諾德斯特龍百貨 (JWN) 2002 Q2 法說會逐字稿

Good afternoon, and welcome to the Nordstrom second quarter earnings conference call.

All participants will be able to listen only until the question and answer session of the call.

This conference is being recorded at the request of Nordstrom.

I would like to introduce your first speaker for today's call, Ms. Stephanie Allen, Manager of Investor Relations.

Ms. Allen, you may begin.

Thank you.

Good afternoon and welcome to the Nordstrom second 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, Pete 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 will lead off with a recap of second quarter highlights, Mike will follow with a review of our financial performance, including guidance for the third quarter.

Pete will conclude with some remarks on our merchandising efforts and then we will take your questions.

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 will hear will 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 may be projected or implied in our discussion.

Additional detailed information concerning a number of factors that could cause actual results to differ materially from information that will be shared today is readily available and our most recent annual report, or form 10K, for the year ended January 31st, 2002.

Now I'll turn the call over to Blake.

Thanks, Stephanie.

Good afternoon, everyone.

And thanks for joining us today in our second quarter conference call.

As we approach the second anniversary in our role as an executive team, we thought this would be a good time to take a few moments to comment on the progress we've made and also provide a sense for where we see the company's future opportunities.

From my perspective, the past two years have been about positioning Nordstrom for future growth.

The initial stages of process involved a period of assessment to determine what was working and what wasn't and develop action plans to begin to adjust the areas of our business that were not operating up to their full potential.

To a large extent, this boiled down to rallying the organization around a manageable number of initiatives, establishing clear ownership and accountability and working to instill a higher level of discipline in areas such as budgeting, planning, capital allocation and inventory and expense management, all the while we are working diligently to retain and enhance our service focus culture.

We believe that the strength of Nordstrom brand is rooted in our commitment to servicing our customers.

For us, service goes far beyond friendly knowledgeable sales people, providing good service also includes offering great merchandise at great values every day of the year.

We believe that service is and will continue to be a key differentiator for Nordstrom.

The traction we are gaining is evident on many fronts.

We are making progress reducing our operating expenses.

We are demonstrating an improvement in our inventory management disciplines, and we are making good progress with our systems upgrades, particularly the implementation of our perpetual inventory system.

All of these improvements are aimed at establishing a solid foundation which will support the future growth of the company.

In 2002, we communicated that our primary focus is driving top-line growth, and we encourage all of to you watch our comp sales performance as a measurable indication of our success executing against this goal.

We are pleased to report that despite our initial expectation of flat to slightly down comps for the second quarter, we achieved positive comparisons for each of the three months in the quarter.

We believe that this improvement is not the result of merchandising changes made during the quarter, but rather the culmination of our efforts over the past 12 to 18 months.

Results do not happen overnight.

They are a product of discipline and focus over a period of time, and we are encouraged to see clear evidence in support of these efforts.

Pete is going to discuss our full-line store results in a moment, but I wanted to interject a few words about the improvement in our Rack business, which has been quite noteworthy as well.

Coming off a difficult year, and operating under new leadership, I am very pleased with the sales results we are seeing at the Rack.

Comp store sales are up 9% in the second quarter, following a 2% increase in the first quarter.

As we mentioned on our last call, the improving business is partially attributable to the adoption of a more promotional stance aimed at competing more directly with other off-price retailers.

Other changes include a higher proportion of national brands in the mix, improved replenishment resulting in better in-stock position on key basic items, and better collaboration between Rack and Full-line merchant teams.

We are happy to see our Rack business making such a positive contribution to our top-line performance.

At this point, I am focusing much of my time on integration issues.

By integration, I mean aligning our different business segments and resources so that the combination of strategies being executed, benefits the company as a whole.

We want each area of our business to be fully aligned with the best interests of the company as a whole.

The goal is to optimize cooperation and collaboration across businesses and leverage resources across all areas of the organization.

This can be a fine balance to strike and means finding answers to questions such as to what extent can our merchants in one channel open doors to new resources from merchants in another channel?

How can we better leverage our I.T. resources across all of our businesses?

Is our private label division being fully utilized across all of our channels?

Does our marketing message support and sustain our brand, and is it consistent across all channels?

The answers to questions such as these is where I believe our opportunity for Nordstrom lies.

An opportunity for us to be even more efficient and seamless in our execution as we strive to expand market share by delivering the best possible service and merchandise to our customers.

We are making progress, but we have a ways to go, and we do not expect our progress to be entirely linear.

We anticipate short-term bumps in the road, but our focus is on making the right decisions for the long-term health and vitality of the company, and we believe we are on the right track.

Now I'd like to turn the call over to Mike, who will discuss our financial results for the quarter.

Thanks, Blake, and good afternoon, everyone.

For the three months ended July 31st, 2002, we reported earnings of 39 cents per share on a diluted basis, excluding nonrecurring items.

This is a 34% increase compared to 29 cents per share in the second quarter of last year and the third consecutive quarter of year-over-year EPS growth following six quarters of decline.

Our second-quarter results were negatively impacted by two nonrecurring charges.

The first charge relates to the completion of the purchase of the minority interest in nordstrom.com, which we announced last quarter.

As many of you may recall, the total charge was split between the first and second quarters.

