Nordstrom, Inc.

Greetings and welcome to the Nordstrom Third 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. As a reminder, this conference is being recorded. At this time, I'd like to turn the call over to Jamie Dewis, Head 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 Kathy Smith, Chief Financial 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, Jamie, and good afternoon, everyone. Thank you for joining us today. I'll start with our Q3 performance. For the third quarter, we delivered revenue of $3.3 billion, earnings per share of $0.41, and adjusted earnings per share of $0.25. Our teams executed against our priorities, adapted quickly to shifting sales trends, and delivered year-over-year profit growth despite lower sales in a challenging macroeconomic environment. We managed our inventory well, as evidenced by the positive sales to inventory spread while leaning into pockets of demand. As we enter the holiday season, our teams have worked hard to deliver the right assortment and engaging experiences for our customers. In the third quarter, we continued to make progress on our three priorities. Improving Nordstrom Rack performance, increasing inventory productivity, and optimizing our supply chain. We will continue to focus on these areas in the quarters ahead in order to drive growth, profitability, and an improved customer experience. Based on our year-to-date results, we remain confident in our outlook, expect to deliver full year results within our updated guidance range. Turning now to our priorities. Our brand purpose is to help our customers feel good and look their best. At Nordstrom Rack, we know what works and believe in our strategy, delivering great brands at great prices, expanding our reach and convenience with new rack stores in key markets, and driving greater engagement and profitability at NordstromRack.com. Throughout the quarter, our team stayed focused on our assortment and moved quickly to meet shifting demand, providing a compelling flow of new and relevant products for our customers. In the third quarter, We continued to grow the most desirable brands, which had over a 300 basis point higher sell-through than other brands in our rack assortment, and feel good about our offering as we head into holiday. We also know that our rack customers value convenience, and we believe our stores are under-penetrated. We opened 11 new rack stores during the third quarter and one early in the fourth quarter, bringing the full year total to 19 new stores. We saw a strong customer response at each opening and have received positive feedback from customers. Rack stores continue to be a great investment for us, delivering returns well in excess of their cost of capital with a short payback period. They also continue to be our largest source of new customer acquisition. The scale of our digital off-price business is differentiated and unique, allowing us to serve our customers via omnichannel offerings in a way that other off-price retailers do not. And while we still have work to do on our digital offering for the RAC, we're making progress as we've reworked the business model to ensure sustained profitability. The RAC digital channel is now profitable on a year-to-date basis, and we expect it to continue to be profitable for the full year. This digital channel plays an important role for the RAC in serving customers across stores and digital. Turning to our next priority, Increasing inventory productivity is critical in providing our customers with a consistent flow of the most relevant merchandise when and where they want it. Total inventory was down 9% in the third quarter and resulted in a positive sales to inventory spread. This lower level of inventory required fewer markdowns than last year and helped to drive expansion in our gross margin by 180 basis points in the third quarter. We're also pleased with the traction that our Nordstrom private brands are gaining. As a retailer of the best brands in the world, we believe our own brands will play a critical role in our overall mix as they have higher margins and lower return rates. Additionally, our investments in RFID technology continue to deliver improvements. enhancing the integrity of our inventory by providing improved stock accuracy and creating operational efficiencies across our stores and supply chain. Thanks to the hard work of our teams all year long, our overall inventory position is healthy heading into the holiday season. We also continue to make good progress on our third priority of optimizing our supply chain capabilities. Following four consecutive quarters of reductions in variable supply chain costs of more than 100 basis points, we were able to drive another 50 basis points reduction in the third quarter. Looking ahead, the absolute level of cost savings will stabilize as we've now been focused on this priority for over a year. However, we'll continue to seek out additional efficiencies in flow and improve productivity through inventory management initiatives. Our efforts to improve our supply chain have also contributed to increased productivity in store fulfillment for online orders at the Nordstrom banner and better inventory positioning and flow across the company. Q3 marked our seventh consecutive quarter of year-over-year improvement in click-to-deliver times. We've been able to improve click-to-deliver times by nearly 20% over the last couple of years. All of this translates into a better experience for our customers and cost savings for us through faster delivery, lower cancellation rates and increased accuracy of inventory. During the quarter, we announced some key leadership changes and welcomed a new member to our board of directors. Jamie Nordstrom was appointed Chief Merchandising Officer. Jamie has worked across nearly every aspect of our business and has held broad-based leadership roles, including in merchandising, store operations, and across our digital channels. Fania Chandler was named President, Nordstrom Stores. She has held several leadership positions, most recently serving as Senior Vice President and Regional Manager of the Southwest Region. Gemma Leonello was appointed the role of President, Nordstrom Rack. She has served in numerous executive positions including in both merchandising and stores, and she spent 11 years working within our Nordstrom Rack business. And Lisa Price rejoined Nordstrom as Chief Human Resources Officer. Having most recently served as a CHRO of a large U.S. consumer company, Lisa understands that the success of our business starts with our people. All four have proven track records of leading successful teams while maintaining a relentless focus on our customers, and we look forward to what they will accomplish in their new roles. We also welcome Guy Perceau to our board of directors. Guy is the senior leader at Procter & Gamble. In closing, we are well positioned for the holiday season as we navigate near-term macroeconomic headwinds while continuing to advance our long-term strategic priorities and remain focused on improving the customer experience. Before I hand it over to Pete, I'd like to recognize the teams throughout our company that have been instrumental in driving our progress this year, despite a challenging environment across the retail landscape. Their focus on and passion for our customer is what makes our success possible.