Nordstrom, Inc.

Greetings, and welcome to the Nordstrom second quarter 2023 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. And as a reminder, this conference is being recorded. At this time, I'll turn the call over to Sarah Penner, Manager of Investor Relations for Nordstrom. Thank you. 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 Kathy Smith, 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, Sarah, and good afternoon, everyone. Thanks for joining us today. Before we begin, I'd like to welcome our new CFO, Kathy Smith, to our earnings call. Kathy is a proven finance leader with many years of experience delivering business results. She has deep expertise navigating the dynamic retail environment in her prior roles with some of the largest retailers in the country. We are thrilled to have her on the team. You will hear more from her today. I'll start with our Q2 performance. We delivered solid results in the second quarter with earnings per share higher than last year despite lower sales. As we've said since the beginning of this year, we saw clear opportunities to drive higher profitability even in a challenging sales environment. We continue to make progress in our three key priorities to improve performance at Nordstrom Rack, increase inventory productivity, and optimize our supply chain capabilities. Our teams performed well. working to improve the customer experience while staying focused on these priorities. Our top line results improved sequentially from the first quarter at both banners. At the Nordstrom banner, our teams did a good job curating the assortment for our anniversary sale, balancing relevance the things customers expect to find with inspiration, the new items they discover shopping online and in store. Customers responded positively to newness and our fall assortment during our successful anniversary event, particularly in stores. At its core, anniversary is a one-of-a-kind event that rewards and engages our loyal customers with brand new product from the best brands at reduced prices for a limited time. We saw higher engagement throughout the event, with more customers this year attending over 740 events and over 90% of our highest level Nordic Club members shopping during the sale. In addition, we're pleased that Anniversary had a very strong inventory sell-through, which was up 15% from last year and puts us in a better inventory position as we enter the second half. At Nordstrom Rack, our initiatives to improve our product mix with strategic brands help deliver sequential improvements in both top line and profitability. Sales trends at the RAC also improved sequentially throughout the quarter, and July was our best month. Looking ahead, we remain confident in our ability to deliver against the financial outlook we set for 2023, even as we continue to navigate economic uncertainty in the near term. We're encouraged by the progress we've made this year and remain focused on delivering against our three key priorities in the second half to drive higher profitability and return to long-term profitable growth. I'll highlight a few wins we had during the second quarter within our three priorities, improving performance at Nordstrom Rack, increasing inventory productivity, and continuing to advance our supply chain optimization initiatives. At Nordstrom Rack, we were delivering on our promise of offering great brands at great prices, and our teams made significant progress on our initiatives to improve both sales and profitability. As we shift our assortment mix to include more of the brands we know our customers respond to, We are seeing results improve through a higher sell-through and faster inventory turns, giving customers newness each time they shop at Nordstrom Rack. In the second quarter, sales from strategic brands came in at our target of 65%, and we've planned our on-order for the second half similarly to meet our goal. We are pleased with the progress we made to expand our reach with eight new Rack stores open to date in 2023, and we look forward to opening 11 additional new stores by the end of the year. Rack stores are a great investment, with returns that exceed our cost of capital and a short payback period. Rack stores also represent the largest source of new customers for Nordstrom, and we are bringing the Rack's unique product offering and suite of convenient services to more markets as we expand our footprint. Turning to our second priority of improving inventory productivity, we continue to manage with leaner inventories, improved sell-through and faster turns across most of our categories, resulting in gross margins that are on par with last year's Q2, which was the highest margin quarter of 2022. We also made progress right-sizing our designer inventory and continue our work to further reduce our position there. We are entering the second half of the year in a good inventory position at both banners, with overall levels down 18% compared to last year versus an 8% decrease in sales. Stronger sell-through during the anniversary sale positions us well to be more responsive to what customers are buying in the second half of the year. Our lower inventory levels will set us up to deliver gross margin improvements, particularly in the fourth quarter compared to last year. Turning now to our third priority, supply chain optimization, we delivered a better experience to our customers through faster delivery, especially during anniversary. For the fourth 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&A deleverage on lower sales. Since we started, we're delivering faster and at lower cost. We began our current supply chain optimization work in early 2022, and since then, we have delivered significant customer benefits and operational efficiencies. Compared to the first quarter of 2022, supply chain costs per unit in the second quarter of this year were 5% lower against an inflationary backdrop of about 7% over that time. Looking ahead, we continue to seek out additional efficiencies in flow and improve productivity through inventory management initiatives. In closing, we are making solid progress against the three priorities we set at the beginning of the year and will continue to focus on these goals. We are fortunate to have an experienced team who has embraced the more disciplined operational approach we are taking to manage near-term headwinds while continuing to keep the customer at the center of everything we do. We have a strong balance sheet and cash position and are confident that by continuing to invest in our digital and supply chain capabilities, as well as in our stores, we will be better positioned to drive sustained profitable growth and 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.