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Operator
Hello and welcome to the Nordstrom fourth quarter 2004 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 1.
At the request of Nordstrom, today's call is being recorded.
I would now like to introduce Miss Stephanie Allen, Manager of Investor Relations for Nordstrom.
Miss Allen, you may begin your call when you're ready.
Stephanie Allen - Manager, IR
Thank you.
Good afternoon, everyone.
Thanks 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 fourth quarter results.
Blake will make a few concluding remarks and then we'll 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.
Mike Koppel - EVP and CFO
Thanks, Stephanie and good afternoon, everyone.
We are pleased to report another quarter of strong financial performance.
Our results clearly demonstrate continuing progress towards achieving our longer term goals.
Sales momentum and significant gross margin improvement offset moderate SG&A expansion, and generated over 300 basis points of pretax margin expansion in the quarter.
Earnings per share on a diluted basis increased 68% to 74 cents.
For the full year, we reported earnings of $1.76 per share versus 66 cents in the prior year.
The 2002 results of 66 cents includes nonrecurring and impairment charges of approximately $71 million net of tax, or 53 cents.
Off this adjusted base, our fiscal 2003 earnings per share increased 48% over 2002.
The full-year results were driven by a 4.3% comp store sales gain, 150 basis points of gross margin improvement, and 23 basis points of SG&A improvement.
Turning now to a more detailed discussion of our quarterly results, I am happy to say that this is the last time we will need to make a distinction between GAAP and 454 sales results, but for the record, our discussion today compares total and same-store sales details on a more comparable 454 basis.
The corresponding GAAP numbers can be found in our press release, which is posted on our website.
Sales trends were strong throughout the quarter and the 8.5% comp store sales increase exceeded our 2 to 4% comp plan by a wide margin.
Total sales increased 12% to $1.9 billion.
All of our geographic regions and most merchandise categories posted comp sales increases for the quarter.
We are encouraged to see such across-the-board top line strength.
Regional performance continues to be fairly consistent.
The southwest and central states regions achieved high single-digit increases; and in the northwest and east coast, comps increased in the mid-single digits.
Our strongest performing merchandise divisions for the quarter were cosmetics, accessories, menswear and mens, womens and children's shoes.
The only comp decreases for the quarter were in women's special sizes and kid's apparel.
This past quarter represents our strongest fourth quarter gross margin performance in over 10 years.
Margin improved 350 basis points or $128 million compared to the prior year.
This is significantly better than expected and the result of lower markdowns, strong sales and favorable shrinkage results.
Approximately 200 basis points of the improvement resulted from better year-over-year markdown performance throughout the quarter.
About 100 basis points was due to sales leverage on various expense components, including buying and occupancy costs.
The remaining 50 basis points is primarily related to lower shrinkage compared to the prior year.
We are continuing to see an improvement in the caliber of our inventory management practices, and the results this past quarter clearly reflect that progress.
With regard to SG&A, we continue to see broad-based fundamental improvement in our underlying expense performance.
For the quarter, we had over 100 basis points of collective improvement in the areas of IT, supply chain, sales promotion, and selling costs; all of which relate to continuing efforts to drive operating efficiencies.
The 50 basis point decline in overall expense performance for the quarter was the result of increased incentive compensation expense, the biggest drivers of which were pretax margin results and the performance of Nordstrom stock relative to peers.
The strength of our quarterly results effectively pushed our annualized performance to a level which triggered maximum payouts across our various incentive compensation programs.
Our bonus and profit sharing arrangements are calibrated to reward employees for pushing to reach stretch goals.
At the start of the year, we were projecting earnings growth in the 12 to 17% range and we ended the year up almost 50%, performance that clearly deserves to be rewarded.
In addition, key leaders received performance share units, essentially stock grants, based on our relative stock performance.
This benefit is intended to align management and shareholder interests.
Share appreciation in the fourth quarter resulted in recognition of additional expense.
Overall, we are pleased with the fundamental expense improvement that we continue to see, and are equally pleased that both our shareholders and employees have benefited from our progress this past year.
Fourth quarter service charge and other income increased $3.5 million, slightly ahead of expectations due to higher total receivables.
However, our propriety receivables are lower than last year resulting in lower bad debt expense for the quarter.
Both delinquencies and write-off trends remain stable.
We closely monitor credit trends and make adjustments to our reserve as needed.
At quarter end, preliminary total debt and total capitalization, on a book basis, were approximately $1.2 billion and $2.9 billion, respectively; generating a total debt-to-capital ratio of 43%, in line with our targeted range of 40 to 45%.
There was no share repurchase activity during the quarter.
Net interest expense was $17.9 million for the quarter.
The $3.5 million reduction from year-ago levels reflects lower year-over-year debt levels as we retired approximately $106 million in debt in 2003.
