Q1 2020 Earnings Call
Greetings and welcome to the Nordstrom first quarter earnings Conference call.
At this time all participants are in a listen only mode. We will begin with prepared remarks, followed by question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder.
This conference is being recorded.
This time I'll turn the call over to Trina Schurman director of Investor Relations for Nordstrom you may begin.
Good afternoon, and thank you for joining todays earnings call will last 45 minutes and will include approximately 30 minutes for your questions. Before we begin I want to mention that we'll be referring to slide which can be viewed by going to the investor Relations section on north from Dot com.
Our discussion May include forward looking statement. So please refer to the slide showing our safe Harbor language.
Participating in today's call, our Erik Nordstrom, Chief Executive Officer, and Anne Bramman, Chief Financial Officer, who will provide a business update and discuss the company's first quarter performance for 2020, joining during that soon a session will be Pete Nordstrom President of North <unk>, eight and Chief brand officer with that.
I'll turn the call over to Eric.
Good afternoon, Thank you for joining us today.
Happen every one of Nordstrom, our Hearts continue to go out to all those impacted by Kobe Bryant chain.
The past several months have been unlike anything we've ever experienced.
We've been working hard to continue to show up in a meaningful way for our customers employees shareholders and communities.
Well health and safety is our top priority.
Temporarily closed our stores on March 17, do our part to help limit the spread of the virus.
Prior to the closures, we saw strong momentum from the second half from 2019 continue into February with positive sales growth.
These closures had a meaningful impact on our financial results.
Stores made up two thirds of sales from 29 gene.
And our ecommerce business sales grew 5% and reached more than $1 billion first quarter.
Online demand trends were consistent with the second half of 29 team.
Well our stores were temporary closed our E commerce business had more than 50% growth and customers who are new to Nordstrom.
HM.
We successfully strengthened our financial flexibility early actions to increase liquidity and reduce our cash burn, which and will discuss further.
Inventory, that's our biggest lover of flexibility, where you reduce receipts by 30% during the first quarter generated customer demand through increased marketing and promotion.
And utilizer fulfillment capabilities to clear inventory held in our store.
These actions decreased inventory levels by more than 25% from last year, putting us in a favorable position to bring in new news starting in June.
As we expected heavy promotional retail environment through July.
Shifted or whatever kind anniversary of that to August 19.
Customers the best experience.
Early access for North from card members will begin August four through August 13, depending on their Naughty club status.
This unique example feature new arrivals and reduce prices for limited time.
In off price, we careful receipts beginning in March through the second quarter, allowing us to take advantage of Closeouts in the marketplace. This fall.
Actually we can leverage our off price business, which makes up a third of sales to help clear accessible price inventory.
To sum up the quarter, we increased our liquidity through proactive steps to shore up financing and reduce our cash burn the significant reduction in our inventory levels enhances our financial flexibility.
Enables us to provide customers with a relevant merchandise offerings across price points brands and key items.
We're confident that we have sufficient liquidity to execute our strategy in 2020 and over the long term.
We believe these unprecedented times are only accelerating the changes that were already well underway with our customers, including how they want to engage with digital and physical experiences.
The flexibility of our business model allows us to stay ahead of these changes as we serve customers through our two distinct brands Nordstrom Nordstrom rack across stores and online.
We see tremendous synergies from this model.
What customer shop across more than one of these touchpoints their spend increases for to 11 times on average.
Additionally, our off price business continues to be our greatest source of new customers and nearly 30% up off price customers Cross shop at full price.
Our unique mix of assets as a competitive advantage.
In 2019 off price and ecommerce accounted for nearly 60% of sales and our U.S. mall based full line stores accounted for 38% what contributing positive cash flows.
As we anticipate an acceleration of peace longer term customer trends, we're taking proactive steps to move faster and executing our strategic plans, including optimizing the mix of our digital and physical assets.
We're permanently closing 16 full line stores and three Jeffrey specialty boutiques.
Accessing customer needs most of the impact of stores are in markets that have multiple full line stores and are more than 20 years old.
We're also accelerating the integration of our trunk club business into a cohesive nordstrom styling offering across stores and online.
As retail continues to evolve our flexible model supports that continue shift from what was predominantly a mall based business for a more diversified model that includes digital and off price.
Our market strategy remains our priority for gaining market share increasing inventory efficiencies in our top markets.
We're bringing greater merchandise selection faster delivery to customers, while increasing engagement through our services.
