諾德斯特龍百貨 (JWN) 2003 Q3 法說會逐字稿

Welcome to the Nordstrom Third Quarter 2003 Earnings Release Conference Call.

All lines will be in a listen-only mode until the formal question-and-answer session.

If you would like to ask a question, simply press star one.

At the request of Nordstrom, today's conference call is being recorded.

I would like to introduce Ms. Stephanie Allen, Manager of Investor Relations for Nordstrom.

Miss Allen, you may begin.

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 and Chief Financial Officer.

Blake and Mike are joining us today from our store in Scottsdale, Arizona.

This afternoon Mike will lead off with a review of our third quarter results.

Blake will make a few concluding remarks and we will open it up for questions.

Please note that any forward-looking statements we make should be considered in conjunction with the cautionary statements contained in our SEC filings.

Now I'll turn the call over to Mike.

Thanks, Stephanie.

And good afternoon, everyone.

We are very pleased with our third quarter results.

Earnings per share on a diluted basis were 33 cents, more than double the 14 cents in the prior year.

Strong sales momentum combined with a significant improvement in both gross profit and operating expenses resulted in about 300 basis points of pretax margin expansion in the quarter.

This performance is consistent with ongoing efforts to improve disciplines over capital, both inventory and expense and flow more incremental sales dollars to the bottom line.

For the sake of our discussion today, the total and same store sales details I'm about to provide are on a comparable 454 basis.

The corresponding GAAP numbers can be found in the press release, which is posted on our website.

Sales trends were strong throughout the quarter.

Total sales increased 9.8% to 1.4 billion, compared to the third quarter of 2002.

This increase was driven by a 5% increase in comp store sales, with the remainder coming from the 11 new full line and six rack stores that were open since February 1st, 2002.

Geographically we are not seeing meaningful variation and performance.

All regions posted positive comp store sales for the quarter.

The Northwest, Central States and East Coast regions all achieved mid single digit comp increases.

The Southwest had a low single digit increase.

Our strongest performing merchandise divisions for the quarter were cosmetics, accessories, menswear, shoes, women's designer apparel and women's activewear , each outperforming the full line average.

The only decreases for the quarter were in women's special sizes and kid's apparel.

We opened two full line stores in the quarter, one in Austin, Texas and one in Richmond, Virginia.

And two rack stores, one in Florida and the other in downtown, Chicago.

Our last planned opening of the year was last Friday, a full line store in Wellington Green, Florida.

In total, our expansion this year resulted in a 4% increase in gross square footage.

Third quarter gross margin improved 180 basis points, or 58.2 million compared to last year.

This is significantly better than expected and primarily the result of strong sales and lower mark downs.

Approximately 100 basis points of the improvement was due to sales leverage on buying and occupancy expenses.

The remaining 80 basis points resulted from favorable mark down performance throughout the quarter, driven by strong sell throughs and well managed inventory levels.

Our SG&A performance for the quarter continues to demonstrate progress, sustaining a higher level of spending discipline.

As a percent to sales, operating expenses improved 110 basis points, compared to the prior year.

Primarily due to leverage on better than planned sales.

Overall we are seeing well managed expenses across the board.

The most notable declines versus the prior year were IT and supply chain costs.

IT expenses were lower as a result of moderating technology spending combined combined with declining overall maintenance and support costs.

The supply chain reductions relate to the warehouse management system we installed last year.

System efficiencies are beginning to benefit our distribution centers and we are seeing lower labor expenses relative to both plan and last year.

Our service charge and other income increase 7.6 million, slightly more than expected.

About half of the increase was due to higher credit sales.

The other half resulted from two fixed asset gains related to the relocation of our Alderwood store and our New York Facconnable boutique.

Bad debt expense for the quarter was lower than last year and both delinquencies and write off trends remain stable.

We continue to closely monitor trends and will make adjustments to our reserve as needed.

Our debt to total capital ratio benefited from debt buy back activity during the third quarter as we were able to retire 62.4 million of our 8.95% notes due in 2005.

At quarter end, preliminary total debt and total capitalization on a book basis were approximately 1.2 billion and 2.7 billion respectively, generating a total debt to capital ratio of 45% in line with our target range of 40 to 45%.

There was no share repurchase activity during the quarter.

The debt retirement activity increased net interest expense for the quarter 7.9 million or 3 cents per share to 26.7 million.

