Dive Brief:

• Nordstrom on Thursday reported that first quarter net sales fell 40% from last year, with all stores temporarily closed on March 17 due to the COVID-19 pandemic. Year over year, full-line sales fell 36%, off-price Rack sales fell 45%, and e-commerce rose 5% to $1.1 billion, with new online customer growth of more than 50%, according to a company press release.

• The retailer experienced loss before interest and taxes of $813 million, from earnings in that metric of $77 million in the year-ago quarter, due to lower sales volume from temporary closures, increased markdowns and $280 million​ in COVID-19-related charges. Nordstrom swung to a net loss of $521 million, including after-tax COVID-19 charges of $173 million, from net earnings of $37 million a year ago.

• Gross profit as a percentage of net sales contracted to 11%, from 34% a year ago, due to lower sales volume and markdowns to clear excess inventory. The retailer kept a firm hand on inventory, which ended the quarter down 26%. Nordstrom reduced inventory receipts by 30% during the quarter, CEO Erik Nordstrom told analysts Thursday.

Dive Insight:

Erik Nordstrom on Thursday reiterated his confidence in the retailer's ecosystem approach to its operations, which knits together its full-line and off-price stores with its offline and online channels. 

"We see tremendous synergies from this model," he said. "When customers shop across more than one of these touchpoints, their spend increases four to 11 times on average. Additionally, our off-price business continues to be our greatest source of new customers, and nearly 30% of off-price customers cross-shop in full-price."

With stores closed in the quarter, Nordstrom ramped up its store fulfillment capacity. The company had been fulfilling 20% of online orders through full-line stores for more than a decade, and that rose to more than half in the first quarter, Nordstrom said. In mid-April, Rack stores began fulfilling online orders for the first time, leading to store-based fulfillment of about 25%, he said.

Several analysts hailed the retailer's firm grip on inventory in the period. Scaling back receipts to Rack stores allowed the retailer to move more of its own excess from its full-line stores through its Rack stores, executives said. But they also agreed that the next couple of months will likely be highly promotional, nevertheless. The company has moved its annual anniversary sale to August, allowing for more new merchandise during the sale and avoiding some of the extra price competition, they said.

More broadly, the company is on track to expand what it calls its market strategy, which entails adding more of its merchandise-free Local locations. The company runs those stores, which are hubs for order pickup and returns as well as services like alterations, in five markets and plans to add five more by year-end, Erik Nordstrom said.

Those stores are in city centers, and, overall, the ecosystem appears to be edging away from the mall. Nordstrom said that last year the company's U.S. mall-based full-line stores delivered 38% of its sales, with off-price and e-commerce together accounting for nearly 60%. He said that Rack stores are primarily located away from traditional malls with more flexible lease terms, and that none of those off-price stores are slated for permanent closure. By contrast, the company is closing 16 full-line stores for good, most in smaller markets that have access to nearby stores.

But that doesn't mean the retailer has lost confidence in physical retail, as its Local strategy shows, according to GlobalData Retail Managing Director Neil Saunders. "Arguably this store format diversification is something all retailers now need to explore and which some, such as Macy’s, are already examining," he said in emailed comments. "Nordstrom, however, has a head-start on the rest of the market which underlines the group’s prescience and forward-thinking."

Credit Suisse analyst Michael Binetti called the quarter's e-commerce performance "disappointing," noting bigger online gains at other department stores and off-price retailers during a similar period, and said his team was "disheartened​" by the company's reluctance to provide much color into its quarter-to-date trends, making it more difficult to assess how the retailer will emerge from the COVID-19 period.

Erik Nordstrom pushed back several times during his conference with analysts, noting that, while 40% of the company's stores have reopened, most have been open for less than two weeks, with key stores in California, New York and even hometown Seattle still closed. "The results, while they've been about at our expectation, slightly above, it's such an unusual time. And the variance by location has been much wider than normal," he said. "So, I think it just wouldn't be wise for us to draw conclusions and make plans going forward off of such a short sampling."

What is clear, though, is that the quarter's half-billion-plus loss is going to be an impediment to recovery, Saunders said. "As much as this is manageable from a financial perspective, it has pushed up liabilities and leaves the group with much less room for maneuver," he said, adding, however, that the planned permanent closures will help with that. "Worryingly, if trade takes time to return to more normalized levels — which we believe it will — Nordstrom is likely to see a further, albeit more modest, deterioration in its financial position."