諾德斯特龍百貨 (JWN) 2002 Q1 法說會逐字稿

Welcome to the Nordstrom first quarter earnings conference call. All lines have been placed on a listen only mode until the question and answer session of today's conference call. Today's call is being recorded at the request of Nordstrom and if you have any objections please disconnect at this time. I would like to turn the call over to Ms. Stephanie Allen, Manager of Investor Relations. Thank you, you may begin.

Good afternoon and welcome to the Nordstrom's first quarter conference call. Joining me on the call this afternoon are Blake Nordstrom, President of Nordstrom, Inc. who is joining us today from a remote location, Peter Nordstrom, President of Full-Line Stores, Mike Koppel, Executive Vice President and Chief Financial Officer, and Rob Campbell, Vice President, Strategy and Planning, and Treasurer.

During this conference call, Blake would lead off with the recap of the company's key initiatives and first quarter highlights. Mike will follow with the review of our financial performance including guidance for the second quarter along with updated full year guidance. Pete would conclude with some remarks on our merchandising efforts and then we will take your question. Though we can allow for as much participation as possible, please try to limit your questions to one per individual.

As is customary in these calls, some of the information you would hear would be forward-looking such as our financial goals, projected inventory levels, expansion plans, and Information Technology and merchandising strategies. Actual results could differ materially from those that maybe projected or implied in our discussions. Additional detailed information concerning a number of factors that could cause actual results to differ materially from information that would be shared is readily available in our most recent annual report on form 10-K for the year ended January 31, 2002.

Now I will turn the call over to Blake.

Thanks Stephanie and good afternoon everyone. Thank you for joining us today on our first quarter conference call. Before we launch into the quarterly results, I would like to take a few minutes to recap our goals for this past year and discuss some of the highlights for the last quarter. We approach our business from a perspective of trying to increase customer value. All of our initiatives are executed with the customer in mind because ultimately we believe that creating value for our customers will translate into value for our shareholders. This year we are concentrating our focus on three key areas. First and foremost we are focused on driving top-line growth. We recognize that ultimately our long-term success will be dependent on driving sales volume. The other two key initiatives are really a carry over from last year. But we continue to concentrate on managing expenses and completing our perpetual inventory implementation. During the first quarter, we made solid progress on several fronts and I am pleased with the improvements our organization is making to execute against our priorities. In a moment, Pete is going to discuss in more detail our primary goal of driving top line growth including both merchandising and inventory control effort. But I did want to make a brief comment of my own. Our comp sales remained negative, which is an indication that we have a lot of work ahead of us. But we are beginning to see a gradual strengthening in many of our merchandise areas. This is encouraging and I believe that the improvement is driven by a combination of better merchandising as well as improve in demand. Our expense management efforts center on reducing overall expense levels to improve our financial performance and overall profitability. And we will do it in a manner that is transparent to our customers. Within our organization there is a higher level of understanding and appreciation for the importance of carefully evaluating how every dollar is spend. Shifting resources towards activity that enhance the customer experience and either drive sales or directly support our sales people. Our efforts in this area continue to gain traction.

For the third consecutive quarter our SG&A is better than the prior year on both the percent to sales and absolute dollar basis. We are committed to achieving our preliminary goal of bringing SG&A back down to the 28.5 to 29 percent range and believe we can do so over the next couple of years. On the systems front, we achieved another significant milestone in our perpetual inventory implementation during the first quarter. We completed the rollout of the system throughout our entire full-line store base. We have been capturing purchase order information since last year. But now as the stores are connected we can begin to accumulate history that includes item level sales performance data. This is the information that our merchants will be able to use to improve the initial allocation of our buys and make more strategic markdown decisions. Another highlight from the first quarter is the performance of our Rack division, which achieved positive comp store sales for the quarter. We view this as a noteworthy achievement considering that Rack posted negative comps all four quarters of 2001. The improving business is partially attributable to the adoption of a more promotional stance aimed at competing more directly with other off-price retailers. In addition, there has been some merchandising changes related to key vendors, specifically a stronger assortment of key brands with enhanced focus on value. As we strive to improve our top line performance we are encouraged by the growth we are seeing in our Rack business and are looking forward to solid sales performances throughout the year.

The last topic I would like to discuss is the resolution of the Put Agreement with the outside investors of Nordstrom.com subsidiary. As we have disclosed in our financial statements, a Put Agreement existed between Nordstrom, Inc. and the minority interest holders of Nordstrom.com, Benchmark Capital Partners and Madrona Investment Group, which grant them the right to sell their shares in Nordstrom to the company for effectively 80 million dollars if certain events did not occur. As we stated in the news release distributed on Monday, we agreed to pay a total of 70 million dollars to Benchmark and Madrona in exchange for their ownership interest in Nordstrom.com. This transaction satisfies all of the rights and obligations contained in the Put Agreement. We are currently in the process of confirming the pass forward with our Internet and catalog businesses. Our commitment maintaining these channels is unchanged and we continue to strengthen our position as a leader in online specialty apparel. We believe that Nordstrom customers value and appreciate the products and services we provide online and in our catalog and we want to continue to use these channels to serve them.

