諾德斯特龍百貨 (JWN) 2002 Q3 法說會逐字稿

Welcome to Nordstrom's third quarter conference call.

Joining me on the call this afternoon are Blake Nordstrom, President of Nordstrom, Inc., 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 the company's key initiatives and third quarter highlights.

Mike will follow with a review of our financial performance, including guidance for the fourth quarter and full year.

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

So 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, expantion plans, information technology and merchandising strategies.

Actual results could differ materially from those that may be projected or implied iun 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 in our most recent annual report in form 10 K for the year ending January 31st, 2002.

Now I'll turn the call over to Blake.

Thanks, Stephanie.

Good afternoon, everyone, and thanks for joining us today on our third quarter conference call.

Before Mike reviews the financial details of our quarterly results, I'd like to make a few comments about this past quarter.

This year our focus has been on three priorities that we believe are key to the long-term success of our business.

As always, these priorities fall under our overarching goal of working to provide great service to our customers every day.

To that end, we invest in our salespeople, and they are the ones who most directly impact the experience our customers have in our stores.

In our view, service also includes great merchandise and great value.

Our merchandise teams are working hard to make sure that exactly what our customers find in our stores each and every day.

We believe that our commitment to servicing our customers at point of sale builds and strengthens our brand, differentiates us from our competition and ultimately drives volume.

So all of our strategic objectives either directly or indirectly support our service focus.

This year those objectives are driving sales growth in our existing store base, reducing operating expenses, and upgrading our system.

We continue to make progress implementing perpetual inventory.

Pete will provide an update on that during his remarks.

I'd like to focus my comments on our sales and expense results.

As we've said in the past, our focus on driving a top line is rooted in the recognition that our long-term success is ultimately dependent on driving sales volume.

During the third quarter we were pleased with the continuation of the positive comp store sales trend that began for us back in May.

Business has been strong in both our full line and rack stores, and that strength has helped us make progress regaining the volume that we lost in previous years.

While six consecutive months of positive results are encouraging, particularly in light of the difficult business conditions in retail today, our enthusiasm is tempered by the fact that these recent gains merely begin to move us toward volume levels achieved in recent years.

We recognize that more work lies ahead.

As we stressed in our conference call last quarter, results do not come overnight.

The groundwork for the comp source sales progress we're seeing today was laid 12 to 18 months ago, as we have remained focused on improving execution, as well as improving inventory and planning disciplines.

Turning to our expense performance, after five consecutive quarters of reduced expense levels, this past quarter we lost some ground.

Mike will provide the details around this result, but I wanted to make a few comments of my own.

The expense improvements we achieved over this past year were largely the result of low hanging proof.

Our current and future efforts are focused on integration opportunities, with integration meaning to better align our different business segment and resources so that in combination we are maximizing total company performance.

Integration involves working to align incentives to achieve an optimal level of collaboration and cooperation across business units.

We have already made progress when we developed our business strategies to better fit with those of our full line store division.

As a result of that change, we have seen a much-improved relationship develop between these two groups, an improvement that will ultimately result in delivering better product to our customers.

We're also seeing heightened collaboration between our rack and full-line merchant teams, and we are in the early stages of better integrating our direct and full-line businesses in an effort to provide seamless service across channels.

In addition, we are currently pursuing opportunities to better leverage our resources across business units, and in doing so drive additional expense gains.

These are all improvements that will ultimately benefit our customers and will drive Nordstrom, Inc.'s performance over time.

We believe we're on the right track with our current set of initiatives and that we are making the right long-term decisions.

We will keep you informed as progress continues.

One quick comment on the west coast port situation.

At this point in time, we do not expect to be materially impacted, either from an inventory or expense point of view, by the earlier work stoppage.

We hope that this matter is resolved quickly and fairly and are taking steps to ensure that we are adequately prepared.

We are not approaching a fourth quarter materially different from how we've approached the past three quarters.

We are planning conservatively, we like the plans and strategies I didn't say we have in place, and we are working to see them bear-proof.

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 October 31st, 2002, we reported earnings of 14 cents per share on a diluted basis.

This is a 75% increase compared to 8 cents per share in the third quarter of last year, and the fourth consecutive quarter of year-over-year earnings per share growth excluding nonrecurring and impairment charges.

Our top line continues to make progress as evidenced by six consecutive months of positive comp sales performance.

The 2.6% calendar comp sales improvement in the third quarter is in line with company guidance of positive low single-digit growth.

In total, our sales grew 6.8% to $1.3 billion.

This was a big quarter for our company in terms of new store openings.

Five full-line stores opened during the third quarter, the most the company has ever opened in any three-month period.

Although the fifth store actually opened on November 1st, the impact on resources, as well as the incremental preopening expenses, fell into the third quarter.

Opening this many stores in this time frame was a major undertaking and proved to be challenging for our organization, but at this point all eight of the new full-line stores planned for this fiscal year have been opened.

