Both Nordstrom Rack and Burlington have had a challenged year as they failed to flow the right brands, in the right categories, at the right value onto their shelves. This was the result of supply chain issues and inventory that didn't match consumer demand (partly tied to issues on the buyer front). Burlington’s management has been candid about that execution and pointed to the strong results at TJX and Ross Stores as evidence that this was not a problem with the off-price model, nor a fundamental change in the business. We agree with that assessment. Nordstrom also has suffered from store service levels, increased complexity, and disengagement from its less-affluent consumers. However (and beneficially), the Nordstrom and Burlington management teams appear to have their hands on their challenges and we expect to see sequential improvements over the next five quarters. Burlington has more chance of success given its singular business line 2Q22.
Key Nordstrom Rack Metrics
- As the comparable-stores sales table in the Nordstrom section shows, Nordstrom Rack continues to underperform Marmaxx (Marshalls and T.J. Maxx) and Ross Stores (using 2019 as a basis). For 3Q22, trailing-twelve-month (TTM) sales per square foot declined -$3 QoQ to $560 and they are well below 2019’s level of $597. We have previously discussed management’s initiative to improve the trend by flowing more better & best brands into the stores (this is what Marmaxx and Ross are winning on at the moment).
- Erik Nordstrom says that the brand has "focused on [its] North Star of great brands at great prices." Management discussed progress on this front; however, it appears that the initiative is still being undermined by its distribution center-to-store supply chain and the stores being stuffed with too many unwanted goods. Nordstrom's company-wide inventory turns declined to 3.5X, down from 4.2X during 3Q19. Erik Nordstrom: "We also have to through the rest of 4Q22 to clear out the inventory that hasn't been as productive, and that sets us up well for 2023."
- Substandard store service levels and task complexity have also been a hindrance to improving the sales trend and one announced change to facilitate that is cutting back on BOPIS orders and raising the minimum order value to get ship-to-store. Chief Accounting Officer Mike Maher noted that the chain "continues to expect that customers are voting for shopping in stores.” Last quarter, management announced that it was discontinuing ship-from-store for the Rack. Relatedly, they announced the discontinuation of Truck Club earlier in the year. As such, we see Nordstrom balancing its strategic focus back towards "Physical Retail 101" and simplification. Simplification and focus allow for strong execution and “success in retail is detail.”
Key Burlington Metrics
- While Burlington's sales and profits were significantly down, they are roughly in-line with management’s plan and the sales trend improved in October and early November as "new, better, and best" buys hit the store shelves at prices that demonstrated great value, similar to what TJX and Ross have been driving sales with. As to the medium-term outlook, CEO Michael O’Sullivan made a strong case that his new merchant team was up to the challenge, especially as the inventory flowed with more of this “newness,” as the merchants open to buy improved, and as some of the cyclical headwinds facing the company normalize.
- O’Sullivan also noted that, "what drives our sales is when we offer great value compared with other retailers. I would say our value differentiation got very compressed in 2Q22 and into early 3Q22, and that was driven by significant promotional activity. We didn't respond to it soon enough. And I feel like the -- a big part of the of the pivot that we made in late August was to take actions to restore that value differentiation by doing all the things I described in the prepared remarks. As we go into 4Q22, we feel better about our value differentiation versus other retailers."
- Critical from a commercial real estate standpoint, O’Sullivan reiterated his long-term plan to expand the brand from 893 locations to 2,000 at an average pace of 125 net new locations per year.
- Trailing-twelve-month (TTM) sales per square foot decreased $7 QoQ to $147. However, compared to 3Q19 they are down -7% on a comparable basis. There is a reasonably good chance that the TTM figure remains at the $147 level by this point next year.
- TTM EBITDA and free cash flow declined to $620M and -$219M, respectively, from $702M and -$160M (which is far below 3Q19 levels of $780M and $408M). Expectations are for these figures to improve to $900M and $300M by this point next year. The key to accomplishing this is improving the inventory turns, running in chase mode, and racing the new merchant team.
