Nordstrom is undercutting its status as a high-end retailer

Big miss for Nordstrom earnings
Big miss for Nordstrom earnings

Nordstrom is struggling.

The retailer's shares plummeted more than 15% after a dismal earnings report.

Companywide, comparable sales — a key metric for retail that reflects sales only at stores open a year ago — were down.

Worse than that number is where Nordstrom is taking a hit. At its full-price business — which includes Trunk Club and — comparable sales dropped 4.3%.

But the same measure for all of its off-price businesses, including Nordstrom Rack and its website, grew by 4.6%.

Nordstrom's strategy with the off-price businesses is to use it as a gateway. About 5 million new customers shopped at Rack last year, and the idea is that one-third of those will graduate to the higher priced stores. Further, the company is expanding the lower-end stores quickly.

While the full-line sales still account for 72% of the business, that's less than it used to be. But the off-price share is growing, and Rack stores already outnumber the full-line Nordstrom. The company has plans to have 300 Rack stores by 2020.

But so far, the company's strategy doesn't seem to be working. And some things Nordstrom has done could be making matters worse. Specifically, the company lets customers return full-line apparel to off-price stores, and vice versa.

Even though the policy is not widely advertised, it erodes the full-line business's prestige and level of luxury.

"The off price business is more about a consistency with our trends and our plans, and there are some challenges and headwinds in the full price business," Blake Nordstrom, the company's co-president, said on a conference call with investors Thursday.

Nordstrom also said, in a separate statement, that the company will take steps to meet customers expectations while "driving profitable growth."

Discount wars

If that means sales to clear inventory, that could spell even more trouble for the company, especially for the full-price business.

Promotions and sales will further associate the full-line Nordstrom with discounted prices, eradicating the brand's high-end positioning. Plus, sales aren't currently unique to Nordstrom, so they might not work.

Constant discounts and promotions run rampant in the industry, from stores like Banana Republic to J. Crew. Macy's reported poor earnings earlier this week, and the chain is also opening up off-price Backstage stores.

In fact, this seems to be part of the problem.

"Where we're seeing a big miss is in our clearance and promo — promotional business. So what we take away from that is, number one, the clearance and promotional environment is really noisy," co-president Erik Nordstrom said. "There's a lot of excess product out in the marketplace. It's certainly easy to shop online. There's some heavy, heavy discounting going on. And we're seeing that effect in our business."

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