Q3 2022 Nordstrom Inc Earnings Call
Speaker 1: Greetings and welcome to the Nordstrom third quarter 2022 earnings conference call.
Speaker 1: At this time, all participants are on a listen-only mode.
Speaker 1: We will begin with the prayer remarks followed by a question and answer session.
Speaker 1: If you'd like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded.
Speaker 1: At this time, I'd like to turn the call over to Heather Hollander, Head of Investor Relations for Nordstrom. You may now begin.
Speaker 2: 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.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 Eric Nordstrom, Chief Executive Officer, Pete Nordstrom, President and Chief Brand Officer, Anne Braman, Chief Financial Officer, and Michael Mayer, Chief Accounting 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.
Speaker 3: Thank you, Heather, and good afternoon, everyone. Thank you for joining us today.
Speaker 3: For the third quarter, we delivered results in line with our expectations, with quarterly net sales of $3.4 billion, a loss per share of 13 cents, and adjusted earnings per share of 20 cents.
Speaker 3: As we discussed while reporting our second quarter results, we saw customer demand begin to soften in late June , mostly in Nordstrom Rack.
Speaker 3: Across both banners, the softening trend was more significant in customer segments with the lowest income profiles, while we saw greater resilience in the higher income cohorts.
Speaker 3: As customer trends shifted, we took action to manage through the short-term macroeconomic uncertainty and position our business for success.
Speaker 3: This included managing expenses to align with sales expectations and clearing through excess inventory to exit the year with healthy inventory levels and mix.
Speaker 3: These actions prepared us well for the third quarter as macroeconomic pressures impacted all customer segments with outsized impact in the lowest income groups.
Speaker 3: Additionally, sales decelerated in late October and early November , particularly in geographies with unseasonably warm weather. In the last two weeks, however, sales trends have improved.
Speaker 3: Our teams have executed well in a challenging environment this quarter and continued to advance our Closer to You strategy.
Speaker 3: Given ongoing inflationary pressures in supply chain and fulfillment, we are particularly pleased that we decreased our variable supply chain costs this quarter.
Speaker 3: Our supply chain optimization workstreams drove efficiency and lowered the per unit cost of moving product through our system while also delivering an improved customer experience and faster order fulfillment.
Speaker 3: We're also on track with our plans to clear through excess inventory and optimize our product mix.
Speaker 3: Net sales decreased 3% versus last year, which includes a negative impact of approximately 200 basis points from one week of the anniversary sale shifting into the second quarter.
Speaker 3: Nordstrom banner sales and gross merchandise value, or GMV, each decreased 3% versus last year.
Speaker 3: The timing shift of the anniversary sale had a negative impact on Nordstrom banner net sales of approximately 300 basis points.
Speaker 3: In the third quarter, customers continued to refresh their wardrobes and shop for occasions such as social events, travel, work, and holidays, which drove demand for our core categories and services.
Speaker 3: Consistent with the second quarter, items with lower AURs underperform higher AUR items.
Speaker 3: customers continue to respond very positively to newness and fashion in our seasonal assortment.
Speaker 3: Turning now to our strategic initiative.
Speaker 3: Our team remains focused on improving rack performance, increasing profitability, and optimizing our supply chain and inventory flow.
Speaker 3: We're making progress in these initiatives and we expect them to benefit our top line and bottom line performance in the fourth quarter of this year, in 2023 and beyond. While we take actions to address a shifting consumer backdrop, we are also building capabilities to better serve customers and deliver increased profitability. As we focus on improving Nordstrom Rack performance, we are also building opportunities to improve the performance of our customers.
Speaker 3: winning in our most important markets, and leveraging our digital capabilities. Starting with Nordstrom RAC, sales declined 2% versus last year as we continued to see softening demand, especially within our lower income customer groups.
Speaker 3: We remain focused on delivering profitable growth while improving the customer experience.
Speaker 3: To that end, this quarter we made the decision to reduce RAC's store-based order fulfillment and raise the minimum order amount to receive free ship-to-store delivery on RAC.com.
Speaker 3: These actions reduced our order cancellations, simplified RAC operations, and improved profitability, but negatively impacted top-line growth at the RAC by approximately 200 basis points.
Speaker 3: We continue to focus on increasing our supply of premium brands at RAC, improving our assortment, and growing brand awareness to fuel future growth.
Speaker 3: Premium Brands are a differentiator for the rack and we are dedicated to having great brands at great prices at each of our locations.
