Nordstrom - Q3 2023

Transcript

Speaker 0

Greetings, and welcome to the Nordstrom Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. We will begin with prepared remarks followed by a question and answer session. As a reminder, this conference is being recorded. At this time, I'd like to turn the call over to Heather Hollander, Head of Investor Relations for Nordstrom.

You may now begin.

Speaker 1

Good afternoon and thank you for joining us. Before we begin, I want to mention that we'll be referring to slides, which can be viewed in the Investor Relations section on nordstrom.com. Our discussion may include forward looking statements, so please refer to the slide with our Safe Harbor language. Participating in today's call are Eric Nordstrom, Chief Executive Officer Pete Nordstrom, President and Chief Brand Officer Ann Bramman, Chief Financial Officer and Michael Mayer, Chief Accounting Officer, who will provide a business update and discuss the company's Q3 performance. And now, I'll turn the call over to Eric.

Speaker 2

Thank you, Heather, and good afternoon, everyone. Thank you for joining us today. For the Q3, we delivered results in line with our expectations with Quarterly net sales of $3,400,000,000 a loss per share of $0.13 and adjusted earnings per share of $0.20 As we discussed while reporting our Q2 results, we saw customer demand begin to soften in late June, mostly in Nordstrom Rack. Across both banners, the softening trend was more significant in customer segments with the lowest income profiles, while we saw greater resilience in the higher As customer trends shifted, we took action to manage through the short term macroeconomic uncertainty and position our business for success. This included managing expenses to align with sales expectations, including through Excess inventory to exit the year with healthy inventory levels and mix.

These actions prepared us well for the Q3 As macroeconomic pressures impacted all customer segments with outsized impact in the lowest income groups. Additionally, sales decelerated in late October early November, particularly in geographies with unseasonably warm weather. In the last 2 weeks, however, sales trends have improved. Our teams have executed well in a challenging environment this quarter and continued to advance our closer to use strategy. Given ongoing inflationary pressures in supply chain and fulfillment, We are particularly pleased that we decreased our variable supply chain costs this quarter.

Our supply chain optimization work streams drove efficiency and lowered the Per unit cost of moving product through our system, while also delivering an improved customer experience and faster order fulfillment. We're also on track with our plans to clear through excess inventory and optimize our product mix. Net sales decreased 3% versus last year, which includes a negative impact of approximately 200 basis points from 1 week of the anniversary sales shifting into the 2nd quarter. Nordstrom banner sales and gross merchandise value or GMV each decreased 3% versus last year. The timing shift of the anniversary sale had negative impact on Nordstrom banner net sales of approximately 300 basis In the Q3, customers continued to refresh their wardrobes and shop for occasions such as social events, travel, work and holidays, which drove demand for our core categories and services.

Consistent with the 2nd quarter, Items with lower AURs underperformed higher AUR items. Customers continue to respond very positively to newness and fashion in our seasonal Turning now to our strategic initiatives. Our team remains focused on improving Rack performance, Increasing profitability and optimizing our supply chain and inventory flow. We're making progress in these initiatives and we expect them to benefit our top line and bottom line performance in the Q4 of this year, in 2023 and beyond. While we take actions to address a shifting consumer backdrop, We are also building capabilities to better serve customers and deliver increased profitability as we focus on improving Nordstrom Rack performance, winning in our most important markets and leveraging our digital capabilities.

Starting with Nordstrom Rack. Sales declined 2% versus last year as we Continue to see softening demand, especially within our lower income customer groups. We remain focused on delivering profitable growth while improving the customer experience. To that end, this quarter, we made the decision to reduce Rack store based order fulfillment and raise the minimum order amount to receive free ship to store delivery on rack.com. These actions reduced our cancellations, simplified Rack operations and improved profitability, but negatively impacted top line growth at the Rack by approximately 200 basis points.

We continue to focus on increasing our supply of premium brands at RAC, improving our assortment and growing brand awareness to fuel future growth. Premium brands are a differentiator for The Rack and we are dedicated to having great brands at great prices at each of our locations. The linkage to the Nordstrom banner gives Nordstrom Rack unique access to premium brands that are not broadly available in the off price space. For example, 90% of the top brands at Nordstrom are sold at Nordstrom Rack. This quarter, sales of our top 100 brands at The Rack increased 9%, which underscores the growth opportunity from increasing our supply of premium brands.

