Q3 2021 Nordstrom Inc Earnings Call
Greetings and welcome to the Nordstrom third quarter 2021 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 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.
At this time I'll turn the call over to Heather Hollander head of Investor Relations for Nordstrom you may begin.
Good afternoon, and thank you for joining us before we begin I want to mention that we will be referring to slides, which can be viewed in the investor Relations section on Nordstrom dotcom.
Our discussion may include forward looking statements. So please refer to the slide with our Safe Harbor language participating in today's call are Erik Nordstrom, Chief Executive Officer, Pete Nordstrom, President and Chief brand Officer, and Anne Brennan, Chief Financial Officer, who will provide a business update and discuss the company's third quarter performance.
And now I'll turn the call over to Eric good.
Good afternoon, and thank you for joining us.
We have long benefited from our commitment to customer service interconnected digital and physical assets and innovative brand partnerships.
However, we need to move faster and more aggressively to better capitalize on those strengths.
While our quarterly results were in line with our stated plans and we are on track to deliver on the financial commitments. We made at our Investor day in February when we look across the landscape, we need to deliver more.
We need to grow market share and deliver greater profitability and.
And we are acting with a sense of urgency to do so.
We've taken a comprehensive look at opportunities to improve our business engaging external consultants with function specific expertise across three key areas.
Proving Nordstrom rack performance, increasing profitability and optimizing our supply chain and inventory flow.
We are not satisfied at all with Iraq business is clearly our recovery is lagging what we think it should be however.
However, we are encouraged with the clear path to improvement that we see in front of us and have identified clear actions, we're taking to improve performance and accelerate profitable growth.
First Nordstrom rack has been challenged by low inventory levels and premium brands in key categories, such as womens apparel and shoes.
Customers are drawn to Nordstrom rack to purchase premium brands at a terrific price.
Fact, 90% of the top brands at Nordstrom are also sold at the rack.
These brands are more highly penetrated in Iraq business than they are at other off price retailers.
While many retailers are dealing with macro related supply chain disruptions rack faces a unique challenge as off price procurement of the same top brands. We carry at Nordstrom is particularly difficult in an environment with production constraints and lower levels of clearance product.
Racks top 50 brands represented approximately 50% of sales in 2019.
Year to date. These brands represented only 42% of sales highlighting the outsized gap and merchandise availability.
In response, we are undertaking a comprehensive set of actions to increase our inventory levels and improved merchandize flow for the rack in particular, we are executing a multi layered plan to both grow our offer of the most coveted brands, we carry as well as source from new vendors to ensure we have the selection of our customer.
There is one.
To minimize supply gaps, we are increasing our opportunistic use of pack and hold inventory, allowing us to buy larger quantities of relevant items. When available then hold a portion of it to deploy in periods with high demand tight supply or system constraints.
Given that we expect macro related supply chain disruptions to continue into next year.
We're strategically evaluating our assortment and increasing our use of pack and hold inventory by a factor of two to three times.
We expect that action in these areas will not only yield benefits as we deal with macro related supply chain disruptions, but also deliver sustainable benefits that will enhance our long term performance as well.
While we are in the early days of these efforts preliminary results show sales responding positively and rack stores with improving inventory positions.
Second our mix has skewed too far to lower prices at the rack with AUR is declining 4% versus 2019.
This sharp sharper than expected decline results from a couple of factors.
First customers come to the rack for coveted premium brands at a great value.
This is a strength of ours as much of this product is scarce in the off price channel.
However, we haven't had adequate supply of those brands as I just described.
Next as we adjusted our assortment over the last year to add more product at lower price points. We found that we went too far in certain categories.
We're now rebalancing our assortment to increase the breadth of selection and premium brands improved average selling price and better align with customer expectations.
Third we are acting to strengthen racks brand awareness and drive traffic as part of this effort, we launched a new more reasons to rack marketing campaign in September.
We are encouraged by early consumer research Reed, which showed a meaningful increase in future purchase intent.
By improving inventory levels, expanding our selection and top brands and increasing awareness and traffic, we expect to grow market share and improve profitability at Nordstrom rack.
