Nordstrom on Thursday reported that total third quarter net sales fell 2.2%, improving by more than 200 basis points from the first half of the year. Full-price net sales fell 4.1% year over year, off-price net sales rose 1.2%, and total company digital sales rose 7% and represented 34% of the business.
Nordstrom no longer reports comparable sales. Earnings before interest and taxes rose to $193 million, or 5.4% of net sales, from $105 million, or 2.9% of net sales, a year ago. Gross profit as a percentage of net sales expanded 100 basis points to 34.3%, primarily due to fewer markdowns in off-price and higher sell-through of full-price anniversary product. Ending inventory fell 2.7% from last year, maintaining a positive spread between inventory and sales for the third consecutive quarter.
Third quarter net earnings rose to $126 million from $67 million in the year-ago quarter, which had included an after-tax estimated non-recurring credit-related charge of $49 million, according to a company press release. Excluding that charge, earnings grew 9% year over year.
Nordstrom in the third quarter strayed from the narrative, underscored in recent days by weak performance from Kohl’s and Macy’s, that department stores are in trouble.
The company demonstrated inventory discipline that helped it avoid markdowns, which dogged both Kohl's and Macy's in their most recent quarters. And it was "one of the few Softlines retailers not cutting full year guidance on the 3Q call," noted Credit Suisse analyst Michael Binetti in a client note emailed to Retail Dive.
Co-president Erik Nordstrom told him and other analysts on Thursday that the department store's strategy — which entails reaching customers through full-line, off-price and e-commerce operations in a coordinated way, with boosts in a few markets from its smaller, merchandise-free Local outposts — is helping it "serve customers in new and differentiated ways."
"Our goal is to gain market share while driving customer engagement and inventory efficiencies," he said, according to a Seeking Alpha transcript. "There are two elements to this strategy. First, we're giving customers greater merchandise selection with faster delivery without increasing inventory levels. Second, we're engaging with customers by offering express services, such as order pickup, returns and alterations at additional locations."
But sales did fall, particularly in full-price, an indication that Nordstrom is hardly immune to department store woes. Like Macy's, the company has focused on its top locations. Unlike Macy's, Nordstrom never over-expanded drastically, so is able to adjust its footprint with greater ease. The company closed six full-line stores since last year; in the third quarter it opened four new ones, a new New York City flagship, another full-line store at a new mall in Norwalk, Connecticut (The SoNo Collection), and two New York City Local locations.
Still, that focus on premier stores like those in Los Angeles and now New York City is leaving some lesser stores to languish, according to GlobalData Retail Managing Director Neil Saunders.
"Overall, Nordstrom is not a terrible business. It remains profitable and has been aggressive on cost management," he said in emailed comments, in which he deemed the quarter a disappointment. "The company has some good ideas and has invested significantly in tier 1 locations across the US. However, it now needs plans to fix the issues that are dragging down the results, and that essentially means focusing on tier 2 and 3 destinations."
The company may also encounter some difficulty maintaining its markdown discipline in light of weakness at the company's full-line stores and looming price competition this season, according to Credit Suisse's Binetti. "[W]e remain concerned by deteriorating trends in full-price brick & mortar," he wrote, noting that's the company's largest segment, with about 40% of sales. "Importantly, we think [Nordstrom's] target for flat 4Q merch margin ... could be at risk amid competitors planning for an ultra-promotional holiday."