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Operator
Welcome to the Nordstrom quarter 4 conference call.
All lines have been placed on a listen-only mode until the question and answer session of today's call.
This call is being recorded at the request of Nordstrom and if you have any objections, please disconnect at this time.
I'd like to turn the call over now to Ms. Stephanie Allen, Manager of Investor Relations.
Stephanie Allen - Manager Investor Relations
Good afternoon, everyone.
And thank you for joining us.
This is Nordstrom's 2002 Fourth Quarter Year End Conference Call.
Joining me on the call this afternoon are Blake Nordstrom, President of Nordstrom, Inc., and he is joining us on the phone, Pete Nordstrom, President of Full-Line Stores;
Mike Koppel, Executive VP and Chief Financial Officer, and Rod Campbell, Vice President Strategy, Planning & Treasurer.
During this conference call, Blake will lead off with a recap of the company's key initiatives and fourth quarter company highlights.
Mike will follow with a review of our financial performance including guidance for the first quarter and full year of 2003.
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, we would like to ask that you limit your questions to one question per individual.
As is customary in these calls, some of our information in this call will be forward-looking in nature.
Information such as our financial goals, projected inventory levels, expansion plans and information technology and merchandising strategy.
Actual results could differ materially from those that may be projected or implied in our discussion.
Additional detailed information and concerning a number of factors that could cause actual results to differ materially from information that will shared today, is readily available in our most annual report, form 10K for quarter ended January 31, 2002.
Now I'll turn the call over to Blake.
Blake Nordstrom - President
Thanks, Stephanie.
And good afternoon, everyone.
Before turning the call over to Pete and Mike, I'd like to lead off with a few comments from our progress this past year, as well as provide some perspective on the upcoming year.
For quite some time, our strategic focus has centered on executing more effectively and efficiently and 2002 was no different.
Simply stated, our goals for the year were to drive top-line growth, implement perpetual inventory and continue lowering expense levels.
We are pleased to report that progress was made on all three fronts.
This past year, our number one goal was to generate comp store sales increases.
And we ended the year up 1.4%.
Against such a challenging retail backdrop, we are encouraged by even modest gain since the long-term success of our business is dependent upon our ability to sustain positive comp store sales.
Our recent momentum is encouraging.
Both our Rack and full-line stores contributed to our top-line performance this past year.
In 2002, full-line comp sales increased .7%.
Our Rack business achieved positive comp for all but one month in 2002 and ended the year with a solid 8% increase.
Our team at the Rack has done a great job of taking advantage of opportunities to compete more aggressively.
And we are expecting another year of positive performance in 2003.
Sales in our direct business, which includes catalog and internet, were down slightly for the year.
Internet sales growth was strong, but catalog sales were down as we had planned.
Our catalog customers are migrating towards our internet channel.
And the lower catalog volume is almost entirely offset by increasing internet sales.
We believe that our competitive position is unique, with our goal to provide superior service and distinctive merchandise with an emphasis on quality and value.
We also believe that our multichannel positioning sets us apart.
From this platform, we have the capability to offer our customers a level of convenience that most other retailers are not positioned to match.
Our perpetual inventory implementation has been moving ahead as planned.
In 2002, our focus was on getting the system up and running and getting our people trained.
As of the end of the year, the implementation is complete, except for the new replenishment system that we began rolling out in December and will finish in April.
Our training effort has gone well, and we will be ongoing in 2003 as we work to support our merchants' teams effort to optimize the new system.
Our people are beginning to fully embrace the system as access to new information is enabling our merchants to better appreciate the opportunities we have to positively impact our business in 2003 and beyond.
Our expense management efforts generated improved results in 2002, despite planned spending increases related to I.T. and new stores.
Prior to 2001, our expense levels have been rising for several years.
A trend that was unacceptable.
In response, we focused a lot of energy on better expense management and our work is beginning to pay off.
In 2001, expenses were down 100 basis points as a percent of sales.
And in 2002, they are down another 50 to 30.3 Just as a reminder, these figures exclude our non-recurring charges.
We still have a ways to go to reach our intermediate term goal of 28.5 to 29%.
But we are making steady progress.
As we look to 2003, our key initiatives remain the same.
While working to provide great service to our customers, we will continue to focus on sales growth, optimizing our new system, and reducing expenses.
Ours is not a one-quarter, two-quarter, or even 2003 story.
We have a three-year internal plan in place that establishes some challenging goals.
Small steps are being taken every day, and we are increasingly encouraged by the opportunities we see within our niche.
Now, I'll turn the call over to Mike.
Mike Koppel - Executive VP, CFO
Thanks, Blake.
And good afternoon, everyone.
For the fourth quarter ended January 31st, 2003, we reported earnings of 44 cents per share on a diluted basis compared to earnings of 38 cents per share in the fourth quarter of last year.
These results are at the end of high end of company guidance.
