Off-price Rack drags down Nordstrom’s holiday performance

Dive Brief:

Nordstrom on Thursday lowered its full-year guidance after a holiday period when net sales fell 3.5% year over year, down 1.7% at its full-line stores and 7.6% at off-price Rack, per a filing with the Securities and Exchange Commission.
For 2022, the retailer now expects to achieve revenue growth at the low end of its previous estimate of 5% to 7%, and EBIT margin of 2.8% to 3.1%, down from its previous estimate of between 4.1% and 4.4%.
Jason Gowans, who had leadership roles in Nordstrom’s digital operations for 10 years, according to his LinkedIn page, is leaving to take the job of chief digital officer for Levi Strauss, effective Feb. 6.

Dive Insight:

Earlier in the season, CEO Erik Nordstrom reported that holiday shoppers, especially those in lower-income households, were pulling back from making purchases this year. That made its mark on the company’s overall results during the full nine-week period, according to his statement Thursday.

“The holiday season was highly promotional, and sales were softer than pre-pandemic levels,” he said. “While we continue to see greater resilience in our higher income cohorts, it is clear that consumers are being more selective with their spending given the broader macro environment.”

The retailer also prioritized right-sizing its inventory, even when it meant deeper markdowns, according to Chief Brand Officer Pete Nordstrom. Inventory is expected to be down by a double-digit percentage year over year, “roughly at 2019 levels,” per the company’s filing.

“Having a healthier inventory level and mix positions us well to react quickly to changing consumer demand,” Pete Nordstrom said in a statement. “Given the continued uncertain environment, we remain focused on executing with flexibility and agility, including conservative buy plans and faster inventory turns.”

The disappointment comes after Nordstrom in early December had already signaled lower expectations and higher promotions for the holidays, William Blair analysts led by Dylan Carden noted in emailed comments.

“And yet, the incremental downside here in our view reflects the continued and seemingly chronic underperformance of the Rack banner as well as the incremental and more sizable margin hit,” they said. “We believe management faces an increasing credibility deficit.”

GlobalData Managing Director Neil Saunders sees the decline at Rack as “much more problematic” than the full-line store, in emailed comments calling it “a calamitous drop which is a continuation of the chronic run of underperformance, making Rack one of the worst performing operators in the off-price segment.”

However, it could have been worse, and the attention to inventory may yet pay off, according to BMO Capital Markets Managing Director Simeon Siegel. The consumer behavior related to income may seem like an obvious factor, but Nordstrom’s results more likely reflect needed corrections to its inventory management during the height of the pandemic, he said in emailed comments. Gross margin is flat relative to 2020, for example, per BMO.

“This consistency is, surprisingly (at least to us), among the best in retail and worth monitoring,” Siegel said. “In other words, based on 1Q back in May, today’s update should have been the expected result, not the surprise.”