The first quarter piece totalled $42 million, and the second quarter portion came in at $11 million.

In its entirety, the charge totalled 53 million, which is less than the 55 to 65 million that we originally anticipated.

The second quarter EPS impact is 5 cents.

We are also planning to record a nonrecurring charge related to the write-down of an I.T. investment in an existing supply chain tool intended to support the Nordstrom's product development division.

We are still in the process of determining the exact dollar amount of this charge.

At this point, it is not expected to exceed 17 million pretax.

The final number will be included in our 10Q, which will be filed no later than September 16th.

At this point, as we look ahead to the back half of the year, we do not anticipate any other nonrecurring charges.

Moving on to the top line of our P&L, I share Blake's favorable view of our comp sales improvement for the quarter.

Comps in our Rack division have been trending positive since March and we are encouraged to see the improving comp trend in our full-line stores as well.

For the second quarter, both Rack and full-line comps were positive for all three months of the quarter, and we ended the quarter with a combined comp of 2.2%, in line with our revised expectation of positive low single-digit growth.

In total, our sales grew 7% for the quarter to $1.7 billion.

We did not experience much in the way of geographic variation in our full-line store comp performance, with all of our regions reporting low single-digit comp store sales increases for the second quarter.

Our merchandise division, our strongest performance for the quarter, were accessories, cosmetics, and women's active, all achieving comp sales in the mid to high single digits.

Women's apparel also exceeded the full-line average driven by double-digit increases in the casual contemporary segment, a mid single-digit increase in designer and low single-digit increases in the better and bridge segments.

Women's and children shoes was positive for the quarter as well, but men's shoes were down, resulting in flat comps for our shoe business overall.

Men's apparel was the weakest division for the quarter.

Gross profit for the quarter, as a percent of sales, improved 65 basis points from the same quarter last year.

Our original second-quarter guidance was for slight to moderate improvement.

This was based on the knowledge that markdowns were high in the second quarter of last year, driven by clearance activity related to excess inventory.

Since inventory is much cleaner this year, we expected year-over-year markdown improvement to drive gross profit expansion for the quarter.

However, the transition to our new inventory management system disrupted our margin visibility such that mid quarter margin trends appeared to indicate margin contraction rather than expansion.

Taking a cautious approach, we opted to change our margin guidance to reflect actual trends.

Our caution turned out to be premature as strong sale-throughs and onplanned markdowns in July resulted in quarterly margin improvement that was keeping with our original expectations.

Our SG&A rate in the second quarter improved 50 basis points on top of a 40-basis point improvement in the prior year and taking into account planned expense increases related to new stores and I.T.

The improvement, however, was less than what we would have liked given stronger than anticipated sales.

The absence of greater leverage was primarily attributable to higher-than-planned distribution costs in combination with higher-than-expected employee benefit expenses.

These impact the results by approximately 40 basis points.

During the second quarter, bad debt levels continued to stabilize relative to our plan, but our outlook remains cautious based on current economic conditions.

As expected, other income for the second quarter was essentially flat with last year and net interest expense was slightly higher, reflecting increased borrowings partially offset by reduced overall interest rates.

Now, let's take a look at certain preliminary balance sheet and cash-flow results starting with inventory levels.

At July 31st, 2002, total inventory at cost was up 37 million or 3.7% from year-ago levels on a 7% increase in gross square footage and a 7% increase in sales.

Total inventory per square foot declined 3.3% versus the prior year.

This is on top of last year's improvement of 3.3% on a total inventory per square foot basis.

Comp store inventory at cost was down 67 million or 8%.

We continue to work diligently to effectively manage our inventory and expect comp inventory levels to decline as compared to last year, again next quarter.

Net capital expenditures for the second quarter totalled approximately 62 million.

As has been the case for some time now, our spending is primarily on new-store construction and I.T. investment.

For the quarter, depreciation and amortization was 57 million.

Preliminary total debt and total capitalization on a book basis at quarter end were approximately 1.35 billion and 2.7 billion respectively, resulting in a total debt to cap ratio of 50.5%, down from the 51.3% at the end of the first quarter.

Our plan is to reduce our debt to total cap ratio to 40% to 45%.

There was no share repurchase activity during the quarter, and we do not anticipate buying back shares in the near future.

With regard to guidance on our performance outlook for the third quarter, we anticipate the following, which is compared to the third quarter of 2001.

Same-store sales, a low single-digit increase.

Gross profit margin, significant improvement on a percent to sales basis.

SG&A, flat on a percent to sales basis, service charge income, one to two million higher on a dollar basis and interest expense, one to two million dollar higher on a dollar basis as well.

Our effective tax rate remains at 39%.

This yields our EPS estimate of between 16 cents and 20 cents for the third quarter, which compares to 8 cents for the same quarter of last year.

In combination with our year-to-date actual earnings, this yields a full-year earnings per share estimate of between $1.20 and $1.24 for 2002, excluding nonrecurring and impairment charges, compared to 93 cents in 2001.

Now I'll turn the call over to Pete for additional remarks on our merchandising efforts.

Thank you, Mike.

I'd like to focus my remarks today on recent sales trends, including quarterly highlights by merchandise division, some comments on our half yearly and anniversary sale events as well as providing updates on the focused store initiatives.

I'll also discuss our progress with perpetual inventory.

