Three months ago, yours truly expressed concern that department store chain Nordstrom (NYSE:JWN) was sitting on too much inventory as of the end of its June quarter. The company explained it needed that merchandise so it would have ample selection for its Anniversary Sale. It typically takes place in June, but because of the pandemic had been postponed to August. I responded at the time, "Between a reaccelerated spread of the coronavirus, economic uncertainty, social unrest, and lots of political tensions, there's plenty of reason for consumers to skip the shopping excursion this time around."

As it turns out, my concern wasn't merited. Although its third-quarter top-line tumbled 16% year over year, the big sale was a success. Earnings of $0.31 per share for the quarter in question easily topped analyst forecasts for a loss of $0.06 per share, even if revenue was merely in line with expectations. Perhaps most important, the retailer sold through a big chunk of that inventory and entered the holiday shopping season with appropriate levels of merchandise.

This dynamic underscores something I asserted six months ago. That was when I argued that Nordstrom really is the best retailer in the world when it comes to inventory management.

Store shelves with neatly folded selection of inventory.

Image source: Getty Images.

Nordstrom is better at it than the rest

The graphic below puts things in perspective, comparing Nordstrom's inventory levels to total sales in each of its past eight quarters. The steep sales dips in the first and second quarters were of course spurred by coronavirus-related shutdowns and slowdowns, and the retailer responded as well as it could in the early days of the pandemic. But, unlike its peers, Nordstrom ended the second quarter with about as much merchandise as it had on hand at the end of the first quarter. In retrospect, it needed it for Q3's big sequential sales improvement.

Nordstrom's inventory levels have been appropriately reduced in response to COVID-19 shutdowns.

Data source: Nordstrom quarterly investor reports. Chart by author. All dollar figures are in millions.

And make no mistake: That sequential improvement goes well beyond the chain's Anniversary Sale. The sales revenue only accounts for about a tenth of its quarterly sales when it takes place in Q2. The rest came from renewed, ordinary consumerism, particularly on the e-commerce front. Online sales of $1.6 billion made up more than half of the department store chain's top line thanks to its double-digit growth in e-commerce business.

Yes, the retailer ended October with a lot more goods than it started the quarter out with. Keep the calendar in mind, though. It's going to need it headed into the gift-giving season.

What the graphic above doesn't fully illustrate is just how much better a job Nordstrom does at keeping its inventory levels to a minimum compared to rival retailers like Macy's (NYSE:M), Kohl's (NYSE:KSS), and Dillard's (NYSE:DDS). That's what the image below does, comparing each of these department store chains' inventory as a percentage of their respective sales during any given quarter.

Nordstrom was the only retailer to curb inventory levels during Q3, and was already the name with the lowest relative level of merchandise.

Data sources: Department store chains' quarterly investor reports. Chart by author.

Even allowing for a surge of this measure in Q1 and Q2 after COVID-19's fallout caught most of the world unaware, Nordstrom wasn't bogged down by excess merchandise. It also did a better job of getting rid of less marketable goods by the time the third calendar quarter of this year came to a close, being the only name of the four to lower its inventory-to-sales comparison last quarter.

Simply put, none of the other major department store chains even come close to how little merchandise Nordstrom needs to carry in order to drive sales.

The little things are big

It may seem irrelevant on the surface. Indeed, more inventory could arguably be a benefit, as it makes it more likely a store will have enough of the right sizes, colors, and styles of any given item when the customer is ready to make a purchase. One could argue Nordstrom would have done even better last quarter with a greater selection.

Being able to offer all options to all buyers all the time isn't necessarily the right move in the world of retailing, though, and particularly in the realm of fashion and apparel.

The longer an item sits unsold on a shelf, the more likely it is to age out of season (try selling swimwear in the winter). It's also more likely to get lost, damaged, or marked down, which crimps profit margins. Even when non-seasonal goods can safely remain on shelves, that ties up money that could be used to buy better-selling and/or more profitable inventory. The fact that Macy's took a sizable loss last quarter while Kohl's barely broke even underscores this idea.

So, I retract the notion I floated in August that this department store chain was taking a dangerous risk. If nothing else, last quarter suggests Nordstrom's buyers have a better handle on their inventory than their rivals' buyers do.