With the actions, we're taking we anticipate improvement in Q4 with more significant improvement to follow in the first half of fiscal 2022.
Turning to profitability, we are committed to delivering significant improvement in merchandise margins and EBIT margin across the business.
We launched a comprehensive study of the factors driving our merchandise margin and found meaningful opportunities for improvement in pricing category management and private label brands.
It will take you through the detailed plans behind those work streams in a moment.
Within SG&A, we remain focused on managing fixed expenses and.
In 2020, we rebased, our overhead cost structure, and we remain committed to sustaining a substantial portion of that reduction.
And while we've seen significant macro related pressure in fulfillment and labor costs.
Were concentrated on mitigating our overall impact from those pressures.
Improving our supply chain and inventory flow was also a priority.
In response to macro related supply chain challenges, we have identified various ways to improve our internal network and processes by diversifying our carrier capacity, gaining better end to end visibility of inventory as it moves through our supply chain, increasing velocity and throughput in our distribution and fulfillment.
Ailment centers.
And better positioning our inventories to get it closer to the customer.
We expect that these initiatives will enhance the customer experience and drive topline growth at both Nordstrom and Nordstrom rack by increasing delivery speed and expanding the selection for in store shopping as well as same day and next day pickup while also driving efficiencies in labor and fulfillment.
We expect to see benefits from these actions beginning in the first half of fiscal 2022.
Turning to third quarter performance, we continue to see improvement in our Nordstrom stores strong digital growth and benefits provided by the interconnected capabilities of our market strategy.
Nordstrom banner sales returned to 2019 levels in the third quarter.
In the southern portion of the U S were 44% of our stores are located Nordstrom comparable store sales grew 8% over the third quarter of 2019.
Our geographic footprint has been a source of strength for us historically with stores located in highly desirable real estate in the country's top markets How's.
However, urban areas have been disproportionately impacted by the effects of the pandemic as a result, our suburban Nordstrom locations outperformed our urban locations by 1300 basis points in the third quarter.
As discussed at our Investor event, winning in our most important markets and increasing our digital and velocity are key strategic priorities for us and we are making progress in these areas.
The convenience and connection delivered by our market strategy continues to be a powerful enabler for the business we.
We are leveraging a strong store fleet that positions us physically closer to the customer and drives value across the business.
As a result, we are able to better serve customers and provide greater access to product by linking our assets at the market level.
Our market strategy delivers incredible convenience that provides customers with four times more product available for next day pickup a one day reduction in average shipping time and the ability to pick up orders at the Nordstrom Nordstrom local or Nordstrom rack location of their choice.
This quarter one third of next day Nordstrom Dotcom orders were picked up at rack stores.
Showing continued evidence of the power of integrating capabilities across our two brands and across our digital and physical platforms.
And our top 20 markets, where our market strategy continues to gain traction order pickup accounted for 12% of digital demand versus 4% in other markets.
Since we launched order pickup at the rack last year, we have seen 70% growth in the program as we head into the holiday season, we are encouraged to see steady increases in order pick up demand each month, which is evidence that customers are taking advantage of our integrated touch points.
This trend is also advantageous because buy online pick up in store provides our highest satisfaction customer experience, which in turn drives more return visits it.
It is also our most profitable customer journey.
The value of our interconnected model is evident as customers dramatically increased their spend when engaging across multiple channels banners and services for.
For example, the average customer that shops across both banners in store and online spins over 12 times more than a customer utilizing a single channel.
The quality and convenience of the services, we offer such as alterations in personal styling drive connection and engagement increasing customer spend by a factor of five to seven times versus customers, who don't utilize those value added services.
We also continue to increase our digital velocity across Nordstrom and Nordstrom rack.
This quarter digital sales increased 20% over the third quarter of 2019.
Digital sales represented 40% of our business in Q3, and we continued to drive growth over 2019, while store traffic improved sequentially.
Before I turn the call over to Pete we'd like to express our thanks to our exceptional team their dedication and efforts in serving our customers and transforming our company drive our optimism about the future of the business.
