Nordstrom : Goldman Sachs Global Retailing Conference Transcript

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JWN.N - Nordstrom Inc at Goldman Sachs Global Retailing Conference (Virtual)

EVENT DATE/TIME: SEPTEMBER 09, 2021 / 4:50PM GMT

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SEPTEMBER 09, 2021 / 4:50PM, JWN.N - Nordstrom Inc at Goldman Sachs Global Retailing Conference (Virtual)

C O R P O R A T E P A R T I C I P A N T S

Anne L. Bramman Nordstrom, Inc. - CFO

Erik B. Nordstrom Nordstrom, Inc. - CEO & Director

C O N F E R E N C E C A L L P A R T I C I P A N T S

Brooke Siler Roach Goldman Sachs Group, Inc., Research Division - Research Analyst

P R E S E N T A T I O N

Brooke Siler Roach - Goldman Sachs Group, Inc., Research Division - Research Analyst

Good afternoon, and thank you for joining us for this next session of the Goldman Sachs Global Retailing Conference. My name is Brooke Roach, and I cover the apparel, accessories and brand sector here at Goldman Sachs. We're coming back from lunch with Nordstrom. Nordstrom is a leading retailer with a strong digital presence and over 350 Nordstrom, Nordstrom Local and Nordstrom Rack stores. Here to speak with us today are Erik Nordstrom, CEO; and Anne Bramman, CFO. Welcome, Anne, and Erik, and thank you for joining us. Erik, would you like to kick it off with a few opening remarks?

Erik B. Nordstrom - Nordstrom, Inc. - CEO & Director

Sure. Thanks, Brooke. We're happy to be here today and appreciate you having us. I want to start with just a look ahead. We feel great about the strategy we laid out at our Investor Day last February. And consider today, very confident in delivering the results that we committed to. As a reminder, our strategy that we use Closer to You, it's really centered around 3 priorities: one, winning our most important markets; two, broadening the reach of Nordstrom Rack; and three, increasing the velocity of our digital business. While we are still in the early innings with much work to be done, we've seen strong proof points that our strategy is working.

First of all, market strategy. Customers have responded really well, especially as we connect our digital and physical assets and leverage our 2 brands of Nordstrom and Nordstrom Rack at the market level. For example, during our recent Anniversary Sale, nearly 40% of our Nordstrom next day online order pickups happened at Rack stores. We're particularly pleased with our digital business. The velocity of our digital business continues, and that's particularly encouraging in the last quarter. We had a 29% increase compared to prepandemic levels, and that occurred as stores were recovering. So lots going on there that we feel good about.

We've also made significant progress in transforming our merchandising approach. A good example, again, during Anniversary, the successful expansion of our customer choice was really a big driver of the gains we had during that event. So we like what we're seeing from the customer in terms of engagement, both in store and online. We are not satisfied with where we are, not at all. We see opportunities to accelerate our progress, and we're holding ourselves accountable to deliver. Our Rack performance has been challenged by inventory flow, particularly with branded product and women's apparel and shoes. We're working with urgency to get after that. Things we're doing, we're leveraging our strong brand partnerships. And what's unique about our brand partnerships in the off-price space is the partnership we have in the full price space. For the most part, these are the same vendors we have in our Nordstrom brand. And by working with these brands across full price and off-price, we have opportunity to improve inventory access and flow.

We're also broadening the reach of Nordstrom Rack by expanding our price range and are implementing plans to drive awareness and traffic. And while we have a financially healthy customer in many ways, we still haven't seen the full benefit of customers returning to work, of tourism, of social functions, especially in more urban locations where we have our best stores. As customer mobility increases, we've seen the largest sequential improvements in shoes, apparel and accessories. Those categories are still below 2019 levels. We see continued strength in pandemic categories. In Q2, for example, our Home category sales grew more than 70% versus 2019, but Home accounts for only low single digits percent of our business. We believe these product mix shifts are transitory, and we'll see growth accelerate in our core categories as customers return to the office, travel

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SEPTEMBER 09, 2021 / 4:50PM, JWN.N - Nordstrom Inc at Goldman Sachs Global Retailing Conference (Virtual)

and just get out there more often. And while we're certainly focused on the near term, we're also accelerating our strategic transformation to win market share over the long term.

We have a strong foundation and some really important unique competitive differentiators, and are working diligently to build on these advantages to win with customers by serving them on better terms. We have tremendous opportunities to capitalize on the disruption in the retail sector to capture market share and drive profitable growth. All said, we are on track to achieve the top and bottom line goals we set forth at our investor event and continue to build capabilities to profitably grow market share beyond that. We're very excited about the path forward.

Q U E S T I O N S A N D A N S W E R S

Brooke Siler Roach - Goldman Sachs Group, Inc., Research Division - Research Analyst

Erik, thank you so much for those opening comments. I'd love to kick off our Q&A session today with the discussion about the transformation that you've made throughout the past 18 months of the disruption. In your view, what are the most important strategic changes that Nordstrom has made to strengthen the business? Where have you gained the most agility? And how is Nordstrom positioned as you look ahead?