Total inventory at cost was down 89 million or 7% from year ago levels and total inventory per square foot decreased 11%.

Comp store inventory at cost decreased 100 million or 9%.

The inventory reduction in the third quarter is a reflection of ongoing inventory management improvement, resulting from better execution, planning and discipline.

Essentially we are doing a better job maintaining planned inventory levels.

In addition, we are making better decisions about where and how to invest our inventory dollars.

Improving the content of our inventories is allowing to drive more volume with less inventory.

Preliminary capital expenditures for the quarter net of developer reimbursements totalled approximately 64.4 million, primarily for new store construction and information technology investments.

Depreciation and amortization for the quarter was 61.8 million.

We just finished updating our three-year capital plan for 2004 to 2006.

During this time frame, we are planning to invest 725 to 775 million on a net basis, which is in line with our 2003 through 2005 plan.

Approximately 60% of this investment will be in new and existing stores and approximately 20% will go towards information technology investments.

The remaining 20% includes maintenance an other miscellaneous spending.

With regard to our performance outlook for the fourth quarter of fiscal 2003, we anticipate earnings per share in the range of 54 to 58 cents, which compares to 44 cents for the same quarter last year.

This range is predicated on the following assumptions: A two to four percent increase in same store sales, both gross margin and SG&A are expected to improve moderately on a percent of sales basis.

We're expecting a 1 to 2 million increase in service charge income and a 2 to $4 million reduction in interest expense.

Our effective tax rate is expected to remain unchanged at 39%.

In combination with our year to date actual earnings, this yields a full year EPS estimate of $1.55 and $1.59 for 2003, which compares to $1.19 in 2002, excluding non-recurring and impairment charges.

I'll turn the call over to Blake for some closing remarks.

Thanks, Mike.

As Mike mentioned, we're encouraged about our results this is past quarter.

As well as the progress we have made so far in year.

Our entire team has been focused on improving our overall performance and in many respects we are starting to see our efforts pay off.

For the second quarter in a row, we have successfully translated above plan sales into improved bottom line performance through effective management of both inventory and expenses.

Our results for the past two quarters represent exactly the kind of performance that we are working hard to sustain and we are increasingly confident that with continued emphasis on both merchandising and operating improvements, we will achieve our stated expense and margin goals.

Driving volume has been one of our key areas of focus and our monthly same store sales results clearly demonstrate progress.

Our underlying trend for the past 18 months has a positive low single digit growth and we have outperformed our peers throughout this time period.

In the third quarter, our sales momentum accelerated despite more difficult comparisons.

It is gratifying to see our two and three-year comp trends both positive and improving.

It's our customers telling us that they are continuing to provide -- that we are continuing to provide the merchandise and service they are looking for.

So while we are working diligently behind the scenes getting our business leaders focused by reducing expenses and integrating systems, we are working equally hard to make sure our sales people remain singularly focused on providing a quality experience for each customer who walks through our doors.

With the perpetual inventory implementation now completed, our attention is turned to realizing a return on our investment.

With each passing quarter, we are seeing our inventory productivity improve.

The most tangible proof is our mark down performance, which has been better on a year over year basis for the past five months.

Each of our merchandising divisions have now experienced some degree of tangible benefit that relates directly to perpetual.

In fact, sell through, markdowns and inventory churn are three key metrics for the majority of our divisions are seeing year over year improvement.

Going forward, the biggest opportunity we see to drive volume and gross margin gains is by improving inventory flow and enhancing the content and mix of inventory in every store.

In this area, we are expecting ongoing progress in the years to come.

With many of our new systems now in place, we have more detailed information and are working to use that information to make more informed decisions in all aspects of our business but at the end of the day, systems are just a small piece of the story.

A contemporary solution to complement what we already do.

The core values of our company revolve around people.

Our success hinges on the product they select and the service they provide.

These are the fundamentals that ultimately differentiate Nordstrom.

Our entire team is firmly committed to furthering our progress and strengthening our competitive position by remaining true to the core values of the company.

Now I'd like to open it up for questions .

Thank you.

If would you like to ask a question at this time, simply press star one on your touch phone telephone keypad.

If you are using speaker phone equipment, please pick up the handset before pressing star one to register your question.

Our first question is from Patty Edwards with Wentward -- Wentworth Houser.

You may begin.

Great quarter.

