Nordstrom Shows Q3 Gains But Underwhelms Due to Rack and High Labor Costs – WWD

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Nordstrom Inc., seeing revenues on the rise, reported third-quarter net earnings of $64 million, compared to $53 million during the year-ago period, though the retailer is still behind its 2019 sales and profit levels and Wall Street sent the firm’s shares tumbling by 21.5 percent in after-hours trading.

Rival retailers including Macy’s Inc. and Kohl’s have been exceeding their 2019 performances and have raised their outlooks for this year. On the other hand, Nordstrom, when it released its third-quarter numbers on Tuesday, reaffirmed its outlook for 2021.

While beating sales expectations, the earnings fell below Wall Street expectations and were brought down due to higher labor costs and challenges at the Rack off-price division, while the Nordstrom banner — the full-line store and digital businesses — showed increases. The miss versus expectations sent Nordstrom’s shares down in after-hours trading to $25.07 after they closed slightly down on the day.

Earnings before interest and taxes came to $127 million in the third quarter ended Oct. 31, compared with $106 million during the same period a year ago primarily due to higher sales volume and improved merchandise margins, partially offset by labor cost pressure.

EBIT was $66 million lower than the third quarter of fiscal 2019 due to fulfillment and labor cost pressures, partially offset by benefits from resetting the cost structure in 2020. Last quarter also included a $19 million tax benefit associated with the CARES Act.

Third-quarter net sales increased 18 percent versus the same period in fiscal 2020 but decreased 1 percent versus the same period in fiscal 2019. The timing of this year’s Anniversary Sale, with about one week falling into the third quarter of 2021, had a positive impact of about 200 basis points on net sales compared with fiscal 2019.

During the quarter, Nordstrom banner net sales increased 3 percent versus the third quarter of fiscal 2019, which included an approximately 300 basis point positive impact from Anniversary Sale timing.

Net sales for Nordstrom Rack last quarter decreased 8 percent versus the third quarter of fiscal 2019.

Sales in the home, active, designer and beauty categories had the strongest growth compared with the third quarter of 2019. More specifically, designer shoes, designer handbags and men’s designer apparel did well, as did sunglasses and swimwear suggesting that the travel industry is getting better.

Geographically, Nordstrom comparable store sales in the Southern regions, including Southern California, grew 8 percent versus 2019 and outperformed the Northern regions. Comparable sales in suburban stores continued to be stronger than urban stores in the third quarter, with both improving sequentially over the second quarter.

“We have long benefited from a commitment to customer service, new and compelling merchandise, innovative brand partnerships and interconnected digital and physical assets. However, we need to move faster to capitalize on these strengths and profitably grow market share,” said Erik Nordstrom, chief executive officer of Nordstrom Inc., in a statement.

“We’re taking action to improve performance at Nordstrom Rack, including optimizing inventory levels, better balancing price points and increasing brand awareness,” Nordstrom said. “Work is also underway to improve merchandise margin across the company and ensure we have the visibility and flexibility we need to serve our customers seamlessly, despite global supply chain challenges.”

New strategies at Rack to improve performance, outlined by Erik and his brother Pete Nordstrom, president and chief brand officer during a conference call with retail analysts Tuesday, included:

  • Increasing “pack and hold” merchandise two to three times to offset future supply chain disruptions.
  • Reversing an over-dependence on lower priced goods in certain categories bringing average AUR down and putting pressure on operations.
  • Strengthening selections of “coveted” brands offered at “premium values.”
  • Strengthening Rack brand awareness through the “More Reasons to Rack” marketing campaign launched in September.

“In the third quarter, we made continued progress toward our strategic and financial goals, driven by strong digital growth, the integrated capabilities enabled by our Market Strategy and increased net sales in our Nordstrom banner stores, but we are focused on accelerating our transformation and improving results.”

Erik Nordstrom
Andrew H. Walker/Footwear News/REX/Shutterstock

Nordstrom continues to expand customer choice counts as part of its evolving merchandising strategy. Alternative partnership models beyond traditional wholesale arrangements grew to nearly 8 percent as a share of total sales, and the company’s recently unveiled partnerships with Fanatics and Asos will provide a broader assortment in new and existing categories for customers, without a corresponding increase in owned inventory for the company.

“Taking lessons learned from this year’s Anniversary Sale, the team has combined the art of merchandising with data-driven insights to put the right assortment in the right place at the right time,” said Pete Nordstrom, president and chief brand officer.

“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.”

For fiscal 2021, the company projects revenue, including retail sales and credit card revenues, to grow more than 35 percent versus fiscal 2020; EBIT margin is expected to be about 3 to 3.5 percent of sales.

Digital sales decreased 12 percent compared with the same period in fiscal 2020, during which the Anniversary Sale temporarily shifted to the third quarter of that year, and increased 20 percent compared with the same period in fiscal 2019. Digital sales represented 40 percent of total sales during the quarter.

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