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Nordstrom Is Trying to Premiumize Rack

Nordstrom posted a third quarter earnings beat, even with $100 million in incremental markdowns, although fourth quarter sales have started out slow.

In a Nutshell: CEO Erik Nordstrom told investors at a conference call that customer demand began to soften in June, mostly at off-price Nordstrom Rack. He said the slowdown was most noticeable among lower-income customers. In response the company tried to align expenses with sales and clear through overstock to close out 2022 with healthy inventory, he said.

“Sales decelerated in late October and early November, particularly in geographies with unseasonably warm weather. In the last two weeks, however, sales trends have improved,” the CEO said.

Supply chain optimization helped improve efficiency, enhance the customer experience and expedite order fulfillment.

“In the third quarter, customers continued to refresh their wardrobes and shop for occasions such as social events, travel, work, and holidays, which drove demand for our core categories and services” in the full price business, the chief executive pointed out.

From the second to the third quarter, a strategic focus was on improving Rack‘s profitability while optimizing the supply chain and inventory flow.

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“We’re making progress in these initiatives, and we expect them to benefit our top-line and bottom-line performance in the fourth quarter of this year, in 2023, and beyond,” Nordstrom told investors.

One decision in the third quarter was to reduce Rack store-based order fulfillment, as well as raise the minimum order amount to receive free ship-to-store delivery on Though this ate into top-line growth, it also reduced order cancellations, simplified Rack operations and were good for profits. The company is now focusing on increasing its supply of premium brands at Rack, improving the assortment mix and boosting brand awareness.

Nordstrom said the added link to the full-price banner provides unique access to premium brands not widely available at other off-price competitors.

“Ninety percent of the top brands at Nordstrom are sold at Nordstrom Rack. This quarter, sales of our top 100 brands at the Rack increased 9 percent, which underscores the growth opportunity from increasing our supply of premium brands,” he said. The plan is to shift away from the lower price point items that haven’t resonated with Rack customers, with that inventory mostly cleared out by the end of the current fiscal year. Nordstrom also said he expects to optimize Rack product mix by mid-2023.

The company is also investing in digital. “We are evolving digital discovery and driving higher engagement with enhanced content, a refreshed shopping experience that includes redesigned product pages, and smarter product search capabilities,” he said.

Despite some uncertainty over consumer behavior, Nordstrom is upbeat about how the initiatives so far have positioned the retailer for what lies ahead. “Macroeconomic conditions and customer behavior [are] moving rapidly, and we feel really well prepared for that uncertainty….,” he said. “We’re not just starting right now of looking at kind of the volatile economic times out there and making adjustments. These adjustments were put in place at the end of last quarter and, again, have served us well through Q3 and have prepared as well going forward.”

The retailer plans to open or relocate eight Nordstrom Rack stores next spring, with eight more in Fall 2023. Another Rack store is set open in early 2024.

“As weather normalized and we get closer to the holidays, we’ve seen sales trends improve and gifting activity accelerate,” Michael Maher, chief accounting officer, said. “As for holiday shopping expectations, we believe that this year’s calendar, which has an extra Saturday between Thanksgiving and Christmas, will lead some customers to wait until closer to Christmas to make their purchases. We continue to expect an elevated promotional environment across retail in the fourth quarter.”

Net Sales: For the three months ended Oct. 29, total revenues fell 2.5 percent to $3.55 billion from $3.64 billion, which included a net sales decline of 2.9 percent to $3.43 billion from $3.53 billion in the year-ago third quarter. The company attributed part of the sales decline to a timing shift of the Anniversary Sale into the second quarter.

Digital sales fell 16.4 percent versus a year ago, attributed in part to a store fulfillment change that impacted Rack digital orders and the shuttering of the Trunk Club earlier this year. Digital made up 34 percent of total sales in the quarter.

By business, net sales at full-line Nordstrom stores fell 3.4 percent and were impacted by the timing of the Anniversary sale. At Rack, net sales declined 1.9 percent from a year ago.

Pete Nordstrom, president and chief brand officer, said “men’s and women’s apparel, shoes and designer” had the strongest growth in the quarter as customers “continue to shop for occasions and return to the office and update their closets.” Home and active, categories that were strong during the pandemic, followed their recent downward trend.

As for inventory, he said the company has taken “aggressive action to align inventory with softening demand and category shifts. We have been focusing on improving our assortment by clearing through product that customers weren’t responding to and showcasing the fashion, newness, and categories they want.” He also noted partnerships with On Running, Skims and Fear of God as part of its strategy to amplify new brands.

In terms of inventory flow and its Closer to You strategy, “We’re reducing the number of product touch points through our network, which decreases our cost and gets the product in a sellable position faster, which improves our regular price sell-through,” according to the chief brand officer.

Another focus has been on expanding merchandise margins “over the long term,” he said, citing faster inventory turns as one to achieve that goal. “In addition to faster inventory turns, we are also working to improve merchandise margins by leveraging advanced analytics to identify customer needs, improve our assortment, increase promotional effectiveness, and optimize markdowns,” Pete Nordstrom said.

For the nine months, total revenues rose 8.8 percent to $11.21 billion from $10.30 billion, which includes a net sales gain of 8.7 percent to $10.89 billion from $10.02 billion.

Earnings: For the quarter, the company reported a net loss of $20 million, or 13 cents a diluted share, against net income of $64 million, or 39 cents, a year ago. Adjusted diluted earnings per share (EPS) were 20 cents, ahead of Wall Street’s consensus estimate of 15 cents on revenue of $3.49 billion.

Nordstrom reaffirmed its outlook for Fiscal Year 2022, with revenue growth up between 5 percent to 7 percent and adjusted EPS, excluding the impact of any share repurchase activity, of $2.30 to $2.60.

“We continue to expect approximately $100 million of incremental markdown impacts from clearance activity in the fourth quarter,” Maher said.

The low end of the company’s guidance assumes promotional activity increases above what has been seen to date, while the higher end presumes that holiday sales will accelerate closer to Christmas Day and in line with pre-pandemic shopping behavior.

Nordstrom didn’t provide fourth quarter estimates, but Wall Street’s consensus is adjusted diluted EPS of $1.45 on revenue of $4.49 billion.

For the nine months, total net income was $126 million, or 77 cents a diluted share, against a net loss of $22 million, or 14 cents, in the year-ago period.

CEO’s Take: “We are navigating short-term headwinds while also continuing to build capabilities to better serve our customers, drive profitable growth, and increase shareholder value,” the CEO said. “We are focused on remaining nimble to navigate this environment and look forward to realizing additional benefits in the fourth quarter and into 2023.”