Erik B. Nordstrom - Nordstrom, Inc. - CEO & Director

Well, our company has been around a long time. And I think if there's one thing that our reputation is known for is taking care of the customer. We've always put the customer first. But over the last 2 years, we have seen a transformation in who the customer is, what the customer wants and where and how the customer shops. We've been investing against that for quite some time. And those capabilities that we've added to serve the customer better are paying off. The way the customer shops from discovery to fulfillment is increasingly digital and the pandemic certainly accelerated those changes in behavior. In response, we charted a new course, our company which is what our Closer to You strategy is all about. We see significant opportunity ahead as we lean into our digital-first approach to expand the aperture of who we serve and how we serve them.

Our digital penetration has more than doubled over the last 4 -- 5 years. Last year, it was over half of our business, and we have a healthy fleet of stores in desirable high-traffic locations. We've made meaningful progress in connecting both our digital and physical to deliver really differentiated customer service.

Core to our brand promise is delivering the best selection across the brands that matter most to our customers. We are the preferred brand for the

• preferred partner for the best brands in the world. And these brands not only resonate with our customers, but they play a central role in discovery. We're significantly expanding our product assortment with the intention of continuing to grow customer choice more than 5x over the next few years. We are uniquely positioned to deliver on this by building on the deep relationships we have with the best brands, while also extending the strength of our own brands.

As we survey the landscape, we think there's just tremendous opportunity to win on digital discovery in our categories. We believe we're uniquely positioned to do so given our assortment breadth and depth as well as the customer data that we have to help us translate it into a curated personalized shopping experience and make discovery relevant for each individual customer. We're building on the outstanding service for which our banners are known. In today's environment, the bar is continuously being raised, requiring us to deliver convenience and connection, primary in digital and physical assets and providing a customized services experience. Looking ahead, we are well positioned to capture market share and drive profitable growth as we are laser-focused on accelerating the implementation of our strategy.

Brooke Siler Roach - Goldman Sachs Group, Inc., Research Division - Research Analyst

Great. That's great to hear. As we think about some of the intro comments that you just made and about capturing that market share, I'd love to get your thoughts on the state of the overall consumer environment and the market. On your latest earnings call, you talked to some sequential improvement in trends across the business that are fueling some of your optimism for second half. Can you talk a little bit more about your outlook

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SEPTEMBER 09, 2021 / 4:50PM, JWN.N - Nordstrom Inc at Goldman Sachs Global Retailing Conference (Virtual)

for overall consumer demand for the rest of the year, particularly as we get a little further away from some of these stimulus payments and also as we see some of the Delta case counts rise across the U.S.?

Erik B. Nordstrom - Nordstrom, Inc. - CEO & Director

Yes. It certainly improved. We're pleased with the activity and engagement we're seeing from customers. Q2 was significant sequential improvement from Q1 and going into last year. And we saw growth across both digital and stores. And even as store traffic improved to see the continued momentum in our digital business is certainly encouraging. But while the consumer spend certainly has benefited from things like stimulus payments, demand for our biggest categories, still have lots of room for headroom. As customers get out there more, could be returning to work, could be travel or just simply interacting more in person. The biggest categories we have are rebounding, but are still a ways away from where they were prepandemic. And we just see lots of momentum for those categories to continue to rebound with the customer.

Brooke Siler Roach - Goldman Sachs Group, Inc., Research Division - Research Analyst

Got it. One of the questions that we get from investors quite often is how to think about weighing that rebound into 2022 and how to think about that consumer environment. I'd love your perspective on the medium-term consumer outlook, particularly the strength in luxury that we've seen this year. As we move beyond kind of the initial COVID-19 recovery and move into '22, how are you thinking about those puts and takes?

Erik B. Nordstrom - Nordstrom, Inc. - CEO & Director

Well, luxury has been a real source of strength. And it has been for us for a number of years. And just to level set, luxury is a big, important part of our business. And we see luxury, we mean true designer business. We talk about our breadth of being from Vans to Valentino. That is unique and differentiates us from a number of competitors. And we think really increasingly fits with how a modern customer shops. Customers don't just buy one brand head to toe. They mix high and low in particular, and want to build their closet that way. So luxury, we've put a lot of focus in for the last 5 to 10 years. And it's been our biggest category of growth over that time.

Designer business has been strong during the pandemic. It continues to be strong. And we think we're positioned to be the partner of choice there. And there's been a lot of disruption in that end of the marketplace. So that's an important part of our focus. But again, for us, to really capitalize on the customer, and I think this fits with where -- to your question of where the customer is at, both near and mid-term? Is to have that breadth of product that we have, the breadth of categories. We've added a lot of growth in pandemic-favored categories, things like Home and Beauty and Active. And those are becoming big businesses for us, particularly Active, which has been a pretty darn big business. So there's momentum there, but we are seeing and saw in Q2, the beginning of the rebounding of these other categories, more dressier categories. There's no getting around it. They're just big, big categories for us.