Now I would like to turn the call over to Mike whose comments will include more financial details surrounding the acquisition of the minority shares.

Thanks Blake and good afternoon everyone. For the three months ended April 30, 2002 we reported earnings of 22 cents per share on a diluted basis, excluding non-recurring items and the impact of adopting a new accounting standard. This is a 22 percent increase compared to 18 cents per share in the first quarter of last year. First quarter results were impacted by previously announced charges one of which relates to the adoption of the new statement of Financial Accounting Standards #142 which went into effect February 1, 2002. Subsequent to completing the impairment test required by the new rule we have recorded a non-cash, pre-tax charge totaling 21.9 million or 10 per share. We are also planning to record a non-recurring charge related to the purchase of the minority interest in Nordstrom.com. This charge will include the acquisition cost, which is 70 million dollars less the fare value of the shares acquired, plus cost associated with the transaction. In total this non-recurring charge is not expected to exceed 55 to 65 million dollars. While the exact dollar amount presently is not determinable we expect the majority of the charge to be recorded in the first quarter and the remainder in the second quarter. The exact dollar amount of the first quarter portion of the charge will be included on our form 10-Q, which will be filed no later than June 14, 2002. This transaction will not increase our debt, as the amount owed to the Nordstrom.com minority partners will be paid with the existing cash on hand. First quarter total sales of 1.25 billion were up 2.3 percent compared to last year, primarily due to the addition of six full-line stores and eight Rack stores since May 1, 2001. Reported comp store sales for the 2002 first quarter decreased 2.1 percent, which was an improvement relative to our plan. As a reminder, we began reporting sales according to the 454 retail calendar in February of this year, but our quarterly financials results remain on a calendar basis. All of our geographic regions reported comparable store sales declines for the first quarter except the Northwest region, which was flat last year. Besides from a relative strength in the Northwest there was no material difference between our Southwest, Central state, and Eastcoast regions all of which posted low single digit declines.

A number of our merchandise divisions achieved positive comp store sales for the quarter. Both women's designer and women's contemporary posted high single digit comp store sales growth. Cosmetics and women's active wear achieved positive mid-single digit growth, and kid's wear comps were in the positive low single digits. Comp store sales in women's better apparel, intimate apparel, accessories and women's shoes were in line with company average, and all other divisions performed below the company average. Gross profit for the quarter as a percent of sales fell 60 basis points from the same quarter last year primarily due to increased occupancy costs related to the addition of three full line and two Rack stores during the quarter as well as higher utility expenses this year versus last. Managing expenses continues to be a key area of focus for the company this year and our efforts in this area continue to gain traction. Our selling, general, and administrative expenses for the quarter declined 12 million or 160 basis points on a percent to sales basis compared to last year which is better than our guidance of slight to moderate improvement. Roughly 40 basis points of this improvement is attributable to leverage gained from better than expected sales. Remaining 120 basis points improvement is the result of savings related to workforce reduction carried out during the third quarter of last year, lower catalog expenses, and improved management of selling costs, all of which served to offset higher IT expenses related to the implementation of our perpetual inventory system. During the first quarter bad debt levels deteriorated compared to last year. But based on a sequential trend this was expected. While we are seeing some encouraging trends in our write off rates, our outlook remains cautious. We continue to closely monitor these trends and will make adjustments to our reserves as appropriate. As expected, other income during the first quarter decreased 10 percent over the previous year due to lower finance charge revenue resulting from declining interest rate and lower receivable balances. Net interest expense of 20 million was slightly higher than the first quarter of last year, reflecting increased borrowing partially offset by reduced overall interest rates.

Our Nordstrom.com subsidiary achieved sales of 63.1 million for the first quarter of fiscal 2002, a 10 decrease compared to the first quarter of 2001. The sales decrease is attributable to lower catalog productivity combined with fewer catalogs mailed this year versus last year. The sales shortfall was partially offset by stronger Internet sales in the first quarter of 2002 versus the previous year. Nordstrom.com posted a pre-tax loss of 308,000 for the first quarter of 2002 compared to pre-tax loss of 4.2 million for the same quarter last year. After adjusting for minority interest the current year loss had a negligible impact on the company's consolidated quarterly earnings whereas the loss in the first quarter of 2001 translated into a reduction of 2 cents per share.

Now lets look at certain preliminary balance sheet and cash flow results. At April 30, 2002 total inventory at cost was down 58 million or 6 percent from year ago level on a 7 percent increase in gross square footage and a 2.3 percent increase in sales. Total inventory per square foot declined 12 percent versus the prior year. Comparable store inventory at cost was down 115 million or 13 percent. We continue to work diligently to effectively manage our inventory and expect comp inventory levels to decline as compared to third quarter. Net capital expenditures for the first quarter totaled approximately 64 million, primarily for new store constructions and Information Technology investments. For the quarter, depreciation & amortization was 55 million. Preliminary total debt and total capitalization on a book basis at quarter end were approximately 1.4 billion and 2.7 billion respectively, resulting in a total debt-to-capital ratio of 50.5 percent which is down from 52.1 percent at end of the fourth quarter. During the first quarter, we used existing cash to retire approximately 77 million dollars in medium-term notes. This is the only significant debt maturity for this fiscal year. On May 1, the company renewed its existing 200 million dollar securitization of a portion of its Visa card receivables. This transaction, which has a five-year term, was and is off balance sheet and has been fully disclosed in our annual report. We did not repurchase any shares during the first quarter as we have achieved a high end of our targeted debt-to-total capital ratio of 40 to 50 percent on a book basis. Our goal over the next several years is to reduce this ratio to a range of 40 to 45 percent.