As expected, inventory levels declined again in the fourth quarter.
Total inventory at cost was down $15 million or 1.6% from year-ago levels, and total inventory per square foot decreased 5.3%.
Comp store inventory at cost decreased $42 million, or 5.2%.
Overall, our inventory is in very good shape.
Receipts in January were approximately $50 million higher this year versus last without which total inventory per square foot would have declined almost 10%.
This is a positive indicator of the quality of our inventory.
We are entering 2004 considerably more current and with less markdown risk than last year.
Preliminary capital expenditures for the quarter, net of developer reimbursements, totaled approximately $45 million; primarily for new store construction, remodels and information technology investments.
Depreciation and amortization for the quarter was $65 million.
Okay, that wraps up our review of the fourth quarter.
Now I'd like to step back and make a few comments about the progress we've made and our goals for the future.
We've been talking for some time about returning to the company to historic levels of financial performance, and three years ago we laid out a couple of goals as an intermediate step.
The first was to reduce our SG&A margin to 28.5 to 29%.
And the second was to bring our pretax margin into the 6 to 6.5% range.
We expected to achieve both by the end of 2005.
As you can all see from our results, our 2003 pretax margin of 6.1% is within the targeted range.
Our progress came from a lot of pure fundamental improvement, along with solid sales momentum throughout the back half of the year.
While we still have work to do, particularly in the area of expense, our results this past year reflect the fact that this company is making forward progress.
I can tell you that today we are operating with a level of rigor and discipline that far exceeds where we were as a company three years ago.
Our business decisions are now supported by more accurate and timely information and we are actively managing our performance against a defined set of key metrics, including return on capital.
Going forward, our financial plans focus on improving operating performance, as well as working capital efficiency; with the goal of driving returns that exceed the company's cost of capital.
To that end, I'd like to take this opportunity update our longer term goals.
As always, we are working to sustain comp store sales growth.
That has not changed.
What has changed is that our thee-year plans are now targeting an SG&A range of 28 to 28.5%, and a pretax margin of between 7.5 and 8.5%.
We believe that these new goals are attainable by the end of 2006.
Going forward, we expect cashflow improvement to result in accumulation of excess cash.
Over the near-term we intend to use that cash to reduce debt levels.
In fact, we recently announced our intent to retire the remaining outstanding principal balance on our 8.95% senior notes, approximately $197 million in the first quarter.
Beyond that, we will continue to evaluate the most opportunistic uses of capital, including new store growth, internal investments, dividend policy, and share repurchase.
Keeping the long-term perspective in mind, let me wrap up by quickly reviewing our 2004 outlook.
For fiscal 2004, we anticipate earnings per share in the range of $2.02 to $2.08, on a fully diluted basis.
An increase of 15 to 18% compared to the prior year.
This range assumes the following -- a 1 to 3% increase in same-store sales, a 30 to 50 basis points of gross margin improvement, resulting from lower year-over-year markdowns, a 50 to 70 basis point decline in expense, $7 to $9 million in additional service charge income, and an $11 to $13 million reduction in interest expense resulting from lower overall debt levels.
Our effective tax rate is expected to remain unchanged at 39%.
Our fully diluted share count for the full year is expected to be approximately 143 million.
For the first quarter, we project earnings per share in the range of 23 to 28 cents on a fully diluted basis.
This range includes approximately $16 to $18 million in additional interest expense related to the debt retirement.
The reduction to earnings is about 8 cents per share, however, subsequent quarters will benefit approximately 2 cents per share from lower interest expense.
First quarter expectations also assume a meaningful gross margin improvement as we anticipate considerably lower markdown levels versus the prior year.
Same-store sales are planned to increase 4 to 6% and our expense rate is expected to decline moderately.
The diluted share count for Q1 is 142 million.
Now I'll turn the call over to Blake for some closing remarks.
Blake Nordstrom - President of Nordstrom, Inc.
Thanks, Mike.
Before opening it up for questions, I have to make a few comments on our progress this past year; as well as provide some perspective on what lies ahead.
The year 2003 was a pivotal year for our company.
The prior couple of years were really about putting the building blocks in place to support and drive the long-term success of the company.
In 2003, those building blocks started to pay dividends and the improvement is clearly reflected in our results.
In 2003, we had the best comp store sales performance in the last 10 years, an increase of 4.3%; and that's on top of a modest increase in the prior year.
The gross margin result of 35% represents our best gross margin performance in over 10 years; and operating expenses were lower for the third consecutive year.
All of this progress combined to generate a 6.1% pretax margin.
A level we had not planned to achieve until 2005.
To be clear, our targeted range of 6 to 6.5% for pretax margin was always intended to be an intermediate term goal.
