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Friday, August 10, 2012 - Page updated at 06:30 p.m.

Nordstrom to speed up Rack store openings

By Amy Martinez
Seattle Times business reporter

In the midst of a tough economy, upscale retailer Nordstrom appealed to cost-conscious consumers by doubling the number of discount Rack stores over the past four years.

That worked so well that Nordstrom now plans to again double its Rack chain by the end of 2016.

The Seattle-based retailer said Thursday it's accelerating the pace of Rack store openings based on the business' strength and the availability of "quality locations." It plans 24 new Racks next year, on top of the 15 planned this year.

Nordstrom, which made the announcement as part of its quarterly earnings report, said there likely will be more than 230 Racks by the end of 2016, up from 110 today.

In a conference call with analysts, President Blake Nordstrom was asked if the Rack's expansion might damage the company's reputation with full-price shoppers. He said he had yet to see any sign of a backlash.

"Trust us that we are very sensitive to the Nordstrom brand in the core business, the full-line store," he said. "To date, we think it's been very complementary and we think it has benefited the company as a whole."

Nordstrom posted an 11 percent drop in its second-quarter profit Thursday, citing new investments in its e-commerce business and a later start to its popular anniversary sale, which pushed promotions into August.

Nordstrom reported a profit of $156 million, or 75 cents a share, compared with $175 million, or 80 cents a share, a year ago. Sales, including credit-card revenue, rose 7.1 percent to $3.01 billion, boosted by strength at the Rack and e-commerce businesses.

Results from Nordstrom's just-completed anniversary sale were described as better than expected, and while the later start hurt revenue in July, it's projected to help he third quarter.

Nordstrom now expects a 2012 profit of $3.40 to $3.50 a share, up from its previous guidance of $3.30 to $3.45.

The stock closed Thursday's regular trading session down 37 cents, less than 1 percent, at $55.08. The stock reached $56.60 in after-hours trading after the earnings report.

"It's been a bit of a topsy-turvy earnings season for companies in general, and there's a lot of concern out there about the health of the consumer," said analyst Dan Geiman, of McAdams Wright Ragen in Seattle. "But you did not see that with Nordstrom. The fact that Nordstrom raised its guidance in and of itself is a positive."

Nordstrom Rack, which already has opened six of its 15 new stores for 2012, saw an 18.9 percent increase in second-quarter sales, more than double the company's overall growth rate.

Sales at Rack stores open at least a year rose 7.7 percent, compared with a 1.1 percent gain at Nordstrom's full-line clothing stores.

Rack customers tend to be younger than full-price shoppers, so the expansion will help Nordstrom develop a new following as more baby boomers reach retirement age, said Jennifer Black, a Lake Oswego, Ore., retail analyst who advises large institutional investors.

"Over the next five to seven years, baby boomers will hit their peak spending potential," she said. "As that happens, retailers want to attract a younger customer without alienating their core customer."

Geiman said Nordstrom is smart to open smaller, less expensive stores at a time when large blocks of desirable retail space are hard to come by.

"They're not really growing their full-line stores. It's not that they don't want to. There's just not a lot of real estate out there, and they have to find other avenues to grow," Geiman said.

In June, Peter Nordstrom, president of merchandising, joined New York Mayor Michael Bloomberg to announce plans for the company's first Manhattan flagship.

The store, which won't open until 2018, will cover seven floors at the base of a planned skyscraper on West 57th Street, between Broadway and Seventh Avenue, just south of Central Park.

During Thursday's call, Blake Nordstrom said preparations are under way for "what we hope will be the highest volume store in our company and an opportunity to further elevate and extend our brand."

Nordstrom also has been forging new retail partnerships to raise its profile with young fashionistas. Last month it joined with Topshop to carve out space for the British fashion brand in 14 of Nordstrom's 117 full-scale stores starting in September.

Meanwhile, Nordstrom announced a collaboration with designer Jason Wu to create a new collection called "Miss Wu," which will hit 49 locations in January.

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com

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