Q4 2020 Nordstrom Inc Earnings Call
Greetings and welcome to the Nordstrom at fourth quarter earnings Conference call. At this time all participants are in a listen only mode. We will begin with prepared remarks, followed by a question and answer session. If he 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.
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As a reminder of 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 afternoon, and thank you for joining US today's earnings call at the 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 slides, which can be viewed by going from the investor Relations section on north from Dot Com. Our discussion may include forward looking statements. So please refer to the slides showing our safe Harbor language.
Participating in today's call are Erik Nordstrom, Chief Executive Officer, and Anne Brennan, Chief Financial Officer, who will provide a business update and discuss the company's fourth quarter performance and outlook for 2021.
Joining during the Q&A session will be Pete Nordstrom, President of Nordstrom, Inc, and Chief brand officer with that I'll turn the call over to Erik.
Good afternoon, and thank you for joining us today.
Looking back at 2020, we're deeply grateful for the way our entire team navigated through these challenging times we.
We made meaningful progress to better serve customers.
Benefiting from multiyear investments that supported our transformation into a digital first business day.
The aggressive actions, we took throughout the pandemic to increase of our financial flexibility has enabled us to generate operating cash flow of more than $425 million over the past three quarters.
Our corporate and our ability to successfully emerge from this pandemic in a stronger position than before.
We're encouraged by the continued sequential improvement in our top line trends, including a 600 basis point increase from the third quarter when normalizing for our anniversary event shift we.
We saw momentum build throughout the quarter and continuing into 2021, we.
We had broad based improvement across our two brands Nordstrom and Nordstrom rack, both in store and online.
Enabled by our market strategy trends at our top 10 markets outpaced our average by 200 basis points.
During the holidays customers responded positively to our gift selection, which represented 67% of sales of 600 basis points over last year.
While we're pleased with our improving top line trends, we're not satisfied with our bottom line results.
Since reopening stores in June we faced inventory constrained throughout most of the year.
Heading into the holidays, we increased our receipt plans to meet anticipated customer demand.
However, we experienced delays in inventory flow debt resulted in higher inventory levels at the end of the year. Additionally.
Additionally, higher COVID-19 related labor at shipping costs contributed to earnings flow through coming in below our expectations were.
We are currently taking actions to realign our inventory position in and we will go into additional detail on our execution of action plans.
An important component of our strategy is to increase convenience and create personal connections with customers.
During the holiday season, we continue to scale digital and physical capabilities to offer greater access to our services.
With pickup options at roughly 350, Nordstrom stores racks, and Nordstrom locals about 10% of online orders were picked up in stores.
Additionally, roughly 30% of online orders were fulfilled from stores, including racks, which were recently enabled with this capability.
These capabilities allow us to increase delivery speed customer spend at inventory efficiencies, we're increasing our connections with customers by strengthening our digital capabilities to offer them discovery and inspiration.
Remote selling options such as luxe created by our sales people using style boards are resulting in outsized customer satisfaction scores conversion and average transaction size.
And we know that when customers engage with us through order pickup operations, where styling their overall spend increases by up to five times.
During the fourth quarter, we saw a significant improvement in customer acquisition trends improving sequentially by roughly 15 percentage points from the prior quarter. We gained one 8 million of new customers online of 40% increase over last year.
We did this without losing sight of our existing customers, where we have seen improving retention trends over the past two quarters.
Encouragingly, our Nordic club customers continue to shop with us during the pandemic.
Approximately 40% of customers are in our loyalty program contributing two thirds of sales.
This gives us growing confidence in our ability to sustain momentum in 2021 as our northern club members shop with us more frequently and spend more than our average customer.
As we laid out at our Investor event last month, our brand promise of getting closer to you is the guiding principle of our growth plans going forward.
Heading into 2021, we are committed to significantly expanding the breadth of who we serve and where and how we serve them.
We're doing this by unlocking the full power of the digital first platform, we have built to capture market share gains drive profitable growth and create significant value for our shareholders.
