Q1 2022 Nordstrom Inc Earnings Call

May 24, 2022

Yeah.

[music].

Greetings and welcome to the Nordstrom first quarter 2022 earnings conference call. At this time all participants are in a listen only mode. We will begin with prepared remarks, followed by question and answer session. If you would like to ask a question. Please press star one on your telephone keypad if anyone.

And 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. Thank you you may begin.

Good afternoon, and thank you for joining us before we begin I want to mention that we'll be referring to slides, which can be viewed in the investor Relations section on Nordstrom Dot com.

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 first quarter perform.

And now I'll turn the call over to Eric Good afternoon, and thank you for joining US today. Our first quarter results were marked by strong topline growth and continued progress in our transformation we.

We know customers look to Nordstrom for vacations that matter most to them. This quarter, we saw customers shopping for long anticipated in person occasions, such as social events travel and return to office.

Vacations customers also reevaluated and refreshed their wardrobes, we're encouraged by this opportunity because it favors the core categories of our business and the core capabilities of our service model, we were well positioned to serve this demand and deliver an excellent customer experience powered by our unique product offering.

<unk> model and strong commitment to customer service, our integrated digital and physical assets continued to allow us to be nimble and enable us to quickly adapt to the channel shift in the quarter as customers increasingly chose to shop in store.

We're staffed well stocked and ready to serve customers as store traffic increased and our dedicated employees delivered an experience that was clearly reflected in our store level of customer satisfaction scores.

Putting the customer first is in our DNA and our teams continued to exemplify that spirit this quarter.

We've always believed that service and selling go together that was reflected in our teams' improved productivity with 75% more Nordstrom salespeople, reaching the $1 million sales Mark in 2021 versus 2019.

We cannot be more proud and we'd like to thank our outstanding team for their unwavering commitment to serving customers and delivering results.

Turning to first quarter performance total sales increased 19% over the first quarter of 2021 Nordstrom.

Nordstrom banner sales increased 23% over last year and exceeded pre pandemic levels and important milestone.

Nordstrom banner gross merchandise value or <unk> increased 25% for the first quarter versus the prior year.

As we saw return to occasions and customers updating their wardrobes, we experienced broad based growth across core categories and geographies.

With customer traffic and activity returning in city centers Nordstrom urban store sales collectively rebounded and reached pre pandemic levels.

In fact, the Nordstrom Manhattan flagship store at the highest year over year sales growth among our stores this quarter.

For the Nordstrom banner, the southern U S continued to outperform the northern U S compared to pre pandemic levels, but the spread tightened to three percentage points.

Our team remains focused on building additional capabilities to better serve customers and drive shareholder value with particular emphasis on three key areas improve.

Improving nordstrom rack performance, increasing profitability and optimizing our supply chain and inventory flow.

Starting with Nordstrom rack sales grew 10% versus last year, driven by increased store traffic improved conversion and better in stock levels.

We also built momentum with sales increasing as we moved through the quarter.

By increasing our supply of premium brands and fine tuning our assortment to better align with customer needs. We are achieving a better balance of price points with Iraq.

We've said before 90% of the top brands at Nordstrom are sold at Nordstrom rack and we believe our work to improve the availability of those brands will fuel racks growth.

And we're pleased with the results of our more reasons to rack campaign.

Which drove improved brand awareness affinity and traffic.

As we move through the year, we expect to see continued benefits from our multilayer plan to both expand our offerings are the most coveted brands, we carry as well as source from new vendors and increase our use of pack and hold inventory to ensure we have the right selection that our customers want.

By improving inventory levels, optimizing our assortment and driving brand awareness and traffic. We are confident that we will profitably grow our rack business throughout the remainder of the year.

Turning to profitability, while we drove improvements in both merchandise margin and SG&A. This quarter. We are focused on plans to deliver incremental improvements and elevated flow through as we move through the rest of the year.

Within SG&A, we expect that the supply chain optimization work streams underway will enhance the customer experience drive topline growth and produce efficiencies in labor and fulfillment, which will compound as we move through the year.

Pete will take you through our progress to date and plans to drive additional merchandise margin and supply chain improvement in a moment.

In addition to the three focus areas that I've outlined winning in our most important markets and advancing our digital capabilities are key strategic priorities for us and we continue to make progress in these areas.