With regards to guidance on our performance outlook for the second quarter, we anticipate the following, which is compared to the second quarter of 2001. Same store sales flat to slightly down. Gross profit margin slight to moderate improvement on a percent of sales. SG&A, a moderate improvement on a percent of sales basis. Service charge income, flat to a million dollar increase. Interest expense slight increase over last year on a dollar basis and our effective tax rate continues at 39 percent. These yields are EPS estimates of between 34 cents and 38 cents for the second quarter, excluding non-recurring items, which compares to 29 cents for the same quarter of last year. In combination with our year-to-date actual earnings, this yields a full year EPS estimate of between 1 dollar and 18 cents and 1 dollar 22 cents for 2002, excluding non-recurring and impairment charges, compared to 93 cents in 2001.

Now I will turn the call over to Pete for additional remarks on our merchandising effort.

Thank you, Mike. As Blake mentioned, we are really trying to hard to get proper focus and energy to having sales increases. Everyone who is in management in the full-line store group, support and sales both has a significant part of their bonus incentives based on comp store sales gain. While we don't have a lot to show forth yet with our year-to-date comp store decrease in full-line stores of 2.6 percent, we feel like there are signs of improvement indicating of progress being made. I would like to highlight a few merchandise divisions that have made progress in the first quarter. Our men's apparel merchandise division is experiencing a notable improvement in trend while we are still running comp store decreases overall in men, we are moving in the right direction with some encouraging signs. Our men's

area, particularly our basic dress, shirt, and network businesses are running increases. We are also happy to report that our men's suit business is improving. All this indicates to us that there is a tangible return to more traditional formal career wears for many of our male customers. The challenging part for us has been catching up to the increase demand for this type of merchandise. Particularly with the dress shirts, we are actually missing some business because we are far exceeding our projections for demand that was largely a result of the conservative plans that came from the decline in business during the third quarter of last year. We plan on being in a much better in stock position by July.

Women's shoes are also showing an improving trend. Our women shoe division includes three departments - junior women shoes, designer shoes, and mainstream women shoes. Junior's and designer have been the relatively stronger segments for several months while our mainstream department which represents over 40 percent of the women's shoes business has been lagging. However, the mainstream business has been improving recently with the arrival of new stream merchandise, which is selling well. Our

has also improved contributing to the improving sales trend. There are some pockets of strength in our women's apparel business. Leading the group is our designer apparel area, which achieved positive high single digit comp store sales growth for the first quarter. We have a terrific team of merchants in our designer area who have done a great job chasing hot trends and partnering with luxury brands to create compelling reasons for the designer customers to shop. Along with exciting new products, we have hosted several successful events catering to the designer customer. The improved cost sales performance is an indication that the content is better and customers are in the mood to buy better. Additional solid areas exist within women's

and contemporary. In total, we still believe that our women's apparel business is on the right track. We are continuing to refine the content of our merchandise assortments and expects continued improvement throughout the year.

The last two divisions I want to briefly comment on are cosmetics and kids wear. Our cosmetic division continues to post superior results building off of multiple years of comp sales increases. This is a significant portion of our business and we are pleased with the continuing strength. The kid's apparel area is probably the most improved, having experienced some of our more challenging results over the last two years. This is an area where we have done a good job of partnering with our MPG product development group to come up with some great items. Customers are responding well. By focusing on value in key brands we look to continue with this trend of increases. Our discipline around inventory management and improving turns is starting to pay off. Last year we turned too slowly which caused significant mark down pressure in most of our merchandise divisions. Our inventory plan for this year calls for 10 percent increase in turns and we expect inventory per square foot to decline for at least the first three quarters. I am happy to report that all of our merchandise divisions achieved significant reductions in inventory during the first quarter, but lower inventory has not hampered sales. For the first quarter, full-line stores has reduced total inventory over 10 percent from last year, but total sales have improved in low single digits. As one example total inventory in men's apparel was down over 20 percent, but total sales increased in the low single digits. We look for this trend to continue as we stay focused on having the appropriate levels of merchandise and a discipline to stick with more conservative plans that we are exceeding on a consistent basis now. This puts us in an open to buy position where we can react much better to hot categories and trends. Being able to chase business like this will be a key factor in improving the top line performance. Having leaner inventories also will help us improve our markdowns for the share. As part of our efforts around driving top line sales we have implemented an initiative that focuses on improving sales in some of our smaller volume sales. We identified a handful of stores that has experienced decreases in volume for several years now. We try to analyze objective demographic information along with our own customer information on these stores to make sure we understand the customer base in these locations. Based on our findings we then challenged all of our merchandise leaders to focus on improving the content of our product offering in these locations so that we could not only get new customers, but we gain some customers we may have lost or alienated over the years. We are happy to report that this focus has paid off with improved sales results. Sales in the majority of the stores that were part of our initial test significantly improved to the extend that they are at or near the top of the rankings in their respective regions. We are planning to apply these lines to more of our small volume stores and are confident that we can replicate the success. These types of efforts improve confident and will help raise the bar and expectations as we learn how to win in these stores.

