Nordstrom : Cowen’s New Retail Ecosystem Summit Transcript

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EDITED TRANSCRIPT

JWN - Nordstrom Inc at Cowen Virtual Department Store Summit

EVENT DATE/TIME: JUNE 09, 2020 / 5:15PM GMT

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CORPORATE PARTICIPANTS

Anne L. BrammanNordstrom, Inc. - CFO

Erik B. NordstromNordstrom, Inc. - CEO, Principal Executive Officer & Director

CONFERENCE CALL PARTICIPANTS

Oliver ChenCowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

PRESENTATION

Oliver Chen- Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

Hi. It's Oliver Chen. And we are thrilled to have Nordstrom here. In our view, Nordstrom is an iconic and modern retailer with what we view as the most advanced local market inventory strategy. This strategy drives speed, agility as well as an unmatched customer experience. Nordstrom is also one of the leading partners to brands as the company has stuck to its long-term goals of executing and redefining what it means to be customer-centric.

Erik Nordstrom is Nordstrom's CEO and a Director of the company. Mr. Nordstrom previously served as Co-President of Nordstrom and has been with the company for more than 35 years in both executive and operational roles.

Anne Bramman is Chief Financial Officer of Nordstrom. Ms. Bramman joined Nordstrom in 2017 from Avery Dennison Corporation where she served as a Senior Vice President and CFO since 2015. Additionally, she has previously held the CFO position at Carnival Cruise Lines and was the CFO of Henri Bendel, a subsidiary of L Brands.

Before I hand it over to Erik and Anne for their opening remarks, I'd like to mention that this fireside chat may contain forward-looking statements. Please refer to Nordstrom's safe harbor language in its Q1 earnings release filed on May 28, 2020.

I'll turn it over to Erik, and then Anne for opening remarks. Erik, thanks for joining us.

Erik B. Nordstrom- Nordstrom, Inc. - CEO, Principal Executive Officer & Director

Thanks, Oliver. Appreciate it. This is, certainly, a challenging time for retail. We're going to get into all of those issues. I want to start with you, more importantly. It is a painful time for our country, and we all know that the death of George Floyd, Ahmaud Arbery, Breonna Taylor and far too many others for far too long, really been painful examples for a country, that change is needed.

We know we have a role to play on that -- in that. We take that responsibility very seriously. Our reputation as a company is something that is personal for us. We're a 119-year-old company. Our reputation both how we serve customers and how we create an environment for our employees, something that's long been a focus for us.

We're often called a people company, and I think that's true. It's -- people have always been our top priority. And in particular, being in an inclusive place where customers and employees from all different backgrounds and experiences, what have you, can feel welcome and comfortable in our stores. That's always the key to who we are. It's a big part of our values. And it's a big part of our strategy, our model as we move forward.

So thank you. With that being said, I want to get into a little bit of our model, because it is unique. And I think sometimes, as I fully understood, there's a flexibility that's inherent in our model. And I say model, in particular, our Nordstrom brand, our Nordstrom Rack brand, having stores and having online, a really robust online business, gives us an inherent flexibility that has served us well over these last several years as there's been change with customers how they want to shop. It has certainly served us well these last couple of months during uncertainty. We think it positions us well for uncertainty for I think the near term, the rest of the year. And more importantly, it allows us to be -- we think, more customer-centric.

The customer has been changing. Clearly, there's been more changes these last couple of months. We see it as an acceleration of changes that were in place before. We feel real confident in our strategy. We feel confident in the investments we've made in these last couple of years, how it positions us to serve the customer on their terms, but we do see it as an acceleration. And so we are accelerating our strategy. I already mentioned our market strategy, which we can get into. But those are -- that's a good example of where we think we need to accelerate to serve the customer where they're going.

So with that, I'll turn it over to Anne.

Anne L. Bramman- Nordstrom, Inc. - CFO

Great. Thanks, Erik. I just want to reiterate Erik's comments. It is part of our culture and values as a company. And given the environment we have with the racial injustice as well as maneuvering through a pandemic in this country at the same time. We recognize our role in this. We recognized it's a painful time, and we also recognized our responsibility to keep our customers and employees in an environment that they feel they can bring their authentic self, but also to keep them safe as we continue to reopen stores.