Gross square footage increased approximately 8% from the addition of eight full-line, four rack, and one Faconnable boutique.

Gross profits for the quarter as a per cent of sales improved 149 basis points from the same quarter last year.

Approximately 110 basis points of this reflects year over year improvement in the quarter including the estimated portion of the shrinkage accrual benefit that is attributable to the third quarter.

The remaining 39 basis point improvement was a result of the shrinkage accrual at adjustment, partially you set by incremental buying and occupancy expenses.

The gross margin improvement during the quarter was less than anticipated due to several factors, primarily related to the impact of our new inventory management system.

The changes we are experiencing are causing volatility in our bookkeeping for gross margin.

I'd like to give some insight as to what those factors are because we firmly believe this is not a reflection of a fundamental change in our business.

First, we are experiencing an acceleration in the recording of markdowns.

The timing of recording markdowns on our books is considerably faster than it has been.

This is a significant change versus our former manual processes which were cumbersome and had weaker controls.

The second factor relates to record keeping.

Our new inventory system uses a different method for recording price changes related to sale events.

The result is movement of dollars between markdowns and markup.

This is causing timing shifts in the recognition of gross margin dollars within and between quarters.

We have since learned that this resulted in upside to our projections in the second quarter and downside in the third quarter.

Both of the above factors are making year-over-year comparisons difficult.

We are essentially rewriting the timing of our baseline gross margin performance.

Our organization is working hard to fully understand and perform under this new cadence.

Ultimately we need to experience a full year's activity to better understand and forecast our gross margin.

By second quarter next year, we will be on an apples-to-apples comparison.

The third factor relates to shrinkage.

We are more completely capturing all price changes, primarily markdowns.

We suspected that shrinkage results would improve but lack of factual data caused us to maintain our shrinkage reserve at recent historical levels.

Our first-ever mid year scanned inventory results conducted for our full-line stores only indicated that the higher level of markdowns that we've experienced so far this year had an offsetting favorable impact on our shrinkage results.

Because this was our first mid year inventory and our financial inventory system was not in place to support a clean book inventory, we did not record the entire amount that these preliminary results suggested.

This improvement was only partially reflected in the shrinkage adjustment we made this quarter.

Our plan is to perform a full physical inventory in January with our new financial inventory books and to further adjust the reserve as supported by those results.

Transitioning to a new inventory system is a major change to any organization.

We recognize and we've shared with you that there would be a learning curve associated with it, and we continue to learn and adapt to our new tools.

We strongly believe the path forward will lead us to improved execution and results.

SG&A for the quarter was expected to remain flat with last year on a percent-to-sales basis.

Our actual results were higher by 40 basis points.

This was primarily due to above-plan selling and distribution center costs.

The selling cost variance was primarily due to new store activity.

The distribution variance has remained with us as our unit volumes have increased.

With the exception of these two areas, our overall expenses were on plan for the quarter.

During the third quarter, bad debt levels were below our plan.

On a year-to-date basis, delinquency rates on both our Visa and retail portfolios have been stable.

Our write-off rate did increase last year and the first quarter this year but since then trends have stabilized.

Our loss provision takes into account both historic and projected write-off trends which gives us confidence in the adequacy of our reserve.

We monitored both delinquency and write-off trends closely and our outlook remains cautious based on current and potential future economic conditions.

Other income increased $2.7 million in the third quarter.

This increase is primarily due to higher receivables and is in line with our projections.

Turning now to preliminary balance sheet and cash flow results, let's take a look at inventory.

At October 31st, 2002, total inventory at cost was up $118 million, or 10% on an 8% increase in square footage, from year-ago levels due primarily to new stores.

Comp store inventory at cost was down $6.3 million, or .7%.

On a per square foot basis comp inventory was $54, which was slightly below last year, and total inventory was $70, which is 3% higher than last year.

We continue to work diligently to effectively manage our inventory and believe that we are well positioned for the holiday season.

Net capital expenditures for the third quarter totaled approximately $55 million.

This spending was primarily on new store construction and I.T. investment.

For the quarter, depreciation and amortization was $58 million.

Our latest three-year capital projection for the years 2003 through 2005 is in the range of $700 to $750 million on a net basis, which represents a reduction from our 2002 to 2004 plan of $850 to $900 million.

The majority of the dollars will be spent on new and existing stores, but approximately 20% will be spent on technology projects, primarily a new point-of-sale system.

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-capital ratio of 50.5%.

This is unchanged from the second quarter.

There was no share repurchase activity during the quarter and we do not anticipate buying back shares in the near future as our plan is to reduce our debt-to-total cap ratio to 40 to 45% over the next few years.

With regard to guidance on a performance outlook for Q4, we anticipate the following, which is compared to the fourth quarter of 2001.

A low single-digit increase in same-store sales.

While we expect comps to be positive for the quarter, we expect the month of November to be negatively impacted by the Thanksgiving holiday shift and are planning the month flat to slightly down.

