諾德斯特龍百貨 (JWN) 2004 Q1 法說會逐字稿

Hello and welcome to the Nordstrom first quarter 2004 earnings release conference call.

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

If you would like to ask a question, please 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.

Ms. Allen, you may begin.

Thank you.

Good afternoon everyone and thanks for joining us on the call today.

On the line with me today are Blake Nordstrom, President of Nordstrom Inc., and Pete Nordstrom, President of Full Line stores.

Blake and Pete are joining us from a remote location today.

Mike Koppel, our Executive Vice President and Chief Financial Officer is also in attendance.

This afternoon, Mike will lead off with a review of our first 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'll turn the call over to Mike.

Thanks Stephanie, and good afternoon everyone.

We are pleased to report another quarter of strong fundamental performance.

Sales momentum, combined with significant gross profit and SG&A improvement, generated over 400 basis points of pretax margin expansion in the quarter.

Earnings per share on a diluted basis increased 140% to 48 cents.

This includes approximately $21 million, or 8 cents of expense related to debt retirement during the quarter.

Excluding the debt expense, our earnings flow through for the quarter was 45%.

Before jumping into a recap of our results, I wanted to call out one change in accounting treatment that we adopted during the first quarter related to the merchandise certificates earned through our loyalty program.

There is no bottom line impact resulting from this change, but starting in 2004, sales figures will no longer include purchases made with merchandise certificates, and the certificate expense will be captured in cost of sales instead of SG&A.

The 2003 numbers in our release have been adjusted to reflect this accounting reclassification and all of my comments today will be in relation to the adjusted numbers.

A schedule of adjusted 2003 quarterly results is available on the Investor Relations section of our website under financial reports.

Sales trends were strong throughout the quarter.

On a comparable 454 basis, same store sales increased 13.2%, exceeding our 4-6% comp plan by a wide margin.

Total sales increased 16.6% to 1.5 billion.

All of our geographic regions and major merchandise categories posted comp sales increases for the quarter.

Regionally, performance continues to be fairly consistent with all five regions posting double-digit increases in the first quarter.

The following merchandise categories also posted double-digit increases for the quarter: accessories, junior apparel, men's wear, women's and children's shoes, intimate apparel and the designer and better segments of women's apparel.

Gross profit increased 320 basis points, or 116 million, compared to last year.

Better-than-expected sales provided the leverage on lower markdowns resulting in approximately 200 basis points of the improvement, with the remaining 120 basis points coming from sales leverage on buying and occupancy expense.

Our system tools are continuing to drive inventory productivity improvements as demonstrated by faster inventory turn, and better markdown performance.

First quarter operating expenses improved 180 basis points compared to last year, primarily due to leverage on better-than-planned sales.

Overall, expenses were well-managed across the board.

We are continuing to see fixed expenses maintained at or below budgeted levels, which is allowing us to fully leverage incremental sales.

For the quarter, the most leverage was gained on labor expense.

Nonselling labor was held to budget, generating about 60 basis points of improvement.

Selling costs, our biggest variable expense, were well-managed throughout the quarter, contributing an additional 30 basis points of overall expense improvement.

Service charge and other income increased 3.9 million for the quarter, in line with expectations.

While total receivables increased year over year, propriety receivables declined, resulting in lower bad debt expense compared to last year.

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

But year to date, delinquencies and write-off trends have been stable to improving.

Net interest expense was 36.7 million for the quarter.

This includes 20.8 million, or 8 cents per share, related to the retirement of 198 million of debt during the quarter.

Excluding this incremental cost, interest expense was about 4 million lower than the first quarter of last year.

Over the past 12 months, we have retired just over 300 million of our outstanding debt.

As result, quarterly interest expense has dropped approximately 5 million, which will translate into about 2 cents per share in earnings benefit in future quarters.

The impact of lower debt levels can also be seen in our debt-to-capital ratio, which has fallen from 49% one year ago to 37% as of the end of this quarter.

On a book basis, preliminary total debt and total capitalization are approximately 1 billion and 2.8 billion, respectively.

There was no share repurchase activity during the quarter.

