Nordstrom, Inc.

Greetings and welcome to the Nordstrom 4th 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. I'll turn the call over to Sarah Penner, Manager 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. As a reminder, we are here today to discuss our business and fourth quarter performance, and we will not be taking questions on other matters. Participating in today's call are Eric Nordstrom, Chief Executive Officer, Pete Nordstrom, President and Chief Brand Officer, and Michael Mayer, Interim 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.

Thank you, Sarah, and good afternoon, everyone. Thank you for joining us today. For the fourth quarter, we delivered net sales of $4.2 billion and earnings per share of $0.74. Looking back on the fiscal year, revenue increased 5% from 2021, and adjusted EBIT margin was in line with last year at 3.3%. We saw customers starting to pull back in late June, primarily in Nordstrom Rack, and this trend continued through the holiday season. Across both banners, the softening trend was more pronounced in customers with lower income profiles. Given the uncertain environment, we are executing with agility. We took action starting in Q3 to clear excess inventory and optimize our product mix. As a result, we are now in a much healthier position with inventory levels down 15% from last year and in line with 2019 levels. While this was the right strategy to better position our inventory levels for 2023, we implemented more markdowns than we had initially planned to achieve our goal. This was compounded by the softening trend, excess inventory levels and promotional intensity in our sector. As a result, our margins were lower than expected in the fourth quarter. Despite this, I'm pleased that our supply chain initiatives delivered efficiency and lower per unit costs in Q4, resulting in more than 200 basis points of SG&A rate improvement, even with lower sales leverage and ongoing inflationary pressures. At the same time, we remain committed to driving more profitable long-term growth. We are looking across our business and operations with this clear mindset to ensure we are deploying our financial resources and talent against the opportunities where we are best positioned to win in the medium and long term. With this in mind, we have decided to wind down our Canadian business over the next few months to simplify our operations and increase our focus on our core U.S. business. We entered Canada in 2014 because we believed it presented a compelling opportunity, and we are grateful for the many customer relationships we have built over the years. Despite our team's best efforts, including multiple initiatives to improve our outcomes, our Canadian business has not been profitable. The impact from COVID drove further losses with no realistic path to sustainable profitability. Canada accounts for less than 3% of our total sales, and we believe we will benefit from a sharper focus on our U.S. business. Michael will provide more detail on the one-time charges related to this decision and the impact on our sales and profitability going forward. While we are confident in our decision, it was a difficult one to make and we recognize the personal impact on our employees. We are committed to treating our Canadian employees with fairness and respect. We are establishing an employee trust that will provide additional benefits for employees during the wind down period. I have the deepest appreciation for the talent and passion of our great team in Canada. I want to sincerely thank them for their dedication to customers and the service they have provided over the years. More than ever, I believe Nordstrom is uniquely positioned to meet the changing needs of our customers. With our two powerful, interconnected brands, the breadth of our products, styles and prices, and most of all, our unwavering passion for customer service, we have a durable foundation for growth. We are taking clear actions in 2023 to expand market share and improve our profitability. It starts with our loyal customer base, our greatest asset. We acquired approximately 10 million new customers in 2022 and added 2.5 million new Nordic Club members. We are committed to building on these successes while delivering on our legacy of service across physical stores and digitally as the customer experience continues to evolve to be even more omnichannel. This is critical to driving engagement and attracting more customers. In addition to improving the customer experience, we are focused on three specific priorities to drive better financial performance in 2023. One, improving Nordstrom Rack performance. Two, increasing our inventory productivity. And three, continuing to advance our supply chain optimization initiatives. I'll address each of these briefly, then Pete will go into more depth on some of our initiatives in support of these priorities. Starting with Nordstrom Rack. Sales in Q4 declined 8% versus last year as we saw consumers pull back spending. We estimate that a little over half of the decrease was driven by specific actions we took to improve profitability, namely eliminating costly RAC store-based order fulfillment and raising the minimum order amount to receive free ship-to-store delivery on norshamrac.com. These actions reduced order cancellations, simplified RAC operations, and improved profitability. but negatively impacted top line growth at the RAC. We also cleared out older and unproductive inventory, giving us increased open to buy and therefore greater flexibility to improve our merchandise assortment as we enter 2023. We are committed to improving both our top and bottom line performance at Nordstrom RAC in three ways. First and most importantly, we are prioritizing 100 nationally recognized strategic brands to help us drive sales and grow market share. Simply put, we know we win with customers at the rack when we deliver great brands at great prices. We believe strong brand recognition drives outsized customer engagement, and these brands are proven performers, many of which are not widely available in the off-price space. By increasing inventory turns of the rack, we can increase the flow of these great brands and give customers newness each time they visit us. Second, we are expanding our reach and convenience for customers by opening 20 new rack stores this year. Rack Stores continue to be our largest source of new customer acquisition, accounting for more than 40% of newly acquired customers in 2022. Our Rack Store fleet is under-penetrated, and we have an opportunity to attract more customers and drive profitable growth through a proven model as we expand our reach with more new stores. Third, we will drive greater engagement and higher profitability at norshamrack.com. Our digital capabilities are unique in the off-price space, and we see opportunities to leverage our digital assets to increase engagement with our rack customers. We will also continue to optimize the operational model for improved profitability as we did by discontinuing store-based fulfillment of norshamrack.com orders. Moving now to our second priority for 2023, inventory productivity. Better inventory discipline across our operation provides customers with relevant and new assortments from the world's best brands. We also have a significant opportunity to improve our earnings and returns on invested capital through increased productivity from our merchandise inventory, our largest annual investment. The substantial disruptions and volatility in our business over the past three years had a significant impact on our inventory management and outcomes, including buy plans, receipt flows, stock levels, markdowns, and turns. As supply chains have stabilized, we have an opportunity to return to pre-pandemic norms across these elements of our inventory management. Finally, let's turn to our third priority of supply chain optimization. We made great progress in 2022 on our supply chain initiatives, which drove improvement in our SG&A rate despite lower sales leverage and continued inflationary pressure. Pete will provide highlights from our work in 2022. This year, we will build on our momentum to further improve the customer experience while driving greater expense efficiency. We're continuing to scale our West Coast Omnichannel Center, and we are building productivity across our network. Improvements in inventory turns and flow also continue to help reduce supply chain costs. The past three years have been the most challenging and unpredictable for our industry in more than a generation. We are incredibly proud of the way our people navigated the unprecedented circumstances while remaining true to our core values. As we enter 2023, we are ready to move forward. We have a clear set of priorities that we expect will drive improved performance in the near term while positioning us for longer-term profitable growth. We have made difficult decisions to increase our focus on executing against those priorities in our core business. We have a strong balance sheet and healthy cash flows, and we remain committed to putting the customer at the center of everything we do. With that, I'll turn it over to Pete.