The year-over-year improvement was primarily driven by on plan comp sales performance and better than planned operating expenses partially offset by below plan gross margin results.
For the full year, we reported earnings of 66 cents per share versus 93 cents in the prior year.
The 2002 result of 66 cents includes nonrecurring and impairment charges of approximately $71 million, net of tax, or 53 cents.
Including these charges, 2002 earnings per share were $1.19 or 28% higher than the prior year.
Excluding nonrecurring and impairment charges, our full-year results reflect improvement in several key areas.
First, comp sales, which were forecast flat for the year, actually increased 1.4%.
Gross profit increased 37 basis points as a percent of sales and selling general and administrative expense improved 48 basis points also on a percent of sales basis.
Both were in line with company expectations.
In total, these improvements translate into 85 basis points of pretax margin expansion for the year.
Now I'd like to focus on the details of the fourth quarter results starting with sales, which increased 7.3% to $1.8 billion, compared to the fourth quarter of 2001.
Our comp stores contributed 1.9 percentage points of that improvement with the remainder coming from the eight full lines and five Rack stores that we opened since November 1, 2001.
The fourth quarter represents our third consecutive quarter of comp sales increases.
From a regional perspective, there was very little variation in performance.
The northwest and central states increased low single digits, east coast was flat and southwest was down slightly, primarily due to the continuing weakness in northern California.
Our strongest performing merchandise divisions for the quarter were cosmetics and accessories, both of which achieved mid-single digit comp sales increases.
Kids wear and women's shoes increased in the low single digits.
Women's apparel overall was flat, but experienced above-average strengths in designer and bridge segments.
Gross profit for the quarter increased $40.1 million and was essentially flat as a percentage of sales versus the same quarter last year.
Which was lower than the moderate improvement we forecast.
There was no margin impact in the quarter related to shrinkage.
As you may recall, we conducted a partial physical inventory count this past August.
Based on the results, we reduced our shrinkage accrual.
This adjustment accounted for 40 of the 150 basis points of gross margin improvements for the third quarter.
Our interpretation of the mid-year inventory results led us to forecast modest shrink related improvement in the fourth quarter as well.
However, the January results were in line with the accrual adjustment that we made in the third quarter, indicating that no further revision was warranted.
Despite quarterly gross margin fluctuations associated with our new system of implementation, we are pleased with the 37 basis point full-year improvement and expect to see additional expansion over multiple years.
SG&A for the quarter was expected to increase slightly on a percent to sales basis.
Our actual results improved 23 basis points.
This was primarily due to lower than planned spending related to selling costs and direct catalog expenses.
Bad debt levels for the quarter were lower than planned and flat for last year.
This year, both delinquincies and write-offs were fairly stable.
As always, we continue to closely monitor trends and will make adjustments to our reserve as appropriate.
Service charge income increased $8 million in the fourth quarter, which was in line with expectations and primarily the result of higher accounts receivable.
Net interest expense of $21.4 million also came in according to plan.
The $3 million increase compared to the fourth quarter last year reflects higher overall debt levels partially offset by lower, overall interest rates.
Now I'd like to spend a few minutes reviewing some of our preliminary balance sheet and cash flow results.
At January 31, 2003, total inventory at cost was up $64.9 million or 7.3% from year-ago levels on an 8% increase in gross square footage and a 7.3% increase in sales.
Total inventory per square foot declined 1% over last year.
Comparable store inventory cost was down $28 million, or 4%.
Preliminary capital expenditures for the fourth quarter and full year, net of developer reimbursements totaled approximately $49.7 million and $230 million respectively, primarily for new store construction and information technology investments.
Depreciation and amortization for the quarter was $64 million and $234 for the full year.
Our capital investment is expected to be in the range of $700 to $750 million with approximately $250 of that spending planned for 2003.
During fiscal 2002, gross square footage increased approximately 8%, with the addition of 8 full-line stores, four Rack stores and one U.S.
Faconnable Boutique.
In 2003, we plan to add 4 full-line and 2 Rack stores for a gross square footage increase of approximately 4%.
Only one of our new stores is planned to open during the first half of the year.
A full-line store in Houston, Texas, scheduled to open March 28th.
Preliminary total debt and total capitalization on a book basis at quarter end were approximately $1.35 billion and $2.72 billion, respectively, resulting in total debt to cap ratio of 49.6%.
This is about 100 basis points lower than the second and third quarters.
And 250 basis points lower than the fourth quarter last year.
There was no share repurchase activity during this quarter and we do not anticipate buying back shares in the near future as our plan is to reduce total debt to cap ratio of 40 to 45% over the next few years.
In 2002, we retired $77 million of debt and paid $70 million to repurchase the minority interest in Nordstrom.com.
These two events had a significant impact on our cash position as we ended the year with $123 million less cash on our balance sheet.
With both these transactions behind us, we are now well positioned to begin to generate positive free cash flow over the next few years.
