In a quarter when year-over-year comparisons were disrupted by both a delay of its Anniversary Sale and the pandemic, Nordstrom on Tuesday said that third quarter net sales fell 16% year over year to $3 billion. Digital sales rose 37% to $1.6 billion, representing 54% of total sales.
At the full-price business, net sales fell 7%; excluding the impact of the Anniversary Sale the decline was in "the mid-twenties percent range," according to a company press release. Off-price Rack net sales fell 32% year over year. The company doesn't report comps.
Nordstrom stayed in the black, but net income slid to $53 million, from $126 million a year ago. Inventory fell 27%. Gross profit contracted 150 basis points to 32.8%, mostly due to the sale shift, but also to lower volume. Merchandise margins "exceeded company expectations and reflected significant improvement relative to the prior quarter."
For a while there, the pandemic threatened to interfere with Nordstrom's project to establish its "market strategy," a knitting together of its full-line, Rack, online and, in some areas, Local stores.
Its ambitions to open several more merchandise-free Local stores have been thwarted, at least for now. But CEO Erik Nordstrom on Tuesday said the crisis has forced the retailer to adapt in ways that have value longer term, including integrating its Rack stores and off-price digital operations more fully into the concept.
The department store is now offering the services found at Locals, like store pickup, styling and alterations, at Rack stores. Rack stores are also now available for pickup of full-line orders, as well as HauteLook and Rack orders. And about 30% of styling appointments are occurring online, he said.
The effort led Cowen & Co. analyst Oliver Chen to call Nordstrom "A speedier & more connected retailer" in a Nov. 24 client note. He also agreed with Nordstrom executives' contention that there will be meaningful pent-up demand for apparel as the pandemic eases.
"We believe [Nordstrom] has numerous best in class features, including 30%+ full-price digital penetration and blending the physical and digital channels, and does an excellent job driving customer centricity," Chen also said. "Nevertheless, physical comps have underperformed at full-price, while we look for steadiness in the off-price channel as performance has been mixed."
The sales plunge at Rack was especially troubling to GlobalData Managing Director Neil Saunders, who noted that it's "a dreadful outcome compared to TJMaxx, Ross and Burlington," whose declines during a similar period were all only in the single digits. Rack does more business online, but lacks the home offer and diverse pipeline of those major players.
"[Rack's] product mix is less focused on comfortable and casual apparel, which is what helped a retailer like Ross perform so well," Saunders said in emailed comments, adding that the off-pricer's merchandise mix "has looked increasingly shabby over the past few months."
"All of this is very disappointing, if only because unlike many of its rivals, Rack does have a transactional website and should be capable of riding the wave of digital growth to make up for some of the softness in stores," Saunders said. "Before coronavirus hit, we flagged some of the weaknesses with Rack and suggested it needed to diversify beyond apparel and improve its assortment in clothing. Coming out of the pandemic, we believe these fixes to be doubly important."
Nordstrom shares rose after its report, despite missing some analyst expectations. That's likely because the retailer is thought of as potentially "the last man standing among a field of thinning department stores," William Blair analyst Dylan Carden said in a Wednesday client note, calling recent cost cuts and the Rack expansions encouraging.
But he also warned that the company "is in for a slow recovery," in light of "an underperforming digital channel," uncertainty about changes to the market strategy, further disruption from the pandemic, declining mall traffic and inventory constraints.