Having a mix of full line stores racks, and Nordstrom locals and connecting these physical assets seamlessly with an online experience gives us a distinct advantage in serving customers on their terms.
Previously, we announced plans to create a leaner more flexible organization.
That is we're combining our full price in off price teams across regions and functions to leverage our business.
Also reducing the size of our corporate teams to increase agility.
Finally, we're continuing to invest in critical capabilities across technology.
It analytics and supply chain.
This includes scaling our end to end platforms to support a single view of customers inventory and product and integrating physical and digital capabilities in off price.
Earlier. This month, we began taking a thoughtful phased approach to our store reopening.
Our decisions are based on where openings are allowed by state and local governments. When we're prepared with the rights safety measures and protocols and when we believed that we can provide for the safety well being up our employees and customers.
We currently have around 40% of our fleet open and we offer a contact less curbside pickup services in both full line stores.
We continue to adjust and refine our approach as we learn more about this new environment.
We've also been incorporating feedback from our customers and our humbled by their support and response throughout this process.
Well most of these stores have only been open for less than two weeks and are located in our smaller markets. We're seeing some encouraging early reads with overall sales trending slightly ahead of expectations.
Our investments to connect our digital and physical experiences continue to serve us well and the impact of Kobin 19 is only emphasizing the importance of these capabilities.
In full price, we've had store fulfillment capabilities in place for over a decade, which generally supported 20% of online units.
This ramp to more than 50% Waller stores were temporarily closed contributing to our reduction in inventory.
In mid April we enabled store fulfillment in off price, which includes a robust ecommerce business exceeding $1 billion annual sales.
This enhances the customer experience by expanding merchandise selection to inventory located in our stores, leading to customer demand and traffic increase.
Since enabling this capability about 25% of Nordstrom rack dot com units are being fulfilled from rack stores.
In March we leveraged our existing infrastructure and resources to launch a dedicated ecommerce site, serving our customers in Canada with all orders fulfilled from stores.
Both customer response and sales have well exceeded expectations.
Online sales or about 10 times the volume we previously had under our third party E commerce provider.
We believe one of our most important responsibilities is supporting the people, who support us, including our customers employees and communities.
We can't thank our employees enough for all they do to care for our customers.
Taking precautions to create a safe work environment than our supporting our employees who are not working at this time.
For our unscheduled and furloughed employees. This includes extending medical benefits and partnering with several companies for temporary work opportunities.
To support our communities, we're leveraging our alterations teams across the country to so nearly 1 million math for healthcare workers.
We believe our relentless focus on the customer remains a key point of difference and we're energized by the opportunities ahead to provide a best in class experience.
The strength of our culture at a loyalty of our customers have sustained us through tough times.
We're also grateful for their dedication and commitment of our teams.
Made us nimbler and more flexible than ever before we're confident in our ability to emerge a stronger position to serve customers and as a leader in the market.
I'll now turn it over to add to provide insights on our financial results.
Thanks, Eric as we discussed last quarter, we finished 2019 any strong financial position.
Accelerated sales trends in the second her and demonstrated our inventory in expense discipline.
This momentum continued into February was still tracking ahead of our guidance expectations for the month.
In March as the impact to cope with my team began to unfold, we took immediate steps to strengthen our financial flexibility by increasing liquidity.
Your lighting inventory and lowering our overhead costs.
Yes that business at these collective actions adds to our confidence that we can emerge from this crisis well positioned to gain market share.
We started the year with $850 million in cash and increase our position to $1.4 billion by the end of Q1.
We took early measures to increase liquidity and reduced our cash burn by more than 40% from March and April.
We suspended dividends and share repurchases amended into down $800 million on our revolver and issued $600 million unsecured debt.
Well continue to make reductions to our cost base cost structure.
As a reminder, our initial plans for expense savings of 200 $215 million included into in productivity improvements and overhead.
Procurement and generational investments.
In addition to greater fulfillment and marketing efficiencies.
In response to cope with Nike will also executing further testing of more than $500 million for the year.
This is net of cobot, nytwo charges and evenly allocated across operating expenses.
And working capital, which includes realigning inventory.
Our total expense savings represent a reduction in non occupancy overhead cost of roughly 20% on an annualized basis.
This includes $150 million in lower fixed labor cost for the year, resulting from our transition to a leaner and more agile organization.
We're on track to deliver on our initiatives and realized approximately $100 million gross savings in Q1.
