Q4 2022 Nordstrom Inc Earnings Call

Speaker 1: Here build with.

Speaker 2: Greetings and welcome to the Nordstrom fourth quarter 2022 earnings conference call. At this time all participants are on a listen only mode.

Speaker 2: We will begin with the prayer remarks followed by a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad.

Speaker 2: If anyone should require operator assistance to run the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

Speaker 2: I'll turn the call over to Sarah Penner, Manager of Investor Relations for Nordstrom. You may now begin.

Speaker 3: 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.

Speaker 3: As a reminder, we are here today to discuss our business and fourth quarter performance, and we will not be taking questions on other matters. Participating in today's call are Eric Nordstrom, Chief Executive Officer, Pete Nordstrom, President and Chief Brand Officer, and Michael Mayer, Interim Chief Financial Officer, who will provide a business of-

Speaker 4: earnings per share of 74 cents.

Speaker 4: Looking back on the fiscal year, revenue increased 5% from 2021, and adjusted EBIT margin was in line with last year at 3.3%.

Speaker 4: We saw customers starting to pull back in late June , primarily in Nordstrom Rack, and this trend continued through the holiday season.

Speaker 4: Across both banners, the softening trend was more pronounced in customers with lower income profiles.

Speaker 4: Given the uncertain environment, we are executing with agility. We took action starting in Q3 to clear excess inventory and optimize our product mix.

Speaker 4: As a result, we are now in a much healthier position, with inventory levels down 15% from last year and in line with 2019 levels.

Speaker 4: While this was the right strategy to better position our inventory levels for 2023, we implemented more markdowns than we had initially planned to achieve our goal.

Speaker 4: This was compounded by the softening trend, excess imagery levels, and promotional intensity in our sector.

Speaker 4: As a result, our mergents were lower than expected in the fourth quarter.

Speaker 4: Despite this, I'm pleased that our supply chain initiatives delivered efficiency and lower per unit costs in Q4, resulting in more than 200 basis points of SG&A rate improvement even with lower sales leverage and ongoing inflationary pressures.

Speaker 4: At the same time, we remain committed to driving more profitable long-term growth.

Speaker 4: We are looking across our business and operations with this clear mindset to ensure we are deploying our financial resources and talent against the opportunities where we are best positioned to win in the medium and long term. With this in mind, we have decided to wind down our Canadian business over the next few months to simplify our operations and increase our focus on our core U.S. business.

Speaker 4: We entered Canada in 2014 because we believed it presented a compelling opportunity and we are grateful for the many customer relationships we have built over the years.

Speaker 4: Despite our team's best efforts, including multiple initiatives to improve our outcomes, our Canadian business has not been profitable.

Speaker 4: The impact from COVID drove further losses with no realistic path to sustainable profitability.

Speaker 4: Canada accounts for less than 3% of our total sales, and we believe we will benefit from a sharper focus on our U.S. business.

Speaker 4: Michael will provide more detail on the one-time charges related to this decision and the impact on our sales and profitability going forward.

Speaker 4: While we are confident in our decision, it was a difficult one to make and we recognize the personal impact on our employees.

Speaker 4: We are committed to treating our Canadian employees with fairness and respect. We are establishing an employee trust that will provide additional benefits for employees during the wind down period.

Speaker 4: I have the deepest appreciation for the talent and passion of our great team in Canada.

Speaker 4: I want to sincerely thank them for their dedication to customers and the service they have provided over the years.

Speaker 4: More than ever, I believe Nordstrom is uniquely positioned to meet the changing needs of our customers.

Speaker 4: With our two powerful, interconnected brands, the breadth of our products, styles and prices, and most of all, our unwavering passion for customer service, we have a durable foundation for growth.

Speaker 4: We are taking clear actions in 2023 to expand market share and improve our profitability.

Speaker 4: It starts with our loyal customer base, our greatest asset.

Speaker 4: We acquired approximately 10 million new customers in 2022 and added 2.5 million new Nordy Club members.

