is relying to a greater degree on feedback from customers and selling-floor data, rather than just Nordstrom family intuition.

Similarly, the approach has changed on square-footage growth. “Eight years ago, we had a set amount we wanted to grow,” Nordstrom said. “We felt the best way to create shareholder value was to expand at a certain clip. If the [real estate] deal drove the decision, then it’s not the best decision. You have to be focused on long-term prospects.”

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