Nordstrom : Morgan Stanley Transcript

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JWN.N - Nordstrom Inc at Morgan Stanley Global Consumer & Retail Conference (Virtual)

EVENT DATE/TIME: DECEMBER 02, 2021 / 6:40PM GMT

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DECEMBER 02, 2021 / 6:40PM, JWN.N - Nordstrom Inc at Morgan Stanley Global Consumer & Retail 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

Heather Hollander Nordstrom, Inc. - Head of Investor Relations

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

Kimberly Conroy Greenberger Morgan Stanley, Research Division - MD

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

Kimberly Conroy Greenberger - Morgan Stanley, Research Division - MD

Sorry. Good afternoon now. We've officially transitioned. My name is Kimberly Greenberger, and I'm the specialty softlines, department store and branded apparel analyst here at Morgan Stanley. We're very pleased to welcome Nordstrom to our conference again this year.

Nordstrom is a leading fashion retailer with over 350 locations in the U.S. and Canada, including about 100 full-line Nordstrom stores, 240 Nordstrom Rack locations and a robust e-commerce business serving consumers in both the U.S. and Canada. E-commerce totals about 40% of sales and will likely approach 50% in the coming years.

Today, we're joined by CEO, Erik Nordstrom; and Chief Financial Officer, Anne Bramman. Erik held a number of positions throughout the company, including buying and regional management before coming -- before becoming Co-President in 2015 and then CEO in 2020. Anne joined Nordstrom in 2017 from Avery Dennison, where she held -- where she had served as CFO since 2015. She had previously held CFO roles at Carnival Cruise Line and Henri Bendel. Welcome to you both.

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

Thank you.

Anne L. Bramman - Nordstrom, Inc. - CFO

Thank you.

Kimberly Conroy Greenberger - Morgan Stanley, Research Division - MD

We're going to spend the majority of today's session in a fireside chat question-and-answer style format, where we'll explore some of the investor questions that we've heard most recently. We've also reserved time to answer your questions. (Operator Instructions) Lastly, before we begin, I need to remind you that for important disclosures, please see the Morgan Stanley Research disclosure website at www.morganstanley.com/researchdisclosures. And I'll turn it over to Heather Hollander at Nordstrom.

Heather Hollander - Nordstrom, Inc. - Head of Investor Relations

Thanks, Kimberly. I'll just begin with a brief financial timing reminder before Erik begins with his opening remarks. Today, we will not be commenting on our fourth quarter results. Any discussion of our performance today will be based on our results through the end of the third quarter. And with that, I'll turn it over to Erik.

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DECEMBER 02, 2021 / 6:40PM, JWN.N - Nordstrom Inc at Morgan Stanley Global Consumer & Retail Conference (Virtual)

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

Thanks, Heather. I'd like to hit on a few points before we open up to Q&A. We just released our Q3 results last week. And the data in there were some real pockets of strength but also several areas of improvement for us. On the strengths, we made progress towards a number of our goals and highlight our strong digital growth, improving trends in our Nordstrom banner business. And we remain on track to deliver both our fiscal 2021 targets as well as the financial commitments that we laid out at our investor event last February.

However, we are not happy with what we delivered and we know we could do much better. Stepping back, it is always our goal to consistently drive profitable growth and increase our market share. Retail has always been competitive and the customer has many, many options. There's no doubt that the pandemic has led to much change with customers and disruption throughout our industry.

For us, we've been around for a long time and what's sustained us is always starting with the customer. It is our job to respond to changes with the customer and continue to find ways to serve them on their terms. And I'd say we just didn't do a good enough job of that last quarter. Now we have a clear view of what's holding us back on our financial results and what we need to do to address it. We've done a full teardown in these big areas that are holding us back, including taking an outside-in view.

These are big subjects for us. They are big opportunities because they all drive significant value. And we have a clear path in addressing them that we'll get into today. We know what we need to do and are committed to delivering. So let me hit on those big areas.

Well, I'm sure we'll get into more detail. But at a high level, there are 3 big areas that we're very focused on in driving improved results here.

First, Nordstrom Rack. Our headwinds that are from Rack business has largely been around inventory levels and flow, consistent flow of newness. We're working to increase our inventory levels, opportunistically leveraging pack and hold inventory. We're looking to and executing on rebalancing our assortment to include more of the coveted premium brands that customers really look to us for as well as strengthening our brand awareness. So that's the first one, Nordstrom Rack.