We are also continuing to shift away from the lower price point items that have not resonated with Rack customers. We expect to clear through this inventory by the end of the fiscal year, which opens more space and buying capacity for premium brands. With the work underway, we expect to optimize Rack product mix by mid-twenty 23. We believe that improving our assortment An increasing penetration of top brands will differentiate the Rack experience for customers and drive profitable sales growth. Next, our market capabilities help us engage with customers by delivering convenience, connection and greater access to product no matter how they choose to shop.

Customers clearly value our interconnected model with a strong store fleet, 2 unique banners and omni channel capabilities linked at the market level. Order pickup represented 12% of nordstrom.com demand this quarter, an increase of 200 basis points versus last year. We are also leveraging our digital capabilities to extend our unmatched one to 1 store experience to a digital world. Our goal is to personalize the digital experience with discovery supported by a broad product assortment, convenience powered by our market strategy and connection via our people and experiences. We are evolving digital discovery and driving higher engagement with enhanced content, A refreshed shopping experience that includes redesigned product pages and smarter product search capabilities.

We are also improving the digital purchase journey with better imagery and product descriptions to help customers make more informed purchase decisions and minimize returns. Total digital sales declined 16% this quarter, which includes a negative impact of approximately 300 basis points from the anniversary sales shift. Additionally, reducing store based fulfillment for rack.comorders and sunsetting trunk club Negatively impacted digital sales by approximately 700 basis points, with the change to rack.comstore fulfillment accounting for the majority of the impact. Our digital sales were also affected by channel shift as customers returned to pre pandemic shopping behavior and increasingly chose to shop in store this quarter. Digital sales represented 34% of total sales during the quarter.

Before I turn it over to Pete, we'd like to thank our employees, customers partners for helping kids start off the school year on the right foot. For the 12th year, we partnered with Nike and Shoes That Fit to donate more than 40,000 pairs of brand new shoes to kids in need for back to school. This program leverages Our heritage in shoes and engages our teams and customers to make a difference in their communities. We're very proud of the incredible support our team and customers put behind this important In closing, though there is continued macro uncertainty, we are pleased with the actions we've taken to prepare for this environment And the progress we've made in improving our agility. The capabilities we've built with our closer to you strategy, digital assets and supply chain optimization We are navigating short term headwinds, while also continuing to build capabilities to better serve our customers, drive profitable growth and increased shareholder value.

We are focused on remaining nimble to navigate this environment and look forward to realizing additional benefits in the Q4 and into 2023. I'll now turn the call over to Pete.

Speaker 3

Thanks, Eric. I'll begin by talking about our category Then I'll discuss the actions we're taking to ensure healthy inventory levels and mix going into next year. Finally, I'll update you on the progress we are making to Supply chain and inventory flow and increased gross margin. Starting with the category performance. Men's and Women's Apparel, Shoes and designer had the strongest growth in the quarter versus last year.

Customers continue to shop for occasions and return to the office and update their closets. We continue to see softness versus last year in categories previously accelerated by the pandemic, including home and active. Turning now to inventory. As you know, we have been taking aggressive action to align inventory with softening demand and category shifts. We have been focusing on improving our assortment by clearing through product that customers weren't responding to and showcasing the fashion, newness and categories they want.

While this clearance activity pressures margins in the near term, the impact is in line with our expectations and consistent with the outlook we shared with you last quarter. Importantly, we expect to have healthy and current inventory by the end of the year, setting us up for longer term growth and profitability. In addition to healthy inventory levels, we are also focused on having the right composition of inventory. We are maintaining a strong inflow of exciting brands to deliver the new We continue to partner with new limited distribution brands to grow their businesses and offer our customers increased selection. For example, our partnerships with On Running, SKIMS and Fear of God illustrate our strategy and effectiveness in amplifying exciting new brands.

These partnerships only began a few years ago and now they're among Nordstrom's top 5 fastest growing brands and ranked in our top brands overall. We also continue to focus on improving our supply chain and inventory flow. Last year, in response to our growing digital business and increasing inflationary cost pressure, We launched a series of work streams to drive efficiency and reduce supply chain costs, while also elevating the customer experience. Improved inventory flow is a key component of this work and an integral part of our closer to you strategy. By optimizing our supply chain, We are able to provide our customers with greater selection and faster delivery speeds.

