Q3 2020 Nordstrom Inc Earnings Call
Greetings and welcome to the Nordstrom third quarter earnings Conference call. At this time, all participants are in a listen only mode and we will begin with prepared remarks, followed by a question and answer session. If you would 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 and your telephone keypad as a reminder, this conference is being recorded at this time I'll turn the call over to Trina Schurman head of Investor Relations for Nordstrom you may begin good.
Good afternoon, and thank you for joining US todays earnings call will last 45 minutes and will include approximately 30 minutes for your questions. Before we begin I want to match and that will be referring to slides, which can be viewed by going to the investor Relations section on Nordstrom dotcom.
Our discussion may include forward looking statements. So please refer to the slide showing our safe Harbor language participating in today's call are Erik Nordstrom, Chief Executive Officer, and Anne Bramman, Chief Financial Officer, who will provide a business update and discuss the company's third quarter performance or 2020.
Joining during the Q and a session will be Pete Nordstrom President of North from Inc, and Chief brand Officer.
With that I'll turn the call over to Erik.
Good afternoon, Thank you for joining us today.
Before diving into the details of the quarter I'd like to highlight our priorities as we continue to navigate through this dynamic environment.
And the foundation of our company our focus has always been on the customer.
Fast forward over 100 years, that's never been more important.
And this moment of retail disruption the key to success is moving with speed and flexibility to adapt to the rapid changes and customer expectations.
Thankful for our team's ability to quickly 'cause it to serve customers and new ways.
Positioning us well to capture market share and generate value for our shareholders and the years to come.
And that and we will continue to amplify the potential of Coke Nordstrom and Nordstrom rack brands with an emphasis on accelerating growth and improving returns.
And she these goals our focus is on fulfilling our customers' needs for book convenience and connection by offering a seamless and personal experience everywhere they shop.
As you look across the business, we prioritize three areas, where there is significant potential for growth.
First we're building on the success of our market strategy, which we now consider or company blueprint and how we operate to better serve customers on their terms and gain market share and increase inventory efficiencies.
By linking our digital and physical assets at the market level, we're able to offer customers up to seven times more merchandise selection with true day delivery or next day order pickup.
We have now reached scale and 10 of our top markets, which accounts for more than half of our sales and we'll continue to roll out our strategy across our top markets.
Another component of our market strategy and to provide customers with more convenient access to our services.
We know that when customers engage with us through order pickup alterations or styling their overall spend increases by up to five times and.
In October we expanded our capabilities. So customers can now pick up their nordstrom dot com or from rock Dot com and whole book orders at nearly 350, Nordstrom and Nordstrom rack locations and the United States.
In addition, we recently opened a force local works from a neighborhood surface hub and the Los Angeles market with a fifth location opening later this year.
Second, we're continuing to leverage digital and physical assets to fuel growth of our Nordstrom rack brand big.
Picking up one third of our business today, we have further opportunities to meet the needs of a broader customer segment.
There are significant synergies between our two brands.
Direct serves as an important pipeline to our nurse from full price business, bringing and 7 million new customers and 2019.
Additionally, more than one third of our rack customers cross shop to Nordstrom, which leads to higher overall customer spec.
We're also competitively positioned as the only off price retailers book, a significant digital platform and.
And the third quarter online represented 40% of Nordstrom rack sales.
2019, we generated nearly 3.5 million downloads of our Nordstrom rack and our highest converting channel.
Another point of difference is our and and approach to leveraging our strong vendor relationships across our ecosystem provide customers with the best brands.
And back more than 80 per cent of our top 200 brands and Nordstrom are also carried out the Iraq.
There are two main efforts underway to capitalize on the growth potential we see Iraq, expanding our price points, particularly for lower prices and.
Better connecting our online and our physical stores, which will significantly increase selection.
And more than 10 years, our Nordstrom full price business has been able to use all sources of inventory across stores and fulfillment centers by having a single view of inventory.
And October we launched these capabilities and Nordstrom rack, enabling online order pickup expanded selection and store fulfillment.
We added 30000 more customer choice is online and nearly one quarter of our online orders are fulfilled from stores and.
Additionally, we're already seeing strong customer customer response with more than 10% of online orders being picked up at rack stores.
Our third driver of growth is to increase the velocity of our digital business.
And 2019 digital and made up 33% of sales and accelerated to 54% this year.
