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Nordstrom Q3 Profits Gain on Inventory Control and Fewer Markdowns

Nordstrom Inc. cut cost of goods and selling, general and administrative expenses to offset a sales shortfall and drove an 8.8 percent profit rise.

In a Nutshell: Erik Nordstrom, co-president, said, “Our third quarter earnings exceeded expectations, demonstrating substantial progress in the delivery of our strategy and strength of our operating discipline. Through our customer focus, we drove broad-based improvement in top-line trends. The consistent strength of our inventory and expense reduction contributed to increased profitability for the quarter.”

Nordstrom said that in full-price operations, it was able to improve the economics of its Anniversary event, which “positively contributed to merchandise margins.” Off-price delivered positive sales and earnings growth, and the business increased inventory turns for the eighth consecutive quarter.

More than 12 million active customers are enrolled in The Nordy Club loyalty program, representing an increase of 13 percent over the last year and nearly 65 percent of sales for the third quarter.

Net Sales: For the quarter ended Nov. 2, Nordstrom said total revenues were down 2.0 percent to $3.67 billion from $3.75 billion. Revenues included a net sales slip of 2.2 percent to $3.57 billion from $3.65 billion.

The company said net sales at full-price stores fell 4.1 percent in the quarter, while off-price net sales increased 1.2 percent. Total company digital sales rose 7 percent in the three-month period and represented 34 percent of the total business.

Gross profit, as a percentage of net sales, rose 100 basis points to 34.3 percent, mostly due to “fewer markdowns from continued inventory discipline in off-price and higher sell-through of Anniversary product in full-price stores.

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Ending inventory fell 2.7 percent from last year, and Nordstrom maintained a “positive spread between inventory and sales for the third consecutive quarter.”

Nordstrom realized $170 million in expense savings year-to-date and expects to “well exceed” its plan of $150 million to $200 million for the year.

Earnings: Net earnings for the quarter were up 8.8 percent to $126 million, or 81 cents a diluted share, from $67 million, or 39 cents, a year ago.

Wall Street was expecting EPS of 64 cents on revenues of $3.67 billion.

For fiscal 2019, the department store kept net sales guidance at down 2 percent, but raised its earnings per diluted share estimates at the lower end of projections. The retailer now expects diluted EPS at $3.30 to $3.50, up from prior guidance of $3.25 to $3.50.

CEO’s Take: According to Nordstrom: “Our market strategy is transforming our business model in how we’re serving customers. We have a unique mix of assets–full-price, off-price, stores and online–and we are further linking our businesses to serve customers in new and differentiated ways. We achieved an important milestone with the opening of our New York City flagship store, significantly increasing our presence in the world’s top retail market.”

Since scaling its local market strategy in Los Angeles, third-quarter sales growth there outpaced other markets by 100 basis points. The strategy has been expanded to include New York, San Francisco, Chicago and Dallas.