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Operator
Hello and welcome to the Nordstrom second quarter 2003 earnings release conference call.
At the request of Nordstrom, today's conference is being recorded.
I'd like to introduce Miss Stephanie Allen, Manager of Investor Relations for Nordstrom.
You may begin.
Stephanie Allen - Manager, IR
Thank you.
Good afternoon, everyone and thank you for joining us on the call today.
On the line with me this afternoon are Blake Nordstrom, President of Nordstrom, Inc., Pete Nordstrom, President of Full Line Stores and Mike Koppel, Executive Vice President and Chief Financial Officer.
This afternoon, Mike will lead off with a review of our second quarter results.
Blake will make a few concluding remarks and then we will open it up for questions.
Please note that any forward-looking statements we make in our remarks this afternoon should be considered in conjunction with the cautionary statements contained in our SEC filings.
Now, I will turn the call over to Mike.
Michael Koppel - EVP & CFO
Thanks, Stephanie and good afternoon, everyone.
We are happy with our second quarter results.
Strong sales momentum along with good inventory and expense disciplines combined to deliver our best operating margins in several years.
For the second quarter ended August 2, 2003, we reported earnings of 48 cents per share on a diluted basis compared to 27 cents per share in the second quarter of last year.
Last year's second quarter earnings included nonrecurring and impairment charges of approximately $16 million net of tax or 12 cents per share.
Excluding these charges, 2002 second quarter earnings per share were 39 cents.
Of this adjusted base, our 2003 second quarter earnings per share increased 23%.
The better than planned results were primarily driven by better-than-expected sales, which delivered meaningful leverage on both gross profit and operating expenses.
For the sake of our discussion today, the total and same-store sales details I'm about to provide are on a comparable 4-5-4 basis.
The corresponding GAAP numbers can be found in our press release, which is posted on our web site.
Sales trends were strong throughout the second quarter.
Total sales increased 7.9% to $1.8 billion, compared to the second quarter of 2002.
This increase was primarily driven by a 3.9% increase in comp store sales with the remainder coming from the additional 9 Full Line and 4 Rack stores that were opened since February 1st, 2002.
The second quarter is traditionally a promotional quarter for us, generating just under 30% of our yearly volume.
Our anniversary event, which features new fall merchandise is in July.
All of these events posted their third consecutive year of positive comp store sales.
The combined men's and women's half-yearly event generated a 2.4% comp increase and same-store sales for our anniversary event increased 6.5%.
Geographically, we are not seeing any notable changes in sales trends.
All of our regions posted positive comp store sales for the quarter.
The central states and east coast regions were relatively stronger with mid single digit comp increases.
The northwest and southwest regions experienced low single digit increases.
Our strongest performing merchandising divisions for the quarter were cosmetics, accessories, menswear and women's designer apparel, each outperforming the Full Line average.
Bridge, active wear, junior women's and intimate apparel all posted low single digit increases.
Our weakest divisions were women's special sizes and kids apparel.
It is difficult to quantitatively isolate the impact of any one of the numerous factors that influenced sales.
However, we believe that our perpetual inventory tools are beginning to have a meaningful impact on our business and the recent improvement in men's apparel is perhaps the most obvious example.
In the month of July, our men's business increased their sales $16 million with $18 million less inventory.
On a year-over-year basis, their markdowns are down, regular price selling is up and the aging of inventory has improved.
These are all solid indicators that inventory is being used more efficiently, that the inventory investment is returning more gross margin dollars and we're driving sales by having more of the right merchandise on our floors.
While men's is perhaps the clearest example, we're seeing signs of progress in other areas as well.
As a percent of sales, gross profit was expected to be flat for the quarter.
We assume that markdown pressure would carry over from the first quarter due to higher than planned inventory levels, offset by a lower year-over-year shrinkage accrual rate.
Our actual gross profit results improved 27 basis points or $51.3 million, compared to the same quarter of last year.
Markdowns were as expected for the quarter, but better than planned sales allowed us to leverage buying and occupancy expenses, ultimately driving our better-than-expected margin results.
Our SG&A performance for the quarter demonstrates continuing progress sustaining a higher level of discipline around expenses.
As a percent of sales, our expenses were 95 basis points lower compared to the second quarter of last year, excluding 2002 nonrecurring and impairment charges.
SG&A dollars for the quarter were lower than expected with across-the-board under planned expense performance, driving approximately 35 basis points of year-over-year expense rate improvement.
The remaining 60 basis points of improvement resulted from leverage on above planned sales.
Bad debt levels during the quarter were essentially flat with last year as both delinquencies and write-off showed signs of improvement.
