Dive Brief:

• Nordstrom on Tuesday reported that first quarter net sales fell 3.5% to $3.4 billion from $3.6 billion in the year-ago period; without credit card revenue, net sales slid to $3.3 billion from $3.5 billion. Digital sales rose to 31% of net revenue from 28% a year ago, a slowdown from last year's 16% growth, according to a company press release. Full price net sales fell 5.1% to $2.1 billion as off-price Rack net sales fell 0.6% to $1.2 billion, according to the company, which no longer reports store comps.

• Lower sales volume pushed down earnings before interest and taxes (EBIT) to $77 million, or 2.3% of net sales, down from $153 million, or 4.4% of net sales, a year ago. Gross profit, as a percentage of net sales, declined 60 basis points to 33.5%. Net income reached $37 million compared to $87 million in the year-ago quarter. The department store trimmed its ending inventory by 5.3% from last year.

• The weak quarter led to a guidance downgrade. The company now sees net sales growth for fiscal 2019 to land between a 2% decline to flat, from its previous outlook for a 1% to 2% rise. Nordstrom also said EBIT would reach between $805 million and $890 million, down from its previous outlook of between $915 million and $970 million, with EBIT margin reaching 5.3% to 5.8%, down from 5.9% to 6.1%.

Dive Insight:

On a conference call with analysts Tuesday evening, Nordstrom executives said that the troubles surfacing in the first quarter are correctable.

"[W]e had some executional misses with the customer experience that had an impact on sales across Full-Price and Off-Price both in stores and online," co-President Erik Nordstrom said, according to a Seeking Alpha transcript. "We know we disappoint our customers and we own it."

In moving to a digital-first marketing strategy for its new "Nordy Club" loyalty program, the retailer cut some paper mailings to customers, for example, and that hurt traffic, he said. Digital marketing also lagged, however, and has since been ramped up. Then there were fundamental merchandising issues, including style misses in women's apparel and out-of-stock and other problems in beauty, he also said.

It was a "gloomy" quarter that uncharacteristically extended to off-price Rack stores, noted Neil Saunders, managing director of GlobalData Retail, in comments emailed to Retail Dive. "While challenges to the full line business are, at least in part, to be expected, the deterioration at the off-price division is more troubling," he said. "Overall, this part of the market is growing strongly – as today's results from TJMaxx and Marshalls showed. In our view, a lot of the issues come down to product mix, which has been more fragmented and less compelling over the past half year."

William Blair analyst Dylan Carden surmises that the retailer's store comps declined year over year. "Though management is no longer providing comp store sales, with square footage down an estimated 1% within the full-line business and up 3% at Rack, it is reasonable to assume both divisions are comping negative to start the year (down midsingle digits for full-line, down low single digits for Rack)," he wrote in comments emailed to Retail Dive. The company is managing to grow share despite the wider "structural decline of department stores," he also said, but may have too many full-line stores, "with inefficiencies within this division leading" to sales volatility.

The company sees its future in its merchandise-free Local stores, a dramatic re-imagining of the department store as a place to try out merchandise and hang out, but where purchases are fulfilled online and not in store. Nordstrom has expanded Local in Los Angeles, which hosts the pilot location, and just announced two more, in New York's West Village and Upper East Side this fall, according to a press release emailed to Retail Dive.

"[W]e would point to our local market strategy. Let me be clear that is our model for the future," Erik Nordstrom told analysts Tuesday. "We started in LA last year and it really started with engagement. How do we engage with customers by leveraging both our digital and physical assets. And that included experimenting with new physical assets in the Nordstrom local service hubs. That engagement part across services and across channels and we know we've got a lot of data on that and we know the more we engage with customers across channels and services the more they spend. That's gone really, really well."

But, while Nordstrom is choosing well in placing those stores, it's unclear how the strategy would work outside of major urban areas, where Nordstrom's prices are often too high and its assortment often fails to resonate, Saunders said. "This doesn't mean Nordstrom's has no customers, but the customer numbers required to support the economics of a big department store business are weakening and the decline in shoppers is getting progressively worse," he said.

Those dynamics are what pushed Nordstrom to focus on urban areas, Saunders said. "The shape of these investments appears to be a hub and spoke model where a number of big stores are supported by smaller local outlets which extend reach and encourage customer interaction. In our view this is a sensible model as it maximizes returns while minimizing capital investment. However, there is still a question mark over how Nordstrom can turn around performance in stores outside of the big cities," he noted.