At the beginning of this year, we set out to focus much of our attention on driving comp store sales and year to date, we are encouraged by the progress that we're making.

Our year-to-date comp store sales trend is showing clear evidence of improvement as we started the year running negative mid single-digit comps.

As the of the end of July, we have posted three consecutive months of positive comp store sales resulting in a 1.5% comp increase.

Our results have also been outperforming our peer group average for the past four months.

As Blake alluded, this improvement has not come overnight.

It is the result of 12 to 18 months of stabilizing our structure, focus and commitment to staying the course strategically and improving inventory and planning disciplines.

From a structural perspective, our merchant organization, in terms of hierarchy, definition of roles, as well as people has not changed for 18 months.

This is after several years of ongoing change.

This stability eliminates a lot of distractions and not only improves our ability to focus on execution but gives our people time to become more experienced in their roles.

In addition, we have remained focused on getting back to some retail basics.

Our focus has been on things like working to better tailor our assortments to each market, improving the flow of merchandise into our stores, creating excitement and newness on the floors through strong item presentation, and heightening focus on multiple selling, sharper pricing and in-store events.

Now, lastly, we have become much more disciplined about managing our inventory and planning our sales.

Sales growth has outpaced inventory growth for five consecutive quarters now.

As an example, we did 5.2% more sales during the second quarter this year on 5.2% less inventory, an indication of the improving inventory efficiency that we are beginning to achieve.

All these factors, stabilization, focus and discipline, are contributing to our improved top-line results.

We are not all the way to where we want to be, and we continue to have opportunities for improvement, but our effort is beginning to be reflected in our sales results.

Turning now to performance in some specific merchandise areas, cosmetics, accessories and women's active wear were the strongest merchandise divisions for the second quarter.

Women's apparel is also positive with strong performance -- excuse me, with strong performances in the casual-contemporary, designer, bridge and better segments, representing about 35% of our business, we are pleased to see positive momentum in women's apparel, particularly across a broad range of price points.

Our shoe business, including men's, women's and children's shoes were flat for the quarter, while this is not where we want to be, this is an improvement over the mid single-digit decline we experienced in the first quarter.

Men's shoe had a positive July with strong sales during the anniversary event, but with negative overall for the quarter.

Women's and children's shoes were both positive, and junior women's shoes was the strongest segment in the shoe division.

Like men's shoes, men's apparel also posted an improved July result, but overall continues to be a challenging area of our business.

The strongest segments are the men's furnishings and young men's areas.

Sportswear and tailored clothing continue to be weaker.

The second quarter is the second largest quarter of the year for us due to our promotional calendar.

We have our -- excuse me, we have our half-yearly clearance [sale] in June and our anniversary event which features new fall merchandise in July and August.

Overall, we are pleased with the results of both events.

Last year, we made some strategic changes to how we executed these events such as sharper pricing and taking a more item focus approach to both merchandising and marketing.

The results were positive, so we built on that same approach this year.

I mentioned this only to make the point that there was nothing dramically different this year versus last year in terms of how the events were executed.

The full-line store comp during the 21 days of the half yearly event increase 2.4% on top of a 7% increase in 2001.

The anniversary event increased 2.5% this year, on top of a 5.6% increase last year.

We're content with these results, particularly in light of current industry trends.

Lastly, I'd like to update you on our focused-store initiative.

As I reported on our conference call last quarter, the handful of initial focus stores achieved improved results to the extent that they were at or near the top of the rankings in their respective regions.

In the second quarter, we added several more stores to this initiative and are starting to see some similar results.

As a group, the focus store sales increased 2.8% in the second quarter, considerably better than the full-line increase of 1.5%.

In fact, every month since we started this effort, the focus group has outperformed the full-line average.

The improvements we are seeing from this initiative highlight the importance of making an objective assessment of the market demographics to better understand each store's potential, and maintaining and reinforcing the collaboration between our stores and our merchants.

When we have everyone fully engaged in making things better, it shows in our results.

We continue to make progress with our perpetual inventory initiative.

During the second quarter, we piloted a price management tool and a data warehouse tool, both of which are scheduled to roll out during the third quarter.

Training efforts have begun for both, and we'll be ongoing throughout the back half of the year.

As a result of the staggered training schedule, we do not expect to begin to realize full benefits of these tools until we get into 2003.

The last phase of our perpetual implementation is the rollout of a new replenishment system scheduled for December of this year.

In closing, I'd like to reiterate how encouraged I am by the steady improvements we're achieving in our business.

Our success over the next few years hinges not trying to revolutionize how we do business but rather on taking advantage of existing opportunities.

Perpetual inventory and our focus store initiative are two examples of such opportunities, both of which hold the potential to significantly drive improvement over the next several years.

Now I'd like to go ahead, and we will take your questions.

Thank you, sir.

At this time, we are ready to begin the question and answer session.

If would you like to ask a question, please press star 1.

You'll be announced prior to asking your question.

If would you like to withdraw your question, please press star 2.

Once again, to ask a question, please press star 1.

One moment, please.

Our first question comes from George Strangent of Goldman Sachs.

Hi, thank you, it's actually Adrian Shapiro for George.