As we head into 2021, our team is dedicated to executing our strategy across our three areas of highest priority.
First winning in our most important markets for.
We're continuing to scale our market strategy by doubling our exposure from 10 to 20 markets by the end of March picking up 75% of our business. This includes key markets, such as San Diego, Houston, Minneapolis and Miami.
Second broadening the reach of Nordstrom rack, which we see as of $2 billion incremental sales opportunity over time.
We're focused on growing our share of the price oriented customer segment.
Our efforts are underway as we recently repositioned 70 stores by re imagining the merchandising offering and store experience.
And third increasing the velocity of our digital business, we're focused on more effectively translating the heritage of service that defines us in this digitally connected world.
This means delivering personalization at scale by creating greater linkages between digital and physical experiences at.
As an example, we are currently migrating Nordstrom rack dot com to the GW and e-commerce platform to enhance the customer experience, while creating efficiencies in our infrastructure and operations.
These strategic priorities are enabled by our digital first merchandising approach.
We are extending beyond our traditional wholesale model to increase selection reduce risk and share the benefits with our strategic brand partners current.
For instance, yesterday, we announced our partnership with total the smartest home gym at personal trainer to expand their retail footprint of 40 Nordstrom stores. This month.
In terms of other partnerships, we also see meaningful opportunities to deepen our relationship with asos and top shop to broaden our distribution and drive growth.
We're grateful for our team's efforts to strengthen our financial flexibility and accelerate our strategic priorities to serve customers in new and differentiated ways.
These actions have put us at a strong position to capitalize on our market share opportunity as customer demand recovers.
While the timing and pace of demand recovery remain uncertain, we see potential to reach $17 billion in revenues at expanded EBIT margins of more than 6% over the next three to five years.
In closing, we have two powerful brands, Nordstrom and Nordstrom rack as well as highly integrated digital and physical assets Fantastic brand partners and employees, who are truly unmatched when it comes to their commitment to the customer.
We're confident in our direction and look forward to sharing our progress in the quarters ahead.
With that I'll turn it over to Ann to discuss our financial results in greater detail.
Thanks, Erik we're pleased to deliver another quarter of sequential improvement in sales through the actions, we're taking to unlock the full potential of our digital first platform.
We're also proud of our team's efforts to generate another quarter of positive earnings and operating cash flow in what remains a very uncertain environment. We continue to satisfy our customers' desire for digital shopping experiences accelerating online penetration across both Nordstrom and Nordstrom rack.
Even as our store sales continue to recover.
Overall, we have seen strong customer response to our initiatives to evolve our operating model positioning us well to drive market share gains, while improving profitability returns and cash flow generation.
That said the quarter was not without its challenges and there were unanticipated headwinds that limited our ability to flow our improving revenue momentum to the bottom line, which I will discuss in detail shortly.
We also exited the quarter with excess inventory that we are working quickly to address.
Overall, we are confident in our ability to support a continued recovery in both demand and profitability and we remain focused on executing our long term growth strategy.
For the fourth quarter, we reported positive earnings per share of 21.
Which included an income tax benefit related to the cares Act.
Earnings before interest and taxes were $30 million.
We continue to be in a strong financial position fully paying down our revolver and ending the quarter with $1 5 billion in liquidity, including $700 million in cash.
We delivered a third consecutive quarter of positive operating cash flow.
Generating more than $425 million over the past three quarters.
For the year, our expense savings well exceeded our targeted range of $370 million to $420 million, primarily from re basing our cost structure.
More than $300 million of realized savings are considered permanent overhead reductions our fourth quarter sales decrease of 20% slightly exceeded expectations.
This reflected improvement in sales throughout the quarter across both Nordstrom and Nordstrom rack with momentum as we head into 2021.
Digital demand was strong with sales growing 24% over last year, and representing 54% of total sales.
Sales trends continued to improve increasing by six percentage points compared to the third quarter after normalizing for the anniversary shift.
Notably we saw strong sequential improvement at both Nordstrom up five percentage points and Nordstrom rack up nine percentage points.