We view this as a fundamental shift and shopping behavior, and we are well positioned to support our customers across both Nordstrom and rack with a scalable platform that has been built to support many years of growth.
We also know that we must translate the heritage of service that defines us more effectively and digitally connected world.
This means delivering personalization and scale by creating greater linkages between digital and the physical experience true.
During the quarter virtual styling accounted for roughly 30% of all styling appointments and.
Sales from personalized looks pretty either by our salespeople tripled and volume from the second quarter.
Going forward, we see opportunities to further leverage the digital capabilities to increase the connection between our sales people and customers.
At the heart of our value proposition and this principle of closer to you, which.
Which is how our market strategy comes to life and helping customers feel good and book their best.
And describes not just who we are but also where we're going and how we will continue to set the standard for product service and loyalty and the digital first world. This.
Thats, how we will ensure that we offer more than just product and convenience from shopping with us, but also true and meaningful connection which for us because the differentiator between good service and great service.
Against this backdrop, we're pleased with our results and the third quarter are ongoing and inventory and expense discipline combined with the immediate actions taken early in the pandemic has set us up well heading into holiday and most importantly positions us for a strong performance in 2021 and beyond.
The steps, we took and the first half of the year to strengthen our financial flexibility enabled us to deliver positive EBIT and the third quarter of more than 100 million earnings per share of 34 cents and operating cash flow of more than 150 million all of which exceeded our expectations.
We also improved merchandise margin trends and continued to see benefits from Rebasing our cost structure.
We exited the third quarter with a high quality mix of inventory positioning us well to serve customers per holiday and heading into the new year.
Our focus remains on providing the best brands that our customers want combined with the high level of service they expect.
We continue to leverage the close relationships, we have with our strategic partners, including leading brands like Nike and Tory Burch global luxury partners like LVMH and emerging brands like Good America.
While we are continuing to amplify categories that are relevant with customers. During the pandemic, we believe that over the medium to long term there will be pent up customer demand, particularly around occasions like travel or in person social events, we are well positioned to meet their needs and capitalize on opportunities to gain market share.
Our brand promise of getting closer to you and pick guiding principle of our growth plans going forward. Our direction is clear and our team is dedicated to executing on our strategy to support profitable growth across our three areas of highest priority owning our most important markets.
Joining the growth at Nordstrom rack and increasing the velocity of our digital business.
We are confident that we will successfully emerged from this pandemic and even stronger position to serve our customers and generate value for our shareholders.
Our team looks forward to discussing our plans with you and more detail at our virtual investor event planned for February 4th.
With that I'll turn it over to and to discuss financial performance in more detail.
Thanks, Eric we're pleased with our third quarter results, which benefited from the immediate actions. We took earlier this year to accelerate our strategic plans rebase, our cost structure and continue our inventory discipline.
We're proud of our team's collective efforts to generate positive earnings and cash flow as we continue our path towards sales recovery.
During the quarter, we made meaningful advances and our digital capabilities.
Moving us any stronger position to better serve customers and grow profitably.
We're also encouraged by the strong customer response from our initiatives to drive both convenient and connection across our Nordstrom and Nordstrom rack brands.
For the third quarter, we reported positive earnings per share of 34 cents, which included 12 cents tax benefit related to the Cures Act.
We generated earnings before interest and taxes of more than $100 million.
From by significant improvement and flow through from Rebasing, our cost structure.
In addition, as a testament to the scale of our digital platform, we delivered healthy profits as online sales accelerated to 54% of our business during the quarter.
For any strong financial position, ending the quarter with $1.5 billion and liquidity, including $900 million and cash.
We delivered operating cash flow of more than $340 million over the past two quarters and returned to positive free cash flow during the third quarter.
The strength of our cash flow generation enabled us to pay down a total of $600 million on our revolver with $200 million outstanding at the end of the quarter.
We remain committed to our long term capital allocation principles.
Which include our focus on continued reinvestment, reducing leverage and returning excess cash to shareholders.
Year to date, we realize cash savings of $550 million net of COVID-19 related charges across expense Capex and working capital.
We expect to continue this momentum tracking ahead at the high end of our targeted cash savings of $750 million for the year.
From an expense standpoint, this included $330 million and savings across our piano, primarily from taking out roughly 20% of our overhead base excluding occupancy costs.
Going forward. This rebasing of our cost structure supports improved EBIT flow through as we continue our sales recovery.
