Nordstrom - Q4 2021

Transcript

Speaker 0

Greetings, and welcome to the Nordstrom Fourth Quarter Earnings Conference Call. As a reminder, this conference is being recorded. At this time, I'll turn the call over to Trina Sherman, Head of Investor Relations for Nordstrom. You may begin.

Speaker 1

Good afternoon, and thank you for joining us. Today's earnings call will last 45 minutes and will include approximately 30 minutes for your questions. Before we begin, I want to mention that we'll be referring to slides, which can be viewed by going to the Investor Relations section on nordstrom.com. Our discussion may include forward looking statements, so please refer to the slides showing our Safe Harbor language. Participating in today's call are Eric Nordstrom, Chief Executive Officer and Anne Bramman, Chief Financial Officer, will provide a business update and discuss the company's 4th quarter performance and outlook for 2021.

Joining during the Q and A session will be Pete now turn the call over to Eric.

Speaker 2

Good afternoon, and thank you for joining us today. Looking back at 2020, we're deeply grateful for the way our entire team navigated through these challenging times. We made meaningful progress to better serve customers, Benefiting from multiyear investments that supported our transformation into additional first business, the aggressive actions we took throughout the pandemic To increase our financial flexibility has enabled us to generate operating cash flow of more than $425,000,000 over the past three quarters. We're confident in our ability to successfully emerge from this pandemic in a stronger position than before. We're encouraged by The continued sequential improvement in our top line trends, including a 600 basis point increase from the Q3 when normalizing for our anniversary event shift.

We saw momentum build throughout the quarter and continuing into 2021. We had broad based improvement across our 2 brands, Nordstrom and Nordstrom Rack, Enabled by our market strategy, trends in our top 10 markets outpaced our average by 200 basis points. During the holidays, customers responded positively to our gift selection, which represented 67% of sales, be up 600 basis points over last year. While we're pleased with our improving top line trends, we are not satisfied with our bottom line results. Since reopening stores in June, we faced inventory constraints throughout most of the year.

Heading into the holidays, we increased our receipt As to meet anticipated customer demand. However, we experienced delays in inventory flow that resulted in higher inventory levels at the end of the year. Additionally, higher COVID related labor and shipping costs contributed to earnings flow through coming in below our expectations. We are currently taking actions to realign our inventory position and Anne will go into additional detail on our execution and action plans. An important component of our strategy is to increase convenience and create personal connections with customers.

During the holiday season, we continue to scale digital and physical capabilities to offer greater access to our services. With pickup options at roughly 350 Nordstrom stores, Racks and Nordstrom Locals, about 10% of online orders were picked up in stores. Additionally, roughly 30% of online orders were fulfilled from stores, including racks, which were recently enabled with this capability. These capabilities allow us to increase delivery speed, customer spend and inventory efficiencies. We're increasing our connections with customers by strengthening our digital capabilities to offer them discovery and inspiration.

Remote selling options such as looks created by our salespeople using style boards are resulting in outsized customer satisfaction scores, Conversion and average transaction size. And we know that when customers engage with us through order pickup, alterations or styling, Their overall spend increases by up to 5 times. During the Q4, we saw a significant improvement in customer acquisition trends, Improving sequentially by roughly 15 percentage points from the prior quarter. We gained 1,800,000 new customers online, A 40% increase over last year. We did this without losing sight of our existing customers, where we have seen improving retention trends over the past two quarters.

Encouragingly, our Nordy Club customers continued to shop with us during the pandemic. Approximately 40% of our customers In our loyalty program, contributing 2 thirds of sales. This gives us growing confidence in our ability to sustain momentum in 2021 As our Nordy Club members shop with us more frequently and spend more than our average customer. As we laid out in our investor event last month, Our brand promise of getting closer to you is the guiding principle of our growth plans going forward. Heading into 2021, we are committed to significantly be expanding the breadth of who we serve and where and how we serve them.