Perpetual inventories is the last topic I want to spend a few minutes on before opening up for questions. As of the end of April, this system has been successfully installed in all of our full-line stores. This is a significant milestone for us but does not signal the completion of the project. There is still considerable work to be done with regards to rolling out system tools as well as training our people so that we can fully realize all the benefits that the tools are intended to provide. The education component of this implementation is critical because this system bring tools to our organization that our merchants simply had not before. We are working to be as proactive as possible with regards to our training effort, so that we can move up the learning curve as quickly as possible. Having said that we still expect this to be a multi-year process. Rather than having each division working on their own to apply the new tools, we are instead running a 12-week pilot focusing on one merchandise division to begin to think about how to best apply the tools and develop some best practices that are applicable to all the merchandise areas. It will be the end of this year before all 13 merchandise divisions have gone through the training process. We believe the impact on replenishment would be the immediate.

In conclusion, we have made some improvement and are encouraged by some very promising examples in our business both on a store side and the merchandise side. We will continue to try improving net income through expense and inventory control, but ultimately our focus on driving top line sales will get us the results our people are working so hard for.

Now I would like to open it up for questions.

Thank you Sir. At this time if you would like to ask a question, press 'star' followed by one on your touch-tone phone, questions will be taken in the order they are received. Again at this time to ask a question, press 'star' followed by one. Our first question comes from Bob Buchanan, thank you and you may please state your company name.

It's AG Edwards, Congratulations especially on this expense control and inventory control. I just want to ask a question I guess for either Blake or Pete, you guys are running getting decent sales with less inventory, Pete you mentioned the example in Men's, this is before I guess systems had really borne fruit, and these systems have really borne fruit. I am just wondering what is happening to get those kind of results, those better turns in areas like Men's?

Well what we did, it started in the planning process last year, we ran with too heavy inventory levels last year and if you stacked it up compared to our ten year history, it would indicate that we had some of the slowest turns we have ever had. So, we knew about midway through the year last year that we had to create plan that were really more in the range where we had success in previous years. So, we were able to do that early on, so

catch up all year. Once we established those levels, it has just been a matter of having the discipline to stay there. And I got to give a lot credit to our merchandising leaders, they have done a good job, we have been focused on this. And the encouraging part is while we are doing it with less inventory we are having some pockets and examples where that is not impacting the top line part of our business negatively at all. Matter of fact, you know, we are in a much better position really than we were last year in terms of the efficiency of our inventory.

Okay, the initial pilot, Pete, is gonna be in which division on PI?

Yeah, it is done in our division that has hosiery, lingerie, and women's active. And the main reason for that is that first of all, a lot of these categories are highly dependent on replenishment issues and so they tend to benefit quickly. Also the person that heads up that merchandise division for us for two years with a lead and our whole perpetual inventory projects, so she has a really good understanding of it, a real passion for

to real business issues. And her group has really embraced it and is going for it.

And just lastly,

early to day, so they had really strong sales in young men led by Streak. I know you guys do a good job in young men's, just want to know how that business is performing?

Young men's, if you were to look at in terms of total sportswear from young to more mature men, the young men's part of it has performed better, but we are still in a place, while the trend is improving we are not entirely not where we want to be. Now we have had some pockets of success in young men's, in particular we have done a pretty good job in our denim business. So, I think that it is fair to say that is a healthier part of the men's business right now.

Okay, thanks so much.

Thank you, Dana Culla you may ask your question and please state your company's name.

Banc of America. Couple of questions guys, in terms of the gross margin, you said most of the reduction was in, you know, the occupancy costs, what were merchandising margin versus

?

Dana this is Mike. Our merchandising margins were effectively flat with last year.

Okay, and if we could drill down a bit, given how tight the inventories were during the quarter, you know, what happened in the sense that one would have thought as a result in last year you had tons of clearance, you would have actually seen an increase?

Dana, that is a good question. There is actually two components that I think kept our margins flat with last year. One was the fact that the increase of our Rack business relative to our total, at a lower margin, caused the overall gross margins to drop a little bit. But, secondly, as we fully implemented perpetual inventory, our record keeping process for booking markdowns is just substantially more accurate than it has been in the past. And we actually that we have had a little bit of an acceleration of recognition of some markdowns. We are not changing our outlook for this, but we believe there was a slight timing difference within the quarter.

And so over the course of the first quarter, what percent of the stores were on perpetual?

Well I would say on average, more than half. Because we completed the first two regions I think by March, and then finished everybody up by the end of April.

Okay and then as I recall there were a lot of expenses embedded in this quarter that we probably wouldn't see for the second, but your SG&A outlook for the second quarter is for an increase in dollars, can you just walk us through that?