We ended the year with no outstanding borrowings against our credit facilities and have more than adequate liquidity to meet our capital needs for the foreseeable future.
More than most years, 2002 was a year of learning for our organization.
In addition to the new inventory management system, we also replaced our entire financial infrastructure with a new financial system.
Both transitions involve process changes that will ultimately help us operate more efficiently as well as provide better internal visibility for running our business.
With this technology foundation in place, our goal for 2003 is to begin to provide better transparency to both our internal and external stake holders.
From a communication perspective our goal is to focus on key business drivers and progress executing our strategic initiatives, all of which span multiple years.
To that end, we are in the process of evaluating how we can provide the most insightful commentary on our business to make investors make the most informed investment decisions.
This evaluation includes consideration of alternative means of communicating, expected quarterly performance.
But our commitment is to maintain our current level of transparency.
With regard to our performance outlook for fiscal 2003 compared to 2002, we anticipate the following.
Flat to low single digit positive comp sales.
Moderate gross profit expansion on a percent to sales basis.
SG&A as a percent to sales is expected to improve slightly.
Service charge income is forecast to increase $6 to $10 million.
Interest expense dollars are expected to be flat.
Our affective tax rate are unchanged at 39%.
This assumption yields an EPS estimate of between $1.33 and $1.39 for a full year, a 12 to 17% increase over the $1.19 fiscal 2002 result, excluding nonrecurring and impairment charges.
Our assumptions for the first quarter of 2003, compared to the same period in 2002 are as follows.
Flat, comp-store sales.
Moderate gross profit expansion on a percent to sales basis.
SG&A as a percent to sales is expected to improve slightly.
Service charge income is forecast to increase $1 to $3 million.
Interest expense dollars are expected to be flat.
Our effective tax rate is unchanged at 39%.
These assumptions yield a first quarter EPS estimate of between 23 and 27 cents, which compared to 22 cents in the first quarter of 2002, excluding nonrecurring and impairment charges.
Lastly, I wanted to remind everyone that starting in the first quarter of 2003, we are converting our financial reporting to the 454 retail calendar.
This change aligns our monthly sales reporting, which converted to 454 at the beginning of 2002 with our quarterly earnings releases.
We are not planning to provide a statement of 2002 financials as we do not believe this transition materially impacts the comparability of our year-over-year quarterly results.
Now I'll turn the call over to Pete for additional remarks on our merchandising efforts.
Blake Nordstrom - President
Thank you, Mike.
This past year, the principle objective in full-line stores has been generating and sustaining comp store sales growth.
Other goals included improving inventory turn and completing our perpetual implementation.
Today, I'd like to provide an update on all three of these efforts as well as discuss our plans for 2003.
In order to drive volume in our stores, we want to consistently provide a quality, customer experience.
This encompasses a range of variables from merchandise to service to shopping environment.
And our comp store sales result are a direct reflection of our success in each of these areas.
In 2002, we regained some lost ground as sales in our existing stores increased .7%.
On a full-year basis, approximately 65% of our merchandise areas were either flat or up for the year.
This was true for less than 40% of our business in 2001.
Our strongest performing merchandise divisions for the year were cosmetics, women's designer apparel and accessories.
We made progress this year by remaining focused on our core merchandise strategy, which centers on providing a balance and differentiated assortment, merchandised by life styles rather than brand.
Both our women's designer apparel and cosmetics areas exhibit how well executed differentiation and strong, experienced leadership drives solid results.
Cosmetics has consistently been one of our strongest divisions.
Our success reflects our distinctive approach we take to selling, what many consider, a commodity item.
First, our sales people focus on educating customers about the product.
We know our customers are interested in experimenting with new products, so we provide samples of any product on request.
The open sales concept that Nordstrom pioneered contributed to a fun, relaxed atmosphere that is comfortable for all ages.
We have built a reputation for nurturing lines.
Today they seek us out which helps us stay ahead of our competition in terms of differentiated product mix.
Our educational approach, combined with the focus on exclusive products and unique specialty vendors drives traffic into our stores because customers know they'll always find something new.
We plan to continue to evolve our concept in the coming years in order to stay fresh and relevant to our existing customers as well as attract new ones.
The strong results in women's designer apparel businesses this past year can be attributed to improved execution and further demonstrate the importance of balance in our assortments when it comes to price and fashion.
Our designer assortments are tailored to each store and we experience exceptionally strong business in the younger, more fashion areas of the designer business.
Because we stayed on top of trends and introduced new vendors to supplement our existing foundation of core vendors.
In slower turning core area, we have improved inventory performance and gross margin by lowering inventory levels and focusing open to buy dollars on top-performing brands at our most productive locations.
In addition, we've developed distinctive marketing plans to promote our designer business and build credibility in the designer market.
We believe that we have begun to attract a new customer to Nordstrom and remain committed to our designer business as it adds a strong dimension to our brand and helps differentiate us from our competition.
