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Nordstrom CEO: ‘It’s Been Difficult to Plan Inventory Flow With Much Precision’

Nordstrom raised its full year sales and EBIT outlook after beating Wall Street’s forecasts. The department store company saw revenue reach $3.66 billion with help from its annual Anniversary Sale, while earnings per share totaled 49 cents. Both numbers surpassed Refinitiv estimates of $3.36 billion and 27 cents, respectively, but the retailer still has a ways to go with sales remaining down 6 percent on a two-year basis.

In a Nutshell: Nordstrom’s Anniversary Sale, which moved back to July this year after the event was pushed back to August due to the pandemic in 2020, saw sales increase 1 percent over 2019, including the final week of the event which fell in the third quarter.

“By leveraging a more data-driven approach along with our evolving partnership models with our vendors, we were able to increase event [merchandise] selection by 12 percent and reduce the rate of items sold out by 35 percent versus 2019, while at the same time maintaining a comparable sell-through, and finishing with a healthy position in owned inventory as we exited the event,” CEO Erik Nordstrom said in an earnings call.

In the call, chief financial officer Anne Bramman said that shoes, apparel and accessories saw sales improvement compared to the first quarter as customers refreshed their wardrobes. Select pandemic growth categories continued their ascent, with active and home seeing 50 percent sales increases compared to 2019 levels.

The department store highlighted three growth priorities in the presentation: winning in its most important markets, broadening the reach of Nordstrom Rack and increasing the velocity of the retailer’s digital business.

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The “Closer To You” market strategy is active in all of the top 20 markets Nordstrom sells in, with 40 percent of Anniversary Sale next-day pickup orders picked up in a Rack store. In these markets, Nordstrom has quadrupled the average selection available for next-day pickup and has reduced average shipping time by one day.

Nordstrom Rack is repositioning 70 Rack stores for a price-oriented offering, with new-to-Nordstrom customer counts increasing 16 percent for the brand over 2019.

As part of the digital transformation priority, the retailer completed the integration of Rack.com onto the Nordstrom.com platform.

Total inventory jumped nearly 49 percent to $2.18 billion in the quarter from $1.47 billion in the year-ago period. Gross margin as a percentage of net sales was 35 percent, increasing approximately 1,370 basis points (13.7 percentage points) compared with the same period in fiscal 2020, primarily due to leverage from higher net sales and lower markdowns.

“We have seen real lumpiness from the global supply chain that has led to some sort of shortages, and more so just unevenness. It’s been difficult to plan inventory flow with much precision,” the CEO said. “We do not expect those conditions to change anytime soon, so it’s really on us to find ways of mitigating that.”

Nordstrom highlighted decisions such as pulling forward orders and expanding lead times, and also confirmed that it’s looking to “strategically” use some air freight to get goods in for holiday. During the Anniversary Sale, the department store increased delivery frequency to its stores to help address the inventory flow, he said.

The CEO also said inventory shortages mostly impacted the off-price Rack business, with some categories remaining “light.”

Ending inventory increased 13 percent compared with the same period in fiscal 2019. The change in inventory levels versus 2019 was primarily due to the timing shift of the Anniversary Sale and the company’s actions to pull forward receipts to mitigate continuing supply chain backlogs and support improving sales trends.

On a two-year basis, gross margin was flat compared with the same period in fiscal 2019, as lower markdowns resulting from healthy inventory sell-through offset deleverage on lower net sales.

Nordstrom raised its full-year guidance with 2021 revenue growth jumping from an initially projected 25 percent to 35 percent. Additionally, EBIT percentage of sales has been raised from 3 percent of total sales to a range of 3 percent to 3.5 percent.

Net Sales: For the second quarter, net sales at the department store increased 101 percent to $3.66 billion from the $1.86 billion generated in the same period of fiscal 2020, and decreased 6 percent from the same period in fiscal 2019.

On a sequential basis, Nordstrom’s sales improved approximately 700 basis points (7 percentage points) relative to the first quarter. The timing shift of the annual Anniversary Sale, with roughly one week falling into the third quarter of 2021, had a negative impact of approximately 200 basis points (two percentage points) on net sales compared with fiscal 2019. Adjusting for this timing shift, the retailer said sales trends improved by approximately 900 basis points (9 percentage points) relative to the first quarter.

For the Nordstrom brand, net sales increased 127 percent to $2.42 billion, above the $1.07 billion seen in the second quarter of 2020, and decreased 5 percent compared with the same period in fiscal 2019.

The off-price Nordstrom Rack saw net sales jump 61 percent to $1.15 billion, compared with the year-ago total of $712 million. On a two-year basis, sales dipped 8 percent.

Digital sales increased 30 percent compared with the same period in 2020 and are up 24 percent from the 2019 second quarter. These online sales represented 40 percent of total sales during the quarter, down from the 61 percent total in the prior year when many stores were closed for part of the period.

Net Earnings: Nordstrom reported second quarter net income of $80 million at 49 cents per share, a turnaround from net losses of $255 million during the fiscal 2020 period, or $1.62 cents per share, which included after-tax Covid-19 related charges of $14 million. 

EBIT was $151 million in the second quarter of 2021, compared with a loss of $370 million during the same period in fiscal 2020, primarily due to higher sales volume and improved merchandise margins. Last year’s loss included $23 million in pretax charges related to Covid-19. EBIT was $65 million lower than the second quarter of fiscal 2019 due to freight and labor cost pressures and lower sales volume, partially offset by continued benefits from resetting the cost structure in 2020.

CEO’s Take: The CEO acknowledged the company has “plenty of areas that are not at peak efficiency,” particularly pointing out the current inventory challenges.

“Particularly we just talked about inventory flow. That’s been a challenge that impacts both top line and bottom line, so that’s a big area of focus for us,” he said. “There’s also lessons from Anniversary, both how we engage customers digitally and connect them into our physical assets, as well as having a more data-driven approach to our inventory mix that showed great results during anniversary. Certainly we’ll continue that through the back half of the year.”