Starting with winning in our most important markets our market strategy helps us engage with customers through better service and greater access to product no matter, how they choose to shop by leveraging a strong store fleet in linking our omnichannel capabilities at the market level, we deliver a level of convenience and connection that our customers enjoy.

Our market strategy rollout, we've seen the power of offering additional pickup options customers clearly value are interconnected model with order pickup comprising 10% of <unk> dot com demand this quarter, an increase of 200 basis points versus the prior year.

In Q2, we will continue to scale our market strategy by expanding next date order pickup capabilities to over 60 additional rack stores in our top 20 markets.

Customers utilizing in store pickup have higher engagement and spent $3 five times more than customers, who don't utilize the service.

Buy online pickup in store also remains our most profitable customer journey and one of our highest satisfaction customer experiences. Our styling program also continues to be a powerful engagement driver as we deliver convenience and build deeper customer connections through our closer to use strategy.

As we position our styling program for further growth, we are sunsetting trunk club and redirecting our resources to the services that our customers tell us they value most I want to be clear. This move reflects our belief and commitment to styling and we are dedicated to growing and investing in these services.

We have a range of styling services from low touch outfit inspiration through our digital channels to a high touch and personalized relationship with the stylist all of which achieved high customer satisfaction scores.

We are directing our investments towards these programs to ensure that we are well positioned to serve customer needs and drive growth.

Customer spend seven times more and report higher levels of satisfaction, when engaging with the stylus either in store or online.

While we still see the highest number of customers engage with our in person styling, we are seeing rapid growth within our digital services.

We continue to leverage data science and advance our digital tools, including virtual style boards to empower our stylists with highly relevant recommendations for their customers.

With more customers returning to stores this quarter digital sales were flat versus the first quarter of 2021.

Digital remains an important part of the business with 39% penetration and digital capabilities are an important part of our in store experience.

We will continue to leverage our digital platforms to deliver personalization at scale, especially as we connect with customers through our upcoming anniversary sale in the second quarter.

We're excited about our plans for the year and the progress we're making on our transformation.

Investments in our market strategy and digital assets put us in a strong position to capitalize on favorable market opportunities as events and overall demand continued to recover.

Beyond topline growth, we've made progress improving merchandise margin and driving SG&A efficiency and we have specific work streams in place to drive incremental improvement in the second half of the year, we have line of sight to achieving the financial targets outlined at our 2021 investor event and remain committed to shareholder value creation.

We look forward to sharing our continued progress in the quarters ahead.

With that I will turn it over to Pete.

Starting with the category performance, we were excited to see customers shopping for events and updating their closets. This quarter and we were ready to serve them with the best product and selection across the brands that matter most to them men's apparel was our strongest category. This quarter more broadly both men's and women's apparel had double digit growth over last.

At year end sales that exceeded pre pandemic levels strength in men's and women's apparel was driven especially by suiting and dresses.

While we always strive for balance across all relevant categories. It is true that event and occasion based categories are important to our customers and represent a significant portion of our business.

We also offer differentiated services, such as styling and alterations that help customers to feel good and look their best as they prepare for important occasions.

The apparel demand we saw this quarter goes beyond occasions, though we also saw robust demand for wardrobe refreshes, especially for the spring and summer seasons.

<unk> had a strong double digit growth with increased demand across formal casual and athletic styles, our designer offering across all categories continued to perform very well also posting strong double digit growth in sales significantly above pre pandemic levels, turning now to our initiatives, we put the customer at the center of.

Everything we do and our strategic initiatives in merchandising and supply chain are designed to optimize the customer experience, resulting in increased profitability.

This quarter, we continued our progress in improving our merchandise margins are team use advanced analytics to better understand customer needs and find opportunities to improve our assortment and presentation and optimized markdowns. We also increased average retail prices without seeing a negative impact on transaction volumes.

We're very encouraged by our Q1 results and the additional opportunities we've identified for the rest of the year to provide the most relevant curated assortment for our customers. We're also using analytics and consumer insights as part of our category work to improve decision, making around our assortment and allocation of inventory beyond merchandising.

<unk>, we're also working on our supply chain and inventory flow, we recognize the critical strategic and operational importance of supply chain, especially amid the broader supply chain challenges facing our industry.

As a result, we identified opportunities across our network to improve efficiencies and capabilities, which ultimately improves our service to customers. We have four initiatives in flight first improving the consistency and predictability of unit flow through our network.