Overall sales were in line with our expectations after.
After normalizing for the anniversary shift trends improve by roughly 17 percentage points relative to the second quarter.
This reflected strength and our anniversary execution sequential improvement and both full line and rack store traffic trends throughout the third quarter and continued digital growth.
From a merchandise perspective, we're encouraged by our customer response to newness.
Our anniversary sales serves as a strong proof point and our ability to amplify relevant categories brands and trends to meet shifting customer preferences.
We achieved record sell through rate, which contributed to profitability by mitigating markdowns on excess anniversary product.
In addition, we met our objective of rewarding our most loyal customers with Nordic club members contributing approximately 80% of sales during anniversary.
We also seamlessly skilled our digital platform during the event to support 60% online penetration and.
And nearly one third of Nordstrom Dot com units per fulfilled from full line stores to enable faster delivery.
Our unique breadth of merchandise assortment across brands price points and styles is a competitive advantage.
This diverse product mix supports our ability to quickly respond to changing customer demand and this dynamic environment.
During the quarter, we continue to see casualization wellness income per trans resonate with customers.
We had outsized growth and active home and beauty, which made up more than 25% of sales.
In addition, we saw continued strength and our designer business.
For the third quarter digital sales of $1.6 billion represented 54% of our business significantly up from 34% a year ago.
Excluding the anniversary shift impact digital sales grew in the mid teens range consistent with trends and the first half of the year.
And the 10 markets enabled by market strategy order pickup sales grew 30% and accounted for 70% of the total order pickup volume.
Moving to gross profit our rate was down 150 basis points from last year with roughly two thirds do the shift and anniversary and one third from deleverage from lower sales volume.
Merchandise margins exceeded our expectations due to stronger sell through and regular price selling trends.
Excluding the impact of the anniversary shift we ended the quarter with their inventory decreased in line with sales for the second consecutive quarter.
And SGN day, we saw a modest rate de leverage of 30 basis points relative to last year.
This reflected a reduction in overhead costs of nearly 20% concern.
Consistent with the first half of the year.
As we head into the fourth quarter the quality of our inventory is strong, reflecting the right mix and improved aging relative to last year.
We're seeing an increase and receipt and expect to have the freshest most relevant product for the holidays across both Nordstrom and Nordstrom rack.
Given the increasing uncertainty in the current environment due to COVID-19, we're prepared for a range of scenarios to ensure that we can sustain and drive our business.
Based on our current expectations that are stores remain open we expect to deliver continued positive EBITDA and operating cash flow per the fourth quarter sales.
Sales are expected to decrease in the low twentys percentage range, which reflects modest sequential sales improvement after normalizing for the anniversary shift in the third quarter.
In addition, we expect fourth quarter EBIT margin to de leverage more than the third quarter, which factors any highly promotional and competitive environment. In addition to shipping surcharges and premium paid during the holidays.
In closing, we made meaningful progress to drive higher profitability and deliver strong cash flow.
The strength of our financial position enables us to give customers a relevant product offering and reinvest and our strategic growth priorities to deliver a best in class experience.
As we head into the fourth quarter and 2021, we're confident and our ability to execute on our strategy and deliver profitable sales growth.
I'd like to now turn it over to Trina for Q and a.
Thank you and before we get started with Q and day. We would appreciate if you can limit to one question to allow everyone accounts to ask a question. We will 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 and indicate that your line is and the question queue you may.
Chris Stark if you would like to remove your question from the Q.
Participants using speaker equipment and may be necessary to pick up your handset before pressing the star key.
Thank you. Our first question comes from the line of and where do you <unk> with bank of Keybanc capital markets. Please proceed.
Hey, good evening guys. Thanks for taking the question.
Some interesting commentary about thinking about pent up apparel demand, particularly in a real bank scenario. We agree with you. When do you start planning for that do you expect to receive to increase as we move forward and when do you start pivoting the assortment to kind of that going out and travel assortment. Thank you.
Hi, I'm going to have Erik address the pent up demand question and how we're thinking about our scenario plans for 21.
Yes.
Thanks, and good question first.
First off.
And we talk about occasions.
Certainly a lot of what we sell still from occasions that doesn't mean, sonangol parties and gala and especially thanks. Its can be simple as a day its going out to dinner.
And and comedy opens up we think there's opportunities for us when that happens exactly.