We are monitoring trends closely and will make adjustments to our reserve as appropriate.
Service charge income increased modestly in the second quarter, primarily due to higher accounts receivable.
Net interest expense for the quarter was $26.1 million.
During the second quarter, we retired $43.3 million in debt, primarily our 8.95% notes due in 2005.
This activity resulted in $6.4 million in additional interest expense for the quarter and shaved 3 cents off our earnings per share.
We plan to take advantage of opportunities that allow us to reduce our debt to total cap ratio so long as we can do it in a value-creating manner.
We feel at this time this is a good use of our cash and helps us more quickly achieve our targeted debt to total capital range of 40% to 45%.
At quarter end, preliminary total debt and total capitalization on a book basis were approximately $1.3 billion and $2.8 billion respectively, resulting in a total debt cap ratio of 47.4%, comparing to 49.2% at the end of the first quarter.
There was no share repurchase activity during the quarter.
Total inventory at cost was down $20 million or 2% from year ago leveled and total inventory per square foot decreased 8%.
Comp store inventory at cost decreased $77 million or 8.3%.
Preliminary capital expenditures for the second quarter net of developer reimbursements totaled approximately $60.2 million, primarily for new store construction and information technology investments.
Depreciation and amortization for the quarter was $60.5 million.
We did not open any new stores during the second quarter.
So far in the third quarter, we have opened one Full Line store in Austin, Texas and two Rack stores, one in Florida and the other in downtown Chicago.
We are planning to open a Full Line Store in Richmond, Virginia in September.
Along with our new flagship boutique in Rockefeller plaza in New York City.
The last one will be in Florida in mid-November.
With regard to our performance outlook for the third quarter of fiscal 2003, we anticipate earnings per share in the range of 16 to 20 cents which compares to 14 cents for the same quarter last year.
This range is predicated on the following assumptions.
Low single digit same-store sales increase.
We are forecasting a flat gross profit rate as we anticipate the shrinkage adjustment that benefited third quarter margin last year will offset expected markdown improvement in the third quarter of this year.
At this point, we are assuming our mid-year inventory results are in line with plan.
Our SG&A rate is expected to decline moderately as we anniversary the incremental expenses related to new stores open in the third quarter of last year and continued progress in expense control.
We are expecting a $4 to $6 million increase in service charge income and a $1 to $2 million reduction in interest expense.
Our effective tax rate is expected to remain unchanged at 39%.
For the full year, our updated earnings per share guidance is $1.33 to $1.37.
Which compares to the prior year's $1.19, excluding nonrecurring and impairment charges.
The underlying assumptions for the full year outlook are as follows.
A low single digit same store sale increase, slight improvement in the gross margin rate, a slight improvement SG&A rate, $6 to $10 million increase in service charge income, a $4 to $6 million increase in interest expense and our effective tax for the year remains at 39%.
Now I'll turn the call over to Blake for some closing remarks.
Blake Nordstrom - President
Thanks, Mike.
We are encouraged by our second quarter results.
The right product, focused merchandising and solid execution of our sale events combined to drive strong sales trends throughout the quarter.
In addition, our team continues to demonstrate improved expense and inventory management discipline and we are able to deliver meaningful operating leverage in the quarter.
Our strong sales momentum, particularly our performance relative to peers, is gratifying.
It tells us that we are continuing to provide the merchandise and service our customers are looking for.
Our business is based on developing and maintaining strong customer relationships through distinctive quality merchandise, better service and by providing a pleasant shopping environment.
We continue to focus on this philosophy throughout our organization and in everything we do.
Now I'd like to talk more about the details of the quarter.
As Mike mentioned, our half-yearly and anniversary sales make this the second highest volume quarter of the year.
Improving our sale events was one of the priorities we set a couple of years ago and we are pleased with the results as each event has achieved comp increases for the third straight year.
Strategically, our approach to marketing and merchandising these events has not changed significantly.
But we have worked hard each year to improve our execution.
The most important factor in the success of our events is, of course, merchandise.
This year we believe that our results benefited from an unwavering focus on new fashion-right merchandise, strong item presentation and sharp pricing.
Our merchants made their right buys and our customer responded.
On top of that, our new systems helped improve the allocation and quantities of our buys.
Which is a contributing factor to our strong event results.
Our Full Line, Rack and direct businesses all delivered solid increases for the quarter.
Our direct segment continues to deliver impressive growth.
Strategically, we view direct as a meaningful compliment to our full-line stores.
We're working to more closely align our direct and Full Line offerings, while also delivering a consistent level of service across channels.