Second increasing productivity in our distribution and fulfillment centers.

Third accelerating delivery speed and finally, expanding the market level selection for in store shopping as well as same day and next day pickup.

We believe these actions will improve the customer experience increase sell through reduced markdowns and drive expense savings. While we still have work to do we are encouraged by early results and we expect to see more significant benefits in the second half of this year. We also continued to evolve our merchandising model to improve cut.

<unk> choices, well, increasing relevance alternative partnership models represented 12% of Nordstrom banner <unk>. This quarter as we continued to provide newness and selection by partnering with brands and new ways beyond the legacy wholesale model.

We're also excited about our new brand launches in the second quarter, we are launching all birds, a compelling fashion forward sustainable shoe brand.

Nordson will be one of all birds few key retail partners beginning June 1st we will offer men's and women's styles in select stores with plans to launch on Nordstrom Dot Com later this summer.

And we've also expanded our asos partnership opening a new store at the Grove in Los Angeles last Friday, specifically designed to engage young adult customers. This is the first asos co branded physical retail location and our first representation of a full asos in person shopping experience we.

Had a great customer response to the launch and we're excited for the opportunity ahead with this partnership.

We are expanding our choice count to grow wallet share with both existing and new customers. We entered Q2 with record high choice Count and we will continue to use our category management process and enhanced analytics to offer more choices, while increasing relevance as we look ahead to the second quarter. We're excited to serve our customers at our Ana.

<unk> sale and believe that they will benefit from the timing of the event as they returned to events and update their wardrobes.

As always our anniversary sale rewards and engages our loyal customers with brand new product from the best brands at reduced prices for a limited time.

To deliver an even more compelling and profitable event each year, we look to make continuous improvement using data science and consumer insights to identify the most successful components of past events and identify new opportunities for the upcoming year. For example, we're leveraging advanced analytics to inform the right depth and.

Net of offers to drive profitable sales for this year's event. We have also put considerable effort into tracking anniversary product and pulling forward receipts, which we expect will result in an improved inventory flow and allocation better sell through and an enhanced customer experience.

With this year's anniversary sale, we're focusing on new and highly coveted brands, bringing back in store events and launching a new digital catalog. We are excited about our approach to anniversary and the opportunity for us to provide a unique experience for our loyal customers, while introducing new customers to Nordstrom and closing with the work underway.

We are confident in our ability to transform our business deliver an even better customer experience and improve our efficiency and productivity I'll now turn it over to Ann to discuss our financial results. Thank you Pete I'd like to begin with a review of our results and take you through our outlook for the remainder of the year.

Earnings for the first quarter were 13 cents per diluted share after excluding a gain on the sale of our interest in a corporate office building and an impairment charge related to a trunk club property adjusted EPS with a loss of <unk> <unk>.

Our first quarter earnings were negatively impacted by <unk> <unk> per share due to discrete tax expenses, primarily related to stock based compensation, which we do not expect to impact our full year projected rate of 27%.

Overall net sales increased 19% in the first quarter.

Nordstrom banner sales increased 23%, while <unk> increased 25% with both exceeding pre pandemic levels.

Nordstrom rack sales increased 10% in the first quarter driven by increased store traffic improved conversion and better in stock levels.

Digital sales were flat compared to the first quarter of 2021 as customers increasingly chose to shop in store as contemplated in our guidance. We took retail price increases this quarter in response to inflationary pressure and higher MSRP prices from our vendors at Nordstrom rack through our strategic pricing actions we.

Raise prices on items with the lowest elasticities.

Across both banners, we saw minimum unit impact from these pricing actions.

This quarter, our sales growth was supported by pricing actions favorable mix shift in transaction growth at this point, we have not seen inflationary cost pressures adversely impact customer spending, which we believe is due to the higher income profile and resiliency of our customer base this quarter, both customer counts and spend per customer.

<unk> versus the prior year.

Gross profit as a percentage of net sales increased 190 basis points, primarily due to leverage on buying and occupancy costs and improved merchandize margins, largely driven by favorable pricing impacts and lower markdown rates.

Ending inventory increased 24% with approximately one quarter of the inventory increase due to pull forward of anniversary sale receipt.

As Pete indicated we have taken steps to improve our tracking of anniversary product and received inventory earlier, which we expect will improve flow and sell through.

