諾德斯特龍百貨 (JWN) 2004 Q4 法說會逐字稿

Hello, and welcome to the Nordstrom's fourth 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, 1.

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

I would like to introduce Miss Stephanie Allen, Director 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, our Executive Vice President and Chief Financial Officer.

This afternoon, Mike will lead off with a review of our fourth quarter and full-year results, Blake will make a few concluding remarks, and then we will open it up for questions.

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

Now, I will turn the call over to Mike.

Thanks, Stephanie, and good afternoon, everyone.

We are pleased to report that the fundamental health of our business is strong and getting stronger, primarily as a result of better execution.

In 2004, improved merchandise execution and disciplined inventory management resulted in our third consecutive year of same-store sales increases, and a 10 percent increase in inventory turnover.

In addition, we are continuing to gain operating efficiencies as a result of better planning, disciplined expense management, and the ongoing adoption of best practices.

We have been working hard the past few years to complement the organization's existing strengths with some new core competencies.

To that end, our updated technology platform is allowing us to apply more analytical rigor to our decision making, and we expect to continue to expand our capabilities in the years ahead.

Through all of these efforts, the organization has learned to take a much more balanced and disciplined approach to managing all aspects of the business, which is allowing us to deliver more consistent financial performance.

In addition, improved operating and working capital efficiency have resulted in a favorable spread between the Company's return on capital and cost of capital.

All of this is clear evidence of the positive momentum within our Company.

As we look ahead, we feel confident in our ability to take full advantage of what we believe are significant future opportunities.

For the full year, we reported earnings of $2.77 per share or 393 million, a 62 percent increase from the prior year.

The full-year results were driven by an 8.5 percent same-store sales increase, 150 basis points of gross margin expansion, and 110 basis points of SG&A improvement.

For the fourth quarter, earnings were 140 million or $1 per share.

This includes a noncash expense adjustment of 4.7 million after-tax, or $0.03 per share, related to a correction in our lease accounting policy.

Complete details are included in our press release which is posted on our website.

Excluding this charge, fourth quarter earnings per share were $1.03, a 39 percent increase over the prior year.

All in all, fourth quarter operating performance was solid.

Strong top line momentum, along with meaningful gross margin and SG&A improvement generated well over 200 basis points of pre-tax margin expansion in the quarter.

The bottom line impact of all of this was partially offset by higher than expected income taxes.

Our income tax provision and our effective tax rate for the quarter were higher than expected, due to a reassessment of our contingent tax exposure and a valuation allowance charge, related to a capital loss carry-forward that expires at the end of fiscal 2005.

Each of these items had a 30 basis point impact on the 2004 effective tax rate, and the combined impact of these items was a $0.04 reduction in fourth quarter earnings per share.

Sales trends were strong throughout the quarter, with all of our geographic regions and major merchandise categories posting same-store sales increases.

Total sales grew 9.4 percent to 2.1 billion and same store sales increased 7.2 percent, well ahead of our low single-digit comp plan.

Our strongest regional performance was in the southern states, and our best-performing merchandise divisions were women's and kid's shoes, accessories, junior women's and men's apparel.

The quarterly improvement in both gross profit and SG&A was primarily the result of strong sales volume.

Excluding the lease adjustment, gross profit increased 80 basis points or $82 million compared to last year, due to sales leverage on buying and occupancy costs.

As for SG&A, we gained 160 basis points of rate improvement versus the prior year.

Approximately 75 basis points of that resulted from effective management of core operating expenses, including labor.

The remaining 85 basis points improvement in the quarter resulted from lower year-over-year incentive costs.

Credit card revenue, the service charge and other income line of the P&L, increased 4.7 million for the quarter, primarily due to receivables growth.

Net interest expense of 13.2 million was in line with expectations and lower than the prior year, due to debt retirement in the first quarter of 2004. 5 million shares of stock were repurchased during the quarter for a total of 225 million.

The resulting reduction in weighted average shares outstanding had about a $0.04 impact on quarterly earnings per share.

At this point, we have fully utilized the $300 million repurchase program authorized by our board this past August.

We are currently reviewing additional share repurchase, and will be discussing the topic with our board at the meeting next week.

Now let's take a look at some balance sheet and cash flow items.

Good progress was made this year in the area of inventory management.

Sales growth continues to outpace inventory growth, and inventory turn improved 10 percent for the full year.