Speaker 4: We are committed to building on these successes while delivering on our legacy of service across physical stores and digitally as the customer experience continues to evolve to be even more omni-channel.

Speaker 4: This is critical to driving engagement and attracting more customers.

Speaker 4: In addition to improving the customer experience, we are focused on three specific priorities to drive better financial performance in 2023.

Speaker 4: 1. Improving Nordstrom Rack performance.

Speaker 4: 2. Increasing our inventory productivity and 3. Continuing to advance our supply chain optimization initiative.

Speaker 4: I'll address each of these briefly, then Pete will go into more depth on some of our initiatives in support of these priorities.

Speaker 4: starting with Nordstrom Rack.

Speaker 4: Sales in Q4 declined 8% versus last year as we saw consumers pull back spending.

Speaker 4: We estimate that a little over half of the decrease was driven by specific actions we took to improve profitability, namely eliminating costly rack store-based order fulfillment and raising the minimum order amount to receive free ship-to-store delivery on NorshamRack.com.

Speaker 4: These actions reduced order cancellations, simplified RAC operations, and improved profitability, but negatively impacted top-line growth at the RAC.

Speaker 4: We also cleared out older and unproductive inventory, giving us increased open to buy and therefore greater flexibility to improve our merchandise assortment as we enter 2023.

Speaker 4: We are committed to improving both our top and bottom line performance at Nordstrom Rack in three ways.

Speaker 4: First, and most importantly, we are prioritizing 100 nationally recognized strategic brands to help us drive sales and grow market share.

Speaker 4: Simply put, we know we win with customers at the rack when we deliver great brands at great prices.

Speaker 4: We believe strong brand recognition drives outsized customer engagement, and these brands are proven performers, many of which are not widely available in the off-price space.

Speaker 4: By increasing inventory turns at the rack, we can increase the flow of these great brands and give customers newness each time they visit us.

Speaker 4: Second, we are expanding our reach and convenience for customers by opening 20 new Rack stores this year. Rack stores continue to be our largest source of new customer acquisition, accounting for more than 40% of newly acquired customers in 2022. Our Rack store fleet is under-penetrated and we have an opportunity to attract more customers and sharing our value to the top.

Speaker 4: and drive profitable growth through a proven model as we expand our reach with more new stores.

Speaker 4: Third, we will drive greater engagement and higher profitability at NorshamRack.com. Our digital capabilities are unique in the off-price space, and we see opportunities to leverage our digital assets to increase engagement with our rack customers.

Speaker 4: We will also continue to optimize the operational model for improved profitability as we did by discontinuing store-based fulfillment of NordstromRack.com orders.

Speaker 4: Moving now to our second priority for 2023, inventory productivity.

Speaker 4: Better inventory discipline across our operation provides customers with relevant and new assortments from the world's best brands.

Speaker 4: We also have a significant opportunity to improve our earnings and returns on invested capital through increased productivity from our merchandise inventory, our largest annual investment.

Speaker 4: The substantial disruptions and volatility in our business over the past three years had a significant impact on our inventory management and outcomes, including buy plans, receipt flows, stock levels, markdowns, and turns. As supply chains have stabilized.

Speaker 4: we have an opportunity to return to pre-pandemic norms across these elements of our inventory management. Finally, let's turn to our third priority of supply chain optimization.

Speaker 4: We made great progress in 2022 on our supply chain initiatives, which drove improvement in our SG&A rate despite lower sales leverage and continued inflationary pressure.

Speaker 4: Pete will provide highlights from our work in 2022.

Speaker 4: This year, we will build on our momentum to further improve the customer experience while driving greater expense efficiency.

Speaker 4: We're continuing to scale our West Coast Omni-Channel Center, and we are building productivity across our network.

Speaker 4: Improvements in inventory turns and flow also continue to help reduce supply chain costs.

Speaker 4: The past three years have been the most challenging and unpredictable for our industry in more than a generation.

Speaker 4: We are incredibly proud of the way our people navigated the unprecedented circumstances while remaining true to our core values.