Speaker 3: The linkage to the Nordstrom banner gives Nordstrom Rack unique access to premium brands that are not broadly available in the off-price space.
Speaker 3: For example, 90% of the top brands at Nordstrom are sold at Nordstrom Rack.
Speaker 3: This quarter, sales of our top 100 brands at the RAC increased 9%, which underscores the growth opportunity from increasing our supply of premium brands.
Speaker 3: We are also continuing to shift away from the lower price point items that have not resonated with RAC customers.
Speaker 3: We expect to clear through this inventory by the end of the fiscal year, which opens more space and buying capacity for premium brands.
Speaker 3: With the work underway, we expect to optimize rack product mix by mid-2023.
Speaker 3: We believe that improving our assortment and increasing penetration of top brands will differentiate the rack experience for customers and drive profitable sales growth.
Speaker 3: Next, our market capabilities help us engage with customers by delivering convenience, connection, and greater access to product no matter how they choose to shop.
Speaker 3: Customers clearly value our interconnected model with a strong store fleet, two unique banners, and omnichannel capabilities linked at the market level.
Speaker 3: Order pickup represented 12% of Nordstrom.com demand this quarter, an increase of 200 basis points versus last year.
Speaker 3: We are also leveraging our digital capabilities to extend our unmatched one-to-one store experience to a digital world. Our goal is to personalize the digital experience with discovery supported by a broad product assortment, convenience powered by our market strategy, and connection via our people and devices.
Speaker 3: We are evolving digital discovery and driving higher engagement with enhanced content, a refreshed shopping experience that includes redesigned product pages, and smarter product search capabilities.
Speaker 3: We are also improving the digital purchase journey with better imagery and product descriptions to help customers make more informed purchase decisions and minimize returns.
Speaker 3: Total digital sales declined 16% this quarter, which includes a negative impact of approximately 300 basis points from the anniversary sales shift.
Speaker 3: Additionally, reducing store-based fulfillment for RAC.com orders and sunsetting Trump Club negatively impacted digital sales by approximately 700 basis points, with the change to RAC.com store fulfillment accounting for the majority of the impact.
Speaker 3: Our digital sales were also affected by channel shift as customers returned to pre-pandemic shopping behavior and increasingly chose to shop in-store this quarter.
Speaker 3: Digital sales represented 34% of total sales during the quarter.
Speaker 3: Before I turn it over to Pete, we'd like to thank our employees, customers, and partners for helping kids start off the school year on the right foot. For the 12th year, we partnered with Nike and Shoes That Fit to donate more than 40,000 pairs of brand new shoes to kids in need for back to school.
Speaker 3: This program leverages our heritage and choose and engages our teams and customers to make a difference in their communities.
Speaker 3: We are very proud of the incredible support our team and customers put behind this important cause.
Speaker 3: In closing, though there is continued macro uncertainty, we are pleased with the actions we've taken to prepare for this environment and the progress we've made in improving our agility.
Speaker 3: The capabilities we built with our closer to you strategy, digital assets, and supply chain optimization prepare us to manage short-term pressures.
Speaker 3: With our strong balance sheet and cash position, we also have the flexibility to respond to shipping demand.
Speaker 3: We are navigating short-term headwinds while also continuing to build capabilities to better serve our customers, drive profitable growth, and increase shareholder value. We are focused on remaining nimble to navigate this environment and look forward to realizing additional benefits in the fourth quarter and into 2023. I'll now turn the call over to Pete.
Speaker 3: Thanks Eric. I'll begin by talking about our category performance, then I'll discuss the actions we're taking to ensure healthy inventory levels and mix going into next year. Finally, I'll update you on the progress we're making to improve supply chain and inventory flow and increase gross margin.
Speaker 3: Starting with the category performance, men's and women's apparel, shoes and designer had the strongest growth in the quarter versus last year. Customers continue to shop for occasions and return to the office and update their closets.
Speaker 3: We continue to see softness versus last year in categories previously accelerated by the pandemic, including home and active.
Speaker 3: Turning now to inventory. As you know we have been taking aggressive action to align inventory with softening demand and category shifts.
Speaker 3: We have been focusing on improving our assortment by clearing through product that customers weren't responding to and showcasing the fashion, newness, and categories they want. While this clearance activity pressures margins in the near term, the impact is in line with our expectations and consistent with the outlook we shared with you last quarter. Importantly, we expect to have healthy and current inventory by the end of the year, setting us up for longer term growth and profitability.