As Eric mentioned inventory is our largest near term lever a flexibility.
In mid March our teams moved quickly to realign inventory reducing received by approximately 80% in April and May.
We leveraged data to analyze our inventory content and composition, including the seasonal nature of certain items.
We ended the quarter with inventory down more than 25% from last year, which reflected a 15% reduction in units.
We're planning to realign inventory by Q2, excluding the anniversary shift.
We take our responsibilities to ensure the long term help our business seriously.
We're keenly aware, the our decisions impact all stakeholders, including our customers employees and shareholders.
We value the relationships, we have with our business partners and strive to be a partner of choice five vendors.
We gave our vendor partners advanced notice of extending payment terms.
Additionally, we paid rent through May so there are no meaningful deferrals cash payments at the end of the quarter.
Well, our long term capital allocation principles are unchanged.
Our current financial priority as we navigate through this crisis is to preserve liquidity and maintain our investment grade credit rating.
We're committed to getting back to our adjusted debt to EBITDA leverage target of 1.52, 0.5 time and paying dividends over the long term.
Our investments to connect our digital and physical experiences are paying off.
And even more so during these unprecedented times.
We reduced our annual Capex plan by roughly 30%.
Prioritizing technology and supply chain investments.
Now I'd like to provide additional insights into our first quarter results.
Our loss per share of three Dollarsthirty three cents, an EBIT loss of $830 million included charges related to cope with 19 of $1.10 or $280 million.
Roughly half of these charges related to non cash asset impairment, resulting from our permanent store closures.
The remainder related to premium pay and benefits in restructuring charges, which were slightly offset by credits from the cares Act.
Excluding these charges two thirds of the EBIT margin decline relative to last year. They from de leverage on lower sales volume and one third came primarily from incremental markdowns.
In the first quarter total company sales declined 40% is our step sales source was temporarily closed during the quarter.
Full price was down 36% and off price was down 45%.
Well, Chris results benefited from having a more established E commerce business, including store fulfillment capabilities, which will enable in rack stores late in the quarter.
While our stores were temporary closed online traffic and conversion trends increased notably at full price in off price, but were partially offset by lower average selling price.
Online demand, which is an indicator of underlying trends.
By 9% in Q1.
Since it was the second half of 2019.
Our online sales growth of 5% included the timing impacts of and ship orders and estimated returns.
Since most online returns are done in our stores. These sales reflect higher reserves for these projected returns.
We leveraged our marketing and promotional capabilities to stimulate sales an appeal to customer interest during these times, including a series of targeted promotions declare seasonal inventory.
Our digital experience highlighted relevant categories, such as wellness in comfort, which contributed to top performing divisions at home.
Were in active.
As we anticipated our softest divisions for men's apparel dresses and designer apparel.
Moving to gross profit our rate was 11% down from 34% last year and reflected merchandise margins in the high Twentys range.
Roughly half of the gross profit decrease related to incremental markdowns included a higher reserve adjustment of around $75 million.
The other half was due to deleverage of occupancy costs implant markdown.
As stores continue to reopen throughout our industry over the next several months, we expect to see an elevated promotional environment.
Our favorable inventory position enables us to bring the newness beginning in June for full price.
We're also able to leverage our off price business declare excess full price merchandise well being opportunistic in the marketplace for Paul Closeouts.
In S. DNA expenses of $1.1 billion was slightly lower than last year.
Excluding cobot 19 charges as she may decrease by roughly 25%.
About three quarters of the decrease was due to lower volume in one quarter was due to immediate actions to reduce overhead labor costs.
Our first quarter results reflected strategic actions that will have a greater benefit in our cash burn in cost structure to the rest of the year.
Based on our current outlook and the actions we took in Q1, we're currently approaching breakeven from a cash burn perspective, and expect to reached this point by the end of Q2.
As we continue to navigate through this uncertainty, we're taking a cautious and thorough approach in planning our business.
Our scenario plans and stress testing contemplate a slow recovery and a continued promotional environment.
Well around 40% of our stores are currently open they are relatively smaller markets.
We're planning to have our full we reopened by the end of June including stores in California opening over the next couple of weeks followed by New York.
Well, we're taking a conservative approach to planning, we expect continued improvement in underlying sales trends and merchandise margins.
Relative to Q1, excluding cobot 19 charges.
Earnings are expected to improve sequentially throughout the year.