We whole heartedly believed that we have opportunity beyond that, which is reflected in the updated goals that Mike laid out for you.
So, while we continue to make good progress, we see several years of ongoing improvement ahead.
Our challenge going forward is twofold.
First, we must continue to remain relevant to our customers by working to maintain and enhance the quality of the shopping experience in our stores.
We do that through our people, our product, and the stores themselves.
What we have learned over the years, from listening to our customers, is that they are not motivated by any one aspect of the shopping experience; rather they value the whole experience.
At Nordstrom that means personalized service, no hassle returns, add-on services and amenities, an unhurried, pleasant shopping environment, and a great selection of high-quality merchandise at compelling values.
All of these things collectively represent elements of the Nordstrom experience.
It all boils down to service and the service we provide takes many forms.
But at the end of the day, the goal is to drive volume.
Our month-to-month relative comp performance over the past two years suggests that customers are responding.
Looking ahead, we will drive volume by continuing to improve the customer experience.
We are midway through the rollout of new point of sale technology, which will serve our customers better by speeding up transaction time at checkout and allowing our sales people the option of accessing Nordstrom.com to fulfill customer requests.
Also in 2004, we will roll out automated personal book technology.
This is a dynamic tool that will strengthen customer relationships by helping our sales people better anticipate and respond to customer needs.
And lastly, our merchants are continuing to leverage perpetual inventory tools to make sure we have more of the right merchandise in the right place at the right time.
Our second challenge in the coming years is that we must continue to push ourselves to establish new levels of performance.
Our goal is to drive sustained improvements and deliver consistency over time.
We have spent a lot of time and money making sure that our people have the tools and information they need to make better business decisions.
We have worked hard to instill appropriate disciplines in all aspects of our business and we are demonstrating progress.
Better information has improved our understanding of the quality and content of our merchandised assortments, which has allowed us to be more responsive to customers seeking newness and fashion.
This was a meaningful driver of our top line success this past year.
Many opportunities remain and we will continue to work to improve our overall inventory management and further reduce expenses.
All of our work the past few years has been aimed at layering on tools and organizational discipline to help us push through the ceiling of historic past performance.
We are encouraged now more than ever and look ahead to 2004 and beyond with the same sense of commitment, but a deeper degree of confidence.
We are an organization composed of a lot of passionate, competitive individuals who are playing to win.
Now I'd like to open it up for your questions.
Operator
At this time, we will begin the question and answer session.
If you have a question, please press star 1 on your touch-tone phone.
As a reminder to the participants using speaker equipment, you may need to lift your handset prior to pressing star 1.
If you'd like to withdraw or cancel your question, please press star 2.
Please stand by while the questions register.
Thank you.
And our first question comes from David Burman of Burman Capital.
Steven Curnkraft - Analyst
It's Steven Curnkraft for David.
I'm surprised to be first on the phone.
Great quarter.
But now that you've included in your goals as you've established this, where you have an increased operating margin goal, what is the expectations now in terms of opening new stores and re-- I don't want to say re-accelerating; but getting back into the new store growth mode when you're opening four or five stores a year.
Is that something that we should be contemplating, or do you still see there will be enough productivity improvements in the stores you built in the last decade to generate the top line growth that you need over the next 5 to 10 years.
Blake Nordstrom - President of Nordstrom, Inc.
Hi, Steve, this is Blake.
Thank you for your nice comments up front.
As you know we, a couple years back, deliberately reviewed our expansion commitment and made some adjustments and have been focused on getting our operations, kind of, if you will, on all cylinders; and there is still more work to do there and a lot of upside with our comp stores.
Not too long ago we announced two Lord and Taylor locations and we continue to look for the right opportunities to grow our business.
Definitely Mike and the finance team, along with our board have helped us raised the bar, if you will, on the disciplines as we allocate capital; and so we're more deliberate in that process than we have been, let's say in the last 5, 10 years.
But we are encouraged about opportunities out there and so though currently there is not a lot of stores listed in outyears, we think there are other opportunities to expand the Nordstrom experience and deliver our model and we hope to be in the future sharing with that with you more specifically.
Steven Curnkraft - Analyst
Okay.
And one other follow-up question, can you kind of, you know, segment -- in terms of the strong comp store sales gains that you've had, is a lot of that coming from your existing strong markets like Southcoast Plaza and Paramus?
Or is most of that coming from the poorly productive markets, you know, like Atlanta?
Blake Nordstrom - President of Nordstrom, Inc.
Well, I think, again, Steve, this is Blake.
I think the answer would be, and it was reflected in both mine and Mike's comments, it's across-the-board.
So, it's not a case of an existing market like Southern California, like you mentioned Southcoast Plaza, or some newer markets or newer stores that we've opened.