We're doing this by unlocking the full power of The digital first platform we have built to capture market share gains, drive profitable growth and create significant value for our shareholders. As we head into 2021, our team is dedicated to executing our strategy across our three areas of highest priority. First, winning in our most important markets. We're continuing to scale our market strategy by doubling our exposure from 10 to 20 markets by the end of March, making up 75% of our business. This includes key markets such as San Diego, Houston, Minneapolis and Miami.

2nd, broadening the reach of Nordstrom Rack, which we see as a $2,000,000,000 incremental sales opportunity over time. We're focused on growing our share of the price oriented customer segment. Our efforts are underway as we recently repositioned 70 stores We will be able to identify the merchandising offering and store experience. And 3rd, increasing the velocity of our digital business. We're focused on more effectively translating the heritage of service that defines us in this digitally connected world.

This means delivering personalization at scale by creating greater linkages between digital and physical experiences. As an example, We are currently migrating nordstromrack.com to the JWN e Commerce platform to enhance the customer experience While creating efficiencies in our infrastructure and operations. These strategic priorities are enabled by our digital first merchandising approach. We are extending beyond our traditional wholesale model to increase selection, reduce risk and share the benefits with our strategic brand partners. For instance, yesterday we announced our partnership with Tonal, the smartest home gym and personal trainer to expand In terms of other partnerships, we also see meaningful opportunities to deepen our relationship accelerate our strategic priorities to serve customers in new and differentiated ways.

These actions have put us in a strong position to capitalize on our market ensure opportunity as customer demand recovers. While the timing and pace of demand recovery remain uncertain, We see potential to reach $17,000,000,000 in revenues and expanded EBIT margins of more than 6% over the next 3 to 5 years. In closing, we have 2 powerful brands, Nordstrom and Nordstrom Rack, as well as highly integrated digital and physical assets, fantastic brand partners and employees who are truly unmatched when it comes to their commitment to the customer. We're confident in our direction and look forward to sharing our progress in the quarters ahead. With that, I'll turn it over to Anne to discuss

Speaker 3

Thanks, Eric. We're pleased to deliver another quarter of sequential improvement in sales through the actions we're taking We will continue to unlock the full potential of our Digital First platform. We're also proud of our team's efforts to generate another quarter of positive earnings and operating cash flow in In what remains a very uncertain environment, we continue to satisfy our customers' desire for digital shopping experiences, accelerating online penetration We will be conducting a call to our shareholders across both

Speaker 2

Nordstrom and Nordstrom Rack, even

Speaker 3

as our store sales continue to recover. Overall, we have seen strong customer response to our initiatives We will continue to evolve our operating model, positioning us well to drive market share gains, while improving profitability, returns and cash flow generation. That said, the quarter was not without its challenges,

Speaker 4

and there

Speaker 3

were unanticipated headwinds that limited our ability to flow our We also exited the quarter with excess inventory And we remain focused on executing our long term growth strategy. For the Q4, we reported positive earnings per share $0.21 which included an income tax benefit related to the CARES Act. Earnings before interest and taxes were $30,000,000 We continue to be in a strong financial position, fully paying down our revolver and ending the quarter with 1 point $5,000,000,000 in liquidity, including $700,000,000 in cash. We delivered a 3rd consecutive quarter of positive operating cash flow, generating more than $425,000,000 over the past three quarters. For the year, our expense savings well exceeded our Targeted range of $370,000,000 to $420,000,000 primarily from rebasing our cost structure.