At quarter-end, we had 917 million in inventory, which is about 2 percent higher than last year.

Inventory per square foot is flat to last year.

Total debt at quarter-end was 1 billion, and total capital was 2.8 billion, resulting in a debt to total cap ratio of 36.5 percent, down from 43 percent this time last year.

Net CapEx for the quarter totaled 70 million and depreciation and amortization was 67 million.

Over the course of the year, we retired $200 million of debt, we repurchased $300 million worth of stock, and still ended the year with approximately 400 million in cash on the balance sheet.

As far as our outlook for 2005, we are currently forecasting earnings per share in the range of $3.25 to $3.35 for the full year.

Excluding the 2004 lease accounting correction, this represents a 16 to 20 percent year-over-year increase.

This range assumes low single-digit same-store sales growth throughout the year.

In addition, we expect ongoing merchandise margin improvement, as well as buying and occupancy efficiencies, to drive 10 to 20 basis points of gross margin expansion for the year.

We are also continuing to take steps to improve the effectiveness and efficiency of all our business processes, and anticipate these efforts will result in an expense rate decline of 40 to 60 basis points.

Interest expense should decline 26 to 27 million and credit revenue is assumed to increase 12 to 13 million.

As a reminder, our capital plan for the coming year is around 300 million net of developer reimbursement, about 40 percent of which will be spent on new stores, approximately 30 percent is earmarked for store remodels, and 16 percent for technology.

The remainder is for maintenance and general corporate purposes.

Depreciation will likely be around 270 million for the full year, and we currently expect inventory levels to remain fairly consistent with last year on a per-square-foot basis.

For the first quarter, specifically, earnings are expected to be in the range of $0.62 to $0.67 per share.

As you probably recall, we retired almost 200 million in debt during the first quarter of 2004, which resulted in about a $21 million of additional expense.

This explains the 30 to 40 percent expected earnings growth in Q1 '05 versus '04.

Earnings growth in subsequent quarters should be more in line with the full-year average.

With regard to stock option expensing, we plan to comply with FAS 123(R) and begin expensing options in the third quarter.

We are currently in the process of evaluating the proposed methodologies, and do not at this time have an estimate as to the EPS impact of the change.

Lastly, I wanted to take this opportunity to update our intermediate term goals for SG&A and pre-tax margin.

Our current 3-year plan is targeting an expense rate in the range of 26.5 to 27 percent, and pre-tax margin range of 10.5 percent to 11.5 percent at the end of 2007.

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

Thanks, Mike, and good afternoon, everyone.

Before opening it up for questions, I'd like to make a few comments about this past year, as well as the year ahead.

Our stated goal from several years ago, was to sustain positive same-store sales momentum and improve overall operating efficiency.

We are pleased to report that we have delivered on both promises. 2004 was our third consecutive year of comp sales growth.

Our gross margin is at an all-time high.

SG&A is almost 300 basis points lower than it was 4 years ago.

And we ended the year with a pre-tax margin of 9.1 percent, well ahead of our 2006 target of 7.5 to 8.5 percent.

These results clearly demonstrate forward progress.

Looking ahead to 2005, we will continue to pursue our long-term goal of delivering industry-leading performance.

Success will depend on 2 factors.

First, is our ability to sustain positive same-store sales momentum.

Second, we must deliver best-in-class operating performance.

To that end, we are focusing all our efforts on achieving these 2 objectives.

It is our belief that successful top-line performance starts and ends with the experience each customer has in our stores.

For us, the foundation of that experience is compelling product and superior service.

These are the 2 elements of our business that will be an ongoing focus for our Company as we work to sustain our momentum.

In the coming year, our product focus initiative is merchandise optimization.

This is a proactive effort to ensure that we're driving maximum benefit from our new system tools, and the focus is two-fold.

First, is continuing to develop proficiency with our existing perpetual inventory tools.

Second, is continuing to establish and execute best practices and more efficient processes in merchandising.

In addition, we will continue to reinforce one of the core elements of what we do, which is giving customers a reason to buy something new.

While we consider this to be a core strength of our merchant team, the dynamic nature of our business means that there will always be opportunities in this area to improve the speed and flexibility by which we respond to fashion trends.

Now more than ever, customers want fashion, and we strive to be a leader in the marketplace with products and trends.

Our service initiative is personal book, which will be a big area of focus in our stores this year.

