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Nordstrom’s Inventory Crunch Worries Investors

Nordstrom Inc. reported third-quarter earnings results that left investors worrying about the state of its off-price Rack business.

In a Nutshell: Like many of its competitors, Nordstrom had an easy beat to year-ago sales figures because of the pandemic impact. It wasn’t so lucky when third quarter sales were compared on a two-year basis to 2019. While full-price Nordstrom stores posted a 3 percent gain, Rack sales fell 8 percent on a two-year basis, mostly due to supply chain issues. It was noticeable to investors, especially following earnings reports from competitors such as Macy’s and Kohl’s, both of which last week said their sales surpassed pre-pandemic levels.

“We have not responded as quickly and as aggressively as we need to. With Rack, in particular, it really starts with our source of goods [which] got disrupted with the pandemic, and it resulted in both just a flat-out shortage of inventory. We’ve been significantly under inventory plans all year,” CEO Erik Nordstrom said on a conference call to Wall Street analysts on Tuesday. While he noted that the shortages were most evident at Rack, the CEO also acknowledged that the company had been too slow in making the needed adjustments.

He zeroed in on its off-price business and cited the need for improving performance, profitability and optimizing its supply chain and inventory flow. “We need to grow market share and deliver greater profitability. And we are acting with a sense of urgency to do so,” he added.

Rack was challenged by low inventory levels in premium brands and in key categories that included women’s apparel and shoes, he said.

“While many retailers are dealing with macro-related supply chain disruptions, Rack faces a unique challenge as off-price procurement of the same top brands we carry at Nordstrom is particularly difficult in an environment with production constraints and lower levels of clearance product,” the CEO said. “Rack’s top 50 brands represented approximately 50 percent of sales in 2019. Year to date, these brands represented only 42 percent of sales, highlighting the outsized gap in merchandise availability.”

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Nordstrom detailed about a multi-layered plan to grow the company’s assortment and source from new vendors, as well as increase opportunistic use of pack-and-hold inventory. “Given that we expect macro-related supply chain disruptions to continue into next year, we’re strategically evaluating our assortment and increasing our use of pack-and-hold inventory by a factor of two to three times,” he said.

Another problem he cited was that as the company adjusted its assortment over the last year to add more lower-price points, “we found that we went too far in certain categories.” That drove AURs (average unit retail) to fall 4 percent from 2019.

“By improving inventory levels, expanding our selection in top brands, and increasing awareness and traffic, we expect to grow market share and improve profitability at Nordstrom Rack. With the actions we’re taking, we anticipate improvement in Q4, with more significant improvement to follow in the first half of fiscal 2022,” the CEO said.

Nordstrom said the company has seen “significant” macro-related pressure in fulfillment and labor costs, and has already identified ways to improve its internal network and processes, such as diversifying its carrier capacity, better end-to-end visibility of inventory flow and improving velocity at distribution and fulfillment centers. He said the initiatives will enhance the customer experience at both Nordstrom and Rack, increase delivery speed and expand selection for in-store shopping, same-day and next-day pickup, as well as drive efficiencies in labor and fulfillment. He noted that the local market strategy provides customers with “four times more product available for next-day pickup, a one-day reduction in average shipping time, and the ability to pick up orders at the Nordstrom, Nordstrom Local, or Nordstrom Rack location of their choice.”

Pete Nordstrom, president and chief brand officer, addressed the use of dynamic pricing analytics to optimize promotional effectiveness, and the value of Nordstrom-branded products. He said private-label gross margins average 500 basis points higher than third-party brands.

Net Sales: For the three months ended Oct. 30, net sales rose 18 percent to $3.53 billion from $3.00 billion. Digital sales fell 12 percent from last year. However, digital sales rose 20 percent in the quarter versus 2019, and represented 40 percent of the overall business in the third quarter, according to the CEO.

The company said the increase in net sales was due to the shift in the Anniversary sale to the third quarter. The Nordstrom banner posted a net sales increase of 11 percent from last year, while the Nordstrom Rack banner reported a net sales increase of 35 percent over the same period.

“Sales in the home, active, designer and beauty categories had the strongest growth compared with the third quarter of 2019,” the company said.

The company said it ended the quarter with inventory up 13 percent when compared with the same 2019 pre-pandemic level, versus a 1 percent decrease in sales. The company flowed merchandise in earlier to support early holiday sales and mitigate supply chain delays.

For the nine months, net sales spiked 47 percent to $10.02 billion from $6.81 billion.

Earnings: Net income for the quarter rose 21 percent to 64 million, or 39 cents a diluted share, from $53 million, or 34 cents, a year ago.

The company reaffirmed its Fiscal Year 2021 outlook expecting revenue, including retail sales and credit card revenues, to climb more than 35 percent versus Fiscal Year 2020.

For the nine months, the net loss narrowed to $22 million, or 14 cents a diluted share, from a net loss of $723 million, or $4.60, in the year-ago period.

President’s Take: “For the holiday season, we are excited about our plans to use our integrated network of stores and digital platforms to showcase holiday dressing, decor and gift offerings, and provide festive experiences and convenient services that make shopping easy and enjoyable for our customers,” the chief brand officer said.