More than $300,000,000 of realized savings are considered permanent overhead reductions. Our 4th quarter sales decrease of 20% slightly exceeded expectations. This reflected improvement in sales throughout the quarter across both Nordstrom and Nordstrom Rack, With momentum as we head into 2021. Digital demand was strong, with sales growing 24% over last year Representing 54 percent of total sales. Sales trends continued to improve, increasing by 6 percentage

Speaker 2

expect to see some significant growth in the

Speaker 3

Q3 after normalizing for the anniversary shift. Notably, we saw strong sequential improvement at both Nordstrom, We will continue to focus on gifting items, expanding our offering in categories of highest demand. We delivered double digit sales growth in both home and active And had strong results in beauty, kids and designer handbags and shoes. Overall, we're encouraged by the sequential improvement in our top line trends, giving us increased confidence in our pivot to market share capture will continue to see a significant progress in 2021. That said, we are not satisfied with the flow through to the bottom line There were 3 key factors that contributed to greater pressure on margins in the quarter, Most of which we expected to be in temporary and reverse as we progress through 2021.

First, merchandise margins were lower than expected. Our decision to take a stronger inventory stance for holiday, combined with delays in inventory flow over the course of the quarter, resulted in higher than anticipated markdowns. 2nd, we experienced higher than expected selling and labor expense, Strong growth in e commerce and the ramp of new capabilities at Nordstrom Rack led to some fulfillment inefficiencies Higher than planned outbound freight expense due to carrier surcharges and costs associated with our decision to mitigate carrier shipping constraints largely due to lower sales volume and higher labor and shipping associated with COVID-nineteen. These costs were partially offset by continued benefits from rebasing our cost structure, which led to a reduction in Q4 overhead costs of approximately 15% from the prior year. Roughly 300 basis points of these expenses are not expected to recur this year.

From an inventory perspective, we increased our receipt plan for the quarter. Much of this inventory came in later than Most of this inventory reflected current receipts and non seasonal merchandise, with improved availability of replenishment items and relevant products with extended We are taking action to mitigate the impact of seasonal and underperforming merchandise categories, particularly in apparel, Including cancellation of orders, return to vendor and clearance activity where appropriate. Importantly, We are quickly building additional flexibility into our buying plans in the first half. We plan to cut our sales to inventory spread in half by the end of the first quarter, We expect inventory levels for our Nordstrom brand to be fully realigned in the 2nd quarter Looking ahead to 2021, given the continued uncertainty with respect With COVID-nineteen, we remain prepared for a range of scenarios to ensure that we can sustain and grow our business. Based on the assumption that our stores will remain open over the course of the year, we expect to deliver revenue growth of more than 25%, With digital representing approximately 50% of sales.

Given expectations for improving gross margin and moderated cost pressures Over the course of the year, we expect to deliver EBIT margin of approximately 3% of sales. Our income tax rate is expected to be around 27% for the year. This guidance contemplates some pressure Gross margin as we work to align inventory in the Q1, a moderation in COVID-nineteen related labor and freight pressure as the year progresses And lapping of 300 basis points of non recurring costs in the 4th quarter. Should the pace of demand recovery accelerate Or COVID-nineteen related costs moderate more quickly than currently anticipated, we do see a path to delivering operating margin will be conducting a reconciliation of approximately 3.5 percent for the year. For the first half, EBIT is expected to be approximately breakeven, Reflecting roughly 45 percent of total year sales.

This contemplates the shift of the anniversary event to begin in July this year With 1 week falling into the Q3. From a capital allocation perspective, we're planning CapEx at normalized levels of 3% to 4% We will continue to deliver on our financial results and financial results. We also expect to reduce our leverage ratio to approximately 3 times And to be able to return cash to shareholders by the end of the year. We made meaningful progress to support the recovery in demand in the 4th quarter. Now as we head into 2021, the strength of our financial position enables us to reinvest in our long term growth strategy.

We are confident in our ability to deliver profitable sales growth as demand recovers. I'd like to now turn it over to Trina for Q and A.

Speaker 1

Thank you, Anne. Before we get started with Q and A, we would appreciate it if you can limit to one question to allow everyone a chance to ask a question. Will now move to the Q and A session.

Speaker 0

Thank you. Thank you. Our first question is coming from Ed Yruma with KeyBanc Capital Markets.