We are reducing the number of product touch points through our network, which decreases our costs and gets the product in a sellable position faster, which improves our regular price sell through. As part of our supply chain optimization efforts, we are Also continuing to increase productivity in our distribution and fulfillment centers and improving the consistency of unit flow through our network. We are very pleased with the early results we're seeing from this work. While we evaluate many supply chain metrics, for our customer, we believe the most metric is click to deliver speed. This quarter, we improved click to deliver speed by 15%.

As we improve unit flow through our network, we increased fulfillment center flow through by 28% versus last year and reduced our variable Handling cost per unit by 3%. In fact, despite inflationary pressures this quarter, we decreased our variable supply chain costs as a percent of sales by To that end, we closed a smaller omnichannel fulfillment center in Los Angeles that is no longer needed and retired the 3rd party technology tested in that center, as we have scaled our West Coast omnichannel center to support the demand in that region. In addition to supply chain optimization, we continue to on expanding our merchandise margins over the long term. One of the most important levers in improving merchandise margin is faster inventory turns. We are committed to delivering a double digit percentage increase in inventory turns in 2023.

In addition to faster inventory turns, we are also working to improve merchandise margins by leveraging advanced analytics to identify customer needs, improve our assortment, increase promotional effectiveness and optimize markdowns. We saw the benefits of this work in the first half of the year and expect to deliver additional merchandise margin improvements once we are past the clearance markdown pressure this year. Turning now to holiday. Our customers are excited for the season and we are well positioned with a fresh relevant assortment to help them get ready for their celebration. We've Used our learnings from past holiday events to improve our offering with the goal of being the go to destination for gifting and preparing for the moments that matter to our customers.

In closing, we're taking actions to clear through excess inventory, improve our mix and assortment, increase agility and enter 2020 3 in a healthy inventory position. We're confident in our ability to build on our progress in driving supply chain efficiencies and the additional benefits we expect in the 4th Order and in 2023. Now I'll turn it back to Eric. As we announced last month, Anne Bramman will be stepping down from her role as CFO on December 2nd. We'd like

Speaker 2

to take a moment to recognize Anne for her dedication to our customers, our employees, our shareholders and our values. Ann made significant contributions to our business over the last 5 years, including helping to successfully guide the company through the pandemic, sponsoring multiple strategic initiatives to improve profitability and elevating the finance organization. So Anne, we thank you for your partnership and leadership. We wish you all the best in your next step.

Speaker 4

Thank you, Eric. It's been a privilege to work alongside you, our executive leadership team, our Board of Directors and all of the incredible people who make Nordstrom such a special place. It has been an honor to be part of this company. I'll now review our Q3 results and then turn it over to Michael Mayer, who will serve as our interim CFO beginning December 5 to address our outlook for the remainder of the year. For the Q3, we reported a loss per share of $0.13 After excluding charges related to a supply chain technology and related Asset impairment.

Adjusted earnings per share was $0.20 Overall, net sales decreased 3%, in line with our expectations. This includes a negative impact of approximately 200 basis points due to 1 week of the anniversary sales shifting into the 2nd quarter. GMV decreased 2%. Nordstrom banner sales and GMV each decreased 3% versus last year. Anniversary sale timing negatively impacted the Nordstrom banner by approximately 300 basis points.

Nordstrom Rack sales decreased 2% in the 3rd quarter. Digital sales decreased 16% this quarter. Digital sales include a 1,000 basis point impact from anniversary sale timing shift, reducing RackSor fulfill and Sunsetting Trunk Club. Gross profit as a percentage of net sales decreased 190 basis points, primarily due to higher markdown rates on clearance product. Consistent with our expectations from the end of the second quarter, we realized approximately 100,000,000 incremental markdowns during the Q3.

As Eric and Pete described, we have taken actions to right size our inventory And as such, ending inventory increased 1% this quarter versus a 3% decrease in sales. As a result of reduced supply chain backlogs, We had a higher percentage of our inventory on hand this year versus in transit last year. We continue to expect that we will end the year in a healthy inventory position and are committed to a disciplined approach to inventory management in 2023. Total SG and A as a percentage of net sales increased 200 basis points due to a supply chain technology and related asset impairment charge, partially offset by leverage driven by fulfillment expense efficiencies. Excluding the impact of the impairment, total SG and A as a percentage of net sales remained flat with the prior year.