And we don't know I think it gets clear off if as time goes on.
The back half of the year look looks encouraging.
We're really.
Focused on it.
As being nimble and flexible theres, a lot of breadth to our merchandise assortment.
And the key is working with our vendors.
So when it becomes clear when things start opening up again and we're in a position to do that because it's we have strength and allow those categories and.
We certainly plan on.
Gross gaming share during that time.
Thanks Happy holidays.
Okay.
Next is Dana Telsey with Telsey Advisory group.
Hi, Good afternoon, everyone. As you think about the fourth quarter just want to get some more color on the sales guidance. I think you had mentioned around down around 20%, what does that imply and how you're thinking about full price and off price channel expectation and also as you think about going towards 2021, how you how you're planning both the store.
And and inventory buys thank you.
Hi, Dana is and I'm going to take your questions from fourth quarter, and then I'm going to ask Pete to way and a little bit on how we're thinking about.
The inventory and piece and just for 21, so as I mentioned in my commentary. We gave some directional guidance that we think is going to be and the low 20 or the negative twentys.
For topline and we really look at it across multiple ways and.
So as you know is a very fluid environment right now we are really set up.
To to respond to how the customers want to shop, and we've done a lot. We've learned a lot from March April and.
We make sure that we were going to be and flexible and and and agile and possible and or into to meet the holiday demand out there. So the way we're thinking about it is we have.
Net inventory out and stores, we've got a lot of store fulfillment capabilities and that our rack business and our and our full price business and and growth and really driving to the curbside pickup pieces as well. So we were saying very fluid or we're really making sure that we've got a range severities sure and we can sustain and drive our business Peter.
You want to weigh in.
Yeah with regards to our assortment for 21, I mean, I think a lot of things that flow Erik and now and have touched on.
Our our true it really starts with us being putting ourselves in a position where weve got lean and efficient inventories. So that we can be agile and we've done that and we think we are really good shape to be able to pursue wherever this takes us there are a few things that.
We believe to be evergreen, though kind of regardless of the pandemic them and for example, just the casualization cash.
And and try and that's been going on for a while.
When we got accelerated and most regards to probably here to stay so I think to Eric's point about the cages and events not so much that we saw much ball gowns tuxedos necessarily but as people get out and do more socializing because.
The health and safety and whatever the vaccines and enable us to do that.
Thats going to help so.
No.
I think what we've seen so far as we've done really well with casual.
And savings across whatever category, the weld wellness beauty active and home and there is a lot of runway there for US I think particularly and act and all and so I think you'll continue to see us to store there.
Thank you.
Thank you next is Oliver Chen with Cowen.
Hi, you had really encouraging merchandize margin performance, how do you balance that against what you're prepared for with the promotional environment and you've also historically.
Collectively price match and went when things when competitors had and other prices. So would love your thoughts there as well as local market strategy and what's ahead for highlights of that as well as we think about next year and the and fourth quarter. Thanks.
Thanks, Oliver So Erik do I take the go to market strategy approach and then Pete and I can both way and on the margin sure.
However, you.
From our Americas strategy.
If you recall it was.
Sure thing over two years ago at Investor Day.
First talked about it and we talked about it in terms of it being our future business model.
And it really is our business model today and it is how we operate.
New.
And particular, just the last month is really bringing our off price business.
As a key part of the market strategy number one by connecting our store inventory, our rack store inventory with a.
Our E commerce business direct dot com and and hope book.
Being able to store fulfill store pickups, if it's a big deal for us.
But it also allows us to.
For customers, even if they do it of course from Dot com.
Order and pick up at a rack store. So we have a lot more locations.
For customers true.
Really received from merchandise from their term up so.
We think there is a lot of runway there have.
No, we just connecting the digital and physical parts of our business, but and leveraging the physical assets. We already have a we continue to open and a few.
Our local service hubs.
Net performed well up.
But there's a lot of those services like store.
Store pickup and alterations that we're doing and our rack stores and.
So to to leverage those existing assets, we think that's a lot and taking care and customers.
Without much additional investment for us.
Oh and your question from on margin, what I would what I would weigh in and say is that right now we have probably the fresh and inventory we've had for quite some time and really encouraging we saw the response from the customers during anniversary, so Dave uptake and re mix product.
Both and categories and price points and.