The Rack continues to compete effectively in the off-price segment and remain strategically focused at growth opportunities.
Our inventory position has improved at the Rack and we expect the resulting open to buy flexibility to deliver better results in the back half of the year.
Our expense and inventory performance this past quarter demonstrates that our organization is operating at a much more controlled and disciplined manner.
Not only are we developing appropriately-conservative plans around both expense and inventory, but we are executing effectively against those plans.
We like the progress we see and remain diligently focused on taking our performance to the next level.
We have mentioned the positive impact that our new systems are beginning to have on our business.
More success stories, large and small, are popping up every day.
We are aware that many of you are frustrated by our reluctance to communicate hard targets for the expense and gross margin improvements we expect from our significant investment in systems.
What needs to be understood is that we are still developing historical context to help us interpret the information the systems are providing.
We have only had accurate year-over-year comparisons for three months now.
We are increasingly confident internally, but until we have more data points to help us better understand at a detailed level where our specific opportunities lie and over what time horizon we expect to see improvements, we are reluctant to communicate specific goals externally.
As we said before, this is a learning process for us, to be successful in retail today, we believe there needs to be a balance between the art and science of retail.
And we are working hard to achieve that balance.
For us, that means adopting the right pace of change so we retain what makes Nordstrom special.
And what we believe sets us apart from our peers, yet continue to evolve and improve our core competencies.
Our team has been in place now for three years.
The priorities we set out for ourselves three years ago, driving top line growth, lowering expenses and upgrading systems, are the same priorities we remain focused on today.
We have worked very hard to derive sustained improvement in our business.
While the past quarter is an example of how far we've come, we are mindful of the fact that we still have a ways to go.
Nonetheless, our progress is encouraging and we remain enthusiastic about the future.
We do not intend to change course.
The entire Nordstrom team is committed to furthering our progress, by each and everyday working to reaffirm our brand and strengthen our competitive position, by remaining true to the core values of the Company.
Now, I'd like to open it up for questions.
Operator
Thank you.
The first question comes from Shari Eberts from JP Morgan.
Shari Eberts - Analyst
Good afternoon, everybody!
Can you please talk a little bit more about the anniversary sale, what drove the 6.5% comp increase, men's versus women's, et cetera?
And what particular categories really stood out?
Thank you.
Blake Nordstrom - President
I'll take that.
This is Pete.
I think when Blake talked about that we've stayed focused on the same strategic initiatives, I think that's pretty much true.
We didn't have a new philosophy getting into the sale.
I think it's just the experience level of the merchants that we have and our increased focus on a handful of others to allow us to execute better.
So, one of the things we've been able to do is build on some of the success we've had the last couple of years.
I think the information that we have now allowed us to allocate better initially, probably more than anything else helped us.
But in terms of the content of what we bought, what we're seeing increasingly is almost more of a seasonless kind of view of it.
Clearly this is a fall sale for us, but the stuff that was more appropriate to a late summer/early fall, a buyout mentality, seemed to do pretty darn well.
We had a big improvement in men's.
Most of that is attributed to the information.
Anything that you would really want to qualify as fashionable or newness and that's relative to each department, I guess, but that's where we seem to have the most success, giving the customer reason to buy something new has been really a key to success.
We continue to have a lot of strength in cosmetics.
We continue to have a lot of strength in accessories.
I think the interesting thing with accessories, that's a division we didn't repeat one item from the year before.
Everything we had there was new.
The anniversary sale often has a combination of the best stuff we've had in an ongoing way and the new stuff for fall.
I think the divisions that tended to lean more towards new and giving the customer reason to buy something new that seemed to play out pretty well.
Shari Eberts - Analyst
Okay, given the deeper penetration of the wear-now product in the anniversary sale versus prior years, do you think it still pretty much represents what your trend might look like for the fall season?
Blake Nordstrom - President
Well, that's hard to tell.
We get a lot of good indications because again, we're selling early fall there.
We have a good idea of the things we need to get back into.
Because it's very difficult to predict.
A lot of the stuff we're buying several months preceding the event.
So, I think we reaffirmed ourselves really what we think the hot categories are going to be.
So, yeah, it's a predictive indicator.
Shari Eberts - Analyst
Great, thank you.
Operator
Daniel Barry from Merrill Lynch.
You may ask your question.
Daniel Barry - Analyst
Thank you, good afternoon.
Congratulations on a great quarter.
If I heard you correctly, you said you were under planned on expenses pretty much across-the-board.
That's sort of unusual.
Can you elaborate on that?
Basically what programs are making that impossible?
