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Nordstrom (NYSE: JWN)
Q3 2024 Earnings Call
Nov 26, 2024, 4:45 p.m. ET
Nordstrom’s Q3 2024 Results Showcase Growth and Strategic Priorities
Inside Today’s Call
- Prepared Remarks
- Questions and Answers
- Call Participants
Opening Remarks
Operator
Greetings, and welcome to the Nordstrom third quarter 2024 earnings conference call. All participants are currently in a listen-only mode. We will start with prepared remarks, followed by a question-and-answer session. [Operator instructions] This conference is being recorded.
Now, I’ll turn the call over to Jamie Duies, head of investor relations for Nordstrom. Thank you. You may begin.
James Duies — Head of Investor Relations
Good afternoon, and thank you for being with us today. We will reference slides that can be found in the Investor Relations section on Nordstrom.com. Be aware that our discussion may feature forward-looking statements; please refer to the slide with our safe harbor language. Present today are Erik Nordstrom, the CEO; Pete Nordstrom, the president; and Cathy Smith, the CFO. They will provide insights on the business and the company’s third-quarter performance.
When speaking about our results and outlook, we will discuss them on an adjusted basis for EBIT, EBIT margin, and earnings per share. Full reconciliations to the closest GAAP measures are available in our Q3 2024 earnings press release on our website. I also want to highlight our previously announced plans to explore ways to enhance shareholder value, including the formation of a special committee to evaluate any proposals that may arise from members of the Nordstrom family about going private. We won’t discuss this topic further in today’s call.
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I’ll now turn things over to Erik.
Erik B. Nordstrom — Chief Executive Officer
Thank you, Jamie. Good afternoon, everyone. I appreciate you joining us today. I’ll begin by reviewing our third-quarter performance, outline our strategic priorities, and then talk about the retail landscape. In the third quarter, our focus on improving customer experiences showed positive results, leading to an increase in net and comparable sales, along with a growing customer base.
This quarter, we posted net sales of over $3.3 billion and earnings per share of $0.33. Both Nordstrom and Nordstrom Rack saw a comparable sales growth of 4%. Notably, our online sales grew by over 6%, demonstrating strong customer interest in our product offerings.
We remain dedicated to our three strategic priorities: driving growth at the Nordstrom banner, optimizing operations, and building on our success at Nordstrom Rack. Enhancing Nordstrom banner growth is pivotal; we have made solid strides in this area during Q3 through a carefully curated selection of popular merchandise across all locations.
Our commitment to customer service is unwavering. We believe good service is defined by customer preferences. This leads to a focused effort by our teams to assist every customer—whether online or in-store. The enhancements made to our digital platform helped boost online sales in Q3, particularly with improved site functionality and a well-rounded assortment of price-sensitive items. Our Marketplace business is also expanding, now including over 300 sellers.
Operational optimization remains another key priority. Our supply chain team has successfully reduced operating costs and is now focused on speeding up order fulfillment. This efficiency has significantly improved the return process; we experienced over a 40% increase in the speed of customer returns this quarter, allowing for quicker inventory restocking.
As we move into the holiday season, we are well-prepared in terms of inventory flow and staffing. Additionally, our expansion at Nordstrom Rack continues to flourish. In Q3, we opened 12 new stores, totaling 23 openings for the year, aligned with our goal to launch 20 to 25 new Rack locations annually.
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Nordstrom Rack Thrives with Digital Sales Growth Amid Holiday Prep
Nordstrom Rack is solidifying its strength in off-price retail by attracting new customers and enhancing online shopping experiences. They continue to deliver strong returns on capital for their stakeholders while encouraging a flexible shopping approach for consumers.
Strong Q3 Growth Fuels Digital Expansion
Third quarter digital sales at Nordstrom Rack surged due to an expanded online product range and effective inventory management of popular items. At the end of the quarter, the company introduced store fulfillment for online orders at over 100 Rack locations, optimizing inventory processes. For the first time, shoppers can buy online and pick up items at selected Rack stores, generating positive early results for this service.
