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Why Nordstrom Will Be ‘Conservative’ About Apparel Buying This Year

Net sales for Nordstrom’s holiday season decreased 20 percent to $3.55 billion, largely falling in line with expectations of $3.6 billion in sales from analysts polled by Refinitiv. And the department store did come out of the final quarter with a profit of $33 million, albeit well below last year’s holiday total of $193 million.

But if Nordstrom wants to improve its standing among shoppers this year, it will have to continue enriching its digital offerings while determining how to better align its merchandise mix with customers and maintain a healthier inventory positioning.

In a Nutshell: Nordstrom’s top-performing merchandise categories in the fourth quarter included home, active and beauty, but apparel, particularly men’s, has continued to underperform, according to president and chief brand officer Peter Nordstrom. 

“I think it would be fair to say that the most challenged category is really fashion apparel, so we’re just being super conservative about our plans going forward and what we’re investing in there and ensuring that we’re staying close to it,” he said in a company earnings call. “When things evolve and change as we all know it will, [then] we’re prepared to put the foot on the gas there, too.”

Heading into the holidays, Nordstrom said it increased its inventory purchasing plans but experienced delays in inventory flow, resulting in higher inventory levels exiting the year. Most of the inventory overage reflected current receipts and non-seasonal merchandise. The retailer is taking actions to significantly reduce inventory levels in the first quarter of 2021 and be fully repositioned in the second quarter.

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Ending inventory at Nordstrom decreased 3 percent year over year, from $1.92 billion to $1.86 billion. While inventory levels were above its plan, the majority of the overage reflected current receipts and non-seasonal merchandise.

“We are taking action to mitigate the impact of seasonal and underperforming merchandise categories, particularly in apparel, including cancellation of orders returned to vendors and clearance activity where appropriate. Importantly, we are quickly building additional flexibility into our buying plans in the first half,” Nordstrom chief financial officer Anne Bramman said in the earnings call. “We plan to cut our sales inventory spread in half by the end of the first quarter, with inventory realigned at Nordstrom Rack. We expect inventory levels for Nordstrom brand to be fully realized in the second quarter after normalizing for the Anniversary shift [from Q2 to Q3 in 2020].”

In the call, CEO Erik Nordstrom reiterated some of the plans shared at the virtual investor event in February, noting that during the holiday season, the retailer scaled pickup options to roughly 350 Nordstrom, Nordstrom Rack and Nordstrom Local stores. About 10 percent of online orders were picked up in stores, while roughly 30 percent were fulfilled from stores, he said.

As part of the retailer’s market strategy to get “Closer to You,” in which Nordstrom expanded its available merchandise selection available for next-day delivery by four times on average within its top 10 markets, Nordstrom beat topline growth by 200 basis points (2 percentage points) and increased customer count by 20 percent. This year, Nordstrom will extend this to 10 more markets in an effort to capture market share gains in key markets such as San Diego, Houston, Minneapolis and Miami.

Gross margin as a percentage of net sales in the fourth quarter was 33 percent, and decreased 160 basis points year-over year from the 34.6 percent to close 2019, primarily due to lower sales volume and higher markdowns and partially offset by planned expense savings.

In the quarter, Nordstrom saw “higher than planned outbound freight expense” due to carrier surcharges and costs associated with the decision to mitigate carrier shipping constraints, by shifting to higher-cost shipping options.

Nordstrom fully paid its revolving line of credit, ending the year with $1.5 billion in liquidity including $700 million in cash. The department store generated fourth-quarter operating cash flow of $88 million, the third consecutive quarter of positive cash flow.

The department store is still looking for more answers as to how to increase store traffic and capitalize on a growing activewear market, and recently made a big splash to do so.

A day before the earnings release, Nordstrom revealed it had partnered with at-home fitness business Tonal to open 40 mini-shops featuring the brand in its stores starting this month. The 50-square-foot shops will be located in Nordstrom’s active department next to workout apparel and other fitness accessories. The move follows yoga-centric brand Lululemon purchasing fitness platform Mirror.

For 2021, Nordstrom based its expectations on the assumption that its stores would remain open for the remainder of the year. The company expects revenue to grow more than 25 percent, with digital representing approximately 50 percent of sales. While the retailer’s EBIT margin is expected to be approximately 3 percent of sales for the year, Nordstrom anticipates it remaining breakeven in the first half, reflecting approximately 45 percent of total year sales.

Net sales: Fourth-quarter net sales decreased 20 percent to $3.5 billion compared with $4.4 billion in the same period in fiscal 2019, slightly exceeding the company’s expectations for a “low-twenties” percentage decrease.

Digital sales now take up 54 percent of total sales at Nordstrom, up from 35 percent at this point in the prior year.

For the Nordstrom brand, net sales decreased 18.6 percent year over year in the quarter from $3 billion to $2.4 billion. The off-price Nordstrom Rack brand saw net sales perform worse at a 22.9 percent decline from $1.4 billion to $1.1 billion.

In 2020, net sales across all Nordstrom businesses tallied $10.3 billion, a steep 31.6 percent decline from the $15.1 billion reeled in throughout 2019.

Net earnings: Net earnings were $33 million, or 21 cents per share, down from the $193 million, or $1.23 per share, earned during the holiday 2019 period. EBIT was $30 million, or 0.8 percent of net sales, compared with $299 million, or 6.7 percent of net sales for the same period in fiscal 2019.

Net loss for 2020 totaled $690 million, compared to the gains of $496 million in 2019.

CEO’s Take: “We’re grateful for our team’s efforts to strengthen our financial flexibility and accelerate our strategic priorities to serve customers in new and differentiated ways,” the CEO said. “These actions have put us in a strong position to capitalize on our market share opportunity as customer demand recovers. While the timing and pace of demand recovery remain uncertain. We see potential to reach 17 billion in revenues and expanded EBIT margins of more than 6 percent over the next three to five years.”