From a merchandise perspective, we saw a strong response to our focus on gifting items.
Spanning our offering in categories of highest demand we delivered double digit sales growth in both home and active and had strong results in beauty kids and designer handbags and shoes.
Overall, we're encouraged by the sequential improvement in our top line trends, giving.
Giving us increased confidence in our pivot to market share capture and a return to profitable growth in 2021.
That said, we are not satisfied with the flow through to the bottom line from our improving revenue momentum.
EBIT margin was down 590 basis points from last year versus our expectation for a decline of approximately 500 basis points.
There were three key factors that contribute to greater pressure on margins in the quarter.
Most of which we expect it to be temporary and reverse as we progressed through 2021.
First.
Merchandise margins were lower than expected.
Our decision to take a stronger inventory stands for holiday combined with delays in inventory flow over the course of the quarter resulted in higher than anticipated markdowns.
Second.
We experienced higher than expected selling and labor expense, primarily due to premium pay related to COVID-19, and higher costs associated with product fulfillment.
Strong growth in e-commerce, and the ramp of new capabilities at Nordstrom rack led to some fulfillment inefficiencies that had been clearly identified and are not expected to recur going forward.
Third we saw higher than planned outbound freight expenses due to carrier surcharges and costs associated with our decision to mitigate carrier shipping constraints by shifting to higher cost shipping options.
Versus last year, our overall SG&A rate deleveraged by 470 basis points, largely due to lower sales volume and higher labor and shipping associated with COVID-19.
These costs were partially offset by continued benefits, where we basing our cost structure, which led to a reduction in Q4 overhead costs of approximately 15% from the prior year.
Roughly 300 basis points of these expenses are not expected to recur this year.
From an inventory perspective, we increased our receipt plan for the quarter.
Much of this inventory came in later than expected, which resulted in not being able to fully support demand during the holidays and higher inventory levels exiting the year.
Most of this inventory, reflecting current receipts and non seasonal merchandise.
With improved availability of replenishment items and relevant products with extended selling seasons.
We are taking action to mitigate the impact of seasonal and underperforming merchandise categories, particularly in apparel, including cancellation of orders return to vendor and clearance activity where appropriate.
Importantly, we are quickly building additional flexibility into our buying plans in the first half.
We plan to cut our sales to inventory spread in half by the end of the first quarter with inventory realigned at Nordstrom rack.
We expect inventory levels for our Nordstrom brand to be fully realized in the second quarter after normalizing for the anniversary of shift.
Looking ahead to 2021, given the continued uncertainty with respect to COVID-19, we remain prepared for a range of scenarios to ensure that we can sustain and grow our business.
Based on the assumption that our stores will remain open over the course of the year, we expect to deliver revenue growth of more than 25%.
With digital representing approximately 50% of sales.
Given expectations for improving gross margin and moderate of cost pressures over the course of the year, we expect to deliver EBIT margin of approximately 3% of sales.
Our income tax rate is expected to be around 27% for the year.
This guidance contemplates some pressure in gross margin as we work to align inventory in the first quarter of.
A moderation in COVID-19 related labor and freight pressure as year progresses, and lapping of 300 basis points of nonrecurring costs in the fourth quarter.
So at the pace of demand recovery accelerate or COVID-19 related costs moderate more quickly than currently anticipated, we do see a path to delivering operating margin of approximately three 5% for the year.
For the first half EBIT is expected to be approximately breakeven, reflecting roughly 45% of total yourself.
This contemplates the shift of the anniversary event to begin in July this year with one week falling into the third quarter from a capital allocation perspective, we're planning capex at normalized levels of 3% to 4% of sales to support investments in technology and supply chain capabilities.
We also expect to reduce our leverage ratio to approximately three times and to be able to return cash to shareholders by the end of the year, we made meaningful progress to support the recovery in demand in the fourth quarter.
Now as we head into 2021 of <unk>.
Strength of our financial position enables us to reinvest in our long term growth strategy.
We are confident in our ability to deliver profitable sales growth as demand recovers.