Holiday Season Strategies and Sales Trends
As the holiday season approaches, Nordstrom Rack is focused on creating a memorable shopping experience for customers across various budgets. Despite feeling well-prepared, there was a decline in sales trends towards the end of October, prompting an update to their full-year guidance. Gratitude was extended to team members for their efforts during this crucial shopping period.
Peter E. Nordstrom — President and Chief Brand Officer
Examining Merchandise Performance and Holiday Plans
During the call, Peter E. Nordstrom shared insights on merchandise performance and holiday strategies. Acknowledging the numerous shopping options, the focus is on curating the best selection of favorite and emerging brands. This year, the company refined its product assortment to emphasize strong-performing brands, particularly in women’s apparel, which experienced mid-teens growth with the help of brands like Vince and Veronica Beard.
Strong Growth in Key Categories
Activewear and shoes also demonstrated solid performance, benefiting from relevant brand offerings such as On Running and HOKA. Growth in men’s apparel was driven by both dress wear and contemporary styles. For Nordstrom Rack, the strategy to provide quality brands at competitive prices resulted in double-digit growth, particularly in women’s premium denim and dresses.
Inventory Management and Planning Ahead
The company’s inventory saw a year-over-year increase of 6%, slightly exceeding sales growth of 5%. This growth was influenced by seasonal categories that lagged in some regions. Overall, the Nordstrom banner maintains a healthy mixture of popular brands with lower clearance levels, while Rack inventories are positioned to support new store openings and a broader online selection.
Exciting Holiday Promotions and Events
Looking to the holidays, Nordstrom Rack is focusing on diverse product assortments that cater to various price points and customer interests. The latest holiday catalog emphasizes gifting, with a curated selection of sweaters and special promotions in beauty products. The addition of features like buy online, pick up in-store and the new app function ‘Rush the Rack’ enhance the shopping experience for Nordy Club members.
To celebrate the season, the company is hosting various events, from virtual fashion consultations to festive in-store experiences such as Letters to Santa and Beauty Bash. The flagship store in New York City will feature unique holiday programs, including daily Santa snow shows and a special brunch series.
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Nordstrom Reports Strong Third Quarter Performance Amid Mixed Market Signals
As the holiday season approaches, Nordstrom is focused on enhancing customer experiences while navigating uncertain economic conditions. Executive leaders recently shared the company’s robust financial results for the third quarter, alongside cautious outlooks for the upcoming months.
Cathy Smith — Chief Financial Officer
Thank you, Pete, and I appreciate everyone joining us today. I’ll start with our third-quarter performance, then outline our expectations moving forward, and finish with an overview of our capital allocation priorities. In the third quarter, we achieved strong results characterized by an increase in net sales and EBIT, alongside margin growth. Total company net sales rose 4.6%, benefiting from positive performance across both our banners.
A notable point this quarter was the timing shift of the Anniversary Sale, which negatively impacted net sales by about 100 basis points, with one day falling in the third quarter this year compared to eight days last year. Comparable sales saw an increase of 4%, with both banners performing well and a significant boost in digital sales. Our Gross Merchandise Value (GMV) increased by 5.3%. Specifically, the Nordstrom banner saw net sales increase by 1.3% and comparable sales increase by 4%.
The difference in performance stems from the adjusted calendar for comparing sales figures, which accounted for a roughly 200 basis point negative impact from the Anniversary Sale’s timing as recorded in net sales. On the other hand, Nordstrom Rack’s net sales surged by 10.6%, with comparable sales rising by 3.9%. Digital sales were also strong, growing by 6.4% in Q3, marking six consecutive quarters of improvement. However, digital sales were affected negatively by the Anniversary Sale shift, costing about 100 basis points.
During this quarter, digital sales accounted for 34% of total sales. Our gross profit margin improved, rising by 60 basis points to reach 35.6%, primarily due to strong sales at regular prices. However, ended inventory was up by 5.9% compared to last year. As Pete mentioned earlier, while the quality of our inventory is good, we acknowledge that stock levels are slightly higher than desired.
Selling, general, and administrative expenses (SG&A) as a percentage of net sales increased to 36.6% from 36.3% last year, primarily due to greater labor costs and charges linked to accelerated technology depreciation. Some leverage was gained from higher sales and cost improvements. Excluding the $14 million charge for accelerated technology depreciation, SG&A expenses fell to 36.2%. Our EBIT margin improved by 45 basis points, reaching 2.9%, with EBIT dollars up more than 25% year-over-year for Q3.