Speaker 4: As we enter 2023, we are ready to move forward. We have a clear set of priorities that we expect will drive improved performance in the near term while positioning us for longer term profitable growth.

Speaker 4: We have made difficult decisions to increase our focus on executing against those priorities in our core business.

Speaker 4: We have a strong balance sheet and healthy cash flows, and we remain committed to putting the customer at the center of everything we do.

Speaker 4: With that, I'll turn it over to Pete.

Speaker 4: Thanks Eric and good afternoon everyone. I'd like to talk about our merchandise performance during the fourth quarter, then follow up with highlights from the workstreams under each of the three focus areas Eric discussed.

Speaker 4: Starting with merchandise performance.

Speaker 4: We prioritized getting to healthy inventory levels by year-end and taking additional markdowns to do so impacted our results in most categories. That said, we saw areas of strength in the corridor. We were pleased to see strength in men's apparel which was up versus last year and at 2019 levels, particularly in dresswear as people shop for special occasions and updated the return to office looks.

Speaker 4: At the Rack banner, beauty grew high single digits as consumers responded well to our expanded offerings with brands like MAC and Clinique.

Speaker 4: To illustrate our efforts to get to a cleaner inventory position, seasonal categories including outerwear, sweaters, and boots had strong sell-through with ending inventory levels 30% less than prior year.

Speaker 4: After a robust start to 2022, our designer business softened in the back half, and we are reviewing our inventory positions to adjust where needed to improve productivity. At the Nordstrom banner, we're making progress on delivering selection, relevance, and inspiration to our customers by partnering with brands in alternative ways. We grew our sales through unowned inventory models by 10% over the last year.

Speaker 4: and they now make up 12% of GMV at the Nordstrom banner.

We continue to scale our Nordstrom Media Network, which grew over 50% versus last year.

In the fourth quarter, we expanded our advertising offering to brands and categories adjacent to Nordstrom, launched off-site partnerships with TikTok and Pinterest, and scaled on-site advertising with display ads on Nordstrom.com.

Our brand partners value the opportunity to connect with our highly engaged and loyal customers with a strong return on ad spend, particularly as advertisers look to diversify their media mix.

Now on to our initiatives. As Eric mentioned, we're focused on improving rack performance and one of the initiatives to drive sales and faster inventory turn is prioritizing a hundred strategic brands that are well known and loved across the US but also have room to grow in the off-price space. Strategic brands have better productivity than other brands in terms of average selling price and monthly sell-through.

for half of rack sales in 2022, they make up 60% of our on order for the first half of 23.

We're still on track to have the RAC assortment in a good place by mid-23. With more open to buy and access to great brands, especially in the current environment, we are well positioned to deliver a more constant stream of newness and improve inventory flow. A second initiative at RAC is to expand our reach with new stores.

as part of our close review strategy.

We are encouraged by the results of our three newest stores, which have exceeded our expectations and perform better than the fleet average in terms of sales productivity.

This proofpoint gives us further confidence in the product mix we're working towards and the opportunity for improvement in our overall rack business through greater focus on strategic brands, NUNIS and inventory flow. The third initiative with RAC is driving greater customer engagement and profitability at NordstromRAC.com.

By increasing the penetration of strategic brands online and leveraging our digital marketing capabilities, we will drive traffic and sales both at NordstromRack.com and in our stores.

We also continue to drive omni-channel engagement across banners.

For example, one in five Nordstrom.com buy online pickup in store orders are actually picked up at our rack stores after we launched this service just three years ago.

The second area of focus across both banners is increasing our inventory productivity. This started with entering 2023 in a healthier inventory position. Looking forward, we have conservative buy plans in place consistent with our outlook for continued macroeconomic pressure on consumer spending. We are also maintaining increased reserves against our buy plans.

which enables us to be opportunistic in season. And we are planning for faster inventory turns with an increase of at least 10% over 2022 to drive newness and flow while also increasing the return on our inventory investment.

We are also enhancing our capabilities to manage inventory with greater precision at the unit level through investments in RFID and the shift to cost accounting for internal merchandising.