Since last year, we've been making progress on our supply chain optimization initiatives to offset anticipated labor and fulfillment cost pressure, and we're pleased with the results we're seeing. We continue to expect that these initiatives will deliver more significant benefits in the 4th quarter and in 2023. EBIT margin was 0.1 percent of sales for the 3rd quarter. After excluding charges related to the impairment, Adjusted EBIT margin was 2.1%. We maintained a solid financial position ending the 3rd quarter with $993,000,000 in available liquidity, including $293,000,000 in cash.

Subsequent to quarter end, we paid off the $100,000,000 we had borrowed on our revolving line of credit and once again have the entire balance available to us. Finally, we are pleased to announce the extension of our credit card program agreement with TD Bank as the exclusive issuer of our proprietary Nordstrom branded credit card. TD has been a strong partner and we look forward to working with them to further enhance the card member experience. I'll now hand it over to Michael to talk through our outlook

Speaker 5

Thanks, Anne. And before I discuss our outlook, I just want to briefly add a word of appreciation on behalf of the finance team here at Nordstrom. We Now I'll describe the macroeconomic backdrop contemplated in our guidance for the balance of the year. As Eric indicated, macroeconomic pressures impacted demand across all customer segments in the Q3, with the most significant impact in the lowest income groups. However, customers continue to Fresh their wardrobes, shop for occasions and respond to fashion and newness in our assortment.

With regard to recent trends, Sales softened in late October early November, but improved in the last 2 weeks. We believe that unseasonably warm In certain geographies contributed to the decelerating trends, along with delayed holiday shopping. As weather normalized and we get which has an extra Saturday between Thanksgiving and Christmas will lead some customers to wait until closer to Christmas to make their purchases. We continue to expect an elevated promotional environment across retail in the Q4. Taking these factors into consideration, we are reaffirming our 2022 financial For fiscal year 2022, we continue to expect revenue growth of 5% to 7% versus 2021.

We expect adjusted EBIT margin of approximately 4.3% to 4.7% for the full year. Our forecast assumes that EBIT margin improvement for the year will be driven by SG and A leverage, with gross profit roughly flat for the full year. Our effective tax rate is expected to be Approximately 27% for the fiscal year. We expect adjusted EPS of $2.30 to $2.60 Our outlook excludes the impact of any future share repurchases. We continue to expect approximately $100,000,000 of incremental markdown from clearance activity in the Q4.

Though we are facing inflationary expense pressures, we contemplated that pressure in our outlook, along with the increasing benefits of our supply chain optimization initiatives. With regard to the assumptions embedded in our guidance range, The low end of our guidance assumes that the softer sales trends from late October early November return and promotional activity in the sector The high end of our guidance assumes that holiday sales will accelerate year over year as we Christmas in line with pre pandemic shopping behavior and that promotional levels in the sector are consistent with what we've seen to date. Shifting to capital allocation, our priorities remain unchanged. Our first priority is investing in the business to better serve our customers and support long term growth. We're planning capital expenditures at normalized levels of 3% to 4% of net sales as we continue to invest in supply chain and Our second priority is reducing our leverage.

We remain committed to an investment grade credit rating and expect to decrease our leverage ratio below 2.9 times by the end of 2022. We continue to target a leverage ratio below 2.5 Our 3rd priority is returning cash to shareholders. Last week, our Board of Directors We will continue to take a measured approach to share repurchases through the remainder of this year, aligning with our cash flow and market conditions. In closing, we've been taking the necessary steps to prepare for a softening macroeconomic backdrop and are confident that we have the financial strength and strategic capabilities to manage through a rapidly evolving environment. We have a strong balance sheet and a favorable debt maturity schedule.

We're reducing our inventory levels to enter 2023 in a healthy and current position and improve our flexibility and agility. Despite markdown and inflationary pressures, we still expect to deliver SG and A benefits from our supply chain optimization work and disciplined expense management and significantly increased our year over year profitability in the Q4. With that, Heather, we're ready for questions.

Speaker 1

Thank you, Michael. Before we get started with Q and A, we ask that participants limit their responses to one question and one follow-up. We'll now move to the Q and A session.

Speaker 0

Thank Before pressing the star keys. Thank you. Our first question is from Ashley Helgens with Jefferies. Please proceed with your question.

