Nordstrom

How’s Nordstrom Inc. faring through the pandemic?

The Seattle-based retailer suffered a big first-quarter loss off a sharp decline in sales due to COVID-19-related temporary store closings and warned that the industry will be intensely promotional for the next two months.

But the company has taken dramatic steps to improve liquidity. It’s slashed inventories by 25 percent and will be opening stores in its two biggest markets — New York and California — in the next several weeks.

“We contemplate a slow recovery and continued promotional environment,” chief executive officer Erik Nordstrom warned Thursday during a conference call 45 minutes after the company released its first-quarter results which, as with most other retailers, were way down.
The company reported it lost $521 million in the first quarter ended May 2 on sales of $2.03 billion, compared to a net profit of $37 million on sales of $3.35 billion in the first quarter of 2019. With sales down 40 percent from last year, the market drove Nordstrom’s stock price down 7.7 percent, or $1.52, to $18.12.
Yet there is some cause for optimism, with the ceo indicating that “the full fleet will be opened by the end of June” and that COVID-19 has not stalled Nordstrom’s market strategy rollout, involving opening Nordstrom Local service hubs and leveraging inventories and services across its selling channels. The strategy operates in five markets now and will be in another five by the end of year, as originally planned.
Regarding the status of the store fleet, “About 40 percent of our stores are open. The big caveat is most of those have been opened for less than two weeks,” said Erik Nordstrom.
“I’m hesitant to draw any conclusions” on the performance of stores reopened. “But the results are slightly above our expectations. There are two general trends at stores opened so far. The more outlying stores are performing better than those in densely populated areas. And the Rack performance is outperforming expectations, and full-price is within expectations. The variance by location has been much wider than normal times.
“It wouldn’t be wise for us to draw conclusions and make plans by such a small sampling. We are trying to be as responsive as we can be. Having our inventories down 25 percent allows us to respond to what we see from customers.
“We have had teams in all of our stores doing fulfills” of online orders. “We have made productive use of people in stores. From the amount of business we see from customers coming to stores, we can leverage that existing labor pretty darn efficiently. We feel good about our store labor,” said the ceo.
For unscheduled and furloughed workers, Nordstrom has been extending benefits and helping them find temporary employment, he added.
The Nordstroms have concerns about deeper discounting industry-wide, and suggest they will resist the markdown mania that’s occurred. Nordstrom historically is not as promotional as its competition.
“The likelihood of a strong promotional month or two is high,” said Pete Nordstrom, president and chief brand officer. “We are not going to be driving a bunch of price promotions because we don’t have to because our inventories are in line. In June and July as stores open up, our focus is getting in-stock on replenishment and key items, and as we get to August we pivot to our Anniversary Sale. The sale is more timely than ever since the whole sale is predicated on newness.”
It’s usually launched in July each year. “There is going to be really great value as well,” added Pete Nordstrom, indicating a lower average price point and greater percentage off on the Anniversary items. Nordstrom’s Anniversary Sale will begin on Aug. 19 for the general public. The event, which is the retailer’s biggest event of the year, gives early access to new fall fashion for all Nordstrom cardmembers starting Aug. 13 or earlier depending on their Nordy Club status. The reduced prices on new fashion arrivals are for a limited period before reverting to full price.
“It’s not part of our strategy to become more price-promotional,” said Pete Nordstrom.
Added costs associated with cleaning and sanitizing stores and providing masks to employees are not material and the company is able to offset them by saving in other areas, according to Ann Bramman, chief financial officer.

The first-quarter net loss included after-tax charges of $173 million related to COVID-19, including asset impairments from store closures, premium pay and benefits, and restructuring charges, which were slightly offset by credits from the Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act.

Losses before interest and taxes of $813 million compared with earnings before interest and taxes of $77 million during the same period in fiscal 2019 due to lower sales volume from temporary store closures, increased markdowns and charges related to COVID-19 of $280 million.

At Nordstrom’s full-price department stores, net sales decreased 36 percent. At the Rack off-price stores, net sales fell 45 percent. The softest categories during the first quarter were men’s apparel, dresses and designer apparel.

Total company digital sales grew 5 percent to reach $1.1 billion in the first quarter. While stores were temporarily closed, the company’s e-commerce business experienced significant growth in new customers of more than 50 percent. Annually, Nordstrom has a $5 billion e-commerce business.

Nordstrom temporarily closed all of its stores on March 17 due to COVID-19, but has been steadily reopening them for the last few weeks.

“We successfully strengthened our financial flexibility by increasing liquidity, lowering inventory by more than 25 percent from last year and significantly reducing our cash burn by more than 40 percent from March into April,” said Erik Nordstrom. “We’re entering the second quarter in a position of strength, adding to our confidence that we have sufficient liquidity to successfully execute our strategy in 2020 and over the longer term.”

The company entered fiscal 2020 with cash of about $850 million and increased its position to about $1.4 billion by the end of the first quarter.

To increase its liquidity this year, the company drew down and amended its $800 million revolver; issued $600 million in senior secured notes, and suspended dividends and share repurchases.

In addition to its planned expense savings of $200 million to $250 million, the company is on track to deliver further cash savings of more than $500 million in operating expenses, capital expenditures and working capital in fiscal 2020. These savings include a reduction in non-occupancy overhead expenses of about 20 percent on an annualized basis.

The inventory reduction of more than 25 percent was a result of decreasing receipts by about 30 percent, and stimulating demand through increased marketing and promotions and store fulfillment capabilities. The company said it will bring in newness beginning in June.

“We have a unique mix of assets, and the flexibility of our business model continues to serve us well,” said Pete Nordstrom. “In 2019, our off-price and e-commerce businesses accounted for nearly 60 percent of sales. As we anticipate an acceleration of these longer-term customer trends, we’re taking proactive steps to move faster in executing our strategic plans.”

The company has decided to keep 16 full-line department stores and all three of its Jeffrey stores closed for good. Most of the stores closed permanently are more than 20 years old, are in markets with multiple Nordstrom stores, and in total represent 2 percent of Nordstrom’s volume. Nordstrom expects to get back 30 percent of sales from the permanently closed stores, through nordstrom.com and stores continuing to operate in markets where the permanent closures are occurring.

No permanent Rack closings have been announced and the ceo sounded upbeat about the prospects for the off-price division. He said the stores are very profitable, have shorter leases and when they come up for renewal, “we are able to invest in that building or relocate to a better situation. Part of it I put under the banner of flexibility.…Off-price is just a huge part of our future.”

He underscored that with his opening remarks, indicating, “The Nordstrom business is continuing to shift from a predominantly mall-based business to mobile and off-price.…The omni-character of the business and synergies between channels brings greater merchandise selection and faster delivery while increasing services to customers.” Off-price makes up a third of sales, he said.

Erik Nordstrom

Erik Nordstrom  John Photography/Shutterstock