As expected, inventory levels declined again in the first quarter.

Total inventory at cost was down 57 million, or 5.3%, from year-ago levels, and total inventory per square foot decreased 8.6%.

Overall, our inventory is in very good shape.

We continue to make progress managing our inventory levels, reacting to sales trends, and reinvesting inventory capital productively.

This is improving the flow of fresh merchandise into our stores.

Our goal for the remainder of the year is for inventory per square foot to be flat with last year.

Preliminary capital expenditures for the quarter, net of developer reimbursements, totaled approximately 47 million, primarily for new store construction, store remodels, and information technology investments.

Depreciation and amortization for the quarter was 65 million.

With regard to our outlook for the second quarter, we expect earnings per share in the range of 70 to 74 cents, an increase of 45 to 55% compared to 2003 second quarter earnings of 48 cents per share.

This range assumes a 4 to 6% increase in same store sales, and a moderate decline in expense rate.

Gross profit is expected to improve significantly, as we anticipate lower markdown levels versus the prior year.

In addition, interest expense will be 11 to 13 million lower, and service charge income 2 to 4 million higher than last year.

For the full year, we are raising our original guidance from a range of $2.02 to $2.08, to an updated range of $2.42 to $2.46; this compares to a $1.76 in 2003.

We are now assuming a 4 to 6% same store sales increase for the year, and 100 to 130 basis points of both gross profit and expense rate improvement.

Interest expense and service charge income assumptions are unchanged.

Our effective tax rate for the quarter and full year is 39%, and a diluted share count is 143 million.

Now, I'd like to turn the call over to Blake for some closing remarks.

Thanks, Mike.

Over the past few years, as our performance gradually began to improve, we have often been asked to comment on what we're doing differently that would explain the turn-around that's under way at the company.

Our first response is that nothing has changed, which is true as far as our fundamental approach to the business, which is exactly the same today as it has been for many years.

That fundamental approach has everything to do with the essence of our brand.

Our business is based on developing and maintaining strong relationships and a level of trust with our customers by providing a pleasant shopping environment, good service, and distinctive, high quality merchandise.

Over the years, these are the elements of our brand that have collectively come to represent the Nordstrom experience to our customers.

These are the fundamentals of our culture that we safeguard.

So while we work very hard to maintain and enhance what makes Nordstrom Nordstrom from the perspective of our customers, our approach to the day-to-day management of our business has changed over the past few years in some very important ways.

First, from a leadership perspective, we are taking a much more balanced approach to managing our business.

As a retailer, Nordstrom will always be intensely focused on improving customer service resulting in increased volume.

However, our leaders are now more attentive to other key levers such as inventory management, cost control, and capital investment.

Historically, we have not consistently executed well in these areas.

But the organization has made considerable strides and our progress is clearly reflected in our results.

Our team has gained an appreciation for the fact that active management of all the controllable aspects of our business results in more stable performance, and we are now doing a much better job adjusting our business to reflect changing market conditions.

The second change is our approach to inventory planning and allocation.

We still rely on the instinct of our merchants to select great product.

It's an instinct born out of experience, and we believe that product selection is a competitive strength of our merchant team.

We work hard to stay one step ahead by identifying the next hot item or trend, and always being on the lookout for new vendors that will help differentiate our mix and drive meaningful volume gains.

However, we no longer need to rely just on instinct to make decisions about how to allocate merchandise across stores; how much to buy of each size or color, when to take a mark down, and when and what to reorder.

Today, the experience of our merchants is complimented by a wealth of information that we simply did not have two or three years ago.

We certainly are not all the way there yet.

But we are working to expand our core competencies by supplementing existing expertise with new business processes and more sophisticated tools.

These two changes have had a dramatic impact on our results.

Our month-to-month comp performance has been positive for the better part of two years now, and we're continuing to outperform most of our peers.

In addition, all aspects of our financial performance have been consistently strong for a number of quarters.

We are proud of our recent track record and remain confident as we look ahead to the remainder of this year.

We will continue to drive fundamental improvements in performance through ongoing balanced and disciplined management of all aspects of our business.