Our percent-to-sales basis we anticipate moderate improvement and gross profit margin during the fourth quarter.

SG&A is also expected to increase moderately as a percent-to-sales.

Service charge income is expected to increase $5 to $7 million and increase expense is planned up $2 to $4 million.

Our effective tax rate is unchanged at 39%.

These assumptions use an earnings per share range between 40 and 44 cents which compares to 48 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 $1.15 and $15.19 for 2002 excluding nonrecurring and impairment charges compared to 93 cents in 2001.

Our range of guidance reflects our continuing belief in our ability to make progress during the fourth quarter.

With that, 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.

I'll also provide an update on our perpetual inventory project.

On one of our conference calls over a year ago, I talked about what we are doing in full-line stores to improve our results.

Things like improving the balance of our merchandise assortments to ensure that your offering includes an appropriate mix of fashion, brands and price points.

Improving regional execution so that regional and store-specificies are better reflected in our stores, also reducing the amount of dramatic change that had been going on within our organization.

As our sales results have improved throughout this year, we are frequently asked about what's driving our results and with a we're doing differently.

The answer is pretty straightforward.

We believe that our positive results and the momentum that is building are driven by the same things that I talked about over a year ago.

The most significant factors driving our results over the past six months come down to the fact that our structure in general merchandising strategy have been stable for almost two years now.

We have good people and in key positions who have become increasingly seasoned in their jobs.

Secondly, commitment to our strategic direction as allowed us to gain meaningful traction and the improvement is reflected in our assortments.

Both have contributed to an environment that allows our people to focus the majority of their attention on execution.

In addition, we're working to improve our inventory and planning disciplines and the new inventory management system which I'll talk about more in a minute is beginning to provide helpful visibility.

Turning now to performance in specific merchandise areas.

The strongest performing divisions for the third quarter were cosmetics, accessories, women's activewear, and several divisions within women's apparel, including designer, contemporary, and bridge.

All of which exceeded the 2.6% full line average for the quarter.

Men's shoes, junior women's, kids wear and intimate apparel were all flat to positive for the quarter.

Our weakest divisions were men's apparel, women's better, kids' shoes and women's special sizes, all down low single digits.

All of our regions posted positive counts for the quarter and performance variation across the regions was minimal.

Relative weakness persists in our northern California stores, and our capital region was negatively impacted by recent unfortunate events in that area.

On a year-to-date basis, all of our regions are running flat to positive.

The same is true of our merchandise divisions except for men's apparel, men's shoes, and women's special sizes.

We opened four full-line stores during the quarter and our Las Vegas store opened the first day of the fourth quarter.

New store performance has been mixed for a variety of reasons.

We expect traffic and sales improvement and feel that the long-term prospects are positive for all our new locations.

Inventory levels at the end of the quarter were a bit higher than planned.

This is primarily due to new stores but early receipts were also a contributing factor.

As we head into the holiday season, we feel that sales momentum is good and inventory levels are appropriate.

Our perpetual inventory initiative continues to progress as planned.

Third quarter milestones include a system rollout to our rack stores, as well as the rollout of price management and data warehouse tools.

The full-line merchants have been trained and are beginning to initiate markdowns.

The data warehouse which is essentially a structure reporting tool is providing the first glimpse to performance metrics such as on-hands, sell-through, rate of sale, estimated weeks of supply and let me telephone gros margin.

The first phase of benefit realization is beginning to take shape.

This is a reactive or cleanup stage that includes activity such as identifying under-performing merchandise and taking action to minimize markdown risk.

In addition, visibility into item level performance allows us to reallocate merchandise based on the strongest performing locations.

We have also been able to initiate key items to ensure positions through the holiday.

In the past this exercise was largely based on gut I think distinct but this year for the first time we've been able to supplement experience and gut I think distinct with hard data.

I mentioned the first phase of benefit realization being reactive.

The second phase will look at how we can proactively use all the information we now have at our disposal.

We intend to maximize performance and minimize costly merchandise transfers by making better buying and allocation decisions up front.

We have said all along that we do not expect to realize the full benefits of these tools until we get into 2003.

That expectation remains unchanged.

Overall we continue to make headway.

Recent top-line strength breeds confidence in our people which should help drive momentum.

Each of our corporate merchandising managers see opportunities to use the new system to improve sales over the next few years.

We are encouraged by this sense of optimism and will keep you informed of our progress.

Now we'll go ahead and take your questions.

At this time if you would like to ask a question, you may press "star" followed by "1" on your touch tone phone.

Questions will be taken in the order they are received and you will be announced by name when we are ready for your question.

Your first question comes from Theresa Donahue and please state your company name.

Newberg Berman.

I had a quick question on the SG&A.

Is that up as a ratio as to percent to sales, Mike, in the fourth quarter and if so why?