Speaker 3: In addition to healthy inventory levels, we are also focused on having the right composition of inventory. We are maintaining a strong inflow of exciting brands to deliver the newness customers expect from us.
Speaker 3: We continue to partner with new limited distribution brands to grow their businesses and offer our customers increased selection.
Speaker 3: For example, our partnerships with OnRunning, Skims, and Fear of God illustrate our strategy and effectiveness in amplifying exciting new brands.
Speaker 3: These partnerships only began a few years ago and now they're among Nordstrom's top five fastest growing brands and ranked in our top brands overall. We also continue to focus on improving our supply chain and inventory flow. Last year, in response to our growing digital business and increasing inflationary cost pressure, we launched a series of work streams to drive efficiency and reduce supply chain costs while also elevating the customer experience.
Speaker 3: Improved inventory flow is a key component of this work and an integral part of our closer to use strategy. By optimizing our supply chain, we are able to provide our customers with greater selection and faster delivery speeds. We are reducing the number of product touchpoints through our network, which decreases our costs and gets the product in a sellable position faster, which improves our regular price sell-through. As part of our supply chain optimization efforts, we are also continuing to increase productivity and increase our supply chain optimization efforts.
Speaker 3: our network, we increased fulfillment center flow-through by 28% versus last year and reduced our variable handling cost per unit by 3%.
Speaker 3: In fact, despite inflationary pressures this quarter, we decreased our variable supply chain costs as a percent of sales by approximately 100 basis points compared to last year.
Speaker 3: As we advance our supply chain capabilities, we are also aligning our network accordingly. To that end, we closed a smaller omni-channel fulfillment center in Los Angeles that is no longer needed and retired the third-party technology tested in that center as we have scaled our West Coast omni-channel center to support the demand in that region. In addition to supply chain optimization, we continue to focus on expanding our merchandise margins over the long term.
Speaker 3: our assortment, increase promotional
Speaker 3: We saw the benefits of this work in the first half of the year and expect to deliver additional merchandise margin improvements once we are past the clearance markdown pressure this year. Turning now to holiday, our customers are excited for the season and we are well positioned with a fresh, relevant assortment to help them get ready for their celebration. We've used our learnings from past holiday events to improve our offering with the goal of being the go-to destination for gifting and preparing for the moments that matter to our customers.
Speaker 3: In closing, we're taking actions to clear through excess inventory, improve our mix and assortment, increase agility, and enter 2023 in a healthy inventory position. We're confident in our ability to build on our progress in driving supply chain efficiencies and the additional benefits we expect in the fourth quarter and in 2023. Now I'll turn it back to Eric.
Speaker 3: As we announced last month, Anne Braman will be stepping down from her role as CFO on December 2nd.
Speaker 3: We'd like to take a moment to recognize Anne for her dedication to our customers, our employees, our shareholders, and our values.
Speaker 3: and made significant contributions to our business over the last five years, including helping to successfully guide the company through the pandemic, sponsoring multiple strategic initiatives to improve profitability and elevating the finance organization.
Speaker 3: So Anne, we thank you for your partnership and leadership. We wish you all the best in your next step.
Speaker 4: Thank you, Eric. It's been a privilege to work alongside you, our executive leadership team, our board of directors, and all of the incredible people who make Nortram such a special place. It has been an honor to be part of this company.
Speaker 4: I'll now review our third quarter results and then turn it over to Michael Mayer who will serve as our interim CFO beginning December 5th to address our outlook for the remainder of the year.
Speaker 4: For the third quarter, we reported a loss per share of 13 cents.
Speaker 4: After excluding charges related to a supply chain technology and related asset impairment, adjusted earnings per share was 20 cents.
Speaker 4: Overall, net sales decreased 3% in line with our expectations.
Speaker 4: This includes a negative impact of approximately 200 basis points due to one week of the anniversary cell shifting into the second quarter. GMV decreased 2%.
Speaker 4: Nordstrom banner sales and GMV each decreased 3% versus last year.
Speaker 4: Anniversary sale timing negatively impacted the Nordstrom banner by approximately 300 basis points.
Speaker 4: Nordstrom Rack sales decreased 2% in the third quarter.
Speaker 4: Digital sales decreased 16% this quarter. Digital sales include a 1000 basis point impact from anniversary sale timing shift, reducing racks will fulfill and sunsetting trunk club.
As Eric and Pete described we have taken actions to rightsize, our inventory and as such ending inventory increased 1% this quarter versus a 3% decrease in sales as a result of reduced supply chain backlogs, we had a higher percentage of our inventory on hand, this year versus in transit last year.