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

Thank you. [Operator instructions.] Our first question comes from Daniel Barry.

Your line is open.

Good afternoon.

Congratulations on a great quarter.

You didn't say much about expansion.

Could you elaborate a little bit on that first.

Are there any more possibility of your acquiring more Lord and Taylor stores, are you still looking for 2 to 3 percent expansion next year, and can you comment a little bit on your success in your small -- in your low volume stores?

Hi, Dan.

This is Mike.

I will answer the first half of that question.

At this point in time, we're still targeting a 2 to 3 percent square footage expansion.

We have maintained conversations in a few other opportunities for the Lord and Taylor stores, although at this point we haven't been able to come to any agreement on those.

So at this point, that's how we're looking at the square footage growth.

In terms of the store performance, the small stores, I'd like to ask Pete to answer that.

Yeah, we've made some good progress this last two years.

We focused a little bit on it, and really with the idea that there is potential that exists out there that if we do our job right, we can get after it.

So we've experienced some nice growth in some of our newer stores over the last couple of years, and that's continued this last quarter.

You've said in the past that if you had good success in these low volume stores you might actually accelerate your store expansion at some point.

Is that still the case?

Well, we still want to make sure that we do it in a way that works for us.

And we have a range of size of stores -- it goes from what, 120,000 square feet to about 250 -- and there's a certain volume level that we don't really want to go below.

So I think we've learned a lot in the last couple of years about what it's going to take to have an effective and profitable store for us, and so we've kind of honed in on that and we're pretty comfortable with the growth expansion plans that Mike described.

Again, would that stay 2 to 3 for a while, or are you indicating maybe later on you might raise if?

Because you did indicate that at one point.

Well I think it's safe to say to wait for the foreseeable future because that really speaks to the current model that we have.

And I think we feel like we can continue to grow that current model at this type of rate.

But for us to do something growing quite a bit of more would really entail some new strategies that are just not in the foreseeable future.

I got it.

Thank you.

Robert Buchanan, your line is open.

Always good to see good people do well, so congratulations.

Just wanted to ask a few questions for Mike.

First of all, Mike, what again was the reason for the restatement?

I didn't quite catch that.

Bob, our -- we had been historically accounting for our merchandise certificates that our customers earn based on credit card usage.

Right.

And the way we had been accounting for those, when they got redeemed at point of sale, we had recognized the sale, we had recognized the cost to that sale, and then the cost of that actual certificate was booked as an expense.

Okay.

And so the appropriate treatment -- this activity has grown significantly in the last couple of years, and the appropriate treatment is not to record the sale.

It's just to record the cost of the merchandise certificate as a cost of sale.

So that -- it's basically a reclass between gross profit and expense.

All right.

It doesn't go into sales anymore either?

Right.

Okay fine.

Okay good.

And I just wanted to ask you on the systems front, the POS system, if you could just give us an update on the timetable there, and just what additional functionality that might provide to you guys.

Well, at this point in time, we've got over three quarters of our Full Line stores implemented on point of sale, and within that three quarters that are implemented, almost three quarters of those stores are on personal book.

So far, some of the big advantages of the -- of just the point of sale application -- is the fact that our ability to process the transaction is on average twice as fast as what it used to be.

Right.

We currently have price look-up technology, which we didn't have before.

And we have a multiple of other opportunities, for example, debit card acceptance that we didn't have in the past as well.

One of the big advantages we see that's starting -- that we're starting to roll out -- is this use of a personal book, which you know, we see as a opportunity for us to take that Nordstrom customer's experience that defines our brand so well and compliment it with some new clienteling technology.

And so far, early reads on that is that it's performing well and our sales people like it.

So those -- that's what we see as some of the initial benefits in the current --

And are there any other other near-term system initiatives we should be aware about?

Well, we just went live this past Sunday on our new HR management system.

So that's the last piece of our infrastructure that we need to put in.

And that's going to give us a platform to work off of, not only just for the basics of processing payroll, but to give us some great information in terms of managing what is our single largest investment, which is our people cost.

Okay.

