Nordstrom reported relatively good earnings this afternoon, but are they just plugging the dike?
Running Point and its chief investment officer, Michael Ashley Schulman, CFA, were cited by Reuters in an article — by reporter Granth Vanaik, “Nordstrom warns of feeble second half as consumers spend cautiously” — regarding Nordstrom Inc.’s just reported second quarter earnings as well as their outlook and retail strategy.
Earnings beat expectations, but…
🛍Nordstrom reported better than expected results with second quarter EPS of $0.84, compared to EPS of $0.77 and adjusted EPS of $0.81 in the prior year. The results reflect management’s progress on improving Nordstrom Rack and overall inventory productivity and supply chain optimization with their fourth quarter in a row with better than a 1% improvement in variable supply chain costs. However, this may not be enough to truly move the needle or indicate a turnaround for share prices in this concerning consumer environment. Nordstrom’s astute management team is slowing revenue declines and maintaining earnings against an overall backdrop of declining sales, but is that enough to fight a receding tide?
Sales are down!
💸Unfortunately, Nordstrom’s earnings and outlook are partially in tune with recent disheartening announcements from retailers such as Macy’s Inc., Dick’s Sporting Goods, Inc., and Foot Locker, Inc.
📉Net sales decreased 8.3% year-over-year, which is better than Q1’s decrease of 11.6%, but still worrisome. Excluding onetime factors like the closing of Canadian operations and the timing of their Anniversary Sale improves the picture, but even so, a significant drop in year-over-year sales confirms that even upscale department store customers are reigning in purchases.
Note: Sales at their lower priced Nordstrom Rack stores declined less than their higher end Nordstrom locations.
Solid management, but are consumers looking the other way?
🏬Management displayed prowess in maintaining their gross profit near 35% while reducing inventory which should help ease promotional pressure over the next quarter and help maintain merchandise margins. The mid-term concern is that if purchases continue to decline, the upcoming holiday sales season will not be festive especially as consumers are exhibiting fickle shopping loyalty.
General merchandise versus necessities and experiences
👀The department store ecosystem has entered a new post-pandemic phase of retrenchment and elevated competition across channels, brands, and marketing, as consumer wallets weaken and people focus more on necessities and experiences—like summer travel, the Barbie movie, Taylor Swift concerts, and video-games like Hogwarts Legacy and Baldur’s Gate 3—than on general merchandise. Expenditures on clothing and accessories have drastically receded from their peak pandemic levels.
💄Similar to Macy’s Inc. in its earnings report two days earlier, beauty and cosmetics were noticeable bright spots for Nordstrom, growing by low single digits, as was activewear, children’s apparel, and menswear.
Credit card delinquencies and theft warnings are up!
🛍Similar to other retailers, like Kohl’s and Macy’s, Nordstrom also warned of elevated credit card / store card pressure, aka delinquencies as well as historically high shoplifting losses (aka, inventory shrinkage).
Article excerpt is below:
Nordstrom CEO Erik Nordstrom also said theft at its stores was still a drag on earnings, though not any more than the company has already planned for this year.
“That needs to come down,” Nordstrom said, adding the company had taken steps such as partnering with local jurisdictions and law enforcement.
Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors, said Nordstrom’s earnings indicate shoplifting and store card delinquencies are the new surprise warnings management and investors have to contend with.
I’ve speculated about what my life might have been like as a musician, but I’m afraid I came to the conclusion that I probably would’ve either been teaching piano or maybe gotten to play at Nordstrom’s department store.
Condoleezza Rice
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