Dive Brief:
-
With the benefit of an extra week, Nordstrom Q4 net sales rose 2.2% to $4.3 billion; with credit card revenue up 6.7% to $127 million, total revenue in the period rose 2.3% to $4.4 billion.
-
By banner, full-line Nordstrom fell 3%, in part due to the closure of its Canadian stores. Off-price Rack rose 14.6%. Digital sales were 38% of total sales and fell 1.7%.
-
Gross profit expanded by 125 basis points to 34.4%. Net earnings rose 12.6% to $134 million, per a company press release.
Dive Insight:
After a year of major adjustments to its full-line fleet, including the closure of its Canadian stores and San Francisco flagship, and a better-than-expected holiday quarter, Nordstrom has a lot to prove this year, analysts said.
On a Tuesday conference call, executives told analysts that new store openings and improved assortments drove Rack’s healthy performance. After opening 19 new Rack stores in 2023, the company aims to open another 22 this year, they said. Encouraged by the momentum at its off-price banner, Nordstrom Chief Financial Officer Cathy Smith said the company will begin providing comp sales data starting in Q1.
“Rack stores continue to be a growth engine for our company as they are our largest source of new customer acquisition, accounting for over 40%,” CEO Erik Nordstrom said on the call. “Growing our store count also supports long-term customer retention. In fact, roughly a quarter of retained Rack customers migrate to the Nordstrom banner within four years.”
But there’s some risk to the strategy, not least because department stores in general are ceding share to specialty retailers in apparel, beauty and home as well as off-pricers, according to William Blair analysts Dylan Carden and Alexander Vasti, a trend they expect to continue.
“We see the biggest risk as continued declines at the full-line banner and ongoing volatility at Rack,” they said in emailed comments. “Thus, while Nordstrom does likely warrant some distinction as the best in the category, the ultimate scale of the business is still a moving target in our view.”
New Rack stores may not be contributing quite as much as previously expected, yet the company is swiftly expanding its footprint, according to Evercore ISI analysts led by Michael Binetti.
“[W]e’re a bit puzzled why the sharp ramp in new Rack stores isn’t having a bigger impact,” Binetti said in emailed comments.
BMO Capital Markets Managing Director Simeon Siegel is less pessimistic about department stores, given their importance to so many brands, but said that Nordstrom’s long-term viability depends on management’s execution on their goals, which seem lofty in the near-term.
“We see Nordstrom as a compelling partner for brands and do not subscribe to the ‘department stores are dead’ mantra,” he said in emailed comments. “That said, it is clearly challenged and with historically choppy [gross margins] coupled with Rack's relative underperformance among the off-prices and an aggressive fiscal year guidance at a time when most are being cut, we worry that, although shares appear inexpensive, numbers appear high.”
Nordstrom said that, including the impact of one fewer week this year, it “expects fiscal 2024 to be a year of continued momentum in its growth and profitability drivers, including opening new Rack stores, growing Nordstrom banner digital sales and driving comparable store sales across both banners.” That translates to an expectation for revenue growth (retail sales plus credit card revenues) of between a 2% decline to a 1% rise and comp sales to range between a 1% decline and 2% growth.
If Nordstrom is gaining momentum in off-price, it may be faltering at its full-line business, which is losing customers and market share, according to GlobalData Managing Director Neil Saunders. Over the holidays, the company’s department stores failed to live up to their reputation for stellar customer service and stand-out merchandise, he warned.
“While Nordstrom’s stores are nowhere near as bad as some of its peers, with relatively high price points it cannot afford to allow the proposition to slide in such a dramatic way,” he said in emailed comments. “In our view, over the year ahead Nordstrom needs to commit itself to rebuilding its full price stores. It must inject the energy and excitement that was once a hallmark of its shops. A failure to do this will likely result in Nordstrom entering a spiral of decline that is very hard to pull out of.”