Just finally -- I appreciate that -- for Blake or Pete, just wondered if there are any new men's labels that are working, either in men's or young men's.

This is Pete.

We've had some really good success in men's and in the younger men's area in the rail, mostly around the fashion and status denim lines.

And they're not necessarily new I don't think in the marketplace, but a lot of it is somewhat new for us over the last year.

And it's actually, in a lot of ways, mirroring what we've done in women's over the last almost two years; we've had a good ramp-up success with fashion oriented product, and we've experienced that in men's as well.

Okay.

Good.

And the turn is still looking pretty good in men's, Pete?

Yeah, it is.

It's improved quite a bit and most of that is due to the fact that we've created pretty conservative plans and we've been beating them every month.

And so we've created open the buy for ourselves, even improved our turn, and the merchandise we're able to bring in, the inventory we have is more current so it's helped sales, too.

So it's been very positive.

Turn is your friend.

Thanks very much, guys.

Thanks, Bob.

Linda Kristiansen,you may ask your question.

Do we have Linda Kristiansen on line?

Yes, I'm here.

Hi.

I thought you had said earlier that the gross margin improvement would probably be moderating this year and we'd see some pickup in expense rate, so my first question is just is that still your view or has that changed?

Well, I think -- Linda, this is Mike -- in terms of our gross profit improvement, we see that moderating as we go further toward the back half of the year.

As you might recall, it was in the third and fourth quarter last year that we started to really make some good progress in gross profit.

We're still seeing some opportunity in the second quarter, but I would expect that to moderate as the year goes on.

And in terms of expense, I think we've been pretty consistent saying that we expect to see moderate improvement in expense, and that that's going to be methodical process in improving that line.

Although, to the extent that our sales exceed our expectations, we expect to leverage that improvement, which is what's happened.

Okay.

And then on the expense for early debt retirement, did you initially talk about 16 million?

I thought that was the number I had from before, as opposed to 21.8.

Yeah.

I think the original range we estimated was 16, 18, but it actually came in based on the final market rates that we paid at around 20.

Okay.

And then also, I was wondering if the gross margin or the merchandise margin benefit at all from lower import costs in the quarter?

No.

No, it didn't.

The primary driver there was the improved markdown performance.

Okay.

All right.

Thanks very much.

Okay, Linda.

Rob Wilson, your line is open.

Yes, thank you.

Can you speak, how the direct to vision performed, and last year the direct to vision was much more profitable.

Can you talk about what you did last year to drive that?

Blake, do you wand want to handle that?

Sure, Rob.

This is Blake.

Our direct division has continued to have improvement that's been above our average; they're having double-digit gains.

And the story starting a year ago was the improvement with the e-commerce side of the business.

So with relatively soft direct business -- catalog business -- and in many case, it's just a changing, or shifting of that to the e-commerce side.

But the team there has made some strides on improving the integration, if you will, with our Full Line store business, but to date that has been a positive story.

And as you know, in the inception there was quite a bit of capital invested to get it going, and last year they turned the corner on profitability and it continues to make progress.

Can you also discuss the strongest and weakest product categories?

I might have missed that early in the call.

And also, one last thing, the personal book technology.

Do you guys manage that from the home office or is that a local store level initiative?

Rob, this is Mike.

In terms of the merchandise categories that we called out that had double digit increases, it was accessories, junior apparel, men's wear, women's and children's shoes, intimate, and the designer and better segments of women's.

In terms of personal book, the management of the technology is all being done centrally.

The actual usage of it within the stores is being managed at a store level, and we are using score cards that our store managers and department managers are using to monitor usage.

Thank you.

Thanks for taking my call.

Okay, Rob.

Christine Augustine, your line is open.

Thank you.

Mike, could you just update us on plans for use of free cash flow this year?

And are there any initial takes from the Nordstrom at home test?

Okay.

Thanks, Christine.

I'll answer the first part and then I'll PC the second part.

In terms of free cash flow, obviously, our number one priority is continue to invest money back in the business which our capital plan does reflect.

But certainly, with the performance we're having, we are looking at our current dividend plans and our -- and the opportunity for share repurchase.