For us, good service depends on our salespeople and the relationships they build with customers.

Personal book is a dynamic tool that will help our people build and strengthen those relationships by better anticipating and responding to customer needs.

We believe this represents a meaningful opportunity to build customer loyalty and drive additional sales volume.

Delivering superior performance takes more than solid top line results, which is why we are continuing to focus on improving operational efficiencies.

Our current expense initiatives are focused on reducing costs in the areas of IT and merchandising.

In addition, we expect planned system enhancements to result in additional opportunities to streamline processes and reduce costs over the next few years.

We are entering 2005 in a position of strength, both competitively and financially.

We believe our competitive advantage is the result of successfully differentiating the shopping experience at Nordstrom through compelling fashion merchandise and customer service.

This approach distinguishes us in the eyes of our customers and sets us apart from our peers.

Financially, we have taken steps to maximize our flexibility.

Current debt levels are low and cash flow generation is accelerating, leaving us well-positioned to consider a wide range of strategic alternatives.

Over the short-term, our primary interest is selective real estate acquisitions.

Currently, the primary barrier to accelerating square footage growth is the availability of desirable locations, and we remain hopeful that ongoing industry consolidation will result in additional real estate opportunities.

Aside from strategic investments, we will continue to review our dividend and share repurchase programs, with an eye towards maximizing shareholder value.

All in all, we are making tremendous progress, and our people really deserve a lot of credit.

Our Company is made up of many talented individuals who are passionate about making Nordstrom the best it can be.

This competitive spirit and strong committment to serving our customers, is truly our most valuable asset.

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

(OPERATOR INSTRUCTIONS) Emme Kozloff, Sanford Bernstein.

In terms of your 2005 guidance, should we expect operating margin improvement to be more heavily weighted to SG&A or gross margin improvement?

I'm trying to understand if the merchandise system improvements you're talking about will be a greater driver than the expense initiatives.

And additionally, you talked about the store locations potentially coming up for sale.

Is there a threshold of square footage growth that you would not want to exceed, that you would like to be comfortable with?

And then finally, just on housekeeping, can we assume option expensing is in the guidance?

Thanks.

Hi, Amy, this is Mike.

Thanks for your questions.

As far as the first one, the guidance we gave called out gross profit expansion of 10 to 20 basis points, and SG&A of 40 to 60.

So, we see the majority of the expansion in the pre-tax margin from SG&A.

In terms of the store location question, certainly in order for us to feel like we're successful and open the right amount of stores in the right way, we do feel like we have capacity limits on an annual basis.

From a financial standpoint, we certainly feel the Company is in a position that if there was some level of additional real estate available, that we could absorb it and not put the Company in any position where we're stretched from a liquidity standpoint.

And then the last question was on options.

And no, our guidance does not include option expensing currently.

I hope that answers your questions.

So, in terms of the square footage, can we assume a certain rate that you would be comfortable with?

I mean, obviously you've got the financials.

I'm sorry, I didn't -- .

In terms of the square footage growth?

The current financials have square footage growth of 2 to 3 percent.

Right, but I'm saying is there a rate of say 4 to 5 percent growth that would be the max, where you top out, because you just feel that the infrastructure -- you wouldn't want to pressure the infrastructure?

Well, you know, I think in 2002 we did almost 8 percent, and that was pushing the envelope a little bit.

So, that might be our top end on an annual basis.

Deborah Weinswig, Smith Barney.

Blake, you talked about the personal book being a big area of focus.

Can you maybe give us an idea of what you've seen already with personal book utilization?

And how are you measuring the impact?

Thanks, Deborah, I think I may turn that over to Pete Nordstrom, because he's working closely in the full-line stores on the personal book, to see some of the specifics there.

Okay.

You're going to have to repeat the question.

Okay?

I'm sorry.

What's the question?

No problem.

Basically with the personal book, can you talk about what utilization rates have been so far?

And also, how are you measuring kind of the impact so far on the consumer?

Well, there is a lot of different ways that we can measure personal book and some of it just has to do with usage that might not necessarily tie to directly to outcome.

So, what we're trying to do is find a nice blend of usage that relates directly to outcomes and improvements in productivity.

And so, we're working on all of that right now.

But the main thrust of our energy over the last few months has just been getting people to use it.

And we have seen a lot of real steady progress there, and clearly people are educated on it, we're having some success, it's been embraced on the selling floor, and now we have got to find a way to translate that into improved productivity.

