Nordstrom, Inc.

Greetings and welcome to the Nordstrom first quarter 2023 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 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 first 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, Chief Accounting Officer, who will provide a business update and discuss the company's first quarter performance. And now, I'll turn the call over to Eric.

Thank you, Sarah. Good afternoon, everyone. For the first quarter, we delivered net sales of 3.1 billion, a loss per share of $1.27, and adjusted earnings per share of 7 cents. Adjusted earnings were higher than the first quarter of last year despite lower sales, reflecting the progress we are making against the priorities we laid out at the beginning of the year. improving Nordstrom Rack performance, increasing inventory productivity, and optimizing our supply chain. As we've seen since June of last year, customer demand continued to be pressured given the current macroeconomic backdrop, which impacted our top-line results across both banners. By comparison, the first quarter of 2022 benefited from a strong pent-up demand for a return to occasions as the pandemic receded. As a result, our year-over-year sales comparisons for Q1 were difficult, but those comparisons get progressively easier as we proceed through the year. Given the uncertain macro environment, we remain focused on executing with agility. Our three key priorities position us for improved profitability in 2023 and a return to long-term profitable growth. I'd now like to talk about our progress against those priorities during the first quarter. Our first priority is to improve the performance of Nordstrom Rack. We're pleased with the progress our teams are making across multiple fronts. Consistent with our customer promise to deliver great brands at great prices, we've increased the penetration of our top-performing strategic brands. As strategic brand penetration increases, we're seeing rack sales trends improve. April was our best month of the quarter, and we have continued to see trends improve in May. We also continued to expand our reach and convenience for customers by opening two new stores during the quarter, which together with the two stores we opened last year have performed well so far, with sales productivity exceeding the fleet average. Rack stores are a great investment, with returns that exceed our cost of capital and a short payback period. They also represent the largest source of new customers for Nordstrom. We are excited to roll out to more markets as we expand our rack footprint. We opened six more stores in May and plan to open 13 additional new stores later this year. With an improved assortment and more new stores, we expect rack performance to sequentially improve throughout 2023. Moving to our second priority of increasing inventory productivity, we are managing with leaner and more current inventories, improved sell-through, and faster turn across most of our categories, resulting in a 110 basis point increase in our gross profit margin over the first quarter of last year. Overall inventory levels were 8% lower than last year, with non-designer inventory down 11%. Pete will talk more about the performance of our designer business and the actions we're taking to right size our designer inventory. We continue to make significant progress on our third priority, optimizing our supply chain. For the third consecutive quarter, variable supply chain costs fell by over 100 basis points as a rate of sales versus the prior year, helping to mitigate overall SG&AD leverage on lower sales. We are continuing to increase productivity throughout our network, reduce transportation costs, and shorten delivery time to customers. To illustrate our progress, We made double-digit improvements in productivity and throughput in our distribution and fulfillment centers. In addition, we are delivering better service to our customers through faster delivery with overall delivery speed up 9% from last year. Supply chain is the largest component of our SG&A expenses, and we believe there is more opportunity to improve our efficiency and drive overall expense leverage as sales improve. I'm also thrilled we added new leaders to help us advance our strategic priorities. We welcome Kathy Smith as our Chief Financial Officer and Jason Morris as Chief Technology and Information Officer. They will play a critical role as we continue to advance our closer to you strategy. Kathy has a long track record as CFO with many well-known brands and brings deep expertise in retail. I look forward to having her join our next earnings call. In addition, We welcome Atticus Tyson and Eric Sprunk to our board of directors this year. Together, they bring a wealth of expertise in retail, including in technology, cybersecurity, and operational excellence. In summary, we are delivering on our priorities to improve profitability against what remains an uncertain macro environment. We believe continued focus and execution will drive incremental improvement over the balance of the year and will position us well to create long-term shareholder value. We look forward to sharing our continued progress in the quarters ahead. With that, I'll turn it over to Pete. Thanks, and good afternoon, everyone. Eric discussed the progress we're making against our key priorities, so I'll focus my remarks on our category performance and our approach