Nordstrom, Inc.

Greetings and welcome to the Nordstrom second 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. If you'd like to ask a question, please press star one on your telephone keypad. If anyone should require operator assistance during the conference, please press star zero 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 second quarter performance. And now, I'll turn the call over to Eric.

Thank you, Heather, and good afternoon, everyone. Thank you for joining us today. We delivered solid results in the second quarter with top-line growth, increased profitability, and continued progress toward our long-term strategic and financial goals. We delivered these results despite customer demand decelerating significantly in late June, predominantly at Nordstrom Rack and in our lowest-income customer cohorts. Though our second quarter was consistent with our previous guidance, we are updating our outlook for the balance of the year to reflect these softening trends and actions we are taking to reduce our inventory levels. In the second quarter, customers continued to shop for occasions while also refreshing their wardrobes, which drove demand for our core categories and services. We know customers look to us for the occasions that matter most, and we were well positioned to serve them with our differentiated product offering the convenience of our interconnected model, and our commitment to customer service. Total sales increased 12% over last year, which includes the benefit of approximately 200 basis points from one week of the anniversary sales shifting into the second quarter. Total digital sales grew 6%. Nordstrom Banner sales and gross merchandise value, or GMV, each increased 15% over last year, and sales showed sequential improvement over pre-pandemic levels. Rack sales grew 6%. Before I discuss the second half of the year, I'll share our perspective on spending and behavior within our customer base. As we discussed while reporting our first quarter results, at the time, we did not see macroeconomic pressures adversely impact customer spending, which we attributed to the higher income profile of our customer base. This continued through most of the second quarter until late June, when demand began to soften, mostly in Nordstrom Rack. Compared to the first two months of the quarter, July sales decelerated 9 percentage points in the RAC banner. 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 income segments. For example, in the Nordstrom banner, items with lower AURs underperformed higher AURs. Within our designer business, higher-priced luxury products significantly outperformed lower-priced product. Customers sought newness and responded very positively to the fall assortment overall, but were less responsive to our private label product and clearance items. Taking all this into account, we are updating our 2022 financial outlook to reflect the deceleration at the end of the quarter, as well as anticipated margin pressure from clearing through excess inventory. And we'll provide more detail on those updates. We are prioritizing actions in the short term to position our business for success in a rapidly evolving environment. This means adjusting our plans for the second half, aligning expenses to those plans, reducing inventory levels, and exiting the year in a clean and current inventory position. At the same time, we continue to focus on improving rack performance, increasing profitability, and optimizing our supply chain and inventory flow. We are making progress in these initiatives, and while they will not fully offset the gross margin impacts of our inventory reductions this year, we expect them to benefit our performance in 2023 and beyond. While we take action to address these short-term headwinds, we will continue to build additional capabilities to better serve customers and drive profitable long-term growth, with a focus on winning in our most important markets, advancing our digital capabilities, and improving Nordstrom Rack performance. A fundamental component of our closer-to-you strategy is winning in our most important markets. Our strategy provides customers convenience, connection, and access to the best product selection through a strong store fleet, two unique banners, and omni-channel capabilities linked at the market level. For example, during this year's anniversary sale, as customers utilize the convenience of our integrated touchpoints, order pickup in stores increased 9% compared to last year's event. Building on our progress this quarter, we scaled our closer to you strategy by expanding next day order pickup capabilities to more than 60 additional rack stores in our top 20 markets. And our top 20 markets outperformed our other markets by seven percentage points. We also continue to advance our digital capabilities, working to further extend our heritage of customer service and personalization to a digital world. We are scaling our styling program and offering a range of digital services, including stylist inspired looks, virtual style boards, and online styling appointments. While we still see the highest number of customers engaged with our in-person styling, we are seeing rapid growth within these digital services. Digital styling customers are also highly engaged, spending five times more than an average Nordstrom customer. Finally, we continue to focus on improving Nordstrom Rack performance by increasing our supply of premium brands, improving our assortment, and growing brand awareness. We're making progress and have driven sequential improvement in sales growth versus pre pandemic levels, the last three quarters since initiating these work streams. we're also encouraged by the positive customer response to our growth initiatives, for example, we are seeing strong early results from our rack beauty program expansion. Despite this progress at RAC in the first half of the year, demand trends decelerated significantly in late June. The deceleration was more pronounced in the lowest income customer segments, which represent a greater proportion of RAC's customer base than at Nordstrom. We also have more work ahead to fully optimize our RAC assortment. As we've said before, 90% of the top brands at Nordstrom are sold at Nordstrom RAC. Premium brands are a differentiator for the RAC and we are focusing on having the best brands at the best prices at each of our locations. This quarter, sales of our top 100 brands at the RAC increased 17%, which underscores the opportunity from increasing our supply of premium brands. In addition to improving penetration of premium brands, we are shifting away from the lower price point items that have not resonated with RAC customers. As Pete will describe later, we are taking aggressive action to clear through this inventory in the second half of the year. We believe that increasing the penetration of top brands at the RAC will differentiate our offer and fuel our growth. In closing, though we face uncertainty as the consumer shifts, we have a seasoned team that has successfully managed through a range of business cycles. We have continued to build on our legacy of being a market leader in customer service that is always a result of our teams putting the customer at the center of everything we do. We are fortunate to have so many people with us who truly care about the customer. We have a strong balance sheet and cash position. And through investments in our closer to you strategy and digital assets, we are well positioned to capture pockets of demand. We are taking the necessary steps to navigate the short term while also continuing to invest in capabilities to better serve our customers, drive long-term profitable growth, and increase shareholder value. With that, I'll turn it over to Pete.