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Nordstrom (JWN) Banks on Solid Online Show Amid Inflation

With consumers returning to normalcy and the resumption of outdoor activities, Nordstrom Inc. JWN has been witnessing sturdy demand for men's and shoes, and women's apparel and beauty. Gains from strategic initiatives and strong anniversary sales, driven by improved customer experience and increased engagement, bode well. A solid e-commerce business acts as an upside.

This led to impressive second-quarter fiscal 2022 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. Adjusted earnings of 81 cents per share reflected a sharp improvement from the year-ago figure of 49 cents. Total revenues grew 12% year over year to $4,095 million, marking the eighth straight quarter of sequential top-line growth. Net sales advanced 12% year over year to $3,991 million, while credit card net revenues grew 13% from the prior-year quarter to $104 million.

That said, let’s take a look into factors that have been supporting JWN’s growth story.

Online Strength, A Major Driver

The company remains focused on advancing in the technology space by boosting e-commerce and digital networks, and improving its supply-chain channels and marketing efforts. Second-quarter fiscal 2022 digital sales rose 6.3% year over year, driven by the shift in the timing of the anniversary sale. The metric also represented 38% of net sales. The digital business witnessed gains from improved digital traffic across both Nordstrom and Nordstrom Rack, as well as increased utilization of the buy online, pick up in-store service.

As part of its market strategy, the company launched additional pickup options, which received positive customer feedback. buy online pick up in store remains one of the most-used services. In the fiscal second quarter, Nordstrom expanded its next-day order pickup service to more than 60 additional Rack stores. Its styling services, which form part of its Closer to You strategy, have been performing well.

Going ahead, management expects to expedite delivery, expand distribution and fulfillment centers, and the market level selection for in-store shopping, as well as same-day and next-day pickup. The company earlier completed the integration of Rack.com onto Nordstrom.com, offering a better customer experience.

Other notable retailers that retained their solid online shows include Hibbett HIBB, American Eagle AEO and Tapestry TPR.

Hibbett witnessed year-over-year e-commerce sales growth of 8.3% in second-quarter fiscal 2023, driven by better inventory, robust traffic across website and app, and improved digital customer experience. The metric rose 174.4% on a three-year basis. HIBB accounted for 15.2% of the total sales, up from 13.1% in the prior-year quarter.

Hibbett remains focused on leveraging its omni-channel capabilities such as home delivery, buy online and pick-up in store, reserve online and pick-up in store, buy online ship to store facility, same day delivery, and mobile app services to fulfill online orders and serve customers.

In second-quarter fiscal 2022, American Eagle’s digital revenues advanced 60% from the pre-pandemic levels (second-quarter fiscal 2019). The metric accounted for 33% of the total revenues compared with 24% in second-quarter fiscal 2019. This was driven by AEO’s mobile app, which is now the largest source of revenues in the digital channel.

Recently, American Eagle launched a mobile point-of-sale system in its North America stores, allowing customers to check out or return items through a store associate. Some other notable efforts include customer self-checkout, a new instant credit feature for returns, the expansion of its Afterpay capabilities in its mobile app, and the introduction of Shop the Look service that allows customers to browse and shop head-to-toe looks curated by stylists.

In the fourth quarter of fiscal 2022, Tapestry’s global digital sales increased in the high-single digits, and represented roughly 30% of the total revenues. In fiscal 2022, TPR generated digital sales of $2 billion, more than tripling from that reported in fiscal 2019 pre-pandemic, and accounting for 30% of the total revenues.

By brand, digital sales increased roughly 30% at Coach, mid-teens at Kate Spade and nearly 25% at Stuart Weitzman in the fiscal year. Tapestry has been expanding its digital distribution channels with a focus on enhancing curbside or store pickup service, as well as contactless payment options, and the opportunity to make virtual appointments.

Other Growth Efforts

Coming back to JWN, it is focused on its long-term strategy, aiming at enhancing its digital-first platform, expanding the reach of Nordstrom Rack, gaining market share and delivering growth. As part of the strategy, the company continues to scale enhanced capabilities like the expansion of order pickup and ship-to-store to all Nordstrom Rack stores. It noted that nearly 40% of next-day orders were picked up from Rack stores during the anniversary sale.

As part of its closer-to-you strategy, the company aims to link stores and services to expedite deliveries, expand online offerings, and add cheaper merchandise at its Rack off-price stores to improve customers’ shopping experiences. It is also on track to integrate Nordstrom Rack assets and offer a wide range of price points offered at Nordstrom Rack. Increased focus on distribution capabilities, along with improved connectivity of physical and digital inventory, is likely to contribute to Nordstrom Rack sales by $2 billion in the long term.

Management envisions its digital unit to account for 50% of the total sales. Apart from these, a rise in new customers, enhanced personalization and expanded product offering are expected to aid revenue growth, profit margin and cash flow generation.

Headwinds to Overcome

Despite such upsides, Nordstrom slashed its fiscal 2022 view on declining discretionary spending stemming from inflation. The company expects total year-over-year revenue growth of 5-7%, down from the aforementioned 6-8% rise. Adjusted earnings are envisioned to be $2.30-$2.60, which compares unfavorably with the prior stated $3.20-$3.50. The EBIT margin is likely to be 4.5-4.9%, down from the earlier mentioned 5.8-6.2%. Adjusted EBIT is expected to be 4.3-4.7%, down from the prior stated 5.6-6%.

For fiscal 2022, the gross profit is envisioned to remain flat year over year. Also, clearance activity and higher markdowns are likely to affect the gross profit by $200 million.

For the fiscal third quarter, it expects a mid-single-digit decline in revenues, as evident from the demand deceleration seen in the latter part of the second quarter. Also, the EBIT margin is likely to be down 200 bps year over year.

The company has been witnessing sluggish demand due to rising inflation. It expects a competitive promotional environment in retail in the second half of fiscal 2022. As a result, it has been making efforts to clear excess inventory by the end of fiscal 2022. The move is likely to hurt margins to some extent in the near term.

Wrapping Up

We hope that despite sluggish demand and inflationary pressure, Nordstrom will stay afloat, driven by strong demand, a solid online show and a long-term growth strategy.

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