to agile inventory management. Starting with category performance, most categories had tough comparisons to last year's strong double-digit increases from pent-up demand coming out of the pandemic. Still this quarter, both men's and women's active apparel and sneakers perform well. Beauty and men's apparel perform better than average, with men's dresswear continuing to be strong. Within active, customers responded well to our fresh offerings from powerhouse brand partners like Nike, as well as newer brands like Viore, On, and Hoka. Our ability to partner with up-and-coming brands and scale them highlights the important role we play in helping customers discover new and exciting products. Designer was our toughest category, continuing the trend we saw last quarter. Moving to inventory management. Our focus on improving inventory productivity helped us deliver more than 100 basis points of gross profit margin improvement in the first quarter. During our Q2 earnings call last August, we talked about our work to right-size inventory in four areas. First, unproductive regular price merchandise, primarily in the Nordstrom banner, which required deeper markdowns to clear through the back half of the year. Second, Our private brands product, which had soft performance last year. Third, lower price point items at Nordstrom Rack, which did not resonate with our customer. And fourth, designer, where trends decelerated after exceptionally strong growth during the pandemic. We took additional markdowns in the second half of 22 as we prioritized finishing the year with leaner and healthier inventory levels. In 23, we are managing with conservative plans and targeting faster turns. At the Rack Banner, we've increased the penetration of strategic brands, which had strong sell-through during the first quarter and are contributing to our faster inventory turn. At both banners, we're encouraged to see improved performance in our private brands product, which contributed meaningfully to sales in men's dresswear and was also the number one volume driver at Nordstrom Rack. As a result of these efforts, we are now well positioned in three of the four areas of excess inventory we discussed last year, and we are actively working to address designer. Designer has a longer buying cycle and takes more time to clear excess product. The category had a strong run-up during the pandemic, and we're now seeing demand normalize. We are working to right-size our designer inventory, which will include incremental markdowns over the balance of this year. The potential impact is already reflected in our financial outlook for the year. It's important to note that designer sales in Q1 remained above pre-pandemic levels. Overall, the category continues to be a strong contributor to our core offering and a key differentiator to our unique breadth of selection. In addition to managing our merchandise mix with greater precision across our banners, we are also enhancing our capabilities to manage inventory with higher accuracy at the unit level through investments in RFID and the shift to cost accounting for internal merchandising. We completed the internal shift to cost accounting in Q1 and began to launch RFID. These capabilities will improve our ability to buy, allocate, and track merchandise across our network, provide us greater visibility into profitability at the unit level, increase efficiency, and reduce shrinkage. Looking forward, we are excited to serve our customers during our upcoming anniversary sale. Our event offers a uniquely curated and diverse assortment of new product from our best brands that will inspire customers across all categories and occasions. This year, we are enhancing our anniversary experience based on customer feedback, providing more ways to participate and delivering the right product while also driving higher profitability. We are focused on engaging and rewarding our best customers through targeted in-store and digital experiences, and our print catalog is backed by popular demand. We have optimized our inventory mix to include more product from the most highly coveted brands, including some exciting new first-time brands. We are excited about our approach to anniversary, which is highly anticipated by our customers and has an outsized impact on our second quarter and fiscal year results. In closing, we're encouraged to see the early results of the disciplined execution of our operational priorities. We're delivering a better customer experience and improving financial outcomes through these ongoing efforts. I'll now turn it back over to Eric to say a few words before Michael discusses our financial results. Before I turn over to Michael, I would like to thank him not only for serving as a great partner in his expanded role as interim CFO during this important transition, but also for his dedication to our customers, our employees, and our shareholders. Michael, you have made significant contributions to our business over the past 13 years, including guiding many strategic initiatives during and after the pandemic, and you have been an integral part in building an outstanding finance organization. Many of you know Michael, and I know you would agree that not only is he an outstanding finance executive and a tremendous leader, but I'll tell you he is an even better person. Thank you for your leadership over the years. We wish you all the best in your next chapter.