<unk> has a strong foundation and unique competitive differentiators and we are working diligently to accelerate our strategic transformation and build on our core advantages.
To be clear, we recognize the need to move faster and more aggressively we are taking decisive steps to improve rak performance increased profitability transform our supply chain and create value for our shareholders.
All said, we remain confident in our ability to achieve the top and bottom line commitments, we set forth at our investor event and continued to build capabilities to profitably grow our market share.
With that I'll turn it over to Pete Thanks, Eric and good afternoon, everyone. As Eric said, we've taken a deep look at our business and identified areas of improvement in pricing category management and private label brands that are expected to drive a better customer experience as well as sales and margin improvements through.
Through decades of experience, we have learned that when you make things better for the customer you make things better for the business overall.
I'd like to first discuss the specific areas of opportunity before getting into our category performance in customer trends in the third quarter and finally, our plans for the fourth quarter.
First we are using dynamic pricing analytics to optimize our promotional effectiveness and improve the pace and depth of markdowns to move product profitably at the end of each season, we expect to see initial benefits from this work beginning in Q4.
Next we are working to improve our category management process.
We are using a data driven customer centric approach to define the role of each category at Nordstrom and Nordstrom rack and then optimize our assortment for the role each category plays we benefit by attracting new customers and expanding engagement and share of wallet with existing customers. We also gained efficiency by phone.
<unk> on the most productive items, eliminating redundancy and editing out are poor performers as a result.
As we shared during our Investor event earlier. This year, we also have a meaningful opportunity with our private label business Nordstrom product group, we see the significant value that Nordstrom made brands represent delivering expanded options and better value for our customers.
While also giving us more control over our merchandise selection, notably the gross margins of our private label brands are on average 500 basis points higher than our third party brand product.
We recognize the opportunity and need to accelerate our efforts to increase our private label penetration. We look forward to sharing our progress with you in the coming quarters turning to category performance. This quarter, we continued to see strength in pandemic related categories, particularly home and active where our sales increased 95%.
57%, respectively, compared to 2019 levels, our designer category continues to perform well with a strong double digit sales increase over 19 led by strength in designer shoes, handbags and designer men's apparel.
We saw signs of travel returning with sunglasses and swimwear posting double digit increases over 2019.
We are also encouraged with our sequential trend improvement and occasion based categories. During the third quarter, a promising signal that customers are beginning to return to social and work events dresses mens suiting and dress shirts dress shoes and makeup all showed sequential improvement during the third quarter and we are closed.
The GAAP to 19 sales levels.
However, we experienced inventory shortages in the quarter, especially in certain core categories, such as womens apparel and shoes were demand came back stronger and faster than we expected.
We responded by trying to increase supply as quickly as possible, but weren't able to land as much product as we needed in certain core categories and Miss an opportunity to capture incremental sales as a result.
We are working to better align inventory levels and customer needs and have pulled inventory receipts forward in anticipation of holiday demand.
We are confident that we are in a much improved position for the holiday season, both in terms of quantity and balance of categories.
As we look at customer trends, our Nordic club loyalty program remains a powerful engagement driver and we are encouraged by positive trends within the program.
Q3 loyalty sales grew 5% versus 2019 and loyalty penetration increased two percentage points to 65% of sales.
We also saw increases in spend and trips per customer compared to pre pandemic levels.
As we look to Q4, we are excited about our plans to continue transforming the business.
We are scaling our Nordstrom median network, which allows our brand partners to advertise directly to customers on Nordstrom Dotcom and Nordstrom rack dot com.
And drive traffic and sales for their brands.
Having successfully piloted the platform in Q3, we are expanding it in Q4 and expect to see more meaningful financial benefit in 'twenty two.
As we evolve our merchandising approach.
Our alternative partnership models have gained approximately three percentage points of total sales share since 2019 to nearly 8% today building on that progress I'm pleased to announce our new partnership with fanatics Nordstrom Dot com customers will now have access to fanatics industry, leading assortment of high quality.
Licensed sports products. This.
