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Nordstrom’s Q1 Was a Mixed Bag

As Nordstrom hopes to rebound in 2021 on first-quarter net sales that jumped 44.2 percent to $2.9 billion, the department store is looking to an expanded product assortment to generate excitement.

In a Nutshell: Sales at the retailer benefited from improving trends in categories such as occasion-oriented apparel, handbags, sunglasses and swimwear. Taken as a group, these recovery categories returned to growth in March and April compared to 2019, with strength continuing early into the second quarter, Anne Bramman, chief financial officer at Nordstrom, told investors in a call.

The activewear and home categories have seen their total penetration of Nordstrom’s offerings increase 5 percentage points since the start of the pandemic.

“Importantly, the merchandise repositioning across price, hybrid and brand doors is progressing, in spite of some challenges managing slower than anticipated inbound inventory flow,” CEO Erik Nordstrom said in a the call. “We remain in the early innings in these initiatives, and our progress is encouraging. Increased customer choice of price-oriented offerings in kids, home and active supported a 37 percent increase in sales compared to 2019 in these categories.”

The department store expanded its assortment in both Nordstrom and its off-price Nordstrom Rack sister brand, while also reducing excess inventory from the end of the fourth quarter of fiscal 2020 faster than expected.

At its virtual investor event in February, the retailer announced it was expanding its “choice count” from 300,000 items last year to 1.5 million over the next three to five years by leveraging a partner marketplace model focused on dropshipping.

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“This quarter, we saw ramping benefits from this initiative, with choice count increasing approximately 20 percent versus 2019, primarily driven by an expanded dropship assortment in both our core categories and in-demand categories like Home, Active and Kids,” the CEO said. “This allowed us to drive strong sales growth in our digital business without a corresponding increase in our inventory investment. We’ve also seen continued strong improvement in conversion, which was up more than 15 percent compared to 2019.”

Nordstrom will also significantly increase selection for its Anniversary Sale this year, with total customer choices up “double digits” compared to 2019, supported by an expansion of alternative partnership models with vendors, he added.

The increase in product count comes as the retailer announced that its own exclusive BP. brand is introducing an ongoing collaboration with Wildfang, which bills itself as a brand challenging stereotypes and gender norms. BP. + Wildfang is designed for women-identifying customers, and will feature jumpsuits, button-ups tops, blazers, statement tees and accessories in a body-diverse size range from $12 to $89.

The BP. and Wildfang teams have worked over the past 18 months to develop a product collaboration, and an immersive partnership that includes gender knowledge trainings for employees, product research, social responsibility initiatives and marketing research. This work will culminate with a series of BP. + Wildfang collections beginning this month.

The collection was created to be versatile yet functional, with fit carefully sized for a variety of body shapes. Everything from the position and depth of pockets to the widths and lengths of sleeves was methodically designed with inclusive styling in mind.

“At Wildfang, we believe that the fashion industry has clung to outdated gender norms for far too long,” Emma Mcilroy, CEO and co-founder of Wildfang, said in a statement. “We are challenging the idea that women have to dress a certain way, act a certain way or have a certain type of job. We are working hard to make the industry more inclusive with every element of our partnership with Nordstrom.”

As the year progresses, Nordstrom is balancing inventory levels with sales while managing receipt flows to mitigate potential supply chain disruptions. Total inventory for the quarter increased 31.7 percent to nearly $2 billion, above the $1.5 billion in the first quarter of 2020. On a two-year basis, inventory declined 2 percent, versus a 13 percent decrease in sales.

The year-over-year jump in inventory levels includes approximately $120 million of spring and summer in-season inventory that was pulled forward into the first quarter, a roughly 700 basis-point (7 percentage-point) impact resulting from the acceleration of vendor shipments to support sales trends and mitigate potential supply-chain backlogs in the second quarter.

“This reflects significant progress addressing seasonal and underperforming category inventory from the fourth quarter at both Nordstrom and Nordstrom Rack,” Bramman said in the call. “At Nordstrom Rack, our sales outpaced inventory growth for the first time since the start of the pandemic. Across both Nordstrom and Nordstrom Rack, our inventory is current and well-positioned in key categories as we prepare for the Anniversary Sale.”

Gross margin was 31 percent, increasing approximately 2,000 basis points (20 percentage points) compared with the same period in fiscal 2020, primarily due to lower markdowns and leverage from higher net sales volume. Gross margin decreased 260 basis points (2.6 percentage points) compared with the same period in fiscal 2019 amid lower sales and lower merchandise margins, partially offset by permanent reductions in buying and occupancy costs.

While Covid-19 related demand impacts are clearly moderating, the underlying cost environment remains volatile, Bramman said. She pointed to elevated labor and shipping costs as well as apparel industry supply constraints as continued pressure drivers.

The department store ended the first quarter with $977 million in available liquidity, including $377 million in cash.

Nordstrom reaffirmed certain financial expectations for 2021, indicating that total revenue, including retail sales and credit card revenues, is expected to grow more than 25 percent. Digital is expected to represent approximately 50 percent of sales. Earnings before interest and taxes (EBIT) margin is expected to be approximately 3 percent of sales, while first half EBIT is expected to be approximately breakeven, reflecting nearly 45 percent of total year sales.

Additionally, Bramman said the retailer is planning capital expenditures at normalized levels of 3 to 4 percent of sales, primarily to support investments in technology and supply chain capabilities.

Net Sales: For the first quarter, net sales increased 44.2 percent to $2.9 billion in the year-ago period and decreased 13 percent from the same period in fiscal 2019, representing a sequential improvement of 720 basis points (7.2 percentage points) relative to the fourth quarter of fiscal 2020.

Sales trends reflected broad-based improvement across Nordstrom and Nordstrom Rack, in stores and online, and across regions and merchandise categories. Nordstrom sales jumped 36.7 percent to $1.8 billion, while Nordstrom Rack sales had an even larger improvement, up 59.5 percent to $1.1 billion.

Digital sales increased 23 percent year over year and increased 28 percent compared with the same period in fiscal 2019. Digital sales represented 46 percent of total sales during the quarter.

Net Earnings: Nordstrom saw a first-quarter net loss of $166 million, which included an after-tax debt refinancing charge of $64 million. The net loss is smaller than the net loss of $521 million during the same period in fiscal 2020, which included after-tax charges of $173 million related to Covid-19.

Losses per diluted share of $1.05 included a debt refinancing charge of 41 per share. First-quarter losses per diluted share totaled $3.33 in 2020.

Nordstrom reported a loss before interest and taxes of $85 million, supported by what it says are improved sales trends and continued benefits from resetting its cost structure. In the first quarter of 2020, losses before interest and taxes totaled $813 million.

CEO’s Take: During the quarter, Nordstrom expanded the rollout of its “Closer to You” market strategy to its top 20 markets, which comprise approximately 75 percent of total sales. As part of the strategy, off-price Nordstrom Rack is playing a major role in fulfilling sales.

“We rolled out last fall, including our Rack stores … and that’s led to a significant uptick in order pickup and ship-to-store to all of our [250 Rack stores],” the CEO said. “At market strategy regions, order pickup has more than doubled versus 2019. Nearly one-third of purchases—next-day pickups in these markets are picked up in Rack stores. And I think that’s a real important one. It goes to these assets we have, our physical assets or Local stores and Nordstrom Rack stores.”