And as you saw and our margins for Q3, we had a really nice sell through at regular price and we think about Q4, we are anticipating a more competitive environment.
Particularly from.
Promotions and so we have baked that into some of our thinking for Q4, but we're really encouraged by the aging and the freshness and the receipt flow that we've got so you don't know if you went away and a little bit more on how you're thinking about it yes.
We don't have a crystal ball and the promotional stuff and has a lot to do whats going on with other retailers really out of our control, but what we do is we're prepared and were going to be competitively price and anything that's the exact same stuff. We carry so it's something we're working on all the time and part of that is make sure and good communications with the different brand partners. We have so that they may.
Be aware of things out there and it's it's always been the same work will.
We're paying super close attention to that but I don't think we expect anything really.
We're out of the ordinary share everything we've got.
Good plan in place.
And is very agile happy holidays. Thanks.
Thank you.
Thank you next is Omar Saad with Evercore.
Hi, good afternoon, and thanks for taking my question I had a question to follow up around the.
EBIT margin de leverage comments, you made around the for fourth quarter. If we think about the fourth quarter almost as a microcosm of this kind of accelerated omni channel world that weve been heading towards.
And the sipping shipping surcharges and other factors that play and add the algorithm for how E Commerce and digital profitability might look for you guys long term help us understand what is.
Comparable and what is and what are the offsets to the surcharges and and other premium costs. During the holiday period can you use your stores is greater assets and drive consumers to stores and save some of the shipping charges. How do we think about that kind of structural profitability of that new omni channel marketplace.
Hi, Omar Erik talked a little bit more how are thinking about from market strategy and getting more inventory efficiencies fulfillment and then I'll way and a little bit on some of the specific expense factors.
Yeah.
First of all I think it's important context to step back and and two things about our digital business number one is it scale. So we took it over and over with and 54% of our total business official so we.
We are a majority digital business right now.
And it's.
It's important.
Because it not only the flexibility and gives us, but the efficiency and give us a hard.
Our official business is profitable and as shown by that our third quarter results.
So that gives us a lot of flexibility and and a lot of strength there.
Market strategy and as we've talked about.
It's really how we're doing business moving forward and and part of that is.
By providing customers more options and how they want to pick up from a clearly perfect services and and order pickup is a growing and really growing I think from a retailer and thats fed offering yet.
Hey, it's particularly important.
And now given the uncertainty that that we face.
And the pandemic and.
And so.
While the and certainty for fourth quarter, we prefer not to add up.
But what gives us the confidence is we're in a much better position now than we were in March and store shippers close down and we have and there.
Our rack stores are able to fulfill orders now and so we really don't have any place and our ecosystem where inventories gets trapped.
And to your point and allows us to offset.
So shipping expenses that.
Yeah, maybe a point in time may not be but I think the point for US is that we've got a nimble and the scale official and over to the connection to our physical assets to be well positioned for a majority and digital business.
And to add onto that the way we thought about Q4 was there what we call that were specific areas that we saw that work and outside our normal digital business because as Erik mentioned, we are getting a lot of scale and efficiencies out of the investments and made a and and you saw that and acute their results and what we called out was just I put it. Thanks.
We saw happening from Q4.
Got it thank you.
Thank you. Our next question is from share Goldberg with Baird.
Hi, Good afternoon. Thank you for taking my question can you give any more insight to the trends you're seeing and rack did you see traffic improvement in line with the sequential top line improvement or other offsetting factors like basketball and the conversion.
Thanks, Erik do I take the conversation on rabbits true.
Yeah, Sara that the share.
Both on Iraq, and and full price business we.
We did see sequential improvement and sales and traffic over the course of the quarter.
Thank you we'll move onto our next question, which is from Paul Trussell with Deutsche Bank. Please proceed.
Good afternoon.
Question on.
Margins just bigger picture.
Obviously, it's been a challenging year, but just curious on your pace of how cold. It has impacted your trajectory from a long term margin growth.
Perspective.
Finally, given that you have.
And.
You know.
Done more cost savings than originally planned just curious on what you think is.
Maybe more permanent and sustainable thank you.
Hi, Paul I'm going to take the specific margin question and I think maybe Erik you can give a broader context and what you're seeing going forward with the business and general as we talked about and got a digital piece to it and.
Has definitely accelerate how customer shock and definitely accelerated and you're seeing that we've got the scale and our business as we think about that our margins going forward.