Yes, Terry, we're anticipating it's up moderately as a percent to sales and our feeling, it's a continuation of some of the expansion we've had in the distribution center costs, as well as, we're nearing the end of some implementation of our IT projects.

In addition, we still have the new stores we opened, which is causing a little bit of a pressure on that rate.

Okay.

Any sense for where that should be headed next year?

Not at this point.

We're not ready to guide that.

Thanks.

Thank you.

Your next question comes from Sherry Eberts and please state your company now.

J.P. Morgan.

I was hoping you could talk a little bit about what the implementation plan for the perpetual inventory is in fourth quarter.

For example, on third quarter the rack came on line.

Just trying to figure out what the implications for gross margin are for fourth quarter and then as we head into 2003 and first quarter as well, what different parts of the business will be coming online.

Sherry, this is Mike.

In terms of the fourth quarter, at this point in full-line stores, we've effectively rolled out the tools to all the merchants.

So there is really no incremental change in terms of what's happening.

It's a question of people starting to use the tools and to build upon the learning to use them effectively.

Next year what we're doing is we've implemented a business integration process where we have teams working with each individual merchandise category to help them rethink and redesign how they buy and how they manage their business and we are doing that group by group, and our expectation is that it willl accelerate the learning and start to produce some results.

My understanding was that in fourth quarter some of the replenishment merchandise may be coming on.

If it's not the whole full-line stores, but are there certain categories that are still yet to come on board?

There are some areas that have started to come on but we're still working through that.

Okay.

I mean, I'm just trying to get a sense of what's left to do.

You know, what could be potential issues going forward, just to get a sense of when smooth sailing, when we might start to see that.

Well, I think in terms of smooth sailing as it relates to our ability to project, we have to go another quarter of history and so it won't be until the second quarter of 2003 that we're apples-to-apples comparison.

In terms of our ability to execute, I think that's something that's going to be aggregating over time, as our learning grows.

Thank you.

Thank you.

Your next question comes from Michael Eckstein and please state your company name.

Yes.

It's Credit Suisse First Boston.

I was just sort of curious as to the tax rate, what happened in the quarter.

Number two, about the sequence of how you guided since you had an announcement ten days ago.

I'm surprised you didn't roll everything up into one announcement.

Thanks.

Michael, this is Mike.

In terms of the tax rate, the tax rate is at the effective 39% and hasn't changed.

On a year-to-date basis, it's different.

That's because of the exercise of the put earlier in the year.

There's no tax benefit to that expense.

So that had the impact of driving up the year-to-date rate.

In terms of how we communicated earlier, I think our intention was to focus on the change in the guidance as it related to the quarter only and to give further update during this call.

Thank you.

Your next question comes from Debra Winswig.

Good afternoon.

Two quick questions.

One in terms of where we are for the point of sale for 2003 and also can you just talk about how private label performed during the fourth quarter.

This is Mike.

I'll take point of sale and then I'll turn the private label over to Pete.

Point of sale right now is in the test phase.

We are currently planning to pilot that in the first quarter, and as soon as we're successful with the pilot, we're going to start rolling it out over the next two years between 2003 and 2004.

In terms of private label, we've actually experienced some good progress there.

And Blake touched on it briefly in some of the integration comments, but I think Jim O'Neal deserves a lot of credit leading that part of our organization to collaborating better with the full-line store merchants and we've been able to increase our orders and have some decent performance.

A lot of it's just based on being on the same page on replenishment issues because we have better visibility on what's selling and how to better replenish ourselves there.

You know, we have a broad enough offering with our own label that there's kind of a mixed bag.

Some is performing well and some isn't as well, but I think on the whole it's been pretty positive.

I'd say in particular, classiques has done pretty well this year.

Also the halogen line in women's has performed pretty well.

Do you think it's more a fashion element or in stock or having the right price points?

It's a combination of both.

When I'm talking about classiques and halogen, most of that has to do with the fashion correctness.

We're just doing a nice job of hitting the mark at the right stuff, the right time, right price.

Then in some of the other areas there's a lot more replenishment type issues.

The improvements are just based on better in-stock position.

Great.

Thanks so much.

Thank you.

Your next question comes from Rob Wilson, and place state your company name.

Yeah, Tiburon Research Group.

A quick question on inventory.

Mike, you suggested that inventory was up 3% versus last year.

Why would that have happened?

Could you maybe get some more color there?

And why were D.C. expenses higher this quarter than the prior year?

Okay.

Rob, this is Mike.

In terms of the total inventory, most of that was driven by the new stores that we've opened.

We opened five new stores during the quarter.

And on a per-square-foot basis, you know, I think our opening inventories, in order to make a big first splash, are pretty compelling and then as the business moves, we tend to adjust accordingly.

In terms of distribution costs, we've experienced the distribution costs expansion for the last several quarters, and most of that is around just that our units are up higher versus plan than they have been, and that is a result of us moderating our price points.

Okay.