This partnership demonstrates our ability to increase choice count quickly and at scale with fanatics will scale to 90000, new customer choices on nordson Dot com, an increase of over 20% of our total choice count without a corresponding increase in owned inventory or labor.
We're also excited to advance our partnership with Asos and offer a broader assortment to better meet the needs of twentysomething customers, We launched select asos brands on Nordstrom Dot com and in two pilot stores. This month.
So we are in the early days preliminary reads are very promising we will expand our in store asos offering with a market rollout launch this spring.
Some stores will be the only physical locations in the world where customers can buy asos product and we are excited about our opportunities to build on this partnership.
As you heard at our Investor event in February we are expanding our choice count to both gain greater wallet share with our existing customers and attract new customers.
We entered Q4 with record high choice Count and we will continue to significantly expand our selection using customer insights and enhanced analytics to present, a curated relevant assortment.
For the holiday season, we are excited about our plans to use our integrated network of stores and digital platforms to showcase holiday dressing to core and gift offerings and provide festive experiences and convenient services that make shopping easy and enjoyable for our customers to.
To drive holiday performance, we're leveraging analytics as well as learnings from our anniversary sale, where we combine the art of merchandising with data driven insights to put the right assortment in the right place at the right time.
Through our customer analytics work, we learned that we have a lot of opportunity to expand holiday gifting and in response, we significantly expanded our gifting assortment and featured gift shops, both in store and online.
In closing, we're excited to drive sales and delight customers with our compelling holiday offering and the newness and choice count expansion from innovative partnerships with fanatics and asos.
With that I'll turn it over to Ann to discuss our financial results.
Thanks, Pete I'd like to begin with a review of our third quarter results then take you through our approach to Q4.
<unk> net sales decreased 1% in the quarter compared to the same period in fiscal 2019.
The timing shift of the anniversary sale with roughly one week following into the third quarter of 2021 positively impacted third quarter sales by approximately 200 basis points.
Nordstrom banner sales returned to 2019 levels, driven by improving store trends sequential store traffic improvement and increasing spend per customer.
Nordstrom rack sales declined 8% as inventory procurement and slow challenges negatively impacted performance.
And as Eric mentioned the team is taking specific actions to improve racks performance and capture market share in the off price sector.
On the digital front, we continue to serve our customers desire for online shopping experiences with strong digital growth, even as Nordstrom store traffic and sales continue to recover.
For the third quarter digital sales increased 20% over 2019 and 16% after adjusting for the timing of the anniversary sale, reaching $1 4 billion.
Gross profit as a percentage of net sales increased 80 basis points compared with the same period in fiscal 2019, primarily due to leverage of buying and occupancy costs and higher merchandise margins.
Ending inventory increased 13% compared with the same period in fiscal 2019.
In transit product represented the majority of our inventory increase in the quarter as we pulled receipts for to address continuing supply chain backlogs and support the anticipated earlier holiday demand.
Entering the fourth quarter, our inventory is current with new exciting products for the holidays.
<unk> ahead, we anticipate elevated inventory levels through the end of the fiscal year as we position product to meet customer demand and invest in pack and hold inventory for the rack.
Total SG&A as a percentage of net sales increased 260 basis points compared to the same period in fiscal 2019 as a result of continued macro related fulfillment and labor cost pressures, partially offset by continued benefit from resetting the cost structure in 2020.
Now turning to our outlook for the remainder of the year as.
As you've heard today, we're excited about our plans for the fourth quarter with a great selection of compelling products and experiences to serve holiday demand both in store and online.
Our outlook for the remainder of the year assumes the economic improvement and increasing mobility will continue to drive consumer spending.
Given third quarter performance in line with our expectations and plans for continued progress in the fourth quarter, we are reaffirming our guidance for fiscal 2021.
We expect revenue growth of more than 35% versus fiscal 2020, and we are still projecting slight sequential top line improvement from Q3 to Q4.
We expect to deliver EBIT margin of approximately three to three 5% for the full year.
I'd like to provide a bit of color on our fourth quarter forecast compared to 2019.