A question initially, Blake, you have outlined you're working on reducing operating expenses, and that's the key initiative, and, Mike, you had outlined that actually in SG&A, distribution costs were higher as well some employee benefit expenses.

I'm wondering could you reconcile that and talk about what -- how that impacts your longer-term goal of getting, I believe, about a hundred to 150 basis points out of the SG&A rate over the next few years?

Well, Adrian, when it comes to the distribution center, the lion's share of that has to do with the fact that we're pushing more units through these buildings, so we've got lower price points on average, and so, that's affected their costs a little bit.

You know, the health care is real.

I mean, that is just a fact of life that health care is jumping on us and every other business, and we need to deal with it.

On top of that, we have I.T. costs, and as Mike mentioned, we're opening new stores, but that doesn't change the fact that we have, the last couple of years, had some historical highs in SG&A, and we feel there's opportunities to improve.

In the last year, last 12 months, we made good progress, we'll continue to be focused on improving that.

I don't know if we'll be able to consistently have that large a gain or improvement every quarter, but we are committed to as a team driving our SG&A down.

Blake, could you then give us where the sources of opportunities are?

Mike, you want to get into that?

Sure.

Well, Adrian, I think there's a couple of opportunities for us going forward.

The largest is the investment we're making in the various technologies, is starting to identify and put the benefits related to those technologies into how we're going to move forward in running a business.

That's something that is going to occur over the next several years.

The second, which I think Blake alluded to, was the concept of integration within the company, and how do we take better advantage of functions within the company in order to create a more efficient process in running the business.

I think those two are the primary areas that we're going to focus on in the next couple of years.

Thank you.

Our next question from Dan Cohen of Banc of America Securities.

Oh hi guys, it's Dana.

A couple questions.

I just want to clarify, when you said SG&A will be flat, you're talking rate, not dollars?

Yes, rate as a percent to sales.

Okay.

And then I guess my question would be, what will be different in the third quarter versus the second since, assuming similar comp trends, why wouldn't you see leverage in the third quarter?

Is there something--some timing issue that's going on?

Well, I think the largest, Dana, is that we're starting to come up against some large improvements in the prior year, in the third quarter last year, our SG&A improved by 118 basis points, in the second quarter last year, was 40, so we're starting to come up against those improvements, but at the same time, we're also adding on by the time third quarter rolls out, eight new stores, and a pretty substantial increase in I.T. costs, so we've been able to maintain last year's significant improvement with all these additional costs coming in through the third quarter.

Got it and moving on to I.T., I had thought most of that went through the P&L.

What is different about this -- the item that you're taking the one-time write-down ---that it would be one time as opposed to an ongoing expense issue?

Dana, this is Blake, and I'd like to address that and Mike might have additional comments.

Towards the beginning of this year, I made the decision strategically that MPG Nordstrom Product Group would go in a different direction, specifically we've been working on an I.T. initiative that would give us the functionality within MPG to run their business and also allow them the opportunity to wholesale our outside sales and I've made the decision that we will not pursue outside or wholesale sales with our private label program, so it's caused us to take a step back and review the initiative that we have, and is there an alternative to might be better suited in the long run if we're going to be internally focused with it, and so, that's why we view it as a one-time charge, and we are just digging into that.

We know that there is an impairment.

We don't know the exact amount, and that's why we -- we kind of were a little vague on the exact [ARM] amount, but we hope to very shortly, I would hope in the next couple of weeks, have a definitive number.

Mike, is there anything else you want to add on that?

Yeah, Dana, just to add a little bit more clarity as to why it is a nonrecurring versus ongoing expense, this is actually an impairment of some capitalized costs.

These are costs that have already been incurred related to implementing or building the system, and because of what Blake said, relative a change in strategy, we believe there's an impairment in those capitalized costs.

So you had thought you would be selling your own product to third party, is that correct, or potentially?

The original plan dates quite back some time, was to have the ability to do wholesale sales, and it was part of the business plan within that business unit, and I have made the decision that we're not going to pursue that.

Okay.

And then my last question is on the gross margin, obviously there's been some changes and learning as you've gone along with this.

Can you just sort of give us a sense of sort of what you've learned over the course of the second quarter, because you've sort of changed the guidance here for the third quarter, and I'm just sort of, you know, what have you learned to gain greater comfort on, you know, this third quarter number?

Dana, this is Mike.

You know, I think the first point there is that the second quarter of this year is the first full quarter that we were using our perpetual inventory systems to record markdowns.

It also happens to be probably our largest promotional quarter, because of half-yearly and anniversary, so as a result there is a large amount of price change activity going through, and the -- the rhythm of that activity was tough to predict, because our historical systems weren't as tight and accurate as the new systems, so I think one of the key learnings here is that there's no doubt that our ability to record markdowns is much more timely, it's more complete, and it's more accurate, and when we make a decision to book a markdown, and the effective date, they all book, versus historically , we didn't quite have that much control over that process, so I think that's the first thing.

I think the second thing is we are starting to get better visibility into our product, and we're learning where, in some cases, we need to take more markdowns and some cases where we need to take less markdowns, and I think as we move forward, we're going to get a much better read as to using our markdown dollars more efficiently.

In terms of the third quarter, that improvement is mostly around the fact that last year in Q3 we took a tremendously large amount of markdown because of what happened last year in September, and our response to slowness in sales and the fact that we added a false sale last year in the third quarter.