So -- all right.

Fair enough.

You've talked about bad debt expense.

There's been a lot of press recently about bad debt at some of your peers.

Can you talk about when you write off bad debts and is that any different than some of the others in your industry?

Well, our policy in writing off bad debt is at 150 days and I think that's about 30 days quicker than some of the traditional guidelines of 180.

Okay.

All right.

Well, thank you.

You are welcome, Rob.

Thank you.

Your next question comes from Adrian Shapira and please state your company name.

Thank you.

Goldman Sachs.

My question related to, comps have been very much in line.

If you could comment on total sales and perhaps give us some insight as to how new stores, what the productivity of the new stores are and then a follow on to that, if you can comment on the 20% of the stores that you seem to have been focusing on that had been underperforming.

Pete?

Yeah, I'll take that.

Yeah, I talked about we had some mixed results with our new stores, the last five.

There's kind of a myriad of reasons there for that.

In a couple of cases, the malls weren't fully leased in terms of the additions to these malls, and that had an adverse impact on the business.

There were just various stages of readiness, when we opened our doors, and that impacted.

Another place where we opened, a week after we opened, there was a big mall open essentially down the road and that had an impact on business.

We knew it would, but that impact was felt.

So we've had kind of a mixed bag there.

I think all in all, the projects represent a lot of promise.

We're happy to be where we are.

We may have a little bit of plan adjusting to do but I think as Mike spoke to, the new stores tentative caused a little bit of the inventory situation we were in, and also some of the expense.

And then all the quality of things that go around it.

It was just, it was a lot for us to handle all at once, opening that many stores in that short a period of time.

So I don't think we would choose to open that many again all at once but, you know, the bottom line is we're open, we're happy about the stores we have, we feel like we have a lot of upside in those questions.

The second part was?

It related to the 20% of the stores that you cited that were under scrutiny that had been underperforming.

We went through that, what we were calling the small store initiatives and we had, you know, about 20% of our stores that either had declined in productivity over the years or never lived up to their initial promise and so we went in and tried to look at those stores as if they were brand-new and look at all the more objective demographic information, make sure that we were doing the right thing to attract the customers we should be attracting in those areas and I'm happy to say that the stores that we touched, I think it was seven or eight of them here in the first couple of quarters of the year, we were able to make some significant impact.

Of those stores, all but one of them are performing above the average of the full-line store comps.

When we chose them, they were all significantly below average.

So we know that our ability to focus on a specific store can really pay off in some good results.

Our plan going forward is not necessarily just to keep it toward smaller volume stores but look at any store that really has an opportunity to do more business and so we didn't really get a chance to get after that in the third quarter just because we had all this new store activity.

I think it was just too taxing on our buying organization to be focusing on that as well.

So obviously fourth quarter, we got a lot on our plate just executing, but we have plans next year to continue on that effort to pick a store or two at a time, store or two a quarter and really laser-like focus on it and see what we can do to live up to our potential there.

And we're confident that we can make strides based on what we've achieved this year.

So as you said, since you are moving the focus beyond just smaller volume stores, is it fair to say you are casting a wider net to even more than just 20% of the stores?

Yeah, I think that's fair to say.

We need to still be selective about it.

Again, I think the criteria would be where do we have the most amount of upside potential, and we've gotten the regional managers involved in this, you know, so far as to say if you could pick one store in your group of stores that we could really focus on, which one would you pick.

And then Eric and I essentially go through and we determine which ones we're going to go with based on that, that list, and I think for it to work, though, we'd definitely have to add it.

We can't just do everything.

So we're going to do one or two stores a quarter.

Thank you.

Thank you.

Your next question comes from Dana Cohen and please state your company name.

Bank of America.

A couple of questions, guys.

Mike, you ran through those inventory guys.

Its total is up 8%.

What is the difference between the comp and the square foot numbers you gave out?

You said comp inventories are down 0.7%?

Is that correct?

Yeah, comp inventories in dollars were down $6 million, or .7%.

And the total inventories were up 10%.

Then you gave out some sort of per square foot number.

What was that number?

Comp inventories per square foot were 54 and total was 70.

Okay.

Got it.

You had indicated that inventories, part of the coming in ahead of plan was new stores; part of it was, it sounds like you brought in inventory a little early.

I mean, can you just give us a sense of, you know, where you originally wanted the inventories to be?

Are we talking maybe a point or two difference?

I mean, inventories are down slightly.

So it doesn't -- sort of gauge.

Yeah, I think that you are correct.

It's a point or two difference.

What we did is we received some inventory early and it was our own product, where, you know, we brought it in and we used to hang onto it and so it can be delivered in the exact month that it was supposed to come in, but the fact is that inventory hits our books anyway and it's just sitting in a, you know, a warehouse or distribution center somewhere.

So we figured we would bring it in.