Question for you, there's been a lot of speculation about some of the Lord and Taylor stores.

Are you ready to comment about any that you may be taking on?

This is Pete.

Well, we're interested and we're looking around a little bit but we're not at liberty to speak about anything specifically, other than we're aware of what's available and we're trying to decide what's the best way to go forward.

So that we really don't have anything to announce other than we're looking at it.

Okay.

Thanks.

Thank you.

Our next question comes from Kristine Augustine with Bear Stearns.

You may begin.

Thank you.

Could you discuss some of the stores -- say the stores that have opened in the last five years, maybe, you know, some markets where you perhaps were entered, you know, on a premature basis, how has the focus been?

I know you sort of isolated maybe a handful of those stores this year to really focus on.

Can you give us any kind of update there?

I'll take that.

This is Pete again.

We have had some success with this.

We've done it the last couple of years, picking a handful of stores to go deep on.

It has to do with a certain amount of potential that the demographics would suggest for that market or we used to do more sales than we currently do.

In either case, it's just represented an opportunity for us to go in and try to rededicate ourselves to that.

So we've had some success with that.

I think for it to work, we have to continue to not do too many.

So we do about four a year.

And there's versions of that get played out in the registers that gate extended to other stores, but we tend to go deep on about four stores a year.

That's where we kind of bring the collective energy of more corporate kind of approach there, the merchandisers and everything there.

So we continue to be encouraged by that.

We still believe we have a lot of opportunity there and there's a lot of stores lined up to -- wanting to one of the four to get that kind of attention.

So do you have any plans to accelerate that or do you think you will keep to that small number

Like I said, I think the pace of that that's pretty good.

The idea is to be able to focus.

If you do too many it's difficult to focus.

You know, if we could take on more, perhaps we will and then we don't have as many new stores coming up in the next year or two so I guess maybe it's possible that we can take on more where we've had a lot of store opening activity as well.

But aside from that, again, you get a bit of a halo effect on this.

There's -- regions of taking those ideas and applied them to other stores.

Each region tries to do a version of it with one store within the region.

We have 10 regions out there.

So if you think about it, it's happening in more than just four.

Four are the ones -- at least at this point are the ones that we're going deep on.

Do you -- based on this performance so far, especially this year, did you have any thoughts about accelerating or re-accelerating your footage growth?

Patty, this is Mike.

At this point in time, we are -- we're going to look at any opportunity we have going forward but right now our capital plan reflects a square footage growth in the 2 to 3% range and then certainly, you know, beyond that we'll look to see if there's any additional opportunities.

I would just add one other thing Pete's comments and to share with you that our stores that are five years old or newer from a comp point of view, are performing stronger than the older base, so I think the efforts that Pete and the team have put in are starting to pay off and improve comp performance.

Thank you.

Thank you.

Our next question is from Shari Eberts with J.P. Morgan.

I just wanted to dig into the sales momentum very bit.

Obviously very strong over the last 18 months versus peers.

Can you talk about what you think is driving, is it merchandising or service or both and then looking out to the spring with the launch of a number of new women's lines and better, what impact you think that might have on your business.

You want me to take that?

Pete.

Yeah.

You know, I guess it's a combination of all those things.

For us, one of the things that's helped is that for the last few years we've been consistently focused on a handful of initiatives and strategies, rather than changing all the time.

I think we've just done a better job of getting our arms around it and stay focused rather than changing the course, which we were a little guilty of several years back.

So I think that that's contributed to it.

The people on the job leading the different merchandising efforts, we haven't had much turnover there.

They've got another year in the job, another two years in the job and I think we just improved.

So there's a content part of it clearly that helps.

The professional inventory information where we're starting to get some benefit from it, we can identify what's performing and what's not performing and it seems like pretty obvious stuff but, you know, with the size of the base of inventory that we have, the subtle adjustment that is we can make there are proven to be helpful.

You know, I think there's obviously an improved retail climate out there because we have pretty consistent results across the different regions and even with the merchandise divisions, about 90% of what we have going on are running increases, so just the whole general thing is -- has improved.

I'd like to think that we deserve come of that credit at least but I I don't doubt there's some more economical factors that are helping us too.

And then the next part, what was the next question?

Looking out to the spring, there's going to be a number of new launches in women's better apparel and I was wondering how interested you are in terms of penetration within your business and what impact you might see on your business or the industry with that.

