Nordstrom : Evercore’s Virtual Consumer & Retail Summit Transcript

THOMSON REUTERS STREETEVENTS

EDITED TRANSCRIPT

JWN - Nordstrom Inc at Evercore ISI Virtual Consumer & Retail Summit

EVENT DATE/TIME: JUNE 16, 2020 / 2:15PM GMT

THOMSON REUTERS STREETEVENTS |www.streetevents.com|Contact Us

CORPORATE PARTICIPANTS

Anne L. BrammanNordstrom, Inc. - CFO

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

CONFERENCE CALL PARTICIPANTS

Omar Regis SaadEvercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team

PRESENTATION

Omar Regis Saad- Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team

Good morning, everyone. This is Omar Saad from Evercore ISI covering the global softlines, fashion and luxury sector. Thanks for joining our annual consumer and retail summit. This year, unfortunately, we're not in person doing the normal store tours. But we really appreciate everyone's willingness and patience participating virtually, both the hundreds of clients who signed up for the event as well as the management teams, especially Nordstrom today, getting up at the early hour on the West Coast. Obviously, you can see there Anne Bramman, the Chief Financial Officer -- Nordstrom Chief Financial Officer, up early in the office; and then we've got Erik Nordstrom, the CEO, on the screen as well. He's coming live to us from a hotel room. He's out on the road doing store tours and kicking the rubber on the tires.

Thank you very much for joining, you guys. It's going to be mostly a Q&A with me, but I wanted to give you the opportunity to make some opening remarks before I jump into my questions. Thanks.

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

Thanks, Omar. Thanks, everybody, for joining us today.

I want to start off, a little context. Certainly, it's a real challenging time for retail. And it has been for a while, but certainly, there's been a lot of change the last couple of months. But it seems just tone-deaf not to acknowledge the painful time it is for our country right now and what's going on around us, the deaths: George Floyd, Ahmaud Arbery, Breonna Taylor, and most recently, Rayshard Brooks. Truly, I'm like -- anytime I've been through, and I'm sure everyone here, it's -- clearly, change is needed and I see that -- I think it is appropriate for this gathering in that it does affect business as well.

If you've followed us, I hope you know we've been around a long time. Our reputation is very important to us, our reputation with our customers, being a great place to shop and our reputation with our employees being a great place to work. This subject, what's going on in the country, is of immense importance to our customers and to our employees. And it's important that we play our part in being part of solutions, and we think that's a responsibility we take very seriously. We've -- we have a good track record, but we also believe we need to do more.

It really goes to, I think, how we've always tried to be positioned as a retailer and therefore, as an employer, which is an inclusive place. We sell nice things. We certainly want to carry the best fashion the world has to offer. But we sell it in a very inclusive way where it's not intimidating, where people can be themselves. And that's what -- that means where employees can be themselves as well. I think part of our reputation that we're fortunate to have is for having good people, especially in our stores, people who care about their customers. And I get a lot of customer comments, every day I talk to customers, and it's always been the case that the most common thread through really good customer comments has been that our salespeople are authentic and are themselves. So I say all that just because being an inclusive place, there's never been higher stakes with it, and it's never been more important where people can come in, not be judged and can be who they are, both, again, in our selling and in being an employer.

Sorry, talking a little to our model. Our model is unique. We have a Full-Price business, our Nordstrom brand. We have an Off-Price business, our Rack brand -- Nordstrom Rack brand. We also have a big store business, Nordstrom stores and Rack stores, and a big online business -- about 1/3 of our business last year, Nordstrom.com, our Nordstromrack.com and HauteLook.

The important point -- and look, our model is -- these aren't just sizable businesses on their own, which they are. Really, the importance is the synergy amongst those businesses. They help each other. Our Off-Price business was born from clearing out our Full-Price business to keep newness coming in. That's vital for us. It's been a big growth area as of late.

It's a big growth area for acquiring customers. We acquire more customers for our Rack channel, our Rack stores and any other channel we have. About 1/3 of those customers become Full-Price customers within the first year. So there's lots of synergy there.