That's really foremost on our list here in the next couple of months.

Can you share with us any examples from either from talking to sales associates or customers?

Or just anything to kind of make it more real for us?

Really I am trying to think of something that would be -- .

Well, one of the things that we can do is, we can highlight what particular customers -- what brands they might like.

So, when new merchandise comes in, we can let them know about that.

So much of our success this last couple of years has been about the newness that's been flowing in, the fashion and what have you.

And I think being able to take advantage of communicating with customers directly in a very timely way about it, rather than hoping they might show up in the stores, has been something that has helped.

Okay.And then also in terms of from the credit card side.

Can you help us understand the benefits you derive from owning your credit card receivables?

And also, how much direct marketing do you do based on the credit card?

Hi, Deborah, this is Mike.

Thanks for the question.

In terms of the credit card business, we still believe that that is an important part of our strategy for a couple of reasons.

Number 1, it's the obvious that we do get some good data out of that, and we do utilize that data for some direct marketing.

But I think probably more importantly, is it allows us to reinforce the relationship we have with the customer, and to serve the customer with our credit card the same way we serve the customer on the floor.

And we think that's certainly a really important part of the total relationship that we maintain with the customer.

Okay.

And just last quick question.

I think in your last call, you talked about a step-up in investment in remodeling your stores.

Can you help us understand either kind of number of stores you expect to touch?

Or just how kind of that also progresses over the course of the year?

Sure.

In our 3-year capital plan, we have targeted to spend somewhere in the range of approximately 90 million-plus a year in remodels, and that touches on average about 6 stores a year.

Daniel Barry, Merrill Lynch.

Good afternoon.

Congratulations on another strong quarter.

Thanks, Dan.

You didn't say much about the Rack business or the catalog Internet business.

Can you give us a little color on what's going on there?

Dan, this is Blake.

In terms of the Rack, they had the best performance in their history with us, and far exceeded their peers in the discount off-price arena.

So, the Rack did a super job this last year.

Number 1, one of their number 1 goals and missions is to move as efficiently as possible the full-line store goods, hence creating some open to buy and ability for the full-line stores to react quicker to fashion and trends.

So, definitely the Rack had a great impact.

The Direct business had another good year.

They are working hard towards a multichannel goal that we have, to become more integrated, more seamless.

And they've made some steps there and we hope to make additional ones in '05.

But in addition to that, they made good progress from a bottom line and overall Nordstrom point of view.

The web portion of the business continues to be the predominant part and the growth aspect of it.

What's your plan for growth in Rack stores going forward?

Since it's doing so well -- ?

The Rack stores, we have made a conscious decision to limit its growth to the square footage and amount of goods that comes from the Full-Line Stores.

So, we have it married to growth with the Full-Line stores.

And given that we've been 2 or 3 percent, we have backed off on the growth with the Racks.

As a matter of fact, with the improved efficiencies in supply chain, it hasn't warranted here in the short run, an additional Rack.

I believe we have 1 tentatively slated for 2006.

But going forward at this point, it will mirror the Full-Line store growth.

Bob Buchanan, A.G. Edwards.

Just want to also congratulate you on just a wonderful job in so many areas, fashion, editing of fashion, visual presentation, inventory control, you name it, it's the way to go.

Thanks, Bob.

Thank you, Bob.

You're welcome.

Just wondering if maybe Pete or Blake could walk us through what is happening in 3 areas of the business that I believe are strong.

Savvy, tbd, and cosmetics.

Okay, this is Pete.

I will take that one.

I think that the number 1 thing there, and you really could have mentioned more departments than just that.

Any departments that we have had that have been successful, have done a really good job of flowing in new merchandise.

You've heard me talk about this on a lot of the calls.

It doesn't necessarily have to do with price, it has to do with newness and fashion, and it applies at all the different categories that we carry.

Savvy, we've seen a lot of good growth there.

There's been, past 2 years a lot of premium denim activity that's been really great there.

And tbd, we tried to find our way the first couple of years, we created that department.

I think we really -- we have in the last 2 years now.

And we're able to deliver great, fashionable, current, casual-type clothes to that customer that we were typically competing directly with some of the vertically-integrated people in the malls, the Banana Republics and the J. Crews, and the Gaps, and the Limited Express, and a lot of these people.