Across-the-board and across divisions we've seen gains and certainly the focus in the last two or three years on some of these underperforming stores are paying dividends; but I think across all regions we've been pleased with the gains to date.
Steven Curnkraft - Analyst
Okay.
Thanks very much.
Operator
Thank you.
Our next question comes from Bob Buchanan of A.G. Edwards.
You may go ahead, sir.
Bob Buchanan - Analyst
I'd like to pass along my congratulations, as well.
It's nice to see you guys doing more than move the pea around the plate, as Blake likes to say! [ LAUGHTER ] Blake, I'm wondering at what point your dad breaks down and promotes you to CEO?
But be that as it may, what's the status on the L&T?
Is it realistic we could see a few more announced this year?
Or is that -- would that be too optimistic?
Blake Nordstrom - President of Nordstrom, Inc.
Hi, this is Pete.
There's a handful of opportunities that we're looking at.
We've announced the two, Dadeland in Florida, and Phipps in Georgia.
There's a couple other we're considering, but really -- we're trying to be really opportunistic about this and only go for the stores that we really, really want.
I think it's premature to say how it's all going to end up, but we should know within the next several months how this is all going to play out, but we're still considering a couple of others.
Bob Buchanan - Analyst
Okay.
And Pete, just sticking with this line, the Dadeland is a great site, of course, the Lord & Taylor there.
Any risk of cannibalization at the nearby Merritt Park store you currently operate?
Blake Nordstrom - President of Nordstrom, Inc.
We looked at that really closely.
I think it's fair to say there will be some cannibalization just because they're relatively close to each other, but there's a pretty dynamic market there with a lot of diversity and the tourism element that's added in, it's not dissimilar from some of the situations we have in Los Angeles; where you can have stores relatively close to each other, but because of the population and all these other factors at play, there is plenty of business to go around.
So, I think we believe there is plenty of business for both of those stores to prosper.
Bob Buchanan - Analyst
Okay, and just one final question, for you, Pete, or Blake.
Are you guys doing a much higher percentage of your markdowns today at nonclearance?
That's my perception as I walk the stores.
Blake Nordstrom - President of Nordstrom, Inc.
This is Pete again.
I -- I think we're doing a better job being more timely.
So, I guess that would play into what you're suggesting there.
We're trying to take the markdowns we need to take more quickly and since our inventory positions have been in good shape, we haven't had those big kind of gluts of more clearance-oriented stuff at the end of the season.
I think that's probably a fair assessment.
Bob Buchanan - Analyst
Okay, sir.
Thanks again.
Blake Nordstrom - President of Nordstrom, Inc.
Thank you, Bob.
Operator
Thank you.
Our next question comes from Dana Cohen with Banc of America.
Dana Cohen - Analyst
Hey, good afternoon guys, and congrats!
Two questions.
You know, if I look at the targets that you're putting out and where you are today, it looks like most of the change in targets is really predicated on further SG&A control or leverage on SG&A; and I guess my question is why not, given the benefits you're seeing in the systems, you know, raise the targets on gross margin?
Mike Koppel - EVP and CFO
Hi, Dana, this is Mike and welcome back!
Dana Cohen - Analyst
Thank you.
Mike Koppel - EVP and CFO
You know, it's interesting, the question on the margin, we've been asked several times over the last few years as to how much we think we can get on the margin.
If someone asked us a year ago would we get 350 basis points in one quarter, I don't think we would have thought that.
We believe there's still opportunity, when you see it at the detailed level of our merchandise content and where we have inefficiencies, we think there's still opportunity there.
But at this point, we believe there is more upside in the SG&A.
So, as it relates to setting out pretax margin goals, we're going to focus on that SG&A; and should we continue to get the kind of improvement out of margin that we've seen, then we should enjoy that, as well.
But we have not looked for any significant improvement over the next two years in these goals.
Dana Cohen - Analyst
Okay.
And then I guess that leads to my SG&A question, you know, God bless you guys deserve the bonuses, but it is a big change in dollars of where we all expected SG&A to come in.
Can you just give us, you know, a little more numbers or give us a better sense of how much -- it seems to me we're talking in the neighborhood of something like $30 million delta.
Just given where you were tracking coming out of Q3.
Is that about right?
Mike Koppel - EVP and CFO
Well, I would say that's in the ballpark, if you take into account not only the bonus, but the performance share units which were directly targeted off of stock price; and then the related payroll taxes.
That -- that is, generally speaking, about where we were and, one thing I would add is that while it is a big number, our relative efficiency in that payout was better than it was last year; and then obviously going forward into next year, that gets reset and so we're going to deliver this year's earnings and then some before we start to kick in incremental incentive.
Dana Cohen - Analyst
Is there some reason it wouldn't have accrued in other quarters?
That it all seems to have just kicked in in Q4?
