All in, though, we’re really, really excited about the great return on investment, great acquisition of new customers for our…
Operator: Our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.
Brooke Roach: I was hoping to get an update on what you’re seeing on profitability of the dot-com business. It sounds like you saw some nice improvement in rack.com’s profitability this year. Where does that sit today comparable to line and total company margin rates? And what’s the opportunity for continued improvement in 2024?
Cathy Smith: Maybe I’ll start, but obviously, Erik can add on as well. it has been a distinct effort of ours to get the Rack digital business profitable. As we’ve spoken to, it is profitable for 2023, the full year. Really proud of the work that the team has done to drive that business improvement. The Nordstrom.com business, though, is actually quite profitable. It’s one of our most profitable channels, and so we’ll continue to have that Nordstrom.com digital business leads our growth in the Nordstrom banner. It’s a great vehicle for us, and it’s how the customer is choosing to shop. Going forward, though, to your question on where is maybe rack.com versus nordstrom.com, still growing or still expanding in margin. We’ll continue to work on that.
Some of the fundamental things we worked on in ’23 were things like inventory integrity that allows us to then start turning on omnichannel capabilities more completely for our customers as they come into Rack. So where — we’ll continue to expand rack.com’s profitability, but pleased with both of them that they’re solidly in the black and Nordstrom.com is well past that.
Erik Nordstrom: Yes, Brooke, I’d just — I’d add on — first, I think in the context, you look at our digital business, first and foremost, we look at it through the customer lens, which is a customer experience that cuts across digital and physical. Almost every customer does that. So, we really look at how we can leverage our physical and digital assets to serve the customer better. That being said, if you look back over our bigger actions over the last couple of years, we have taken some — made some decisions and some tough ones that were really about reducing unprofitable sales. So, growth in Canada would be a part of that, doing — shutting down store fulfillment out of our rack.com business is another example. So, as we look at it, to Cathy’s point of — the financial model in our digital business is really strong, and it scales well, it scales really well.
We have, over the last couple of years, really address the unprofitable parts of the business. Both platforms are very much poised for growth, and we need growth out of both of them.
Brooke Roach: Cathy, if I could just ask one quick follow-up. You gave some helpful color on the credit card revenue at close to 3% of sales in 2024. Can you elaborate on the assumptions that are embedded within that, and what the impact is of the late fee changes in credit revenue based on the announcement today?
Cathy Smith: Yes, happy to. And interesting timing on the announcement today for sure, given it’s our day of earnings release. I want to start with reminding us that the average credit quality of our portfolio tends to be higher than some of our peers, so therefore, late fees are a smaller piece of the overall credit revenue to our P&L. So, I’ll start there. We do expect there to be some legal challenges too. I suspect as soon as the federal register actually registers the new regulation, we’ll see some legal challenges, and we’ll continue to monitor that. But most importantly, the estimate — our best estimate has been included in our guidance that we’ve given today. So, we’ve been monitoring it. We expect there will be continued pressure both politically and from consumers on late fees. And so, we did build that into our guidance the best estimate we have.
Operator: Next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Dana Telsey: Good afternoon, everyone. Just expanding on some of the merchandising comments, with Active, Beauty and Women’s Apparel being the most improved this year — this quarter, last quarter, I believe accessories was in that mix. What was different this quarter from last quarter with accessories and what are you seeing there? And then also just following up on the merchandise margin. Any impacts on Red Sea or how you’re thinking about freight costs and delivery costs for this year embedded in the margin?
Erik Nordstrom: Yes, accessories, handbags in particular, which is a big category in accessories for I think for everyone, has not been as strong kind of through the year. So, we continue to see that. That being said, every single merchandise category that we have did improve sequentially from Q3 to Q4. So, we’re also encouraged about that. On the merch margin question, we really don’t see at this point, an effect from what’s going on in the Red Sea on our merch margin. We have some portion of our goods that’s delayed a bit, but we don’t see any material effect to our results.
Operator: Our next question comes from the line of Oliver Chen with TD Cowen. Please proceed with your question.
Neil Goh: This is Neil Goh on for Oliver today. Nice to see inventories managed pretty well in line with sales growth. What are your expectations on inventory management throughout the year? And then how would you describe the promo environment leading into spring summer? And any implications on merch margins as we get through the fiscal year?
Cathy Smith: Maybe I’ll give a start and then Erik can add. So, on inventory growth, to your point, thank you for the comment on inventory productivity or the management of inventory. I think the team did a terrific job of building some new disciplines and really being sensitive to the trends and chasing into it. I think we’re poised really well as we ended the year in inventory health. As we ended the year and then begin the new year, allows us to have some newness, which is always important for customers. So very, very excited about where inventory is at and the progress we’ve made around inventory productivity. As we move through the year, we’ll be prudent. So, we’re going to continue the same disciplines of making sure we’re chasing into demand.