We continue to expect that we will end the year in a healthy inventory position and are committed to a disciplined approach to inventory management in 2023.
Total SG&A as a percentage of net sales increased 200 basis points due to a supply chain technology and related asset impairment charge, partially offset by leverage driven by fulfillment expense efficiencies excluding.
Excluding the impact of the impairment total SG&A as a percentage of net sales remained flat with the prior year.
Since last year, we've been making progress in our supply chain optimization initiatives to offset anticipated labor and fulfillment cost pressure and we're pleased with the results we're seeing.
We continue to expect that these initiatives will deliver more significant benefits in the fourth quarter and in 2023, EBIT margin with 0.1% of sales for the third quarter.
After excluding charges related to the impairment adjusted EBIT margin was two 1%.
We maintained a solid financial position ending the third quarter with $993 million in available liquidity, including $293 million in cash.
Subsequent to quarter end, we paid off the $100 million, we had borrowed on a revolving line of credit and once again have the entire balance available to us.
Finally, we are pleased to announce the extension of our credit card program agreement with TD Bank as the exclusive issuer of our proprietary Nordstrom branded credit card.
TD has been a strong partner and we look forward to working with him to further enhance the card member experience.
Now hand, it over to Michael to talk through our outlook for the remainder of fiscal 2022, Thanks, Dan and before I discuss our outlook I just want to briefly add a word of appreciation on behalf of the finance team here at Nordstrom.
We've all benefited from your leadership and coaching over the past few years. Thank you for everything and all the best in your next chapter.
Now I'll describe the macroeconomic backdrop contemplated in our guidance for the balance of the year.
As Eric indicated macroeconomic pressures impacted demand across all customer segments in the third quarter with the most significant impact in the lowest income groups. However.
However, customers continued to refresh their wardrobes shopper occasions, and respond to fashion and newness in our assortment.
With regard to recent trends sales softened in late October and early November .
But improved in the last two weeks.
We believe that unseasonably warm temperatures in certain geographies contributed to the decelerating trends.
Along with delayed holiday shopping.
As weather normalized and we get closer to the holidays, we've seen sales trends improve and gifting activity accelerate.
As for holiday shopping expectations, we believe that this year's calendar, which has an extra Saturday between Thanksgiving and Christmas.
Will lead some customers to wait until closer to Christmas to make their purchases.
We continue to expect an elevated promotional environment across retail in the fourth quarter take.
Taking these factors into consideration we are reaffirming our 2022 financial outlook.
For fiscal year 2022 we continue to expect revenue growth of 5% to 7% versus 2021 we.
We expect adjusted EBIT margin of approximately 4.3% to 4.7% for the full year.
Our forecast assumes that EBIT margin improvement for the year will be driven by SG&A leverage with gross profit roughly flat for the full year.
Our effective tax rate is expected to be approximately 27% for the fiscal year.
We expect adjusted EPS of $2 30 to $2.60.
Our outlook excludes the impact of any future share repurchases.
We continue to expect approximately $100 million of incremental markdown impacts from clearance activity in the fourth quarter.
Though we are facing inflationary expense pressures, we contemplated that pressure in our outlook along with the increasing benefits of our supply chain optimization initiatives.
With regard to the assumptions embedded in our guidance range. The low end of our guidance assumes that the softer sales trends from late October and early November return and promotional activity in the sector increases above what we've seen to date.
The high end of our guidance assumes that holiday sales will accelerate year over year as we approach Christmas in line with pre pandemic shopping behavior and that promotional levels. In this sector are consistent with what we've seen to date shifting to capital allocation our priorities remain unchanged.
Our first priority is investing 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% of net sales as we continue to invest in supply chain and technology capabilities.
Our second priority is reducing our leverage we remain committed to an investment grade credit rating and expect to decrease our leverage ratio below 2.9 times by the end of 2022.
We continue to target a leverage ratio below two and a half times.
Our third priority is returning cash to shareholders last week, our board of directors declared a quarterly cash dividend of 19 cents per share.
Year to date, we also repurchased approximately $53 million of our stock at an average price of $23 per share.
We have approximately $447 million remaining on our share repurchase authorization.
We will continue to take a measured approach to share repurchases through the remainder of this year aligning with our cash flow and market conditions.
In closing, we've been taking the necessary steps to prepare for a softening macroeconomic backdrop and are confident that we have the financial strength and strategic capabilities to manage through a rapidly evolving environment.