In Q2, the shift the entire anniversary that into Q3 is about 10 percentage points.
While were plan improved merchandise margins and further expense savings in Q2, this will be more than offset by leverage from de leverage from the anniversary shift.
As we plan to the new normal environment, our model will continue to flex and evolve with changing customer expectations.
We have accelerated our long term strategic plans by optimizing the mix of our physical and digital assets and increasing our agility through a leaner organization.
As we emerge from this crisis.
Focus remains on gaining market share well driving topline growth and improving profitability.
We look forward to providing an update on our strategy and long term financial outlook at our Investor Day. This fall.
We believe our financial flexibility, coupled with our business model to serve customers on their term positions us for success over the medium and long term.
I'd like to now turning over to Trina for Q1 day.
Thanks, Anne before we get started acuity we would appreciate as you can limit to just one question to allow everyone accounts to ask a question, we'll now move to the Q and a session.
Thank you.
If you would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is in the question Q you May Prestart too if you would like to remove your question from the Q for participants using speaker equipment and may be necessary to pick up your handset before pressing the star Keith.
First question comes from Ed Yruma with Keybanc capital markets. Please proceed with your question.
Hey, good afternoon. Thanks for taking the question and I Hope you in your family's you're saying health and healthy in fact during this time.
I guess, just a little bit more insight into the portfolio in the stores closed and you gave some age parameters around kind of I guess, what what was the run rate revenue of that group.
Ladies profitability and how do we expect from a timing perspective, those closings to work through the piano. Thank you.
Hey, I'll take the first part of that question. So in broad terms as you know our portfolio.
Cash flow positive coming into 2020, and you know we take a look at it.
Source come off their operating covenants and we look at.
The physical presence, we've got in certain markets I'm. So as we as we ran our stress testing our scenarios. There was an opportunity for these particular stores to to make the decision and there was a very difficult decision to close that from a run rate perspective, I would say that it's not a meaningful material part of a total sales for the company.
And we certainly expect.
About 30% of sales to be transferred either through our Nordstrom dot com or other stores in that market, but I would say overall it.
Thanks Superstar do cross sell for the company it will be accretive opposite will drive incremental profitability. Let me close historic distort could not reopened it the public we are continuing to still be store fulfillment, but the stores.
So I would say over the span second quarter, maybe early third quarter is when you really see that started to come through.
Thank you.
The next question comes from the line of Omar Saad with Evercore ISI. Please proceed with your question.
Good afternoon. Good evening, Thanks for taking my question. Thanks for all the information.
It was great to see actually how you're able to leverage you're kind of omni channel capabilities.
Drive those inventory levels down it seems like has strong E commerce during the kind of quarantine period. No is is it fair to say that you're also that was also one of the reasons, we're able to attract such a big increase a new digital customers and how do you look at your omnichannel kind of inventory market capabilities.
If there is this opportunity to use this pandemic or this crisis.
To jump at the kind of step function change in consumer adoption of BOPUS and some of the other omnichannel.
Offerings that you guys have thank you.
Hi, how are.
I think.
First off to step back we certainly believe that the changes drastic changes were seen with our best have through this crisis, it's really an acceleration or what have been in place before hand.
So she mentioned Bopis.
Leveraging store inventory is a big part of that when the crisis hit our our party shifted quickly as well and we really focused on cash and inventory levels.
And being able to.
Hi, App store fulfill became.
For maybe obvious, but it's really important for a couple of reasons. A one was to access that inventory than would have been trapped otherwise and allowed us to reduce our inventories out that we really feel good about levels right now.
The other is it it's a better customer experience it brings a significantly bigger selection to customers.
Most cases faster delivery so.
And we were able to flex that up.
We also allowed us to relieve some of the pressure our supply chain capabilities.
So feel to flex from our full line stores were currently about 20% store fulfill to over 50%.
Since cobot head.
And our off price business, we did not have store for Phil.
Capabilities of our rack stores going into this our team has quickly able to.
Install that capability and it's been about 20% of our orders so far I've been talking rack stores.
It's a super helpful and.
I think the bigger point as not only been helpful and getting inventory down in a time when.
Stores were closed and as you know our our inventories very perishable.
But that capability, we certainly believe is going to be more important even more important into future being able to get.
Inventory efficiency get bigger selection to customers with faster delivery.
Requires watching this inventory thats in stores coaster customers, we've invested a lot in it.
And there's no doubt that a necessity so.