I think that we've done a pretty good job there.

And while we've had a lot of growth, we still have a long ways to go in tbd.

In cosmetics, I think that's a division that we have that's really grounded in -- with a culture of offering newness all the time.

They've always been good with innovation, they do a great job of working with our vendor partners, and getting the first and the newest and identifying the hot trends and categories, and we just -- we've been on a pretty good roll there.

We have got some really great people in the cosmetic division.

So those are 3 great departments you talked about, but there's more than that, too.

Just a quick follow-up, Pete, on cosmetics.

Have you expanded the number of resources in cosmetics, contracted it, stayed the sam, over the last year or 2?

Well, it's about the same.

The neat thing about cosmetics is, it forces editing, because you have all this caseline space, and if you're bringing something in, something else has to leave.

It's how they can just squish more onto a rounder, or fold more things on top of a table, like you would possibly in apparel.

So, I think that effort has really helped them to stay new.

So, if I had to guess, I would say it's about the same.

We just are bringing new things in and editing out the things aren't as productive or interesting to our customers.

Okay.

And just lastly, in premium denim, some of the real high-end fare, like True Religion, do you do tonnage business in that?

Or does that just basically serve as an umbrella to help you sell more units down lower?

Well, I guess it depends how you want to define tonnage, but it's a significant business.

We sell a lot of premium denim.

I think more than -- if you were to have asked any of us a few years ago if we'd sell that many jeans at plus 150, $200 price points, I think we would have have been very surprised at the amount that we actually have sold over this last year.

So, it's been great.

As long as customers are interested in that, we 're going to keep feeding it.

But, as you know, these things evolve and change, and we're always looking to add onto that with whatever's new.

Okay.

Again, congratulations, guys.

Gregory Fowlkes, Morgan Stanley.

Yes, hi, a couple of questions.

The first on inventory.

You've already got about the best inventory turns in the business, and you're getting pretty close to 5 times this year.

You mentioned that inventory should be fairly flat on a square footage basis this year.

But given some of your supply chain initiatives, like replenishment optimization and some of the other things you're doing, do you think there's additional room to strip out some inventory, and perhaps take turns higher over time?

And then the second question is, should we be using a 39 percent tax rate going forward?

Hi, Greg, this is Mike.

And I will answer those questions.

The first one in terms of inventory, we do believe we have further opportunity.

We have in our plans over the next several years to target improved turn at about 3 percent a year.

Based on the data that we have and the things that we've learned over the last couple of years, we still have pockets in most of our categories where we can better allocate those dollars.

So, we think there's continued opportunity.

And in terms of the tax rate, yes, the effective rate for next year is 39 percent.

Christine Augustine, Bear Stearns.

On spring selling, can you talk about some of the early trends that you're seeing?

Second question is: Is there any update on the vendor preticketing initiative?

And then finally, I know that you've said historically, with regard to real estate that you currently are in about two-thirds of major markets, but are not fully represented in about half of those markets.

I'm just wondering if it that's still the case, or if there's an update there.

Thank you.

Hi, this is Pete.

On the spring selling, we've just been encouraged that the trend continues on, in terms of color and newness and fashion, so it -- I think that's the good news.

There isn't a big wholesale change in what customers are looking for.

It's just a continuation of what we've seen over the last couple of years.

We've had a great early read on color, really across the board.

And we have also had a really good read, if you look at like shoes for example, open up footwear is selling out really well again.

We're anticipating that it will be a real positive season, and our early indications are good.

Christine, this is Mike.

I will take the other questions.

In terms of the vendor preticketing, through the end of this year, we're at almost 25 percent of our goods coming in that are vendor preticketed, and we've seen a lot of progress in this area.

Our cost per unit was down almost 10 percent this past year.

And we would expect over the next several years, as this program rolls out, that we will continue to gain some efficiencies there.

In terms of real estate, I'm sorry, I didn't quite follow your question.

I think in the past, you've said that, looking at sort of major markets -- .

Yes.

You have stores in about two-thirds of major markets.

Yes.

But in those markets, you're only maybe fully represented in half, meaning fill-in opportunities are probably where the growth would come from.

So I'm just wondering if that is still the case.

Just thinking about real estate strategy, if there's consolidation, what sort of regions you may be targeting?

Well, I think I would try to answer that just slightly different.

You know, we had talked about that we had identified about 50 locations that we would think would be a good fit for 1 of our stores.