Mike Koppel - EVP and CFO
That's a good question.
At the end of the third quarter, our estimates for earning performance were only 110% of target.
That's exactly what we were accrued at.
In the fourth quarter, our EBIT was about $73 million over last year.
It was a big increase, Dana, and it just pushed it beyond the max levels.
So, we felt very comfortable with the accrual relative to where we saw the business at the end of the third quarter.
Dana Cohen - Analyst
Okay, great, thanks so much.
Mike Koppel - EVP and CFO
Thanks for the call.
Operator
Thank you.
Our next question comes from Linda Kristiansen, UBS.
Linda Kristiansen - Analyst
Hi, good afternoon.
I have two questions.
One, I wondered if you could just discuss some of the most significant opportunities for expense rate improvement, as I understand it a lot of them are supply chain related?
And secondly, I've seen recently in some of your stores a new department called At Home.
Can you discuss that a little bit and what you're thinking, how much you intend to get into the home business, et cetera?
Mike Koppel - EVP and CFO
Hi, Linda, it's Mike.
I will take the SG&A piece and Pete will take the At Home piece.
In terms of SG&A it continues to be the major components we've talked about.
You mentioned supply chain.
A good example of that is at the end of this year, when we're fully rolled out on POS, we will be able to begin to eliminate a lot of ticketing within the company.
So, beginning toward the end of '04 and certainly into '05, we should start to see the benefits of that.
We continue to see streamlining in IT, as we sunset old systems, and also get more efficiency out of the applications we have.
And then, you know, I've mentioned before we continue to methodically look at back office functions and our labor pool to get more efficiencies.
I think the combination of all of those, we're going to continue to work on and that should deliver the number we're looking for in '06.
Linda Kristiansen - Analyst
Is cross stacking a big part of this beginning in 2005?
Mike Koppel - EVP and CFO
It starts to become a big part of that.
Linda Kristiansen - Analyst
Okay.
Is that going to get under way right at the outset of '05?
Mike Koppel - EVP and CFO
I -- we're actually testing it right now in a small way, but in terms of any kind of volume to generate a noticeable result, it's really going to start next year.
Linda Kristiansen - Analyst
Okay.
Blake Nordstrom - President of Nordstrom, Inc.
And as far as the At Home goes, it's a relatively new thing for us.
It's only been around for about a month.
We had gift departments before that, we felt weren't performing as well as they could and so we've taken a different approach and tried to do a little bit more of an at home approach, hence the name; and I think we're encouraged by how it's been received by customers and our employees initially, but it is way too early to tell exactly what that's going to mean for us in the long run.
I think we're optimistic it could be a good category for us, but really until next year I think it's going to be difficult for to us make that a quantitative statement; we just kind of have to wait and see.
Linda Kristiansen - Analyst
But it has been rolled out to all your stores, then?
Blake Nordstrom - President of Nordstrom, Inc.
To all the stores that had a gift department, that's roughly half the stores that we have, had a gift department, got converted to At Home.
Linda Kristiansen - Analyst
Okay.
Thank you.
Blake Nordstrom - President of Nordstrom, Inc.
Thank you.
Operator
Thank you.
Our next question comes from Christine Augustine with Bear, Stearns.
Christine Augustine - Analyst
Thank you.
Could you give us an update on your marketing plans, if there will be any changes in '04?
And also, could you give us the plan for inventory through the year?
At least if you can talk about the first half, how should we be thinking about where you're targeting your inventory levels?
Thank you.
Blake Nordstrom - President of Nordstrom, Inc.
Hi, this is Pete.
In terms of marketing, we don't really have any dramatic changes to the plan.
We're continuing to try to do a better job of understanding exactly who our customers are and finding a way to get more wallet share from those customers; and part of that is the improvement of systems that we have, point of sale and what have you.
So, I think that we're really at pretty early stages of being able to use that information better.
So, in terms of how exactly we spend our marketing money, that -- that tends to evolve a little bit over time, but there isn't a big strategic shift there.
And the other question was about the inventory levels, is that right?
Christine Augustine - Analyst
Yes, how should we think about where you're going to be or where you'd like to be, maybe for the full year, if you can talk about that yet or maybe just talk about the first half?
Blake Nordstrom - President of Nordstrom, Inc.
Well, we've been working really hard at making sure our sales growth is outpacing our inventory growth.
I think the place to start is to presume that we're going to be about flat in comp stores with our inventory plan for this year and we've improved our discipline around that fairly well.
I think it's really made a dramatic difference in our results and our ability to keep fresh inventory going.
So, we found religion on that subject and we're going to keep after it.
Christine Augustine - Analyst
Thank you.
Operator
Thank you.
And our next question comes from Adrianne Shapira, Goldman Sachs.