Navigating this crisis has accelerated our capabilities there.
That's super helpful and as a type of a new customer growth Eric.
With that.
To the tied to new customer growth. Yeah can you tell that they index and the exceptional new customer growth that you experienced in the period does that is that having that inventory accessibility and availability in breast and that is that part of new customer growth or is it another factor but.
Oh I'm sorry.
[laughter] very very unusual time, and we're hesitant to draw.
Too many predictive conclusions because of it.
Having stores closed.
Our customers being at all.
What categories are interested in changed dramatically.
And.
It's also been a very promotional tire.
Retailers are.
Our IND clearance mode, there's too much inventory out in the system.
And.
We really look to balance.
Things like our cash or inventory level certainly sale.
And and price promotion I was a big part of that.
So.
Yes, we're we're pleased with how many new customers are came to our site.
I'm just not sure how predictive that is trends moving forward.
Understood. Thank you.
Next question is from Oliver Chen with Cowen. Please proceed with your question.
Hi, nice job on the inventory agility.
The stores that you've you've opened would've been some of the learnings and how have you been oh.
Have you have you have you been pleased with the productivity and the ramp up and have you thought about planning inventory in labor and those stores and then helping you in form.
What you're going to do as the balance of the chain opens.
Also been really progressive with price matching and as you know we're going to face a very promotional environment. So what are the the brand appropriate strategies for you to undertake and should we anticipate markdowns to be greater than last year. Thank you.
Hey, Oliver it's Eric I'll take the first question.
We have a center today, we have about 40% of our stores opened but.
I think the big caveat on that is.
Most of those have been opened less than two weeks.
Oh, we're hesitant to draw any conclusions from that the result, a wallaby Ben.
About at our expectation French slightly above.
It's such an unusual time and the variance by location has been a much wider than than normal time. So.
I think it just which would be.
It wouldn't be wise for us to.
To draw conclusions that big plans going forward office, such a short standpoint, especially when.
Our big markets, having opened up yet.
We're not open in California.
New York and Seattle.
So we're trying to be.
That's responsive as we can be.
And.
We do really feel very good about our position without having our inventory down 25% allows us to respond to what we see from customers.
The.
Planning inventory and labor.
One of the nice aspects of historic fulfilled <unk> Waller startup in quotes we have had changed at all of our stores during store fulfill.
Yeah.
And now having that in and rack stores as well.
We have productive use of people in store so.
The amount of business coming from customer is actually coming of stores, it's easier to manage that and it's a we can leverage that existing labor pretty darn efficient way so.
We feel pretty good about.
The variability of our our in store labor and the inventory.
And all participate all uptick in part of the price matching it you're right I mean.
The likelihood of a strong promotional month or two is high and we factored that in it and we're planning for it I guess in our case since you've heard about our ability to melt the pile and address distressed potentially distressed merchandise through our ability to.
Fulfilled through stores and fulfillment centers, we're actually in pretty good shape, so we're not going to be driving.
A bunch of price promotion, because we don't really have to to get our inventories in line. So we're going to be entered a reactive position and I think it's again fair to assume that environment, it's going to be highly promotional and working after responded in kind.
And take competitive markdowns, so that seems like the likely scenario in.
June and July as as stores opened up our focus is really.
Trying to make sure that weren't getting in stock on replenishment of key items and all the things that are customers would expect to to want to buy from US right now and then as we get to August we pivot in.
So our anniversary sale, which.
This year, it seems maybe more timely than ever since the whole sales predicated on new notes given customers reason to buy something new we're going to be able to tailor that assortment to be relevant to what they're interested in.
And and it's going be really great value as well, we've taken a much more aggressive approach Sean.
Set a job and.
Lower average price point.
We've actually in the last month.
Reprice, some things to even make it more of a value so.
We think we're going to being a great position to be responsive to customers' interest on value on price, but I think you're right. The reactive price promotion part, particularly June July I.
I think you could prepare for that to be significant.
Thank you very helpful Best regards.
Thank you.
The next question is from Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Good afternoon, everyone. As you think about the portfolio if the off price stores as compared to the full line stores. How do you think about the performance and how you're planning for off price versus a full line stores and given the closures of the select number of full line stores. How do you feel about the real estate portfolio of off price.
And is there opportunity for any pruning, they're giving you also have online. Thank you.
Hey, Dan.
Hi, Yes, I think.
Let's start with a number one to of how integrated our off price full priced at this is our especially right now.