Speaker 5

Hey, good evening, guys. Thanks for taking the questions. I guess first just On the inventory commentary, I guess as you think about the back half, obviously, lots of discussion about reopening. Has the experience in the 4th quarter changed some the inventory plans you might have around that and have you embedded more conservatism? And then as a bigger picture question, if you could just give us a little bit of insight into some of these Partnerships, total sounds exciting, but kind of how you see them playing a role in the longer term growth?

Thank you.

Speaker 3

Okay. Thanks, Ed, for your question. Pete, why don't you start with the partnerships and then I can talk about some of the inventory thinking in the first half of

Speaker 6

Yes, thanks. The partnership thing is an evolving subject that's happening as we see it's been going on will for a while and I think the pandemic has given us all an opportunity to rethink how this all works in the spirit of will be more agile and making things better. And so there's a lot of good things to talk about there. I would say, the point is probably will take a look at the one particular example that we're super enthusiastic about and that's our partnership with ASOS. As you know, ASOS just recently bought the Topshop, Topman brand, which is you likely know is a very big and important vendor So that was important to us that this landed with someone that we have a lot of confidence in.

So first of all, we've got a lot of confidence ASOS is going to be very capable of investing and elevating this brand and to reach Full potential. So there's a big opportunity for us. As you may have read is they're counting on their relationship with us To realize the full value of this investment and towards that end, it gives us a huge opportunity in North America specifically To really own this business and we think there's a lot of upside to that. But I think the point about the brand partnerships is ASOS is not A traditional wholesale outlet, they're retailing. So they're approaching this knowing we have this Topshop business Hey, look, what's the best way to do this?

So it works for all of us given a clean slate. And I think, again, considering everything we've gone through, a clean slate is nice to have. And We know a lot about that business and they and we're really motivated by their ambition, I think by their willingness to partner in new and different ways and we're confident that it's It's going to bode very well for our results. And then the other part of that is ASOS has other brands They have going on. There's other commercial opportunities that are available to both of us through this relationship.

And we've been in regular contact already. And I can tell you that Whether it's Anne or myself or Ken

Speaker 2

and Terry or others here that

Speaker 6

have been interacting directly with their team, every interaction just builds our confidence And what we think is possible. So I guess as time goes on this year, we'll be able to talk more about that. But I think it's going to be a lesser of what's possible together.

Speaker 3

Yes. And then the second part of your question as far as how we're thinking about inventory plans for the first half of the year. As we exited, or in the second half of twenty twenty, you rightfully commented that with stores reopening, it was a bit choppy as far as Reopening and some of the inventory levels. Part of the decisions we made for Q4 was to get back in stock and just basic replenishment and items that were And so that was a very conscious decision and we saw great customer response to that. So as we go through the first half, we feel like we're in a very good With those inventory levels, there was a piece of it that was more seasonal.

Some of the delay in receipts, as we come through the Particularly Q1, we're taking a number of actions to get that right sized. But I would just say, in general, we're building more flexibility into the plans. And As we continue to see customer demand, we're ready to meet the customer where they want to shop and how they want to shop and what they want to shop for.

Speaker 5

Thank

Speaker 0

you. Next is Dana Telsey with Telsey Advisory Group. Please proceed.

Speaker 7

Good afternoon, everyone. As you think about the Rack business and increasing the revenues of Rack, what do you see in terms of the assortment there as we go through 2021 as compared to the core Nordstrom business And is the opportunities for either product enhancement collaborations there also? And just lastly on the real estate portfolio, take any updates to how you're thinking about openings, closings or restructuring of leases that are rental not owned. Thank you.

Speaker 2

Hi, Dana. This is Eric. I'll take both

Speaker 6

of those.

Speaker 2

And Pete, you can chime in if it's on the Surbman. Iraq, I think it's important, when you think about our Iraq business that it's not a standalone business. It is very integrated Our model is the 2 brands, Nordstrom, Nordstrom Rack and having digital and physical business. And there's the point of that is there is a synergy to that. And Rack is particularly flexible.