Adrianne Shapira - Analyst
Thank you.
And my question relates -- I mean we're seeing the power of rolling out the potential inventory systems and I'm wondering if -- we've long heard the terrific improvement with mens, they seem to be the earliest on board.
Give us a sense of how far along the other categories are?
What the adoption rates and the type of improvements that they're seeing, are they sort of ramping up the learning curve faster?
Blake Nordstrom - President of Nordstrom, Inc.
This has been a big year for us.
We made a lot of pretty good strides.
It's gone beyond just the people that are voluntarily getting after it, to really get to the point where it’s an expectation for all divisions to perform at a competent level with regards to the tools; and so I -- I think it's safe to report that all the divisions are -- are operating at a level that, you know, that we find acceptable, but there's still a lot of upside there.
In terms of the divisions that it's helping the most at this point, the -- the areas that are a little more intensive on inventory ownership and a little slower turning, that have more at stake in replenishment programs, they seem to have had more of the near-term benefit.
When you describe mens, there are a lot of categories in that area that would fit that description; but really across all our divisions, we're having areas that we can identify, that we can really attribute the success directly to the enhanced tools and the perpetual inventory system.
So, I guess the news is there it's -- we're having success across-the-board.
Adrianne Shapira - Analyst
Pete, is the level of outperformance dramatic across categories where, as you describe it there is a greater replenishment to the category?
Or are they starting to revert all to some sort of mean?
Blake Nordstrom - President of Nordstrom, Inc.
It's not that dramatic.
It really -- there's a bunch of little things that we're doing a little better than we were before and I think it's just giving us this encouraging start.
Like Mike said earlier, we're not exactly sure where that's going to take us, but we're going to keep after it as best we can.
We believe there's a lot of upside still, but there really isn't a big difference right now.
It would be difficult to quantify here and explain specifically, because it's a bunch of little things that we're just doing a little bit better based on better information.
Adrianne Shapira - Analyst
Okay.
And Mike, as far as the guidance you gave on '04, the margin improvements, does that factor in the rollout of the vendor ranking tool, the POS, the data book technology, all of that?
Or is it just more improvement from perpetual?
Mike Koppel - EVP and CFO
Well, I think all of those components are considered, but it's primarily improvement from perpetual.
Adrianne Shapira - Analyst
Thank you.
Operator
Thank you.
And our next question comes from Shari Eberts with J.P. Morgan.
You may go ahead with your question.
Shari Eberts - Analyst
Thank you, great job, guys.
Just a couple of questions.
First, I was hoping to get a little bit more detail on the shrink improvement.
I know you did your physical inventory at the end of the year, but is this a sustainable lowering of the shrink accrual going forward?
Or was it some kind of a catch-up?
Mike Koppel - EVP and CFO
Hi, Sheri, it's Mike.
We did have, for the year, approximately about a 30-basis point improvement in shrink that impacted our margin.
We -- we will see that benefit in -- in a small way in the first half of the year as our accrual gets reduced and in the back half of the year it should be approximately flat.
Shari Eberts - Analyst
Okay, great.
And then just in terms of other long-term goals, as you were guys were formulating some of your earnings before taxes goals, have you set any -- in terms of inventory turns or -- I know you mentioned return on invested capital better than your cost of capital; but any specific numbers that you've targeted for either of those items?
Mike Koppel - EVP and CFO
What we have said is that, you know, we have targeted to improve our inventory turns approximately 3% a year and that's what we've been working toward.
In terms of return on capital, we haven't shared any specific numbers on that.
I will tell you that as of this point, we are just slightly under our internal returns and we've made a lot of progress this past year and our intent is to continue to push beyond that number.
Shari Eberts - Analyst
Great.
And then just last question, in terms of cap ex for the year -- for '04, I don't know if I heard the plan there.
Mike Koppel - EVP and CFO
Well, our cap ex plan for the next three years is in the range of about $750 million, and next year's number is approximately $240 to $250.
Shari Eberts - Analyst
Okay, thanks.
Great job.
Mike Koppel - EVP and CFO
Thank you, Shari.
Operator
Thank you.
Our next question comes from Dorothy Lakner at CIBC World Markets.
Dorothy Lakner - Analyst
Thanks and let me add my congratulations, as well, on a great quarter.
A couple of questions.
One, could you give us a little bit more detail on the rollout of the automated personal book technology, and what that might involve, training and so forth?
And if you could update us on the catalog and your online business as well as the -- the Faconnable business, also?
Thank you.
Blake Nordstrom - President of Nordstrom, Inc.
This is Blake.
There's three questions there!
First of all, thank you for your nice comments.
In terms of the point of sale, the rollout of that and the personal book effort.
As we communicated, we started last fall rolling out the new registers, we're maybe halfway along.