I'd like to now turn it over to Trina for Q&A.
Thank you and before we get started with Q&A. We would appreciate it if you can limit to one question to allow everyone. A chance to ask a question, we'll now move to the Q&A session.
Thank you if you would like to ask a question. Please press star one on your telephone keypad at confirmation tone will indicate your line is from a question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star of keys.
Thank you. Our first question is coming from Eddie room of with Keybanc capital markets.
Hey, good evening guys. Thanks for taking the questions I guess first just on the.
On the inventory commentary I guess as you think about the back half obviously lots of discussion about reopening.
As experienced in the fourth quarter changed some of the inventory plans you might have around that and have you embedded bar of conservatism and there's a bigger picture question. If you could just kind of sort of insight into some of these strategic partnerships.
Sounds exciting, but kind of how you see them playing a role in the longer term growth. Thank you.
Okay. Thanks for your question Pete why don't you start with the partnerships and then I can talk about some of the inventory thinking on the first half of the year, yes. Thanks.
The purpose of thing Thats an evolving.
Subject that's happening you know as we said it's been going on for a while and I think at all the pandemic has given us all of an opportunity to rethink how they fall at work.
In the spirit of being more agile in making things better.
There's a lot of good things to talk about there I would say point is probably.
One particular example that we're super enthusiastic about net our partnership with Asos as you know Acos just recently at the <unk>.
Topshop pop Mam brand, which as you likely know at the very big and important vendor from so that was that was important to us that this land at with someone that we have a lot of confidence and so first of all you've got a lot of confidence at Asa.
It's going to be very capable of.
Investing in elevating the brand and to reach its full potential so there's a big opportunity for us.
As you may have read as their.
They are counting on their relationship with us.
To realize the full value of this investment and towards that end. It gives us a huge opportunity in North America specifically.
So really all of this business and we think Theres a lot of upside to that but I think the point about the brand partnerships as <unk>.
Not a traditional wholesale outlet there of retailer and so they are approaching this knowing we have this topshop businesses like they look at what's the best way to do this so it works for all of US given a clean slate and I think again considering of everything we've gone through of Queensway, It's nice to have and we know a lot of about that business.
And we're really motivated by their ambition I think by their willingness to partner in new and different ways and we're confident that it's going to bode very well for our results and then the other part of that is.
So as other brands that they have going on this other commercial opportunities that are available to both of us to this relationship and.
We've been in regular contact already and I can tell you debt, whether it's andrew or myself or Kevin Perry of other ins here thats been interacting directly with their team.
Every reaction just builds our confidence.
What we think is possible. So I guess as time goes on this year, we'll be able to talk more about that of it but I think it should be illustrative of what's possible together.
And then the second part of your question of card how are thinking about inventory plans for the for the first half of the year.
And we exited.
In the second half of of 2020, you rightfully commented that with stores reopening it was a bit choppy as far as reopening of some of the inventory levels.
Part of the decisions. We made for Q4 is to get back in stock and just basic replenishment and items that were at.
Our seasonal work and so that was a very conscious decision and we saw great customer response to that.
So as we go through the first half we you know we feel like we're in a very good position with those inventory levels. There was a piece of it that was more seasonal and.
Some of the delay in receipt.
As we come true, particularly Q1, where we're taking a number of actions to get that right size, but I would just say in general we're building more flexibility into the plans and as we continue to see customer of a man, we're ready to meet the customer where they where do they want to shop at how they want to shop of what they want to shop more.
Thank you.
Next is Dana Telsey with Telsey Advisory group. Please proceed.
Good afternoon, everyone. As you think about the rack business and increase in the revenues of rack what do you see in terms of the assortment there as we go through 2020, one as compared to the core Nordstrom business and as the opportunities for either plots of enhancement collaborations there also and just lastly.
On the real estate portfolio any update as to how you're thinking about openings closings or restructuring of leases that are rental not owned thank you.
Hi, Dana.
It's Erik.
Uh huh.
Thanks, all of those of you can chime in.
Urban zone.