Turning now to the topic of inventory.
We have worked hard this year to improve our performance.
For the full year, inventory turnover improved 8%.
Our plans call for additional improvement over the next few years as our new inventory system will contribute to increased inventory efficiency.
Speaking of the new system, our perpetual inventory initiative progressed as planned this year. 2002 was a year of learning for our merchants and training focus primarily on learning the system and fundamentals.
We believe that we have opportunities to translate those fundamentals into meaningful sales and gross margin improvements over multiple years.
In our view, there are two phases of benefit realization associated with the new system.
The first is a reactive phase where access to more details and timely information will allow our merchants to identify opportunities and react more quickly.
Understanding which merchandise is performing well and which isn't, will help us improve the timing and execution of markdowns, enhance flow, and ensure in-stock positions on key items.
It should also help us be more nimble about identifying and taking advantage of merging trends in our business.
These are areas that we see the most opportunity for tangible result in the '03.
The second phase involves proactively using the new information to make better buying and allocation decisions.
We expect that this phase will take more time to play itself out for a couple of reasons.
First off, the buying cycle itself results in a three to nine-month lag depending on department, between the buying decision and the resulting sale.
Secondly, this is an area where we expect to improve gradually as we accumulate more transaction history and get better at analyzing and interpreting the information.
Over time, the cumulative impact of all of these improvements will contribute increased sell-throughs and lower markdowns helping us drive sales while flowing more dollars in the bottom line.
Overall, we continue to make headway, despite the fact that we have much to learn, our merchants are increasingly enthusiastic about the new opportunities they see to enhance results.
Now we'd like to go ahead and take your questions.
Operator
At this time, we are ready to begin the question-and-answer session.
If you'd like to ask a question, please press star 1 on your touch-tone phone.
To withdraw your question at any time, you may press star 2.
Our first question comes from Mr. Bob Buchanan.
Please state your company name.
Mr. Buchanan, please check your mute button.
Robert Buchanan
Can you hear me?
Blake Nordstrom - President
Yes.
Robert Buchanan
Hello?
Blake Nordstrom - President
Yes, Bob.
We've got you.
Robert Buchanan
Okay.
Just a couple questions.
First of all, you guys have opened up some stores in Florida, Miami and Tampa, recently.
Just wondering how those are doing.
And in particular, what efforts you've made to try to micromerchandise the assortments in Florida?
Blake Nordstrom - President
That's a good question.
I think it's fair to say that we still have a lot of room to improve there.
We're encouraged by the start we got off to.
Again, depending on the store, we're either about a plan or slightly below plan.
But we've had some improvement and in particular the stores that have been there a year or two now, we've really started to make progress there now.
I think it's obvious for everyone that for us to be successful there, we're going to have to tailor our assessments specifically to that marketplace.
We're learning all the time.
I think we're getting better at it.
We now have a few different locations down there and some experience.
So I would anticipate that we would continue to improve.
But I think it is fair to say there is still a lot of upside for us still in that marketplace.
Robert Buchanan
In Miami last weekend, it looks like you're promoting in women's quite a bit more than you are in some of your other stores outside of Florida.
Would that be a correct assumption?
Blake Nordstrom - President
Well, there's no strategic agenda in promoting more in Florida.
It could be a result of competitive issues we have there or also a result of having a particular overbought situation in that particular area.
But there is no strategic agenda around having a different promotional strategy for Florida.
Robert Buchanan
Okay.
And then just one other question on the replenishment front.
Or on the systems front.
I understand where you're getting more data points to help you with the things like markdown and to enhance flow.
Just wondering, when all is said and done at the end of this year or early next year, whether there will be much of your assortment that will be automatically replenishment set up?
Blake Nordstrom - President
Well, I think it's a little early to tell exactly what's going to be on our replenishment and what's not.
We're still finding our way through that.
I think there's some obvious opportunities for us.
Most of it has to do with the rate of which we sell out.
The rate of which our initial allocations are appropriate and the degree to which we may be overstocked in some more core basic kind of items.
So I think for us to improve our flow and efficiencies is kind of more of the a-ha rear -- here.
But in terms of a quantifiable ratio in terms of what is replenishable, I really don't have a number I can give you there.
Mike Koppel - Executive VP, CFO
Bob, this is Mike.
I would just like to add that as we continue to put each category on to replenishment, there is a learning curve and level of confidence that needs to be built in each merchandising area in terms of the reliance in the data and the relative history we have in that.
So we believe it's going to take some time before we get full and complete engagement in all areas that can participate on replenishment.
Robert Buchanan
Okay.
Have you guys ever said what you paid for the software?
Mike Koppel - Executive VP, CFO
We haven't specifically said what we paid for the software.
But we have said that the total cost of implementation is in the neighborhood of $180 to $190 million.
Robert Buchanan
Okay.
So that includes the consultant, the implementation as well as the software?