These capabilities will help us deliver a fresh and relevant assortment at the store level for our customers. It will also improve our ability to buy, allocate, and track merchandise across our network, provide us greater visibility and profitability at the unit level, increase efficiency, and reduce shrinkage. Our third focus area, continuing to enhance our supply chain capabilities, is the supply chain.

ordering practices as well as partnering with suppliers on shipment standards and we'll be rolling this out further this year.

We improve productivity and throughput in our distribution and fulfillment centers by more than 20% through better unit flow, focusing on team member retention and leveraging data for scheduling and training. Lastly, we increase delivery speed from click to delivery overall. For instance, our share of orders delivered within four days or less is up 40% from last year.

throughout 2023. In closing, we are entering 2023 position for increased agility and are focused on our key priorities for improving the customer experience and our profitability. We especially want to thank our team for their ongoing commitment to helping our customers feel good and look their best.

With that, I'll turn it over to Michael to discuss our financial results. Thank you, Pete.

I'll begin with our fourth quarter results, and then walk through our outlook for fiscal 2023. For the fourth quarter, we reported earnings per share of 74 cents. Net sales and GMV each decreased 4%.

For the full year, total revenue, net sales, and GMV were all up 5%.

In Q4, NOS from Banner Sales decreased 2% and GMV decreased 3% versus last year.

Norts from rack sales decreased 8% with a little over half of this decrease attributable to the elimination of rack store fulfillment starting in the third quarter. Digital sales decreased 13% this quarter, including an estimated 500 basis point impact from eliminating rack store fulfillment and sunsetting trunk club earlier in 2022.

Gross profit as a percentage of net sales decreased 525 basis points, primarily due to higher markdowns as we prioritized right-sizing inventory to start fiscal 2023 in a healthier position. Ending inventory decreased 15% from a year ago, compared to a 4% decrease in fourth quarter sales.

We remain committed to a disciplined approach to inventory management in 2023, with a goal of improving turns by at least 10%.

Despite lower sales than last year, total SG&A as a percentage of net sales decreased 240 basis points in the fourth quarter, primarily due to supply chain expense efficiencies.

As with last quarter, we're pleased with the progress we made on our supply chain optimization initiatives, despite labor and transportation cost pressures.

We expect these initiatives will continue to deliver significant benefits in 2023. EBIT margin was 4.5% for the fourth quarter. For the year, EBIT margin was 3.1% and adjusted EBIT margin was 3.3%. We have a strong balance sheet and financial position.

ending the fourth quarter with one and a half billion dollars in available liquidity, including the full $800 million dollars available on a revolving line of credit.

Turning to our 2023 outlook, I'll start by discussing the macroeconomic backdrop and the related assumptions underlying our guidance. We expect that elevated inflation and rising interest rates will continue to weigh on consumer spending, especially in the first half of the year. We also anticipate continuing inflationary pressure on our expenses.

especially labor and transportation costs. However, we also expect global supply chain disruptions to continue to dissipate, benefiting inbound freight costs and inventory flow.

Taking these factors into consideration, for Fiscal 2023, we expect revenue to decline 4-6% vs. 2022.

This outlook includes two significant items worth calling out.

The first is an approximately 2.5 percentage point negative impact from the wind down of our Canadian operations, which delivered sales of approximately $400 million in 2022.

The second is an approximately 1.3 percentage point positive impact from the 53rd week in fiscal 2023, which we expect will add approximately $200 million in sales to the fourth quarter. Next, I'll highlight three factors that shape our outlook between the first and the second half of 2023.

Year over year sales comparisons will be more difficult in the first half against our stronger first half in 2022, with more favorable comparisons expected in the second half.

In addition, one week of the anniversary sale will shift from the second quarter into the third quarter this year. This will negatively impact second quarter sales and positively impact third quarter sales by approximately 200 basis points.