Okay.
Then the off price business. It is oh vital part of our overall model and and part of that is as an exhaustive inventory from full price. So we really look a cross full price in off price.
As our shift.
Our focus shifted.
Turning to pandemic to trying to lower inventory.
How about to do that and leverage not only a clearance and our full price channel, but getting some of that product into our off price channel.
So we were fairly aggressive in canceling orders.
In off price, which frees up our ability to one.
Exhaust.
Excess product, our full price channel and into.
Go get what we think it's going to be some terrific values in the marketplace. There so.
That's overall business the scope part of it.
Your offer we didnt announce any store closings for rack stores.
Our rack stores are very profitable.
They're almost all of them are a non mall locations.
They have shorter leases.
We are able to of waste has come up.
Usually.
Move around too.
Either invest in that building again or.
Relocate to a better situation. So we feel really good about our off price business and again part of it I'd put under the banner flexibility and these uncertain times going forward are off price stores give us a lot of flexibility.
Where we can not only do we have shorter leases, but but how we use this stores.
We launched in New York in the fall.
I'm Express services and our rack stores in Manhattan, where we can do full price order pickup returns and alterations and rack stores and that's gone really well so we think that.
Physical asset footprint.
It is going to change and we look at it by market. We look where we are following stores were half rack stores.
Things like our.
Our local service hubs are part of the mix as well.
We think theres, a real synergy going forward there and.
And that our off price tortures, just a huge huge part of our future.
Thank you.
The next question comes from the minute post you know with Deutsche Bank. Please proceed with your question.
Good afternoon and.
I just wanted to ask on the local market strategy.
Has has that changed the way materially from what you outlined before moving to 10 markets by the end the year how are you thinking of it.
Thank you.
Oh and did not change should we still plan on.
In five markets right now with those.
Enhanced capabilities and we do plan on adding five more.
By year end.
Thanks.
Your next question comes from Tracy Kogan with Citigroup. Please proceed with your question.
Thank you I am I was hoping you guys could talk a little bit more about that credit performance in the quarter.
Maybe if you're seeing any changes in the payment rates or charge off and then what are you expecting for credit revenues. This year now thank you.
Hi, Tracy so for the credit performance really haven't seen a significant change in the portfolio today.
Having from a charge off our collection piece to it we have as customers. We have offered and deferral planned Orson payment plans for customers are up that are really good customers, who called in after that in particular situation.
But having said that we do and you know our planning as we talked about a lot of scenario planning, we're anticipating that we're gonna have higher loss rate in the second half of the you're going into 2021, I said, we certainly have contemplated that is part of our our scenario plans for the year.
And then how about the revenue number for this year I think you had said mid single digits previously.
Yes, I think if you recall, we pulled our guidance for the year, we're not particular yeah.
Got it thank you.
The next question comes from Alexandra Wallace wit.
Goldman Sachs. Please proceed with your question.
Good afternoon. Thank so much for taking the questionnaire. Thanks to the color on the call. So far my question is on the E. Com US business I Wonder if you could shed some more color on the on the cadence of E commerce growth through the quarter and perhaps into May if you could comment on the difference between full price and off price.
As well as any step changes in gross as you lead that promotions or perhaps as you rolled out that incremental pick up opportunity in off price I would also be particularly interesting.
Okay.
Hey.
Certainly the.
Oh from good demand and E commerce, but again.
Our top priorities were cash and lowering inventory.
So.
There is a guy as I mentioned earlier it certainly is a very promotional environment out there right now and there is.
Demand can be generated a quite quickly with.
There's price promotion.
So oh, we do twist that dial a as needed but to really look after the land right now.
Our cash and inventory levels and and we also balance it between.
Price in off price.
Our supply chain network.
One of the dynamics with E commerce.
It is more price promotional.
Average price, it's really for us is quite a bit lower and so our units are way up.
As you see that the customer number up.
As well with that.
So we do have more units going through the system.
The dollar number is not as big.
So.
We think it was a program. We're encouraged were at in again in particular effects on cash our inventory levels, there, but Pete talked about with anniversary in particular.
Our strength is not as a price promotional retail our strength is.
Bringing in newness and then a inspiring the customer to buy something new.
That requires flexibility.
Our inventory and so.
So it's really about setting us up for the future and we feel really good about that.
Thank you very clear I appreciate the color.
The next question comes from Sarah Goldberg with Baird. Please proceed with your question.