Iraq.
Yeah, I think it's important when you think about Iraq business at its not a standalone business. It is very integrated to our model.
Our model is the two brands Nordstrom Nordstrom rack.
And having digital and physical business and theirs.
The point that if there was of synergy to that end.
Rack is.
Particularly flexible we make commitments closer to season.
So it's a much more opportunistic business.
And we do see opportunities to adjust our assortment certainly the hot categories from of.
Through the pandemic of of active at home.
Of beauty wellness, even some kids business, we see.
<unk> there in Iraq business too.
To have outsized growth there.
And again at the flexibility.
Even in the stores, we can move around space allocation really easily and quickly. So there's a lot of experimentation.
And I think that's particularly important.
As you look forward in 2021 that Oh, what happens, what's the customer who would be interested in when things start to open up more when people are returning to work or starting to travel again are going to restaurants.
And that's.
That's something we've got a point of view on but maybe we need to be flexible.
And again, we see a lot of opportunities for us to be nimble.
And move there.
At the collaborating gives you opportunities for collaborating in Iraq absolutely.
We talk to vendors at is as a total business or all of our vendors have an off price business.
And we talk a lot about the synergies in our business and how.
Does that point of discovery, and acquiring new customers and our rack business.
<unk> works for US is at retailer and works for brands, we have a lot of data on that of of <unk>.
Customers, who get introduced to our brand and our rack business.
And end up becoming a full price customer of that brand so well.
We're showing at work with vendors on that.
On the real estate piece.
And as you know, we closed or did not reopen 16 full line stores.
Early in the pandemic, we don't see a lot of of change in the near term there.
Our from our history pre pandemic is probably the best gauge.
There's a it's always a combination of store performance and the lease obligations that we have and so over time.
I think though as our history has been you know there's a few stores a year that are.
Now, we don't renew the lease on AR, but we don't see anything major.
Thank you.
Next is Omar Saad with Evercore ISI.
Thanks for taking my question good afternoon.
I wanted to ask on the 10% in store pick up that you achieved that's pretty impressive how does that compare to a year ago and you know what do you think of the key obstacles to getting that higher.
And then on private label, it's at it was one of the topics at your Investor Day.
The target go from kind of going from 10% to 20% maybe you could dive into that deeper at was it was one of the areas. We didn't get to ask a follow up question on of why you think that that could be an important strategy.
Or do you include them all of them all of the broader initiatives that you talked about as well. Thanks.
Thanks Omar.
Yeah, we're off of.
We are encouraged of our fifth store pick up.
We've had buy online pick up in store capabilities of our Nordstrom business for cash I think 10 years now, it's a new capability in Iraq business.
And.
Yeah.
You've seen other retailers have a lot of growth there I think we have hit a tipping point.
And that company is like it.
And it's not something that we've done all of of marketing with as.
We've added at the capabilities as we have more and more inventory that's available for same day or next day pick up which is part of our market strategy, we really see instant reaction to it.
So.
It certainly doesn't feel like we're anywhere close to the ceiling on there I think it's clear that debt.
Those.
Delivery options pickup options or something that isn't a.
Covid only subjects at a that's a change in customer behavior of that that will continue.
And so.
In general our direction of travel is current market strategy.
How do we enable a bigger selection of customers with faster delivery and.
We've been able to do that in the 10 markets. So far with market strategy, we have 10 more coming.
And the next month.
And the proof points have been consistent.
Yes, and all of our relative to our own label products.
We do have ambitious growth plan here and we think at the timing of space of that.
Ill prepared to do at in the proof points of that at least in the <unk>.
Most recent past of just Ben.
As you've seen the relevant of certain categories that we have evolved and in particular, the casuals nation. That's something we've been speaking of up well that debt speaks well to our strength and our own label programs a lot of it's really based on the casual part of that offer we already really good.
Businesses with high search results like of the Nordstrom remains specifically in light of Zelle of brand, which is an active brand for us.
Truly successful going from the last few years, but certainly in this last year with act of being such an important category. So we think we've got a good foundation.