Mike Koppel - Executive VP, CFO
Yes.
It includes hardware, software, our people's time, consultants time, everything it took to get that up and running.
Robert Buchanan
Okay.
And just finally, are you guys satisfied with the way that process is moving along?
Or, you know, is there disappointment?
I'm just trying to get a handle of where you are on the systems front.
Mike Koppel - Executive VP, CFO
As it relates to perpetual inventory, the project has been essentially signed off.
The teams that were involved in implementing the system are now moving on to other assignments.
The system has been -- is fully engaged in all merchandise categories.
The only area where we're left to complete is replenishment, which is rolling out through April.
So we are fully operational with perpetual.
And, in fact, we came in below our original dollar budget.
Thank you.
And congratulations.
Robert Buchanan
Okay.
Thank you.
Operator
Our next question comes from Adrianne Shapira.
You may ask your question.
Please state your company name.
Adrianne Shapira
Thank you.
Goldman Sachs.
Mike this is a question regarding the gross margin.
As you stated, it came out different than you expected.
You were expecting some improvement but it came out flat.
Is it fair to say that your improvement you were looking for was solely related to shrink?
And if that is the case what can you tell us about the mark down rates in the quarter?
Mike Koppel - Executive VP, CFO
When we talked back in the third quarter, Adrianne, our expectations, based on initial results were that we would have better shrink results.
Well, actually, our shrink came in almost exactly to the rate we adjusted the accrual to in the third quarter.
So that expected improvement didn't happen.
Our markdowns came in around plan to where we expected them to come in.
So the whole expectation and lift was around shrink at this time.
Adrianne Shapira
Okay.
So as far as the systems benefits, we shouldn't be expecting much margin improvement this quarter even or the next few quarters?
Mike Koppel - Executive VP, CFO
Well, I think our guidance is for moderate improvement and margin going forward.
In the first couple of quarters, an element of that is going to be an adjustment down of our shrink provision versus last year.
But we're also looking for opportunities in our margin as it relates to our markdowns as we start the anniversary, the use of the system and as we start to implement some of the key learnings around the markdown dollars.
Adrianne Shapira
And we'll anniversary that in which quarter?
Mike Koppel - Executive VP, CFO
Beginning in second quarter is when we're apples to apples with the system.
Adrianne Shapira
Thank you.
Mike Koppel - Executive VP, CFO
You're welcome.
Operator
Our next question is come Theresa Donahue.
Please state your company name.
Theresa Donahue
Hi, guys.
Newburgher Berman.
First, I'm just wondering about the flat comp guidance for the first quarter when it's your easiest quarter of the year and secondly, why you're forecasting a services increase charge of fairly meaningful proportion for '03.
Mike Koppel - Executive VP, CFO
Teresa, this is Mike.
You know, in terms of the flat comps, I would say the biggest reason for that is what we've experienced so far in February with the weather on the east coast.
Theresa Donahue
Okay.
Mike Koppel - Executive VP, CFO
That's going to have an impact on our results February.
And we felt it would be prudent to be cautious our our sales outlook for the quarter.
In terms of the service charge income, that's mostly driven by growth in receivables, and we saw growth in our receivables last year.
And we continue to see it.
And that's primarily what's driving that number.
Theresa Donahue
Okay.
Thanks.
Mike Koppel - Executive VP, CFO
Yep.
Operator
Our next question comes from Dana Cohen.
Please state your company name.
Dana Cohen
B of A. Hi, guys.
Couple of questions.
I guess, going back on the gross margin.
Can you give us the components of merchandising margin versus buying occupancy.
Mike Koppel - Executive VP, CFO
Dana, we haven't historically done that.
Dana Cohen
Well, just can you just give us just a sense?
I mean, you're saying shrink was a positive.
So can you -- I mean, it sounds like with markdowns, merchandising margins were down a bit, excluding shrink?
Mike Koppel - Executive VP, CFO
No.
We said shrink was in line with what we had expected in the third quarter in terms of the adjustment.
But it wasn't as positive as we had hoped.
Dana Cohen
But it was positive year on year.
Mike Koppel - Executive VP, CFO
Yes.
Year over year, we had improvement.
Dana Cohen
Okay.
And then just on the system, can you talk about what you think the learning issues have been and, you know, given the fact that, you know, it sounds like markdowns may have been a bit higher than you thought last year before the systems got implemented.
What do you think the learning process has been and therefore, what are the opportunities for next year?
Mike Koppel - Executive VP, CFO
Well, you know, I think the learning -- there's been several items.
One is just the relative timing of how we take our markdowns and how they get reflected in our results.
I think historically, because we have these manual processes, we weren't always seeing the impact of what we were doing on a timely basis.
So I think that's the first thing.
I think the second is that with the system and with the tools we have in place now, it has been able to tell us a lot more and more clearly about where our opportunities are to move merchandise.
