Nordstrom Inc., reporting a 38 percent leap in first-quarter profits driven largely by an 18 percent digital sales gain, expects 2018 to be a “pivotal” year for performance improvement.
Recent investments in such areas as digital, Rack’s expansion into Canada, the 47,000-square-foot three-level New York men’s wear store, and improvements to Rack stores in the U.S. are expected to feed stronger results this year. In addition, Nordstrom now sees the potential to scale up its Local format, which it has been trialing in one location in Los Angeles.
Nordstrom officials did not comment on the strategy to take the company private.
“Our overall sales performance was in line with expectations,” said copresident Blake Nordstrom, during a conference call Thursday to discuss the firm’s results. “Investment in digital continued to pay off.”
He did acknowledge that he was not quite satisfied with Rack store trends, but said the company is “focused on making improvements in the Rack business.”
Nordstrom’s only freestanding men’s store, which opened last quarter on Broadway between 57th and 58th Streets in Manhattan, is “off to a good start,” Nordstrom said. “Manhattan is a premier destination representing our largest online market.”
He also said Nordstrom’s New York women’s flagship, under construction just across Broadway, is expected to deliver a “meaningful lift in sales” and is scheduled to open in the fall of 2019.
The first three Rack stores in Canada, opened in Toronto and Calgary last quarter, are yielding “terrific results,” Nordstrom said.
Also on the call were Blake’s brothers, Pete and Erik Nordstrom, who are copresidents, as well as chief financial officer Anne Bramman.
One message that emanated from the call is that learnings from the Nordstrom Local service store in Los Angeles mean the format is scalable to other markets. According to Erik Nordstrom, the company’s wide spectrum of services are “not always conspicuous to customers” but Nordstrom Local “makes it easier to communicate to customers what we can do.”
“It was a solid start to the year,” Bramman said during the call. She noted that credit revenues came in better than expected, and that the core full-price business is seeing stabilizing trends. She also said Trunk Club is showing signs of improvement, while off-price has been below plan.
Last quarter net earnings rose to $87 million, compared with $63 million during the same period a year ago. That triggered a positive narrowing of the retailer’s earnings outlook for 2018 to $3.35 to $3.55 a share, from the $3.30 to $3.35 previously forecast. There was no change in the forecast for total sales for 2018 of $15.2 billion to $15.4 billion, and no change in the outlook for comparable sales gains of between 0.5 and 1.5 percent.
Results in 2017 included an interest expense charge of $18 million related to a debt refinancing.
Last quarter, the retailer opened its first freestanding men’s store, which is on 57th Street and Broadway in New York. The company expanded its presence in Canada by opening the first three Nordstrom Racks in the Toronto and Calgary markets.
Digital sales increased 18 percent in the first quarter, and digitally enabled sales represented 29 percent of first-quarter sales, up from 25 percent a year ago.
Earnings before interest and taxes, or EBIT, were $153 million, or 4.4 percent of net sales, compared with $151 million, or 4.6 percent of net sales, during the same period in fiscal 2017
Earnings per diluted share for the quarter came to 51 cents, compared to 37 cents in the year-ago period, which included a debt refinancing charge of 6 cents.
Net sales increased 5.8 percent to $3.7 billion, from $3.3 billion a year ago. Nordstrom did shift a Nordstrom Rewards loyalty event into the first quarter from the second quarter last year.
Somewhat disappointing was the slowdown in comparable sales gains, which were up only 0.6 percent, a weak showing compared to Macy’s 4.2 percent comparable gain reported on Wednesday. J.C. Penney Co. Inc. on Thursday reported just a 0.5 percent comparable-store gain for the first quarter.
Merchandise margins were in line with expectations, suggesting good inventory management.
For the next five years, Nordstrom has a capex budget of $3.2 billion and a “priority to reinvest in the business,” particularly in digital and with the development of the New York City flagship. The company is planning a fulfillment center in southern California, enabling Nordstrom to offer a much bigger selection online and much faster shipping.
Despite the slowness at Rack, Blake said customer traffic counts are flat. “There is still a lot of great foot traffic. Inventories are in line. We don’t believe we have undue risk with markdowns.”
Pete Nordstrom cited some best-selling brands, including Airbirds, Sweaty Betty, Anthropologie Home, Gucci, Valentino, Saint Laurent and Chanel. He did say that one area where there is room for improvement is shoes, with sandal sales being affected by cool weather at the beginning of spring. “Women’s shoes, if we can get that humming along, that would make a big difference,” he said.
No large-scale store closings are expected at either Rack or Nordstrom full-price.
While the business at Rack stores has slowed, “We are very pleased to have a very robust online business,” with Rack online “just shy of $1 billion last year,” said Blake Nordstrom.
On Trunk Club, “The team spent all of last year doing a pretty deep dive,” and making some changes to the business, said Erik Nordstrom. “We think we can scale it.”
After the market closed, Nordstrom stock dropped 6.7 percent or $3.42, to close at $47.49.