To build off of I would say the other thing thats true as well.
Look at the.
The growth ambition, we have around the home classification of that one's itself pretty well to our own label too and so I think that thats going to give us opportunity. So.
It's a combination of making sure we've got the right inputs there that we've got the right alignment with our buying team and.
The people, who design to produce that product for us and I think we've achieved that we were really clear on what we need to do together to grow this and so we'll keep you posted as time goes on but we're certainly set for growth.
That's helpful color. Thanks.
Thank you next to Oliver Chen from Cowen.
Alright. Thank you very much regarding underperforming categories could you be more specific about which ones you need to clear goods end and as we think about the year ahead, how are you managing promotions.
I would also love more color on what you mean by flexibility of the buying plans I.
I feel like you've had flexibility in the past.
So what's different this time and how might you integrate closer to your drop ship concession to rethinking of inventory management going forward.
Yes, okay.
With the underperforming the toughest category just broadly for us over the last year has been apparel.
In particular of men's apparel is pretty difficult.
That's a fairly sizeable business around things that are.
A little more work or formal oriented I think relatively net.
At the big business for Us so that is off considerably and it's also true in women's and apparel generally cash of barrels of most perishable as well so.
That's something that debt, obviously is of concern to us and we're looking at but you hurt and talk about the products that we have the inventory we have.
<unk> of it is largely around.
Real seasonal, but you know it could be of beauty or something of replenishment items.
And so that.
That helps kind of.
I think mitigate some of the risk about what we own but I think it would be fair to say that the most challenge.
Category for US is really fashion of apparel. So we are just being super conservative about our plans going forward and what we're investing in there and ensuring that you know, we're staying close to it and when things evolve and change as we all know where all of that we're prepared to deploy on the gas there too so.
It's a dynamic thing and I think we've learned a lot of lessons of share about making sure. We're applying the appropriate rigor and operational disciplines. So that we do.
Get ourselves in trouble and were doing the right thing and maintain flexibility with promotions, we don't really have we.
We don't have any different or new promotions.
Planned I mean, even though we were somewhat overbought.
What about some giant markdown kind of cleared debenture notes at a clearer set that that's not the most practical at prudent way for us to solve for of inventory issues and we will solve for those in the right way of there'll be in the best interest of the bottom line of our business. So I wouldn't expect any more promotion and I'll, let Wade and win in this a little bit.
But.
With the flexibility of maybe I'm once you go in <unk>.
With that I mean I.
I guess, what I would say your hurdle of a bit about the extent of models that we have.
And while we've always had some flexibility I think if your corporate of street wholesale relationship where you're buying the goods.
Seven months out or something that doesn't necessarily lend itself to create agility and so I think the spirit of at this thing it's more about shared accountabilities and finding of defining together with the brand what good looks like and how we can work force that together. So I don't know if you want to expand at that.
I'm not at all so all of our I would just add inventory discipline has been definitely of our bellwether of of how we operate the business and it's certainly something we take very seriously and.
It was a lot of uncertainty out there as far as how quickly the customer comes back demand comes back in particular in areas like apparel. So we're just building in that flexibility of making sure that we're there to meet the customer demand, but also staying very focused on the discipline around our inventory management as well, whether it's alternative models or how we buy.
Okay.
Okay very helpful. Thank you for all of the color.
Thank you as a reminder, we ask that you. Please limit yourself to one question. Our next question is from Mark all of <unk> with Baird.
Good afternoon, Thanks for taking my question.
Following up on the sales guidance.
Over 25% growth. This year, it's been implies year settles out, maybe 14 or 15% below fiscal 2019 levels.
Any more help on how youre thinking about the first half versus the back half on that front I guess Q4 was down 20% versus 2019 with a few headwinds that you called out. So I'm wondering if it's fair to expect sequential improvement from that run rate kind of each quarter as you move through the year or if things might be a little bit more back.
And loaded on that front. Thanks.
