Nordstrom, Inc.

Greetings and welcome to the Nordstrom Third Quarter 2022 Earnings Conference Call. At this time, all participants are on 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 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'd like to turn the call over to Heather Hollander, Head of Investor Relations for Nordstrom. You may now 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, Anne Bramman, Chief Financial Officer, and Michael Mayer, Chief Accounting 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. Thank you, Eric.

Thank you, Heather. And good afternoon, everyone. Thank you for joining us today. For the third quarter, we delivered results in line with our expectations with quarterly net sales of 3.4 billion, a loss per share of 13 cents and adjusted earnings per share of 20 cents. As we discussed while reporting our second quarter 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 income cohorts. 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 and clearing through excess inventory to exit the year with healthy inventory levels and mix. These actions prepared us well for the third quarter as macroeconomic pressures impacted all customer segments with outsized impact in the lowest income groups. Additionally, sales decelerated in late October and early November, particularly in geographies with unseasonably warm weather. In the last two 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 workstreams 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 one week of the anniversary sales shifting into the second quarter. Nordstrom Banner sales and gross merchandise value, or GMV, each decreased 3% versus last year. The timing shift of the anniversary sale had a negative impact on Nordstrom Banner net sales of approximately 300 basis points. In the third quarter, 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 second quarter, items with lower AURs underperformed higher AUR items. Customers continued to respond very positively to newness and fashion in our seasonal assortment. 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 fourth quarter 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 RAC store-based order fulfillment and raise the minimum order amount to receive free ship-to-store delivery on RAC.com. These actions reduced our order cancellations, simplified RAC operations, and improved profitability but negatively impacted top line growth at the RAC 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 differentiator for the RAC and we are dedicated to having great brands at great prices at each of our locations. The linkage to the Nordstrom banner gives Nordstrom RAC 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 RAC 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 RAC 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-2023. We believe that improving our assortment and 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, two 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-one 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 RAC.com orders and Sunsetting Trunk Club negatively impacted digital sales by approximately 700 basis points, with the change to RAC.com store fulfillment accounting for the majority of the impact. Our digital sales were also affected by channel shifts 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, and 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 cause. 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 prepare us to manage short-term pressures. With our strong balance sheet and cash position, we also have the flexibility to respond to shifting demand. We are navigating short-term headwinds while also continuing to build capabilities to better serve our customers, drive profitable growth, and increase shareholder value. We are focused on remaining nimble to navigate this environment and look forward to realizing additional benefits in the fourth quarter and into 2023. I'll now turn the call over to Pete.