Nordstrom Inc. reported second-quarter earnings that topped expectations although sales came in at the lower end of the expected range.

Net earnings fell 13.0 percent to $141 million, or 90 cents a share from $162 million, to 95 cents a year ago. Wall Street, however, was looking for 75 cents on average.

Total company net sales decreased 5.1 percent in the second quarter to $3.78 billion, falling short of consensus estimates at $3.87 billion.

“We delivered strong bottom-line results, demonstrating our inventory and expense discipline. We exited the quarter in a favorable inventory position and made important strides in productivity,” said Erik Nordstrom, co-president, Nordstrom, Inc. “We’re focused on driving our top-line, and while this can take time, we are confident in our ability to manage through cycles. We remain encouraged by our key initiatives, including our local market strategy, and are making good progress on key areas of focus that we believe will collectively drive increased value creation for our shareholders.”

Nordstrom is focused on driving top-line growth, improving profitability and executing key strategies to enhance the customer experience:

  • The company’s earnings beat expectations, resulting from strong inventory discipline as well as significant expense efficiencies across the company. Inventory was down 6.5 percent over last year, positioning the company well to re-balance its merchandise assortment with customer demand.
  • While the company’s bottom-line exceeded expectations, sales were around the low end of its expected range. This reflected a challenging start to the quarter as well as softer performance for the Anniversary Sale and Off-Price business. However, Nordstrom saw positive outcomes from the execution of its loyalty and digital marketing programs. The company is taking advantage of its strong inventory position to increase depth in key items and improve in-stock levels, applying learnings from its Anniversary Sale. The Off-Price business is amplifying its marketing efforts and making strategic inventory investments to fuel growth in the second half of the year.
  • During the Anniversary Sale, the company experienced year-over-year improvements in customer metrics and anticipates improved sell-through of Anniversary product to favorably impact merchandise margin performance in the third quarter.
  • The Off-Price business managed inventory efficiently, enabling it to be opportunistic in the marketplace to drive a constant flow of newness in the second half. The strength of its inventory and expense execution mitigated most of its year-to-date sales shortfall.
  • The goal of Nordstrom’s local market strategy is to gain market share by increasing customer engagement through services and leveraging inventory in its most important markets. Scaling in the broader Los Angeles market, customers have significantly greater access to merchandise selection, contributing to Buy Online & Pick Up in Store sales nearly tripling in this market in July.
  • Nordstrom will expand its local market strategy to New York City, its largest market for online sales, with the opening of its flagship store on October 24 and two Nordstrom Local neighborhood hubs in September. The combination of Nordstrom’s physical and digital assets is expected to add a significant sales lift in this market.

Second Quarter 2019 Summary

  • Second quarter net earnings were $141 million compared with $162 million during the same period in fiscal 2018.
  • Earnings before interest and taxes (“EBIT”) were $216 million, or 5.7 percent of net sales, compared with $246 million, or 6.2 percent of net sales, during the same period in fiscal 2018. The decrease was driven primarily by lower sales volume.
    In Full-Price, net sales decreased 6.5 percent compared with the same period in fiscal 2018. Off-Price net sales decreased 1.9 percent.
  • Total company digital sales grew 4 percent and represented 30 percent of the business.
  • Gross profit, as a percentage of net sales, of 34.5 percent decreased 50 basis points compared with the same period in fiscal 2018. This was primarily due to deleverage on occupancy expenses. Ending inventory decreased 6.5 percent from last year, reflecting two consecutive quarters of maintaining a positive spread between inventory and sales. Despite a continued elevated promotional environment, merchandise margin rate relative to last year sequentially improved from the prior quarter.
  • Selling, general and administrative expenses, as a percentage of net sales, of 31.2 percent increased 26 basis points compared with the same period in fiscal 2018. This was primarily due to fixed expense deleverage on lower sales volume, partially offset by expense savings related to ongoing efficiency initiatives as well as adjustments to performance-related expenses. On a year-to-date basis, selling, general and administrative expenses decreased 1.4 percent over last year, reflecting Nordstrom’s ability to increase productivity and bend the expense curve. To date, the company has realized over $100 million in expense savings, tracking ahead of plans to achieve $150 to $200 million for the year.
  • The company’s enhanced loyalty program continues to grow. The Nordy Club has 12 million active customers, which represented an increase of 12 percent over last year and 64 percent of sales.
  • During the six months ended August 3, 2019, the company repurchased 4.1 million shares of its common stock for $186 million. A total capacity of $707 million remains available under its existing share repurchase authorization. The actual timing, price, manner and amounts of future share repurchases, if any, will be subject to market and economic conditions and applicable Securities and Exchange Commission (“SEC”) rules.

Fiscal Year 2019 Outlook

The company revised its annual outlook to reflect second quarter results and expectations for the second half of the year. While the company is evaluating the fourth tranche of tariffs on goods from China and has not incorporated the associated impact in its annual outlook, the estimated impact is expected to be relatively immaterial for the year.

Photo courtesy Nordstrom