For the fourth quarter, we are forecasting significant gross margin improvement versus the fourth quarter of 2019.
Collecting the benefits of lower promotional activity and higher regular price sell through this year.
We expect the SG&A pressures, primarily related to fulfillment and labor costs will continue in Q4, resulting in SG&A deleverage similar to what we experienced this quarter. After excluding an impairment charge that we recorded in the fourth quarter of 2019, turning now to capital allocation, we remain committed to our ongoing priorities with.
Our first priority being investment in the business.
We are planning capital expenditures at normalized levels of 3% to 4% with an emphasis on supporting supply chain and technology capabilities.
Our second priority, reducing our leverage we are committed to an investment grade credit rating and remain on track to decrease our leverage ratio to approximately three times by the end of this year and approximately two five times by the end of 2022.
Through a combination of earnings improvement and debt reduction.
Our third priority is returning cash to shareholders and we continue to expect to be in a position to do so by the end of the year.
As you've heard today, our third quarter results show, some pockets of strength as well as several areas for improvement.
We made progress toward our goals with strong digital growth and improving trends in our Nordstrom banner stores.
And we remain on track to deliver our fiscal 2021 targets and the commitments, we set forth at our investor event.
Living EBIT margins greater than 6% in annual operating cash flow greater than $1 billion.
As Eric said earlier, we recognize that we need to deliver more and we are acting with a sense of urgency.
These medium term targets are you step on the way to delivering greater profitability and cash flow as we grow share optimize across platforms and drive scale.
We are confident in our path forward and excited about the future of our business.
I'd like to now turn it over to Heather for Q&A. Thank.
Thank you Anne before we get started with Q&A, we ask that participants limit their responses to one question and one follow up we'll now move to the Q&A session.
Thank you.
If you'd like to ask a question. Please press star one on your telephone keypad.
For me some tone will indicate your line is in the question queue you.
You May press star two if you'd 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 keys.
Our first question is from Omar Saad with Evercore ISI. Please proceed with your question.
Good evening, Thanks for taking my question.
I'd Love for you to dive in deeper on the rack.
Challenges and opportunities in Iraq business, maybe talk about try to wait between.
External factors impacting that business versus <unk>.
Merchandising better merchandising and other thank you guys can do internally.
To improve that business.
And could you also maybe talk about you built this great digital platform Omnichannel platform the market.
Our local market model, maybe you could help us understand why.
All of the data and analytics that comes out of that ecosystem isn't helping you to be.
It'd be better at placing the inventory and buying inventory and getting it where it needs to be the right inventory, where it needs to be it's a little bit surprising it sounds like maybe you didn't have enough premium brands.
Thanks.
Thanks Omar this is Eric.
Yes.
I mean, certainly there's external headwinds, but everyone's dealing with those.
I'd put it on internally we.
We have not responded as quickly and as aggressively as we need to.
With rack in particular, it really starts with our source of goods that are source of goods.
Got disrupted with the pandemic and.
It resulted in both.
Just flat out shortage of inventory, we've been significantly under inventory plans all year.
We've had.
I had lots of fallout.
Our on order.
But it has also resulted in a mix issue.
Talked about it in the prepared remarks.
Not having the quantity of our top premium brands the brands that are our top brands in our Nordstrom banner.
Which tend to be our higher price point brands and rack and really has to choose that gets customers excited to come to rack.
These great brands at great prices.
We haven't had enough.
Thought that.
Added to that.
We've been I think just too slow to adjust to that.
And then adjustments, which.
Are underway as both working with these top brands.
To get that flow of product, we need and oftentimes that is making commitments a little further in advance.
But it's also with their key categories and price points of our customers are asking for and we can't get it from <unk>.
Brand day, we Gotta go to brand B.
So.
We're working on that.
Another issue.
It is related.
As our AUR or average price being down 4%.
Not only does that put a lot of pressure on our operations. It just isn't what the customer wants.
Again, the customer wants these these top premium brands.
And so our mix has skewed.
More lower price than our customer wants.
And that's been a lot of pressure on our operations as well.
So yes, there is external factors.