At this point, we haven't defined anything specific on share repurchase, but that is something that we are looking at.

For at home, we're essentially on plan.

We approached it pretty conservatively and we've had some success, and we've obviously had a little bit of trial and error that goes with that as well.

The major challenge for us has been that most of what we carry in there we design and source ourselves, and it makes it difficult when you're doing that, rather than having a bunch of different domestic vendors that you can count on to fill in the blanks if something is shipped late or what have you, so we've had some not perfectly consistent flow of goods coming in there.

You know, we're learning and I think we're getting better all the time.

So I would say so far, so good.

It's too early to really draw any kind of conclusion for at home other than to say we're on track, we continue to learn, and we're still optimistic that it could be a good category for us.

Thank you.

Thanks, Christine.

Adrianne Shapira, your line is open.

Thank you.

Could you talk about the rollout of the vendor ranking tool and the benefits that we can expect still to come?

Pete, do you want to start that?

Not really. [ Laughter ] Go for it, Mike.

All right.

I'll answer that.

We started last year, Adrianne, that was part of some of the initial reporting we got out of perpetual and as part of our vendor score card, and it has been an ongoing exercise for us.

And I don't think I would call out anything of any dramatic value at this point in time, other than the fact that we continue to learn how to use it.

I think part of our markdown -- our improved markdown -- performance has been that we have been doing a better job of partnering with our vendors in ensuring that our gross margin performance is as positive as it can be.

Okay.

So is it helping you have better conversations with your vendors as a result?

And/or is it better tailoring your assortments for stores or a combination of both?

Well, I think it is helping us much more ensuring that the content of our inventory is more productive.

I mean, that's where we're going to get the biggest bang for our buck, is making sure we have the right inventory in the stores and it's allocated appropriately.

You know, the latter part of using it as a way to negotiate for vendors is a much smaller piece of it.

Okay.

And then my second question on the margin improvement, clearly you're seeing continued opportunity.

Could you just address the former projected goal?

You talked about the 7.5, 8.5 pretax margin that you're looking for in '06; any reason that we couldn't achieve that well ahead of schedule or is -- and also 8.5% is any reason to think of that as a ceiling?

Yeah, well, that's a great question, because if you look at the projections we just gave you for this year, it would suggest that we would be in that 8% range.

Right.

And so what that says is at this point, we aren't coming out and reprojecting that three-year goal.

I think what we'd like to do is see how this year plays out, and as we've done every year we'll reproject our medium term goals.

But certainly, with the kind of sales performance we've had, Adrianne, combined with the leverage we're getting on the operating model is getting us there quicker.

Terrific.

Thank you.

Thank you.

Jennifer Black, you may ask your question.

Good afternoon and congratulations.

Thank you.

I wanted to know, because you've kept your inventories so lean, if it would change the way you did your half year or your anniversary sale, bringing in fresher inventory from the perspective of special makeups versus clearance merchandise, since you don't have as much clearance merchandise.

Hi Jennifer, this is Pete.

Yeah, that would be correct, particularly for half yearly where it's a clearance event.

Particularly this year, or last year at this time, we had a fair amount of goods that we were clearing just from the fact that we started off the year being pretty overbought.

We came into the year real clean.

We've been beating sales plans every month.

So we'll have some clearance, but it's not as much as it's been in the past.

And actually, our ability to be able to buy into things that are closeouts, closer to the event, really helps enhance the sale.

So we're not going to make any predictions about what that's going to mean exactly for half yearly, but I do get the sense that our merchants are feeling pretty confident about it.

They feel like they've been able to get out there and find some things that are going to be current and sell well for them.

So that's feeling positive.

In terms of anniversary it is a completely different animal; it's not a clearance event.

So the thing that's probably helped us the most in anniversary is just being able to have the information so that we can allocate correctly up front.

And it's simple things like sell-through rates and top-to-bottom ratios, and the way we sell certain sizes and all those things.

We've been able to apply information that we've not really had before so that when we have these big events and the big buys that we make, it's just a much more efficient process.