We expect improvements in our business to build into the second half, especially in the rack as our merchandise assortment continues to improve, and we open new stores. We will also lap the impact of discontinuing rack store fulfillment of online orders, beginning in the third quarter. As a result of these factors,

We expect revenue to decrease by a low double-digit percentage in the first half, and to increase by a low single-digit percentage in the second half versus 2022. We expect the wind down of our Canadian operations to result in one-time pre-tax charges of $300 million to $350 million in the first quarter of 2023, primarily related to the right off of our investment in Nords from Canada.

These charges will reduce our first quarter and full year earnings per share by approximately $1.40 to $1.60. Excluding these charges, we expect an adjusted EBIT margin of approximately 3.7 to 4.2% for the full year versus 3.3% in 2022.

Our forecast assumes that adjusted EBIT margin expansion will be driven primarily by gross margin improvements from our focus on inventory productivity, especially in the second half of the year when compared to the elevated markdowns we took in 2022. The wind down of Canadian operations will also improve EBIT.

will help partially mitigate S-GNA expense delivery resulting from lower sales and inflationary cost pressures.

Given the previously mentioned sales and gross margin trends, we expect EBIT margin increases in the second half of the year, offsetting decreases from lower sales in the first half of the year.

Our plan assumes that first quarter EBIT will be roughly break even. Our effective tax rate is expected to be approximately 32% for the fiscal year, which includes an estimated 500 basis point impact from the one-time Canada charges.

Our tax rate excluding this impact is expected to be approximately 27%.

We expect earnings per share of $0.20 to $0.80. Excluding charges related to the wind down of Canadian operations, we expect adjusted earnings per share of $1.80 to $2.20.

Our earnings per share projections exclude the impact of share repurchases if any.

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 of 3 to 4 percent of net sales, primarily for investments in supply chain and technology capabilities. Our second priority is reducing our leverage. We remain committed to an investment-grade credit rating through a combination of earnings improvement and debt reduction.

declared a quarterly cash dividend of 19 cents per share.

In addition, during Fiscal 2022, we repurchased approximately $62 million of our stock at an average price of $22 per share.

We have $438 million remaining on our current share repurchase authorization.

We will continue to take a measured approach to share rate purchases, aligning with our cash flow and market conditions. As you've heard today, we are taking significant steps to execute with agility given the continued challenging macroeconomic backdrop. We are prioritizing initiatives that will drive greater profitability through improved performance at RAC, a disciplined approach to increase inventory productivity.

and continued progress on our supply chain optimization efforts. We are confident in our ability to navigate through economic uncertainty and remain excited about the future of our business and our ability to deliver significant shareholder value over time.

With that, Sarah, we're ready for questions. Thank you, Michael. Before we get started with Q&A, we ask that participants please limit themselves to one question and one follow-up.

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 comes from Brooke Roach with Goldman Sachs. Please proceed with your question.

Good afternoon and thank you so much for taking our question. I'd love to spend a little bit more time digging in on the timeline to positive comparable sales growth at the RAC business.

How are you currently forecasting rack sales cadence throughout the year? What are you seeing from your initial? inventory rebalancing efforts and can you provide a little bit more context on the profit impact of Right sizing the business to focus on your most important brands. Thank you You know yeah, thanks. This is Michael. I'll go ahead and take a shot first at the way. We've contemplated

we were lapping a much stronger first and half of last year and the first quarter in particular, we were up 19% year over year in the first quarter last year. So we've just got a tougher comparison as we start the year out. We also have, as we've talked about, as we're building our assortment of strategic brands in the rack.

We expect to get to a place where we're targeting somewhere around the middle of the year But we expect sequential improvement as we go through the next couple of quarters And then we're also opening new rack stores Those will begin here in the spring So we'll see some benefits in the first half of the year But it will be most pronounced as we get into the second half

And then finally, you've got the impact of eliminating RACs for fulfillment, which we did in the third quarter of last year. And so that results in a step up as well when we get into third quarter this year, and we aren't going against that headwind any further. That's sort of how RAC factors into the shape of that overall revenue guidance. Pete, do you want to talk a little bit about the inventory positioning at RAC and what works the availability? Sure. Yeah.