That's start a lot of this.
These things are within our control we have a plan to address these things we're absolutely determined to get this on the right path to get this fixed.
We will do that.
To your second question.
The data from our omni capabilities at the America strategy driving inventory placement.
Yes.
I think from your question.
We've talked about our inventory issues.
It has been most pronounced for our rack banner and market strategy.
It's much more about our Nordstrom banner than direct banner so.
The data.
That we have is helping us.
Our Nordstrom banner.
As we've started to link our our rack stores to market strategy and it's really been a pick.
Pickup point for <unk> Dot com orders.
We do have that multichannel data set for our customers which is helpful.
So where is that we've been seeing some some benefit.
From it.
But we see a lot of benefit coming ahead, both as our.
Our sources of goods become little more stable and more predictable.
And also as we continue to leverage out our dataset.
And apply.
Analytics to get the quantity inventory, we want and need our customers want.
The content.
And the location that serves our business pass.
Thanks.
Hi, This is Ian I, just wanted to add on that Eric talked about kind of the.
Opening comments about direct business.
Flowing through to some of the improvements in the inventory in key areas with some of the key brands.
We're seeing some early reads on this.
In the quarter.
Given.
Optimism.
Congrats on that.
So.
While still very early.
Actually.
Cognizant.
Thanks, Dan.
Next is Edward <unk> with Keybanc capital markets. Please proceed with your question.
Hey, good afternoon. Thanks for taking the question I wanted to ask about SG&A I understand you guys did the repositioning and took out a lot of SG&A last year.
There's been some rebuild and some of it's been due to a higher cost pressures, but I guess as you guys think about the medium term are there incremental layers of SG&A, you can remove or will leverage really be reliant on just driving higher top line and then just a follow up to that thinking about Iraq repositioning do you think this is an area where incremental investment from <unk>.
SG&A perspective as needed.
Hi.
I'll take the first part of the SG&A and then I can talk a little bit about the Rockies and then Eric I think maybe you want to talk about that as well, but just in general on the <unk>.
Fixed cost expenses, we did take a significant portion of the expenses in 2020, we are actually on track slightly ahead of our target of the permanent reduction of over 300 million. This year and we believe that will.
And we will continue to be.
Thats short and medium term takeout.
Takeout of costs going forward in the structure the add back to SG&A has really been on the data.
Favorable cost line, so as some of the wage pressure that were seeing in stores as well as our distribution centers supply chain and then on top of that it's really about freight costs and shipping costs.
And so.
Actively working to offset some of those not just top line, but really through a number of levers that at some point and let me give you a couple of examples or some context around that.
As Pete and Erik both talked about there are a number of levers that we're pulling in our merchandize margin pricing gains.
Again, I'm not a profit at the end of season product on the markdown component to the sell through.
Well as I'm really looking at private label brands.
Supply chain, we're making a number of improvements that we expect to start seeing some results.
In 2022, and it's really about improving processes in our network.
Really diversify our carrier capacity, which we're already doing right now and then gaining really better visibility on the inventory to ensure that we have fewer touches.
Our ecosystem.
Scaling some of our supply chain investments that we've made on the west coast.
We are reducing a lot of cost.
Around order pickup and getting just general scale on our platform. So those are all offset.
With that we're seeing in the two areas that we've called out so we're very optimistic about how we're progressing on this.
As you've heard in the opening comments, we've got a lot of work streams underway.
After this and I believe that it will.
Not only help us achieve our investor day targets.
Go beyond that as well so you can think about the long term future.
Hey, Eric I'm going to talk about the investments in SG&A per rack.
Yes.
Correct.
Yes.
Our two channels, we have a really big digital channel and rack dot com, we've been making investments there and with rack dot com.
Particular.
Is is to improve our our contribution margin. There we know there's a lot of demand and there is not much competition for online off price.
Product there so we've been making investments there that are that are paying off and some of that has been integrating on the back and we got rack dot com.
Our.
<unk> Dot com platform.
Earlier, this year and we're starting to see the benefits from that on the storage side we.
We do think there is opportunity to add stores.