Well, the second quarter continues to reflect the dollars that we are spending on our perpetual inventory implementation. And our caution on expense while we had particularly good news in the first quarter, we are still cautious moving forward because the implementation process is significant, there is a variety of unknowns out there. And we continue to remain cautious on that until we get through the quarter.

Okay, and then lastly I was interested in these stores that you tested, to sort of try to do some sort of a

, what percent of the stores are we talking about, can you talk a little bit more detailed, sort of what was the analysis to sort of figure out what was wrong with those stores?

Sure, this is Pete. What we did was we identified the bottom 25 percent in terms of sales per square foot. So it is a combination of small stores and actually stores that are may be a little over-sized for the volume that we are doing. Some of them are new stores; some of them have been around a long time. We just felt that we were having some challenges there and weren't able to apply the appropriate energy to make the improvement. So, what we did, we took a handful of stores at a time where we should actually look at it as objectively as we could. So, it was almost like going back to when we first opened the store, we would look at the demographic information that would suggest where we really should, how we should be doing and the different consumer group which we are doing with. And then we can track with that and compare it with what we are actually doing in these stores, and often times there was a bit of a disconnect. As an example the market may indicate that there is a lot of young families, but our businesses around young family kinds of business may not have been good. So, it would show us that may be we are not bringing in the right kinds of merchandise for what that general demographic would want. So, we kind of took a high level view at it, we used our corporate merchandising people that really has ability to be, not really through their experience, but because there is a little bit of difference between them and these stores would be more objective about it. So they were able to come in and work with a more local buying people, who would say, `OK, we been doing this, but how about trying this based on what we are seeing. And I think it is a very healthy process for us to take an objective look at it and the whole thing was how can we do some things that will impact us right now, not philosophical things that may be could be applied over two years. So, lets see if we can jump start this right now, that's part of the reason why we only picked a handful of stores, We tended to only focus on one per geographic region, so we didn't overwhelm the area. And so far, so good. It has been a notable positive improvement in a vast majority of the stores we have taken this on. And we've got more to do and we really believe that there is something you learn there that is applicable. We not only took under performing stores but the stores that were doing well too, because it is really, I mean the issues kind of the same, whether you are talking of a store like South

Plaza or talking about a store that has been around for

you know, half that size, something like

or something. So, we are learning a lot.

Great, thanks.

Thank you, Teresa Donahue, you may ask your question and please state your company name.

Hi guys, I had a question relative to your Rack experience, you mentioned you have become more fashion forward, more national brands and more aggressive on prices. I wonder if there is any learning's that you might may be thinking of applying to the full-line stores?

Mike can you take that question.

All right, I can answer the rack part, but she concluded with about the full-line stores, so?

I know, I know they are different businesses but it seems to me that you have gotten a lot more aggressive and proactive in driving the value message there. Like I said, I am wondering if on the margin you are thinking, you know, there is some lessons that might apply to the full-line stores.

Well

this is Blake. I think that that's fair, again to start with we filled in our Racks over the last couple of years through some of our efforts that we got a little a stale. And that we were almost aspiring to be like full-line stores, and we weren't as relevant as we should to be to that customer and that competitive group. So, we tried to get more aggressive and Lorie

, who is the leader of our Rack division really excels in the merchandising area, and she has been working closely with our key top vendors from the full-line store division to ensure that the Racks get first opportunity for these close outs and special values. And they have taken a sharper pen or pencil to it, and try and pass on those value to the customer, and we are seeing early some success and we are hopeful for the future. There is no question that those basic fundamental elements applied to some of the things that Pete and the corporate merchandisers are working on, they are doing in a way that is appropriate for the full-line stores. Pete you wanna add anything to that at all.

Yeah, I do and I think this is an important point because for us it's to try to capitalize this with a singular notion of 'we've lowered prices to improve value'. It is probably not the best place for us to go. There are places in our

that is appropriate, but as I mentioned that the single strongest division we have going right now is our designer apparel area. And they are not on some kind of value kick, that's for sure.

Yeah, but it is working great. They really understand what their customer wants and I think they have worked hard around events and units and working with new vendors and doing all these things like exclusivity and stuffs that has been really helpful to us. On the side where values really improved, is the Kid's apparel example, where we have done a better job of trying to mean, before I think we were a little bit guilty of trying to mean all things to all people. We carried a very broad range in those departments, and

in your Kid's departments probably they are not super big, so it is difficult for us to stand for anything. In general we have been able to edit our selection a little bit, and where we have had most of our improving businesses around more of the more moderately priced, somewhat own-label stuff in Kid's items and what have you. So every division kind of has their own version of what this is, and I am really trying hard to make sure that we are using appropriate finesse to do the right thing here, because a blanket one size fits all solution is not going to best for the overall balance of our inventory.

Thank You.

Thank you, George Strachan, you may ask your question and please state your company name.

Hi this is actually Adrienne Shapiro along with George from Goldman Sachs. I was wondering Pete perhaps you can give us an update on private label success. Caslon clearly had a strong start, haven't seen as much to Talora in the stores, was wondering have you struck the right balance with national brands versus private labels, how are they faring, and

what percentage they represented the percentage of sales, and where do you see them leveling off?