I'd like to also talk a little bit about our recent earnings call and talk a little bit about the results that we shared with you. Just to provide some context, as we exited 2019, we were in a strong financial position. We had accelerated our sales trends in the second half of the year, and we continue to demonstrate our strong inventory discipline. That momentum continued into February where sales tracked ahead of our guidance that we've given for the expectations for the quarter.

And in March, as we started seeing the impact of COVID-19 began to unfold, in particular, being here in Seattle, we had some early visibility into that. We took immediate steps to start strengthening our financial flexibility and increase our liquidity, immediately start looking at our inventory, realigning that and then also start the hard work of reducing our overhead costs.

We'll talk a little -- a lot on our conversation today, but inventory is our biggest lever of flexibility. It's our biggest investment in any single year. It's our biggest lever. And so we immediately started having conversations with our partners, our vendors, and we reduced receipts by 30%. And we generated customer demand through increased marketing and promotions on our -- digitally. We also use the fulfillment capabilities that we've invested in for quite some time to do store fulfill, and that really helped us clear the inventory, especially the seasonal inventory that was more perishable during this time when stores were closed.

As a result, these actions actually decreased our inventory in Q1 by 25% from last year, and this really put us in a favorable position. And it's allowing us to bring in some freshness in June -- for June receipts. We know our customers like fresh, fresh product, they like newness. And so it really helped us have some dollars available to be able to do that.

We also significantly decreased our cash burn as we exited the quarter, and we expect to get to a breakeven monthly cash burn by the end of Q2. And we're confident based on these actions and additional actions we did to raise funds that we've got sufficient liquidity to execute our strategy in 2020 and well beyond that as well.

And so with that, I'll turn it over to you, Oliver, for Q&A.

QUESTIONS AND ANSWERS

Oliver Chen- Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

Thank you so much. Very helpful opening remarks. So Erik, regarding store reopening and trends, can you update us on how many stores have opened? And any updates on what you're seeing? We've been seeing some optimistic point -- data points from other retailers today.

Erik B. Nordstrom- Nordstrom, Inc. - CEO, Principal Executive Officer & Director

Sure. Right now we have about 40% of our store fleet open. That includes full-line stores and Rack stores. This is a big week for us. We open 118 stores this week. That will get us to about 75% of our stores. So it's -- and in general, that 40% was more focused on smaller markets than our biggest markets.

So I would be a little cautious in making too much out of small sampling, but I would tell you that our results are ahead of expectations. Our Rack results are a bit stronger than our full-line store results at this point. And we are seeing improvement sequentially over the weeks that we are seeing things improve.

Oliver Chen- Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

Yes. Erik, and have there been learnings in terms of the opening process and what you're thinking about what makes sense for other openings? It's quite a dynamic situation and also planning both labor inventory is not very easy in this environment.

Erik B. Nordstrom- Nordstrom, Inc. - CEO, Principal Executive Officer & Director

Yes. We've learned a lot. I mean, there's -- clearly, there's been many subjects these last couple of months that have been new. We've learned -- we felt really good about our safety plan going out. We've received very positive response from customers and our team as well, which is a big part. I mean giving people both -- our employees the confidence to come to work and the customers' confidence to come to shop is important. But we've learned some practical applications in that and then made some adjustments.

As far as inventory and staffing goes, I would say it's back to the flexibility. That's been more important than trying to plan it with any precision. I really can't. But we've had crews in our stores all along. Our stores are closed because of, as Anne mentioned, the big store fulfill that we do.

So we have productive use of people in our stores to begin with. So to open the doors isn't a big burden from a labor scheduling standpoint. There's -- activities can be done in either certain customers that are in the stores or fulfilling of orders. And with the inventory -- and being able to fulfill so much from the stores, we weren't too backed up. But we move around so much inventory to begin with.

What goes with fashion. Fashion is, with all the sizes and colors, it's not a narrow and deep inventory model. It is broad and shallow. So inevitably, what our customer may want is in another location. So being able to leverage the inventory we have and move it around very quickly for customers has always been important, but especially right now.

