10-Q: Nordstrom Reports Mixed Q1 Results Amidst Strategic Shifts and Operational Adjustments

Nordstrom's first quarter saw a net loss of $39 million despite a 5.1% increase in net sales, driven by strong Rack performance and offset by higher loyalty costs and supply chain issues.

Summary

• Nordstrom reported a net loss of $39 million, or $0.24 per diluted share, for the first quarter of 2024.
• Total company net sales increased by 5.1% compared to the same period last year, with comparable sales up 3.8%.
• The wind-down of Canadian operations negatively impacted total company net sales by 75 basis points.
• Nordstrom Rack net sales increased by 13.8%, with comparable sales up 7.9%.
• Digital sales accounted for 34.3% of total net sales, a slight decrease from 36.1% in the prior year.
• Gross profit decreased by $18 million, and gross profit as a percentage of net sales decreased to 31.6% from 33.8%.
• The company opened 6 new Rack stores in the first quarter and is on track to open 22 new Rack stores in 2024.
• The company changed its inventory accounting method from the retail inventory method to the weighted average cost method, resulting in a $39 million decrease to accumulated deficit, net of tax.
• Credit card revenues decreased slightly to $114 million from $117 million due to higher credit losses.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the reported net loss and decreased gross profit margin, despite positive sales growth and strategic initiatives. The exploration of a potential going private transaction also adds uncertainty.

Positives

• Nordstrom Rack experienced strong sales growth, with a 13.8% increase in net sales and a 7.9% increase in comparable sales.
• The company is expanding its Nordstrom Rack store network, which is expected to contribute to future growth.
• The implementation of a digital marketplace is expected to broaden product offerings and improve customer experience.
• The change to the weighted average cost method for inventory accounting is expected to provide more precise data and enhance visibility into item-level profitability.
• The company is making progress in optimizing its supply chain, leading to faster delivery times and reduced variable fulfillment costs.

Negatives

• The company reported a net loss of $39 million for the quarter.
• Gross profit decreased by $18 million, and gross profit as a percentage of net sales decreased to 31.6%.
• Digital sales as a percentage of total net sales decreased slightly to 34.3%.
• Credit card revenues decreased slightly due to higher credit losses.
• The wind-down of Canadian operations negatively impacted total company net sales by 75 basis points.

Risks

• The company faces risks related to the successful execution of its customer strategy and evolving business model.
• Disruptions in the global supply chain, including factory closures and rising prices, could negatively impact the company.
• The company's ability to control costs through effective inventory management and supply chain processes is crucial.
• The exploration of a potential going private transaction by the CEO and President could impact the business and stock price.
• The company is exposed to risks related to cybersecurity breaches and compliance with information security and privacy laws.
• The company's performance is subject to seasonal fluctuations and cyclical trends in consumer spending.
• Economic and market conditions, including inflation and changes in consumer behavior, could impact the company's results.
• The company is subject to various legal and regulatory risks, including compliance with domestic and international laws.

Future Outlook

For fiscal year 2024, the company expects a total revenue range, including retail sales and credit card revenues, of a 2.0% decline to 1.0% growth compared with the 53-week fiscal 2023, which includes an approximately 135 basis point unfavorable impact from the 53rd week.

Management Comments

• First quarter results reflected progress on our 2024 key priorities of driving Nordstrom banner growth, operational optimization and building upon the momentum at the Rack.
• We are committed to delivering profitable growth while improving the customer experience and are encouraged by the progress we made against our key priorities during the first quarter of 2024.
• We are focused on optimizing our operations, including in supply chain, which drives improvements in customer experience through faster delivery and improves our cost position by maximizing our inventory value throughout its lifecycle.
• Our strategy and focus on great brands at great prices continued to deliver results with increases in traffic, conversion and customers in the first quarter of 2024.
• We believe continued focus and execution on our key priorities will position us well to build capabilities to better serve our customers, drive profitable growth and increase shareholder value.

Industry Context

The retail industry is currently facing challenges such as changing consumer behavior, supply chain disruptions, and economic uncertainty. Nordstrom's focus on digital growth, operational optimization, and expansion of its Rack division aligns with broader industry trends aimed at adapting to these challenges. The company's performance is being closely watched by investors and competitors alike as it navigates these market conditions.

Comparison to Industry Standards

• Nordstrom's comparable sales growth of 3.8% is mixed compared to other department stores and retailers. Some competitors have reported stronger growth, while others have struggled.
• The company's gross profit margin of 31.6% is lower than some luxury retailers but comparable to other department stores.
• Nordstrom's digital sales percentage of 34.3% is in line with many retailers, but some online-focused competitors have higher percentages.
• The expansion of Nordstrom Rack is a strategy similar to other retailers who are focusing on off-price channels to capture a broader customer base.
• The company's focus on supply chain optimization is a common theme across the industry as retailers seek to improve efficiency and reduce costs.
• Nordstrom's adjusted ROIC of 8.2% is a key metric that investors use to compare the company's performance to its peers.

Legal Proceedings

• The company is subject to various claims and lawsuits arising in the ordinary course of business.
• Nordstrom Canada commenced a wind-down of its business operations pursuant to a CCAA proceeding overseen by the Ontario Superior Court of Justice.

Related Party Transactions

• Subsequent to the deconsolidation of Nordstrom Canada, certain intercompany liabilities and receivables are now considered related-party transactions and are recorded at estimated fair value.

Stakeholder Impact

• Shareholders are impacted by the net loss and the exploration of a potential going private transaction.
• Employees are impacted by the company's efforts to optimize operations and manage costs.
• Customers are impacted by the company's focus on improving the customer experience and expanding product offerings.
• Suppliers are impacted by the company's efforts to optimize its supply chain.
• Creditors are impacted by the company's debt levels and compliance with debt covenants.

Next Steps

• The company will continue to focus on driving growth at the Nordstrom banner, with a focus on digital-led growth supported by stores.
• The company will continue to optimize its operations, including in supply chain, to improve customer experience and reduce costs.
• The company will continue to expand its Nordstrom Rack store network.
• The company will focus on providing an exceptional Anniversary Sale in the second quarter.
• The company will continue to explore potential avenues to enhance shareholder value, including the potential going private transaction.

Key Dates

Keywords

Nordstrom, Nordstrom Rack, Retail, Sales, E-commerce, Digital Sales, Supply Chain, Inventory, Financial Results, Quarterly Report