We make commitments closer to season. It's a much more opportunistic business. And we do see opportunities to adjust our assortment. Certainly, the hot categories through the pandemic of Active at home, beauty wellness, even some kids business, we see opportunities there in our rack business To have outsized growth there. And again, the flexibility, even in the stores, We can move around space allocation really easily and quickly.

So there's a lot of experimentation. And I think that's particularly important as you look forward in 2021 will What happens, what's the customer going to be interested in when things start to open up more, when people are Returning to work or starting to travel again or going to restaurants. And that's something we've got a point of view on, but mainly we need to be be flexible. And again, we see a lot of opportunities for us to be nimble and move there. The collaborating gives you opportunities for collaborating in the rack, absolutely.

When we talk to vendors, it is as a Total business. All of our vendors have an off price business, and we talk a lot about will The synergies in our business and how that point of discovery and acquiring new customers in our rack business works for us as a retailer and works for brands. We have a lot of data on that Of customers who get introduced to a brand in our Rack business and end up becoming A full price customer of that brand, so we're certainly working with vendors on that. On the real estate piece, And as you know, we closed or did not reopen 16 full line stores early in the pandemic. We don't see a lot of change in the near term there.

I think our history pre pandemic is probably the There's it's always a combination of store performance and the lease obligations that we have. And so over time, I think as our history has been, there's a few stores a year We don't renew the lease on, but we don't see anything major.

Speaker 0

Thank you. Next is Omar Saad with Evercore ISI.

Speaker 8

Thanks for taking my question. Good afternoon. I wanted to ask on the 10% in store pickup that you achieved, that's pretty impressive. How does that compare to a year ago? And what do you think are the key obstacles to getting that higher?

And then on private label, it was one of the topics at your Investor Day The target go from going from 10% to 20%, maybe you could dive into that deeper. It was one of the areas we didn't get to ask you a follow-up question on why you think That could be an important strategy to include among all the broader initiatives that you talked about as well. Thanks.

Speaker 2

Thanks, Omar. Yes, we're encouraged of our store pickup. We've had buy online pickup in store capabilities in our Nordstrom business for, gosh, I think 10 years now. It's a new capability in our rack business. And you've seen other retailers have a lot of growth there.

I think that we have hit a tipping point And that customers like it and it's not something we've done all our marketing with as we've added the capabilities as we have more and more inventory that's be available for same day or next day pickup, which is part of our market strategy. We really see instant reaction to it. So Certainly doesn't feel like we're anywhere close to the ceiling on there. I think it's clear that those Delivery options, pickup options are something that isn't COVID only subject. That's a change in customer behavior that will continue.

And so in general, Our direction to travel is through our market strategy, how do we enable a bigger selection of customers with faster delivery? And We've been able to do that in the 10 markets so far with market strategy. We have 10 more coming in the next month And the proof points have been consistent.

Speaker 6

Yes. And on our relative to our own label products, We do have an ambitious growth plan here and we think that the timing is great for that and we're well prepared to do it. And the proof points of that at least in the Most recent path have just been, as you've seen, the relevant of certain categories that we have evolved and in particular, the casualization that's We've been speaking about for a while. That speaks well to our strength in our own label programs. A lot of it's really based on the casual part of the offer.

We already have really good businesses with high search results like the Nordstrom name Specifically and like the Xela brand, which is an active brand for us, we've been extremely successful, really, for the last Certainly in this last year with active being such an important category. So we think we've got a good foundation to build off of. I'd say the other thing that's true is, if Look at the growth ambition we have around the home classification, that lends itself pretty well to our own label too. And so I think that's going to give us opportunity. So it's a combination of making sure we've got the right inputs will there that we've got the right alignment with our buying team and the people who design and produce that product for us.

And I think we've achieved that. We're really clear on what we need to do together to grow this. And so we'll keep you posted as time goes on, but we're We're certainly set for growth.

Speaker 8

That's helpful color. Thanks.

Speaker 0

Thank you. Next is Oliver Chen from Cowen.