Yes, Mark let me let me maybe help you help guide if there's a little bit so as we think about the year. We did say we are giving guidance of 25% plus on the top line piece to it the way we're thinking about it is at the first half of the year represents about 45% of total sales. So you do you.
At that would imply that you would see a progressive improvement throughout the year of particularly the second half the other.
Ting at meetings, how frame Apple.
Are you is you look at 2019 of at baseline for pre Covid levels at the way I think about it is we expect demand to continue to recover for the year, but we would expect a greater decline against 2019 in Q1, and then you would see improvement throughout the year and in particular, highlighting that Q2 will have at.
Anniversary sale and at last year. It was in Q3 entirely this year. We've got two weeks of anniversary sale in Q2 in one week in Q3. So as you think about the year that hopefully that helps you kind of anchored of how how we're thinking through it.
That is helpful and just a quick follow up there I think and you also spoke of in your prepared remarks about margin potentially getting to three 5% if the demand accelerates faster than you're currently anticipating.
Would you be able to say kind of like what is the sales scenario that would get you comfortable with that margin picture.
Yeah. So there's a number of components to it there's some sales but the other pieces are really the drivers of the EBIT piece and so there's a couple of components of that one we would expect to get more leverage on sales as you go through the year. If you saw some improvement but also more.
Importantly, we think doing quite a bit of headwind of Covid expenses things that we saw in Q4, continuing particularly the first half of the year pressure from current premium pay.
Surcharges of charges from carriers.
Covid expenses associated with that so depending on how things recover or how quickly are those cost start mitigating that would never be another lever we pull of tickets at three 5%.
Okay. Thank you for all of the detail.
Thank you next is Chuck Grom with Gordon Haskett.
Okay. Thanks.
I just wonder if you guys could just sides up force the impact.
On margins from what you need to do it at the correct inventory levels.
The first quarter and then just as a follow up you spoke about improvement in their sales terms.
Throughout the quarter and I believe in February of just wondering if you could just opine a little bit.
Some of the categories that you're seeing and Bruce thanks.
Yes at Peter you want to talk a little at about the categories and then I can comment on the margin component, yes in terms of categories of our improving yeah.
Well.
We talked about getting over bought during the fourth quarter and Thats all winter current goods and the good news is it was cold kind of late this year. So that's been helpful.
We've seen an uptick actually filling of winter. So that's good for us at this current situation I'd say, there's some view of things getting back to normal in some way like we've seen things like dresses at some of these things improve but it's still pretty early in the game.
I wouldn't get too far out in front of at I think it's really it continues to be the same themes around casuals. They surround active around home around beauty kids, you forgot that the designer business outside of the other apparel part of for the most part has been.
Strong so I think in the near term, it's clear on where to invest.
Of the trickier part of that is the year of goes on.
Trying to see how things evolve.
Line to get every kind of bit of objective data, we can around leading indicators of all.
When these things will evolve and change but.
I think we're pretty good shape in terms of the proportions of our inventory of like I mentioned before I mean, typically fashion of apparel that the more challenging part of it right now, but we've been aware of that for a while.
So on the margin piece, we gave the guidance of a breakeven for first half.
And so that did contemplate some of the away from some of the margin pressure, we would experience from Q1.
Although we are using multiple ways to mitigate the inventory situation. There is a piece of it is marked down.
Later, so that is kind of a do you have one of its been contemplated at the half on guidance as far as breakeven.
And so as you think about the sales trends are at those will continue to progress through the year, you've got Anniversarying and Q2 end.
Q1, traditionally is a very small quarter for us anyway.
Yeah.
Thank you next is Matthew boss with J P. Morgan.
Great. Thanks on gross margin so beyond the impact of the inventory actions in the first quarter at that you just spoke to I guess any headwinds that you see constraining merchandise margins relative to 2019 pre pandemic levels. This year and then my second question on the same topic is as well.
Then think about beyond this year, the changes that you're making in terms of digital inventory relative to the wholesale model in the past is there any reason as we think about merchandise margin going forward I guess help at the peg it to any historical levels or at how best to think about gross margin going forward when we put all of.