Speaker 6

Hi, it's Blake on for Ashley. Thanks for taking our question. I just wanted to ask on the sales guide, A couple of headwinds, I guess, you called out you're seeing from the rack decisions about door based fulfillment and the shipping minimum.

Speaker 7

Thank you.

Speaker 5

Yes, Blake. This is Michael. I'll take that. So that's right. Those headwinds that you talked about are contemplated in They're pretty consistent with what we saw in the Q3 though.

So the assumption is that the choices we've made around Rack Store fulfillment Our consistent impact to our business in the Q4 relative to what we've seen in the 3rd. So generally speaking, I just kind of bring it up a level. As we think about going forward, I think you can expect to see something similar in the Q4 in terms of the banner breakout, as well as the We continue to expect that customers are voting for shopping in stores and that we'll see some mix shift to that. Great. Thanks.

So a couple of questions. First, how are you planning full line inventory by category as we think about anniversarying some of the shift toward occasion and dress up apparel next year? And then at Rack, Could you just speak to the timeline you think is reasonable to return the rack to positive sales growth and some of the initiatives behind that?

Speaker 7

Yes, this is Pete. I'll start with the category inventory. As we mentioned in our comments, we feel Really good about the content of what we have available here for the Q4 and coming into holiday. And that's because Things have stabilized a little bit in terms of what customer demand is. We talked about categories that were really Over indexing in early days of the pandemic and we were part of that as well with home and active in categories like that doing very well.

But In the last, gosh, probably 8, 9 months or so in particular, the return to occasions and people just moving around more and Just being out there, it's lent itself well to what we've traditionally always done pretty well at. And we talk about that in terms of the moments that matter. And so We've done well in apparel and shoes and the categories that really reflect people just out and about Engaged in more activities and events. And so, I think that that's really where we've focused Our inventory is going forward. And I think the only other thing about that is just coming this time of year is Doing the best you can to try to figure out weather and what cold weather and the impact that that has and we feel really good about our assortment in cold weather too.

Speaker 2

Matthew, this is Eric. For the RAC, a couple of things We'd emphasize, we do continue to see traction in our strategies. So it's 3rd Quarter in a row sequential improvement versus pre pandemic, and really since we've focused on Our North Star of Great Brands at Great Prices. And as we called out, we had some actions, Most notably, stopping store for sale for rack.com orders that hit our top line, but made it It's a more profitable business and a better customer experience. So overall, our business is about flat, if you back that out.

And we continue to see traction from these best brands. Last quarter, our top 100 brands in Iraq grew 9%. We Continue to see growth there. As for the timing, there's 2 things that are 2 reasons we have to address to get at the timing. One is certainly getting access and ordering A greater percentage of our inventory in these great brands and that is happening.

The second piece, as we talked about coming out of last quarter, is Clearing through the less productive inventory we have. And as sure you know, Rack is part of our total Ecosystem and we've coming out of Q2, as we revised our guidance, We saw that it would take through half 2 to clear out and open up the inventory dollars to get us In the balance that we want going forward. So for Rack, we need to certainly get more of these great brands in, but we also have to Through the rest of Q4 clear out the inventory that hasn't been as productive. That sets us up well for 20

Speaker 0

Next is Chuck Grom with Gordon Haskett. Please proceed with your question.

Speaker 8

Hey, just to follow-up on Matt's question a little bit. Just on the rack, if you look at it on a 3 year basis, it really decelerated and all of your off price peers Have reported over the past week or so and really haven't shown that level of softness. So I was just wondering if you can maybe just go a layer deeper to the factors Of the end of performance. And then as we look to 2023, how are you planning the entire enterprise business from a Category perspective, are you expecting, some of the recent areas of strength to continue? Or are you expecting a shift back to Some of the pandemic areas to presume their strength.

Speaker 9

So Eric, do you want to talk a little bit about the rack?

Speaker 2

Sure. Yes, I'll take a start with that, Chuck, I'm sure I have a lot more to add there. It's as we talked about Coming out of Q2, we did see a pullback in our customer cohorts that are lower income segments for us and that It is most pronounced in our rack business. And we certainly see signs of customers Being unrestrained from economic conditions, and we've seen evidence of some pullback across all customer cohorts, But most pronounced at lower customer lower income customer cohorts. And Again, that hits us more in the Rack business.