Well, I think it's really exciting for us.

You know, it just represents an opportunity to try something new and the customer is going to benefit from that.

There's -- Lauren is a big giant brand and what's happened there is just given an opportunity for other things to come to the table and create choices and so we're just really looking at it as an opportunity to try some different things and chase really what we believe to be the most successful.

We're -- we've got a handful of different brands that we're going to try and we're really not locked into anything, which is kind of good, I think from our point of view and we're going to -- I guess to sum it up, we're encourage add by it.

We think it's going to be a benefit to the business but there is a certain amount of unknown because there's a lot of new things happening.

Okay.

Great.

Thank you.

Thank you.

Our next question is from Theresa Donahue with Newberger You may begin.

Hi.

I had questions --

Hi Terry.

Hello.

Do you -- the expense gross was very impressive this quarter.

How should we be thinking about it in dollars going forward, particularly with your indications on the distribution center and then I had more of a qualitative question on how you keep, you know, your buyers enthusiasm in check in terms of their ordering and their merchandise -- you know in their inventory levels, given the strong sales.

Terry, this is Mike.

I'll take the first part of this question.

You know, in terms of the expense growth, you know, we've obviously through the third quarter now, anniversaried all of the store openings from last year so you're seeing a more relative growth to the core base of our business an the fact is that we're starting to see some, you know, savings in the IT and distribution.

So as we look forward, we're looking at a 2 to 4% increase in SG&A over the short-term and of course that would be subject to any new stores that we might add too.

Okay.

I said SG&A.

And my second question was, you know, I know you guys have made a lot of like trying to get the buyers to, you know, buy, you know, sales trends and give you -- I'm wondering how you're keeping them in line and on board with that, given the wonderful sales momentum that you've had lately.

Pete, you want to talk about that in

Yeah, there's a real natural tendency to want to pawn the gap.

We're pretty good at that.

Because we've had some real tangible success across all divisions by keeping the inventory down at an appropriate level, we proved to ourselves that we can have increases on less inventory and, you know, now more of the conversation have to do with the quality and the content of our inventory rather than how can we just have more of it.

The fun thing is when you're making your sales plan, so we can chase the business a little bit an that's happening out there.

And so I think just in terms of being a buyer, there's a good time to be it.

This is the fun part.

You can be in a position of chasing and you're having some success and we're trying to capitalize on that.

Thanks.

Thank you.

Our next question comes from Wayne Hood with Prudential Financial.

You may begin.

A couple of questions for Mike.

Mike, on the interest expense for next year, with this debt retirement, are we looking at about $60 million pretax?

That's about right, Wayne.

Okay.

Second question on the Lord and Taylor side again, even though you don't want to talk about price or locations, can you maybe just give us some quality feel what the maximum number of stores that you -- you know, if you added your way you could get them all, what that number might be.

I think in terms of the stores we're interested in, it's a handful, four to five.

Okay.

And inventory at the end of the year, where do you think that's going to be and what are your plans for growth or another decline in '04?

Well, we certainly expect our inventories to be below last year coming out of the fourth quarter as well.

I think if you look at the second and third quarter, that trend should continue and by the way, we came out of last year fourth quarter little heavy.

So we do expect it to be down, you know, consistently with what it's been the last couple quarters.

And going forward, you know, we have plans in place to continue to work to improve our turnover over a multi-year period, so to the extent that that turn is improving at a rate faster than our sales growth, you know, we expect inventories to come down.

Okay.

My final question is terrific quarter and you guys got back to a level it look like 1990 levels but there was a period of time in '94 when your operating margin was 8.2%.

Is it unrealistic I guess in the coming third quarter thaw couldn't get back to that level or actually hit maybe a peak level of operating margins for the third quarter?

Well, Wayne, we really believe that there's a lot of hard work still left in front of us and there's opportunities and certainly our ability to drive the top line and continue to get value out of the middle of the P&L is going to define where we can ultimately go, but I think the ultimate answer to that is we're not going to give up on it.

Okay.

Thanks, Mike.

Great quarter.

Thank you.

Our next question is from Michael Exstein with Credit Suisse.

You may begin.

Good afternoon everyone.

Just in talking about the macro environment, can you just talk about what you're seeing competitively and how you're assortment has begun to shift to get around some of the competition out there, how your positioning the company longer term?

