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Nordstrom’s Clean Inventory Level at End of Q2 Should Help Second Half Profitability

While it wasn’t exactly the best quarter, Nordstrom Inc. did have a second-quarter profit, and a lower inventory level leaves room for higher-quality opportunistic buys in the back half of the year.

In a Nutshell: It was a mixed second-quarter for Nordstrom, which managed to beat Wall Street’s profit estimate by 14 cents a share despite a revenue miss. And while there were some challenges for the Anniversary Sale and the Nordstrom Rack off-price business, the 6.5 percent decline in inventory from last year will allow the company to re-balance its merchandise assortment to meet customer demand.

The Anniversary Sale saw softer performance as the retailer didn’t go deep enough on key items, while the pullback on flash sales drove less traffic to the business.

Co-president Erik Nordstrom told Wall Street investors in a conference call Thursday afternoon, “We ended the quarter in a strong inventory position giving us the ability to better align our assortment in the second half of the year.”

As for the softness in sales during the Anniversary event, Nordstrom said the merchandise team curated the assortment to highlight customers’ favorite brands that drove higher sell-through in the year-ago sale. “We did not have enough depth in key items and we are actively addressing this in the second half, particularly with our top gift ideas for the holidays.”

What the team didn’t foresee was the change in customer behavior.

“Certainly, we always see a highly disproportionate amount of demand on our top items,” Nordstrom said. “What was different this year was how deep that disproportion amount was….[W]e simply ran out faster of our to items than we had planned.”

At the Off-Price segment, the co-president said “sales fell short of expectations.” The company had reduced its less profitable flash events. Because the events help to drive traffic to its Nordstrom Rack and Hautelook sites, Nordstrom said the company plans to increase the number, but this time with “high-quality flash events” in the back half, and it will launch a Nordstrom Rack television marketing campaign to drive traffic to the business.

So far this year, the focus has been on leveraging inventory across the broader Los Angeles market through its local market store strategy, essentially turning the market into a neighborhood service hub. In the L.A. market, Nordstrom began offering customers up to seven times more selection that’s available next day, which contributed to sales form order pickup “nearly tripling in July,” the co-president said. Its next iteration of local market will be in New York City, starting in October with the opening of a flagship store and two Nordstrom local doors. All seven locations, including Nordstrom Rack and Trunk Club doors, will be leveraged to “take care of our customers through services such as returns, order pickup and alterations.”

Anne Bramman, chief financial officer, said, “Our second quarter earnings demonstrated our continued inventory and expense discipline. We are in a strong position to rebalance our merchandise assortment.” Flash-sale events in the Off-Price segment was cut 25 percent for the first half, but will change back to the same levels with better quality merchandise. She also said the company in investing in its women’s apparel business “to address the gap in our assortment from a price points perspective.”

Net Sales: For the three months ended Aug. 3, total revenues fell 4.8 percent to $3.87 billion from $4.07 billion. Revenue included a 5.1 percent slide in net sales to $3.78 billion from $3.98 billion. The balance came from an 8 percent increase in credit card revenues to $94 million from $87 million.

The retailer said full-price net sales fell 6.5 percent in the quarter to $2.53 billion, while off-price net sales slipped 1.9 percent to $1.25 billion. In addition, total company digital sales grew 4 percent, representing 30 percent of the business. And Nordstrom noted that its enhanced loyalty program now has 12 million active customers, an increase of 12 percent over last year, representing 64 percent of sales.

Earnings: Net income fell 13 percent to $141 million, or 90 cents a diluted share, from $162 million, or 95 cents, a year ago.

Wall Street was expecting earnings per share of 76 cents on revenues of $3.92 billion.

Nordstrom also updated guidance for fiscal year 2019, lowering its earnings per share forecast at the upper end of the prior estimate. Nordstrom now expects the range to be between $3.25 to $3.50, versus prior guidance at $3.25 to $3.65. The company also forecasted a decrease in net sales, now expecting “approximately 2 percent decrease” versus the prior outlook of “2 percent decrease to flat” from year-ago figures.

President’s Take: “As we head into the second half, we are being opportunistic in the marketplace with plans to accelerate forward receipts,” Eric Nordstrom said. “Our local market strategy leverages our physical and digital assets to provide greater access to merchandise selection, with faster delivery and at a lower cost to us.”

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