Secondly, improving our merchandise margin. We're taking decisive actions to optimize pricing and category management as well as increasing our private label penetration.

And third, to drive top line results as well as cost efficiency, we're optimizing our supply chain and inventory flow. So improvements in these areas, these are big long-term strategic subjects. There's a lot of operational rigor in these subjects. And there's benefits in the short term on there.

We see delivering improved results in those 3 areas in Q4 as well as continued improvement through the first half of next year. And as we execute on these priorities, strategically, we will continue to leverage the benefits of our interconnected model, which has served us well, and we continue to get strong proof points of the customer responding to those investments.

Our consistent focus on the customer over all these years has resulted in us having a strong reputation with a very attractive and large base of customers. And we have a unique model that drives this. We have 2 powerful brands in Nordstrom and Nordstrom Rack. And each of those banners has a robust scaled store business but also a digital business. And these are not only big businesses on their own. The real power and what we continue to see is the synergy amongst these businesses.

Simply put, we have more ways of engaging with customers and can provide differentiated services and products, all in a compelling economic model. For example, the average customer that shops across both banners, both in-store and online, spends over 12x more than a customer that uses a single channel. And customers who utilize our value-added services such as alterations and personal styling, things that we're really known for, spend 5 to 7x more than customers who don't use these services. So this level of connectivity and customer engagement is critically important to us as we work to expand our reach and grow our share.

All said, we recognize we need to deliver more, and we have a clear action plan to do so. We are confident in our path forward, excited about the future of our business and look forward to sharing our progress with you. So with that, Kimberly, I'll hand it back to you for Q&A.

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DECEMBER 02, 2021 / 6:40PM, JWN.N - Nordstrom Inc at Morgan Stanley Global Consumer & Retail Conference (Virtual)

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

Kimberly Conroy Greenberger - Morgan Stanley, Research Division - MD

Okay. Great. Thank you so much for that introduction, Erik. We really appreciate it. 2021 has been a dynamic year in retail. I wondered if you could just reflect on the 3 quarters we've seen year-to-date so far. Which areas of the business do you feel really good about, that are outperforming? And which areas do you think are either still recovering or where you see additional opportunities heading into 2022?

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

Well, let's start with our Nordstrom banner business. Our sales returned to 2019 levels last quarter, both with store traffic increasing and our digital growth growing versus 2019. Also, I call out our digital business overall, grew 20% versus 2019. And then as you mentioned, Kimberly, at the introduction, our digital business is large. It's 40% of our business. Last year, it was over 50% of our business. With stores coming back, it's at 40% right now. These are our big businesses that continue to grow.

More specifically, our market strategy, which we've been implementing for a couple of years now, it continues to gain traction. And in market strategy, in short, if you haven't heard us talk about it, it really is connecting our digital and physical assets at the market level and allows us to serve customers better in things like delivering much more selection with faster delivery and pickup times by linking all the inventory that we have in the market.

A big step we've taken in the last year is to link our Rack stores to this market strategy. And a real good example, last quarter, 1/3 of the next-day Nordstrom.com orders, so next-day pickup, were actually picked up at Rack stores. So we have 250 Rack stores. We have 100 Nordstrom stores. This adds a lot of convenience for customers. They choose this pretty readily. And it's also good for our model.

As a highlight in my introductory comments, when we can engage customers across the 2 banners and across channels, spend goes up significantly. Having these Nordstrom.com pick-up at our Rack stores is a real win-win.

Merchandise, category-wise, strengths continue to be in pandemic-related categories. Our home business is up 95% versus 2019. Our active business is up 57% versus '19. Designer continues to be a strong business. And I want to emphasize, when we talk about designer, it is a true designer business. This very scarce product, exclusive product that's not available everywhere. It's a big business for us. Over the last 5 years or so, it's been the fastest-growing category for us. We've seen this year double-digit sales increases in designer over 2019, led by strength in designer shoes, handbags and designer men's apparel.

And there are signs of travel returning. Sunglasses and swimwear both had double-digit increases over 2019. To your other question of what areas are still recovering, I'd start with more occasion-based categories. While we've seen a lot of improvement in things like dresses and men's suiting, dress shirts, dress shoes, makeup, they've all shown sequential improvement during the third quarter and they're closing the gaps in 2019 levels, but still some gaps there.