Hi, Michael, this is Blake.

I understand you had an operation the other day.

I hope you're feeling okay.

I think that question is probably best suited for Pete on merchandising.

So Pete you want to take that?

Yeah.

Michael, can you repeat that?

I'm sorry.

The question was talk about the macro environment.

How you're positioning Nordstrom going forward.

As you see Bloomingdales and Saks doing sort of their thing and Neiman's on the other side.

Where do you see the positioning going?

You've added a lot of opening price points, you've done a lot of features and benefits, those types of things.

I think in general where we've had the most amount of success is where we've been able to chase the fashion part of the business a little bit more and that really cuts across all merchandise categories and all price points and if you look at our top performing areas, it doesn't have much to do with the price point level.

Actually, it has a lot more to do with the fashion content that that he have.

So where we've been able to create more kind of a speciality store approach in giving customers a reason to buy something new is typically where we've been more successful, not getting into the habit of repeating everything that we did prior.

There's a balance that comes into play there but with the enhanced information that we're getting, just starting to learn how to use, it's been fun to be able to try to apply more energy to the fashion part of it and chase that part of the business and again, where we've done that, that's what's driven our comp sales.

Thanks very much and thank you, Blake.

Good luck, Michael.

Thanks.

Thank you.

Our next question is from John Jerris with Founders Fund.

You may begin.

Good afternoon, everyone.

Mike, I got two questions for you.

Okay.

Number one is in terms of this high cost debt that you've been retiring, is there still some outstanding, should we expect to see some more that have going forward?

And then number two is I know on the last call you guys were relatively careful about gross margin guidance because you had the large adjustment I think to shrink in the prior year.

I was wondering if you had a chance to go back and look at that and did you have another adjustment to shrink this year and are you comfortable with the levels right now?

John, this is Mike.

Thanks for the questions.

The first thing on the debt, we don't plan on retiring anything this quarter.

You know, I'd like to get through the holiday season and certainly the beginning of next year.

We're going to reevaluate that.

We have about 200 million remaining on that 8.95% debt that matures in the fall of '05.

So, you know, as we see the business health and our needs for liquidity, we'll balance that with our opportunities to retire early.

In terms of the shrink, we did have -- we did take our first full fiscally controlled inventory result in the third quarter this year and our results were where I would say moderately better than our plan.

The net impact of that adjustment in the third quarter this year versus the adjustment we made last year was almost a wash.

So it didn't affect the year over year numbers.

But it was slightly better versus our initial expectations going into the quarter.

Now, we're going to be taking another inventory at the end of January and so that will be reflected in the fourth quarter results and we believe at that point in time we will have taken three full inventories on our new system and we'll have a much better gauge as to what our true shrink results are and next year's provisions should be more accurately reflected on a period to period basis.

Keep up the good work.

Thanks.

Thank you.

Our next question is from Jennifer black with Jennifer Black Associates.

You may begin.

Miss Black, your line is open.

Can you hear me?

You're open now, ma'am.

Great.

Good afternoon and congratulations.

I wondered, you spoke about a little bit about the merchandising and one of my questions was have you changed the mix as far as the percent of higher end product?

I notice that you're carrying lots of Burberry and all kinds of great stuff and I wondered if you had changed the mix moderate versus bridge versus couture, can you speak to that?

That's my first question.

Yeah.

You know, it's been not been a prescribed change, but because we've created open to buy for ourselves because we've sold that stuff well, you know, it's taken on some bigger proportions.

We've experienced some of the strongest designer-oriented business we've ever had.

It cuts across all categories, beyond just women's apparel.

It's happening in accessories and shoes and other places.

So I think as long as the customer is telling us that that's where they want to go and the product being provided by these vendors is compelling as it's been, I think we'll let it grow naturally.

But there is no again prescribed kind of percent that we're trying to achieve at the expense of something else.

We -- one of the nice things about the way that our departments are set up, it allows to chase that a little bit based on the current trends.

Yeah, there's no question that that part of our business has been healthy and it has a bit of a halo effect over the other parts of the business, which kind of speaks this idea where fashion is really been a strong element for us in the success.

Okay.

As a follow up to that, do you look at the productivity per department across the board and for example, children's shoes, it seems like it's been tough in special sizes for a period of time.

Are those departments that you would ever shrink as a percent or are they traffic drivers?

I mean, can you speak to that as the way you look at productivity per department?

