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Focus on Digital Helps Drive Q3 Sales at Nordstrom

A 37 percent jump in digital sales from a year ago and the shift of its Anniversary Sale event helped Nordstrom Inc. best Wall Street’s earnings per share expectations for the quarter.

In a Nutshell: Nordstrom said it saw “strong customer response” to its Anniversary Sale, which drove “record sell-through rates” and contributed to profitability. Nordy Club loyalty customers drove about 80 percent of sales. Digital sales represented 60 percent of sales and about one-third of online orders were fulfilled from stores to enable faster delivery, the company said.

“Our ability to significantly strengthen our financial flexibility early in the pandemic was key to delivering operating profitability of more than $100 million and cash flow of more than $150 million in the third quarter,” Erik Nordstrom, CEO, said.

During a company conference call Tuesday afternoon after the retailer reported third-quarter results, Nordstrom spoke about how the company continues to scale its market strategy to other markets, a move that allows it to increase customer engagement, drive share gains and optimize inventory efficiencies. In the quarter, the retailer rolled out the strategy to five additional markets, scaling to 10 of its top markets, which account for more than half of sales. In addition, the presence of the market strategy allows those customers to have access to up to seven times more merchandise offerings with either two-day delivery or next-day pickup. In addition, pickup as a service option for orders from nordstrom.com, nordstromrack.com and HauteLook.com is now available at all 350 Nordstrom and its off-price Nordstrom Rack locations in the U.S.

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Nordstrom said the company views the market strategy as its “blueprint” for future growth and that it will continue to roll it out to its other top markets. The CEO said the company recently opened its fourth local service hub in Los Angeles and plans to open a fifth hub later this year in that market.

As for its Rack business, Nordstrom said the nameplate helps serve as a pipeline to its full-price stores, bringing in 7 million new customers. He added that digital is a significant component of that business, noting that Rack is “positioned as the only off-price retailer with a significant digital platform.” The CEO said two efforts to capitalize on Rack’s growth potential include expanding price points, particularly at the lower end of pricing, and connecting online with physical stores.

Nordstrom added that the company “believes over the long term that there will be pent-up demand [for certain apparel categories, such as] travel and social.” He explained it was less about major social events with large gatherings and more about date night.

Pete Nordstrom, president and chief brand officer, said on the call that he believes the casualization trend is “probably here to stay.” And while he also noted that the company doesn’t expect people to go out and buy ballgowns and tuxedos anytime soon, he did point out that when they are able to get out and do more socializing, Nordstrom’s merchandise and operational teams have the flexibility and agility to adapt quickly to customer needs.

As for the New York market, the chief brand officer said: “We were open five months when the pandemic hit. It remains a huge market… It gives us a lot of urgency and focus around how to connect with customers personally….We’re going to work through it. There will be brighter days ahead.”

Net Sales: For the quarter ended Oct. 31, net sales were down 15.8 percent to $3 billion from $3.57 billion. Top performing categories include active, home, beauty and designer.

By segment, Nordstrom’s full-price business posted a 7 percent decrease in net sales. Excluding the Anniversary Sale event shift, sales decreased in the mid-20 percent range, the company said. Rack reported a 32 percent decline in net sales versus the same period a year ago.

Digital sales in the quarter totaled $1.6 billion, representing 54 percent of total sales and an increase of 37 percent versus a year ago. Excluding the impact from the shift of its Anniversary Sale event, digital sales increased in the mid-teens percent range in the third quarter, consistent with trends in the first half of the year, Nordstrom said.

Gross profit, as a percentage of net sales of 32.8 percent, fell 150 basis points from the year ago period, attributable mostly to the impact from the shift of the Anniversary Sale event and to deleveraging from lower sales volume. “Merchandise margins exceeded company expectations and reflected significant improvement relative to the prior quarter,” the company said.

The company said it ended the quarter with inventory down 27 percent from last year. Excluding the Anniversary Sale event shift impact, the decrease in inventory was “in-line” with the decrease in sales for the second consecutive quarter.

For the nine months, net sales fell 36.4 percent to $6.81 billion from $10.69 billion. The decline in sales mostly reflect temporary store closures in earlier quarters due to the coronavirus.

Earnings: Net income was down 57.9 percent to $53 million, or 34 cents a diluted share, from $126 million, or 81 cents, a year ago. Net income in the quarter include an income tax benefit of $19 million associated with the CARES Act.

Wall Street was expecting a net loss of 6 cents on revenue estimates of $3.1 billion.

For the nine months, the company posted a net loss of $723 million, or $4.60 a diluted share, from net income of $304 million, or $1.95, in the same year-ago period. Losses reflect impacts from the Covid-19 pandemic in earlier quarters this year.

CEO’s Take: Nordstrom said the company “unlocked new ways to better serve customers on their terms with greater convenience and connection, including expansion of our online order pickup services to nearly 350 locations across both Nordstrom and Nordstrom Racks.”