We have a strong balance sheet and a favorable debt maturity schedule, we're reducing our inventory levels to enter 'twenty twenty-three in a healthy and current position and improve our flexibility and agility.
Despite marked down and inflationary pressures, we still expect to deliver SG&A benefits from our supply chain optimization work and disciplined expense management and significantly increased our year over year profitability in the fourth quarter.
With that Heather we're ready for questions.
Michael 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.
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Thank you My first question is from Ashley <unk> with Jefferies. Please proceed with your question.
Hi, This is Blake on for Ashley Thanks for taking our question just wanted to ask on the sales guide.
A couple of headwinds I guess, you called out you're seeing from the rack decisions about store based fulfillment and the shipping minimum you also talked about kind of weakness in the lower AUR interest the general macro what are the positive offsets youre seeing on the top line to help you maintain the guide here. Thank you.
Yeah Blake this is Michael I'll take that so that's right those headwinds that you talked about or contemplated in the guide there pretty consistent with what we saw in the third quarter, though so the assumption is that the.
The choices, we've made around rack store fulfillment.
Our consistent impact to our business in the fourth quarter relative to what we've seen in the third but generally speaking I'd just kind of bring it up a level as we think about going forward. I think you can expect to see something similar in the fourth quarter in terms of the banner breakout.
As well as the.
The channels will look at we continue to expect that our customers are voting for shopping in stores.
And that we'll see some mix shift to that.
Next is Matthew boss with J P. Morgan. Please proceed with your question.
Great. Thanks, So a couple of questions first how are you planning full line inventory by category as we think about Anniversarying some of the shift toward occasion and dressed up apparel next year and then it rack could you just speak to the timeline do you think is reasonable to return the brac to positive sales.
And some of the initiatives behind that.
Yes. This is Peter I'll start with the category inventory.
We mentioned in our comments, we feel really good about the content of what we have available here for the fourth quarter and coming into all day.
And thats because.
Things have stabilized a little bit in terms of what Patrick manager, we've talked about categories that were really over indexing in early days of the pandemic.
We were part of that as well.
And active in categories like that doing very well.
And the last gosh.
It's probably eight or nine months or so in particular, the return of occasions and people just moving around more than.
Just just being out there, it's lend itself well to what we've traditionally always done pretty well.
We can talk about that in terms of the moments that matter and so we've done well in apparel and shoes.
And the categories that.
Reflect people out and about engage more activities and events and so.
I think that that's really where we've focused.
Our inventories going forward.
I think the only other thing about that is just coming in this time of year.
Best you can to try to figure out whether.
What cold weather the impact that that has and we feel really good about our assortments in cold weather too.
Okay, Hi, Hey, Matthew this is Eric.
Yeah for the rack couple.
A couple of things we would emphasize.
I Wonder if we do continue to see traction.
And our strategy.
Third quarter in a row of sequential improvement versus pre pandemic.
And really since we focused on our north star.
Brands at great prices.
And as we called out.
We had some action.
Most notably.
Stopping store fulfill for rack dot com orders that hit.
<unk> hit our top line, but <unk>.
Made it some more profitable business and a better customer experience. So overall our business is about flat.
You back that out.
And we continue to see traction.
From the best brands last quarter, our top 100 brands Iraq grew 9%.
We can continue to see growth, there and sort of timing.
There's two things that are.
Sure.
Yeah sure we have to address it at that.
Timing you know one is certainly getting access.
And ordering a greater percentage of our inventory in these great brands and that is that is happening.
The second piece as we've talked about coming out of last quarter is clearing through.
The less productive inventory, we have and.
Sure.
As part of our total ecosystem and.
Coming out of Q2.
As we revised our guidance.
We felt that it would take.
Through half two two to clear out and open up the inventory dollars to get us in the balance that we want going forward. So for rack Ah we need to really get more of these great brands, but we hope to also have too.
Through the rest of Q4 clear out the inventory that hasn't been as productive.
This up well for 2023 to have continue.
Continued improvement.
Best of luck in holiday.
Okay.
Okay.
Next is Chuck Grom with Gordon Haskett. Please proceed with your question.
Hey, just to follow up on Matts question, a little bit.
On the rack if you looked at it on a three year basis. It really decelerated in all of your off price peers have reported over the past week or so and I really havent shown.
That level of softness so I was just wondering if you could maybe just go a layer deeper.
So the factors.
In our performance.
And then as we look to 2000.
23, how are you planning the entire enterprise business from a category perspective are you expecting.
