Nordstrom, Inc.

Greetings and welcome to the Nordstrom Third Quarter 2021 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. If you would like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. At this time, I'll turn the call over to Heather Hollander, Head of Investor Relations for Nordstrom. You may begin.

Good afternoon, and thank you for joining us. Before we begin, I want to mention that we will 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, and Ann Bramman, Chief Financial Officer, who will provide a business update and discuss the company's third quarter performance. And now, I'll turn the call over to Eric.

Good afternoon and thank you for joining us. We have long benefited from a commitment to customer service, interconnected digital and physical assets, and innovative brand partnerships. However, we need to move faster and more aggressively to better capitalize on those strengths. While our quarterly results were in line with our stated plans, and we are on track to deliver on the financial commitments we made at our investor day in February, when we look across the landscape, we need to deliver more. We need to grow market share and deliver greater profitability, and we are acting with a sense of urgency to do so. We've taken a comprehensive look at opportunities to improve our business, engaging external consultants with function-specific expertise across three key areas, improving Nordstrom RAC performance, increasing profitability, and optimizing our supply chain and inventory flow. We are not satisfied at all with our RAC business, as clearly our recovery is lagging what we think it should be. However, we are encouraged with the clear path to improvement that we see in front of us and have identified clear actions we are taking to improve performance and accelerate profitable growth. First, Nordstrom Rack has been challenged by low inventory levels in premium brands and key categories such as women's apparel and shoes. Customers are drawn to Nordstrom Rack to purchase premium brands at a terrific price. In fact, 90% of the top brands at Nordstrom are also sold at the rack. These brands are more highly penetrated in our rack business than they are at other off-price retailers. While many retailers are dealing with macro-related supply chain disruptions, rack faces a unique challenge as off-price procurement of the same top brands we carry at Nordstrom is particularly difficult in an environment with production constraints and lower levels of clearance product. RAC's top 50 brands represented approximately 50% of sales in 2019. Year to date, these brands represented only 42% of sales, highlighting the outsized gap in merchandise availability. In response, we are undertaking a comprehensive set of actions to increase our inventory levels and improve merchandise flow for the RAC. In particular, we are executing a multi-layered plan to both grow our offer of the most coveted brands we carry, as well as source from new vendors to ensure we have the selection our customers want. To minimize supply gaps, we are increasing our opportunistic use of pack and hold inventory, allowing us to buy larger quantities of relevant items when available, then hold a portion of it to deploy in periods with high demand, tight supply, or system constraints. Given that we expect macro-related supply chain disruptions to continue into next year, we're strategically evaluating our assortment and increasing our use of pack and hold inventory by a factor of two to three times. We expect that action in these areas will not only yield benefits as we deal with macro-related supply chain disruptions, but also deliver sustainable benefits that will enhance our long-term performance as well. While we are in the early days of these efforts, preliminary results show sales responding positively in rack stores with improving inventory positions. Second, our mix has skewed too far to lower prices at the rack, with AURs declining 4% versus 2019. This sharper than expected decline results from a couple of factors. First, customers come to the rack for coveted premium brands at a great value. This is a strength of ours, as much of this product is scarce in the off-price channel. However, we haven't had adequate supply of those brands, as I just described. As we adjusted our assortment over the last year to add more product at lower price points, we found that we went too far in certain categories. We are now rebalancing our assortment to increase the breadth of selection in premium brands, improve average selling price, and better align with customer expectations. Third, we are acting to strengthen RAC's brand awareness and drive traffic. As part of this effort, we launched a new More Reasons to RAC marketing campaign in September. We are encouraged by our early consumer research read, which showed a meaningful increase in future purchase intent. By improving inventory levels, expanding our selection in top brands, and increasing awareness and traffic, we expect to grow market share and improve profitability at Nordstrom Rack. With the actions we're taking, we anticipate improvement in Q4 with more significant improvement to follow in the first half of fiscal 2022. Turning to profitability, we are committed to delivering significant improvement in merchandise margins and EBIT margin across the business. we launched a comprehensive study of the factors driving our merchandise margin and found meaningful opportunities for improvement in pricing, category management, and private label