Part of that is to try to offset some of the increase in distribution costs, and one of the ways that we can do that, to mitigate that rising cost is to have a more even flow and so to bring stuff in as it comes in and be able to work more consistently, the products, that helps us take down some costs.

So we decided that we would take the merchandise.

In a lot of ways I think it helped our business.

You could see that our comps have done well, and I think largely because we've got goods, and obviously the goods we have have been well received by the customers.

So what you see is some of our [INAUDIBLE] product that's coming early but it know at a huge impact.

And where should we be thinking inventories will be as we move into spring.

Should we be thinking flatish into the spring?

Well, I think, Dana, coming out of the fourth quarter I would expect us to be a little bit above last year.

You know, last year we were extremely lean coming out of the fourth quarter and then the next year our plans are to continue and improve our turns.

So that would suggest that we should be flat to slightly up.

Okay.

And then on the SG&A front, someone had asked before about the D.C. but can you go over in a little more detail on the selling expenses as to -- you know, I'm sure you had a budget for the new stores.

I know they came in less than expected, but why would SG&A dollars have come in more?

Well, I think, you know, the bottom line to it was we spent more than was in our plan and some of our stores our productivity wasn't as high as we had anticipated.

So what we've done is we've responded to that and we're adjusting down accordingly, but I don't think it's any more complicated than those two items.

Okay.

Great.

Thank you.

Thanks, Dana.

Thank you.

Your next question comes from Wayne Hood and please state your company name.

Prudential.

Mike, I've got a couple of questions coming back to this expense rate.

Maybe you could give us some sense of what your comp store expense rate was in the third quarter.

Would you care to talk about that?

Absolutely.

Our comp, as a period of time-to-sales, was flat with last year and as you recall last year in the third quarter, we had about 120 basis point improvement.

Okay.

The second question I had is on the shrinkage.

Assuming that your fiscal goes well in January, how much can we expect, you know, that reserve to come back to?

Would it be of the magnitude of 39 basis points that we saw in the third quarter, or something less than that?

And what's embedded in that margin, modest increase you've given us?

Well, you know, Wayne, I don't think I'm prepared now to talk about anything in detail because we just don't know what those results are going to be, but I will tell you that I think we've looked at this from a conservative point of view.

Okay.

And the last two questions, the capital spending coming down by $150 million, where is that coming out of?

Well, mostly new stores.

New stores and then technology.

But you haven't slowed your new store growth rate.

I mean, what's changed?

Because you gave us projections of, you know, unless you've changed those from what, you know, the outlook is the last couple of years.

Our new store growth rate in 2004 and 2005 is slower than even 2003.

Okay.

We're projecting about a 4% square footage increase next year and about a 1 to 2% the following two years.

And then finally, what was the bad debt provision to writeoffs in the third quarter?

Bad debt provision to writeoffs?

I don't have that number with me.

Okay.

I'll call you back on the outside.

Thanks a lot.

Okay, Wayne.

Thank you.

Your next question comes from Robert Toomey and please state your company name.

RBC Dane Rouscher.

Is there any way you can quantify at this point at all what you think might be the potential of benefit to gross margin of the perpetual inventory program?

No, Bob, not at this point.

I think that we all expect that there will be opportunities in our ability to, you know, improve our turns, and our margins but at this point we haven't put an absolute number to that.

Also, I think it was Blake or Pete mentioned that you are seeing improvement in, is it holiday momentum?

Did I hear that right?

Bob, this is Blake.

I don't know if we said improvement.

I think that we said that we're sticking with our conservative plans, and certainly that we don't see any changes in our trends but we feel good about the plans that we have and we're going to stay focused on executing them and hope that by the end of the quarter, our results are commensurate.

Okay.

Thanks.

And I have one other question on comps.

How much do you think comps are benefiting from either, from better buying or from better systems?

Can you -- by "systems," I mean, you know, perpetual inventory, or how much of it is coming from what you think is just better buying in general?

My brother Pete's not in this room.

I think he probably would take credit that his merchants are better buyers but he is probably the best to answer it.

But it's all of the above, both -- I guess even more than all the above.

As Pete said, the stabilization with his merchandising, more clarity and accountability there, executing better costs out front and the systems were relatively new, as he talked about marrying the gut I think strings if you will with this hard data.

It's getting better and better every day but we feel we have a ways to go on this and the most important thing is, are we learning from it or are we making progress?

We think at this early stage, we are.

And one other question if I might.

There's been a lot of discussion, as you know, in the media, and on Wall Street about the weirdness of the consumer spending right now and the economy.

Do you have any insights on what's happening out there with the consumer?

I guess you are keeping a pretty conservative approach right now, but as that relates to the economy relative to your projections?

Bob, this is Blake.

We're merchants.

We're not economists.

We can tell day to day how customers vote with their dollars and we try to react to that, but there's no question there's a customer that has a number of issues or concerns, and we look at it from a merchant point of view that the customer has lots of choices right now, and we're trying to focus on the things within our control and create a reason why the customer would want to shop or vote with their hard-earned dollars with us versus somewhere else.