So it is going to be exciting for us to see how that plays out.

All right.

Thanks so much and good luck.

Thank you, Jennifer.

Dorothy Lakner, your line is open.

Thanks.

Good afternoon everyone and congratulations.

I wondered if you could update us on progress that you're making on the remodels.

I've noticed, of course, Garden State Plaza has been undergoing that, and I wonder how it has affected the business, how the general program is going.

And my other question would be regarding what's going on with the Nordstrom product group labels, how they're doing, and so forth.

And then finally, I seemed to notice that there are just a lot more events going on in the stores these days.

I wondered if that's something you're really focusing on to help drive traffic.

It certainly seems to be working in any case, but I wondered if that is a deliberate focus.

Thank you.

Pete, you want it take that?

Yeah, I'll try that.

On the remodels, our business has improved pretty much everywhere.

To Mike's comments initially on the call, all regions have done pretty well.

And so where we've been able to remodel, obviously, while it's happening that can be somewhat challenging, but I think that everything that we've done, we've tried to do -- keeping in mind aesthetically what's going to make us more current, but also if there's ways we can do more volume.

And so there's examples in every remodel we've had where we've been able to make better use of the floor space and get into some categories that were helping us better.

So I guess on the whole, that's been positive for us.

In terms of the NPG label, NPG has performed well.

Again, I would say the fact that we've got better information allows us to allocate better up front.

When you talk about NPG stuff, we tend to buy it a lot further advance with a lot longer lead time than we do with the branded merchandise we buy.

So having good information is really important, and so we're just starting to get some of the effects of that.

I guess what I would say is the sales have been great, and we have been able to do it with actually having less inventory.

In particular, [Kazlon's] performed pretty well.

And then you mentioned events as well.

We try to, in the most decentralized and empowering way that we can, get every store and every department to try to create happenings in their department that will help drive sales.

And we've found that the more that we push that responsibility closer to the floor and encourage people to do it and recognize people when they do it well, that that's served us well.

There is a lot of activity going on out there and I think if were you to ask anybody in the stores, they would say it's contributed quite a bit to the improved business over the last year or so.

Thank you.

Thank you.

Dana Cohen, your line is open.

Hey, good afternoon guys.

Just following up on that question, can you talk a little bit about sort of -- what's been interesting to watch in garden state is sort of the remerchandising of the store.

To what effect is that happening to a letter degree in other stores, even when there is not a total leader model.

And second, on sort of the inventory management, or sort of can you give us a sense of sort of what you're learning on the systems and what might the merchants be able to do this year versus last year just as they're getting up to speed?

Okay.

In terms of the remerchandising, a lot of what we've done is we're living in our stores with some decisions we made four, five, six, seven, eight years ago when we changed some things around in sometimes a pretty dramatic fashion.

So we've learned over time that not all those department moves were the best.

So particularly in women's apparel, we've really tried to find ways to get the synergy and the adjacencies better.

We've had some departments that have grown quite a bit over the last couple of years, something like TBD, which four or five years ago was hardly anything and now it's one of the biggest volume women's departments we have, so we have to try to find a way to give that the proper exposure and space.

I would also say that our accessory division has had a lot of good growth in the last two years, and we've found ways to add some new business there.

And I think that's created some interesting challenges in how we can allocate the first floor, particularly when we have such a strong cosmetic and shoe business which certainly doesn't want to give up any floor space.

So it's actually a pretty good problem to have and it's an ongoing thing.

We will continue to try to have the stores laid out in the most efficient manner possible.

In terms of the inventory management, maybe you can ask that again, specifically --

Can I just come back though on the remerchandising in the stores?

I guess what I found even more interesting than those things, is just sort of like, you know, on the bottom floor, you know, now there's sort of a smaller cosmetics area, whereas you used to have the piano and the couches.

And it seems like you've slowly recaptured selling square footage, and I was just wondering how widespread that is?

Well, we hold pretty dear the fact that we've got common area space that isn't all cluttered and that customers can navigate our stores comfortably and easily, and so we're not anxious to get rid of that.

We think it's a good point of difference.