Our income tax expense for the quarter was $11 million, resulting in an effective tax rate of 18.9%. This is an increase from 14.2% in the same quarter last year when profits benefited from shutting down our Canadian operations. Earnings per share (EPS) for Q3 came in at $0.33, up from $0.25 last year, largely due to higher sales and expanded gross margins. We concluded the quarter with $1.2 billion in available liquidity, including nearly $400 million in cash.
Our financial position remains solid. Now, before I discuss our outlook, I want to comment further on our Q3 results and the current retail environment. Positive indications show that our efforts to enhance customer experiences are bearing fruit—with a growth in customer counts, increased shopping frequency, and expanded margins.
That said, our credit card revenue as a percentage of total revenue declined slightly compared to last year’s Q3. This decrease is due to higher losses within the portfolio, though it was somewhat offset by increased balances. This trend aligns with our previous expectations.
Looking Ahead
Despite our optimism around current results, we recognize that the external environment is still unpredictable. Sales softened toward the end of October, and we are facing a shorter holiday shopping season by five days this year. Additionally, last year’s 53rd week provided a substantial boost to fourth-quarter net sales, contributing 460 basis points.
Historical patterns suggest that we generally realize around 30% of our yearly net sales and approximately 40% of our annual EBIT in the fourth quarter. Taking all this into account, we are updating our outlook for revenue and comparable sales growth for the year. We now estimate full-year revenue growth to be flat to up by 1%, reflecting a headwind of around 135 basis points from the previous year’s 53rd week. We expect total comparable sales to grow between 1% and 2% in 2024 when compared to the adjusted 52-week period of 2023.
We still anticipate our EBIT margin for the full year to fall in the 3.6% to 4% range, while the tax rate should remain close to 27% for the full year.
From the perspective of earnings per share, our projections for the full year are in the range of $1.75 to $2.05, excluding the impacts from any share repurchases. It’s important to highlight that we expect SG&A expenses to include charges approximating 10 basis points due to accelerated technology depreciation in Q4.
We plan to maintain our capital allocation priorities, focusing on high-return projects that improve customer service, reduce our leverage, and return cash to shareholders. Our board recently declared a quarterly cash dividend of $0.19 per share. To wrap up, we are pleased that our strategies are resonating with customers and driving sales and margin growth. I would also like to extend thanks to our dedicated teams and wish everyone a joyful holiday season. Thank you for your interest in Nordstrom.
James Duies — Head of Investor Relations
Thank you, Cathy. Before we move into the Q&A session, we kindly ask that participants limit themselves to one question and one follow-up. Let’s proceed with the questions.
Questions & Answers:
Operator
Thank you. [Operator instructions] One moment while we collect questions. The first question comes from Brooke Roach at Goldman Sachs. Please go ahead with your question.
Brooke Roach — Analyst
Good afternoon. Thanks for taking my question. Erik, can you discuss the current health of the Nordstrom consumer across both banners? What do you attribute the slowdown in sales you noticed late October to? And how have holiday sales been progressing so far in November?
Erik B. Nordstrom — Chief Executive Officer
Hi, Brooke. Let’s begin with the third quarter. We saw strong consumer health across both banners and all income groups, with the highest spending increases found in the higher income segment. Regarding Q4’s slowdown, it’s still too early in the quarter for extensive insights. We just wanted to responsibly convey what we’ve seen, noting a decline in sales recently.
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Nordstrom Executives Discuss Strategies for Growth and Margin Expansion
Brooke Roach — Analyst
Thank you, Cathy. Looking ahead, what do you consider the key factors for multiyear EBIT margin growth? Are there any challenges we should keep in mind as we near 2024 and move into 2025?
Cathy Smith — Chief Financial Officer
Good afternoon, Brooke. The most significant factor for EBIT margin expansion is our top-line growth, which is performing well this year. We are over 4% in year-to-date growth, and this will continue to be our main driver for margin expansion.