Sure.

Well, first of all, children's shoes business hasn't been tough.

It's been pretty decent.

Children's apparel hasn't been as good and special sizes have been the tougher areas.

But it's been our experience that if you change that stuff based on short-term results and I'm talking about something over a course of a year, things change.

Then all of a sudden you're left with real estate decisions that is are difficult to change again.

So we're usually better served to kind of ride it out a little bit and see where we're at.

I'm encouraged that both in special sizes and children's apparel, there's no reason we should be able to improve.

And we have seen improvement in recent months.

So I think if there was a long-term trend, absolutely, we do allocate space based on, you know, what's driving the volume, what's driving the profit but we just need to be careful not to look at it over -- too short of a period of time.

Okay.

And then lastly, can you speak to NBG?

It seems as though that product has really become -- it's sensational it seems in all departments and I just wondered if you could speak to that and if you're seeing any sourcing benefits.

Thanks.

It's -- the thing that's interesting about NBG, you know, it makes up a sizeable part of our business.

It's such a cross of broad spectrum of offering that in the given time, a certain brand or category could be performing well and one not.

I can't really generalize that it's all good or all bad.

There have been things that are happening that would be encouraging.

I would point back to staying focused on strategies about how that area is going to interact and work in concert with the retail side to get after the customer and I think that we've made a lot of improvements there and Jim O'Neil runs that area for us.

He deserves a lot of credit.

I get the sense that we're much more focused on the customer, rather than different agendas that existed in the past.

That's improved business.

I think in general where we've had the best improvement with our own product is a little bit more in the item part of the business, just the Nordstrom label rather than any specific brand.

I think we've just -- we've gotten sharper at how to pursue that and continue to build some great product but I give a lot of credit to our folks in NBG.

They're doing a great job.

I agree.

Good luck.

Thanks.

Thank you.

Our next question is from Dorothy Lakner with CIBC World Markets.

You may begin.

Thanks and congratulations everyone.

A couple of questions.

One, I've seen a real influx it seems of new brands and various departments as I walk through the stores and I wondered just how much that's playing a role in your success in driving the kind of sales gains that you have been getting.

And two, if you could also just give us a little bit more color on what we could see -- what kind of benefits we could see coming from perpetual inventories as you get further along in the process.

I know you talked about seeing more of what's selling versus what's not selling but as you get deeper into it, what are the kinds of things that you could get out of it that you're not saying getting out of it right now?

Thanks.

Okay.

I think in terms of the new vendor part of it, I'll again reaffirm this idea that when you have some more experience in the buying range and you don't have wholesale changes in the strategy, over time you build confidence and that allows to be a little more risk taking.

If we can consistently beat sales plans and be at our under inventory plans, it allows to experiment and try some things.

So if you've seen that.

I am glad you noticed that.

It's usually a result of us having discipline around inventory control.

So, you know, we -- because we've been able to achieve some of this, you can create some momentum off that subject and I feel like your merchants are done a good job of it.

It's a very fragile thing and we have keep after it but if we can keep making those plans, I think time and time again almost across all divisions that newness and fashion is selling and we want to be able to chase that.

In terms of the perpetual benefits and what we're getting, more specifically, I think it speaks a lot to more of our initial allocations and it's things as simple as by classification or by large brand making sure that the buy is more reflective of the demand and what we actually sell by store.

And it -- again, they're fairly subtle changes that we make but given the size of our business, it can roll up to a pretty good improvement in the gross margin buy saving some markdown.

We're just able to go in and mine information than we have in the past and I think the initial allocations are what benefits most at this point.

Great.

Thanks.

Well keep up the good work on the brand because I think it does give the stores newness.

It does create excitement.

Thank you.

Thank you.

Our next question comes from Robert Toomey with RBC Dain Rouche.

Good afternoon.

Mike, earlier you in response to another question, I think you indicated what you think interest expense would be in fiscal '04, can you repeat that again.

I think the question was that interest expense would be in the range of 60 million.

For fiscal '04?

Yes.

Okay.

And with respect to the improvement in your margins, obviously surprisingly well in the -- in this quarter, if you go back a few years to the mid and late '90s you're at a gross margin in the 35%, do you think it's feasible to get back to that level again at some point?

Yeah, Bob, this is Mike.

We do believe the opportunity is there to do that.

Okay.