I would say that we are in approximately two-thirds of the major markets, and with -- within those 2 cuts you used, we think there's somewhere around 50 opportunities for us over some period of time, should that real estate become available.

Jennifer Black, Jennifer Black & Associates.

Good afternoon, and let me add my congratulations.

Thanks, Jennifer.

Thanks, Jennifer.

You're welcome.

I wondered if you could -- I know private label has typically represented about 18 to 20 percent, and I understand you're introducing a higher-end Classiques line, I think it's called CE.

And I wondered if you could speak about CE, and also the higher-end that you introduced with Faconnable.

And if you could comment any new initiatives in private label, because I think you guys have the best private label stable of brands in -- of all the retailers.

Thanks, Jennifer, this is Pete.

Hi, Pete.

Let me see how I can address that.

Our -- it's been interesting the last couple of years.

We've really tried to make a conscious effort to allow customer demand to dictate how much of our own product we're going to offer out there, rather than be prescriptive about a certain percentage.

And it settled into a number that's less than maybe we've had in the last several years, but we've actually been more profitable with that, showing that we've just made smarter decisions around what we are buying under our own label.

Like everything else that we've sold, we've done well with things that are fashionable and new.

And I think it's been good for our product group to have to get on a faster track with delivering.

So, they're competing with everything else out there.

You talked about Classiques and some of things, how we continue to evolve it.

And we will do that, just because the customer demands it.

I mean, every bit of indication we get is that customers want newness, and that holds true with our own product, as well.

So, we've been encouraged in how that's gone.

I think it's found a really good level.

There's opportunity do better, but I think given all the strides that we've made, we feel like we can build on what we have there, and NPG, our own label, will continue to be an important part of our overall mix.

And so can you answer how has the higher-end Faconnable done?

And I mean does it serve as an umbrella for the entire brand?

Or can you speak to your thinking on introducing higher-end?

Do you know what I'm asking?

Yes, I think I know what you're asking.

But there really is no connection between price and desirability by the customer.

It has to do with the styling and the value and the quality and the newness.

So, just because something happens to be more expensive than NPG, doesn't mean it's performed better or given us some kind of umbrella image effect.

That's not really what we're looking for.

We're trying to evaluate everything we do on its own merit, and the customers that we're trying to serve.

So, we've had success really across the board, and nothing -- but I can't speak to anything that really stands out, I guess compared to anything else.

In NPG in general, we performed well across all different product categories.

Okay.

And then 1 other question, and I think this is for you, as well.

Have you increased the number of events that have been in the store?

I know that Cynthia Duffy (ph) and Frank O'Sardo (ph) and it seems like there's been lots and lots of events that have really brought the customers in.

It seems more so this year than even last year.

I wondered if there was a difference, if that's something that's a major focus.

Can you speak to that?

Yes, I think, again, it's just an example of the organic opportunities that we have.

There is a lot of things we could spend money on and help entice customers to come in, any kind of advertising or events or things like this.

And what we have found is customers really like the events, and we have a better way of tracking and measuring our success there.

So, anytime we can tie new product into some kind of event for the customer, that has been generally a pretty good thing.

We have a lot of traffic in our stores, as you know, and if we can create exciting and compelling things going on in any given department because of an event, then we like doing that.

It's just making sure that we do it in a quality way, and have really something to say.

Well, you guys are awesome.

Anyway, thank you and good luck.

Teresa Donahue, Neuberger Berman.

I had 3 questions, 2 of them merchandising-related.

First of all, I noticed you haven't talked in some time -- you haven't called out the women's areas for the most part in some time as being strong.

I was wondering -- relative to the rest of the Company.

I was wondering what opportunities you see there?

Secondly, if you discussed it, I apologize, I missed it.

But the contribution of merchandise margin versus B&O in the quarter, you know, in terms of quantifying?

And then finally, I was just wondering who you're benchmarking yourself against in setting your margin targets for the next 3 years?

Okay.

Well, this is Pete.

I will take the women's apparel question.

I think I'll let Mike handle the other 2.

Thanks, Pete.

You're welcome.

I think when you're talking about women's apparel, and you mentioned it yourself, it's a relative strength.

We had an improvement in every major merchandise category that we're involved in.

And women's apparel is a big part of our business.

And for us to have the results we have, clearly women's apparel had to play a positive role in that.