Some store growth.
But our short term focus right now is to get our comp stores going.
We see a lot of opportunity there we know what our issues are we.
We know how to fix them.
But we need to we need to get after that before we invest a lot of money in that channel.
Thank you.
Next is Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Good afternoon, as you look at the puts and takes of enhancing the supply chain and optimization, what should we be looking for as the guidepost as we look as we move through 2021 into 2022, how do you see this optimization of inventory and being able to to get the different elements of supply.
Where you want both for the full line and for direct businesses. Thank you.
Okay.
So inventory David Thanks for the question as we as we think through 'twenty. One 'twenty two as I mentioned there are a number of things that we measure not just on the cost side, but also on.
The time to serve customers how quickly we can get inventory available for customers and how we can enhance.
The customer experience as far as getting their purchases as quickly as possible.
That piece to it.
So we're going to continue to talk about that we're going to continue to optimize that.
Also really reducing some of the headwinds you see on the cost side as well.
The puts and takes we do you expect to get.
Some leverage in our overall platform for supply chain.
We also expect to see improvements.
Going forward on the SG&A piece of that as well.
Can I just add.
Yes.
We're several years into our market strategy, we scaled it to our top 20 markets, which is 75% of our sales.
And I think as you know a big part of that is lengthening the product that we have as close to our customers and be able to leverage the product as a market.
And we're seeing.
Real good results from that continue to adding the racks, a rack stores as a pickup point for <unk> Dot Com orders. We're now seeing one third of our next day buy online pickup in store orders being picked up at the rack.
And our <unk> strategy is delivering four times more selection for next day pick up their customers. Our average shipping time has had a one day reduction already.
And.
And our top 20 markets order pickup is accounting for 12% of our additional demand versus 4% in our other markets. So my point. There is we're seeing a lot of proof points, but those are the type of proof points that you should continue to see.
We optimize not only our market strategy and in particular optimize our inventory placement and.
And then David I would just finish.
On the right investments in inventories as we talked about some of the opening comments I just wanted to get a little bit of context.
Do you believe you're still going to continue to be some headwinds our flow of inventory coming in so we're taking efforts to make sure that the pull forward inventory.
Sure that we've got the right product at the right time for our customers. An example of that for holiday. We did pull forward into Q3 from the holiday receipts and we will expect to do that again for spring for spring receipts.
Exit Q4 into Q1. Additionally, in particular in the rack space, we are investing in pack and hold.
Yes.
One time investment and then hold it through but its really making sure we've got great seasonal product.
Customers.
Supply chain disruption.
Thank you best of luck. Thank.
Thank you.
Next is Oliver Chen with Cowen. Please proceed with your question.
Hi, Thank you regarding Iraq and whats happening ahead, how would you contrast, this relative to the the price doors strategy you had earlier and as you think about pack and hold which sounds prudent.
Why is it prudent now versus using this less so in the past.
I would also love your thoughts on promo effectiveness I know you called it out on your prepared remarks, but what are the aspects where you see opportunity I do think you have.
A pretty advanced digital.
Analytics platform, so what happened with promo effectiveness indoor whereas the lower hanging fruit. Thank you.
Yeah.
Yes.
With the <unk>.
Direct question first question there on the price store strategy, yes.
Many of the <unk> shares that we saw opportunity to.
In particular grow share of wallet of customers, who were in our rack stores.
And buying premium product from us.
Two other off price retailers for lower priced product.
So we did bring in half rod.
Lower price product and over the year.
Frankly, we went too far we brought some lower price product and categories that we've heard from customers is.
What theyre looking for now overall, we have seen good performance from our price stores, particularly in customer acquisition.
But we also know that.
The hot stuff is kind of hot everywhere. So the example, I use the handbags.
The $20 $30 handbag market is not our sweet spot.
Having access to.
It really coveted brands and brands I mean, a lot in that category.
We should have that in all of our stores and we can sell it and all of our stores. So.
It is not.
It's really not surprising to us that we've had to adjust.
Our merchandising strategy.
A new effort.
What's been.