We've done a lot of work over the last couple of years to figure out our rack strategy. As you know, maybe two years ago now, we went with a bargaining strategy that had us lowering AUR a little bit to try to see if we could gather more customers that way. We did, but not enough, really think the offset the lower AUR. And in a lot of ways, what we learned and maybe validated something we knew all the way along is the secret sauce for us in the off-ride space is the quality of the brands that we're able to offer. And that's why the whole kind of great brands, great prices thing is really where we're focused. We know.

to get the markdowns there, to clean ourselves out, to get ourselves in a really good spot for 23 with a balance of seasonality, age, and categories.

And now we have opened it by, we're chasing into it, there's good product to be bought out there, and it starts with these top strategic brands. Thank you very much, I'll pass it on.

Next is Matthew Boss with JP Morgan. Great, thanks. So, Eric, could you elaborate on more recent trends that you're seeing maybe across income cohorts? In particular, I think you cited the softening more at the lower income side. And maybe could you touch on trends that you're seeing on the designer ends? And then Michael?

Just in terms of the phasing of the year, could you just maybe help bridge or walk through your confidence in the phasing of revenues front half down low double digits to the up low single digits in the back half of the year?

Hey Matthew. Yeah, when we look at our customer code, it's pretty clear that the customer across the board is challenges.

and there's some softness, and I think particularly in discretionary areas, we have seen that softness more pronounced in our lower income and our rack business, but it's safe to say that we've seen a pullback across our customers.

For Designer, I think Pete can go into that a little deeper. Yeah, Designer business for us, I mean, to put this in context, I think this may be the first quarterly call I've been on the last 10 years of what I did in Say Designer was one of our best performing categories last month, or last quarter.

So I think it's important we keep this in context. One quarter is not a trend make here. And to put it in a different context, last year we did more to find ourselves than we've ever done in the history of our company. We had double digit increase. So what happened to us though is that we had a very large double digit increase trend going with our sales that dropped.

and we'll be able to work through that. But I think the good news is our customers, over a long period of time, have showed a strong interest in the designer business. And it's something that's really important to our overall success, and we have good partnerships there. And again, continues to be an important part of our business and what our customers expect.

So Matt, you'd asked about the revenue cadence between the first and the second half. Let me talk about a few factors there that led us to set the outlook out that way. So first of all, those more difficult comparisons in the first half, not that 2019 is necessarily the perfect baseline, but if you just look at the way last year progress...

earlier in 2022, both RACS or fulfillment and also discontinuing our trunk club business. So that is to gather worth about 200 basis points of headwinds to the first half of the year and it essentially, you know, it disappears in the second half, we'll be fully laughing those things. And then the last thing is, well actually two more things. One of them is a-

basis points between half one and half two. So you put all those things together and and it gets to you know low double digit decrease in the first half of the year at low single digit increase in the back half.

Very helpful. Best of luck. Next is Noah Zatkin with KeyBank Capital Markets.

Hi, thanks for taking my question. Just any color on what you've been seeing in the promotional environment exiting the year, particularly as it relates to the plan cadence of gross margin moving through the year would be helpful. Obviously, compares become easier in the back half, but with inventory in a healthier position exiting the year, just any color on puts and takes we should be thinking about.

would be helpful. Thank you. Yeah, this is Pete. The biggest factor on our promotion has to do with our own inventory levels. So you saw an increased markdown level in the fourth quarter for us, and that was largely of our own doing. There was regular promotional activity having a competition that we had respond.

responsive to that, so we'll see how that plays out. But for now we can tell you with a lot of confidence that we're going to return to more normal markdown cadence because our inventory is in a much better position.

