Nordstrom gains steam in Q1, especially in off

Nordstrom Q1 net sales fell 11.6% year over year to $3.1 billion as it exited Canada. E-commerce fell 17.4%, in part due to the closure of apparel box service Trunk Club.

Full-line department store net sales fell 11.4%, with the wind-down of its Canadian business siphoning 270 basis points. At off-price Rack, net sales fell 11.9%, with the elimination of store-based fulfillment of digital orders hurting sales by about 600 basis points.

Gross margin expanded by 110 basis points to 33.8%, reflecting a focus on inventory productivity, according to a company press release. Ending inventory was down 7.8%. The company swung to a $205 million loss, from net income of $20 million a year ago.

The first quarter started slow at Nordstrom, but momentum began to build and continued into the second quarter, executives told analysts on a call Wednesday.

That was especially true at off-price Rack, thanks to elevated merchandise and the opening of two new Rack stores in the quarter that are performing well, they said. The company, which recently shook up its Rack leadership, faces a lawsuit from Patagonia, which said it found counterfeits sold at Rack stores.

"Consistent with our customer promise to deliver great brands at great prices, we've increased the penetration of our top-performing strategic brands. As strategic brand penetration increases, we are seeing Rack sales trends improve," CEO Erik Nordstrom said. "April was our best month of the quarter, and we have continued to see trends improve in May."

The company reiterated its outlook for 2023, expecting revenue, including retail sales and credit card revenues, to fall 4% to 6% year over year. That includes a negative impact of about 250 basis points from the wind-down of Canadian operations but a positive impact of about 130 basis points from an extra week in the fiscal year.

Lower inventory at Nordstrom and at rivals have allowed for fewer promotions, which led to improved margins, executives said. They also noted that Q1's year-over-year comparisons were especially tough given last year's particular strength, which will also ease as the year goes on. But compared to pre-pandemic Q1 2019, sales fell 8.5%, with full-price down 4.7% and Rack down 15.1%, according to GlobalData research.

"While this includes the impact of store closures, this is nevertheless a rotten set of results. Nordstrom has become a smaller business at a time when overall retail spending has gone through the roof," GlobalData Managing Director Neil Saunders said in emailed comments. "Worryingly, not only has Nordstrom become a smaller business, but it has also become a much frailer business that seems to lack the energy or ability to quickly get back on the front foot."

Saunders warned that both of Nordstrom's businesses lack compelling assortments, and that its full-price department store locations have lost much of the stellar customer service the retailer is known for.

"Nordstrom is nowhere near as bad as some of its department store peers, but neither is it anywhere near as good as it used to be," he said. "This matters because the stumbles have lost Nordstrom customers and sales and, unless addressed, we believe this dynamic will only worsen as consumer finances become tighter and shoppers become choosier about where they buy."