In particular, the last couple of months through the pandemic, the synergies between digital and physical have become more important. And we certainly believe the changes that have come on these last couple of months, which have been severe in our industry, are -- but are very much an acceleration of what's been in place for some time now, certainly the growth of e-commerce, but the changing nature of what physical retail is, that connection between digital and physical not just having a big e-commerce channel. In particular, a good example is fulfillment of customers wanting and embracing the control of having fulfillment of their orders as they want it: buy online pick-up in store, curbside services, in particular, these last couple of months. There's a lot of flexibility built in this model. We can pivot, which, in these times of uncertainty, has become even more important. I'd say a good example the last couple of months is our ability to fill orders from our stores. Normally, for Full-Price, it's about 20% of our orders are filled from our stores. With stores being closed and inventory being somewhat trapped in there, we moved over 50% of our orders for most of the last 2 months being filled from Nordstrom stores. We're able to fill some orders from our Rack stores for Nordstromrack.com. This flexibility, the synergy has helped us get through this time. It helps us be a more efficient business, but most importantly, it helps us serve customers on their terms, how they want to be served.

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

Anne L. Bramman- Nordstrom, Inc. - CFO

Thanks, Erik. So I just want to reiterate Erik's comments. We -- as a company, our values and culture is really about being inclusive where people feel comfortable not only shopping but being who they are as an employee and bring their authentic self to be with us. On top of that, we're experiencing a pandemic across the world. And it's really important to us, and we take our responsibility very seriously, about keeping our employees and our customers safe during these turbulent times.

So pivoting a little bit to where we are from our -- from our results perspective, I just want to give a little bit of overview. We had our earnings call a couple of weeks ago. And I think it's just helpful to provide some context. So exiting out of 2019, we were in a strong financial position. We had accelerated our sales trends in the second half of the year. We continued to demonstrate very strong inventory and expense discipline in the business. And it's really actually set us up pretty well to react very quickly to what we saw happening in the last several months.

The momentum that we had in the business in the second half of 2019 continued into February. We actually were, on a top line perspective, exceeding some of our plans as far as what was based on our guidance expectations for that month. And then in March, we had the impact of COVID-19, and it began to unfold -- and unfolded quickly. I would say we had a little bit of an advantage sitting here in Seattle, being part of the epicenter that are seeing early signs of it. And we reacted very quickly and had a lot of scenario planning, stress testing of what -- how this could impact us and what we need to do to accelerate.

As part of that, we took immediate steps to strengthen our financial flexibility. At that point, it was really pivoting towards liquidity, cash and managing our biggest investment, which was inventory. And in our business, it's pretty perishable. When you're in a fashion inventory business, that -- I would like to say that inventory doesn't get better over time. So we really took a very data and analytics approach to that. So we did some fundraising. We really managed our cash burn. We've reduced our expenses. And more importantly, to Erik's point, we really leveraged our inventory throughout the whole ecosystem.

By the end of the quarter, we actually exited with our inventory down 25%. We did this by reducing our receipts. Our units were down by 15% versus last year. And we generated a lot of customer demand through marketing and promotions and then utilized our fulfillment capabilities across our entire ecosystem. And this actually put us a pretty favorable position to bring in newness for June. We know our customers like newness, and so by exiting out of some of the more fashionable, perishable items, it's actually brought us newness for our customers.

We significantly decreased our cash burn, and we expect to be breakeven, our cash burn, monthly cash burn, I should say, by the end of Q2, which is pretty significant. We're very confident. We stress test. We do scenario planning. We've got downside scenarios, and we've done all of this for second half and in 2021. And we feel like we've got enough cash and liquidity to not only manage through these uncertain times, but through a lot of uncertain times for the long term as well. And so we feel like we're in a really good position to really leverage our capabilities and to really serve our customers as well.

So Omar, I'll turn it back over to you for Q&A.

QUESTIONS AND ANSWERS

Omar Regis Saad- Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team

Yes. Thanks, guys. That was great. I appreciate the introduction or introductory comments.

Let me start with where are you in the progress in reopenings? Where do you stand? Are you comfortable with the recovery trends you're seeing so far and your operational capabilities? Anything that -- to point out there, and then we'll kind of dive into more of a digital and e-commerce conversation next.

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

Sure. I'll start that. We are about 75% open, 75% of our stores. We opened 110 stores last Thursday, 3 more over the weekend. And so it's been fairly recent. We'll be about 90% open by the end of this week.

So what's going on there? It's -- we're a little ahead of our plans so far, more so in our Rack stores than our full-line stores. It's very early. We just opened up California last week, which is our biggest state, 4 a.m. this morning.