Well without getting too specific about it, last year probably represented for us towards the bottom range, I think, of what our overall MPG or own product participation would be as a whole. I think we recognized that, while we are not going to mandate any kind of specific percentage of the business, we have a lot of opportunity to improve there. And Kids would be an example of where we

, we really need our own product label to be kind of a backbone of this department and we ramped it up there a little bit. You mentioned Caslon, that is going well, I would say that's going about according to plan. You mentioned Talora, that is a brand that we have decided to exit and you will not be seeing that label in our stores any more, I think after

but half-yearly still happens during June. That would probably be the end of that product, now we have taken some of those silver

and we taken some more items and we will be selling them in the stores right under either Nordstrom label or Studio 121 label. But Talora as a brand and trying to do collections around that is something that we are going to do away with. So, I guess, I would say in general while our percentage of total own label products is not as high as may be it has been in the past, it is not that far off, but I think we are really moving in the right direction. And I gotta give Jim O'Neil, who is leading our NPG division now a lot of credit. I just feel like we have a much better collaborative spirit in how to approach the business, I think we are working together a lot better to identify opportunities that we can try to exploit and I just see this as a much more positive situation, so we should look for that to improve.

And you mentioned that you are exiting Talora, are there any other labels that we'll see exiting at the stores or any other additions inside the label?

At this time, no.

And as a rule, I mean, how is private label sales trends compared to national brand?

You know it is a broad enough assortment where there are some things that are good and some that aren't so good. I would say again the examples of what is pretty positive is been in men where I think we've identified items that tend to be a little bit more value-priced, particularly we talk about our dress shirt business, a large percentage of the dress shirt business we do is under our own label and that has done very well. I think in the shoe division there has been a renewed spirit around getting and finding opportunities to do some business there. Gosh, there is a ton of examples out there; I guess would just say on the whole it is pretty positive.

Thank You.

Sherry Eberts you may ask your question and please state your company name.

JP Morgan, thank you. Second quarter is obviously an important sale event quarter for Nordstrom. Can you talk about any changes you have made in your marketing plans or your other plans for the sales events this year versus last?

Can you repeat the question please? I am sorry.

Yeah, the question is that your sale events are coming up in the second quarter, the half-yearly sales that you were just talking about, as well as the anniversary sale and I was wondering what your marketing plans as well as any other plans are for those events this year versus last year?

As you may recall, last year we made some real efforts around trying to improve our sales events and we were successful with that. And I think that the overall strategy is to try to do much the same stuff. In terms of marketing specifically, I think we are doing more in a focused way around some radio advertising and some newspaper advertising, which is probably the two best vehicles to be able to do a broad general fare like this. So, I think you will see us increase our presence a little bit in those areas.

Okay, but basically the

and tackling similar to the changes you made last year and that's what you would implement this year?

Yeah, it is pretty much the same strategy with some enhancements around the

.

Dorothy Lackner, you may ask your question and please state your company name.

Yeah. Thanks. Good afternoon everyone. CIBC World Markets. You talked about the great success you had in the designer on the women side. I wonder if you could just give us a little bit more color on improvements that you are seeing in the better and contemporary businesses in women's'. And then on the men's business, is it your perception that the improvement you are saying is a sort of a generalized trend or is it more related to what you are doing in the men's' business and how you've improved your efforts?

That is a great question. You know, I'm a bit reticent to sit here and tell you today that we have got the men's thing figured out and we are really

on that along. But, the fact is, we are still running comp store decreases now, but the trends are improving and we do have some pockets where it is looking pretty good. I don't know if that is a general trend all retailers are experiencing. I know that there are a lot of efforts that we have made that specifically attacked the issues that we had a hand in the challenges and we are showing that those efforts are bearing some fruit. You, know, there are examples all over the place. I think the most encouraging aspect is that our suit business and our tie business and basic dress shirt business have improved. This, kind of indicates that our customers are really looking towards again for more typical career wear and that we've been known to do a pretty good job there in the past and take a place to our strengths. But this is pretty encouraging. We are chasing that business; get back to that value thing again. You know, we are doing well with suit,

a little bit in the face that everyone is just looking for cheaper stuff because that is not what we dealt about.

But you are getting your message out better, perhaps?

Well, you know, I don't know that we are necessarily getting the message out better. I think New

have good traffic going through. We have the product assortments right, it shows quickly and I think that we have just done a better job of

merchandise presentation with store but mostly just a content of having

and having the tastes and demands of the customers of all the little bit and in kind of the area where I think we have some strength. In the women's part, you are talking about designer and

and contemporary. Of that group, the designer part has been really good. That would include the collector's area where we have got the luxury brands. They will also include

which tends to be more casually based sports wear, not necessary a designer, but higher price. Those products are doing great. In the contemporary side where we have TBD department that has a casual contemporary clothes

top performer in the more moderate priced women's department. Someone mentioned earlier about our tracked label brands. In particular, we have some improvements in classics, which would be in

area. We are really a kind of chasing that business a little bit right now and are encouraged by the directions we have taken.