So there are a number of things that we can control, but we are encouraged by the things within our control, and our team is making traction on that every day.

Great.

Thanks a lot.

Thank you.

Your next question comes from Dan Guyman .

McAdam, Wright, and Reagan.

Can you talk about some of the pricing pressure that you may or may not have experienced in the third quarter and how they relate to maybe what you experienced in the first half of the year?

Peter, it's probably best if you respond to that.

Yeah, I don't think anything really stuck out as being pressure for us with competitive prices that would be beyond typical.

Okay.

Great.

Thank you.

Thank you.

Your next question comes from Jennifer Black and please state your company name.

Wells Fargo Securities.

Can you hear me?

Sure.

Yeah.

Okay.

Great.

I wondered if you could give a little bit of color on men, as far as furnishings versus suits and do you think that men's is in the bottoming-out phase and then I have a few other questions.

Okay.

I'll take that.

I think I mentioned it last time.

It appeared to me that men's have, you know, kind of bottomed out.

Looked like we had some hopeful signs and some promising signs and I think we continue to progress along that but it's gradual.

We do have pockets of success in men's, and, you know, our trend is improving there all the time.

But, you know, until we're running actual positive comps and something we can report, you know, on a quarterly basis, you know, we've got work to do and so I think it's getting better.

In terms of how it applies, you know, across the different product categories with, whether it's furnishings or suits or sportswear, you know, I think in furnishings we've had some improvement largely because we just have better visibility to our on-hand position, and as you know, in a business-like furnishings, a lot of that's replenishment size-oriented business and these new tools are helping us there.

So we've been able to make some progress there.

I think we've had some success in sportswear and junior men's.

We've had some improvement there, but I don't want to get too far ahead of myself.

In terms of where our results are.

I think that we're moving the right direction but we will keep you posted with our results as we report them.

Okay.

And then two other questions.

One is about the distribution center I'm not sure I fully understand.

I'm not sure I fully understand.

Are you volume constrained or can you explain a little bit better as to why you had problems?

Jennifer, it's not a question of volume constraint.

It's, we're moving more units through the buildings than we anticipated in our plans, and, you know, there's a variable cost per piece in doing that and as you have more units, you have higher cost.

It's as simple as.

That I think part of it is because, you know, we have been focused on getting better balance or price points and to dry volume, we are selling more units at some lower prices.

Okay.

And then lastly, is there anything new with your customer loyalty programs?

I noticed that you are giving a gift card of $10 for every $100 you spend on your V.I.P. nights, and I wondered, one, did the V.I.P. nights really move the needle, and if you could just tell us where you are going with that.

Pete, do you want to take that or do you want me to take that?

Doesn't matter.

Go ahead.

This is Blake.

I'll take that.

The event you are referring to, Jennifer is this fall that was started a couple of years ago and it's had a couple of different initiatives and one for this select group of customers was actually a 10% discount, and we're concerned that we have fair values and make sure that we're offering the same offering to all of our customers and so the idea of discounting for a select group is one that is difficult.

So in this particular event we feel our credit program we think is somewhat unique and our strategy is a little bit different than our competition.

Our strategy with credit is to enhance the relationship that we have with each customer, and these events like the one you're talking about is to build loyalty and relationships through our credit program.

We think we have great vehicles there in credit, and these points have been well received and we're trying a different format as a discount utilizing these points and there's immediate payback as you described.

Yeah, it definitely moves the needle.

They have been good events and when we execute them well, they can be great.

Well, I know I do my duty.

Thanks a lot.

Thank you.

Thank you.

Your next question comes from Felipe.

Please state your company name.

Good afternoon.

First Boston Research.

A couple of questions here.

What percentage of sales actually occur on the Nordstrom credit card and if you could also refresh our minds whether credit card is a profit center or just a great deal for you guys.

Then the second question I had, if I look back at your current rating outlooks, both S&P, it changed negative all the way back to 2001.

Typically they keep them no longer than two years at the same kind of outlook.

Any indication what they are looking for to perhaps bring them back to a stable outlook?

Thanks.

Felipe, this is Mike.

To answer the first part of your question, our credit sales penetration is about 26% of our sales.

Our credit business as disclosed in our segment reporting does make money, but, you know, our strategy is not for it to be a profit center.

It is to be a complement for our customer to provide a vehicle to spend and also to create a better relationship.

In terms of the moodys question, we're actually meeting with both moodys and S&P in the next 30 days and this is typical.

At this point there's no update.

Okay.

Thanks very much, Mike.

Okay.

You are welcome.

Thank you and once again as a reminder, if you do wish to ask a question, please press "Star" followed by "1" on your touch tone phone.

Your next question comes from Theresa Donahue.

Please state your company name.

Newburgher Berman.

To follow up in terms of the environment question, you guys have had, you know, very nice momentum all the way.