As we’ve discussed before, we need to focus on our transition to an omnichannel retailer. We have work to do in supply chain and technology, and our goal is to see the positive impacts of our investments in these areas. Furthermore, shrinkage remains problematic, staying at historically high levels. Reducing this will be essential for long-term margin expansion. We’re already starting to see some progress due to our current investments.
Brooke Roach — Analyst
Thank you, Cathy. I’ll pass it on.
Operator
Next, we have Simeon Siegel from BMO Capital Markets. Please go ahead.
Simeon Siegel — Analyst
Good afternoon, everyone. I’m pleased to hear about your continued growth at Rack and the increase in customer count.
Could you explain the balance between acquiring new customers and increasing spend from existing ones at Rack? Additionally, how many new customers are coming from Rack versus those changing from the Nordstrom brand? Finally, Cathy, can you provide some insights on receivable growth? Thank you.
Erik B. Nordstrom — Chief Executive Officer
I’ll start by saying our customer metrics are positive. We’re seeing growth in customer counts and purchase trips across both brands. New stores at Rack remain our largest source of customer acquisition, which has been effective in introducing customers to both banners.
Cathy Smith — Chief Financial Officer
I’d add that we have witnessed positive trends in both customer trips and frequency of trips per customer. Now, Simeon, what exactly would you like to know about receivables?
Simeon Siegel — Analyst
It seems that receivables grew a bit faster than usual. Any context on that would be helpful.
Cathy Smith — Chief Financial Officer
Nothing particular stands out regarding that growth.
Simeon Siegel — Analyst
Okay, thanks a lot. Best of luck with the holiday season, and have a great Thanksgiving.
Operator
Next is Oliver Chen from TD Cowen. Please proceed.
Oliver Chen — Analyst
Hi, Erik, Pete, and Cathy. As we look toward the future, what is your guidance on promotions and merchandise margins? Also, how do you envision inventory growth relative to sales growth? Lastly, can you discuss how product execution at Rack compares with the full-line stores and areas for improvement?
Cathy Smith — Chief Financial Officer
Good afternoon, Oliver. That’s a lot to unpack. I’ll start by addressing inventory, then turn it over to Pete for more details on our product assortment.
We aim for sales growth to align with inventory growth. Currently, our inventory is slightly higher than what we would prefer. We’ve previously mentioned this, and we’re actively working to optimize it as we transition into the new year’s spring offerings. Our inventory growth is primarily to support the Rack banner, reflecting our ongoing new store openings while ensuring we have enough stock for the holiday season.
Peter E. Nordstrom — President and Chief Brand Officer
From our perspective, performance in categories is quite similar between the Rack and Nordstrom banners. While there are nuances in our merchandise strategies, one of our key focuses has been investing more in popular brands. This effort has allowed us to streamline our offerings and improve funding for essential products. We’ve seen success in this approach across both banners, and you should notice enhanced visual merchandising in our stores.
Additionally, our own product label has also been successful, registering double-digit sales increases. We’ve effectively introduced attractive pricing points, particularly appealing to younger customers.
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Building Online Assortments for Customer Satisfaction
The strategies for developing product assortments online differ greatly from those employed in brick-and-mortar stores. Company representatives acknowledge the significance of having a diverse choice count for online customers, and improvements made over the past year bolster their confidence. As these strategies evolve, customers can expect to see continued advancements in their online shopping experience.
Insights from Analysts
Oliver Chen — Analyst
Thank you. Happy holidays to everyone!
Operator
Next, we have Dana Telsey from the Telsey Advisory Group. Please go ahead.
Dana Telsey — Analyst
Good afternoon, everyone. Based on the positive branded results you’ve achieved, how do you see new products influencing various categories? With the activation in the New York store and BOPUS at Rack, can you discuss how this might impact your top line? Also, what are your thoughts on margin structure for the fourth quarter and 2025, particularly regarding freight and pricing trends compared to last year? Thank you.
Peter E. Nordstrom — President and Chief Brand Officer
Hello, Dana. In terms of categories, our main focus has been on the brands. Specifically, women’s apparel has seen a healthy performance this year, a notable change from previous years, during which we may have lost market share.
