Nordstrom Shares Tumble as 2021 Sales Outlook Disappoints, Retailer Sees Bigger Shift to Rack

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  • Nordstrom expects fiscal 2021 revenue to rise more than 25% from 2020 levels.
  • Its digital business will make up 50% of total sales, compared with 33% in 2019.
  • Longer-term, Nordstrom expects revenue to grow low single-digits annually from 2019 levels, and the company said it expects profits to continue to grow at a rate faster than sales.
  • With new shoppers patterns, Nordstrom said it plans to focus its investments on smaller-format stores, building its off-price Rack business and e-commerce.

Nordstrom shares tumbled Thursday as the department store chain delivered a disappointing sales outlook for the year, and said it plans to shift more of its business toward off-price.

Nordstrom said it expects revenue to rise more than 25% in fiscal 2021 from the prior year, with roughly half of its sales coming from its digital business. Last year, the department store chain rang up about a third of its sales online.

The anticipated 2021 growth comes in a bit lower than the 26.6% revenue increase expected by analysts, according to a Refinitiv survey.

The company also anticipates earnings before interest and taxes to be positive in fiscal 2021, it said ahead of an virtual meeting with investors Thursday.

Nordstrom shares were halted ahead of the news release, up 4.1%. Having resumed trading, shares were recently down more than 5%, as investors processed the fresh forecast.

"Nordstrom had become a retail reopening rally favorite among investors," BMO Capital Markets analyst Simeon Siegel said. Its stock had runup more than 16% year to date, more than Kohl's, Best Buy, Gap and a number of other retailers.

With shoppers changing their purchasing behaviors in the wake of the coronavirus pandemic, Nordstrom said it plans to focus its investments on smaller-format stores, building its off-price Rack business and e-commerce, as it tries to win back old customers and reach new ones.

While the pace of growth is staggering compared with previous years, Nordstrom will be lapping 2020, when its brick-and-mortar stores were closed for two quarters due to Covid restrictions in the spring. Sales were later hurt on the West Coast, as Covid-19 cases surged across the region into the fall and winter, prompting state officials to renew restrictions.

Nordstrom won't report its fourth-quarter results until March 2. But the company has reiterated its previous outlook calling for sales to be down in the low 20% range compared with a year earlier. Earnings before interest and taxes are still expected to be positive, too.

Low single-digit revenue growth

Longer-term, Nordstrom said it expects revenue to grow at a low single-digit pace annually from 2019 levels, while profits continue to grow at a rate faster than sales. In 2019, Nordstrom reported net sales of $15.1 billion, marking a 2.2% decline from the prior year.

During the virtual presentation, Chief Executive Erik Nordstrom said the company is targeting $17 billion of annual revenue in the medium term.

"We have recently engaged in a robust evaluation of our addressable market," he said. "And we see significant opportunity to expand the customer base that we serve."

With a more affluent customer base, Nordstrom is seen as one of the strongest department store chains left standing in the United States. Its stores tend to be in better-performing malls and there are fewer of them, which has helped control its fixed costs. At the end of 2019, Nordstrom said 95% of its full-line department stores were located in so-called A-rated malls, while most of its Rack locations were in off-mall shopping centers. Its Rack business, which competes with the likes of TJ Maxx and Ross Stores, has helped Nordstrom reach shoppers who are more price conscious but still want designer brands.

"At Nordstrom Rack, we have historically focused on trendy fashion lovers who are looking for great value with a high brand focus ... but we have not prioritized price-oriented shoppers who look for deals and value first," Nordstrom said. The CEO added that the Rack business is on track to drive $2 billion in incremental revenue over the next five years.

Nordstrom's stock has fallen about 3% over the past 12 months to a market value of $5.9 billion, while shares of Macy's are down a little more than 10%, bring its value to $4.6 billion.

Kohl's is up almost 9% from a year ago, a boost that has given it the biggest market cap of the three, at $7.8 billion. Earlier Thursday, Kohl's preannounced that its holiday-quarter revenue is expected to fall 10%, but the company said it's seeing sales strengthen since the start of the new year.

In the department store space, rivals like J.C. Penney and Neiman Marcus filed for bankruptcy protection last year. Macy's and Penney have also closed hundreds of stores, while Nordstrom shuttered just 16 locations in 2020.

Nordstrom's earlier investments online have paid off and boosted performance. It's close to having half of its business come from digital, and that's far ahead of rivals. Macy's, for example, said its digital sales made up just 26% of total sales in 2019. And Kohl's said its digital business represented 24% of net sales in 2019.

"We'd always thought about this and talked about this was going to happen at some point," Nordstrom Chief Financial Officer Anne Bramman said in an interview. "It has just accelerated with the environment that we're in right now."

A bigger role for Nordstrom Rack

Nordstrom also envisions a bigger role for Rack in the future. Bramman said the company expects Rack to make up half of its sales in the near future, compared with about a third at the end of its most recently reported fiscal year.

It's clear the company aims to gain a larger presence off mall, with even A-rated mall values tumbling in recent years.

"We continue to believe that [Nordstrom] has the potential to take profitable market share over time, as we see the business as well-positioned relative to peers," Telsey Advisory Group founder Dana Telsey said in a note to clients ahead of Thursday's meeting. "In our view, Nordstrom continues to operate in an off-price channel that has legs for growth ... [and] a profitable digital presence that continues to grow."

Nordstrom Rack President Geevy Thomas said the Rack expects 45% of its sales come from online in the future, thanks to investments in services like curbside pickup. Meantime, the brand will continue to open locations in new markets and invest in key categories, like footwear, that drive shopper traffic.

Another strategy that Nordstrom plans to use to win sales is to offer shoppers more selection: Nordstrom said it plans to increase the items it offers to more than 1.5 million from roughly 300,000 today.

Bramman explained the retailer plans to ramp up some of its private fashion labels, as it continues to work with "new and emerging brands, and expanding our partnerships with some of our bigger brands."

"We're executing a new playbook, but it's a lot of foundations that have already been put in place," Bramman said.

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