And as strong as a lot of the economic indicators have been in Q2, there's still a long ways to go for particularly urban areas to recover. I'm sitting above our Downtown Seattle store right now and to look out on the street. It's not nearly as busy as it was prepandemic. And very few businesses have come back to work. That's been delayed pretty much across the country. But we are seeing -- starting to see recovery in those categories and feel confident that, that will continue.

Brooke Siler Roach - Goldman Sachs Group, Inc., Research Division - Research Analyst

Great. One final question on categories before we move on. Home, Active and some of these new merchandising initiatives like your partnership with Tonal have been a new growth area for Nordstrom over the course of the past few years. Can you talk about your expectations for the growth in those categories? How will that assortment -- how the assortment evolve as you move forward? And how big of a growth driver is that for Nordstrom?

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SEPTEMBER 09, 2021 / 4:50PM, JWN.N - Nordstrom Inc at Goldman Sachs Global Retailing Conference (Virtual)

Erik B. Nordstrom - Nordstrom, Inc. - CEO & Director

Well, newness is always important. Our business is -- we're not a price promotional business. Our business is driven on newness. And it's not only about newness of styles, but it's also newness in categories. I think the -- you brought up Tonal. I think that's a good example of -- we have a big Active business. In particular, our own brand of Zella is a big top 10 powerful brand for us. We see a lot of growth there. But bringing in a partner like Tonal does a couple of things. It certainly brings more legitimacy, authority to an important growing category like Active, which we're committed to doing, but it also leverages our store environment and makes them better. The Tonal product is something that customers just love to engage with. It's a very participatory element in our stores. And that is part of the kind of the magic of stores. It isn't kind of always a sales per square foot. It is about engagement activity and being a place where customers see something new, and it's through things -- partnerships like Tonal.

We've done a lot of partnerships with -- in particular, brands that's really born online and digital brands. We've done a lot with our pop-in shops both for men and women. And these are centered in our biggest stores, which tend to be these more urban locations. But that is something that we've had a lot of good experience in these last couple of years of bringing engagement to the stores. And that is a different way of looking at our store business and some of these partnerships is we know the more we can engage with a customer across our 2 brands in Nordstrom and Nordstrom Rack, across digital and physical, it really doesn't matter much what that engagement is. It could be in alterations. It could be a pop-in shop. That increased engagement just leads to good things for us and more trips and more spend from the customers.

Brooke Siler Roach - Goldman Sachs Group, Inc., Research Division - Research Analyst

Fantastic. I'd love to pivot for a moment to inventory and pricing. And maybe first, we can start with the Rack business. As there's been a little bit of an inventory challenge at that business recently, can you talk to the path to driving positive sales growth versus 2019 in the Rack business? What those key proof points are? And how you're thinking about the supply chain issues versus the core momentum of Rack?

Erik B. Nordstrom - Nordstrom, Inc. - CEO & Director

Yes. I always start with -- we're not happy with the performance of our Rack business. Overall, there's a lot of strong proof points to our overall strategy. But the near-term results in Rack, we're not happy with because we can see they can be much better. And one of the big headwinds we've had last quarter was inventory flow, particularly in our big categories of shoes and women's apparel. And some of that comes from our source of products. The vast, vast majority, almost all of our top 200 brands that are in our Nordstrom banner are also participating in our Nordstrom Rack business. It's a very branded off-price strength that we have there. That's been more challenging to get that branded product, particularly in those categories. So what do we do about it? We've -- we do work as one company with these top brands. Our merchants go to market, meet with these brands, And they're not just talking about Nordstrom business or Nordstrom Rack business. They really talk about end-to-end.

And these -- all brands have full price and off-price business. And for most of these brands, we're their biggest partner in the full-price business, and we should be their biggest partner in the off-price business as well. So we can work with brands to get access to this product. And given the supply chain disruptions going on globally, it does demand that we have more strategic interaction and partnerships with these brands to get access and flow that product in there.

We've also have -- feel much better about the plans we have in the back half. Frankly, the shift in categories was faster than we had planned for and some of the shift of just customer behavior. So our mix is a little off in our Rack business the last quarter. And so we're working on that and see some pretty easy adjustments that give us confidence there.

And the other part I'd mention would be we are encouraged with the early results and expanding the aperture of our price offering, layering on some lower-priced product to complement the more branded product we have in our Rack business, but we're early in that. And we don't have that mix right by category, by store location. And so again, these are expected adjustments to make, but we're not happy at all about the pace. We're really holding our own feet to fire on moving quickly to get after these opportunities to accelerate.

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