We have intentionally constructed our assortments based on price and category. However, the transition to colder weather this winter has posed challenges, with a late start impacting our cold-weather product categories. While we have seen sales improve as temperatures dropped, managing our inventory to align with customer demand remains crucial.
Cathy Smith — Chief Financial Officer
Regarding your inquiry about margins, while we don’t plan to provide specific guidance for 2025, we are cautiously optimistic about the rest of this year. Our teams continue to negotiate effectively with freight suppliers to secure advantageous rates.
On the pricing front, we aim to gradually reduce average selling prices (ASPs), which we believe will benefit our customers. However, as we expand the Rack division, we expect a shift in sales mix, as Rack typically sells at a lower average price compared to the Nordstrom brand.
Maintaining a balanced portfolio remains essential, ensuring we cater to our customers’ needs effectively.
Erik B. Nordstrom — Chief Executive Officer
To address the BOPUS aspect, we’ve launched this service in 100 stores, emphasizing the importance of inventory accuracy. Our ongoing investment in RFID technology enables us to provide accurate inventory information for online shoppers. This improvement enhances customer experience and positively affects sales and margins. For off-price shopping, it’s particularly valuable, allowing customers to conveniently purchase clearance items online.
Dana Telsey — Analyst
Thank you.
Operator
Next, we welcome Alex Straton with Morgan Stanley. Please go ahead.
Alex Straton — Analyst
Thank you for taking my questions. I’d like to understand how your outlook for the fourth quarter has shifted compared to previous discussions. It seems more cautious now, particularly regarding sales. Could you elaborate on this aspect? Additionally, you mentioned higher inventory levels. Is this concentration in specific categories or banners? Thank you.
Cathy Smith — Chief Financial Officer
Good afternoon, Alex. Starting with our Q4 outlook, we were pleased with our performance in Q3 and the strength showcased across both brands. However, we are adopting a more cautious perspective due to a recent slowdown in late October. It’s prudent to consider that Q4 generates nearly 40% of our profits and about 30% of our overall sales; therefore, a careful approach is necessary.
As for inventory levels, they are somewhat elevated to support the Rack business, and we’ve also seen an increase in cold-weather categories. The recent unseasonably warm weather caused a temporary lag in sales for items like boots and outerwear. Fortunately, with the weather change, we anticipate a rebound in those categories. Pete, would you like to add anything?
Peter E. Nordstrom — President and Chief Brand Officer
That’s accurate. Our inventory aging is in good shape, and it’s not a concern there. The issue lies with maintaining the right quantity to meet demand, particularly in categories that lagged during warmer weeks. We aim to recover and boost sales for cold-weather items as the season progresses.
Alex Straton — Analyst
Thank you, and best of luck!
Operator
Next, we have Tracy Kogan with Citigroup. Please proceed.
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Nordstrom’s CFO Discusses Gross Margin, Traffic, and Future Growth During Analyst Call
Tracy Kogan — Analyst
Thank you. I have a question regarding your gross margin improvements. You mentioned these were driven by stronger full-price selling. Is this trend consistent across both divisions, or is one performing better than the other?
Additionally, was the gross margin for this quarter above your expectations? How do you anticipate the promotional environment for gross margin will evolve in the fourth quarter? Thanks.
Cathy Smith — Chief Financial Officer
For Q3, the 50 basis point increase we reported was mainly due to the gains in regular price selling. Regarding the banners, Nordstrom did show a bit more strength year-over-year, but nothing significant stands out. As for Q4, we maintain our prior guidance, expecting continued year-over-year improvement in gross margin and gross profit.
Tracy Kogan — Analyst
Can you provide your insights on the current promotional landscape as we approach the holiday season?
Cathy Smith — Chief Financial Officer
Q4 is indeed a promotional period for retailers. While we may wish it were not the case, it certainly is. So far, it has aligned with our expectations.
Tracy Kogan — Analyst
Thank you for the clarity.
Operator
Next, we have Blake Anderson from Jefferies. Please go ahead.
Blake Anderson — Analyst
Hello. Thanks for your time. I wanted to ask about customer traffic at your different banners. Also, regarding the new Rack stores, are you noticing any new types of customers that were not shopping at your previous Rack locations? How are these new customers interacting with different categories compared to existing Rack customers?