We're not doing that this quarter, and we don't anticipate having the same level of slowdown in business, so that's the major part of that improvement.

Got it, thanks so much.

Sure.

Our next question comes from Steve Curcroud from Berman Capital.

Yeah, hi guys.

Congratulations on a great quarter.

I have a couple questions that probably follow up more so on what Dana was just asking, and firstly, in terms of the gross margin improvement, issued in the third quarter, in addition to the comparisons that you had of huge markdowns last year, shouldn't you get a benefit in terms of reduced shrinkage, the way you [INAUDIBLE] for the large charge here in the second quarter here and the way you're booking some of those expenses.

Steve, this is Mike.

We would like to believe that, because of the more accurate bookkeeping, that there is an opportunity to have improved shrink results, but until we take a full financial physical inventory at the end of the year, we're not going to know definitively what that is, but at this point, we're proceeding cautiously as to where we are with our shrinkage vision.

Okay.

And are you taking rolling inventories, or is it just going to be, you know, once in January, you're taking a physical inventory at that point of everything?

Well, actually, we are, for the first time taking a mid year inventory this month, but it's not a financial inventory, because our systems aren't in place to do that accurately.

We'll take a unit inventory and compare physical units to our book units and see how that looks, but that is not going to be enough information to fully convince us that we have to change our shrink provision.

Okay.

Okay.

So based on that, you wouldn't be adjusting your shrink in the third quarter? you'd wait for the fourth quarter, and it seems appropriate at that point.

at this point, probably not, but we need to see what this tells us.

Okay.

And secondly, Blake, could you just kind of elaborate on terms what you learned out of the anniversary sale, since the sale was so--was successful, particularly in light of the retail environment out here, you know, what kind of fashion are people looking at for the fall?

It gives you a head-start in terms of ordering stuff for September, October delivery?

Well, Steve, I'd like Pete to answer some of that, and I would reiterate his earlier comments about, you know, we didn't reinvent the wheel on this sale, but we did last year utilize our 100th anniversary, kind of a rallying point with all of our troops, to give back to the fundamentals of the sale, and that certainly was encouraging last year, and Pete and his merchandising team took those learnings and made numerous small adjustments, and the customer responded very favorably, so, you know, it seems a little strange to be getting euphoric about 2% increases, but in this environment, I guess a win's a win, but we were pleased with, you know, the fundamentals of the sale, in terms of merchandise trends, it's correct that this is predominantly a false sale and one of the benefits is for us to get a read on the false hope.

I'll leave that to Pete.

Pete do you have any comments on that?

Yeah, I think the only real common thread that cuts through this whole thing is that newness really sold, and when we talk about newness, it can be wrapped in the term fashion, and fashion isn't really so much about price its just-- it's about newness, and there's alot of things going on I think in the marketplace that are playing into that, particularly in a division like accessories where they've just---we've had a really good improvement in the last several months there, just capitalizing on some new trends, so, you know, our deal is to try to maintain a balance of price points and a balance of styles.

The anniversary sale, the whole premise is that we offer our best that we have for Fall.

I think what we've learned over the years is that you don't want to get too far out there in terms of selling clothes for cold weather, because it's 90 degrees in most of our places where we have to do business, when we have the sales.

So a lot of buy now/wear now works pretty well, but can you can definitely get a pulse of what's going on with the trends, and the departments that didn't get bogged down in repeating everything they did the year before, tended to do best, the ones that stepped out with some newness.

And was it the opening price point stuff that sold best or the stuff at the upper end of the price curve?

Well, you know, I think that sale tends to attract a bit more of a bargain type of shopper, so I think it will be fair to say that where we were more value priced, we did better and our more higher-priced departments, like designer, which has been doing well the last several months, the sale doesn't benefit them a lot.

What really benefits them is just getting a flow of new receipts, and that's continuing to be the same thing.

They're regular priced business has been really, really good, and they don't have as much of a lift to their sales when the markdown time comes, so I guess it would be fair to say in this event that more the moderate price range is where we tend to get most of the benefit.

Okay.

Okay, thanks very much.

Jennifer Black of Wells Fargo Securities, you may ask your question.

Good afternoon, and congratulations.

Mike, I wondered if you could talk a little bit about your receivables.

I know that for the second time, as far as the second year, you had special incentives for 90 days if you purchased in the first three days of the sale, and I wondered if you could also speak to the usage of your cards and versus last year and any extensions to the loyalty programs?

Thank you.

Okay, Jennifer, thanks for the question.

Our receivables were up quarter year over year, and, yes, we did utilize a deferred program for the first three days of the sale, for purchases over an aggregate of purchases over $400 was deferred.

In addition, we also utilized the loyalty point program, which incented our customers as well to spend over certain levels to drive business, and those were consistent with what we did last year.

So candidly, we didn't create any new event year over year, we just used the same event and experienced the continued lift.

Right.

But I just wondered if you were seeing any difference because the customer base seems to be even more loyal than it was having gotten the customer back, I wondered if you'd seen any kind of difference in the patterns when you're looking this with your systems, and is there anything at all that you can note?

You know, Jennifer, I don't have anything specific I can call out there.

Okay, I was just kind of curious.

All right.