So what's going on there? Operationally, we feel good about and have gotten a lot of great feedback from our safety measures in place from customers and our folks. And I think I would point that operationally, because we have had store fulfill all along here, we have had skeleton crews in our stores doing fulfillment activity. So the scheduling, the labor part of it, we actually have a lot of flexibility there. We have people in the stores who, again, are filling orders. So kind of depending on the traffic, we can flex that pretty easily and quickly to respond to what can be very localized, not just traffic, but more so just the local regulations on capacity. So far, so good.

Omar Regis Saad- Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team

Right. Right. Got it. So let's kind of shift to e-commerce a little bit. You guys are -- and we've written about it a lot best-in-class, omnichannel, e-commerce, digital capabilities. You guys have been investing big for a long time. You've gone through different iterations and evolutions. So it's a little bit surprising to us and some of our clients when the e-commerce growth in the first quarter was -- seemed a little bit slower than some of the peers, but it's hard for me to know if that's mall related or category related. We've seen Home category be really strong early days in the recovery period. Any sort of kind of illumination on helping us understand what's going on in your e-commerce business in the first quarter versus the marketplace would be helpful. And then maybe we'll dive and dig deeper into omnichannel and BOPUS and some of those other questions next.

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

Sure. Yes, I think a couple of things, a trend. Category is certainly part of it. Apparel has not been a strong category as something like Home except for the last couple of months. But for this, when the stay-at-home orders hit, our focus went to cash and our inventory levels, and that was really our top priorities. And as we looked at levers we can pull, we looked at them through those lenses. And we really feel great about how much our inventory levels came down, dropping by about 25%, and touched on our cash burn and you all know what our liquidity position is. We feel really good about those things.

The business right now, there is and has been in the last couple of months, there's business to be had. It tends to be very promotional. That pull on the markdown lever is effective in driving some top line. We look to balance that, again, mainly these last couple of months, through the cash and inventory lens. And we sit here today, feel really good about our inventory position where we can start pivoting to bringing in freshness and driving the top line without relying so much on just discounting older merchandise.

Anne L. Bramman- Nordstrom, Inc. - CFO

Yes. Omar, a couple of things I'd like to add on that as well, if I may. We had -- if you look at the volume we did in Q1, and we talked a little bit about in the earnings call, we had a high velocity of units that went out the door. So I would say it was more than 20% velocity of units. And as Erik talked about, we were a little bit promotional as we went through that inventory and cash management component to it. So your price went down, but your units went up significantly.

I think the other thing is because we've been doing it for so long, we look at a number of different factors. One, we look at demand. And the difference between demand and sales is what you assume for returns. And we actually net our -- what we assume for returns against that number for a net sales number. We don't just do -- we actually put it against the digital sales. And we also look at our demand. And demand was up 9%, which is pretty consistent with what we saw in the second half of '19. But also, we also offset the digital -- the net sales piece of it for items that haven't shipped out as well. So there's a number of things that we also net against it. So I think you have to look at the underlying metrics, and I think what you see is they were actually pretty strong.

Omar Regis Saad- Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team

Okay. Okay. So there's some differences there, it sounds like, between Nordstrom and maybe others in the marketplace potentially.

So one follow-up on omnichannel BOPUS. You guys are big believers and proponents of those types of transactions and that kind of ecosystem that you've created across the different formats and giving that consumer that optionality. Because of COVID and the pandemic, we've seen a lot of customers and consumers get more familiar with those types of ways to shop. Maybe pure e-comm customers or pure store customers are learning about it. Is this really -- do you think it's possible we're at an inflection point for potentially going forward for the industry and your business, in particular, just given how well you're positioned for that around omnichannel consumption? Are you seeing anything that says there might be a sustainable acceleration in that type of business?

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

Yes. I'll start it. Yes, so again, we see this as a significant acceleration of trends that have been in place before COVID hit. And there's really no evidence that it's going to go backwards to what it was, not just pre-COVID, but years before that, to where these channels are really separate. A customer does not view their life through channels. They don't view themselves having an e-commerce outing and then a store outing. They just -- and especially for our category. Our category's a lot about discovery. It's not a commodity that's on a shopping list where someone just checks off and finds it through maybe a product description or something that's more quantitative. A lot of what is sold in our categories is -- customers have an interest in something new, but they don't know exactly what. And so that discovery piece does lend itself to a combination of digital and physical. So those trends, we feel really good about the investments we've made the last few years. You've touched some of them, Omar. That direction, you got correct.