Are you assuming plan or below-plan in your guidance for the year?
And are your merchandising technology in any way helping you in your expense control?
Michael Koppel - EVP & CFO
Hi, Dan, this is Mike.
In terms of expenses, we've been working hard for a while on making expense discipline a core competency in the Company and I think what we're starting to see is an across-the-board awareness of controlling and monitoring expenses and using some of the new tools and information to stay close to it.
I will tell you some of the bigger categories that drove our improvement were our IT expenses, which continue to come down and are coming down at an accelerated rate.
We had really good progress in our cost to distribution, which last year we had some challenges with all the system changes and this year we're starting to see the benefits of using those tools.
We continue to maintain good controls over our selling costs, which had improvement.
And then I could tell you in mostly every other functional category in the company, we came in below plan.
And what that did is that allowed us, obviously, basically to flow through the gross margin dollars to the bottom line with very little incremental expense.
In terms of the technology, yes, the technology is starting to help.
As I mentioned in the area of the distribution centers, we're seeing that progress.
I think just in terms of the timeliness and improvement we have in information, it's allowing to us better see what's happening within our business and to act upon it quicker, but I will also qualify by saying, we're just starting to do that.
We have a ways to go but we feel like we're making the right amount of progress and in terms of the guidance for the rest of the year, we're maintaining pretty much where our internal plans are slightly better as we look at the balance of the year.
Daniel Barry - Analyst
Great, thank you.
Michael Koppel - EVP & CFO
Sure, Dan.
Operator
The next question comes from Linda Kristiansen from UBS.
Linda Kristiansen - Analyst
Hi, good afternoon.
I had a couple of questions.
One, could you talk a little bit about private label?
And how that category performed or how that area performed?
Blake Nordstrom - President
This is Pete.
As you know, we have private label over a pretty broad spectrum of merchandise offering in our stores.
To try to quantify it on the whole, it's difficult to do.
We had some good performance in private label, I'd say specifically, men's did well, most of that, again, just the Nordstrom label that we had.
We had good results, again, with halogen and DVD department.
On the whole, the private label performed pretty well, but it is broad enough where some things are better than others.
Linda Kristiansen - Analyst
I was specific about Teflon.
There is a lot of that being marked down.
Are you happy with them or has that been a problem?
Blake Nordstrom - President
Calaphalon, we've seen a problem there.
We're selling more suiting, that's an indicator we received with the anniversary sale.
The more career dressing and suiting is pretty good and there is a pretty good core balance of merchandise in the category.
That performed well.
We've got some things we can build off there.
So, I think we're hopeful about what's going on with Calaphalon.
We've had some markdowns in the first part of the year.
Most of that was overbought there.
Linda Kristiansen - Analyst
I don't know, on private label most of your competitors say it's been pacing their sales or at least running well ahead of their average sale.
Would you say that's true for you, as well?
Blake Nordstrom - President
Again, it's pretty broad.
I think when you roll it all up in total, it's probably just a little better than average -- than the domestic goods we receive, but not a huge difference.
Linda Kristiansen - Analyst
Okay, and just on your new stores, or stores that have been underperforming.
Can you elaborate on what you've been doing to get them up to speed?
I think there were three you're working on this year?
Blake Nordstrom - President
We're taking on what we call focus stores and we selected a handful every year to do.
We did, what, two last quarter?
And have two coming up next month that we're going work on.
And where we've done that over the last year and a half or so, we've had the ability to be able to impact results positively really compared to the overall trend and in many cases, stem the tide of some stores where we've been going the wrong direction and moving into positive comp increases.
We're encouraged by that.
The building for us to be successful there means that we still have to look at it as a focused store so we're not taking on all the stores at once, because you can't ply the appropriate amount of energy to it.
We have to do a handful a year so we can do the right things for the store, but it's working well.
Linda Kristiansen - Analyst
I have one other question.
You talked about I think it was service charge income and something about taking away 3 cents a share.
Could you just repeat that?
Michael Koppel - EVP & CFO
Oh, Linda, this is Mike.
That was interest expense.
Linda Kristiansen - Analyst
Okay.
Michael Koppel - EVP & CFO
I mentioned that we retired some debt early this quarter and the impact of the prepaid interest was 3 cents.
Linda Kristiansen - Analyst
Oh, great, okay, thank you.
Michael Koppel - EVP & CFO
Okay.
Operator
Jennifer Black from Wells Fargo, you may ask your question.
Jennifer Black - Analyst
Good afternoon.
And congratulations, as well.