And then so there's some macro issues, but Internally, again, I'd pull you back to getting our mix right. We're very confident in that of how Why customers respond strongly to the rack? Why they choose us? And getting that mix Right. Again, we have some cleanup to do still here in Q4, but We see that entering 2023 in a real healthy and clean inventory position to where we'll get the mix That we won.

Speaker 9

So Chuck, this is Anne. I would add a couple of things to that. Just to remind you, when we talk about the change in wraps.comstorefulfill Program for the last quarter, that was worth about 200 basis points top line impact to the Rack banner itself. So when you adjust for that, it's It's a flat business overall for the quarter. Having said that, just to remind you, if you look at the history of the rack, We typically have not had a big category in home, and certainly not a lot in athletic apparel, which was certainly high COVID pandemic category.

As we come through, we've also reshifted the focus on the best brands at the best prices. And That has also been a piece of getting out of some of this older inventory that's a lower priced inventory and moving into the categories and the brands that people really seem to Anjal, we're seeing the results of that was positive increases in those areas, and we'll continue to drive that, both balancing getting out of the current inventory It's not working, but also really leaning heavy into next year as far as these better brands.

Speaker 8

Got it. Thank you very much.

Speaker 9

Yes, on the 23 question, I think the thing I would add to that is We as Pete talked about, we're really focusing on the category they're responding with the customers. I think for us, we're also focusing On being pretty conservative, but agile as well. So it's giving us the capability to chase more than what we've seen in the last couple of Coming out of the pandemic, certainly supply chain has gotten much better, access to goods has gotten much better. And so this is giving us the ability to More being able to chase where the customer is going as well. So we're trying to keep powder dry as we go into 2023, but also really focusing on seeing early trends and respond to the customer.

Speaker 8

Great. Thanks, Anne.

Speaker 0

Next is Oliver Chen with Cowen.

Speaker 10

Hi, there. This is Katie John, for Oliver. Thanks for taking our question. First was on the variable costs. Are those permanent improvements?

Or is that just sort of More flexing with the sales performance. And then our second question is more on that excess inventory. How much Is left to sort of clear through in Q4? Thank you.

Speaker 9

Yes. So I'll take the variable cost piece Then, Michael, Keith, you want to take the inventory component, that would be great. So on the variable costs, those are actually permanent. As we talked about the last couple of quarters, Coming out of I would even rewind a little bit to the end of last year. We saw inflationary costs and headwinds.

We determined that we thought those were going Pretty primitive, out there. And so we started taking into it started doing initiatives around really driving improvement. And We talked about in the last couple of quarters that we thought we were going to get leverage in our overhead in the first half based on top line, just your Fixed overhead getting leverage on the sales side. On the second half, we as we've indicated, we really we're continuing to get momentum in our supply chain cost per unit initiative And efficiencies. And so for that, you saw that coming through in Q3 and it's continuing to build in Q4 and beyond.

Speaker 5

Katie, with respect to the inventories, we said at the end of last quarter that we expected to take approximately $200,000,000 in incremental markdowns in the back half The year roughly evenly split between the 3rd and 4th quarters, and we're on track for that. So we still expect to exit the year in a healthy and current inventory position.

Speaker 10

Thank you so much. Have a great holiday.

Speaker 0

Next is Kimberly Greenberger with Morgan Stanley.

Speaker 11

Great. Thank you so much. Good evening. I wanted to ask About just some of the puts and takes in your operating margin as we head into next year, It would seem that the inventory cleanup and potentially lower markdown rate in 2023 could be Tailwind for gross margin, are there any headwinds that might be noteworthy? And then Anne, specific to your comments on SG and A, I would assume that SG and A dollars are likely to grow next year.

There's still ongoing I would imagine that you're experiencing some of the same. But do you have any do you or Michael have any sort of preliminary Thoughts on how we should think about the growth in SG and A in 2023 compared to this year? Thanks.

Speaker 9

Yes. Thanks, Sumana. Eric is going to give some broader context and then

Speaker 2

Yes. Thanks for the question, Kimberly. Let me start There's certainly a lot of uncertainty out there. Macroeconomic conditions and customer behavior It's moving rapidly, and we feel really well prepared for that uncertainty. And I take you back to Our last quarter call, we started to see a little softness in the end of June.

And we made the call pretty early in hindsight to take what we thought were the prudent steps. And in particular, reducing inventory, managing our expenses and overall improving our agility to navigate these uncertain times. And those actions have served us well. We really feel good about our execution through Q3 of that plan. We exceeded our plan last quarter.

