Nordstrom, Inc.

Greetings and welcome to the Nordstrom Fourth 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'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, and Ann Bramman, Chief Financial Officer, who will provide a business update and discuss the company's fourth quarter performance. And now, I'll turn the call over to Eric.

Good afternoon, and thank you for joining us today. Our fourth quarter results were marked by sequential sales improvement, strong digital growth, improved profitability, and continued progress in executing on our long-term strategy. Looking back on the fiscal year, revenue increased 38% versus 2020, and we delivered an EBIT margin of 3.4% in line with our guidance. Importantly, we've made progress on our strategic initiatives and have line of sight to achieving in the coming year the financial targets we presented at our 2021 investor event. Our team continues to work with urgency to build additional capabilities to better serve customers, expand market share, and deliver greater profitability. We are laser focused on the three key areas we outlined in the third quarter, improving Nordstrom Rack performance, increasing profitability, and optimizing our supply chain and inventory flow. Starting with Nordstrom Rack, last quarter we undertook a thorough analysis of the business and developed prescriptive plans to optimize the customer experience and improve our performance. As we raised inventory levels and improved average price points in our stores, we posted a sequential sales improvement of 320 basis points in the fourth quarter. Though we are in the early stages of implementation, the Rack results and improving store customer satisfaction scores reaffirm our confidence in the plans we've outlined. Nordstrom Rack has a unique mix of brands with limited distribution in the off-price sector. Customers are drawn to the Rack to purchase sought-after brands at a terrific price. Rack faces a unique challenge as off-price procurement of the same top brands we carry at Nordstrom is particularly difficult in the current environment with production constraints and lower levels of clearance product. As a result, we are executing a multi-layered plan to both expand our offerings of the most coveted brands we carry, as well as source from new vendors to ensure we have the selection our customers want. In Q4, we improved our in-stock position at the rack by increasing the flow of inventory, making more frequent deliveries to our stores, partnering with brands to prioritize rack deliveries, and focusing our sourcing efforts on core categories that matter most to customers, such as shoes and apparel. We are also increasing our opportunistic use of pack-and-hold inventory. allowing us to buy larger quantities of select relevant items when available, then hold a portion of it to deploy in periods with high demand, tight supply, or system constraints. As we improve our supply of premium brands and fine-tune our assortment to better align with customer needs, we expect to achieve a better balance of price points at the RAC. Finally, we are taking action to strengthen RAC's brand awareness and drive traffic. are pleased with the results of our more reasons to rack marketing campaign which showed a meaningful increase in future purchase intent through this comprehensive set of actions we anticipate continued improvement in rack performance throughout fiscal 2022 to be clear we are confident in our ability to profitably grow our rack business and won't be satisfied until we do so turning to profitability We delivered significant improvement in merchandise margin this quarter. Pete will take you through our progress to date and our plans to deliver incremental improvement in 2022 through strategic pricing and category management. Within SG&A, we rationalized our overhead cost structure in 2020 and remain committed to sustaining our expense discipline. Given the significant macro-related pressure in fulfillment and labor costs that we're facing currently, the team is taking action to mitigate the overall impact from those pressures, including optimizing our supply chain to drive efficiencies. We expect that the supply chain optimization workstreams we began implementing this quarter will enhance the customer experience and drive top-line growth while also driving efficiencies in labor and fulfillment in 2022. Pete will provide more detail on our plans for supply chain improvement in a moment. Turning to fourth quarter performance, in addition to sequential improvement in our RAC banner, we saw strong enterprise digital growth of 23% versus 2019 and increased utilization of the interconnected capabilities delivered by our market strategy. Nordstrom Banner's sales were flat, while gross merchandise value, or GMV, increased 2% in the fourth quarter versus 2019. We continued to see significant disparity in geographic performance. The southern U.S., where 44% of our stores were located, was a source of strength for the Nordstrom Banner, outperforming the northern U.S. by approximately 7 percentage points. Notably, suburban locations outperformed our urban locations by 10 percentage points in the fourth quarter, as city centers have been disproportionately impacted by the effects of the pandemic. In addition to the three focus areas that I've discussed, the team continues to make progress in the key strategic growth priorities we laid out at our investor event last year. Winning in our most important markets and increasing our digital velocity. Starting with our priority to win in our most important markets. We are leveraging a strong store fleet that positions us physically closer to the customer. Our strategy links our omni-channel capabilities at the local market level, allowing us to drive customer engagement through better service and greater access to product no matter how customers choose to shop. This platform is a unique differentiator, delivering unmatched convenience and providing 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. We continue to scale the enhanced options we launched in 2020, like the expansion of order pickup and ship to store to all Nordstrom Rack locations, with order pickup reaching a record high 11% of Nordstrom.com sales this quarter. And one third of next day Nordstrom.com demand was picked up at Rack stores. demonstrating the power of integrating capabilities across our two banners and across our digital and physical platforms. We are encouraged by increases in order pickup demand, a leading indicator of future growth as customers utilizing in-store pickup have higher engagement and spend three and a half times more than customers who don't utilize the service. Increasing buy online, pickup and store utilization is advantageous as it is both our highest satisfaction customer experience and most profitable customer journey. Customers clearly value the strength of our omni-channel model as evidenced by a dramatic increase in spend when they engage across our 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 and banner. We also continue to evolve our approach to get closer to our customers than ever before, building deeper connections through our loyalty program and differentiated service model. Our Nordy Club loyalty program is a powerful engagement driver with 67% sales penetration in 2021. Our core customers remain highly engaged with loyalty customer accounts exceeding 2019 levels. We're also pleased to see customers responding well to our assortment and services with new customer acquisition activity returning to 2019 levels. We continue to advance our digital tools, including virtual style boards and style links. to allow our salespeople to offer our customers highly relevant recommendations, both in-store and digitally. This year, remote selling sales volume increased 63% versus last year. We're encouraged by the results of this program with very high customer satisfaction scores and average customer spend over six times that of an average Nordstrom customer. With regard to increasing our digital velocity, we maintain strong growth at nordstrom.com and nordstromrack.com this quarter, with digital sales increasing 23% over the fourth quarter of 2019. With continued growth in digital, our total penetration has increased by nine percentage points over the past two years to 44%. In the fourth quarter, We also saw record high mobile app usage, with mobile users representing approximately 70% of total digital traffic. Though we still have much work to do on our transformation, the progress we've made gives us confidence in our strategic plans and business outlook for 2022. We believe there is a meaningful opportunity ahead for us to better serve customers by improving rack performance and transforming our supply chain. leading to increased profitability and shareholder value creation. We have line of sight to achieving the financial targets outlined at our 2021 investor event, while building the capabilities to profitably grow market share beyond that. We look forward to sharing our continued progress in the quarters ahead. As we look back on the year and look forward to 2022, we'd like to thank our outstanding team for their tireless dedication to serving customers, building new capabilities, and evolving our company. Our people are truly our greatest asset. With that, I'll turn it over to Pete.