I have a few questions, I wanted to know first, with the sale, I was curious to know if the IMU/value price relationship was pretty much the same as last year across-the-board?
Blake Nordstrom - President
Well, our methodology there didn't change much.
In general, it was pretty similar.
But we're always looking for ways on the anniversary sale to try to deliver the most amount of value possible, rather than finesse our way through with some sort of markdown scheme.
So, we had every division really participate with an item or two or three that they went really tight on the margin there and almost in kind of a loss leader approach and where we did that, we have had a lot of success, so, we will continue to build on that.
I think we're always going to apply pressure on anniversary sale to represent as much pressure as we can.
Jennifer Black - Analyst
I think that was really something that made you very successful and then also, I was curious to know if you look at the return ratio because I would think that it would be pretty low compared to last year?
Or even prior years?
Michael Koppel - EVP & CFO
You mean customer returns?
Jennifer Black - Analyst
Yes.
Michael Koppel - EVP & CFO
Well, we haven't looked at it for that short a period.
We tend to look at that stuff at the end of the year --
Jennifer Black - Analyst
Okay, I --
Michael Koppel - EVP & CFO
It doesn't vary much.
I don't have any information for you in terms of how it worked out on the anniversary.
But on the price thing, back to your previous comment, the sale period is one thing, but in general, our general overall pricing situation and results and average cost of units and all that stuff is almost identical to last year.
Jennifer Black - Analyst
Okay.
I kind of thought that, but the merchandise really looked great and then you just had one catalog this year versus four, is that correct?
Blake Nordstrom - President
We had two this year.
We cut it north and south rather than east and west and south and all that.
And what we continue to learn over time is that there's more similarities than differences, at least in the catalog.
The best stuff tends to be stuff.
So, we will look at how to make that the most efficient it can be.
Jennifer Black - Analyst
Okay, and one other question.
It seemed like the sale was busier through the very end more than I think I've ever seen and it also seemed like I was hearing that it was difficult to get merchandise at the end because -- and there's still merchandise coming for customers that bought it during the sale and I just wondered how the systems were working and were you expecting that kind of business?
Blake Nordstrom - President
Well, our sales exceeded our plans.
So, I don't doubt in many cases that we ran out of stuff prior to than we thought we would.
It happens every year, there is at least a handful of things that sell better than you predict and we scramble around to get more and get the customers taken care of.
I don't doubt there's lots of customers and lots of items out there that we're trying to get back into to deliver the promise of the anniversary to the people when they were in here during the event.
But it happens any year.
I don't think it's anymore than it's ever been, other than we exceeded our sales plan by a fair chunk, so it put more pressure on that.
Jennifer Black - Analyst
One last question, I don't know if you thought about this or not, but we've been in an environment, it seems like, where the consumer buys something and the next week or two weeks it's marked down.
Do you think that your sale is becoming more of an event because people know that it's going to be marked up?
Blake Nordstrom - President
Can you repeat the last part of that again, Jennifer?
Jennifer Black - Analyst
I'm curious to know that if you think -- I think people are tired of buying merchandise and then seeing it marked down the next week or two.
And I'm curious to know because your sale is so differentiated that people wait for this because they know that the merchandise will be marked up after the two-week period.
Blake Nordstrom - President
Well, that's the strategy.
I mean this sale is different and we spent a lot of years and time trying to articulate what that difference is, but the biggest thing, customers know, they come in, the ones that shop with us regularly understand what the sale is about.
I will tell you that this year was the best door and kind of anticipation and initial rush of customers that I've experienced or any of us experienced in quite some time.
We had a lot of people waiting to get in the doors the first morning.
I think that indicates that what we had to offer was compelling.
The whole premise of what the sale is compelling to the customer.
So, we're encouraged by that and will continue to build on that in further years.
Jennifer Black - Analyst
You guys are doing a great job.
I did my damage.
Thanks a lot.
Blake Nordstrom - President
Thanks, Jennifer.
Thank you.
Operator
George Strachan from Goldman Sachs, you may ask your question.
George Strachan - Analyst
Thank you, let me add my congratulations.
Mike, you cited some very interesting numbers on the men's business and frankly I didn't get them all written down.
Sales up $16 million in the category on $18 million less inventory in July.
If you could sort of repeat the rest of that, I'd appreciate it.
And I wondered, is men's ahead of the curve on PL or is it simply the nature of the category?
Or is the kind of experience you expect to see replicated in other categories?
And is there a rollout effect here?
Or how is that happening?
Michael Koppel - EVP & CFO
Well, George, my comments after those, quoting the sales and inventory, were qualitative comments around markdowns -- that markdowns were down, regular price selling is up and the aging of inventory has improved.
