Nordstrom Q4 Reflects Transition To Digital-First Business As Rising Cost Crimp Profits

Luxury retailer Nordstrom said it posted a 20 percent decrease in fourth-quarter sales and an 82 percent decline in earnings as higher than expected merchandise markdowns, increased freight costs and COVID-related expenses crimped profits.

The Seattle-based chain that operates 100 namesake department stores and 250 off-price Nordstrom Rack locations also said that its digital sales for the quarter ending Jan. 30 rose 24 percent and accounted for 54 percent of its total revenues, which enabled it to post sequential improvement over its third-quarter results.

“While we are pleased with our improving top line trends, we are not satisfied with our bottom line results,” CEO Erik Nordstrom told analysts and investors on the company’s earnings call after the close of trading Tuesday (March 2). “We made meaningful progress to better serve customers benefiting from multi-year investments that supported our transformation into a digital first business,” he added, noting the retailer saw momentum build throughout the quarter and continue into 2021.

The company said roughly 30 percent of its online orders were fulfilled by stores last quarter and that about 10 percent of online orders were picked up in stores, a trend it wants to increase.

“We know that when customers engage with us through order pickup, alterations or styling, their overall spend increases by up to five times,” Nordstrom said.

New Approach To An Old Problem

Erik Nordstrom, who is the great grandson of the company’s founder and took over the singular role of CEO last March following the death of his brother, said the management team was currently taking action to realign its inventory position and to manage other selling and administrative costs which rose to 40 percent of sales in 2020, up from 32 percent in 2019.

“Our team is dedicated to executing our strategy across three areas of highest priority,” Nordstrom said, the first of which is “winning in our most important markets.”

“We’re continuing to scale our market strategy by doubling our exposure from 10 to 20 markets by the end of March [which will enable us to] pick up 75 percent of our business,” he said, highlighting key cities such as San Diego, Houston, Minneapolis and Miami. Nordstrom has historically done the vast majority of its sales in a couple dozen locations.

Second, Nordstrom said, is a plan to “broaden the reach of Nordstrom Rack” and deliver a “$2 billion dollar incremental sales” increase over time. That would mark about a 60 percent increase in sales at the Rack division, up from the $3.3 billion it did in 2020, which amounted to one-third of Nordstrom’s total revenues.

And lastly, the company reiterated a plan it unveiled in February that would “increase the velocity of its digital business” and pointed to the recent migration of the Rack into the Nordstrom.com website.

The high-end retailer also said it planned to do more brand partnership such as the 40 in-store mini Tonal fitness equipment shops it announced Monday.

Headwinds And Guidance

CFO Anne Bramman told analysts she was pleased to deliver another quarter of sequential improvement in sales in what remains a very uncertain environment.

Bramman also said she was confident that the company’s actions would unlock the full potential of its digital-first platform, which has garnered a strong customer response.

“That said, the quarter was not without its challenges and there were unanticipated headwinds that limited our ability to flow our improving revenue momentum to the bottom line,” Bramman said.

“There were three key factors that contributed to greater pressure on margins in the quarter, most of which we expect to be temporary and reverse as we progress through 2021,” she said, in reference to merchandise margins that were lower than expected, selling and labor costs that were higher than expected and shipping costs that also came in higher than planned.

For the year to come, Nordstrom said as long as stores remain open it expects to total revenue, including retail sales and credit card revenues, to grow more than 25 percent, with digital representing approximately 50 percent of sales.

Shares of Nordstrom have rebounded sharply in the past four months, rising from $12 to $37 per share, leaving the stock about 8 percent higher than where it was 12 months ago.