I'm wondering if there is anything you can share with us as to how you plan to counter, you know, what is always a more professional Al environment seasonally in the fourth quarter and seems like it's going to be as intense as ever this year.

I know you guys usually don't have, you know, big promotional events prior to Christmas.

Well, Terry, this is Blake.

I think Pete with the full-line source is best to answer that.

Okay.

Gosh.

You know, I think that, you know, part of our responding to the pressure with markdowns is, you know, we get reactive on that.

You are right.

We don't have any planned promotion.

I think the best way for us to combat that is just to have a great flow of fresh new product that gives the customer a reason to buy something new.

We've been able to do that pretty well, I think, of late.

And the early indications are that we're hitting the mark on a lot of good things for holidays.

So I think we're encouraged by what's possible in the holiday.

I think we're going to have plenty of merchandise and hopefully it's the right merchandise.

You know, it's hard for me to say right now.

I think most retailers this time of year tend to feel kind of optimistic about stuff and I would say we'd be right there.

But our plans are conservative enough that I think we're going to be in good shape.

This is Blake.

In addition to that, you know, we feel strongly we won't be under sold and so we go to great lengths on a number of different fronts to have a level of trust with our customers that they can ensure they are getting a competitive and a fair value with us, and we think that's important as well.

And it's challenging in this promotional environment but to date, our folks have been able to execute that pretty well.

Thanks.

Thank you.

Your next question comes from Jay Ashton and please state your company name.

Also with Newbergher Berman.

I just want to follow up with a question that was asked before with complementation to the perpetual inventory system.

I thought what I understood you to say was that in next year, you would actually have people working with the buyers to help them use the technology more effectively.

Did I understand that correctly?

And if so you know, would that ultimately be incremental costs to you-all as far as training your people to use these systems and that's the first question; and the second question being, at what point do you actually expect to gain efficiencies, have the people up to speed on the systems?

Jay, this is Mike.

We did say that.

That program has actually started and is happening now and it's just a question of rolling it out through our 13 different merchandise categories.

And, yes, it is costing us money to do that, and we are incurring that now and expect to incur it as we roll through this program.

But that would be included in any sort of guidance or plan that we give.

Okay.

All right.

Thank you.

You are welcome.

Thank you.

Your next question comes from Rob Wilson and please state your company name.

Tiburon Research again.

Mike, what's the top line sales number for direct vision?

We didn't disclose that for the quarter.

Okay.

Are you going to disclose it in the Q?

We normally don't break that out.

You don't?

No, because it's no longer a stand-alone entity.

We used to break it out when it had minority ownership.

Okay.

And it's really not material at this point.

All right.

Okay?

Also, you mentioned you are going to lower price points on average.

Is there -- do you have any data on average transaction sizes or traffic or average unit retail that you could relate to us?

Well, you know, we haven't had very good data historically.

We're starting to gather that data with our new tools, but we don't have a lot of good history at this point, Rob.

Okay.

You know, can I add something to that, Mike?

Sure.

It's probably not looking at the big picture to say that we've achieved some success by having average lower price points.

There are some cases where that has happened but I want to be clear about some of the strength in our business, and if you looked over last couple of months when we've talked about this last couple of quarters, the strength, and it's -- you know, I think our top division of late has been women's designer, and again they are not on any value or price kick there.

I mean, they have just done a really wonderful job of having great products that the customers want by all the designers that they are looking for, and I think it's dangerous to try to paint this with a broad brush to say that this is exactly what's going on at Nordstrom.

We're a pretty broad-based retailer and some areas that applies where we have lower price points but on some areas they were going pedal to metal on it.

So it really kind of depends.

Again I think we have numerous examples of where price is not what's driving the business.

Okay.

Thank you.

I think we have time for one more question.

Thank you.

Your final question comes from Dana Cohen and please state your company name.

Yeah, guys.

Bank of America.

Just following up, how much of the SG&A increase was for the new stores, or the new store openings that will not repeat, you know, some of the pre-opening costs.

I would say it was in the range of $5 to $7 million.

Thanks.

Thank you.

I would now like to turn the call over to your speakers for any closing remarks.

Thank you for participating in our conference call this afternoon.

If you have additional questions or need further information, you are welcome to contact me.

My name is Stephanie Allen.

I'm the Manager of Investor Relations, and my number is 206-303-3262.

A telephone replay of this conference call will be available today beginning at approximately 6:30 p.m. eastern standard time through 3:00 p.m. eastern time on Saturday, November 23rd.

To hear the replay please call 1-800-944-9092.

Again, that number is 1-800-944-9092.

An audio replay of the conference call is also 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.

Next, click on the Q3 conference call link which will guide you to the audio portion of the web cast archived version of the conference call will be available through this link until Thursday, December 19th.

Thank you and good-bye.

Thank you.

This does conclude the Nordstrom conference call.

We thank you for your participation.