And, you know, last year, as we first started coming up on the system, we learned a lot about items that historically we might not have seen that were slow sellers that we're now seeing are slow sellers, and we're taking quicker action on those.
I think also, on the other hand, too, is we are seeing areas where historically we might have taken markdowns that weren't necessary.
And so, you know, I think the key learnings in very simple terms is that we're getting information now that's going to help us better invest those markdown dollars in areas where they can do the most good, versus historically, we've kind of done it with a sledgehammer.
Dana Cohen
Great.
No, that I understand.
But I guess my question is, clearly that's taking longer to implement and to see the results as we move into next year.
And I guess my question is, what was the learning process?
Did people take markdowns too trigger happy this year?
What are they learning this year that they couldn't implement the minute the system got turned on?
Mike Koppel - Executive VP, CFO
Well, the minute it got turned on, there was no comparable history to understand the -- what was happening with their business.
And in order to effectively use something like this, you've got to build some history to understand what you can improve upon.
So we were basically establishing a new baseline of result as we turn a system on.
Blake Nordstrom - President
Well, I would also add that a lot of it had to do with getting into the latter part of the year we got ourselves a little bit overbought.
Some of that was in relation to overplanning some new stores.
Some of it is just plain being overbought.
So it wasn't a system issue, as it was you just have to live with being overbought or undersold, however you want to articulate it.
And that hurt us beyond our plan, at least toward the end of the year, it did.
Dana Cohen
Great.
Thank you.
Operator
Our next comes from Sheri Ebert.
Please state your company name.
Sheri Ebert
J.P. Morgan.
Just to follow up on the gross margin a little more.
You mentioned that 40 basis points was the benefit from shrink in Q3.
Can we assume then that the yearly over year benefit from shrink in Q4 was about the same and that's what we should expect until it anniversaries?
Mike Koppel - Executive VP, CFO
That's approximately right.
I think that's fair.
And I think what you'll see is primarily improvement in the first and second quarter as we projected was a reduction in the shrink accrual.
Sheri Ebert
Thanks.
That's very helpful.
And to follow up on the service charge income, you mentioned most of it coming because accounts receivable are growing.
Can you just talk about your strategy in terms of credit business?
I think you mentioned that the profitability was a little below plan.
Just why are the receivables growing so rapidly in this environment?
Mike Koppel - Executive VP, CFO
Well, our receivable growth last year was primarily just on -- as it relates to total sales growth.
It wasn't an increase in penetration.
So, you know, last year our total sales grew 7%, 8%.
And the receivables grew corresponding to that.
Next year, the total sales is about 6%.
And receivables will grow at that same rate.
Sheri Ebert
Okay.
So it's not a penetration issue.
Mike Koppel - Executive VP, CFO
No.
Oh, no.
Sheri Ebert
Okay.
And can you comment any more specifically in terms of why the credit was below plan from a profit perspective?
Mike Koppel - Executive VP, CFO
I don't think we said.
I think we said our chargeoffs were below plan for the quarter.
But not credit profit.
Sheri Ebert
Okay.
Maybe I misunderstood that.
Mike Koppel - Executive VP, CFO
Yeah.
I think we said our chargeoffs, Sheri.
Sheri Ebert
Okay.
Thank you.
Mike Koppel - Executive VP, CFO
You're welcome.
Operator
Next question comes from Deborah Weinswig.
Please state your company name.
Deborah Weinswig
Salomon Smith Barney.
Few questions.
One, what difference in shopping behavior are you seeing between your full-line stores and your Rack stores in terms of the customer?
Blake Nordstrom - President
I'll take that one, I guess.
You know what?
It's not that demonstrative of a difference.
I think the biggest drivers for us is flow and newness and fashion.
It speaks at all price point levels.
And it speaks in all regions and all stores.
I can't speak for the Rack specifically because that's not my specific area of focus.
But if you're to follow up, when people have good business, it's almost always related to newness and flow and having the right items.
Deborah Weinswig
And if we talk about newness and flow.
I know on a few of your stores and maybe you can update us currently that have the VSC area, can you talk about, you know, the number of designers that you have currently, and how would you think about the roll out there?
Blake Nordstrom - President
Well, it's kind of a new deal.
I think to put it in perspective, I don't know how many VCs ours we have, 15 or 20, it's not a huge deal.
And they're really specific kind of a boutique-like department in designer area.
We don't have a ton of vendors in there.
They're just strictly -- there's not a lot of space.
And there's not a lot of inventory for them.
We're nurturing them slowly.
I think it's fair to say that we met and exceeded our expectations in terms of what we thought we could do there.
There's a lot of great stuff to choose from in the marketplace.
It's been great for us to have an opportunity to bring in newness, new designers, new fashion, have a vehicle to do that.
So we're going to build upon our success Viate (ph) , but I don't want to overstate what that is because it is a relatively small, specialized part of the business.
Deborah Weinswig
And can you also talk about what you've seen in the bridge business as well?
