Fashion retailer Nordstrom (NYSE:JWN) reported its Q3 2014 earnings earlier today. It beat analyst expectations on earnings as well as revenue and shares of the company were up 2.2% after hours. Total comparable sales increased 3.9% in the third quarter, with both average price and number of items sold up compared with prior year. While there was a slight improvement in full line sales growth and building momentum in the online channel, their off-price Rack business posted softer sales growth. Also gross profit was lower due to expansion in Rack stores (16 new added in Q3) and price matching in the full line business.
Earlier in the year the company acquired Trunk Club, a personalized online menswear business, which had an expected dilutive impact on earnings. Trunk Club is a high sales growth business which is expected to achieve operating profitability in the near term. In addition the company expanded into the Canadian market in September with a full line store in Calgary – to be followed by new stores in Ottawa, Vancouver and Toronto for a total of 6 stores.
In light of all these factors the major takeaways from today’s earnings call were the following.
1. Inventory Management
A focal point in today’s call was the over planning of inventory in the Rack stores. Management acknowledged the need for better inventory planning across all classes of merchandise in the Rack business. The excess inventory was attributed to over forecasting, softer than expected sales in the channel as well as to some degree the acceptance of returns from HauteLook in Rack stores.
A disciplined inventory approach is crucial for long term success of this business. Over bought inventory in Rack can be a problem because being an off-price channel it needs to be fluid and flexible in moving merchandise and jumping on buying opportunities. The positive highlight was that management did accept the need for tightening inventory management in this segment and cited strategies like “pack and hold” which may help to bring back the extra merchandise at a later period for sale.
2 Price Competition
The fashion retail business is highly competitive and Nordstrom faces competition from not only other department stores, but also online retailers to acquire and retain customers. This has put pressure on margins due to price matching in its full line stores, which is unavoidable to some extent in order to remain competitive on price.
The company plans to continue its promotional activity but is in the process of revamping its traditional clearance event to be spread across lesser days and feature a better selection of items to boost business. In addition I think that its multi-channel approach could help in this regard if the company is able to attract customers through a lower margin channel like Rack, and subsequently cross sell / up sell its higher margin merchandise.
Overall my outlook on Nordstrom remains positive at present, but I will be watching for updates on the two important issues above in subsequent releases by the company.
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