I didn't quote anymore numbers after that.
In terms of what's happening in men's versus others, our men's business has been challenging for a number of years now and quite frankly, the leadership in that area took very seriously using these tools to try to get the business back on course.
And our leader in that area, David Whitman, has done a terrific job of getting his organization behind the tool, ensuring that they're using it consistently and finding new ways to use it and edit out underperforming inventories and putting in inventory dollars that are working.
This is not inconsistent with what's happening in other areas, but I will say that overall that area is probably the most further along.
This is happening in other areas of the business at various degrees.
We continue to have essentialized training program out there that's driving this process.
And the other thing that's happening is it's just the nature of wins.
We start to get more and more wins on this and the momentum is building.
People are realizing the benefit of using this tool and it's a starting to gain some real traction.
And I think that's the story right there.
George Strachan - Analyst
And there's nothing about the category itself that is to say the replenishment aspect of men's shirts and that sort of thing to make this category different in that respect?
Blake Nordstrom - President
Well, I think that's true.
This is Pete.
I don't know if base is the right word, but there's a lot of core elements in the men's business that's more replenishment oriented.
I think that really make a big difference, not only with the inventory ownership, but our ability to sell things.
I think it's fair to say that that contributes to their success, as well.
I would reiterate who Mike said, the men's division has really taken the lead, for whatever reason, on embracing this information and the technology and they deserve a lot of credit for that.
It's kind of fun now to have someone out there, taking the lead in the other merchandise divisions, taking a look at the results they're having and finding ways to sign up for the same benefits.
It's been good for us to have success there.
George Strachan - Analyst
One other question, I'm sure you noticed that the Lord and Taylor division is being trimmed down a bit at May.
And frankly a lot of the sourcing of their clothing appears to be in southern markets and markets they call remote from the core.
I wondered if there's any thought to cut back on some of the recent expansion at Nordstrom or are you pretty pleased with what you're seeing there?
Blake Nordstrom - President
Well, as you know, George, we have slowed down our growth, we're opening four new stores this year, but over the next couple of years, it's slowed down to anywhere from one to three stores a year.
And so, we're being a lot more disciplined over -- over our site selection and our investment there.
I wouldn't say that anything has changed in terms of how we view it since the Lord and Taylor announcement, though.
George Strachan - Analyst
Are there any disparities in store productivity that really stand out here and maybe create an opportunity to improve return on assets?
Blake Nordstrom - President
Well, frankly at this point, we have any stores that we are considering closing in Full Line at this point in time.
George Strachan - Analyst
Thank you.
Operator
Christine Augustine from Bear Stearns.
You may ask your question.
Christine Augustine - Analyst
Thank you.
Could you please provide us with an update on the installation of the new POS system?
Thank you.
Michael Koppel - EVP & CFO
Sure.
Christine, this is Mike.
We, right now, have 15 stores that are rolled out in our new point of sale systems.
We opened a new store last week in Austin, Texas, using the new point of sale.
Our plan is that by the end of October, prior to the holiday selling, we will have 40 stores live.
At that point, we will suspend any implementation and pick it up after Christmas.
We've been very happy with the results, we piloted it in one store here in Seattle.
We worked through some issues and at this point if time, we're working forward.
Christine Augustine - Analyst
Great.
So, Mike, will you by, say this time next year, then, do you anticipate having all Full Line Stores on that system?
Michael Koppel - EVP & CFO
Yes, by pre-holiday '04, which is sometime in October.
Christine Augustine - Analyst
Great, thank you.
Operator
Philip Guston from CSFB, go ahead.
Philip Guston - Analyst
Yes, good afternoon, everybody on the line.
Congratulations.
Have a couple of housekeeping questions since I was kind of late on the call.
Did you disclose at all what your total debt was at the end of the quarter?
And what Cap Ex was?
Michael Koppel - EVP & CFO
I didn't.
I didn't share the debt number at this point.
But I can, I think the Cap Ex was $16 million and the debt's a little bit below $1.3 billion.
Philip Guston - Analyst
Okay.
Wonderful.
And then did you comment at all on the quality of the credit card portfolio?
And the trends you've seen there throughout the quarter?
Michael Koppel - EVP & CFO
Yes, I did and my comment was that we've seen improvement in our delinquency and our charge-off and are still staying close on it, but don't see any risk at this point if time.
Philip Guston - Analyst
Okay.
And then a question based on previous calls.
I mean you currently still have a negative outlook from both rating agencies.
Michael Koppel - EVP & CFO
Uh-huh.
