Nordstrom Rack’s refocus on key brands ‘is the strategy that will work’: Analyst

Morningstar Equity Analyst David Swartz discusses retail chain Nordstrom’s forward outlook and operational guidance amid tightening consumer market conditions.

影片文字轉錄稿

SEANA SMITH: All right, let's take a look at Nordstrom. Shares up just about 1 and 1/2% here in after-hours. The company's full year adjusted EPS guidance coming in at the high end of the range. They're coming in better than expected, a big driver here in the after-hours action. Revenue for its most recent quarter for fourth quarter coming in just shy of the Street's estimates of 4.32 billion. Adjusted EPS in line with the Street at $0.74. Let's talk about it and what we could expect to here from Nordstrom, going forward. We have David Swartz. He's Morningstar's equity analyst. So, David, I know you've just had a few minutes here to look at this report. But what's your initial take?

DAVID SWARTZ: It's pretty much in line with what we expected after the earlier announcement in January. So back in January, Nordstrom had told us that its fourth quarter sales are going to be light. It gave a holiday sales update. And it appears that January, after that, pretty much progressed as expected. So the sales are pretty close to expected. It looks like the full line sales were a little bit lower than I expected, but Rack had came in pretty much as I expected, although the quarter were certainly very poor for Rack, with sales down 8%.

DAVE BRIGGS: Yeah, that's where I was going to go with you. Surprising to see that 8%. What is the strategy moving forward with Rack?

DAVID SWARTZ: That's very unclear because Nordstrom's management has actually changed the strategy at Rack a couple of times in the last year or year and a half. There was talk at one time that Nordstrom would try to sell more less expensive products at Rack.

Then they-- management seemed to believe that that strategy did not work. And they kind of switched it up on the last report and said that they're really going to focus on the key brands, which I think is really the strategy that will work for Rack because the real benefit of shopping at Rack over a store like TJ Maxx or Ross is that Rack tends to have much nicer brands. People know when they go there that they're going to find brands that they will not normally find at other discount stores.

SEANA SMITH: David, shares surged back in February after activist investor Ryan Cohen took a stake in the company. From your perspective, from an analyst perspective, how are you looking at that? Is that potentially good here for Nordstrom going forward? Or could it be a distraction?

DAVID SWARTZ: We've heard nothing about this Ryan Cohen story since that initial report. So I'm not sure what's going on, if anything. So far, it doesn't seem to have amounted to anything. But the company did announce today that they're winding down the Canadian operations. This is a surprise. This was also included in the earnings report. And this is certainly a reversal from the last several years when expansion in Canada was a big part of Nordstrom's strategy. I don't know if this has anything to do with Ryan Cohen at all, but it does indicate that Nordstrom's management is making some big changes in the strategy.

And there have also been a lot of management changes at Nordstrom. Not the Nordstrom brothers, of course, which run the company, but most of the managers below them have actually been replaced in the last year or so, including the chief merchandising officer just a couple of months ago. So there have been a lot of changes at Nordstrom. I think activists like Ryan Cohen could bring in a lot more changes, but we'll have to see if that actually happens.

DAVE BRIGGS: CEO Eric Nordstrom addressed that shutdown of the Canadian side. This will enable us to simplify our operations and further increase our focus on driving long-term profitable growth in our core US business. David, you also cover Macy's. Is there a common thread when it comes to the consumer in these two Q4 reports?

DAVID SWARTZ: It was a very difficult period for all apparel retailers, including both Macy's and Nordstrom. They were coming off a very strong year for a lot of apparel retail back in 2021. The comparisons to 2021 are very difficult. And so it was pretty likely that it was going to be a negative report. But, you know, I think Macy's handled the market conditions better in 2022 than Nordstrom did and certainly better than Kohl's and Gap and some others. I don't know that you can say too much at this point, except that expectations are low for the first half of 2023.

DAVE BRIGGS: There could be some tough times ahead. David Swartz, Morningstar equity analyst, great to have you, sir.