Some of the recent areas of strength to continue or are you expecting a shift back to some of the.
Pandemic areas to presume that strength.
So Eric you might have over that the rack sure Okay I'll start with Chuck.
Actually I have a lot more to add there.
As we talked about.
Coming out of Q2, we did see a pullback in our customer cohorts are lower income segments for us and that's us.
Most pronounced.
And our rack business.
And we certainly see some tens of customers.
Being under strain from economic conditions, and we've seen no evidence of some pullback across all customer cohorts, but.
Most pronounced.
Lower customer a lower income customer cohorts and.
Again that that hit us more in the rack business and then so there are some macro issues, but internally.
I will get back to get our mix right.
We're very confident.
And that of how.
Why customers respond strongly to the rack why they choose us.
And.
Getting that mix.
Right.
We have some cleanup to do still here in Q4.
We see that entering 2023, and a real healthy and clean inventory position to where we.
Get the mix that we want.
This is Dan I would add a couple of things to that.
Just to remind you when we talk about the change in rack dot com through our hotel.
Program for the last quarter that was worth about 200 basis points of top line impact in Iraq banner itself. So when you adjust for that it's actually a pretty flat business overall for the quarter, having said that just to remind you.
Patrick the history of Iraq, and we typically have not had a big category at home.
It's certainly not a lot.
Like apparel, which was certainly high Covid pandemic category as we've come through we've also re shifted to focus on the best brands at the best prices.
That has also been a piece of getting out of some of the older inventory that the lower price inventory and moving into the categories.
But people really seem to respond you all are seeing the results of that with positive increases.
Areas and we'll continue to do.
Both Alex and getting out of the current inventory.
It's not working but also really really heavy into next year as far as the better brands.
Got it. Thank you very much yeah on the 23 question.
I think the other thing I would add to that is.
Can you talk about you know, we're really focusing on the category. They are responding with customers I think for US we're also focusing on adding.
It's a pretty conservative agile, giving us the capability to chase.
More than what we've seen the last couple of years coming out of the pandemic.
<unk> got much better access to goods has gotten much better and so this is giving us the ability to be more.
Being able to chase, where the customer is going as well.
Sorry to keep powder dry as we go into 'twenty three.
Really focusing on early trends.
Customer.
Great. Thanks, Ed.
Okay.
Next is Oliver Chen with Cowen.
Hi, there this is Katie on for Oliver Thanks for taking my question.
First was on the variable costs are those are those permanent improvements or is that just sort of.
More flexing with the.
The sales performance.
And then our second question is more on that the excess inventory how much is left to sort of clear through in Q4.
Yeah.
Yes, I'll take the variable cost.
Michael do you want to.
Take the inventory component that would be great. So on the variable cost those are actually permanent.
We talked about the last couple of quarters.
Coming out of I Wouldnt want to rewind, a little bit to the end of last year, we saw inflationary cost headwinds.
We determined that we thought it was going to create permanent.
Out there until we start actually.
Start doing initiatives around really driving improvement and we've talked about in the last couple of quarters that we thought were going to get leverage in our overhead in the first half based on top line.
Fixed overhead getting leverage on the sales side on the second half we as we've indicated we will continue to get momentum in our supply chain cost per unit initiatives and efficiency.
And you saw that coming through in Q3, and Thats continuing to be up in Q4 and beyond.
Acadia with respect to the inventories we said at the end of last quarter that we expected to take approximately $200 million of incremental markdowns in the back half of the year roughly evenly split between the third and fourth quarters and we're on track for that so we still expect to exit the year in a healthy and current inventory position.
Thank you so much have a holiday.
Next is Kimberly greenberger with Morgan Stanley .
Great. Thank you so much good evening I wanted to ask about.
Just some of the puts and takes in your operating margin as we head into next year.
It would seem that the inventory cleanup and and potentially.
Lower markdown rate in 2023 could be a tailwind for gross margin.
Are there any headwinds that might be noteworthy and then and specific to your comments on SG&A.
I would assume that that's a the SG&A dollars are likely to grow next year.
Still ongoing inflation out there and I would imagine.
That you're experiencing some of the same.
But do you have any do you or Michael have any sort of preliminary thoughts on how we should think about the growth in SG&A in 2023 compared to this year. Thanks.
Yeah, Thanks, Ken Erickson and give some broader context of the market.
A quick question.
Yeah. Thanks for the question Kimberly.
Let me start with either there's certainly a lot of uncertainty out there.
Mac.
Economic conditions and customer behavior.
