Nordstrom crushes inventory optimization
Despite its stores being closed for 47 days during the first quarter, Nordstrom was able to slash inventories by 26 percent year-over-year.
Among others in the apparel and footwear space that have reported, Dillard’s and Urban Outfitters also fared well, reducing inventories by 14 percent and 18 percent, respectively. Inventories were down three percent at Kohl’s and off one percent at Abercrombie & Fitch, while expanding 20 percent at Foot Locker and 10 percent at L. Brands, the parent of Victoria’s Secret and Bath & Body Works.
How did Nordstrom do it?
First, Nordstrom decreased receipts by 30 percent, including reductions of approximately 80 percent in April and May.
Second, the retailer accelerated its promotional activities. Gross margins eroded to 11 percent from 34 percent with roughly half of the decline attributed to incremental markdowns, including a higher reserve adjustment of around $75 million.
Third, Nordstrom used its in-store inventories to fulfill online orders. For full-price stores, half of online orders were fulfilled from stores amid temporary closures, up from 20 percent typically. In mid-April, the company enabled store fulfillment of online orders from Rack. About 25 percent of Nordstromrack.com units are now being fulfilled from Rack stores.
On a conference call last week, Erik Nordstrom, CEO, said the inventory reductions put the company “in a favorable position to bring in newness starting in June.”
The inventory reductions also placed the retailer in a “reactive position” to be able to aggressively respond to an expected elevated promotional environment over June and July.
Nordstrom cancelled receipts at Rack in March through the second quarter, allowing the chain to take advantage of closeouts in the marketplace and be in a better position to help clear excess full-price inventory.
Mr. Nordstrom said his company’s increasingly diversified model — including e-commerce and Rack, which accounted for 60 percent of revenues last year — stands out as particularly beneficial as the overall department store sector struggles. “As retail continues to evolve, our flexible model supports a continued shift from what was predominantly a mall-based business toward a more diversified model that includes digital and off-price,” he said.
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DISCUSSION QUESTIONS: What lessons should Nordstrom’s inventory management execution offer to others? How much of a benefit will Nordstrom’s omnichannel capabilities and Rack ownership be as the department store sector faces a shakeout?