Speaker 4

Hi. Thank you very much. Regarding underperforming categories, could you be more specific about which ones You need to clear goods in. And as we think about the year ahead, how are you managing promotions? I would also love more color on what you mean by flexibility in the buying plans.

I feel like you've had flexibility in the past. So what's different this time and how might you integrate closer to you dropship concession into rethinking inventory management going forward?

Speaker 6

Yes. Okay. With the underperforming, the toughest category just broadly for us over the last year has been apparel. In particular, Men's Apparel has been pretty difficult. We got a fairly sizable business around things that are will be more work or formal oriented, I think relatively and that's a big business for us.

So that is off considerably. And it's also true in women's. And apparel generally, fashion apparel is most perishable as well. So That's something that obviously is of concern to us and we're looking at, but you heard Anne talk about the products that we have, the inventory that we have, The makeup of it is largely around stuff that's not real seasonal, but it could be beauty or something or replenishment items. And so that's that helped kind of I think mitigate some of the risk about what we own.

But I think it would be will be able to say that the most challenged category for us is really fashion apparel. So we're just will be being super conservative about our plans going forward and what we're investing in there and ensuring that We're staying close to it and when things evolve and change as we all know it will that we're prepared to pour on the gas there too. So It's a dynamic thing and I think we've learned a lot of lessons this year about making sure we're applying the appropriate rigor and operational discipline so that we don't will get ourselves in trouble and we're doing the right thing and maintain flexibility. With promotions, we don't really have We don't have any different or new promotions planned. I mean, even though we were somewhat overbought, it's not about Some giant markdown kind of clearance events you're going to see to clear us up.

That's about the most practical and prudent way for us to Solve for inventory issues and we'll solve for those in the right way. They'll be in the best interest of the bottom line of our business. So yes, I wouldn't expect any more promotion. And I'll let Wayne end Wayne in this a little bit, I guess. But with the flexibility, maybe I want you to go ahead and start with that.

I mean, I guess what I would say, you heard a little bit about the extended models that we have. And while we've always had some flexibility, I think if you're caught up in a street Wholesale relationship where you're buying the goods 7 months out or something, that doesn't necessarily lend itself to great agility. And so I think The spirit of this thing is more about shared accountabilities and finding or defining together with the brand what good looks like and how we can work towards that together. So I don't know, Anne, if you want to expand a bit on that at all.

Speaker 3

So, Oliver, I would just add inventory discipline has been definitely have a bellwether of how we operate the business and it's certainly something we take very seriously and There is a lot of uncertainty out there as far as how quickly the customer comes back, demand comes back, in particular in areas like apparel. So we're just building in that flexibility of making sure that we're there to meet the customer demand, but also staying very focused on the discipline run our inventory management as well, whether it's alternative models, or how we buy.

Speaker 4

Okay, very helpful. Thank you for all the color.

Speaker 0

Thank you. Our next question is from Mark Altschwager with Baird.

Speaker 8

Good afternoon. Thanks for taking my question. Just following up on the sales guidance, So the over 25% growth this year, I think that implies the year settles out maybe 14% or 15% below fiscal 2019 levels. Any more help on how you're thinking about the first half versus the back half on that front? I guess, Q4 was down 20% versus 2019 with a few headwinds that you called out.

So I'm wondering if it's fair to expect sequential improvement from that run rate kind of each quarter as you move through the year or if things might be a little bit more back end loaded on that front. Thanks.

Speaker 3

Yes, Mark, let me maybe help guide this a little bit. So as we think about the year, we did say we are giving guidance of 25% Plus on the top line piece to it. The way we're thinking about it is that the first half of the year represents about 45% of total sales. So you do that would imply that you would see progressive improvement throughout the year, particularly the second half. The other thing, maybe this helps frame it up for you is, if you look at 2019 as a baseline for pre COVID levels, The way I think about it is, we expect demand to continue to recover for the year, but we would expect a greater decline against 2019 see improvement throughout the year.