As a result, we believe we are well positioned for upcoming anniversary sale total SG&A as a percentage of net sales decreased 320 basis points in the first quarter, primarily due to leverage on higher sales.

However, we continue to see pressure in labor and fulfillment and we've been working since last year to deliver offset through our supply chain optimization initiatives.

We expect that benefits from supply chain optimization, we will build as we move through the year.

EBIT margin was two 1% of sales for the first quarter.

After excluding the gain on the sale of our interest in a corporate office building and the trunk club impairment charge adjusted EBIT margin was 9% we continued to strengthen our financial position ending the first quarter with $1 3 billion in available liquidity, including $484 million in cash and the full 800.

Available on our revolving line of credit.

This month, we entered into a new $800 million revolving credit agreement, replacing the previous agreement that was scheduled to expire in September 2023.

The new agreement is another milestone in improving our capital structure post pandemic.

Riding additional flexibility as we go forward now turning to our updated outlook for fiscal 2022.

I'd like to begin by describing the macroeconomic backdrop contemplated in our outlook.

We continue to be encouraged by the momentum in our business as customers update their wardrobes and prepare for long awaited locations.

To date, we haven't seen an adverse impact on customer spending from inflationary pressures, which we suspect is due to the higher income profile of our customer base.

We continue to see macro related cost pressure in labor and fulfillment, which we factored into our guidance along with offsetting benefits more supply chain optimization initiatives.

At the same time, we continue to consider macroeconomic headwinds, including the potential of more pronounced inflation impacts and supply chain disruption both to our customer as well as to our margins.

Taking all these factors into consideration we are updating our 2022 guidance to reflect our first quarter topline performance, which exceeded our expectations, while holding assumptions for the second quarter and the rest of the year consistent with our previous guidance.

For fiscal year 2022, we now expect revenue growth of 6% to 8% versus 2021.

We continue to expect adjusted EBIT margin of approximately five 6% to 6% for the full year.

Our forecast assumes that year over year improvement in both gross profit margin and SG&A leverage will be significant contributors to 2022 adjusted EBIT margin.

<unk> in both gross profit margin and SG&A will be driven by leverage on higher sales, especially in the first half of the year and benefits from our strategic initiatives, which will build throughout the year.

All said, we expect similar levels of adjusted EBIT margin improvement between the first and second half of the year compared to 2021.

Our effective tax rate is expected to be approximately 27% for the fiscal year. We now expect adjusted EPS of $3 22.

To $3 50.

Our outlook excludes the impact of any share repurchases I'd also like to provide some additional detail on our forecast for the second quarter.

We anticipate that second quarter revenue growth will be approximately half that of the first quarter.

Our projections include the impact of one week of our anniversary sales shifting into the second quarter, which adds approximately 200 basis points of revenue growth to the quarter. We expect that our second quarter EBIT margins will approach 2019 levels and that our tax rate will be roughly in line with our full year rate of 27% shifting to capital allocation.

Our first priority is investment in the business to better serve our customers and support long term growth.

We are planning capital expenditures at normalized levels of 3% to 4% primarily to support supply chain and technology capabilities.

Our second priority is reducing our leverage.

We are committed to an investment grade credit rating and remain on track to decrease our leverage ratio to approximately two five times by the end of 2022.

Our third priority is returning cash to shareholders.

This quarter, we resumed our quarterly cash dividend and last week, our board of directors declared a quarterly cash dividend of <unk> 19 per share.

Our board also authorized a new $500 million share repurchase program.

We plan to take a measured approach to share repurchases this year.

With our cash flow and market conditions.

In closing we are very pleased to see the momentum in our business and customers re engaging with our core categories.

We made the right investments to prepare for this shift and we are well prepared to serve our customers in the moments that matter most to them.

We are very excited about the momentum in our business and our plans to deliver shareholder value over the long term.

With that I'll turn it over to Heather for Q&A. 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.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment.

And may be necessary to pick up your handset before pressing the star keys.

Our first question comes from the line of Oliver Chen with Cowen You May proceed with your question.

Hi, there this is Katie on for Oliver Chen Thanks, So much for taking our question.

We would just love to know more about sort of how youre seeing the sales and cost environment, obviously labor and fulfillment cost inflation.

Just sort of as gross margin.