Philip Guston - Analyst
Have they at all told you what exactly it will be that they need to see before they will change at least as a beginning that that negative outlook at least?
And I'm particularly referring right now to Moody's, which has given you the lowest rating.
Michael Koppel - EVP & CFO
Yeah, well, at this point in time, we have been staying the course on saying we needed to improve our comp sales and improve our expenses and it's starting to pay off.
I think from a credit agency point of view, we're kind of categorized within the sector, which is getting a closer eye right now.
But hopefully the continuous improvement we've had in comp sales and operating performance will convince them to change their point of view.
Philip Guston - Analyst
Wonderful, thank you very much and good luck with the upcoming holiday season.
Michael Koppel - EVP & CFO
Thank you.
Operator
Next is Dorothy Lakner from CIBC World Markets.
Dorothy Lakner - Analyst
Thanks and good afternoon, everyone.
Congratulations on a great quarter.
I wondered if you could you share with us some of the other areas besides men's where you said you were seeing some signs of progress using the perpetual inventory system.
And then a second question, just relative to what you're seeing from the customer, obviously your sales results show that the customer is responding to what you're doing but what's your perception of kind of the larger macro picture and what you see as we head into the second half of the year?
Blake Nordstrom - President
In terms of the departments that have embraced the technology, seem to be farther ahead.
Men's is probably the farthest ahead.
The other division is what we call specialized, inclusive of women's and women's intimate apparel, active apparel and hosiery.
That leads the merchandise effort for us, used to be the person that was the leader of the technology effort and implementing it through the company.
So, she's pretty well versed on what's possible there and also, the product category lends itself well in more of a replenishment-type of scenario to render these results.
I think it's fair to say that all of the divisions have had success there.
We're trying to give you a flavor of who might have had the most remarkable results to illustrate it, but they're all on board and everyone's coming along.
Cosmetics is another one with good results.
I just shared information with them yesterday that was encouraging about how we're able to flow merchandise to the distribution center with a lot more efficiency.
It's been good; it's paying off.
So, I don't want to get too far ahead of this.
I think we're appreciative of the benefits that we're getting.
We're still pretty young on this process and we're got a ways to go.
But the indicators are good.
So, we will keep moving forward with that.
I'm trying to remember the second part of your question.
Is that what categories --
Dorothy Lakner - Analyst
Just about the tone that you're seeing from customers, I mean a lot of retailers talk about the spottiness of traffic and a customer that's fairly fickle, but obviously you're seeing a customer who's responding to what you're doing and certainly a lot of the credit is due to you, but is your feeling that you're seeing just a generally better tone because of economics factors as we head into the second half of the year?
Is your customer, perhaps because they're more affluent, also feeling better and it's partly that's driving the results?
Blake Nordstrom - President
I don't think anyone at Nordstrom is in a position to be able to comment on the external economic factors.
We're just doing the best we can with the hand we're dealt and we're going to try to concern ourselves with the things we have control over.
I think there are a lot of things we can continue to do to gain market share out there.
There are people buying stuff in other stores and we want to continue to gain market share.
I'm not comfortable to talk about the economic factors.
It is what it is.
I think we had increased traffic but I think that's because of what we had control over in our execution of the stores.
What was the second part of that one, too?
Was that it?
Dorothy Lakner - Analyst
I think that was it.
Blake Nordstrom - President
Okay.
Dorothy Lakner - Analyst
Thanks.
Blake Nordstrom - President
Thanks, Dorothy.
Dorothy Lakner - Analyst
Thank you.
Operator
Dana Cohen from Banc of America Securities.
You may ask your question.
Dana Cohen - Analyst
Hey, good afternoon, guys, and congrats!
A couple of questions, on the men's side, can you just give us some illustrations of sort of how you re-orient given what you learned from the system...
Blake Nordstrom - President
I didn't hear all of that.
How we re-orient what?
Dana Cohen - Analyst
The assortment.
Blake Nordstrom - President
Well, most of what Mike kind of touched on.
We know we have the ability to look at historical data.
You can see, for example, gee, we spent "X" amount of inventory dollars on this vendor or category yet it resulted in this amount of sales.
If we have a disconnect there, we have a chance going forward to right size our application to be more measurable to sales.
When you add all of those things up for the size of that business that men's is, it makes a pretty healthy difference.
Again, I'm not exactly sure to answer it really beyond that.
Michael Koppel - EVP & CFO
That's basically what it was.
It was really an exercise of editing our dollars and putting dollars in areas that are performing better than others and taking out vendors and/or styles that aren't performing.