Behavior is moving rapidly.
And we feel really well prepared for that uncertainty.
I take it back to.
Our last quarter call, we started to see.
Softness in the end of June .
And we made the call pretty early.
In hindsight too.
To take what we thought were the prudent steps and in particular, reducing inventory managing our expenses and overall improving our agility to navigate these uncertain times.
Those actions have served us well, we really feel good about our execution execution through Q3 of that plan, we exceeded our plan last quarter.
And probably more importantly.
It sets us up well for the uncertainty going forward, we're not just starting right now of looking at kind of the volatile economic times out there and making adjustments. These adjustments were put in place.
At the end of last quarter, and again have served us well through Q3 and have prepared us well going forward.
Yes, so we can't really more specifically than about 2023 is we're not giving 'twenty three guidance today, but given the uncertainty that Eric just talked about in the macro environment, we're really focused on.
Preserving and protecting that agility and that flexibility as we go forward into the fourth quarter and into next year. So that means managing inventory more conservatively to not only increase agility, but also improved gross margin, we'd rather be chasing the business in clearing.
You heard Pete talk earlier about a double digit improvement target for our 2023 inventory turns.
It also means disciplined expense management and continuing to hold the line on that.
Then just continuing to build on the strategic initiatives that we've talked about with a special focus on supply chain given the size of our digital business that that helps us that improves our capability to serve our customers, but it also helps to mitigate some of that inflationary cost pressure that you alluded to and improve our profitability. So not ready to give specific guidance, yet, but those are sort of.
A guiding principles as we think about planning for next year.
Thank you.
Next as Edu Irma with Piper Sandler.
Hey, guys. Thanks for taking our questions in and best of luck in your next steps I guess first a bigger picture question gosh. It might have been a couple of analyst days ago, but you once said that online and stores had roughly equivalent contribution margin just given the new dynamic of kind of growth out pacing in the store fleet versus E. Com can you kind of refresh us on.
That and how we should view contribution margin now they're tipping back to stores and then as a follow up.
The traffic trends seem to have lagged historically or in recent history at the urban stores ex New York kind of give us a quick update as the performance of urban versus suburban thank you.
Yeah, Let me, let me start and.
Ross can jump in there to.
So the contribution margin between online and stores.
For the Nordstrom banner, they remain pretty darn close.
And I guess I'd call out two variables just shed a little more light on it.
Certainly theres been increased expenses and supply chain, particularly transportation that hits, the digital business a little more.
But offsetting that is our digital business.
It has been leveraging really well.
Gross sales there.
There's a big fixed cost.
Yes.
Base there that.
It gives us a lot of leverage.
Sales so overall.
Really pleased with our online profitably and <unk> Dot com.
The Nordstrom stores.
That model has a lot of variable expense tourists, which allows us to match up well.
Sales.
Trend up or down.
The only thing I'd call out.
We're not at parity at rack dot com and rack stores.
And in particular.
Go back to our decisions last quarter.
To stop doing store fulfillment in rack stores for <unk> Dot com.
And they're really two reasons that.
And these are two things.
Sorry.
I'll ask ourselves all the time.
One how.
How do we provide a great customer experience and two.
How do we get profitable growth.
And store fulfillment at our rack stores.
<unk> was not providing the level of customer experience that we hold ourselves to a we had a higher cancellation cancellation rates there because it's a more difficult finding the product and a treasure hunt environment in the stores.
But secondly kind of to your contribution margin point.
The economics get tougher.
With the lower price points, we have in the rack versus our Nordstrom banner.
So.
Didn't meet our standards of profitable growth so.
That's an example of there are levers that we are actively pulling to address our contribution margin.
In our off price digital business.
Go ahead Jeremy.
The urban or do you want to comment okay as.
As far as urban and suburban Theres not.
That's leveled out a bit.
Still.
Our urban stores got hit harder during the pandemic.
So they are growing faster in general versus our non urban stores.
In New York as we've called out.
It continues to be a winner.
One of our very top stores and sales growth over last year.
Thank you.
X does know as Atkins with Keybanc.
Hi, Thanks for taking my questions.
Just on the rack on the opportunity at the rack to kind of accelerate improvement in brand mix given the excess inventory in the channel could you just provide an update on what youre kind of seeing in the channel there and any progress on that opportunity.
And then second just on the decision to reduce store based fulfillment at the rack is that a permanent change or would you expect to revert back to the prior minimum for free ship to store at some point in the future. Thank you.