Blake Nordstrom - President
Well, our bridge business has been fairly broad.
So, we've had some areas that were more successful than others, but I think on the whole it was a pretty successful year.
A part of that is the year before wasn't entirely successful.
We weren't going against really stellar numbers there.
But we're made some steady progress.
And I guess I would attribute it to having some more seasoned people in the job and really sticking with the strategy that we, you know, had evolved into a few years back.
And I think that story can actually be told of a lot of our merchandising divisions, being another year with the same people and same strategy has really has paid off.
And you throw on top the enhanced tools and it has benefited bridge as much as anybody.
Deborah Weinswig
And my last question on the merchandising side as well, I think I saw an article that talked about a new line that you're going to be rolling out, the Satin Collection, I guess it is.
Can you talk about the number of stores it will be in and who that's going to target and different merchandise in the stores for women?
Blake Nordstrom - President
Well, the platine, part of it -- and it's in women's specifically.
It's really more of a designer price point.
We felt like there was a void in the marketplace there.
And we have this opportunity with Faconnable to really play to the idea of really beautiful quality fabrics and timeless quality design.
It's starting off relatively small.
I think we're actually only a dozen, 15 stores in our initial launch.
It's like anything, we'll get after it, see how it goes and hopefully it grows.
But I can tell you the people people are very enthusiastic about what's going on there.
The initial designs have been great.
We're optimistic, but we'll approach it cautiously.
Deborah Weinswig
Great.
Thanks so much.
Operator
Our next question comes from Dorothy Lakner.
You may ask your question.
Please state your company name.
Dorothy Lakner
CIBC World Markets.
Good afternoon, everyone.
Could you talk a little bit about some of the departments you didn't mention earlier.
You talked about the strength in cosmetics and accessories, kid's wear, shoes, women's apparel and so forth.
Could you just talk about the men's side of the business, shoe departments other than women's and just what you're seeing there?
And then secondly, you've, I think, been more successful with your sales events over the course of the last year than before having made some changes there.
And what are you going to do there in '03?
Are there any more changes for the sales events?
Or are you pretty happy with what you ended up with in '02?
Thanks.
Blake Nordstrom - President
Yeah.
I don't want to get too specific with the merchandising departments.
But you obviously heard about the designer apparel and accessories.
When I say accessories division, that encompasses hand bags and fashion jewelry and fine jewelry and gifts and there's a lot of categories there.
Our shoe business on the whole was kind of flat.
Women's shoes tend to be on the higher side.
Kid's, kind of in the middle.
And men's shoes, a little tougher.
Our men's business in general is still not where we want it to be.
And I think that's probably fairly consistent with most retailers.
The men's business is continuing to be challenging.
I can tell you, I think we've improved.
And we're making steady progress there all the time.
And we expect to have increases there this year.
We're planning for it, going for it.
And we think we're going to have a reasonable chance to do that.
But I can't sit here and tell you that there's been some miraculous turnaround in the men's business.
I think for us, it's just been an issue of getting really focused on what we have control over and getting after it.
So we've made some strides.
I think in particular, some of our younger men's business in the brass rail department has been better.
I'm trying to think what else you're asking for.
Mike Koppel - Executive VP, CFO
The sale events.
Blake Nordstrom - President
Oh.
The sale events.
Well, I think it's right.
We did have pretty good success this last year, year and a half with our sales events and that was strictly because we focused on it and made the necessary adjustments to have good results.
So for us, it's kind of a plan, prepare, and execute thing.
We've got to plan to do it right.
We've got to focus those sales events so that when they are happening, they're demonstratively different than anything else that's going on.
We don't run sales all the time, so when we do have one, it's got to be really meaningful.
We work hard at having added assortments that have deep discounts and having the first markdown be our best.
Again, it's not a tricky proposal, but we've had to get disciplined about that and it has paid off.
And I guess the answer to your question for 2003, we're going to continue on with the same strategy.
We're not adding any new events or strategy.
We'll just keep executing our sale events because we have had enjoyed great success there.
Dorothy Lakner
Great.
Thank you.
Operator
Our next question comes from Wayne Hood.
You may ask your question.
Wayne Hood
Prudential.
Mike, I was wondering what level of comp do you need to get to your goal of 28 1/2 to 29 expense rate?
And kind of related to that, if you look at SG&A dollars in 2003, would there be any reason that they would grow more than 2002's4.4% increase given you're really cutting the full-line store growth in half in terms of units, and you do have new systems?
Mike Koppel - Executive VP, CFO
Okay.
Wayne, the first part of your question is we still believe flat to low-single digit comps can support us getting to that expense goal.
The second part of your question that, you know, we did open -- we're opening less stores this year, although five of those stores opened in the middle to end of third quarter last year.
So we have a fair amount of expense from those five stores from last year that are layering on to this year, on top of the four new ones this year.
