Nordstrom and Saks Fifth Avenue are betting big on their off-price concepts.
This story first appeared in the April 4, 2014 issue of WWD. Subscribe Today.
The Seattle-based Nordstrom Inc. plans to sharply increase the number of Rack stores in the U.S. to 230 by 2016 from 148 currently, while Saks parent Hudson’s Bay Co. plans to double the size of Saks Off 5th over the next five years, opening about 70 stores to boost the count to 140.
The Rack did $2.7 billion in sales last year, a 12 percent increase, and is seen as one of the key growth vehicles for the company, said Pete Nordstrom, executive vice president of merchandising at Nordstrom, speaking Thursday at the first annual Symposium on Omni Retailing at the Fashion Institute of Technology in New York. “We’re opening three, four and five Rack stores in one day,” he said.
HBC previously said it would open up to 25 Off 5th outlets in Canada, along with seven full-line Saks stores, starting with a 150,000-square-foot unit carved out of 750,000-square-foot Hudson’s Bay flagship in downtown Toronto. The ambitious plans for Off 5th would add another 45 stores to the concept in the U.S., said Richard Baker, HBC’s governor and chief executive officer, and is one key to expanding HBC’s volume to 10 billion Canadian dollars, or nearly $9 billion at current exchange, by fiscal 2018.
Baker expects the new template for Off 5th to represent a significant departure from the existing one, with stores larger than the average of 30,000 square feet for the 72 existing stores in the U.S. and the concept more improvisational.
“We’re modifying the format,” he told analysts on a Thursday morning conference call to discuss HBC’s fourth-quarter results. “We will deliver true fashion and real value in an easier-to-shop, treasure-hunt type of environment.”
For HBC and Nordstrom, omnichannel offers another avenue of growth. Baker said there will be an accelerated expansion of the group’s omnichannel efforts and a focus on the top 10 doors of its Saks, Lord & Taylor and Hudson’s Bay department store brands.
HBC has earmarked an additional 40 million Canadian dollars, or about $36 million, in incremental spending for 2014 “to better complement our strength in traditional stores,” according to Donald Watros, president and interim chief financial officer. Overall capital expenditures this year will total between 380 million and 420 million Canadian dollars, or about $340 million to $376 million.
Part of that expenditure could go to upgrading the Saks flagship in New York. HBC plans to spend $250 million to renovate the flagship. Contrary to previous reports, the renovation will include converting the basement to selling space.
Nordstrom, meanwhile, will launch rack.com in May. The Rack is growing in other ways, too. “It’s a persistent offer from the Rack,” Pete Nordstrom said, adding, “We’re not trying to get very siloed about these channels.” Accepting returns from nordstrom.com at full-line stores is connecting physical retail to online. The company, which owns flash-sale site HauteLook, has allowed online shoppers to return products to Rack units. The result has been unexpected. “When we enabled HauteLook returns to go to any Rack store, we saw that 50 percent of the customers are new. That’s the success,” he said. “We have HauteLook customers who aren’t Nordstrom customers.”
With 117 full-line stores in the U.S., Nordstrom admitted that “the goal is not to have a store in every state. That is the humbling part. [But] if you don’t have a store in Manhattan, it’s as if you don’t exist.
“Besides Canada and Manhattan, we’re opening full-line stores in Milwaukee; Jacksonville, Fla.; Puerto Rico, and Houston,” Nordstrom said. “By and large, we’re in all the places we need to be. This is not where growth is coming from.” The full-line stores did $7.7 billion last year. Online did $1.6 billion, a 30 percent increase, and HauteLook did $280 million.
Nordstrom was supposed to open Rack stores in Canada next year but has delayed its market entry until 2017 in order to focus on opening its full-line stores there. Nordstrom plans to open six Canadian department stores, starting with a location in Calgary in the fall.
Baker is ready for the competition from Nordstrom in Canada, believing HBC knows the market best. “The Canadian opportunity is substantial and there is no retailer better suited for this expansion than HBC. We have existing real estate, logistics, IT, call centers and linguistic capabilities as well as an understanding of how business is done in Canada.”
Here, a detailed look at HBC’s results and more on Pete Nordstrom’s speech:
HUDSON’S BAY CO.
HBC’s fourth-quarter results were the first since it bought Saks. Largely on costs associated with the acquisition and integration of Saks and related financing, net income for the quarter fell 66.5 percent to 86.8 million Canadian dollars, or $87.5 million, in the year-ago period. Adjusted net earnings for continuing operations fell 16.5 percent to 81.5 million Canadian dollars, or $76.3 million, from 97.6 million Canadian dollars, or $98.3 million.
With the addition of Saks, revenues expanded 73.6 percent to 2.41 billion Canadian dollars, or $2.25 billion, from 1.39 billion Canadian dollars, or $1.4 billion, in the fourth quarter of 2013. U.S. dollar amounts have been converted at average exchange for the periods to which they refer.
Gross margin receded to 36.8 percent of sales from 37.6 percent, but rose 80 basis points independent of the effect of purchase price accounting connected to the Saks acquisition, in part because of the higher gross margins generated by Saks’ retail operations.
Comparable-store sales increased 6.6 percent. Hudson’s Bay comps rose 5.2 percent and Saks’ advanced 3.1 percent on a U.S. dollar basis, while L&T’s declined 1.3 percent on the same basis, failing to “rebound as we had anticipated” as the fiscal year ended and inclement weather persisted, the ceo said.
Baker told WWD that first-quarter trends have been similar to those at the end of the fourth quarter. “Saks Fifth Avenue is off to quite a strong start,” he said. “We’re seeing strong demand for luxury products in the U.S. The better customer is willing to spend for unique and luxury-type items, and that’s helping us drive that business.”
Nordstrom’s trajectory to an omnichannel perspective began with the launch of its Web site in 1998, and continued with direct shipping from stores in 2005. “In 2008 to 2009, we had one view of the inventory,” Nordstrom said. “That’s been a big competitive edge. It’s a much more efficient way to view inventory.”
Nordstrom said he realized in 2010 that the way the customer defined service had changed. The customer valued speed and convenience. “If we didn’t make this a core competency, we were doomed,” he said. “We got aligned around speed and convenience.” Around this time, Nordstrom realized that “Amazon was the new standard-bearer for what’s happening online,” he said. “We got clear about who we were competing against. We went to free shipping and free returns. I don’t know how you can’t do it, because we had integrated platforms that allowed us to do these things faster.”
Speed and convenience means delivering merchandise in shorter periods of time. “Now it’s three to five days,” Nordstrom said. “It’s OK today, but a year from now, if you can’t deliver in one or two days…” Nordstrom has earmarked $1 billion for technology upgrades. Nordstrom said 25 percent of online business is done via mobile.
The much-anticipated New York store, which opens in 2018, will have entrances on 57th Street and Broadway. The first seven floors will be devoted to the department store, with two below grade and five above.
Nordstrom said the store is on track and in the approval and permitting stages. “It’s happening,” he said. “There’s a hole in the ground. We’re working on design. We will have restaurants. We’ve nailed down the literal footprint of 285,000 square feet.”
Another brand with a store in its future is HauteLook. “The idea is, if you’re a pure play online, in order to grow, you need a physical presence,” Nordstrom said.