I know it's Michael, I just add to that that our outlook for gross margin assumes a more normalized level of markdown. So not any kind of historic best or anything like that, but just a normal cadence, a normal level, we do have some remaining pockets that we expect will be clearing in the first half of the year. That's contemplated in there as well. I know that out. I know not knowing so well. A man. I know not major grygation of what he's doing, but I think I. Know that went down. You know, my time. I sleeping with him come up and all that that was not important enough. We were going. What them both the same gyro guy back that doesn't seem like they are, but you know, that they already will be back on track. No, that I'm not. You know, they're. Well, we've were dealing with the proper arts of course everything

But then just through greater inventory discipline in terms, we would expect as you go against that elevated level of markdowns in the fourth quarter that we should see some meaningful improvement. Next is Blake Anderson with Jeffries. Thanks for taking our questions. So I wanted to ask on the previous medium term guide you provided a couple years ago, just thinking about the margin target. So I think you would say you could do a 4.5% margin operating margin if you're at least 14.5 billion in revenue.

which is what your guide implies this year. You're slightly below that on the margin guide, so how do we think about you bridging back to at least 4.5% and then when it to revisit how you get back to that second target of 6% plus?

Yeah, Blake, it's Michael. I'll take a first shot at that. We believe that those targets are remain achievable in a normalized environment with sort of sustainable

low single-digit top-line growth, we believe we can achieve better margins than we did on comparable revenue beforehand. We're not quite in a normalized environment at this point. We talked about some of the macro headwinds we're seeing right now on consumer spending and also the inflationary pressures. But we took a meaningful amount of our...

overhead costs out back in 2020 as you might recall. We continue to drive meaningful efficiencies in our supply chain, which is now the largest element of our S-GNA. And we've been driving down our buying and occupancy as a percentage of our sales as well, which, as you know, is a component of gross profit for us. So really the last element in that equation for us is, you know, once we're in sort of a normalized macro environment where we can generate and sustain low single digit top line growth, we believe we're positioned to achieve those long-term even margin targets. Okay. And then...

they were open to by going forward and we're in a position to start receiving them.

The newness to brands and the talent that's gonna be a good recipe for us in Iraq

Thanks so much. Next is Ed Rumma with Piper Sandler. Hey, good afternoon, guys. First, a housekeeping question. The 20 new rack stores, I guess, how much does that contribute to sales growth in 23? I guess you're stepping back a little bit. I know that the store comps.

maybe was a little easier because of Omicron, but even X, some of these special items, digital seems to be underperforming. How should we think about your digital business in 23? Will it outperform the store's business or more online? And kind of what initiatives do you have underway to kind of restore help there? Thank you. I'll start with the Rack new store contribution.

It is approximately 100 basis points to the year and that's going to be back half waited. And then as far as digital, I can talk a little bit about the trends and then let Eric speak to just more generally the outlook for our digital business. So, yeah, as you mentioned, we're comping Omicron in the fourth quarter of last year.

All on the first half of last year, you'll probably recall there was a strong pent-up demand for getting out again. Stores were especially showing a strong growth, a little bit of retreat and a digital penetration. And then to your point, we're lapping some of those decisions that we made last year that have suppressed our digital growth but are helping us be more profitable. So...

We remain a 40% digital business. We continue to see it as a meaningful part of our overall business. And I think once we're past some of those timing impacts, we should see growth normalized. Eric, anyone who had on that? Yeah, I think a digital, you know, one piece of context. You know, we made some decisions last year.

to focus on crossbow growth, which hurts some of our top line digitally, in particular, stopping store-foot-film on a rack.com order. So it's about 500 basis points on our digital performance.

on possible growth, which hurts some of our top line digitally, in particular stopping store-foot film on a rack.com order. So it's about 500 basis points on our digital performance.

But we do see Nordstrom.com in particular as a growth vehicle for us. Our focus there isn't so much about pure digital growth. It is about engagement with customers as we continue to see the customer want omnichannel capabilities.

things like only buy online pickup and store but for us it's been very successful then we opened up our rack stores to the pickup point from Northshim.com orders so not only having cross-channel capabilities but leveraging the two brands that we have there there are a piece that call out the big

general area for us to work on is around discovery. Our strength is around newness and Inspiring our customers to to try something new and introduce new brands to them. We've got a lot of success over the years. It's not necessarily exclusive product, but it's brands that aren't often aren't widely distributed and Digital is real important

Part of that, of the discovery experience is more and more customers start their journeys online, even if they end up being in stores. So, discovery is something that we have a lot of initiatives around this year. Thank you. Next is Chuck Grom with Gordon Haskett.

