Dive Brief:
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Nordstrom Q1 net sales rose 5.1% year over year to $3.2 billion, with comps up 3.8% and digital sales about flat. Full-line Nordstrom net sales edged up 0.6%, with comps up 1.8% and gross merchandise value up 0.3%. (Last year’s Canadian closures hurt Q1 net sales by 110 basis points.) Off-price Rack net sales rose 13.9%, with comps up 7.9%.
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Gross margin contracted by 225 basis points to 31.6%, in part due to theft in its transportation network. Net loss shrank 81% to $39 million.
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On a call with analysts, the company said it had no update on the work of a special board committee, which continues to “carefully evaluate any proposal that may be received and consider whether it is in the best interest of Nordstrom and all shareholders,” including a potential proposal by Erik and Pete Nordstrom to take the company private.
Dive Insight:
Nordstrom’s department store business is still roughly double that of its off-price business — the full-line banner notched $2 billion in Q1 while Rack notched $1.2 billion — but it is increasingly receding as Rack expands.
Speaking to analysts Thursday, CEO Erik Nordstrom reiterated plans to open another 22 Rack stores this year and said the company has already opened nine so far.
“Our new stores are performing well as we've improved our planning with better data and insights as well as a team fully dedicated to new store openings,” he said. “New Rack stores continue to be a growth driver and excellent investment for us as they deliver well in excess of their cost of capital within a relatively short payback period.”
President and Chief Brand Officer Pete Nordstrom also noted that Rack is able to merchandise stores with appealing product “and a lot of that stems from the relationship we have with these brands and the full-price channel.”
According to research from GlobalData, improvements in the quality of Rack’s merchandise have been noticeable.
“Rack has gone from being something of a dumping ground for excess inventory and boring buys, to having a much sharper assortment that includes interesting brands and great-value gems,” GlobalData Managing Director Neil Saunders said in emailed comments. “Essentially, the fun of treasure hunting has returned to the business. Consumers have responded positively with better conversion, higher average transaction values, and more repeat visits. These good metrics should encourage the team to double down on the efforts as it looks to win more customers.”
Full-line Nordstrom has deepened its assortment, Pete Nordstrom told analysts. Growth in the quarter was led by Vuori, Hoka and Adidas, and children’s apparel sales improved, he also said.
But, while there are signs of progress in merchandising, including more casual offerings and better displays, the department store banner continues to suffer from its tilt toward more formal apparel and higher prices, according to Saunders.
“The unfortunate truth for Nordstrom is that the full-price business has simply become less relevant,” he said. “That means it has a much harder time drawing in customers and convincing them to buy. It is also the case that store standards remain below where they should be, and this is a further turn-off to shoppers.”
Unlike retailers that saw shrink improve or plateau in Q1, Nordstrom reported that shrink was the main pressure on gross margin in the period, with Chief Financial Officer Cathy Smith telling analysts that “the primary drivers were external theft in our transportation network and inventory cleanup in our supply chain.”
Evercore ISI analysts led by Michael Binetti warned that, because the retailer’s margins are so slim, the combination of theft in the supply chain and missing inventory discovered in distribution centers could continue to be an issue, though its recent comp trends bode well.
“We think there is little room for error on margins and see some risk that the shrink issues could spill over beyond 1Q,” Binetti said.