This should be completed fall of '04, and we are right now just getting ready to start to launch this personal book tool, which, given our emphasis on relationships with the customer and providing our sales people with the proper tools, we think this is very important.
We're encouraged by it and we've gotten good feedback on our early kind of reviews with it, with our sales people.
So, that will happen throughout '04.
Your second question had to do with our direct division in catalog and the internet -- or e-commerce, how it was doing.
We're pleased that we're making good progress there.
It's -- it has all the numbers fully baked into it now and it's on the plus side, so it's contributing in that respect.
It's also starting to contribute in a meaningful way from a multichannel point of view.
We're starting to learn how to measure and use it a little bit better to drive customers to the Full Line Stores and back and forth.
We think there's a lot of work to do there, and we're working on the functionality that's needed to be able to fully leverage that asset.
Your third question, as I recall, had to do with Faconnable and how it was doing?
Dorothy Lakner - Analyst
Right.
Blake Nordstrom - President of Nordstrom, Inc.
As many of you know, that are back in the northeast, we opened last fall -- or we moved to a new location, our boutique into Rockefeller Center; so that was our one big change last year with the boutiques.
Mark Breshear, who oversees this division last spring moved to Nice, France where it's based and so he's there everyday, working with the team and working with the design and what we stand for in Faconnable.
We continue to make good progress but there is lots to do.
Within the business we have a significant business in the Full Line Stores, with mens, with womens; we have a domestic, smaller business with the boutiques.
We have a European boutique business and a wholesale business and, again, we're seeing some improvements; but on all the things that we're addressing now, it's probably not in the top one or two or three, but it's definitely something that, as a leadership team, we're sensitive to and working on.
Dorothy Lakner - Analyst
Great, thank you.
Operator
Thank you.
And our next question comes from Jennifer Black of Jennifer Black & Associates.
Jennifer Black - Analyst
Good afternoon and let me add my congratulations, as well.
I have two questions.
I first wanted to know how you think your new systems are able to measure stock outs?
Because you've done such a great job with our merchandise, I am wondering what you can see?
And then I'll ask my second question after that.
Blake Nordstrom - President of Nordstrom, Inc.
Thanks, Jennifer, this is Pete.
Well, I think we just have visibility to the stockouts where before it was a pretty manual process.
We had to literally get out there and count it and -- and that was not always the most accurate way; and it certainly wasn't very quick.
So, I think that we've identified the items in the categories that are performing well for us, and we can mine the data every single day in a real accurate way.
So, it's just the speed and the quality of the information is enhanced greatly.
Jennifer Black - Analyst
Okay.
And then my second question would be is if you have any new additions to your great customer loyalty program?
Is there anything you have planned to -- for the future?
Blake Nordstrom - President of Nordstrom, Inc.
We're testing a few things that we really not prepared to go into much detail about.
But it's one of those deals where we have to look at a way of enhancing the value proposition there.
So we're working on some things.
Jennifer Black - Analyst
Are you happy with the Nordstrom Visa card?
Blake Nordstrom - President of Nordstrom, Inc.
We'll let Mike answer that one.
Mike Koppel - EVP and CFO
Hi, Jennifer, it's Mike.
Jennifer Black - Analyst
Hi, Mike!
Mike Koppel - EVP and CFO
Hi, Jennifer!
The Nordstrom Visa card is actually performing well and, you know, the growth in our receivables has been primarily from that card as our propriety card has lost a little ground.
At this point in time, it's done very well.
Jennifer Black - Analyst
Well, I do my job!
Thanks very much and congrats.
Mike Koppel - EVP and CFO
Thank you.
Operator
Thank you.
Our next question comes from Leah Vermulen of Tiburon Research.
Leah Vermulen - Analyst
Hi, good afternoon.
I have a couple of questions related to merchandising, but first I was curious if you could give us the cash balance at the end of Q4?
And tell us how the online division performed during Q4?
Mike Koppel - EVP and CFO
Sure, Leah, I will start with the first one.
Cash at the end of Q4 was approximately $460 million.
Leah Vermulen - Analyst
Okay.
And --
Blake Nordstrom - President of Nordstrom, Inc.
This is Blake on direct.
I'm looking at it Stephanie, if we break out specific numbers on direct by quarter, I don't think we do.
But it -- it was a very successful part of our portfolio and was toward the top of all merchandise divisions in regions in terms of performance.
So, they had a good fourth quarter.
Leah Vermulen - Analyst
Okay.
Great.
And then as far as merchandising goes, I'm curious how your merchandising team is reacting to the many launches that we're seeing by designers such as I guess Tommy Hilfiger with "H" and Perry Ellis and Calvin Klein; and how it's going to affect your better apparel arena?
Blake Nordstrom - President of Nordstrom, Inc.