Right, Thank you.

Belinda Christiansen, you may ask your question and please state your company name.

UBS Warburg. I wonder if you could elaborate a little bit more on your gross margin guidance for the second quarter. You talked about a slightly up growth margin, which is obviously reversal from the trends in the first quarter, but presumably higher occupancy expense will be a factor in the second quarter, hopefully the Rack may be doing well. So, could you just elaborate a little bit about your rationale?

Sure. Belinda, this is Mike. The biggest change is the relative increase in our markdowns that we experienced last year began in the second quarter of last year. Our actual markdown performance in the first quarter of 2001 versus 2002 was a slight up tick. In the second quarter last year, it was a significant up tick. So we believe with the leaner inventory levels, moving into the second quarter, we should see some of that benefit playing out more.

Okay, thanks a lot.

Jeff Simpson, you may ask your question and please state your company name.

Midwest Research. Michael, Could you talk a little bit about the credit business and add some color as far what the write-off trends look like as you move through the quarter and what you might expect the trends to look like as we move forward?

Well Jeff, our write-off trend in the first quarter was pretty consistent with what it was in the fourth quarter, which is telling us that things are stabilizing somewhat and our actual write offs were a little better than planned. So, while we are not at the point yet, we are looking to call out that we have an improvement coming forward. At least we feel the deterioration relative to our expectations and our plan is in line.

And then, I guess a followup question on the perpetual inventory system. When should we begin to see a benefit as far as the allocation of products by store? I understand you gave me correct historical data and now that is all implemented, when should we see those benefits on the merchandising side?

Jeff, I wouldn't expect any noticeable benefits directly from the system until sometime next year. By the time we can pull out this information together, train our group to, write our orders in a more efficient and get it so. It is a standard practice across all the merchandising categories. I feel it will take a little time. So, I don't anticipate directly from the system would be sometime next year. Now, I will say that just with some basic disciplines that we put in place, recently we are starting to see some of the benefits of those.

Okay.

Michael Extant, you may ask your question and please state your company name.

It is Credit Swiss First Boston. I am just following up on two quick questions. The pricing initiatives that you did on certain items, how are they working out? Are you still getting into the positive gross margin dollar contribution from that initiative? Is that more intensive, less intensive and how much of the SG&A improvement is from the Rack business? Thanks.

Well, I will take on the value part of it first, in terms of having some lower price points and some lower markets on certain

. I think it just speaks into the balance of what makes our deal work and every merchandising division, with the exception of designer, has some value propositions they are going after that does reflect higher mark ups. I think it is fair to say that that hasn't negatively impacted our margins because you don't

markdowns, I mean, you have to trade off a little bit there and we are selling through things pretty well, more of our value oriented great stuff, great price kinds of items. It is just a continuation of what we implemented last year during the fourth quarter. I really don't have any specific report on than other than we stand focused on that what is appropriate.

Michael, this is Mike on the SG&A question. The Rack has done a great job with the expenses consistent with the rest of the company. But, in terms of its impact to the whole of Nordstrom, Inc the major expense dollars are coming from full line stores and from our corporate headquarters and that is where the absolute dollar savings are being experienced

Ok, thanks.

Wayne Hood, you may ask your question and please state your company name.

Yeah Mike, I just have a question on the gross margin again. You mentioned, if I heard you correctly that you found some inventory as you brought up the new system, I guess that needed to be cleared. I am wondering if that is true, how much that was and how much is left to be cleared and how much of it is just a result of the perpetual, you know, getting into better measure

it is actually up and did you change your

during the first quarter?

Wayne, my comment wasn't related to the fact that we found more inventory, it was related to the fact that now when we take permanent markdowns we take it off of on-hand. Our old methodology was actually go in the stores, count it, list it and key punch it and so by doing it on an effective date, our on-hands and perpetual, we are taking it on the day it is effective. So, we are finding a timing difference from that. In addition, any mis-rings at the register we used to lose the markdown on that and it would be reflected in our shrink results. Now those markdowns are being captured at point of sale.

Okay, and then my final question is on the smaller stores. Can you add any color about the earnings power of that

stores if you were to get them to the company average? You know what they can produce or you know, what level below the company average might they operate?

Well, that is good question. I don't have anything specific on that, Wayne, at this moment.

Okay. Thanks a lot.

Sure.

Robert Timney, you may ask your question and please state your company name.

RBC

. I just have a question on a statement you made in the press release at the end of the fourth paragraph, you talk about better balance of fashion brands and prices remained focused on addressing opportunities to expand volume. Can you expand a little bit on some of the opportunities that you see going forward to increase volume?

Well, sure, I think I feel a lot of stuff that I have covered already. Again, it is not going to be easy for me to sum that up in one sense. Every merchandising division has their own issues. I think we just have to be a lot sharper and lot more efficient with our inventory. What would happen when you are not doing super well and you work on the backend to get rid of inventory, you are kind of

down, it doesn't really put you in a position where you are on the

stuff and I think the biggest shift for us over the last 18 months is that we are in a position now where we can really attract the business more because we have edited our

a little bit so that we really know what to get after. I just think that we are in a much better place to be able to react and respond to the positive parts of the business, rather than spend all the time hunker down and try to prevent over-inventory situations.