And in particular, highlighting that Q2 will have anniversary sale in it. Last year, it was in Q3 entirely. This year, we've got 2 weeks of anniversary sale in Q2 and 1 week in Q3. So as you think about the year, hopefully, that helps you kind of anchor to how we're thinking through it.

Speaker 8

That is helpful. And just a quick follow-up there. I think Ann, you also spoke in your prepared remarks about margin potentially getting to 3.5% If the demand accelerates faster than you're currently anticipating, would you be able to say kind of what is the sales scenario that would get you comfortable with that will Margin picture. Yes.

Speaker 3

So there's a number of components to it. It's there's some sales, but the other pieces will be discussing the 2 are really the drivers of the EBIT piece. And so there's a couple of components to that. One, we would expect to get more leverage on sales As you go through the year, if you saw some improvement, but also more importantly, we've baked in quite a bit of headwind of COVID expenses things that we saw in for continuing, particularly the first half of the year, pressure from COVID premium pay, surcharges or charges from carriers, COVID expenses associated with that. So depending on how things recover or how quickly those costs start mitigating, that would be another lever we could pull will take a look at 3.5%.

Speaker 8

Okay. Thank you for all the detail.

Speaker 0

Thank you. Next is Chuck Grom with Gordon Haskett.

Speaker 9

Hey, thanks. I just wonder if you guys could just size up for us the impact on margins from what you need to do to correct inventory levels In the Q1. And then just as a follow-up, you spoke about improvement in your sales trends throughout the quarter and I believe in February. Just wondering if If you could just opine a little bit on some of the categories that you're seeing improve. Thanks.

Speaker 3

Yes. So Pete, do you want to talk a little bit about the categories and then I can come in The margin component?

Speaker 6

Yes, in terms of categories that are improving? Yes. Well, we talked about getting overbought there in the Q4 and that's all will

Speaker 1

we will we will we will

Speaker 6

we will we will we will we will we will we've seen an uptick actually in selling winter. So that's good for us in this current situation. I'd say there's some view of things getting back to will In some way, like we've seen things like dresses and some of these things improve, but it's still pretty early in the game. And I wouldn't get too far out in front of it. I think it's really It continues to be the same themes around casualization, around active, around home, around beauty, kids.

You've heard about that the designer business outside of the apparel part for the The report has been strong. So I think in the near term, it's clear on where to invest. The trickier part of that is as the year goes on, trying to see how things evolve and we're trying to get every kind of bit of objective data we can around Leading indicators about when these things will evolve and change. But I think we're in pretty good shape in terms of the proportions of our inventory. Like I mentioned before, I mean, typically fashion apparel is The more challenging part right now, but we've been aware of that for a while.

Speaker 3

So on the margin piece, we gave the guidance of a Breakeven for first half, and so that did contemplate some of the I would say some of the margin pressure we We would experience in Q1, although we're using multiple ways to mitigate the inventory situation, there is a piece of this markdown Related. So that is part of the half one. It's been contemplated in the half one guidance as far as breakeven. And so as you think about the sales trends, those will continue to progress will continue to see the progress through the year. You've got anniversarying in Q2, and Q1 is traditionally a very small quarter for us anyway.

Speaker 0

Thank you. Next is Matthew Boss with JPMorgan.

Speaker 10

Great. Thanks. On gross margin, so beyond the impact of the inventory actions in the Q1 that you just spoke to, I guess any headwinds that you see constraining merchandise margins relative to 2019 pre pandemic levels this year? And then my second question on the same topic is, as we then think about beyond this year, the change that you're making in terms of digital inventory relative to the wholesale model in the To the wholesale model in the past, is there any reason as we think about merchandise margins going forward, I guess help us to peg it to any historical levels or how best to think about gross margin going forward when we put all the pieces together?