Thank you very much.

Yeah, well, thanks for the question.

Michael Epstein of Credit Suisse First Boston, you may ask your question.

Good afternoon.

I just sort of--I wanted to pursue the private label program [Foss and Knob] stands.

I know you all have made a decision to expand [Fossen Knob] in New York, but has the decision been made not to make it available elsewhere in the world, second parties, and what about some of the programs you have in Japan selling other private-labeled goods there?

Thanks a lot.

Michael, this is Blake.

One of the changes that I made at the beginning of the year, or just prior to it in December, was to separate [Fossen Knob] from our MPG group, they were intertwined, and it is being led [Fossen Knob] by Mark Brashear who reports directly to me, and Mark previously ran our southwest area, which is the state of California and Arizona, so it's a large assignment, and he's working hard on that purchase that we made almost two years ago.

We feel as stewards of the brand that we have a real opportunity.

Again, one of the original thoughts or strategies in the purchase was the possibility of doing wholesale or outside sales outside of Nordstrom.

Again, I've made the decision at this point that we are not going to do that.

We are focused 100% to ensure that that product in the Nordstrom stores and the boutiques, both domestically and internationally, it's the best quality value relationship possible, and so, we have made a slight change there.

In regards to wholesale sales or outside sales, private label in Japan, it is true that we've been on a test, if you will, the last couple years with a couple of well-regarded retailers with products such as Classique.

It's been very successful for us.

It doesn't require a lot of time, energy from us, and so, we're not necessarily expanding the program, but we are continuing that.

Thanks a lot.

Theresa Donahue of New Berger Burman, you may ask your question.

Hi guys, I had two questions.

First -of-all, you indicated that you're taking a physical inventory in the third quarter to match against the book.

I don't know if you can give any indication of what you're expecting to find or if we should be concerned about big variations there, and secondly on the anniversary sale, I had a question on pricing which seemed to me to be a bit sharper in the positive sense than it was at this time last year.

Pete---this is Blake.

Pete, you want to take the pricing subject on the anniversary?

I do.

Why don't we---let Mike start with the first part of the question and I'll take that next.

Hi, Teresa.

On the inventory, the objective there is this is our first-time that we're going to take a fully scanned physical inventory with all of our full-line stores on retax so most of this is about establishing the disciplines procedures and processes in doing that, and to learn what differences we may have at a unit level to ensure that our units are reflecting the most accurate levels.

You know, in terms of financial results, our books are currently not set up that we can do an accurate financial inventory here, so it probably won't give us enough reliability to understand what the shrink is, but it's more about making sure that our units are as accurate as possible as we go into the fall season.

Okay.

On the pricing part of the sale, I appreciate your comments that way.

I don't know statistically exactly how that would bear out in terms of compared to last year, but I do know that a lot of the success we had last year is where we did take an item and really got aggressive on the pricing, and I think that that added to the results from what transpired there, as given our merchants some confidence to really go for it during these events and, you know, the game you play there is you want to sell through, but you don't want to run out either.

You want to, you know, maximize the sales and so forth.

I think this idea that we've had people in their jobs now for at least 18 months, gives them some experience to be able to go and do what they think is best for these sale events, so we -- I appreciate you saying that.

I think that it was maybe some better and we're going to continue to try focusing on making sure the three events that we have every year are really terrific values.

Thank you.

Sherry Eberts of JP Morgan, you may ask your question.

Hi, everybody.

I was wondering if you could give any more detail in terms of the same-store sales guidance by month given how volatile things were last year, just how you're planning through the quarter?

Hi, Sherry, this is Mike.

You know, we haven't broken that out by month.

It's just for the quarter.

Okay.

And do you expect any impact -- obviously you're taking away that sale event, that something that's been factored into the up one to three for the quarter?

Yes, we have.

You know, if you look at the quarter, even with that sale event, you know, comps were still pretty significantly soft in the third quarter last year.

Right.

So we have taken that into account and, you know, we believe there's opportunity even with that event.

Well, plus, I think the thing to note is our inventories are in a lot better shape this time of year than they were even last time,[ but this time before] all of September 11th stuff happened.

So we're just not going to have the same kind of markdown pressure barring any unforeseen circumstances.

Okay, great.

And then just secondly, I was wondering if you could just update any cash-flow outlook that you have for the year?

Well, in terms of cash flow outlook, you know, we haven't shared anything of any specifics going forward.

But, you know, I would just -- I would just say that we're continued confident as to where we are with our cash position.

We don't anticipate having to borrow any additional money certainly for the next 12 to 18 months, and that's about as far as I think we're prepared to say at this point.

Okay, thank you.

Okay.

Once again, to ask a question, please press star 1.

Rob Schwartz of J.L.

Advisors you may ask your question.

Congratulations on a good quarter.

I just wanted to get a little more color on the perpetual inventory issue.

You stated that mid-August you noticed that you were being conservative with gross margin and that things had improved.

What did you see in the last two weeks, and, you know, what do you -- what gives you comfort for the third quarter?

Rob, this is Mike.

I believe what I said was that it was in mid second quarter under perpetual inventory that we were -- we saw an acceleration of markdowns, which is why we got conservative with our margin guidance.