But there are a few stores where we still have some space that we could make more productive for us.

And a store like [inaudible] that does the highest sales per square foot does a lot of volume.

And you're familiar with that store, and that big area down there is so large that it lends itself to us trying something.

And the neat thing about it is we have a chance to expand on what we're doing in accessories and cosmetics with a lot of the new business, a lot of the more fashion-oriented trend kind of business, that it's just really a layer on, an addition to what we've already done.

So we use that, actually, kind of as an experiment of how we could take those departments and see if we could have them do something on multiple floors.

And it's a brand new thing.

We're obviously optimistic that that's going to work well.

But you pointed out a good example.

That's something that we'd like to try to do more of but I wouldn't want to send the message that we've got all this common area space that we are now going to be able to merchandise, because for the most part that is not true.

Okay.

And then with respect on the inventory side, I guess this is more a system question, which is, clearly there has been a learning curve for the merchants, and I was -- and you've sort of late last year you started to talk about sort of what they were doing that they couldn't do before, because they had systems and they had intelligence in term was what was selling and what wasn't.

And I was just wondering where are we on that spectrum, you know, are there further improvements, what are they now doing that they weren't doing even six months ago?

Well, we were just looking at that this last week trying to get up to date on our whole business case for the perpetual inventory model, and it is hard to say exactly.

We've gotten to the point where we were completely novice in our knowledge of the information, how to use it.

I think in a lot of cases we've moved to knowledgeable; there's now the next step of being real proficient and expert in it, and I think most our people are not there.

I think we've just moved most of our people into a knowledgeable area, and there's -- so we're making a lot of progress.

But I would say you're really looking at about a five-year plan on this thing until we can become totally fully functional and getting the maximum benefit from it, and here we are what, in year two.

So we've enjoyed a lot of success.

I think most of it's due to the fact that we've just had increased inventory discipline and focus there, and now we can layer on the fact that we've got some information.

I know I'm being being pretty general with you here, but the fact is we've got so many different divisions with so many different types of reporting that we're looking at that it is difficult for me to give you one example.

Okay.

And then just last question for Mike.

I know you've given us the SG&A in ratio for the year.

I think SG&A was up, what, 6% or so for the first quarter.

Can you just give us a sense of what it'll be up in dollars for the balance of the year?

For the balance of the year, I would say SG&A is going to be up around the 3% range, 3-4% range.

Okay.

Great.

Thank you.

Thanks, Dana.

Wayne Hood, you may ask your question.

Yeah, I was just wondering, Blake, are you happy with the performance of the kids' business presently?

I mean, do you feel like you're-- from a price point perspective -- where you need to be?

And also, if you could comment on special sizes and maybe the performance even of bridge.

And then I had one additional question.

Wayne, this is Blake.

Congratulations on your recognition the other day.

I think because of the very specific merchant questions, I'm going to have Pete respond to those, if that's okay.

First of all, every merchandise division that we had had an increase for the quarter, so to speak about them doing well or not well is kind of a relative term.

I mean, everyone's having improvement.

I would say that in kids' apparel, we still have a ways to go there.

We've made some progress.

We've had some improvement.

But we still are not having the kind of increases we think we should.

I think our strategy's the right one and we've spent a lot of time talking about it.

But getting to the point where you can articulate it in a board room setting, and actually being able to execute on the floor consistently across 93 stores, is another thing.

So we have a ways to go, I think, until we're really executing the way we want.

I think just generally in terms of the categories that we participate in and our general price points, that's -- we're right about where we want to be.

But there's a lot of subtle and not so subtle tweaking with just the content of what we carry, and being a little more focused, I think, would help us.

We're probably a little broader our offer than is maybe practical, given the size of our kid's area, is a general comment.

You asked also about the special sizes.

We've had quite a bit of improvement there.

Actually women's apparel on the whole, almost any way you cut it for the first quarter, represented quite a bit of an improvement for us, particularly as it relates to margin percentage; quite a bit improved.

I still say that in special sizes, we still have some ground to make up if you're looking at historical all time highs, but the progress has been positive.

And then I'm sorry, you asked about bridge as well?

