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After a three-year delay, Nordstrom hangs its hat on rollout of Rack discount outlets in Canada

Nordstrom is set to open as many as 15 Rack stores in Canada, starting with the first one on Thursday in the Vaughan Mills mall north of Toronto

Workers prepare for the opening of the Nordstrom Rack store in Vaughan, Ont., on Thursday. The site is one of six Canadian stores the company aims to open in 2018.

When U.S.-based Nordstrom Inc. arrived in Canada in 2014, the upscale retailer planned to launch its discount Rack chain the following year amid rising demand for low-cost "off-price" fashions.

But plans went awry when it became clear the department-store retailer's new merchandising systems couldn't handle the Rack business without major modifications. So Nordstrom took a more cautious approach – a move that seemed prescient in the midst of U.S. discounter Target Corp.'s too-speedy, botched expansion into Canada that ended in retreat in 2015.

Now, three years behind schedule, Nordstrom is set to open the first of as many as 15 Rack stores in this country (six this year), starting on Thursday in the Vaughan Mills mall north of Toronto.

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Rack will face heavy competition in the increasingly crowded off-price market from stores such as Saks Off 5th, owned by Toronto-based Hudson’s Bay Co., as well as Winners and Marshalls.

Rack is entering an increasingly crowded off-price Canadian market. Outlet malls offering discounted brand-name fashions are sprouting up across the country. And Rack will face competition from rivals such as Saks Off 5th, owned by Toronto-based Hudson's Bay Co., as well as Winners and Marshalls, both owned by U.S.-based TJX Cos. Inc.

"Are we going into a crowded market?" Geevy Thomas, president of Rack, asked in an interview. "We admire all of those [retailers] – they're great competitors. We share very little of the same merchandise with any of them."

Nordstrom is betting on its fast-growing Rack division after having invested heavily in its six full-price Canadian department stores as that sector struggles to gain ground, feeling pressure from discounters and e-commerce heavyweights in a soft apparel market. At the same time, Nordstrom is using Canada as a testing ground for new ideas it can bring back to its U.S. Rack stores.

Off-price retailers cater to consumers' burgeoning appetite for stylish fashions at prices of up to 70-per-cent off. The stores stock their shelves with inventory from suppliers' excess merchandise or unsold items from full-price stores, shipping in new products sometimes daily to create a treasure-hunt shopping experience.

Still, there is room for growth, especially in Canada, said Tamara Szames, fashion industry analyst at researcher NPD Group.

Off-price sales here are far outperforming the overall Canadian apparel market, she said. They jumped 12 per cent to $1.8-billion in the year ended Jan. 31, even as overall apparel sales dropped 2 per cent to $26.9-billion in the same period, according to NPD.

Rack outlets in Canada will carry almost twice as much merchandise from its own full-line stores than its U.S. Rack stores do.

In the United States, off-price sales gained just 2 per cent to US$26.5-billion in that period (compared with a 6-per-cent increase the previous year) while overall apparel sales dipped 1 per cent to US$219-billion, NPD data show. Off-price sales represent 12 per cent of the U.S. total clothing market, but only 7 per cent of the Canadian market.

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"There is space for Nordstrom Rack in this market," Ms. Szames said.

Nordstrom counts on Rack to draw new customers who eventually cross-shop the two chains, Mr. Thomas said. Last year, its off-price business attracted six million new customers and roughly one-third of them shopped both chains, he said.

In its fourth quarter, Nordstrom's off-price sales rose 3.7 per cent at stores open a year or more and just 0.4 per cent at Nordstrom's full-price business. Today, the company has almost double the number of Rack outlets (235) as full-line Nordstrom stores (122).

In Canada, Rack is using its launch as an opportunity to experiment with new concepts, quietly testing them at six of its U.S. stores, two in each of its eastern, central and western regions, over the past 3.5 months, Mr. Thomas said. "In Canada, we wanted to take a completely fresh look at it."

Its Rack outlets here will carry almost twice as much merchandise from its own full-line stores than its U.S. Rack stores do: Almost 30 per cent of the Rack products here will come from Nordstrom stores, Mr. Thomas said. That compares with 15 per cent in the United States, he said.

Off-price sales in Canada jumped 12 per cent to $1.8-billion in the year ended Jan. 31, even as overall apparel sales dropped 2 per cent to $26.9-billion in the same period, according to NPD.

"It's more of what I call the juice or the treasure," Mr. Thomas said. "It's our very best stuff that we bought for our full-price stores and it's what we had left at the end of the change-of-season."

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At Saks Off 5th, an average of about 10 per cent of its inventory comes from its full-price Saks Fifth Avenue, HBC spokeswoman Tiffany Bourré said. Rack delivers new items to its outlets five times a week, Mr. Thomas said. Saks Off 5th ships goods "nearly every day," Ms. Bourré said.

Rack tried to simplify the layout of the new stores to make it easier for shoppers to find "treasures," Mr. Thomas said. The Vaughan Mills store is organized by categories (such as dresses and denim) and by size – all hanging from racks – rather than by brands, he said. The concept worked so well in the U.S. test stores that the retailer is rolling it out to 40 Rack outlets south of the border.

Still, Rack will have no dedicated Canadian e-commerce site; online customers will have to ship returns rather than take them back to stores, Mr. Thomas said. Most U.S. online returns are made at stores where customers often buy more, he said.

Rack won't be alone: TJX's Winners, Marshalls and HomeSense have no e-commerce but continue to perform strongly; their fourth-quarter same-store sales jumped 7 per cent. Last month, the company, with more than 450 Canadian stores today, raised its goal to 600 from 500. "We see additional opportunities for expansion in rural communities and locating stores closer to one another," TJX chief executive Ernie Herrman told analysts.

Rack will have no dedicated Canadian e-commerce site. Online customers will have to ship returns rather than take them back to stores.

But not all off-price retailers have thrived. Luxury Holt Renfrew & Co. has closed its discount hr2 outlets, one of them in Vaughan Mills.

For Nordstrom, a lot is at stake. The Canadian division posted an operating loss of US$32-million in 2014 and expected the loss to almost double to US$60-million the following year. It expected losses here to start to recede by 2017 and to become profitable as it gained economies of scale, Nordstrom executives have said.

"Rack is important – it is the money-spinner because you can put it into more markets even though the margins are higher in the full-line stores," said retail specialist Wendy Evans of Evans & Consultants.

Susan McGibbon of retail consultancy Three Sixty Collective added Nordstrom did well to bring its full offering to Canada rather than following Target's misstep of operating "a lite version" here. At Nordstrom "as in the U.S., the off-price offerings will likely be their major driver of revenue."

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