So we still have a fair amount of new store expense that's layering on to our expense base.
I -- you know, I will say in terms of our opportunities for expense, I think now that we've gotten out of the major phase of some of this systems implementation and we're really starting to engage in the execution, we're really spending a lot of time in focusing on where those opportunities are.
And I think what we've done is we continue to guide cautiously as to where we're going.
But we're very, very focused on the opportunities that we have.
And a couple of them that we have already begun is we continue to integrate some of our back office functions so they're more shared amongst our business units and then going forward, you know, we continue to see opportunities in our supply chains to minimize the touches and gain more benefit now that we have these systems in place.
Wayne Hood
So the benefit to get to that rate probably comes to fruition in '04.
Mike Koppel - Executive VP, CFO
I would say that's reasonable in that time frame.
Wayne Hood
Okay.
And then I know we're only supposed to ask one question, but let me me get another quick question in here.
The credit contribution for the full year looks like it might have been 14 cents versus 11 cents last year.
Is that true and can you talk about how you dealt reserves for the full year and maybe where the allowance at the end of the year?
Thank you, Mike.
Mike Koppel - Executive VP, CFO
I haven't really looked at the specific credit contribution now.
Historically, it's been about 10% or 11% of our bottom line.
It probably is a little better because our bad debt performance for the year was relatively better than last year.
Last year, not only, you know, were our chargeoffs increasing, but we were increasing the reserve levels.
This year, our chargeoffs were fairly stable and our reserves stayed stable.
I mean, we did not build the reserve, in fact, we ended the year with pretty much the same reserve as we started.
We pretty much just booked our charge offs.
We feel that reserve level is totally adequate in terms of what we're experiencing.
Wayne Hood
Thanks, Mike.
Mike Koppel - Executive VP, CFO
Sure.
Stephanie Allen - Manager Investor Relations
Allison, I think we have time for one final question.
Operator
Our final question comes from Robert Toomey.
RBC Dane Rouscher.
Robert Toomey
I have a couple of questions.
First, you mentioned that there were some slower-moving areas, particularly in women's.
And I wonder if you could comment on what you might be doing to stimulate traffic in some of the slower-moving areas.
Blake Nordstrom - President
I guess in general, women's businesses that tended to do the best were the ones that focused more towards fashion and contemporary and relatively youthful styling.
And that's not to suggest that we change our balance.
But I think what it does say is that again, it's important for us to have newness and flow and fashion in a balanced way for all the departments.
The biggest issues for the women's areas that underperformed are just finding ways, because we now have a lot better information about the inventory that we own, we can maybe take some of the slower-moving inventory and apply that to freshness.
And we're able to do more of that all the time.
So we're going to continue to build on that.
Robert Toomey
Okay.
Also, you mentioned earlier you're taking steps to improve buying decisions.
Can you comment on that a little bit?
What do you think are the key factors that will help you improve buying decisions, obviously outside of, you know, the improvement you're making in systems?
Blake Nordstrom - President
Well, yeah, the systems.
We think we know where that's going to take us.
But again, it's a little presumptious of us now to predict what that's going to mean.
But there's a fair amount of confidence that goes with having to work and build on the success of that.
So we've got that going forward with that.
I don't want to underestimate the fact that we've been able to be stable in our strategy, stable in our structure and who is doing what.
I think that's helped.
Where you look at the division where we've had the most success in general, they tend to have the more experienced people.
And we've had not a lot of turnover in the last couple of years in our upper merchandising ranks.
And I think that's going to bode well for us.
Robert Toomey
So you're keeping the best people.
Blake Nordstrom - President
Well, we think we are.
Yeah.
We have just been stable there.
And there's always opportunities in all the businesses.
But you know, we like the team we have.
And we think they're getting better than they were all the time and they're being enabled in ways they never have been before.
So it's an exciting time to be around here with merchandising.
Robert Toomey
And one more question for Mike.
Do you know what depreciation and amortization will be for fiscal '03.
Mike Koppel - Executive VP, CFO
You know, I'm really not prepared to share that at this point.
And I don't think we have perspectively shared that information in the past.
Stephanie Allen - Manager Investor Relations
We haven't, Bob.
And I can share that information with you later.
Robert Toomey
Okay.
Mike Koppel - Executive VP, CFO
Thanks for the question, Bob.
Stephanie Allen - Manager Investor Relations
Thanks for much for participating on our conference call this afternoon.
If you have any additional questions, you're welcome to contact me, 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 through 10:30 p.m. eastern on Sunday, February 23rd.
To hear the replay, please call 1-800-925-0735.
An audio replay of the conference call is also available via the internet.
To listen to the call over the internet, please access Nordstrom's website at www.Nordstrom.com.
Then click on the investors relations box on the bottom of the screen.
And next, click on the Q4 conference call link, which will guide you to the audio portion of the web cast.
The audio archive will be available through Thursday, March 20th.
Thank you.
And goodbye.