Speaker 3

Yes, Matt, thanks for the question. I think as we think through the different pieces of the financials, For us, it's really anchoring on the top line and the EBIT pieces too because there's a number of puts and takes throughout the P and L. As far as margin, gross margin in particular for the year, as I mentioned earlier, we believe or we see that when you start getting a little bit more top line, you actually start Leveraging more, you get less deleverage in the lines, right, in gross margin and also in SG and A. So as we go through that, we would expect to see some continuing improvement In the gross margin line, that contemplates the merch margin pieces to this as well. The on the digital side, there are will have a bunch of puts and takes.

And so the way I would think about it is 2021 is definitely the road to recovery. It is definitely in line with will take our targets that we laid out for the next 3 to 5 years and it certainly gets us to the on the journey to achieving those targets from both the top line and EBIT rate

Speaker 0

Our next question comes from Tracy Kogan with Citigroup.

Speaker 11

Thank you. I just wanted to clarify first, did you guys talk about your sales trends quarter to date or when you talked about sales trends continuing to improve, Did you just mean January? And then secondly, I was wondering if you could talk about the inventory levels And also the margin pressure expectations between full line and rack, is it more isolated to one division or the other? Is it really across the board? Thanks.

Speaker 3

Yes, Tracy. So on the sales trend, what we talked about in the quarter was sequential improvement throughout the quarter. So will continue to see customer demand, actually continue to get better throughout those 3 months. We have not talked about what's going on in this quarter. We typically don't will give commentary on what's happening in the current quarter.

But hopefully, that helps you give you some perspective on where we can continue to see improvements In both the Rack business and the Nordstrom Grand business as well. As far as the inventory levels and the margin pressure, let me reframe this for you. We have opportunities in both brands. We expect that the Nordstrom Rack business will be back in line by the end of Q1. It's typically a business that's will be shorter in buy cycle.

You have more closeouts. You've got more capability to be more flexible in how you're doing your buys. And then by early Q2, we expect to be back in line in the Nordstrom brand from an inventory position.

Speaker 11

Great. Thanks for

Speaker 1

your time. We'll now take one more question.

Speaker 0

Our last question comes from Simeon Siegel with BMO Capital Markets.

Speaker 8

Great. Thanks. Good afternoon, everyone. Congrats on the Tonal announcement, very exciting. Anything you can share on the partnership or maybe speak to how you picked Tonal, etcetera, whether this begins a meaningful shift, now you're approaching active, whether this is more of an opportunistic one off.

And then Anne, sorry, I don't know if I missed it, did you or Could you quantify merch margin in Q4? And then within the comments you made for the full year, any help on thinking about the cadence of gross margin? Thank you.

Speaker 6

Yes. Hi, this is Pete. I mean, speaking to the Tonal thing, what I think that's reflective of is the merchant will kind of orientation that our team has and giving them the empowerment and the accountability to chase in The things that are really working well and so the business increasingly is less about a whole legacy review about how we plan in the future, but it's more trying to think about clean slate and how we can pursue the categories and The products that our customers are most interested in, so I just give back credit to our active team looking for opportunities out there to will enhance our authority in this subject, in this category and classification. I think Tonal is a way we can do that. We clearly have will be a shared customer between those two companies and they've got a willingness to try something with us and as do we with them.

So These are the kinds of things we love doing.

Speaker 3

As far as the question on margin in particular, I think there's a couple of things to keep in mind. One, we're expecting to see sequential improvement through the year on top line, which will help the deleverage component to it. The second is we would we are expecting to see a gradual improvement in some of the headwinds that we see with some of the COVID expenses throughout the year. And then last, I just want to remind you that we've got our supply chain outbound shipping cost in our SG and A. And so as we think about the whole business, we really look at the whole thing from a contribution margin or an EBIT perspective as well.

So we would expect to see gradual improvement throughout the year.

Speaker 8

Great. Thanks a lot, everyone. Best of luck for the year.

Speaker 1

Thank you. Again, thank you for joining today's call. A replay, along with the slide presentation and

Speaker 0

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