We you know as you know we took a lot of action early in the year and you're seeing that flow through and that benefit happening. We believe that about 80% of those savings are going to be pretty prominent calling in and 21. So we would expect to see a better flow through and 21 and will not require the same level of sales that we have here.
Her to come and so we actually think we're really well position and you're also seeing this and the financial health and strength of the business and the cash flow generation as well. So we feel like we're really set up well for 21 Erik.
Yes, Paul I think in general.
All right well, we've talked about this of of coated and less about.
Change there no one thought coming to a net massive acceleration of change that was already in place and.
Two things and particular yeah.
One that shifted digital sales I mentioned, the Arpus is over half to show now a year ago third quarter, our our business was 34% digital so.
That's a big big acceleration.
The other piece is the business model and and we had been evolving our business model.
And certainly one of the driving factors and that is it's not just the shift to digital but the changing role of stores.
As a as we fill more orders out of stores and do more or pick up a halving of both capabilities and and really having to change organizational model that we have and stores, a cold and accelerated both both banks and a big way up.
And hi, Yeah, I would say, we would not be where we're at today and if it wasn't for Coke and I mean that that got us very focused on embracing the new world, where where a majority of digital and our store labor model for instance is dramatically different than it was pretty kogut.
We have.
Significant staffing our store to handle order order.
Order fulfillment and order filling curbside services.
Oh things and it's a it's actually given us much more flexibility and stores with our with our staffing.
To share with our customers and the store or filling and order.
Just made our model much more flexible and much more efficient.
Thank you next and Simeon Siegel with BMO capital. Please proceed.
Hi, This is a T cell from saying thanks for taking the question.
I was just wondering if you could just give us some more detail and how you see promotional cadence from the holiday and how you see that shaping up.
And then just on idea of how the return rates were in the quarter and Thats shifted at all thank you.
So from a airport promotional how we think about the promotional T shirt and I can and Greg wrap up on the on the return Okay. Yes, I think you touched on this it's hard to know because it is responding true to others.
Yeah.
And with our control and number one is oh.
No and quantity and the health of our inventory, which Dan points really never and better the freshness inventory.
As we measure that.
But it's all from the Red category. So we feel really good about that and as well as the quantity. So we don't see.
Having excess and markdowns from happening.
Excessive.
Inventory, but we won't be undersold, and that's a promise from into our customer so.
Or per play that.
As a go.
So and the sales return piece to it it was a continuing trend that we've seen in the first half of the year and some of it is based on price point some of the space on the category share were had and I think you anniversary was a great. Great response from that with the highest sell through was ever seen which really helped mitigate some of the market potential markdown as well as.
And help us sustain kind of merchandise margin. So we are seeing lower return but.
But as a continuing trend and what we've been seeing and in the marketplace.
Thank you next is Tracy Kogan with Citi.
Thank you good afternoon, and I was hoping you guys could talk about the new customers you've added to the minority club this year and whether you're seeing any difference in the demographics or any differences in what they are buying relative to your average customer. Thanks.
The Erik do you want to take the question on the customer mix sure.
Well first of all.
The shift towards digital we've had a much higher rate of customer acquisition new customers.
Net.
And we just havent had before so and there's been I.
And I am pleased to report elsewhere that there.
There is that customers are willing to try new retailers. During this this time.
Time and.
Life has changed so much that theres opportunities there so.
We certainly.
Okay and take advantage on data from getting them into our north and club.
That's a little tougher and usually that from a from a first experience what does does not result, and sunny and for our loyalty program.
But we think that certainly can comment.
Starting at the top of funnel with new.
New customer acquisition.
Hopefully would per provided good experience and can educate customers about the benefits of our of our Nordic club.
And anything on the demographics and the customer younger that you're seeing and all the new customer.
Yeah, its a little younger.
Great. Thank you.
Next is Michael Binetti with credit Suisse.
Hey, guys. Thanks for taking our questions here and I was wondering if you can help us understand a little bit of how you're thinking about gross margin versus as today and in the fourth quarter were trying to normalize and the SGN and for the anniversary shifts and then I guess, Tony coming out of that I guess thinking a little more long term you did mention.
With all the cost work you've done about using about 80% and there will be sticky as you look to 2021 I'm wondering if that's a net number.
Fourth day, and new offsets just coming up mostly from the industry side, we've heard from a lot of retailers and freight is going to be higher you're.