Hi, Good afternoon. Thank you for taking my question given the new operating protocols in the stores to ensure health and safety DC any structural change to the margin profile the stores.
All right. There. So we we called out specific coveted expenses in the first quarter, which is basically our premium pay a and some of the thing we did our employees during that time going forward. There are some expenses, it's not material things like masks and cleaning and that type of thing, but we have certain.
Found.
Expense saving offsets to that till the time material piece to the go for Peace report margins citizen.
Okay. Thank you.
The next question comes from Jay sole with Yes. Please proceed with your question.
Great. Thanks, so much.
Keith maybe just give us a little bit of how thinking about how to.
Gross margin procedure in the markdown pressure that you might experience in Q2, because obviously inventories down 25% that's terrific, but it's likely that sales were down more than what the anniversary sale shifting into third quarter. What can you tell us I mean do you feel like the Mark Downs will be as much as Q1 will be less if it's going to be less how much less.
Yeah, Okay. So I think in my comments I talked about the fact that we thought we'd have sequential improvement from Q1, Oh, we certainly we took markdowns in Q1, and we got through a lot of seasonal inventory it with Pete talked about his his commentary earlier and we are bringing in new freshness and <unk> are not punishment.
Right and they have a lack of a markdown risk to it. So we do expect it to be a promotional environment.
But we certainly expect to see sequential improvement, including two too we are starting to reopen stores are bigger markets will open up a in the June timeframe, and we still have a very strong off price omnichannel.
Network never Congress will continue into a server customers with so yes, the other piece I would say.
With the sale that we have a highly variable model and sell it also allowing us to get a little bit more flow through on this as well.
Got it and maybe a Eric.
Just a question about how you're thinking about promotions for next year, obviously, Nordstrom historically has never been a very promotional retailers.
Would you think that going forward. This is something just a regular thing that will become just part of the business model or would you want next year to sort of go back to a mode of of doing a lot by promoting.
Well.
We do think our strength will be in the unique merchandise mix, we happen to service we provide.
And that the for.
Where we should excel isn't a discovery of new products. So.
You talked about.
They're safe to assume there's going to be a lot of clearance activity.
Too much inventory the system industry right now for the demand.
But.
We don't see that lingering into next year or at least for us that's a weekend.
Get back to.
Our focus is on what what we hear from customers.
Around having great product getting great service.
Okay. That's our focus yes, PDL one thing I would add that it's our intention is to be a full price retailers much fossils what's not.
Part of our strategy to become more price promotional event in fact.
Our strategy doesn't change in terms of newness being driving and more full price sales, it's given us a great opportunity I think Tim good constructive conversations with our brand partners about.
How that can be something that we're we're both working on together except that we can insulate.
Our sell through that based on our assortment car selection.
With with key brands.
Got it no one of my question.
Your last question comes from Kimberly Greenberger with Morgan Stanley. Please proceed with your question.
Great. Thank you so much I wanted to ask about just understanding that the stores you have reopened our in some of the smaller markets and they've only been open for.
Couple of weeks now and maybe slightly less than two weeks do you have to productivity metric you're willing to share with us in terms of the sales.
As a percentage of last year that are being produced by those stores and Tonight I just wanted to clarify one of the earlier comments and that you said on the 16 full line stores that are closing I think you indicated they left they represent less than 2% of total sales for the company and I wanted to know is.
That.
Net of the expected, 30% retention rate or is that the gross number before oh.
Before you it.
Lets say adjust for that 30% retention rate. Thanks.
But let me just to answer that question really quickly and then Eric will talk about that sounds performing but that was a gross number that if you net out the sales transfer it's actually less than that.
Great. Thanks.
On the store.
We're not going to share a specific metrics productivity metric of stores been open.
Hi, good I.
What do you think if such a small sample size.
Both a number of stores anti being open.
Much of an unusual time that.
It would be wrong to drive precocious from that I would say there's.
Two general trends.
Well there has been.
If converted ability there are two trends one.
More outlying stores are performing better than more depth.
Definitely populated areas I think that makes sense.
The second part are off price because our rack business is outperforming our expectations are for parts business.
Bottom line with expectation.
Again, thank you for joining today's call a replay along with a slide presentation and prepared remarks, well be available for one year on our website. Thank you for your interest in Nordstrom.
It.
It's today's teleconference. You may disconnect your lines at this time, thank you for your participation.
[music].