And the -- I had a follow-up question on the comment on perpetual, it was indicated that your -- further implementation of perpetual inventory will enable you to enhance content.

Can you expand on that a little bit, try to help me understand how that will help you enhance the content of your product?

Well, again, I think it has a lot to do with just right sizing up front.

So for example, if brand X represents 20% of our buy in a certain indemnity, yet only represents 15% of sales, it would indicate that we're buying more initially than we should.

And it may be working out over the course of the whole company but we can actually go by stores and get those allocations.

So the fallout is we take less markdowns and in some ways we get into buying less.

We end up transferring less stuff around, which there is an expense attached to that.

It's that kind of stuff that is benefiting us most with regards to perpetual.

But I think it's fair to say that we're still relatively new in being able to understand this and work with the information and actually we don't really have a lot of our buy in yet that's been impacted about enhanced information.

So that's one of the reasons we're pretty encouraged going forward.

We've seen some improvement and we know that we have future buys coming in that we're going to benefit from this information.

So I don't know if I'm answering your question directly.

I think you have.

Do you think that your system is better than some of your competitors at this point or can you comment on what the others?

I have no way of knowing that.

I don't know.

This is Mike.

I would say with regard to that question is, you know, we feel that we, you know, some of the latest available technologies in-house now and it's very competitive to what anybody else may or may not have but I would also say that, you know, the bigger question on the table is our ability to take advantage of it and the speed with which we can get our organization up to speed to maximize.

So I think that's the bigger question that we need it continue to monitor.

Great and then just one last question if I might.

That is, your square footage growth is slowing somewhat and just wondered if you could just comment on what -- you know, what type of opportunities you feel are out there for new store openings, you know, particularly in the country.

Do you feel there's still a lot of opportunities there for new store locations?

Thank you.

Bob, this is Blake.

You know, we three years ago took a look at our commitments and made some adjustments in our ability from a capital point of view and just from the organization's ability to execute all those stores and we purposely decided to really focus on our comp stores, which have a lot of upside and a number of them that were underperforming to our standards.

There are still opportunities around the country for what we do in our model and both Pete and Eric look at that regularly and it takes about four years of window by the time you look at a site and agree to terms and plan and prepare and execute to get it open.

So you're correct in the next couple of years, our square footage is rather modest, but again, think think part of or original strategy was how could we shore up our results, number one, our finances, our disciplines, our use of the technology, our people, our reputation with the customer so that we were in a position going forward of strength and we had more doors open and that we could be on the offense.

And so I don't think, you know, our crystal ball is that clear, you know, that far forward but as we go down the path, we want to be in a position to react accordingly to what the customer's telling us and we think we're moving in that direction.

Great.

Thanks very much.

Bob, you know, just one add on here.

I had your question and Wayne's question about the interest expense and I think we said 60 and I believe for next year that number is a little low.

It's probably more into the neighborhood of 70.

I wanted to make that correction.

Thank you.

Okay.

Thank you.

One more question.

Thank you.

Our next question comes from Dan Geiman with McAdams Wright.

You may begin.

Good afternoon guys.

Can you provide an update on installation on the POS system.

Are there any early findings or results that you've seen so far and are you still looking at a full roll out by next fall?

Yeah, Dan, this is Mike.

Thanks for the question.

We now have a little over 40 stores live on the system.

Our plan is after Christmastime, to kick that up and complete by next fall.

I would say early read on the system it's gotten an extremely positive response from our folks in the stores.

It's making their lives a lot easier.

Our ability to get through transactions is about twice as fast as it used to be.

And so, you know, one of the benefits in that is we're finding we don't need quite as many registers as we thought we would need.

Our ability to move through transactions during busy days is greatly improved.

So, you know, those are the benefits that we're seeing today and, you know, we see as we go out the next couple years when this is fully rolled out there's going on other benefits that will be able to accrue as the full chain is up and running.

And what's the education process on this?

I'm sure it's not as extensive as on the perpetual inventory system.

What is the educational process here?

Well, we are putting everybody through formal training.

It does cost money.

I think the difference is we're putting in touch screens and I think the world we live in today with everybody used to pointing and clicking and going on screens and being more intuitive has helped to accelerate that learning versus the old days where you had to look at a manual to understand what key to press.

Great.

Thanks very much.

Okay.

Thank you, everyone for participating in our conference call this afternoon.

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