Added to our difficulty there.
Was.
The lack of receiving the.
The premium brand product that we normally have so going too much with the price strategy product and not getting the flow that we ordered on the premium brand product compounded.
The situations, where we ended up having a lower AUR than than we should have.
Which kind of somewhat scrutiny as it relates to your question on pack and hold.
We've done pack and hold before in particular, we did quite a bit of it when we were more aggressively opening opening rack stores.
It really helped us.
We have the right flow of goods for these new store openings.
And when we pulled back on our store openings a couple of years ago, we pulled back on pack and hold.
Which was fine at the time our source of goods.
Particularly from these premium brands that are at the same brands.
We work with in the full price channel.
They had at once product they had short term product, where we could adjust our buys and that's just gone away during the pandemic. These brands do not have the supply.
<unk> of goods in the short term that we normally have add.
Given.
That and given the disruptions in the supply chain.
It.
It seems pretty obvious to us that.
What we can do to react to that.
To have more product that we're backing of holding.
And because we do believe we're going to continue to have.
Some level of these disruptions going into next year in this pack and hold will really smooth out our inventory flow.
You answered the question.
Yes, sure so relative just our approach there on how to do a better job with markdowns.
It's really feeds into what you've heard us talk about before.
Digital kind of a data first approach and how we're doing this and I think what youre going to see from US is more of a surgical effort to leverage that data to make mark downs, both related to timing and depth of markdowns in a way that maximizes.
The profitability I know that sounds August and we've always been a version of that but I think taking kind of the extra step to take.
A more analytical approach to that is something that we think will bear fruit.
Something we've piloted and worked on in the past, but I think we can apply that methodology more broadly and we believe.
There's a lot of goodness that can come from that that will affect our profitability positively.
Hey, Alex we have time for one more question.
Thank you.
Our last question comes from Mark <unk> with Baird. Please proceed with your question.
Good afternoon, and thanks for squeezing me in here.
I guess first following up on the direct investments.
As you look to broaden the product availability at rack and it sounds like increase in flexibility with brands and price points are there incremental investments needed and merchant teams or supply chain beyond what's already contemplated in the market strategy.
Is this just about rebuilding and rebalancing or are there some broader changes needed to drive the type of consistent growth you want longer term.
Yes. This is Pete I think the biggest thing with the rack is everything that happened in the pandemic really affected our model as we've known them for a lot of years, Eric mentioned that.
Having the great relationships, we do with these premium brands has allowed us to be in a good position to be able to do a lot of at once just in time type of <unk>.
Inventory planning.
What we learned and unfortunately through the pandemic as bad if you didnt make those those by the upfront it was hard to react and really short time to be able to do that so.
I think.
We've had to learn from that.
We've got to be better at planning that out and making sure. We have a more balanced approach to flowing inventory and you've heard that with pack and hold that some mitigating strategies that will be good for us.
Same is true with our own label brands, which there is an application for in the rack as well so.
I think that we'd rocked along and have done our playbook really well for a long time.
The landscape has changed and evolved we got to change with it.
With a great sense of determination that were taken this on and urgency.
We expect to start having improvement right.
Right away and we look forward to better days ahead for sure.
Thank you.
And if I could ask a quick follow up for Ann and I think the analyst day targets implied roughly mid single digit type of growth trajectory. After 2021 is that a fair baseline to be thinking about as we model out next year are there other factors, we should be considering thank you.
Hi, Mark Yeah. So.
No, we're not really giving 2020 guidance at this stage, what I will say to give a little more context.
That's right.
Topline particular targets, but once we got to 2019 level I think in general when you look at where we are.
If you look at the range of guidance that we have for the rest of this year. It was certainly if you back into the different parts to it and it gets you back to pretty close to flat with 19 topline.
And it would also imply that we're getting back to that 6% target.
We bought forgiven.
Our Investor day as well so I think if you look at Q4, we look at the progress we're making it certainly would have implied.
Does this medium term goal of the commitments that we've made out there.
Well on that path of getting that it will provide you a lot more color commentary and when we have our neck.
Sterling.
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