Nordstrom Posts Significant Q2 Declines, but Sees Upsides
Though Nordstrom got hit hard on the bottom and top lines, cash flow and margins improved.
WWD By David Moin on August 25, 2020
Nordstrom Inc., impacted by the pandemic-related charges and sales declines across all selling channels, reported a net loss of $255 million in the second quarter ended Aug. 1, compared to net earnings of $141 million during the same period last year.
Losses before interest and taxes came to $370 million, which included pretax charges of $23 million related to COVID-19. In the year-ago period, Nordstrom reported earnings before interest and taxes of $216 million.
Charges last quarter consisted primarily of asset impairments from store closures, premium pay and benefits, and restructurings, which were slightly offset by credits from the Coronavirus Aid, Relief and Economic Security Act. In the second quarter of 2020, these charges reduced net earnings by $14 million or $0.08 per diluted share, and consisted primarily of corporate asset impairments.
Revenues came to just over $1.86 billion in the last quarter, compared to $3.87 billion in the year-ago quarter. Big urban stores, including the Manhattan flagship on 57th Street, have been hardest hit by COVID-19 with bigger traffic drop-offs than other areas of the country.
While the numbers were down and not surprising due to the pandemic and the retailer’s assortment of “non-essentials,” officials said cash flow and earnings exceeded expectations and were attained through improved merchandise margins and significant overhead cost reductions.
They also said that with “cleaner” inventories and available open-to-buy, inventories are being adjusted to better reflect the demand for casual, active, home and wellness categories. Top-performing merchandise areas last quarter were home, kids’ wear, accessories, beauty and active, in both full-price and off-price channels.
Back in May, the company revealed 16 department stores and the three Jeffrey designer specialty stores would be permanently closed. The company, which last year generated $15.5 billion in revenues, also recently consolidated its merchandising organization, further reducing the headcount, and has reduced inventory levels.
Net sales decreased 53 percent from last year, reflecting temporary store closures for about 50 percent of days during the quarter due to COVID-19 as well as the shift of the Anniversary Sale, Nordstrom’s biggest event of the year, from the second quarter to the third.
“At the onset of the pandemic, we focused on protecting and enhancing liquidity, and we successfully executed on these plans,” said Erik Nordstrom, chief executive officer of Nordstrom Inc. “Thanks to our team’s efforts during the second quarter, we further strengthened our balance sheet with liquidity of $1.3 billion and generated operating cash flow of more than $185 million. We are now pivoting to prioritize market share gains and profitable growth as we advance our strategies.”
“As we head into the second half,” Nordstrom said during a conference call with retail analysts, “we are continuing to take a flexible and prudent approach to planning our business. We are confident in our ability to adjust quickly.”
He said he expects sequential improvement in sales, earnings and cash flow in the back half of the year, provided stores remain open (just about all Nordstrom stores are open currently) and there is a steady flow of new inventory receipts.
“There is no doubt the pandemic significantly shifted demand by categories,” and where the company is investing more or less dollars, the ceo said. The Anniversary Sale, which is currently in progress, “represents significant adjustment. We have a home business that is growing nicely. There are plenty of categories where we have been able to adjust our investment and where we are seeing great (positive) signals from our customers to those adjustments.”
During the first quarter, Nordstrom reduced inventory by more than 25 percent to mitigate markdowns on seasonal inventory and bring in newness for customers. As a result, merchandise margin trends in the second quarter improved sequentially and exceeded expectations. While officials said sales results met their expectations, they were constrained by the flow of inventory which improved as the quarter progressed. In July, Nordstrom increased inventory receipts to meet customer demand, particularly for its Anniversary Sale, which offers early access to new fall designer goods at temporarily reduced prices first to Nordy Club customers and later all customers. Nordstrom said the Anniversary Sale is tracking in-line with expectations, reflecting improvement in underlying trends relative to July.
Second-quarter operating cash flow of more than $185 million exceeded company expectations and enabled Nordstrom to pay down $300 million on its revolving line of credit. Nordstrom ended the second quarter with $1.3 billion in total liquidity including $1 billion in cash.
“We’re confident that we can improve sales trends in the second half of the year and beyond,” said Pete Nordstrom, president and chief brand officer. “Our inventories are current and in-line, and we’re focused on amplifying relevant categories, brands and trends to meet customers’ changing preferences.”
During a conference call with retail analysts, Pete was upbeat about the 2020 holiday season and how it’s been planned. Unlike many other retailers, Nordstrom doesn’t break out the holiday decor and gifts weeks before most consumers are inclined to buy gifts.
“We don’t decorate our stores till after Thanksgiving,” Nordstrom said, adding that the patience demonstrated by the retailer in getting into the holiday mode has been the biggest compliment the store gets from customers. Still, for the upcoming holiday season, Nordstrom doesn’t want to be left behind. “It’s pretty clear there is an opportunity for us to sell gifts prior to Thanksgiving,” said Pete. “We are going to bring in gift offerings before Thanksgiving and make it clear to customers we have that.”
“What’s really encouraging is a continuation of the (holiday) plan we executed and learned from last year,” said Pete. “Before the pandemic, we had a pretty clear path of where we thought we could be successful.” He said the company sees opportunities to expand casual, active and wellness categories; the digital offer; and gifts at lower prices with greater breath and across categories.
If needed, “We feel like we have some time to amend what we are buying,” Pete said, adding that he’s “super positive” about the company’s clean inventory position and open to buy availability, facilitating merchandise adjustments.
At the full-price department stores, net sales decreased 58 percent. Excluding the Anniversary Sale event shift impact, full-price sales decreased in the mid-forties percent range.
Off-price net sales decreased 43 percent compared with the same period in fiscal 2019. The Rack played a key part in cleaning up inventories, said Erik, though he added that “access to product has been a little spotty. There’s no doubt our vendor base has pulled back during the pandemic.” To get the desired merchandise, it takes “close cooperation with our vendors.”
Total company digital sales decreased 5 percent. Excluding the Anniversary Sale event shift impact, digital sales increased about 20 percent in the second quarter and in the mid-teens range on a year-to-date basis. There was “significant growth” in new Nordstrom customers shopping digitally of more than 50 percent. Erik also pointed out the importance of providing curbside pickups of online orders at stores. “Curbside represented one quarter of order pickup volume,” he said.