On the sales side Youre seeing sales equal to that of 2019 levels gross margin SG&A are sort of below those.

Could you could you bridge the gap there sort of what needs to happen in order to get gross margin back to that 2019 level. Thank you.

Alright, Hey, I'll start off talking a little bit about this from the.

Financial perspective, and then Eric chime in from a more macro.

More than welcome.

As we talked about for the for Q1, we knew that are coming in.

And inventory needed to work through some of them.

Of that with the markdown.

So we compare.

Our margin EBIT against Q1 of 19.

I would say the two biggest factors for US are one clearance markdowns that we've had we've gotten ourselves in a really good situation.

Little bit of pockets in Q2 and address it really coming out of Q1.

Good morning.

The majority.

Sorry inventory.

Troy situation, there and the second is I think as everyone is seeing is inbound freight costs.

Giving some of the cost of the product coming out on the gross margin.

I would just say stepping back and looking at our business in general we are really pleased with our customer resiliency and the demand on that.

Sure.

Ofer.

From a sales perspective is that people are coming back are shopping for home locations are returning to opex.

There's a wide range of categories and styles.

The war chest that relief.

Serving our customers well.

Paresh events I'm ready for the.

The customers are really responding that from a sales perspective.

I could talk about where you like everyone else.

Functionary pressures from labor and supply chain costs, we started seeing that last fall.

Completed in our guidance and we kind of working early to try to address some productivity offsets to that throughout the year with GE, which we're seeing in our.

Got it.

Thank you very much.

Our next question comes from the line of Omar Saad with Evercore ISI. You May proceed with your question.

Good afternoon, really nice quarter. Thanks for taking my question.

I'd Love for you guys to dive in a little bit deeper on rack.

It's been a little bit of a laggard amongst the segments last several quarters the flow of inventory the excess inventory.

Maybe.

Merchandising opportunities can you give us an update where we stand on <unk>. It sounds like maybe got a little bit better at roughly around the same area, but are you seeing that inventory the quality of the inventory.

Especially as people start to I think you mentioned refreshing the reward growth.

Yes.

Bringing in new.

Sure.

Great.

I can address that question for you yeah. Thanks for the question Omar Yeah.

We're pleased with our rack result.

Our plan.

Going into the year and really going back last year was to communicate to have sequential improvement quarter after quarter in Q1.

Did achieve that.

Talked about.

Unified clear areas of focus for us.

Making progress I would say, we're still in the early innings.

On these initiatives.

But more specifically.

<unk>.

Thank you touch on your question is.

The content of our inventory really getting to what.

Is the secret sauce for Iraq business.

The covenant brands at great prices.

And those brands are harder to get we were light on those last year, which drove our average price down.

More than that one we think that's good for business really what customers are looking for.

That's starting to come back.

Not back all the way, but a much better position and getting the mix of brands that we want that's helping with our price points.

And then Pete commented it affects rack and this affects our notion banner too as you look at Q1.

Last year, we talked.

In total we are experiencing headwind through the pandemic.

Category Wise, what we have and geography.

Having more.

More stores and more urban type areas densely populated areas where.

The office component.

Yeah, a lot of those headwinds have turned a tailwind in Q1 and rack participates in that as well as customers.

Our out more.

And care more about looking at their best if they leave the hull more.

We benefit from that in our category mix has set up really well for that so.

That is a big part of the rack business.

There are peaks, we've talked on rack is driving traffic.

Our traffic did increase over.

Over the quarter, we also saw improved conversion better in stock levels.

And encouragingly, our momentum build throughout the quarter, each month being a little better than the previous month.

Lastly.

At this point out.

We felt.

We were hurt last year from some access to inventory and not having a pack and hold inventory.

To lean upon.

We've been building that.

Double to triple the size that we had pre.

Pre pandemic.

And we feel good about that but that's there's still a lot of dumping thats out there and supply chain, we are certainly not immune to that.

So having that pack and hold inventory.

Good about.

Yeah.

Thanks, Eric.

Our next question comes from the line of Chuck Grom with Gordon Haskett. You May proceed with your question.

Hey, thanks very much.

Quick one from me on the rap.

It is home to the.

Premium brands versus where you want them to be.

In terms of editing the assortment.

Yes versus pre COVID-19 levels.

Okay.

Alright, Chuck can you give it.

I didn't get the first part of your question.