Hi, this is Eric Cohen on for Chuck. You fill up the consumer being under pressure, particularly more of the rack customer. So I guess, trying to understand the acceleration in the rack openings this year. So why doing it now comes with under pressure and maybe not wait until the business is a little more on steady footing? All right, great question. Thank you.

First and foremost, our Iraq stores are a great return on investment. Full stop. We have a real strong track record of the return on these stores. It is a great use of capital. It's low capital investments, low risk investment on a proven model. And we have a real strong track record of the return on these stores.

Most recent proof points we'd share would be our three recent store openings in RAC. All three of them are beating plan. All three of them are outperforming our fleet average and sales productivity and even margin. And part of that is step back a little bit. Off-price in particular has the real requirement around convenience.

And the discovery process and off price for a lot of customers lends itself to stores. So having more stores provides a lot more convenience. And Sierstein's clearly that our fleet's underpendent rated. You look at our store account compared to others out there. We see a lot of room for growth there. The other piece I just would call out is what RAC stores do to our ecosystem. Thing that we can do here with the system.

Rackstores remain the largest source of new customer acquisition for. It's more than 40% of our new customer acquisition occurred in rack stores. So there's just a lot of goodness all around for us, open rack stores. You know, Eric, one other thing I would just add to underscore Eric's comment about, you know, rack stores being a great investment. There are a little capital investment, which he said just to highlight that though, archimulative investment this year in rack new store openings is going to be less than 15% of our total.

Our credit card portfolio is similar to what we've seen sort of more broadly reported out there with large record issuers. In general, we see consumers pulling back a little bit on discretionary categories. We see the credit metrics declining a little bit from where they were last year, but just for context as a reminder, they were at historically good level last year. We're coming out of COVID with stimulus money and X.

and fee income, that'll be offset by some higher loss rates. Overall, we think credit revenue will be a similar percent.

to our total revenue. Our last question comes from Oliver Chen with TD Cowan. Hi Eric Pete and Michael.

Regarding inventory, how should we think about inventory growth relative to sales growth in the next few quarters? Also, as you mentioned, there's a big opportunity to increase inventory terms, which categories do you see the most opportunity? And then you also mentioned the cost method of accounting for inventory and switching from the retail to the cost method.

That sounds like it could be very customer-centric and helpful. Would love more information on timing and how that may or may not impact agility and decision-making in terms of understanding the gross margin return on inventory profiles. Thank you.

Thanks Oliver for the question. I'll start and then I'm going to let Pete chime in as well. First of all, in terms of the inventory versus sales growth, yeah, with the 10% or better improvement in turn, you should expect inventory levels to be lower than sales. Whatever kind of change in sales we see, we should be better in that in terms of inventory.

I'll let Pete speak to the specific categories where we think have the most opportunity. But real quickly, before I turn it over to him, I just want to address the cost method. We've made that switch for internal merchandising. We absolutely agree. It gives us the opportunity to be much more item focused and precise in the way we're managing our inventory, which is good for customers, as you said.

Do you just want to clarify, though, that there is no change to our external reporting we remain on the retail method for our financial accounting and external reporting? So you won't see any impact to our report to Gross Margin. Pete, you want to add to that? Yeah, with turn, I mean, I think the blanking answer is we have room to prove across the board that if I'm to choose, or probably the biggest opportunity is, I'd say the rack, all up, across all categories, I'd say probably...

particularly in apparel. There's a version of that also in the Nordstrom banner, I would say, you know, apparel is probably the one, and I, everything I say is that is probably the most perishable stuff that we have in terms of its seasonality and what have you. So, there's opportunity across the board and what we've done is we've gone back to get context, context through historical bests and turns and how that impacts our markdown rates and our margins, and really not use last year as a guide, but really kind of starting.

at the all time best that we had in planning accordingly. Again, I think the answer is across the board. We want to thank you for joining today's call. A replay, along with a 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. We thank you for your participation.