Oliver Chen- Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

Yes. Erik, on the digital business, which is a key point of difference for Nordstrom and what you've done there, e-com grew 5% last quarter. How did that perform versus your internal expectations? You mentioned that traffic was fueled by more than 50% growth in new shoppers. Can you discuss strategies to turn those new shoppers into permanent shoppers? And more broadly, how should investors think about the e-com growth opportunity in terms of penetration?

Erik B. Nordstrom- Nordstrom, Inc. - CEO, Principal Executive Officer & Director

Sure. So our digital results were in line with our plans, our expectations. When COVID hit, and our stores got shut down, that's 70% of our business. Our focus quickly shifted to cash and inventory. Those became our most important subjects, and we approached our digital business with that let. So we're very pleased with the results on both those fronts. Our -- both the liquidity position we have -- the burn rate of cash came down dramatically as the quarter went on, and as Anne mentioned, our inventory being down about 25%. Early report that the -- as -- would not be surprised. It is a promotional environment out there in retail right now, be it online or now as stores are opening up. And so the average price is less. It's -- bidders

-- from an inventory perspective, it is important to get through the units. But there was -- there's a lot more units that have gone for our system and which would correlate a bit with the number of customers and orders. But then every transaction brings down the sales number a bit.

Oliver Chen- Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

That's very helpful. And from a margin perspective, how is it best to think about 2Q and 3Q versus first quarter as we think about what Erik meant -- what Erik communicated around promotions, deleverage and also the shift in your anniversary sale from 2Q to 3Q?

Anne L. Bramman- Nordstrom, Inc. - CFO

Yes. Thanks, Oliver. So we -- as Erik talked about, our inventory is very perishable. There's a piece of it. So we know that the longer it sits there, the less value it has, so we took a lot of actions in the quarter in order to get the most we could for that inventory and also open up some dollars so that we could drive some freshness in Q2. We fully anticipated Q2 was going to be highly promotional in the marketplace, and so we wanted to have a little bit different assortment offering for our customers as well. I think from a -- if you step back and look at the sequential -- the guidance we gave, is that we continue to believe this is going to be a slow recovery. We've modeled that. We stress-tested that. We are certainly cautious as how we're approaching all of this from a business perspective in order to give us some flexibility as we see things progress. But we do expect to see continued improvement in margins. So we think Q1 was kind of the low point from a margin perspective. We will continue to see some improvement, but it's not going to be an immediate improvement, it's going to be a gradual improvement.

The -- and we're also expecting our earnings to gradually improve through the year as well as we look at a lot of stress testing and a lot of scenario planning in the business. We did shift the anniversary sale out. We -- one, because we thought it was going to be a highly promotional environment; and two, we wanted to make sure that customers -- I mean, as you know, our anniversary event is really known for bringing in new goods, new fresh product at a promotional price, and so we wanted to give that opportunity to really give our customers something to look at and shop and to stand out. So we believe that, that's worth about 10 percentage points shift from Q2 to Q3 on a sales perspective. But we are continuing to expect further expense savings that will help offset some of that shift as well but from an expense deleverage perspective.

Oliver Chen- Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

And that leads to another topic about inventories and merchandise margin management. You did exit with a clean position, which gives you lots of flexibility. How are you approaching the next few months as we do face this promotional environment? And you've been very -- a very good retailer about price matching in the past. And how are you balancing the top line versus merchandise margins?

Erik B. Nordstrom- Nordstrom, Inc. - CEO, Principal Executive Officer & Director

Okay. Anne can fill in. I think, well, yes, we are committed to price match. It's -- and we've always said that. I think to -- there's -- if you're going to be customer-centric, you don't want the customer to feel like they made a bad decision buying something for you and 5 months later, they see it less price someplace else. So that's part of our customer promise.

We -- as I mentioned, we're in position to start bringing new receipts. And we really look at our model as a whole. We look at our Rack business as this very efficient, effective channel to clear out older merchandise. And even with our inventory down 25%, we still have some clearance of spring goods to deal with. And certainly, the industry does.

So we look at our sell-through rates, what's the best channel to clear out our goods, and that's -- that was the premise of launching Rack to begin with, was to keep our Full-Price business clean and able to bring in newness.

But we know already that there are a lot of great buys that we had on the marketplace, especially in Off-Price. So we look at that to flex the balance between those 2 channels, and we will be buying some merchandise that we think we can sell-through real quickly and at good margins.