And probably more importantly, it sets us up well These adjustments were put in place at the end of last quarter and again have served us well Q3 and have prepared as well going forward.

Speaker 5

Yes. So Kimberly, more specifically than about 2023 is we're not giving guidance today. But given the uncertainty that Eric just talked about in the macro environment, we're really focused on preserving and protecting that agility and that As we go forward into the Q4 and into next year. So that means managing inventory more conservatively to Not only increase agility, but also improve gross margin. We'd rather be chasing the business and clearing.

You heard Pete talk earlier about a double digit improvement target It also means disciplined expense management and continuing to hold the line on that. And then just continuing to build on the strategic initiatives that we've talked about with a special focus on supply chain given the size of our digital business That helps us that improves our capability to serve our customers, but it also helps mitigate some of that inflationary cost pressure that you alluded to and improve our profitability. So Not ready to give specific guidance yet, but those are sort of the guiding principles as we think about planning for next year.

Speaker 1

Thank you.

Speaker 0

Next is Ed Yerma with Piper Sandler.

Speaker 12

Hey, guys. Thanks for taking our questions and best of luck in your next steps. I guess first, a bigger picture question. Gosh, it might have been a couple of analyst days ago, but you once said that online and stores had roughly equivalent contribution margin. Just given the new dynamic of kind of growth outpacing in the store fleet versus e comm, can you kind of refresh us on that and how we should view contribution margin now that you're tipping back to stores?

And then as a follow-up, the traffic trends seem to have lagged historically or in recent history at the urban stores ex New York. Kind of give us a quick update as to Performance of urban versus suburban? Thank you.

Speaker 2

Yes. Let me start and you all To the contribution margin between online and stores, for the Nordstrom banner, they remain pretty darn close. And I guess I'd call out 2 variables just to shed a little more light on it. Certainly, there's been increased expenses in supply chain, particularly transportation that hits the digital business a little more. But offsetting that is our digital business has been leveraging really well.

As we grow sales there, there's a big fixed Costs based there that gives us a lot of leverage as we add sales. So overall, Really pleased with our online profitability, nordstrom.com. For Nordstrom stores, that model has a lot of variable Expense to it, which allows us to manage it well as sales trend up or down. The only thing I'd call out We're not at [email protected]. And in particular, I'd Go back to our decisions last quarter to stop doing store fulfillment in Rack Stores for rack.com.

And there are really two reasons that and these are two things that we at NorthStar, we ask ourselves all the time. 1, how do we provide a great customer experience and 2, how do we get profitable growth? And store fulfillment At our Rack Stores, we're not providing the level of customer experience that we hold ourselves to. We had higher cancellation rates Because it's a little more difficult finding the product in a treasure hunt environment in stores. But secondly, kind of to your contribution margin point, Economics get tougher with the lower price points we have in the rack versus our Nordstrom banner.

So Didn't meet our standards of profitable growth. So I use that as an example of there are levers that we are actively pulling To address contribution margin in our Off Price Digital business.

Speaker 9

Go ahead.

Speaker 2

Do you want me to take the Urban, do you want to comment? Okay. As far as urban and suburban, there's not that's leveled out a bit. We still Our urban stores got hit harder during the pandemic. So they are growing faster in general versus our non urban stores.

And New York, as we've called out, kind of all year, it continues to be, one of our very top stores in sales growth over last year.

Speaker 12

Thank you.

Speaker 0

Next is Noah Zatkin with KeyBanc.

Speaker 13

Hi. Thanks for taking my questions. Just on the Rack, on the opportunity at the Rack to Accelerate improvement in brand mix given excess inventory in the channel. Could you just provide an update on what you're kind of seeing in the channel there And any progress on that opportunity? And then second, just on the decision to reduce store base fulfillment at the Rack.

Is that a permanent change? Or would you expect to revert back to the prior minimum for free ship to store at some point in the future? Thank you.

Speaker 9

Yes. So Pete, do you want to take the what you're seeing in the market and then do you want to finish Eric?

Speaker 2

Sure. We have a

Speaker 9

question on that.