Okay. Great. Thank you.

Jennifer Black, you may ask your question and please state your company name.

Can you hear me? Ok great, I am on two conference calls at the same time. Congratulations on a good quarter. I wondered if you could tell me, if you have to just make a guess, what percent of your employees, do you think, will be trained by the start of the anniversary sales on the perpetual inventory system?

Well the people on the floor level are trained. They change the process and how they account for things at the point of sales. So, that is pretty much done. So anyone we would bring in new for the sales, obviously would get that kind of training before they hit the floor. I think the larger issue has to do with the buying areas and you know, all the clerical support people and all the buyer and that is how we process orders. If there is an ongoing training program, I think Mike really spoke to that, we have taken account of one bite at a time. But I think by the end of this year we should be in a position where we pretty much fully understand how to use the system and then see how to acquire that in real practice in few weeks.

Okay, so the buys have already been made, and, I think I understand now but this should be beneficial, I would think, for your sales?

Well, if you are talking about, were we able to buy these

based on all the notch we had from perpetual inventory and that probably wouldn't be accurate because a lot of these buys were done six months ago when we didn't real have full implementation. I think that what you will see going forward, again that is why most of the benefit we hope to really be able to see happen in 2003.

Okay. Al right, thank you very much. Oh, can I ask on the IMUs in Classiques, it looks like those have gone up a bit but the stuff was great? Can you speak to that?

Our initial mark up hasn't gone up.

It was may be a sort of product-by-product basis.

It is probably the case. I can tell you our Classique business is good.

Yeah, it looks good. Okay. Thank you.

Thanks Jennifer.

Dan Diamond, you may ask your question and please state your company name.

Thanks, McAdams, Wright, Reagan. On the topical store expansion, I assume, you are still taking a pretty conservative stand there. Is it possible that you might take a more aggressive in the future and if so what would it take to get to you to make that decision?

Blake, do you want to take that?

Sure, we reevaluated how we are allocating capital for new stores here well back and we have a higher hurdle. It doesn't mean that we try to stick it off but there are also fewer opportunities out there. So, going forward after this year, we believe we will be at a more manageable rate. This year is a peak for us, with eight full-line stores and five Racks. Well, after this, it is down to roughly four. We are still looking for opportunities but again they are limited. When we decide on our location on average it takes about four years by the time we look at it, sign a deal and get the doors open. Again this year, some people could question why are we opening eight stores in this environment. I think it happens to be an opportunity for us - a positive one, but it was a decision done a while ago. So, going forward, I think our challenge is to find where are there great locations to add stores where we can be positive both for our results in our employees and our customers. We want to be careful that we are not opening a store that, in the

can be called a B store and that could in the customers mind is something less than what they expect from Nordstrom.

I would like to add that through our efforts on these small store initiatives, I think what it is going to help us to do is to be able to determine in some of these markets how we can be successful and that could open some doors for us with expansion opportunity. I think, first, we have to really have to figure what we have got

. Could we have a pretty wide array of stores in our portfolio? So, hopefully, we can really figure that there is a way that we can have really great productivity in 120,000 square foot stores along with the 225,000 -250,000 that we feel we generally have pretty good success with.

We have time for one more question.

Okay, Phillip Gosan, you may ask your question and please state your company name.

Can you hear me? Yes, good afternoon, great quarter! Couple of questions here. Can you just repeat one more time for me what the CAPEX is for the full year and also the breakdown between new stores and IT spending? And the second question, given that we have now three consecutive quarters of improved expense management, what can you learn from your conversations with the rating agencies right now? You still have a negative outlook by book. What would they be looking for before that would change their outlook, let us say, back to stabilize the first step?

Well, thanks for the question. This is Mike. On the capital piece, our plan this year is to spend 300 million to 350 million in capital. Of that half is on new stores, about 25 percent of it is on technology and the balance on just general upkeep and minor

remodels. As far as the credit agency question, I would like to turn that to Rob Campbell, our Treasurer.

As far as the rating agency, we have ongoing dialogue with them and their focus has largely been on operating performance. We've made some progress and we need to continue to make progress and I think they are looking for that kind of consistency along with improvement in our top line. So, that is where our focus and I believe that is where their focus is as well.

Okay. Thanks Rob.

Thank you very much for participating in our conference call this afternoon. If you have additional questions or any further information, you are welcome to contact me - Stephanie Allen, I am the Manager of Investor Relations and my direct line is: Area code 206-303-3262. An audio replay of the conference call is available via the Internet. To listen to call over the Internet please access Nordstrom's website at www.norstrom.com, then click on the investor relations option at the bottom of the screen. Next click on the Q1 conference call link, which will guide you to the audio portion of the webcast. The archived version of the conference call audio will be available through this link until Saturday, June 15. A telephone replay of this conference call will be available today beginning at approximately 6.30 p.m. through 6:00 p.m. Eastern on Saturday, May 18. To hear the replay please call 1-800-294-6358. Again that is 1-800-294-6358. Thank you and good-bye.