Of the piece of it again.
Yeah, Matt thinks of the question I think as we think through the different pieces of the financials.
For us, it's really anchoring on the top line and the EBIT pieces too because there's a number of puts and takes throughout the P&L.
Far as margin gross margin in particular for the year as I mentioned earlier, we believe or we see that when you start getting a little bit more top line you actually start leveraging more I get less deleverage in the in line right in gross margin and also in SG&A.
We go through that we would expect to see some continued improvement in the gross margin line.
Debt and contemplates the merch margin pieces to this as well.
On the digital side.
There are a bunch of puts and takes and so the way I would think about it at 2021 is definitely the road to recovery is definitely in line with our targets that we laid out for the next three to five years and it certainly gets us to the on the journey to achieving those targets from both the top line and EBIT rate and a return of invested capital for shareholders.
Okay.
Thank you. Our next question comes from Tracy Kogan with Citigroup.
Thank you I just wanted to clarify first did you probably talk about your sales trends quarter to date or when you talked about sales trends continuing to improve did you. Just mean January and then secondly, I was wondering if you could talk about the inventory levels and also the margin pressure.
Expectation between full line and rack is at more isolated to one division or the other or is it really kind of across the board. Thanks.
It's Tracy filling the sales from what we talked about in the quarter with sequential improvement throughout the quarter.
So as you think about the quarter. It's November December and January and we saw sequential improvement each month in the quarter. So we were you know we are continuing to see customer demand.
Actually continue to get better throughout the three months, we have not talked about what's going on in this quarter, we typically don't view.
Just a commentary on what's happening in the current quarter, but hopefully that helps at Gibson perspective.
To see improvements in both the rack business and the Nordstrom brand business as well as far as the inventory levels in the margin pressure, let me reframe that for you.
We have opportunities in both of brands, we expect that the Nordstrom rack business will be back in line by the end of Q1 at cyclically our business at shorter than buy cycle, you have more closeouts, you've got more capability to be more flexible in how you're doing your buys and then by early Q2, we expect could be back in line and in the north.
From brands from an inventory position.
Great. Thanks, maybe I'll take one.
Well now take one more question.
Our last question comes from Simeon Siegel with BMO capital markets.
Great. Thanks, good afternoon, everyone.
Congrats on the total announcement very exciting anything you can share on the partnership or maybe speak to how you picked on all of et cetera, whether this began to meaningful shift in how you're approaching active whether this is more of an opportunistic opportunistic one off and then I am sorry, I don't know if I missed it did you or could you quantify merch margin in Q4.
And then within the comments you made for the full year of any help on thinking about the cadence of gross margin. Thank you.
Yes. This is Peter speaking to the total thing.
Well I think that's reflective of the merchant kind of orientation that our team has and giving them.
Empowerment and accountability.
Chase into the things that are really working well and so.
The business increasingly is less about a whole legacy view about how we plan in the future, but it's more of trying to think about clean slate and how we.
Pursue the categories and the.
The products at our customers are most interested at zions to give that credit to our active team.
Looking for opportunities out there too.
Enhance our authority in this subject in this category and classification I think total.
As a way where we can do that we clearly have a shared customer between those two companies end up.
They've got a willingness to try something with us.
So.
These are the kinds of things, we love to do it.
As far as the question on margin in particular.
I think there's a couple of things to keep in mind, one we're expecting to see sequential improvement through the year of top line, which will help deleverage component to it.
It is we would we are expecting to see a gradual improvement in some of the headwinds that we see with some of the COVID-19 expenses throughout the year and then last I just want to remind you that we've got our supply chain outbound shipping.
Of course in our SG&A and.
And so as we think about the whole business, we really look at the whole thing from a contribution margin or EBIT perspective of what we would expect to see gradual improvement throughout the year.
Great. Thanks, a lot of it around best of luck of the year.
Thank you.
Again, thank you for joining today's call a replay of all of the slide presentation and prepared remarks will be available from one year on our website. Thank you for your interest in Nordstrom.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Okay.
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