Speaker 7

Yes. I think as everyone has noticed In the last few months, pretty much everyone in retailing is over inventory at some level. And as a result of that, that plays Right into our hands, I think in terms of being able to be selective about pursuing great brands, the great prices and I hear us talk about premium brands and these are really the brands that you would typically find in a Nordstrom store that are not ubiquitously distributed amongst Typical off price retailers. We've got great relationships with all these brands. And what we try to do is We first call for them when they have inventory to clear.

And like I said, there's inventory out there to be had, and I think it puts us in Great position being able to be selective. So we feel very good about what's going to be possible for us in 2023.

Speaker 2

Yes. I'll take the store fulfillment and rack. Certainly, we would revisit that. Just to be clear, there was 2 actions we took last quarter. 1 was Doing store fulfill of rack.com orders.

The other was having free the threshold for free Shipping to a rack store of a rack.com or order. The store fulfillment is the bigger Impact of those 2, but that threshold is something we consistently look at. And Yes. Again, we look at the business model there and we look at the customer experience. So we have a lot of initiatives underway to continue to improve the inventory accuracy That we have that helps with the customer experience side by reducing our cancellation.

So we do think That will get better going forward. And then the costs for the supply chain costs of moving that product around, There's obviously a lot of external factors there, but there's plenty of internal levers for us to pull and last quarter is a good example. I feel really good about our supply performance this last quarter and the traction we're getting on some initiatives. So, the long way of answering your question that, yes, we would revisit that as conditions change.

Speaker 13

Thank you.

Speaker 9

And now we'll take one more question.

Speaker 0

Our last question comes from Dana Telsey with Telsey Advisory Group.

Speaker 14

Hi, good afternoon, everyone. As you've seen the season unfold and the difference between the lower income in the higher income customer cohort, how are you positioning the brands at the core at the full line Nordstrom stores Between the higher end and the lower end and the positioning for Rack. And as we see this going through into 2023, Is there a cadence of what the assortment should look like at Rack that you've identified given the more premium brands that works well there of how you're transitioning the full line stores too in order to better balance the lower income versus the higher income consumer. Given that typically we think of Nordstrom as a little bit more higher end than lower income with the headwinds that are arising today. Thank you.

Speaker 7

Hi, Dana. It's Pete. It's interesting you would intuitively think that when Customer demographics are showing different spending patterns related to what's happening out there, inflation that you would see us over indexing and selling a lot more lower price Good. And that's not necessarily true. I mean, the broken record for us, almost regardless of what Macro times we're going through is newness and flow and great brands and Just giving people compelling reasons to buy new things, that's what really works for us.

And it works in the Rack banner and it works in the Nordstrom banner as well. The fact that we called out that we're still having good growth in Designer, I think, is evidence of the fact that it's not so much About a specific price point or offer, we pay close attention to what's going on with our customers and close attention to what's going on out there in the macro environment, but I think getting our inventory levels in a position where we can have that kind of consistent flow and The large majority of what we have to offer is new. That's the most important thing for us. I think in terms of what's happening in the rack, again, it's really about those great brands. It's not about us Without pursuing the cheapest good.

It's great brands at great prices. And that formula has worked for us in the past At all times, really, again, regardless of what's happening in the macro environment, and we anticipate That will continue to work for us again. So we feel good about it. We've got access to the greatest brands in the world. We're going to continue to bring them in.

We do have a difference. We have the 2 banners. We've got that Full Price proposition and then we've got that Bargain Hunter proposition And so we feel like it's a big net where we can serve a lot of customers.

Speaker 14

And what is how are you thinking about store openings for Rack going forward?

Speaker 2

Hi, Dan, it's Eric. As you know, we started announcing some more Rack openings. As we've mentioned before, we think there's opportunity for new stores In the Rack banner, our Rack stores are profitable and IRR opportunities are really Compelling. And I've asked for the off price space, convenience store locations is Even more important than in the Nordstrom banner space, we know you get outside of about a 20 minute Drive to a direct store, we start to lose customers. And you've seen a lot of The leading off price players had a lot of store count over the last handful of years and it's helped drive their growth.

And One of the things we know is when we share a location, we share a parking lot with other off price competitors In the vast, vast majority of cases, we have the highest sales per square foot. So when we share a parking lot, More often than not, customers choose us. So given our store count compared to what else is out there, some competitors, we

Speaker 9

We want to thank you for joining today's call. A replay along with the slide presentation and prepared remarks will be available for 1 year on our website. Thank you for your interest in Norstrom.

Speaker 0

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.