Q2 Report: Nordstrom Sees More Daylight
Nordstrom Inc. is continuing to show improvements in its operations after months of turnaround efforts.
On Thursday, the Seattle-based Nordstrom reported second-quarter net earnings of $137 million, or earnings per diluted share of $0.84, and earnings before interest and taxes of $192 million. Excluding the wind-down of Nordstrom’s Trunk Club men’s styling service, EBIT on the adjusted basis came to $210 million.
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That compares to net earnings of $126 million, or EPS of $0.77, and EBIT of $202 million in the year-ago period.
Though sales continued to decline in this year’s second quarter, which ended July 29, the slippage wasn’t as steep as the first quarter. Net sales in Q2 decreased 8.3 percent compared to a decrease of 11.6 percent in the first quarter, reflecting sequential improvement in sales at both Nordstrom and Nordstrom Rack, the company indicated.
At the end of the first quarter, Nordstrom executives did say they were starting to see progress in their turnaround efforts. For that quarter, Nordstrom reported a net loss, largely due to charges stemming from the wind-down of Nordstrom’s stores in Canada. Thursday’s second-quarter report does provide further evidence that strategies are helping to right the ship, though Nordstrom is currently being steered without the benefit of a chief merchant. The position has been vacant since earlier this summer when Teri Bariquit retired.
The company beat estimates on the earnings side, but the negative sales and the reiterated outlook for a minus 4 to 6 percent revenue decline for the year resulted in Wall Street pulling Nordstrom’s stock price down about 4 percent, or $0.70, to $16.18 in after-market trading.
Gross merchandise value (GMV) declined 8.5 percent. GMV refers to all the merchandise sold including owned goods, and those sold through leased shops, marketplace formats and drop shipping.
It should be noted that Nordstrom’s second-quarter sales were negatively impacted by the wind-down of its stores in Canada and a change in the timing of the Nordstrom Anniversary Sale. Nordstrom calculated that excluding those two changes, sales would have been down only about 4 percent. There was a 275-basis-point negative impact from the wind-down of the Canadian operations and a 200-basis-point negative impact from shifting one week of the Anniversary Sale from the second quarter to the third quarter.
Nordstrom entered Canada with a flourish in 2014, opening some of its most modern stores at the time, but disclosed last March that it was no longer worth it to operate north of the border. Nordstrom operated six department stores and seven Rack stores in Canada. The second quarter of 2023 included no sales from the Canadian operations, compared with a full quarter of sales from the Canadian operations in the second quarter of 2022.
The popular Anniversary Sale, which lasted three weeks, gives Nordstrom’s best customers early access to new fall fashion at discounts. When the sale ends, the goods revert back to original prices, if they haven’t sold out.
“We’ve worked hard to improve our operating model, and our solid results reflect the continued progress we made against our top priorities to improve Nordstrom Rack performance, increase inventory productivity and deliver efficiencies through supply chain optimization,” said Erik Nordstrom, chief executive officer of Nordstrom Inc. “These 2023 priorities improve the way we operate and drive profitability in the near term, and better position us to succeed and deliver value to our shareholders in the long term. Looking ahead, we remain confident in our ability to deliver on these priorities, all while keeping the customer at the center of everything we do.”
“Our annual Anniversary Sale was a successful event, especially among our most loyal customers. We were pleased by strong sell-through of new merchandise from the best brands, both in stores and online,” said Pete Nordstrom, president and chief brand officer of Nordstrom Inc.
“In the second quarter, we were also encouraged by sequential improvement in sales trends at both Nordstrom and Rack. We remain focused on managing inventory with greater discipline, improving mix and productivity, and thank our teams for their hard work in bringing it all to life for our customers.”
While Nordstrom’s latest financial report was generally positive, during a conference call with analysts, chief financial officer Cathy Smith said the company continues to see “a cautious consumer,” that early third quarter sales trends have decelerated at both the Nordstrom and Rack banners, and that credit card delinquencies are rising above pre-COVID-19 levels.
Commenting on the company’s designer business, Pete Nordstrom said that while there has been good growth “that changed abruptly about a year ago. We have more [inventory] than we need. It takes time working through that.”
He also said during the call, “We need to do better with younger customers and have plans to do that. Our own label is going to be a big part of that. In 2024, we should be able to see improvements with that young customer.”
“Traffic has been softer, but there’s strength in conversions and spend per customer,” said Erik.
Commenting on shrinkage – a mounting problem industry-wide – Erik said that at his company, “Losses of theft are at historical highs. It’s unacceptable and needs to be addressed, though we have not seen shrinkage levels exceeding what we planned, but it’s a drag on earnings that needs to come down. We’ve done everything we can do to make our stores safe and secure and to address the loss,” including partnering with local law enforcement, he said. “The whole industry needs to come together to find better solutions.”
For the Nordstrom banner, net sales decreased 10.1 percent, improving sequentially from the first-quarter decrease of 11.4 percent, and GMV decreased 10.4 percent compared with the same period in fiscal 2022. The wind-down of Canadian operations had a negative impact on net sales of 400 basis points, and Anniversary Sale timing shift had a negative impact of about 300 basis points compared with the second quarter of 2022.
Bestselling categories were active and beauty, which grew by low-single digits. Kids’ apparel and men’s apparel performed better than average for the quarter, the company indicated. Dressed up styles also performed well, particularly with contemporary labels.
At Nordstrom Rack, the off-price banner, net sales decreased 4.1 percent compared with the same period in fiscal 2022, improving sequentially from the first-quarter decrease of 11.9 percent. Sales of accessories, especially handbags, showed strength.
Digital sales decreased 12.9 percent compared with the same period in fiscal 2022. Collectively, eliminating store fulfillment for Nordstrom Rack digital orders during the third quarter of fiscal 2022 and sunsetting Trunk Club during the second quarter of fiscal 2022 negatively impacted second-quarter digital sales by about 500 basis points. The timing shift of the Anniversary Sale had a negative impact of about 300 basis points. Digital sales represented 36 percent of total sales during the quarter.
Ending inventory decreased 17.5 percent compared with the same period in fiscal 2022, versus an 8.3 percent decrease in sales, reflecting what the company characterized as “continued strong discipline.”
Selling, general and administrative expenses, as a percentage of net sales, of 32.8 percent were flat compared with the same period in fiscal 2022 primarily due to improvements in variable costs from supply chain efficiency initiatives and more favorable carrier rates than expected, and a gain on the sale of a real estate asset. These were offset by higher labor costs and deleverage from lower sales.
“Nordstrom’s 2Q demonstrated the company’s productive management of a challenging operating environment for apparel-focused retailers,” David Silverman, senior director at Fitch Ratings, wrote in a research note wrote. “While revenue is expected to remain challenging through 2023, the company profits and cash flow are benefitting from its tight control over inventory and discretionary purchases.Although still challenged, Nordstrom’s Rack business saw some sequential improvement in 2Q as it continues efforts to improve merchandising and operations. Fitch expects Nordstrom can demonstrate improving profitability and cash flow as the year progresses despite topline headwinds, given efforts to reduce inventory and pull back discretionary expenses.”
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