Yes, so Pete do you want to take that.
Being in the market and then.
A question on that.
Yes.
Everyone has noticed in the last few months pretty much everyone and retailing is over inventory at some level.
And as a result of that that plays right into our hands I think in terms of being able to be selective about.
Pursuing great brands at great prices going to hear us talk about premium brands and these are really the brands that you would typically find in the Nordstrom store that are not ubiquitously distributed amongst.
Typical off price retailer.
We've got great relationships with all of these brands.
What we tried to do is to be first call for them when they have inventory to clear.
Like I said, there is inventory out there to be had and I think it puts us in a great position of being able to be selective. So we feel very good about.
What could be possible for us in 'twenty three.
Yeah.
Yes.
And take the store fulfillment and rack certainly we would revisit that just just to be clear. There is two actions we took last quarter.
One was.
I do.
Doing store fulfill a rack dot com orders the other was.
Having free the threshold for free shipping to our rack store of our rack dot com or order.
The store fulfillment the bigger.
The impact of those two.
But.
That threshold is something we.
Consistently look at it.
Yeah again, we look at the.
The business model, there and when you look at the customer experience.
So we have a lot of initiatives underway too.
Continue to improve the inventory accuracy.
We have that helps with the customer experience side by reducing our cancellations.
So we do think that will get better going forward.
And then.
Costs for our supply chain cost of moving that product around.
Obviously, a lot of external factors, there, but there's plenty of internal levers first of all in the.
Last quarter is a good example, I feel really good about our supply chain performance this last quarter and the traction we're getting on some initiatives.
So long way of answering a question that yes, we would revisit that as conditions change.
Okay.
Thank you.
Now we will take one more question.
Our last question comes from Dana Telsey with Telsey Advisory group.
Hi, good afternoon, everyone as you've seen the season unfold and the difference between the lower income and the hiring income customer cohort. How are you positioning the brands at the corn the full line Nordstrom stores.
Between the higher end and the lower end and the positioning for rack and as we see this going through into 2023.
Is there a cadence of what the assortment should look like Iraq that you've identified given the more premium brands that works well there of how you're transitioning the full line stores two in order to better balance the lower income versus a higher income consumer given that typically we think of Nordstrom is a little bit more higher and then lower.
Income with the headwinds there are rising today. Thank you.
Hi, David.
It's interesting you would intuitively think that.
Customer demographics are showing different spending pattern related to what's happening out there inflation that you would you would see over indexing in selling a lot more lower priced goods.
So that's not necessarily true I mean, the broken record for us almost regardless of what macro times is going through its newness.
Flow and great brands.
And just giving people compelling reasons to buy new things Thats, what really works for us and it works in the rack manner and it works in our Nordstrom brand or as well so.
Fact that we called out that we're still having good.
Good growth in designer I think is that this is the fact that it's not so much.
About a specific price point of our offer.
We pay close attention to what's going on our customers and close attention to what's going on out there in the macro environment.
I think getting our inventory levels in a position, where we can have that kind of consistent flow and the large majority of what we have to offer is new.
The most important thing for us.
I think in terms of what's happening in the rack.
Again, it's really about both great brands, it's not about us pursuing the cheapest is good.
Great brands at Great prices and you know that.
That formula has worked for us in the past.
At all times really.
Regardless of what's happening in the macro environment and we anticipate that will continue to work for us again.
So we feel good about it and we've got access to the <unk> brands. The world, we're going to continue to bring them in we do have a difference we haven't even having the two banners.
Got that full price.
Proposition and then we've got that bargain hunter proposition as well so we feel like it is.
It's a big net where we can serve a lot of customers.
And what is how are you thinking about store openings for rack going forward.
Hi, Dan it's Eric.
As you know.
We started announcing some more a rack openings. So as mentioned before we think there is opportunity for new stores.
In the rack banner.
Our rack stores are profitable.
And the IRR opportunities are really compelling.
For the off price space.
Convenience store locations is.
Even more important than in the normal banner space.
We know.
You get outside of about 20 minutes.
Drive to a direct store or we start to lose customers.
And you've seen a lot of the leading off price players.
Got a lot of store count over the last handful of years and has helped drive their growth.
One of the things we know is when we share a location we share a parking lot with.
Other off price competitors are in the vast vast majority of the cases.
We have the highest sales per square foot.
So we share of pocket parking lot.
More often than not customers choose us so.
Our store count comparator or what else is out there some competitors, we think theres a lot of attractive opportunities.
To add some stores.
Thank you.
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