What happened as the quarter played out is we realized that mark -- it was really more of a timing issue, and so, our markdowns became in line for the quarter and the sell-throughs from anniversary helped to push our margin -- our margins to a positive level.

In terms of the third quarter, it's purely about last year's significant increase in markdowns as a result, you know, the events in September, the backing up of the business and the backing up of the inventory where we took a lot of markdowns to clear that out.

We don't anticipate anniversering that.

And in terms of the timing issue related to perpetual inventory, is that going to take more time to play itself out, or is that--do you currently have your hands around that?

Well, I think, you know, as I said, the second quarter is our largest promotional quarter in terms of price change activity, so we probably saw the biggest impact there, but I will also say that, you know, we've got another three quarters of learning to go on this system, and I'm sure there's going to be areas where we're not quite fully understood what's going to happen, and we're going to have to build that history.

But I think once we get past that, we're going to have a tool that's going to allow us to be a lot more precise in our ability to forecast what's happening in the business.

Great.

And just one more question.

I was wondering what plans you guys had in store around, with the days surrounding September 11th?

We're not planning any kind of special promotion or event.

You know, I think we want to be sensitive to not appear to be trying to capitalize that in some kind of commercial way.

You know, we're going to do what we can to be respectful of what's going on at that time, and -- but in terms of any kind of special promotional event, we're not doing anything.

Great, and then last question, could you tell us where you expect inventories to be at the end of the third quarter and at the end of the fiscal year?

Well, I think in my comments I suggested that we expect our comp inventories to be below last year at the end of the third quarter.

I would expect total inventories to be probably somewhat similar to where they were at the end of the second quarter.

In terms of the fourth quarter, I would not expect them to be below last year.

Last year, when we came out of the fourth quarter, our inventories were at an all-time low, and I wouldn't think we're going to be that low again.

Thanks a lot.

Okay.

Wayne Hood of Prudential Securities, you may ask your question.

Yeah, Mike, I just wanted to come back to the issue of timing on markdowns.

Are you saying that the system, in terms of timing, is taking it where it should be taken whereas before it may have been dragged out longer so you're getting a distortion in the timing of markdowns?

That is what I'm saying.

All right.

And when -- I can understand why you would feel comfortable in the third quarter without the promotions but when you get into the fourth quarter with the markdowns that'll come up, doesn't that raise the risk profile and do you feel like you'll have a better handle around then in the fourth quarter?

Well, it probably wouldn't raise the risk profile in November with women's half yearly and somewhat at the end of December with men's half yearly.

But we don't have the anniversary sale, and so, it allows us in the month of January, I think, to catch up and have a little bit more visibility.

But that's not to discount that we're probably going to have another level of learning, Wayne, in the fourth quarter.

All right.

And the shrinkage accrual, you probably won't release the actual number, but how much off is that accrual rate versus last year?

You're right.

We haven't released that number.

Well, not releasing it, could you give us a color -- how much sense -- how much you're accruing the rate versus last year, is it up 50 basis points, 20 basis points?

You know, Wayne, all I can tell you is that we've been cautious in the provision to ensure that, you know, we don't have any negative surprises.

Okay, thanks a lot.

Okay.

Stan Gymen of McAdams, Wright, Reagan.

You may ask your question.

Good afternoon.

On the topic of men's apparel, a couple questions.

What's it going to take to really get that side of the business going?

And, also, what's your level of optimism right now versus, say, a few months ago?

Well, we're feeling a little bit better about the men's business.

It's improving.

We're definitely moving in the right direction, it just isn't happening all at once.

You know, that's a great question.

I think for us we just have to take advantage of the things that we know that are happening out there and one of the things that we've done that's helped our business is we've just done a better job on our dress shirt program, for example, we were spread kind of thin before and we weren't in very good sizes on a lot of stuff and we've reeled that in and we're in a much better in-stock position there.

Our young men's business is pretty good.

I think that still lends itself to alot of the casualization issues that are going on.

The suit business is good in pockets, but on the whole, it's still a little down.

So I think the biggest indicator for us going forward is just getting our mainstream men's sportswear business moving the right direction since it's such a huge chunk of the business, and, you know, like I said, it's moving in the right direction, but to echo what Mike's saying about our cautious approach, we are just going to take it kind of conservatively, and we are comfortable -- we feel comfortable with our plans going forward.

We are achieving those, and we're just going to keep moving along.

Okay.

So would you say you're more or less optimistic then than you have been recently, or about the same?

Well --

I would --

[I guess we're] feeling more encouraged than I was six months ago.

We're moving in the right direction, but to say I'm optimistic or enthused is probably a little too strong.

Right.

We're cautiously encouraged, I suppose.

This is Blake, and I guess I would say that there's still a lot of uncertainty out there, and we have learned in years past that when we get goal-oriented with our budgets and our inventory plans, that it bites us in the butt.

And so, we're trying to be much more conservative and create more upside opportunities, so there aren't a lot of indicators out there right now for us to get really excited or encouraged or optimistic, and I would say Pete's correct, it's certainly better to have wins and losses like we were maybe, you know, five, six months ago, but by no means does it mean we're out of the woods and starting to take our eye off the ball.

Great, thank you.

Dave Sullivan of Horizon Financial Group, you may ask your question.

No question, thank you.

Jennifer Black of Wells Fargo Securities, you may ask your question.