Chuck can you repeat the question.

Yes, sorry.

Just could you guys.

Handicap the mix today, its premium brands versus where are the ones that will be in touch.

Without any assortment over time.

Yes.

<unk> talked to our merchandisers on it.

The number this isn't a precise number but it's about 80% they've got their back.

Back so.

Coming back most of the way, but not quite all the way back of having the access to these premium brands. So we still think there's some room to go there and we're seeing that continuing to improve.

Hi.

Our next question comes from the line of Simeon Siegel with BMO capital markets. You May proceed with your question.

Thanks, Hey, good afternoon, everyone.

Can you just quantify the margin benefit you received from the growth in alternative partnerships. Thank you.

Yes, so on the on the.

I would just say in general our top line increased by the vast majority of it is the category mix as.

As well as ASP.

Both <unk> and the Nordstrom banner.

The transaction growth as well so when we combine all together those are really the big three drivers both banners.

Growth in Q1 as far as the margin component.

And the guidance that we gave.

We really talked about for Q2.

That works.

Within a 200 basis point.

When compared to last year four point.

Another week of anniversary sale in the quarter and then it's roughly the same flow through and we expect second quarter EBIT margin sorry approach in 2019 level.

And then in general when you look at gross profit margin and SG&A leverage for the year. The way, we're really thinking about this is that both our supply chain initiatives and our gross profit margin initiatives going on around our merchandise margin.

Really again those are really driving the improvements and will receive the leverage on higher sales, especially in the first half of the year and then the benefits of our strategic initiatives building throughout the year, but really more being more impactful in the second half of the year.

And so when we think about the adjusted EBIT margin improvement, it's really similar levels of improvement between the first and second half compared to 21.

Great. Thank you and then just how does the flow through work on the alternative partnerships I assume as that grows is that.

Benefit.

Yes, so the GMB.

And we talked about that that was it.

The driver for us as well in the quarter.

<unk>.

Different relationships as you can imagine, but at the end of the day the way we think about this is that.

Health care and return on invested capital.

The better choice for the customer higher selection choice and so what you typically see at this point.

Contribution margin kind of a hidden revenue and some of it just a contribution margin, but within the day, we're looking at the return on the contribution margin.

Great. Thanks, a lot best of luck for the rest of year. Thank you.

Our next question comes from the line of Michael Binetti with Credit Suisse. You May proceed with your question.

Hey, Thanks for all the detail here today.

And could you help us understand how much excess freight impacted the first quarter and maybe what you've baked into the guidance for the first half versus second half on freight when do you see that improving.

Yeah. So we haven't given a particular expert specific line items, what we did and I will refer you back to our guidance as far as how we're thinking about the improvements.

And our freight costs and as well as our supply chain productivity initiatives that are going on.

As I mentioned, we did bake in what we saw going on from a labor and a supply chain cost.

Scenario headwind, starting last fall and what we do.

We worked that through for this year as well I think we started early on trying to identify opex for productivity.

We continue to see that impact coming through the year as well.

As far as the.

What we're seeing coming through our cost pressures a lot of it.

Were already contemplated in our guide and I will just conclude anything about the trend that we saw from last fall and.

Please can this continue this year from an inflationary perspective.

If I could ask a follow up.

As we try to look at the shape of the business and compare the business coming out of Covid to pre Covid 2019, I think we're getting to the second half being about 71% 72% of the total EBIT for the year and I think in 2019, it was a little lower at 64%.

Just eyeballing the anniversary sale dates I think theres literally anniversary sale in the back half in 2019, but in general is this is this becoming a more and more second half weighted business. If we if we try to normalize for that change in anniversary sale versus pre COVID-19.

No I think what we've talked about we're seeing improvement or even range pretty consistent from first half second half.

And so yes anniversary constantly shifts things around between half one half two.

In general we're not seeing a huge.

Shifting the curve in particular.

Again anniversary.

The way, we've given the guidance.

EBIT rate improvement.

Similar half one half two.

Okay. Thanks, a lot.

Yes.

Our next question comes from the line of Jay sole with UBS. You May proceed with your question.

Great. Thanks, so much I know you just addressed this but I was wondering if you'd clarify the statement on the gross margin that's implied in the guidance for Q2, because it looks like the implied margin guide for Q2 is about 50 to 75 basis points lower than what was previously implied so I'm just wondering if the gross margin is driving the decrease in and what you are embedding for gross margin in Q2. Thank you.