This is Pete.
I think what it does is it gives us a chance to try some new lines.
That's a good thing, really for everybody.
We had a fairly established business with Lauren and now we had a chance to get into a few different things since that's all changed, and we're going to be doing business with the new Lauren deal, the new -- the Jones signature and Calvin Klein, Michael Kors which comes on in fall; and really all of that open to buy is created from what happened with Lauren in terms of what you guys are all familiar with.
Leah Vermulen - Analyst
Right.
Looking forward to seeing it in the stores.
Thank you.
Blake Nordstrom - President of Nordstrom, Inc.
Thank you, Leah.
Operator
Thank you.
Once again, if you have a question, please press star 1 on your touch-tone phone.
And our next question comes from Paula Kalandiak, Wells Fargo.
Paula Kalandiak - Analyst
Good afternoon and congratulations.
I have one question.
A lot of broad-lined retailers have been commenting on weakness in children's.
To what are you attributing the weakness in special sizes, and what initiatives do you have in place to try and improve that business?
Blake Nordstrom - President of Nordstrom, Inc.
This is Pete.
Special size is a tough business.
Because you know, you are talking about a size, you are not talking about a lifestyle, not really talking about a category.
You know, and given the amount of open to buy floor space we give both to petites and our plus size department, Encore; we need to get fairly focused to be meaningful there.
I think we've have challenged as the floors have been spread too thin and had issue with our balance.
So, the good news of having the information that we have at our disposal now, I think it allows us to get more focus and I think that will help improve the business.
We've made some improvement there.
We've got a ways to go, but I think we're on the right track.
Paula Kalandiak - Analyst
Thank you.
Operator
Thank you.
And our next question comes from Theresa Donahue of Neuberger.
Theresa Donahue - Analyst
Hi, guys.
Congratulations.
Blake Nordstrom - President of Nordstrom, Inc.
Thanks, Terry!
Mike Koppel - EVP and CFO
Thank you, Terry!
Theresa Donahue - Analyst
Enjoy the bonuses!
I had a quick question on your margin goals.
Follow-up on Adrianne's point...
Qualitatively, how far would you say the other key areas -- and I guess I'm thinking of the subdepartments of womens, are relative to mens in using the systems and getting maximum results out of them from an inventory standpoint?
Blake Nordstrom - President of Nordstrom, Inc.
Well, you know, we talked about mens being one of the initial areas to really get after.
I don't think it's fair to say now that they're leading the pack.
We've had some good results there, but I really feel like most of the divisions have really caught up to that.
So we're having success in all the different divisions in ways that are applicable to those specific businesses.
I would say that we still have, probably, the most opportunity in womens apparel of all the merchandising divisions we have; and that's based on historical context of getting our turn levels to historic all-time highs and our markdown levels down and our margin levels up.
So, we -- we've got work to do there still.
We've had enough taste of success there that I think the whole buying organization is really embracing the tools and the new information they're getting.
Theresa Donahue - Analyst
Thanks, guys.
Blake Nordstrom - President of Nordstrom, Inc.
Thanks, Terry.
Mike Koppel - EVP and CFO
Thanks, Terry.
Stephanie Allen - Manager, IR
We've got time for one more question.
Operator
Thank you.
And our next question comes from Daniel Barry of Merrill Lynch.
Daniel Barry - Analyst
I will add my congratulations, if I heard you correctly, you’re guiding to a 4 to 6% comp in the first quarter and 1 to 3% for the year?
Mike Koppel - EVP and CFO
That's correct.
Daniel Barry - Analyst
That's a big slow down, the back half.
I realize you've got very tough comparisons, but is that the only reason for the slow down?
Or is there something else there?
Mike Koppel - EVP and CFO
Well, the big reason, Dan, is that in the back half of the year we are up against pretty significant comps.
Daniel Barry - Analyst
That's the only reason?
Mike Koppel - EVP and CFO
Yes.
Daniel Barry - Analyst
Okay, fine.
Thanks.
Mike Koppel - EVP and CFO
Thanks, Dan.
Stephanie Allen - Manager, IR
Thank you very much for participating in our conference call this afternoon.
If you have additional questions or need further information, I can be reached at 206-303-3262.
The replay number for this call is 1-800-839-4519.
That number again is 1-800-839-4519.
There is no passcode required and the replay will be available through this Sunday.
An archived version of the webcast will be available on the Investor Relations section of our website for 30 days.
Thank you for your interest in Nordstrom.
Operator
Thank you, Miss Allen.
I'd like to thank all participants for participating today's conference call.
Have a good day.
And at this time, all participants may disconnect.
Mike Koppel - EVP and CFO
Thank you.
Blake Nordstrom - President of Nordstrom, Inc.
Thank you.
Thank you.