Cathy Smith — Chief Financial Officer
I’ll start with the traffic update, and I’ll let Erik and Pete chime in afterward. Our traffic increased across the banners, although conversion rates remained stable. As Erik mentioned earlier, we’re pleased to see continued growth in transactions.
Erik B. Nordstrom — Chief Executive Officer
To add to that, our Nordstrom stores draw customers from a larger geographic area; it’s not uncommon for customers to drive over an hour, especially to flagship locations. In contrast, for our off-price Rack stores, convenience is essential, typically attracting customers within 15 minutes. This ‘treasure hunt’ aspect is crucial in the off-price sector. Although new customers seem similar to existing Rack customers, our brand variety is what truly sets us apart. While price remains important, we lead with brand recognition, which resonates well with customers at new locations.
Blake Anderson — Analyst
Thank you for the explanation.
Operator
Next, we’re joined by Chuck Grom from Gordon Haskett. Please proceed.
Chuck Grom — Analyst
Thank you for the strong results. I have both a short-term and a long-term question. First, could you provide more detail on the recent slowdown in the past few weeks? This differs from what we’ve heard from many other retailers. Has this slowdown been noticeable across all divisions, including both Rack and full-line stores? Are there any geographic areas or specific categories contributing to this trend? Regarding the Rack stores, is a model of adding 20 to 25 stores per year realistic for future growth? Considering your current position compared to other off-price retailers, what do you foresee as the growth potential of the Rack? Thank you.
Erik B. Nordstrom — Chief Executive Officer
Thanks, Chuck. The slowdown in Q4 has only been noted for a couple of weeks, making it difficult to analyze thoroughly. It seems to be affecting all areas of our business. In Q3, we reported strong sales across the board, but beginning the last week of October, we noticed a trend change. This period is quite noisy for various reasons: the calendar doesn’t align with last year, we’re facing weather factors, and there are distractions from the election cycle. These elements combined make it hard to draw firm conclusions about the slowdown.
We’re optimistic about the upcoming holiday season, feeling good about our inventory and gift offerings, even though the momentum has shifted slightly since Q3.
Cathy Smith — Chief Financial Officer
Regarding your question about Rack stores, while we haven’t provided specific guidance for next year, projecting 20 to 25 new stores annually is reasonable for planning. We are indeed under-penetrated in the market, and we see a lot of potential for additional Rack locations where there is customer demand.
Chuck Grom — Analyst
Thanks for your insights.
Operator
Our final question comes from Lorraine Hutchinson with Bank of America. Please go ahead.
Unknown speaker — Bank of America Merrill Lynch — Analyst
Hi, this is Melanie speaking for Lorraine. Looking ahead, what comparable sales figure do you anticipate will enable you to leverage the SG&A costs? Thank you.
Cathy Smith — Chief Financial Officer
That’s a nuanced question, Melanie. Growth from Rack stores will naturally support top-line revenue. For the Nordstrom banner, if we consider a typical inflation environment of about 2% to 3%, we’ll need comparable sales growth of around 0% to 1%. To achieve notable leverage, closer to 1% will be necessary.
Unknown speaker — Bank of America Merrill Lynch — Analyst
Thank you.
James Duies — Head of Investor Relations
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Nordstrom Earnings Call Recap: Highlights and Key Participants
We appreciate your participation in today’s call. A replay, including our slide presentation and prepared remarks, will be available on our website for one year. Thank you for your continued interest in Nordstrom.
Operator
[Operator signoff]
Duration: 0 minutes
Participants on the Call:
James Duies — Head of Investor Relations
Erik B. Nordstrom — Chief Executive Officer
Peter E. Nordstrom — President and Chief Brand Officer
Cathy Smith — Chief Financial Officer
Brooke Roach — Analyst
Erik Nordstrom — Chief Executive Officer
Simeon Siegel — Analyst
Oliver Chen — Analyst
Pete Nordstrom — President and Chief Brand Officer
Dana Telsey — Analyst
Alex Straton — Analyst
Tracy Kogan — Analyst
Blake Anderson — Analyst
Chuck Grom — Analyst
Unknown speaker — Bank of America Merrill Lynch — Analyst
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