Yes.

Bridge is an area again, while we've had increases, I would say it's been probably below the total average for where we are.

But again, it's a relative comment because we're still having increases there, so it's going pretty well.

There are some areas that have been good, in particular, our individual business has got a little bit better.

We've got some plans to try some new things there, and so, yeah, I'm feeling pretty positive about it.

And my last question gets back to growth in units again.

The Rack division has not seen a lot of growth over the last few years.

And do you think that at this point the platforms is such that maybe you might be able to grow that business in an accelerating rate over the next few years or no?

Well Wayne, this is Blake.

We purposely kind of reigned in the growth in the Rack, because not too long ago, about five years ago, we felt that we were a little behind the curve in terms of the amount of square footage or stores that we had to efficiently support the full line stores, which is one of their top functions is to kind of minimize the loss, if you will, the markdowns, in an efficient way dispose of these goods.

So I believe we're currently at 49 Rack stores at this point.

And we've had different kind of rules of thumb what our square footage or Full Line stores or volume, in terms of the relationship of how many Racks we'll have.

And given that our growth has slowed down a little bit in the Full Line stores and that we're being much more efficient with the inventories, we're happy where the Racks stand right now.

The good news with the Racks is we literally can look at a site, plan, prepare, execute, and get it open in six months, whereas a Full Line store is right around four years for us, on average.

And so we have a lot more flexibility there.

So we're closer to the vest.

And we'll watch with our Full Line store business, but right now, we like the ratio that we currently have.

And so if we were to ramp up in Full Line store, then we would look to slowly add a Rack or two.

All right.

Thank you.

We have time for one more question.

Thank you.

Our last question will come from Robert Toomey.

Your line is open.

Hi, good afternoon.

Just a couple of quick questions.

I wonder if, Mike, can you say what cap ex and depreciation should be for the full year?

Cap ex for the full year, Bob, is going to be somewhere in the range of 225 to 240 million.

And depreciation should be somewhere around 240, 245 million for the year.

Okay.

And then you talked about the potential for further cost reduction, and I wondered if -- or expense reduction, excuse me -- and I wondered if you could just comment on where you see, where you think you have the most opportunity for further expense reduction?

Sure.

Well, we've been commenting, I think, for the last couple of quarters on several areas, and those would be the areas in our supply chain area, where as we complete the rollout of point of sale and go to price lookup technology, it'll allow us going forward in the future years to minimize our ticketing efforts.

Also, in the IT area where we've invested a lot of resources over the last several years, as we start to plain out in our investments and start to capture the benefits from those and sunset some of our old legacy systems, we're going to see some savings.

And then I think the other area which we've been seeing pretty consistently every quarter is as new technology has come on and as we have found ways to do things more efficiently, you have seen leverage in our nonselling labor costs.

And we expect that to continue.

Great.

And one last question for Blake, if I might.

And it has to do with kind of the retail environment with respect to you know, there's been a lot of concern on Wall Street about rising interest rates and oil prices.

And I'm just wondering if you could just give us your perspective on how you kind of see the environment right now given that kind of a backdrop.

Hi, Bob.

This is Blake.

I think all of us as retailers are very leery of even putting our toe in the water on that question or that subject.

You know, kind of sales are the truth for us, so every day we look at that.

There is no question that there is a lot of noise or communication regarding whether it's the election year or the war or you know, the gas price, or the things that you mentioned.

I think what we tried to say in our remarks was we're really focused on the things in our control, we're making some headway there, and our confidence is rising as we implement these tools, improve our disciplines, and take a more balanced approach.

So we're sensitive to that, and we think what we've learned and Pete talked about with the inventories, that we're very well served by planning our business from a conservative point of view, and then if sales do pick up, having some upside, and so having that flexibility.

And so, you know, Mike mentioned the balanced half of this year, we're going against some improved results from last year, so we have relatively conservative plans, low single-digit increases, and we're hoping to beat that.

And when we beat it, that's where we get some good leverage.

Great.

Thanks very much.

Thank you, Bob.

Thank you for participating in our conference call this afternoon.

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