brands. Pete will take you through the detailed plans behind those work streams in a moment. Within SG&A, we remain focused on managing fixed expenses. In 2020, we rebased our overhead cost structure and we remain committed to sustaining a substantial portion of that reduction. And while we've seen significant macro related pressure and fulfillment and labor costs, we're concentrated on mitigating our overall impact from those pressures. Improving our supply chain and inventory flow is also a priority. In response to macro related supply chain challenges, we have identified various ways to improve our internal network and processes by diversifying our carrier capacity gaining better end-to-end visibility of inventory as it moves through our supply chain, increasing velocity and throughput in our distribution and fulfillment centers, and better positioning our inventory to get it closer to the customer. We expect that these initiatives will enhance the customer experience and drive top-line growth at both Nordstrom and Nordstrom Rack by increasing delivery speed and expanding the selection for in-store shopping as well as same-day and next-day pickup while also driving efficiencies in labor and fulfillment. We expect to see benefits from these actions beginning in the first half of fiscal 2022. Turning to third quarter performance, we continue to see improvement in our Nordstrom stores, strong digital growth, and benefits provided by the interconnected capabilities of our market strategy. Nordstrom banner sales returned to 2019 levels in the third quarter. In the southern portion of the U.S., where 44% of our stores are located, Nordstrom comparable store sales grew 8% over the third quarter of 2019. Our geographic footprint has been a source of strength for us historically, with stores located in highly desirable real estate in the country's top markets, However, urban areas have been disproportionately impacted by the effects of the pandemic. As a result, our suburban Nordstrom locations outperformed our urban locations by 1,300 basis points in the third quarter. As discussed at our investor event, winning in our most important markets and increasing our digital velocity are key strategic priorities for us, and we are making progress in these areas. The convenience and connection delivered by our market strategy continues to be a powerful enabler for the business. We are leveraging a strong store fleet that positions us physically closer to the customer and drives value across the business. As a result, we are able to better serve customers and provide greater access to product by linking our assets at the market level. Our market strategy delivers incredible convenience that provides customers with four times more product available for next day pickup, a one day reduction in average shipping time, and the ability to pick up orders at the Nordstrom, Nordstrom Local, or Nordstrom Rack location of their choice. This quarter, One third of next day Nordstrom.com orders were picked up at rack stores, showing continued evidence of the power of integrating capabilities across our two brands and across our digital and physical platforms. In our top 20 markets where our market strategy continues to gain traction, order pickup accounted for 12% of digital demand versus 4% in other markets. Since we launched order pickup at the RAC last year, we have seen 70% growth in the program. As we head into the holiday season, we are encouraged to see steady increases in order pickup demand each month, which is evidence that customers are taking advantage of our integrated touchpoints. This trend is also advantageous because buy online pickup in store provides our highest satisfaction customer experience, which in turn drives more return visits. It is also our most profitable customer journey. The value of our interconnected model is evident as customers dramatically increase their spend when engaging across multiple channels, banners, and services. For example, the average customer that shops across both banners in-store and online spends over 12 times more than a customer utilizing a single channel. The quality and convenience of the services we offer, such as alterations and personal styling, drive connection and engagement, increasing customer spend by a factor of five to seven times versus customers who don't utilize those value-added services. We also continue to increase our digital velocity across Nordstrom and Nordstrom Rack. This quarter digital sales increased 20% over the third quarter of 2019. Digital sales represented 40% of our business in Q3 and we continue to drive growth over 2019 while store traffic improved sequentially. Before I turn the call over to Pete, we'd like to express our thanks to our exceptional team. Their dedication and efforts in serving our customers and transforming our company drive our optimism about the future of the business. Nordstrom has a strong foundation and unique competitive differentiators, and we are working diligently to accelerate our strategic transformation and build on our core advantages. To be clear, we recognize the need to move faster and more aggressively. We are taking decisive steps to improve rack performance, increase profitability, transform our supply chain, and create value for our shareholders. All said, we remain confident in our ability to achieve the top and bottom line commitments we set forth at our investor event and continue to build capabilities to profitably grow our market share. With that, I'll turn it over to Pete.