I would also say we've had -- call out that we've got some inventory shortages in some key categories for us. Specifically, women's apparel and shoes. We've seen strong demand come back there. Our pipelines to get product in has been challenging those areas, in particular. So we're focused very much on better aligning our inventory levels with customer demand as those areas continue to recover. And the last one I'd call out of what's lagging a bit, as I mentioned earlier, is our Nordstrom Rack performance, particularly our Rack store performance.

We've been particularly hurt there with flow of product especially in some key categories. We've simply been under inventory and have had some empty picture space in our stores there. So that flow of product, particularly that premium brand product where 90% of our top Nordstrom brands are also in our Nordstrom Rack stores, that flow of product has really been challenged this year. So we see some levers we can pull there, like using pack and hold inventory, that will really help us better manage a consistent flow of not just merchandise, but the right merchandise that our customers are looking for.

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DECEMBER 02, 2021 / 6:40PM, JWN.N - Nordstrom Inc at Morgan Stanley Global Consumer & Retail Conference (Virtual)

Kimberly Conroy Greenberger - Morgan Stanley, Research Division - MD

Okay. Great. Well, a conversation in retail these days is not complete without a discussion of inventory and supply chain. And just building on the comments you just made, Erik, how do you think about navigating the next several quarters of supply chain headwinds and flow and improving inventory flow? Is there an opportunity to change strategies? You talked about pack and hold, for example, at Rack. What are the things that you're doing inside the organization over the next 1, 2, 3, 4 quarters to work through what are, I think, delays in supply chain that really are quite universal?

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

Yes, I can start and Anne could probably chime in here with some specifics. Yes, obviously, the world is dealing with supply chain challenges, and we're no exception there. We've had -- everyone's got their unique issues. For us, our sources of goods really are big, important and just big brands. We are a branded business. We believe in brands. Brands in the fashion business plays a huge role in discovery of newness. We're not a price promotional retailer. We don't run a bunch of sales and 1-day sales, 2-day sales, things like that. It's -- our business is driven by a flow of new really coveted product and really known brands and up and coming brands. Brands that aren't -- customers don't see everywhere is super important. So we're susceptible to that flow being interrupted.

We do believe strongly there's things within our control on that. There's obviously things we don't control in the global supply chain. But there are things we can do. I mentioned pack and hold inventory for our off-price business. That's something we used to do when we were opening a lot of Rack stores. We backed off of that as we have not opened so many stores the last couple of years. And that's hurt us. That didn't give us the cushion to provide the flow of goods as it was interrupted externally.

So there's a lot of opportunity out there to get great product at discounts as product is slow coming in. There's some late product that does provide opportunities in the off-price segment. Some of that, we are looking to pack and hold and bring out to our customers when the timing is right.

Supply chain-wise, in the near term, we have diversified our carrier capacity. We've gained better end-to-end visibility. Our inventory moves through our supply chain so we can make real-time decisions on how to flow our product. We have clear opportunities to increase the velocity and throughput through our network, our distribution and fulfillment centers.

And importantly for us is the positioning of inventory. I mentioned market strategy. Market strategy is really taking advantage of the physical assets we have in stores and not just stores for customers to visit, but stores as points of inventory fulfillment, be it a buy online, pickup in store or be it just it's a pure online order, we fulfill it from our stores. It gives bigger selection, but it gets faster shipping as well. So there's still opportunities there for us, not just in linking our market-level product, but in really being AI-driven to allocate the product, place the product where it makes the most sense and we can get big selection to customers, fast delivery and really at an efficient level for us. So, Anne, do you have...

Anne L. Bramman - Nordstrom, Inc. - CFO

Yes. I would just say, in general, you talked a lot about the pack and hold piece too. We've already started that investment. We estimate this is going to be about $100 million in one-time investment that we'll sustain through for our Rack business. And we think it's a really -- right now, we're seeing it's a really good bet for us as we smooth some of the disruption, particularly when you think about in this off-price space, it's going to be really helpful for us.

I think the other thing you saw is, traditionally, we've been a really high-turn, I would say, more of a just-in-time model on flowing inventory. And with the disruption we're seeing, that model isn't as effective. And so you've seen us do some things like pull-forward inventory. And in particular, when you look at our sales to inventory spread for the quarter and we've signaled for the end of Q4 are similar, we're going to continue to pull forward a lot of the inventory that sits in transit. So it's flowing for a couple of weeks. It's a bit of a timing.

But it's really to make sure that we thought that the customer -- that what they covet and the demand for the product is getting in front of the customers as quickly as possible. And so we're building some of that cushion in as we're placing orders and working with our key brand partners

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