Thursday afternoon, Nordstrom (NYSE: JWN) became the latest department store giant to report a massive loss for the first quarter of fiscal 2020. Like its peers, Nordstrom closed most of its stores in mid-March in response to the COVID-19 pandemic, contributing to a sharp drop in sales and erosion of margins.
However, the worst of the pandemic’s impact may have passed for Nordstrom, thanks to the company’s aggressive efforts to cut costs and eliminate old inventory. While it may take a year or two for Nordstrom to fully get back on track, now may be the time for patient investors to bet on this long-term outperformance.
Nordstrom posts big loss
The first quarter has started well for Nordstrom, with sales ahead of plan in February (the first month of Nordstrom’s fiscal first quarter). Unfortunately, the COVID-19 pandemic crushed the company’s momentum in March. Store traffic slowed in the first half of the month and the retailer was forced to close all of its stores in mid-March. The reopening process only started at the beginning of the month, after the end of the fiscal quarter.
Nordstrom has a strong e-commerce business, which accounted for about a third of the company’s sales last year. Digital sales saw modest growth in the first quarter, with demand up 9% and sales (after factoring in timing of shipments and estimated returns) up 5% year-over-year . However, that was not enough to make up for the loss in store sales. As a result, Nordstrom’s total sales fell almost 40% to just over $ 2 billion.
While Nordstrom quickly took action to reduce expenses as sales slowed, there was no way to fully offset the margin impact of declining sales. (Additionally, like many peers, Nordstrom continued to pay all of its employees during the first few weeks of its store closures.) the high-end retailer had to implement significant markdowns to eliminate seasonal stocks that were in danger of becoming obsolete. This brought the gross margin down to just 10.7%, from 33.5% in the previous year period.
This led to an operating loss of $ 813 million, compared to operating income of $ 77 million in the first quarter of 2019. Management attributed $ 280 million of this loss to special charges related to COVID- 19, consisting of asset write-downs for 16 complete stores being closed, restructuring costs and temporary bonuses and benefits for employees. Nordstrom’s net loss amounted to $ 521 million, or $ 3.33 per share, while it made a net profit of $ 37 million ($ 0.23 per share) a year earlier.
Nordstrom also said it burned $ 826 million in cash in the last quarter. While the first quarter is still seasonally low for cash flow, cash consumption was only $ 240 million in the first quarter of 2019.
The worst is over
While Nordstrom’s performance in the first quarter was quite poor, there is good reason to expect rapid improvement. Most notably, Nordstrom ended the quarter with inventories down 25.8% year over year. It’s still not fully aligned with sales trends, but it does mean the risk of future markdowns is much lower. This should support the sequential improvement in gross margin in the second quarter, with further gains likely in the second half.
In addition, after peaking in March, Nordstrom’s cash consumption slowed significantly in April and is expected to improve further in the second quarter. CFO Anne Bramman said the company is on track to break even by the end of this quarter.
The stores have started to reopen and Nordstrom expects all of its stores to be operational by the end of June. The first results of the reopened stores exceeded expectations. The Nordstrom Rack non-price chain (which has been particularly affected by store closings) could be a bright spot in the coming months, as it will have access to excess Nordstrom full line inventory and closures from various vendors. Giant at a low price TJX companies recently reported that sales volumes at reopened stores exceeded 2019 levels within one week.
Plenty of cash and a solid long-term outlook
Nordstrom started fiscal 2020 with $ 853 million in cash. In April, it strengthened its balance sheet by issuing $ 600 million in secured debt and modifying the terms of its $ 800 million credit facility (which it fully drew on). This allowed Nordstrom to end the first quarter with $ 1.36 billion in cash: more than enough given the slowdown in its cash consumption.
Looking ahead to the second half of the year, there is a good chance that Nordstrom could generate positive cash flow even if in-store traffic remains well below 2019 levels. After all, the company will benefit from favorable seasonality in the fourth. quarter, and it has a strong online business, an improved cost structure and low investment needs in the future. Nordstrom is also on hold for a tax refund that could total hundreds of millions of dollars due to provisions in the CARES Act that will allow it to carry over 2020 losses to previous years.
While COVID-19 has had a severe negative impact on Nordstrom in the short term, it could instead bolster the company’s long-term outlook. The pandemic has instilled more urgency in reducing overhead costs, which will lead to savings in the long run. The company is closing 16 low-volume full-line stores, which will improve the overall footprint of its full-line stores. Meanwhile, Nordstrom could gain market share if competitors like Lord & Taylor out of business.
Nordstrom has already made substantial strides away from shopping center stores over the past decade. The opening of a new flagship store in Manhattan last fall, increased online sales and recently announced store closings will accelerate its distance from this declining part of its business. This could set the stage for a big Nordstrom comeback over the next few years.
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