Nordstrom Q4 2015 & 2015 Earnings

Source:  Geri, Elizabeth, "Nordstrom, Vancouver BC." 2015.

If you are like me, you marked the date of the Nordstrom Q4 earnings announcement on your calendar (Thursday February 19).  I got up that morning, excited.  Unlike most of the retail industry, Nordstrom does not release monthly performance metrics (aren’t you a little bit jealous that they don’t have the monthly spin??) Generally considered the perennial favorite of the department store segment, Nordstrom is solidly managed with innovative leadership and an actively involved founding family.  Their performance sets the bar, while quarterly announcements yield important insights on operations.  Watching Nordstrom’s performance also gives us all an excuse to do a little comp shopping in the name of research.

So, back to last Thursday…  1pm came (I’m on the west coast) and the release dropped.  Good news!  “Nordstrom Fourth Quarter and Fiscal 2015 Earnings In-Line with Expectations”.  The subheading indicates “Achieved sales growth of 7.5% and comparable sales increase of 2.7% for the year.”  Phew!  After concerning Q3 results, marked by a customer fall-off in August, I was worried. But, these headlines seemed fine - crisis averted.  I planned to skim the release and then review the call transcript the next day.  But, a murky picture quickly emerged.

Friday morning headlines painted a bleak picture.  “Nordstrom just confirmed a curse in American retail,” Business Insider asserted.  “Stay away from apparel,” Cramer urged on CNBC.  “Nordstrom:  Unhappy Holiday” argued Barrons.  The sky is falling!

We already know that holiday was tough, so lets look beyond the headlines and hype to see what Nordstrom is signaling and  how they plan to tackle 2016 and beyond.  We are all smarter than those headlines.

Just one year ago, Nordstrom announced a goal of reaching  $20B in sales by 2020, while delivering top quartile shareholder returns.  This was after missed earnings, but solid comp sales resulting in $13B total sales. Today, with $14B in sales, they are focused on:

• Driving topline growth through investments in new businesses like Canada, Trunk Club, HauteLook and online extensions.
• Pursuing product freshness and newness with TopShop, Brandy Mellville and Charlotte Tilbury and  continuing investments in their own private label brands.
• Enabling seamless customer shopping - including significant investments in technology to meet the customer where she wants. 

Are these investments working?  Nordstrom added nearly $1.0B in topline sales (8% growth) in 2015.  Full price businesses (including Canada and Trunk Club) grew 5% while off-price (Rack, Nordstromrack.com and HauteLook) increased 14%.  Given the modest growth environment, this indicates Nordstrom is stealing share from competitors.  Great news!  

So, why the dismal stories?  Most of the press is targeting the financial community - the folks that make a living trading stocks (ok, I'm over simplifying here, but you see the point, right?)  Stock price is based on confidence in future performance.  The $20B in 2020 target, followed by weak performance and lower 2016 projections call into question the company’s ability to deliver on the goal.  There are two main threads to the story:

1)  Physical store comp sales are down, while online is growing.

Comparable sales increase (decrease) by channel:	Q4 2015
Nordstrom full-line stores	(3.2%)
Nordstrom.com	10.9%
Nordstrom	0.2%
Nordstrom Rack	(3.0%)
Nordstromrack.com and HauteLook	50.4%
Total Company	1.0%

Source:  Q4-15 Performance Summary FINAL.pdf  from Nordstrom website.  (http://investor.nordstrom.com/phoenix.zhtml?c=93295&p=irol-Quarterly, performance summary link.)

While e-commerce and disruptive models dominate the business news cycle, roughly 80% of sales are still coming from physical retail.  Given the volume, it is hard to compensate for lost physical comp sales.  Looking at full-line Nordstrom stores, a 10.9% online comp was necessary to offset the 3.2% negative stores comp, bringing multichannel comp to 0.2% comp (or practically flat).  At the same time, stores operate on a heavy fixed-cost structure, while online has a significant variable component driving down margin as the channel mix shifts.

2)  Profit is falling.  Gross profit as a percentage of net sales decreased 184 basis points (1.84%).  The leadership team argues that this is primarily due to increased markdowns and lower sales - during an ever-increasingly promotional environment during peak season.  

