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Nordstrom Exec Talks Denim as ‘Destination Category’

Nordstrom saw total revenue increase 23 percent during the fourth quarter to $4.5 billion on net income of $200 million. In the holiday quarter, revenue outpaced Wall Street analysts expectations of $4.35 billion, while earnings of $1.23 per share beat estimates of $1.02.

In after hours trading on Tuesday, Nordstrom stocks jumped more than 37 percent on the earnings report positive 2022 guidance.

In a Nutshell: Nordstrom’s “choice count” of total products sold has reached an all-time high, increasing 50 percent over last year, with the help of more than 300 new brands launched during 2021 including Open Edit, Farm Rio, Fanatics and Asos Design. The retailer plans to bring its total choice count to 1.5 million, from its 300,000 in 2020.

The department store’s alternative vendor partnership models accounted for 10 percent of Nordstrom’s banner gross merchandise value (GMV) in the fourth quarter, up from 7 percent in 2019.

Across the board, GMV increased 24 percent versus the same period in fiscal 2020 and was flat versus the same period in fiscal 2019.

The department store said it continued to navigate global supply chain disruptions throughout the quarter by accelerating receipts and investing in improved in-stock levels. Inventory levels at the end of the quarter were higher than planned, but the company expects to reduce its inventory relative to sales during the first quarter of fiscal 2022.

Ending inventory as of Jan. 29 increased 23 percent to $2.3 billion from the $1.9 billion to close out 2020. On a two-year basis, inventory levels climbed 19 percent. Approximately half of the inventory increase versus 2019 was due to planned investments to prioritize in-stock levels.

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Gross margin was 38.4 percent of sales, increasing 500 basis points compared with the 33.4 percent in the same period in fiscal 2020. The metric increased 340 basis points compared with the same period in 2019, due to improved merchandise margins from reduced markdowns, and increased leverage on buying and occupancy costs.

Sales in the home, active, designer, beauty and kids categories had the strongest growth compared with the fourth quarter of 2019. Pandemic-related categories, namely home and activewear, saw sales soar 52 percent and 22 percent, respectively, compared to 2019 levels.

Core categories including apparel and shoes, which collectively make up more than 70 percent of Nordstrom’s business, are “not quite back to 2019 levels, but they are recovering,” said Pete Nordstrom, the retailer’s president and chief brand officer, during the earnings call. “We saw signs of renewing customer interest in post-pandemic occasion-based categories, with improving trends in dresses, men’s sportswear, outerwear and women’s shoes.”

Nordstrom also highlighted the women’s denim category as an example of the department store’s category and assortment optimization.

Denim has always been an important category for our customers and a strong performer for us too, but our analysis highlighted an opportunity to lean into it as more of a destination category,” said Nordstrom. “In response to our analysis, we increased inventory depth for the most highly sought-after jeans to ensure that we are in-stock for our customers, piloted a dedicated in-store women’s denim shop to better highlight our extensive selection and make it easier to shop, and planned a campaign aligned with April’s Earth Month to showcase a curated group of denim brands with a focus on sustainability.”

The retailer provided a full-year outlook for 2022, with total revenue expected to jump 5 percent to 7 percent on earnings per share (EPS) between $3.15 and $3.50 (excluding impact of buybacks). Earnings before interest and tax (EBIT) margin is expected to be between 5.6 percent and 6 percent, with an income tax rate of approximately 27 percent.

The company also said its annual Anniversary Sale will return to the second quarter after two years of occurring in the third quarter due to the Covid-19 pandemic.

Cash and cash equivalents now total $322 million. Nordstrom finished the year with $1.1 billion in liquidity including $800 million available on its revolving line of credit.

Net Sales: Net sales increased 23 percent to $4.4 billion versus the same period in fiscal 2020, when the department store took in $3.6 billion. On a two-year basis, sales decreased 1 percent.

Total revenue when including credit card revenues also increased 23 percent during the quarter to $4.5 billion, from $3.6 billion in the year-ago period.

For the Nordstrom banner, net sales in the fourth quarter increased 23.3 percent to $3 billion compared with the same period in fiscal 2020, and were flat against the same period two years ago. The company’s off-price Nordstrom Rack saw sales increase 23.5 percent on a year-over-year basis to $1.4 billion, but decline 5 percent versus the 2019 fourth quarter.

Total digital sales declined 1 percent, and represented 44 percent of total net sales in the holiday quarter. E-commerce penetration was 54 percent of sales in the 2020 fourth quarter.

Full-year revenue for fiscal 2021, including retail sales and credit card revenues, increased 38 percent to $14.8 billion, compared with fiscal 2020’s $10.7 billion.

Net Earnings: During the fourth quarter, Nordstrom reported net earnings of $200 million, or $1.23 per diluted EPS, and EBIT of $299 million, or 6.8 percent of sales. The income was a significant boost from the $33 million generated in the 2020 fourth quarter on 21 cents per diluted EPS.

For the full-year, net earnings were $178 million and diluted EPS was $1.10, with EBIT of $492 million, or 3.4 percent of sales. Net earnings for 2021 included an $88 million debt refinancing charge ($65 million after tax, or diluted EPS of 40 cents) in the first quarter.

CEO’s Take: CEO Erik Nordstrom spent the early portion of the call discussing the Rack business, which was reportedly considered for a spinoff among other potential strategic alternatives.

“We are executing a multi-layered plan to both expand our offerings of the most coveted brands we carry, as well as source from new vendors, to ensure we have the selection our customers want,” Nordstrom said. “In Q4, we improved our in-stock position at the Rack by increasing the flow of inventory, making more frequent deliveries to our stores, partnering with brands to prioritize Rack deliveries, and focusing our sourcing efforts on core categories that matter most to customers, such as shoes and apparel.”

Nordstrom also noted that the off-price seller would be increasing its use of pack-and-hold inventory tactics. This will enable the retailer to buy larger quantities of select relevant items when available, then hold a portion of it to deploy in periods with high demand, tight supply or system constraints.

He noted that one-third of next-day demand was picked up at Rack stores, “demonstrating the power of integrating capabilities across our two banners and across our digital and physical platforms.”

“We are encouraged by increases in order pickup demand, a leading indicator of future growth as customers utilizing in-store pickup have higher engagement and spend 3.5 times more than customers who don’t utilize the service,” he added.