10-Q: Nordstrom Reports Mixed Q2 Results Amid Strategic Shifts and Potential Privatization

Nordstrom's second-quarter results show a slight increase in sales and earnings, but also include a supply chain impairment charge and ongoing strategic considerations.

Summary

• Nordstrom's Q2 2024 net earnings were $122 million, or 3.2% of net sales, with diluted earnings per share of $0.72.
• Total company net sales increased by 3.4% compared to Q2 2023, and comparable sales increased by 1.9%.
• The timing of the Anniversary Sale benefited net sales by approximately 100 basis points.
• Nordstrom Rack net sales increased by 8.8%, with comparable sales up 4.1%.
• Digital sales accounted for 37% of total net sales.
• The company incurred a $51 million non-cash impairment charge related to supply chain assets.
• Gross profit increased to 36.6% of net sales, up from 35.0% in the same period last year.
• The company is exploring a potential going private transaction.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While sales and gross profit showed improvement, the supply chain impairment charge and the potential going private transaction create uncertainty. The results are mixed, and the future direction of the company is unclear.

Positives

• Total company net sales and GMV increased for the second quarter and six months ended August 3, 2024, compared with the same periods in 2023.
• Gross profit increased $102 and 155 basis points as a percent of net sales for the second quarter of 2024, compared with the same period in 2023.
• The company continued to expand its reach and convenience for customers by opening 5 new Rack stores in the second quarter of 2024 bringing our year to date total to 11 new Rack stores.

Negatives

• The company incurred a $51 million non-cash impairment charge related to supply chain assets.
• SG&A increased $103 for the second quarter compared with the same period in 2023, due to a charge primarily related to a supply chain asset impairment, higher variable costs associated with higher sales volume and a 2023 gain on the sale of a real estate asset.
• Diluted EPS decreased $0.12 for the second quarter of 2024, compared with the same period in 2023, due to a charge primarily related to a supply chain asset impairment that had a net unfavorable impact of $0.24 per diluted share in the second quarter of 2024.

Risks

• The potential going private transaction could adversely affect the business, financial condition, and stock price.
• The concentration of stock ownership may limit shareholders' ability to influence corporate matters.
• The company faces risks related to the retail environment, supply chain disruptions, and economic conditions.

Future Outlook

In fiscal 2024, the company expects a total revenue range, including retail sales and credit card revenues, of 1.0% 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

• Second quarter results reflected progress on our 2024 key priorities of driving Nordstrom banner growth, optimizing our operations 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 second quarter of 2024.
• We believe continued focus and execution on our key priorities will help us navigate through the near-term uncertain external environment and position us well to build capabilities to better serve our customers, drive profitable growth and increase shareholder value.

Industry Context

The retail industry is facing challenges such as changing consumer behavior, supply chain disruptions, and economic uncertainty. Nordstrom's focus on digital growth and operational optimization aligns with broader industry trends, but the potential privatization adds a unique element to its current situation.

Comparison to Industry Standards

• Nordstrom's comparable sales growth of 1.9% is mixed compared to other department stores. For example, Macy's reported a comparable sales decline of 1.4% in their most recent quarter, while Kohl's reported a comparable sales decline of 3.3%.
• Nordstrom's digital sales as a percentage of total sales at 37% is in line with other retailers who have invested heavily in their online presence. For example, Target's digital sales accounted for 18% of total sales in their most recent quarter, while Walmart's e-commerce sales grew by 24% in their most recent quarter.
• The company's gross profit margin of 36.6% is relatively strong compared to other department stores. For example, Macy's gross margin was 39.8% in their most recent quarter, while Kohl's gross margin was 38.8% in their most recent quarter.
• The $51 million supply chain impairment charge is a significant one-time expense that is not typical for most retailers. This charge is likely due to the company's efforts to optimize its supply chain and may indicate a need for further investment in this area.

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.

Related Party Transactions

• Subsequent to deconsolidation, liabilities and receivables between Nordstrom and Nordstrom Canada were no longer eliminated through consolidation, are considered related-party transactions and are recorded in our Condensed Consolidated Balance Sheets at estimated fair value.

Stakeholder Impact

• Shareholders face uncertainty due to the potential going private transaction.
• Employees may be affected by the ongoing strategic changes and potential privatization.
• Customers may experience changes in the retail experience as the company continues to evolve its business model.
• Vendors and suppliers may be impacted by the company's strategic shifts and potential privatization.

Next Steps

• The Special Committee will review the proposal from the Bid Group.
• The company will continue to execute its customer strategy and optimize operations.
• The company will continue to expand the reach of Nordstrom Rack.

Key Dates

Keywords

Nordstrom, retail, financial results, quarterly report, sales, earnings, supply chain, privatization, Nordstrom Rack, digital sales