Yes, Jason we're not going to give specific line item guidance, but what I can say in general if it were expecting both.

SG&A improvement from a leverage perspective, as well as seeing some of the initiatives coming through from our productivity as well as the gross margin piece of it and then just to remind you we do have anniversary sale coming as well in the second quarter and so when we think about the Q2 guide what we really have been trying to do is talk about the top line could you could we say.

About half the same growth rate.

Q1.

And then.

The second quarter EBIT margin will approach 2019 level.

So we're not giving specific line and so I think that gives you enough to go on.

Got it that's helpful. Thank you so much.

Our next question comes from the line of Brian Callen with Bank of America. You May proceed with your question.

Brian You May proceed with your question.

Our next question comes from the line of Trey.

Tracy Kogan with Citigroup you May proceed with your question.

Thank you guys I think last quarter, you talked about having too much inventory and I think you said a little while ago that you were able to work that can be most of it I was just curious.

If you were able to do that at a better rate than you expected. Because you did note that your markdown levels were favorable to last year and I don't know if you could just favorable to last year or if it was favorable to what you had expected going in.

And then secondly, I just wanted to ask about the digital sales performance at the full price versus the off price business. Thanks.

Yes.

Markdown perspective, I'll, let Pete weigh in on this as well.

But from a markdown perspective, it was about what we thought it would be.

Quarter favorability better than last year.

We were able to get to a lot of.

On the right.

Last year as well.

Component, we don't typically break that out by banner, what I will say is for the for the quarter. It was about 39% penetration we expect.

To continue.

Legacy stores continue to be a bigger growth driver for us this year and that's what we anticipated.

Little in general is a very important part of our business and quite frankly, we're pretty agnostic.

Our customer shops, just as long as it's a great experience for them.

Great. Thank you.

And we have time for one more question.

Our last question comes from the line of Carla Casella with Jpmorgan. You May proceed with your question.

Hi.

I have a question about.

On the shifting as well so what percentage of your goods are coming in through that port of L. A and have you made any adjustments for the potential.

Alright, let's strike in July .

Yes.

You can imagine we have a lot we have.

Our own product that comes in multiple parts.

Our vendors.

And so we've been working with that we're quite pleased and adjusting for anniversary received we've received more anniversary this year than we have in years past.

We feel like we're in very good shape to be ready for the anniversary sale.

In general.

Certainly from a ramp perspective have opportunity.

The receipt of goods from multiple areas.

And so certainly we watch this very closely but we are.

We're making sure that we've got all of the University of product available.

Okay and then just wanted to follow up you mentioned this in your urban stores are back to pre pandemic levels.

I'm, assuming there's still some upside from tourism return and can you give a sense for what percentage of your sales today are tourists and where do you think there should be longer term.

I don't have that number right now I would say.

Urban stores.

Our mix in there and.

Really.

We define that category by stores that have real concentration of offices in the area.

But to your question there is a pretty wide range of tourism that I would say, we still have a number of downtown that rely more on tourism.

That's sort of a ways to go to get to 19 level.

And there are some big stores for us so.

Just as we called out our Manhattan flagship.

There's good momentum there we're encouraged.

But even in Manhattan.

You are there.

While there is certainly more tourism than there was six months ago.

Still.

Congrats on room to get back to normal, especially the international tourism. So.

We see some upside.

There are urban stores.

Okay, great. Thank you that's very helpful.

Thank you we want to 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 in Nordstrom.

This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.

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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. Thank you you may begin.

Good afternoon, and thank you for joining us before we begin I want to mention that we'll be referring to slides, which can be viewed in the investor Relations section on Nordstrom Dot com.

Indications customers also reevaluated and refreshed their wardrobes, we're encouraged by this opportunity because it favors the core categories of our business and the core capabilities of our service model, we were well positioned to serve this demand and deliver an excellent customer experience powered by our unique product offering.

<unk> model and strong commitment to customer service, our integrated digital and physical assets continue to allow us to be nimble and enable us to quickly adapt to the channel shift in the quarter as customers increasingly chose to shop in store.

We're staffed well stocked and ready to serve customers in store traffic increased and our dedicated employees delivered an experience that was clearly reflected in our store level customer satisfaction scores.