Nordstrom (JWN) Benefits from Spike in Demand: Will It Sustain?

Zacks Equity Research
·4 min read

Nordstrom, Inc. JWN is one such retailer benefiting from spike in consumer demand despite the COVID-led hardships. Strong demand, particularly during its Anniversary Sale, led to higher sell-through rates. This even contributed to the bottom-line beat in third-quarter fiscal 2020. Also, strong digital sales have been a growth driver. Improved merchandise margins and overhead cost reductions are aiding the bottom line.

Coming to cost-cutting efforts, the company remains focused on restructuring regions and adjusting supply chains to help it stay afloat amid the coronavirus situation. Notably, it is tracking ahead of the target of $750 million in annual cash savings for 2020, net of COVID-19-related charges, driven by strong execution of plans to create a leaner and more efficient organization. These actions led to improved merchandise margin, on a sequential basis, in the fiscal third quarter.

Going ahead, management expects to sustain the strong momentum in fourth-quarter fiscal 2020 and beyond, driven by current and on-trend inventory. Markedly, shares of this Zacks Rank #3 (Hold) stock have skyrocketed 164.4% in the past three months, significantly outperforming the industry’s growth of 53.1%.

 

E-Commerce: The Holy Grail

Nordstrom is progressing well with plans to enhance the technology space by boosting e-commerce and digital networks and improving its supply-chain channels and marketing efforts. As a result, fiscal third-quarter digital sales advanced 37%, driven by the Anniversary Sale event shift. During the event, digital sales accounted for 60% of total sales. Excluding the Anniversary Sale event shift impact, digital sales increased in mid-teens in the said quarter.

Encouragingly, management introduced pick up options for Nordstrom.com, Nordstromrack.com and HauteLook.com orders from all Nordstrom and Nordstrom Rack stores across the United States. Also, the company launched its market strategy to five additional markets, wherein customers can avail increased merchandise selection with two-day delivery or next-day pickup facilities.

Recently, the company came up with its holiday sales numbers, wherein the online channel retained its momentum. For the nine-week period ended Jan 2, 2021, digital sales grew 23% year over year, accounting for 54% of total sales. This compares favorably with the year-ago period, wherein digital sales represented 34% of total sales. The uptick can be attributable to the company’s enhanced omni-channel capabilities, including order pickup and store fulfillment services.

Moreover, Nordstrom and Nordstrom Rack stores fulfilled more than 30% of online orders in the holiday season period. Notably, the company noted that about 11% of Nordstrom.com orders were picked up in-store, which increased to more than 20% in the week before Christmas. For Nordstromrack.com, almost 9% of orders were picked up in-store.

Apart from these, the expansion in gifting options resulted in the category representing 67% of total sales. This reflects an increase of 600 bps year over year. That said, management continues to expect positive earnings before interest and taxes (EBIT) and operating cash flow for the fourth quarter.

Headwinds to Overcome

However, the fiscal fourth-quarter EBIT margin is likely to decline roughly 500 bps year over year due to reduced sales volume. Planned shipping surcharges and premium pay related to the holiday season also hurt the EBIT margin. Apart from these, continued impacts of COVID-19, particularly soft store traffic, remain a threat to the top line. Going ahead, management foresees sales to decline in the low twenties for the fiscal fourth quarter.

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