We're seeing a lot and marketing investment in the fourth quarter I am wondering if any does need to come back into into the EPS you Nae line as we look into early 21. Please.
Yes.
The way we saw that from continuing from the year, we're continuing to see the 20% reduction over have occupancy and the fixed cost and as we think about our cost base going from 21 traditionally it's been about 50% variable there 50% X.
You think it's going to be a little bit more leaning more variable, particularly if they exit and Q4 and a 21 as well you should see and.
Little bit more flow through happening and continue to happen as we think about Q4, what we baked in it's true.
Specific things around the holiday between promotional environment, we talk from Clinton marketing campaign around that as well as we talked about earlier and the holiday labor surcharge and and about the shipping surcharges and receive for holiday as well, but I think I would just because it back more broadly.
And in general.
You are seeing a common theme and that we've got the scale and our digital business and because of the way and we've got our Nordstrom market strategy and the way, we're using our physical and digital assets together, it's really giving us a lot of opportunities to serve customers fulfill product and had a closer to the customer and so there's a lot of opportunities efficiencies and we're continuing to execute.
And on both in our off price and full price.
Thanks, a lot.
Thank you next is choppy from with Gordon Haskett.
Hey, Thanks, and good afternoon, and and on the fourth quarter and perhaps speak to the magnitude of the expected operating margin look good leverage that you're expecting to see given that sales and will be down about 20% and then target gross margins and then they're going to be and a little bit more to rush and then the third quarter and then the follow will be just on the non.
The store fleet with 54% of from sales they know from from digital channel just just kind of how you're feeling about the oh.
This force store base.
At this point in time.
Yes, and once you talk the talk about how we think about our store base and then Mike and I can circle back.
Yeah, we announced a.
Early and a pandemic or we wouldn't reopen 16 of our full line stores, we don't have any more to open at this point.
And we think about it.
Not for a store by store, but physical assets and and really by market. So hopefully leverage vathree assets, we have and what's direct mix of assets and that includes full line stores Nordstrom local and rack stores up so [noise].
I don't know exactly how and feel play and I would say.
It's probably going to be different than what we have now we really like that index that we have having those are different our capabilities with different assets.
And finding more ways to link them.
And it gives us a more ways of optimizing.
Our physical footprint. Besides just looking at as a full line store.
So as I think about Q4, and just to just to clarify we the what we talked about in the script is it sales are expected to decrease and the low twentys percentage range.
Which does reflect a modest sequential sales improvement after normalizing for and the anniversary ship and the third quarter.
What I would also point to is that we are continuing to believe even though we've got some de leverage and Q4 things that we've been talking about we still expect to deliver continue positive EBITDA and operating cash flow for the fourth quarter. So while we're not giving specific pieces to this I would just anchor the fact that we're cutting even within that guidance, we're expecting to have.
Positive cash flow and positive earnings.
And we'll now take one more question.
Thank you our last question is from Dr., Michael with Guggenheim.
Hi, I'm just curious if you could maybe comment can you talk about the local market strategy, but just curious on New York city's performing for you and what the flagships and and and whether or not and the traffic's, there and the volume and and how the customers are responding and in a big and and big market like New York. Thanks, Yeah. Thanks Peter.
Addressing your question.
Yeah, well, you know I think that [laughter].
And working for us so good the Earth day is that we don't have a huge legacy and body worked and we were opened what five blood and for the pandemic kits sobering I guess in some ways. It helps that we don't have this big history built out, but we still are big believers in that market and it remains a huge and powerful market, we talk about occasions and stuff.
I got you think about the New York market things like tourism and people going to work and go and event. That's a big part of what drives sales. There. So that you know, it's it's been pretty hard, but I think it's similar for us and pretty much in the urban store, we have whether that they'll be Chicago, and Seattle or San Francisco.
So it's not a total and non anomaly, but.
We've got a really great team, there and I know, it's probably the the blessing in disguise always it's given us a lot of urgency and focus around how to connect with customers personally.
And and and.
Prove kind of the personal sales and and everything that goes with that so you know we're still big believers in New York, and where it's going to work through it and there will be brighter days ahead for sure.
Great. Thank you very much.
Again, thank you for joining today's call a replay along with the slide presentation and prepared remarks will be available for one year on our website. Thank you for your interest and Nordstrom.
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