Hi again.

Pete, I think this question is for you.

I wondered if you could give us an update on VFC, how many stores is it in, and just what you see for that department?

That's a good question, we've added a couple recently.

I think we're in 12 stores for VFC.

I'm not exactly sure.

For those who don't know what VFC, it's kind of a bridge department to our collector's designer area where we tend to have a bit of a younger, more fashion-oriented, more casual offer there and it's -- it's kind of generated around newer designers.

We've had a lot of success where we've added it at the very least, it adds infusion and excitement to the store and newness, and we just need to be careful about where we're going to add it, because we have 85 stores.

It doesn't belong in all 85, but I think if we continue to see the kind of positive reaction we've been getting, that it could be in half our stores over time, so we'll keep rolling them out as it's appropriate.

Okay.

And then one other question, I don't know if anybody asked this on the sourcing side of your private label business, are you seeing benefits from the excess capacities overseas?

Jennifer, this is Blake.

Hi, Blake.

I think it's less about excess capacity, but more about --

the right product?

We're learning and improving about our supply chain and opportunities, and we're finding other opportunities around the world to source merchandise that meets our expectations in terms of quality and various other issues, so instead of being wedded to one factory, to one country, we believe there's more opportunities that are very encouraging to us to meet our customers' and salespersons' expectations.

Okay, all right.

Very good.

Thank you very much.

Teresa Donahue of New Berger Berman, you may ask your question.

In terms of the focus stores or the ones you're trying to bring up to speed, what percent -- what's the number of stores in that group or the percent of sales that it is now?

That you're working on?

Well, this has evolved a little bit for us.

What we did initially is we looked at the stores that we had to do under 42 million --

okay.

-- which doesn't make them necessarily small stores.

There's some pretty good volume in there.

But in that group, which represents -- I don't know.

It's not -- it's not a huge percentage, but what we try to do is strategically take a handful of stores and say, either we've never lived up to the potential that we originally thought we would have there, or we've had some type of decline over the years, so how can we just get back to doing what the market suggests we should be doing when we look at it objectively as possible?

So I think what we've learned through that is it doesn't necessarily mean that it has to be focused on small stores.

It applies -- the things that work there apply in all the stores, but I think to do it right, you have to take it one at a time, so we're going to take a handful of stores a year, couple store as quarter, and really ring it out as best we can, and, you know, it's fair to say that we've got a number of those that we can do to achieve the potential, and so, we've got a plan to work on here for the next couple years with that initiative.

Thank you.

Rob Wilson of Retail Stock Investor.

You may ask your question.

Yes, I have a question related to complex expenditures.

Do you have a preliminary estimate to capital expenditures for next year, and is there an ability, or maybe you can conceptually tell us what your thoughts are on free cash flow, because the past few years, you guys have had very little in the way of free cash flow.

Is there an opportunity next year to actually start paying down some debt?

Bob, this is Mike.

In terms of Cap Ex for next year, what we've generally framed out as our Cap Ex for the next three years, which we have shared in the 850 to 900 range, which is '02 through '04, in terms of the free cash flow question, this year we will have slightly negative cash flow.

Next year, we should begin to see positive free cash flow as two things happen.

Number one, our performance continues to expand on the margin line, and number two, our Cap Ex has peaked in 2002 and will --and will go down in the future years, mostly because our new store growth is going to moderate and our technology spending is going to moderate as well.

In terms of paydown of debt, you know, we have -- we pay down $77 million in the first quarter of notes that have matured.

Our next major maturity is in 2005, an there's 400 million.

Odds are that we wouldn't have any significant acceleration of that, but certainly, you know, we'd like to generate an opportunity for ourself in that year to not have to fund all that debt again.

Right.

Okay.

Thanks.

One more question.

This is the second quarter in a row you've come to the conference call with a write-off without an exact amount.

Can I inquire as to the timing of the decision to write off the $17 million in capitalized expenses?

Yeah, Rob, this is Mike.

As far as the timing, it's been purely the fact that we have not come to a conclusion that we feel comfortable with, and, you know, we kind of were sensitive to that fact that some folks might read into that, but, you know, we believe the right thing to do is go through our due diligence and to make the right decision.

That's the reason for that.

In terms of the first quarter, it was purely the timing of the execution of the put and getting our arms around all those charges, so I think both of them were totally independent and totally depending on making the right decision.

Thank you.

There are no further questions at this time.

Okay, great.

Thanks very much for participating in our conference call this afternoon.

If you have additional questions or need further information, you're welcome to contact me, Stephanie Allen.

I'm the Manager of Investor Relations, and my direct line is area code 206-303-3262.

There's also a telephone replay of this conference call that will be available today beginning at approximately 6:30 p.m. eastern.

It's running through 10:30 p.m. on Saturday, August 17th.

To hear the telephone replay, please call 1-888-568-0379.

That number again is 1-888-568-0379.

There's also an audio replay of the conference call available via the internet to listen to the call there please access Nordstrom's website at www.nordstrom.com.

Then click on the "investor relations" option at the bottom of the screen, and there is a second-quarter conference call link on the home page there.

The archive version of the web cast will be available until Friday, September 13th.

Thank you, and good-bye.

This concludes todays conference call.

You may disconnect at this time.