Dana Cohen - Analyst
Okay.
And then on SG&A, Mike, the SG&A dollars, the growth rate in Q2 came down dramatically.
Michael Koppel - EVP & CFO
Yep.
Dana Cohen - Analyst
It's now looking more like a mid single digit growth rate.
I mean is that the type of ongoing SG&A growth rate we should be thinking about?
Michael Koppel - EVP & CFO
Yes.
Dana, what's happening there is the fact that we're starting to anniversary all of those new stores that we opened last year and so the gap between this year and last year's expenses are narrowing and will even more in the third and fourth quarter.
Dana Cohen - Analyst
So, we could see possibly less in terms of growth rate than what we saw in Q2?
Michael Koppel - EVP & CFO
Yes.
Dana Cohen - Analyst
Okay.
Great.
Thank you.
Michael Koppel - EVP & CFO
You're welcome.
Operator
Robert Toomey from RBC.
You may ask your question.
Robert Toomey - Analyst
Thanks.
Hi, good afternoon.
Mike, were you free cash flow positive in the quarter?
Michael Koppel - EVP & CFO
Yes, we were.
Robert Toomey - Analyst
Okay.
And just for my benefit, I apologize for asking this, but I got on the call a little bit late.
But did you give guidance for the full year?
Michael Koppel - EVP & CFO
Yes, and Bob, it's in the press release, as well.
Robert Toomey - Analyst
Okay, I can pick it up there.
And also, the question about private label came up earlier in the call, can you comment at what percent of your total sales right now is private label versus men's and women's?
Do you ever break those out as a percent of total sales?
Blake Nordstrom - President
Well, we have a pretty good idea.
Yes, we know.
I'm not really comfortable talking about that.
Michael Koppel - EVP & CFO
We don't share that.
What we've done is shared the total private label, which is about 17%, 18% of our total.
Blake Nordstrom - President
Right.
Robert Toomey - Analyst
Okay.
And --
Blake Nordstrom - President
It varies division by division.
Robert Toomey - Analyst
Okay.
And the last question is -- going forward, what are the most critical technology implementation that you can do over the next couple of quarters that you think will benefit your business, more of the same?
Michael Koppel - EVP & CFO
Bob, this is Mike.
It's the completion of the point of sale rollout.
Robert Toomey - Analyst
Okay.
Michael Koppel - EVP & CFO
Which is going to be complete next fall.
And the other thing that's happening right now, too, is we are in the process of implementing a new human resource management system, which will help us in the years ahead better manage our payroll dollars.
Robert Toomey - Analyst
Great, thank you very much.
Stephanie Allen - Manager, IR
I think we have time for one more question.
Operator
Jeffery Feinberg from JLF Asset Management, you may ask your question.
Jeffery Feinberg - Analyst
Thanks very much.
Congratulations, guys, terrific, terrific results!
Just wanted to understand two things, number one is I know obviously we're not talking any time frames, but you've, in the past, given some indications, you know that there might be potential to get your pretax margins, 6% to 7%.
Some of the competitors, May and others are in this type range.
Given the dramatic-type improvements you're seeing, is that a reasonable way to think about the long-term potential or might it be a bit better?
Michael Koppel - EVP & CFO
Jeff, this is Mike.
We've been stating for a while that our median term goal is 6% to 6.5% pretax margin.
We're not waving from that at this point in time and not changing it based on one quarter at this point in time, either.
Jeffery Feinberg - Analyst
Okay.
And just to be clear that is pretax, after the service income and interest.
Michael Koppel - EVP & CFO
Yes, that's correct.
Jeffery Feinberg - Analyst
Okay.
And the other question is when you think about the comp guidance that you've given, in terms of comparisons, on a two-year basis, the back half of the year is much, much easier in terms of comparisons to the quarter we just finished because when you look back in the second half of '01, you had quite negative comparisons, down 6% Q3, down 3.5 Q4.
I'm sort of curious, when you're doing your planning, do you look back at the historical productivity and how easy that might make the comparisons?
Michael Koppel - EVP & CFO
Yes, we do.
We do that.
And I think as we stated earlier, I think Blake mentioned that we are working very hard to keep our plans very prudent to ensure that if we do have better than planned results, we can flow through to the bottom line.
The low single digit is a good representation of how we feel about the business at this point.
If it does better, hopefully our performance will be leveraged.
Jeffery Feinberg - Analyst
Terrific.
Thank you so much.
Michael Koppel - EVP & CFO
Okay.
Stephanie Allen - Manager, IR
Thank you very much for participating in our conference call this afternoon.
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Thank you and goodbye.