Wall Street hit Nordstrom hard on Wednesday, with shares for the Seattle-based retailer dropping nearly 20% a day after the company said it had to take extra markdowns on clearance items to move inventory as demand softened in July.
Much of the company’s earnings call on Tuesday afternoon focused on the retailer’s off-priced Rack banner, which saw July sales decelerate by 9 percentage points compared to the first two months of the quarter. On the call, CEO Erik Nordstrom said that the deceleration was more pronounced in the lowest income customer segments, which represent a greater proportion of Rack’s customer base than at Nordstrom.
Despite this slowdown in demand, net sales for Nordstrom Rack in Q2 increased 6.3% to $1.22 billion.
Regardless, Nordstrom said on Tuesday that it is focusing on improving Rack performance by increasing its supply of premium brands, improving its assortment and growing brand awareness. “As we’ve said before, 90% of the top brands at Nordstrom are sold at Nordstrom Rack,” the CEO said. “Premium brands are a differentiator for the Rack, and we are focusing on having the best brands at the best prices at each of our locations.” This quarter, sales of its top 100 brands at the Rack increased 17%, Nordstrom said.
In addition to boosting penetration of premium brands, the retailer is also shifting away from the lower price point items that have not resonated with Rack customers. Nordstrom added that the retailer is taking “aggressive action” to clear through this inventory in the second half of the year. “We believe that increasing the penetration of top brands at the Rack will differentiate our offer and fuel our growth,” he added.
Nordstrom president and chief brand officer Pete Nordstrom added on Tuesday’s call that the company expects this clearance activity and associated markdown pressure will reduce second half gross profit by approximately $200 million, which is reflected in its updated outlook.
“We estimate that approximately half of this additional markdown pressure reflects actions we are taking to improve our assortment,” Nordstrom said. “The other half is related to external factors such as softening demand and our expectation that the promotional environment in retail will become more competitive in the second half of the year.”
Nordstrom added that these steps are “necessary” to align with consumer shifts and implement strategies that will drive the company’s longer-term growth and profitability. “We’re taking action to rightsize our inventory, improve our sales to inventory spread and enter 2023 in a clean inventory position,” Nordstrom said. “We’re confident in our ability to deliver long-term benefits from our supply chain optimization work and improved merchandising capabilities.”