Third-quarter net earnings at Nordstrom Inc. dropped to $53 million from $126 million in the year-ago period, though the company cited sequential improvement in sales and earnings from this year’s second quarter.
The net profit for the third quarter ended Oct. 31 included an income tax benefit of $19 million associated with the Cares Act.
Earnings before interest and taxes came to $106 million, a decrease from $193 million during the same period in fiscal 2019, primarily due to lower sales volume, partially offset by realized expense savings.
Like other retailers, Nordstrom has been hurt by the coronavirus and lack of store traffic. Its flagships in New York, San Francisco and Los Angeles would be particularly impacted with many downtown office workers choosing to work from home, and many families fleeing to the suburbs where the population is less dense and perceived risks of getting infected by the coronavirus are reduced.
Through the health crisis, however, Erik Nordstrom, chief executive officer, emphasized during a conference call Tuesday that the company remains focused on its three priorities for growth. First, building its market strategy, which he characterized as “the company blueprint.” The strategy links store and digital assets to provide greater services, faster deliveries, more pickup options, and greater merchandise choices in key metropolitan areas. In October, Nordstrom rolled out its market strategy to five additional markets, scaling to 10 of its top markets, which account for more than half of sales. In these markets, customers have access to up to seven times more merchandise selection with two-day delivery or next-day pickup. In addition, customers can now pick up nordstrom.com, nordstromrack.com and HauteLook.com orders at all Nordstrom and Nordstrom Rack stores in the U.S.
The second priority is “fueling growth of Nordstrom Rack, which represents one third of Nordstrom Inc.’s total business,” Nordstrom said. He said last year Rack brought in 7 million new customers, a third of which cross shopped to Nordstrom full-line department stores, leading to a higher overall customer spend. “Eighty percent of the top 200 brands are also carried at the Rack,” Nordstrom said.
The third priority is to increase the velocity of digital sales. Digital sales of $1.6 billion represented 54 percent of total sales and increased 37 percent last quarter. “We are a majority digital business right now. It is profitable as shown by our third quarter results,” said Nordstrom. Excluding the Anniversary Sale shift, digital sales increased in the mid-teens in the third quarter, consistent with trends in the first half of the year.
Total company sales decreased 16 percent to $3 billion last quarter, from $3.56 billion in the year-ago period. The sales results included an approximate 10 point positive impact from the Anniversary Sale event, which shifted from the second quarter in 2019 to the third quarter this year.
Top-performing merchandise categories included active, home, beauty and designer.
In Nordstrom’s full-price department store business, net sales decreased 7 percent. Excluding the Anniversary Sale shift, sales decreased in the mid-20s percent range.
In the Nordstrom Rack off-price business, net sales decreased 32 percent compared with the same period in fiscal 2019.
Gross profit as a percentage of net sales of 32.8 percent decreased 150 basis points from the same period in fiscal 2019 primarily due to the shift of the Anniversary Sale in addition to deleverage from lower sales volume.
Merchandise margins exceeded company expectations and reflected significant improvement relative to the prior quarter, strong sellthroughs and greater regular priced selling, the company said.
During the call, Anne Bramman, chief financial officer, said the company remains “in a strong financial position” and that sales fell in line with expectations.
For the fourth quarter, the company projects a sales decline in the low 20 percent range. Executives s expect a more competitive fourth quarter, promotion-wise, but Nordstrom will be “competitively priced” on the same things different stores sell.
Like other retailers, Nordstrom sees a pent up demand for apparel, specifically occasion-related apparel be it for a wedding or a date, and that sales will surge once the economy opens up again. “When that happens, we don’t know,” said Nordstrom.
“As people get out and do more socializing, that is going to help,” said Pete Nordstrom, president, chief brand officer, and Erik’s brother. “We have done really well with casual, wellness, beauty, active and home. There is a lot of runway there.”
“Our ability to significantly strengthen our financial flexibility early in the pandemic was key to delivering operating profitability of more than $100 million and cash flow of more than $150 million in the third quarter,” said Erik, in a statement. “We unlocked new ways to better serve customers on their terms with greater convenience and connection, including expansion of our online order pickup services to nearly 350 locations across both Nordstrom and Nordstrom Racks.”
In other results, third-quarter operating cash flow of $155 million exceeded expectations, enabling Nordstrom to pay down an additional $300 million on its revolving line of credit. Nordstrom ended the quarter with $1.5 billion in liquidity including about $900 million in cash.
“We are thankful for our team’s dedication to serving customers in new and differentiated ways,” said Pete. “By working with our vendor partners, we have made quick adjustments to ensure a great holiday offering for our customers. We are encouraged by the positive momentum and expect continued progress in the fourth quarter and into 2021.”