There is likely more to the story.  Those programs driving top line sales are likely impacting earnings as well.  Growth businesses (Canada and New York) incur costs before they start up and affect the overall margin.  New merchandise strategies protect against established brands that are no longer performing as well - but it takes time to build awareness and they are not yet at full contribution.  Seamless shopping?  That comes at a cost in the development of new technologies and increased fulfillment expense.  It appears that growth initiatives are hurting profitability.  

What is a company to do?  Lucky for us, Nordstrom has a plan.

• Positioning.  Nordstrom is focusing on their position as a premium brand, eschewing promotions unless part of their price matching policy.  This gives the company greater access to like-minded brands, interested in protecting their margin.   Nordstrom is maintaining pricing integrity, while acquiring the best product for their customers.  
• Expense Discipline.  Like other retailers, Nordstrom is driving cost discipline, working hard to keep expense growth inline with sales growth. This includes ever increasing fulfillment costs. But, conspicuously absent?  References to headcount reductions.
• Capital Expenditure Reductions.  By focusing on just a few meaningful projects, the team will increase focus and return.  Initiatives include:  scalable cross-channel merchandising solutions, re-platforming technology to reduce costs and streamline new development, reduced online shipping and fulfillment costs and refining online assortments.  2015 was planned as peak expenditure and the team is planning to cut another $300M over the next 5 years.
• Loyalty.  Nordstrom reinforces their strong customer loyalty, stating that  Rewards members represent 40% of sales volume - which is remarkable given that rewards may only be earned with a Nordstrom credit card.  They are also developing a tender neutral (non Nordstrom card) loyalty program launching Q2 2016.  This will allow for more track-ability of customer behaviors, a better customer experience and targeted marketing.  Ultimately, this will reduce costs and increase repeat business.

So what does all of this mean?  While obviously not a victory lap, this is not the end of Nordstrom or retail as we know it - despite the headlines. This leadership team is struggling with a business that is meeting neither their own nor their investor’s expectations.  They are not making excuses, blaming the weather or lack of trend.  They’ve rolled up their sleeves and are doing the hard work of figuring out how to meet expectations.  And, let’s not forget - they are still very profitable. 

My take?  At first glance, I thought $20B by 2020 was unattainable.  But to reach this, they need to grow $1.2B per year for the next five years - and they grew just under $1.0B in 2015.  With Canada coming online with more stores, New York opening and other growth investments getting traction, this may be feasible.  However, if there is another recession (not unlikely within 5 years) or consumer apparel spending continues to show anemic growth, this becomes more challenging.

Nordstrom remains a favorite company to stalk (aka, obsess over and spend money at!)  As a customer-centric company with a progressive leadership team, I’ve found their moves to be smart.  They are testing aggressively and carefully roll out new programs.  I know that if I see something in multiple stores, it is working.  I don’t have to worry that they are trying to appease investors with fancy press releases announcing new technologies that I never see in stores.  

This earnings report solidifies my respect - Nordstrom is fighting in a rough battle for customers and growth - but they are rolling up their sleeves tackling the problems with discipline.  

Sources:

Nordstrom Quarterly Earnings:  

http://investor.nordstrom.com/phoenix.zhtml?c=93295&p=irol-Quarterly

• Earnings Release
• Earnings Slides
• Earnings Call Transcript
• Performance Summary

About Elizabeth:

Elizabeth is a multi-channel retail strategist and digital innovation expert, experienced with strong multi-national brands including:  Gap, Old Navy, Banana Republic, Athleta, Intermix, Amazon.com and Sotheby's.  She has led teams in customer relationship management (CRM), marketing strategy, business intelligence, customer fulfillment, digital marketing (including search, affiliates and display) and strategy.  She recently returned to Seattle from Shanghai China with her husband and two elementary school children.  Elizabeth holds an MBA from the University of Chicago, Booth School of Business and a BA in History and Economics from Whitman College.  When not obsessively reading about retail and shopping her favorite stores, you can find Elizabeth swimming, skiing and trying to avoid cooking dinner.