By Neil Saunders
Nordstrom has started its second half on a slightly more positive note, reversing the gloomy sales trends of the first part of the year. Both total and comparable sales are back into growth territory, the former rising by a very solid 7.2%. As welcome as these numbers are, their strength is somewhat diminished by two considerations.
The first of these is that some of the growth has come from the partial shifting of a key promotional event, Nordstrom’s Anniversary Sale, into this period from the prior quarter. When both quarters are combined, Nordstrom’s underlying comparable growth of 0.4% looks more subdued — although it is still an improvement on the first quarter.
We are encouraged by the steps Nordstrom is taking to tie online and physical together. This includes a pilot of being able to reserve items in store via mobile, as well as several initiatives around the more effective management of inventory across its various routes to market. The latter is starting to deliver through in terms of cost savings, while the former has made it easier for customers to shop across channels.
The second consideration is that despite its sales gains, Nordstrom posted a $10 million net loss this quarter. To be fair, all of this was related to a $197 million goodwill impairment for the group’s Trunk Club business, without which the company would have seen net income rise by over 130%. Nevertheless, given that profits were already down going into this quarter, this has further weakened the year-to-date performance and means that Nordstrom will come in below expectations for the full year.
At a segment level, Rack continues to drive most of the growth with a 3.9% uplift in comparable sales. This underscores the importance of this part of the business to the overall health of the company — something, in our view, that puts Nordstrom as a whole in a much better position compared to its department store rivals. Thanks to the shift in the promotional calendar, sales at the full price segment also rose, albeit by a fairly anemic 0.9%
Across both divisions, it is online that is thriving — often at the expense of stores. Online comparable sales in the full price business increased by 20.1%, while off-price growth was 23.2%. In contrast, store sales in the full price business decreased by 4.5%, while off-price physical sales grew by 0.9%. In our view, this dynamic raises some questions over the scale and scope of future store expansion, especially in the full price part of the business. Nordstrom has partly recognized this with a lower capital expenditure plan and a slight reduction in the number of Rack stores it intends to open. However, our view is that further adjustments may be needed.
That noted, we are encouraged by the steps Nordstrom is taking to tie online and physical together. This includes a pilot of being able to reserve items in store via mobile, as well as several initiatives around the more effective management of inventory across its various routes to market. The latter is starting to deliver through in terms of cost savings, while the former has made it easier for customers to shop across channels.
As Nordstrom moves into its holiday quarter we maintain our view that this year will be fairly flat for underlying sales and negative for profitability growth.
Neil Saunders is CEO of research firm Conlumino.