You heard me earlier talk about tbd, which is the women's department, and it's done very, very well.

We've had good results in women's juniors, another area that we talked about that had good, strong business in the fourth quarter.

So, that would be part of women's apparel.

I don't have anything to call out that's been disappointing, but I do think that some of the strength that we've seen in some of the other categories, serves as a reminder that there's opportunity in all the apparel areas, or any of the categories we participate in, to do better.

And when I think of some of the strides we've made in accessories or in shoes, for example, clearly those customers want to buy apparel, as well.

And I think that it's created a nice, competitive, healthy spirit around here about how we can maximize the potential of these customers in the stores.

So, we keep working at it.

But I do think it's fair to say, given the relative strength and the size of the total opportunity there, that it's going to continue to be a focus for us.

We want to be -- we want to do better in women's apparel.

And I think we've got some good momentum, and we should see some improvement there.

Okay.

Terri, this is Mike.

I will take those other 2.

In terms of the gross profit, pretty much all of the expansion in the rate was due to a leverage of buying and occupancy.

The merchandise margin was relatively flat year-over-year.

In terms of benchmarking, the way we'd like to look at it -- we called out that 3-year of 10.5 to 11.5 percent pre-tax margin.

The high end of that range starts to push some of the higher pre-tax margins in the department store sector.

Right.

But how we'd like to look at it is, we view ourselves as a specialty store.

And we have the opportunity and produce a sales per square foot that is certainly higher than some of the more traditional department stores, and so it gives us an opportunity to develop some productivity at that level.

But we also believe we can push to be more efficient like some of those big box chains.

And so, we're going to continue to look at those models and find ways to gain leverage on that to improve our performance in the years ahead.

Adrianne Shapira, Goldman Sachs.

Mike, just wanted to follow up on Terri's question.

Kind of surprised the merchandise margin flat, given the strength of the comps.

Could you just speak to the IMU and the level of promotions that you're seeing to drive these types of sales?

Well, in terms of -- in terms of the markup, markup has been relatively flat year-over-year, it's not coming from that.

Our markdown rate in the quarter was just slightly higher than it was last year.

The biggest difference was last year in the fourth quarter, our shrink results produced a pretty good size benefit for the period of time.

And this year, our shrink was just slightly better than planned, as we've lowered our accrual for the year.

Okay.

Right.

So, it was basically the year-over-year impact of the shrink results.

Okay, that helps.

The question -- I had a few other questions.

On the SG&A, clearly that's the big opportunity on margin expansion.

I'm just wondering, could you give us a sense, what's the biggest bucket of expense reduction opportunity, if you look out and look at source support, supply chain, IT, where the biggest opportunity on the SG&A side is?

Well, I don't know -- I think we've talked about for a while that our overall supply chain costs and a number of touches that we've historically had with moving our merchandise is a big opportunity for us.

But I think one of the things that we've learned over the last couple of years, is that with better planning and better visibility within how we do things, we're gaining a lot of leverage by just holding some of our nonselling activities flat, finding a way to do them more efficiently, and getting a lot of leverage on the top line.

And, that's where we think the big opportunity is.

We've invested a lot in technology.

Our people are constantly finding better ways to do things and if we can keep this comp store sales going at even a low-single digit level, we will continue to leverage that over the years.

Okay.

And then my question -- I guess the last one is for Pete.

The reinvent campaign probably brings up a lot of bad memories at Nordstrom, but clearly the success you've been seeing in the past few years seems to have accomplished just what that set out to do, trying to attract kind of a younger, more fashion-forward customer.

And I'm just wondering, had you gone back and polled maybe focus groups in terms of who -- what your typical, what your average customer now looks like in terms of age and demographics?

We have a lot better information about customers just because of the increased sophistication in our technology and point of sale systems.

So, we know a lot more about our customers than we used to.

So we don't literally have to do surveys, and mirror our customers buying things, and (indiscernible) be in the stores.

That's our information that we use.

And I don't know if it's so much about a chronological age, but for whatever reason, we just have been able connect with people pretty well when it relates to fashion, again.

And I think there's a certain, modern, contemporary or youthfulness implied there.

I think for our store to be successful, we have to always feel -- the customer has to feel like there's a pulse, and that we're current, and we're giving them a reason to buy something new.

So we focused on that pretty hard.

And while we've stayed away from the word reinvent, I do think that we've talked about how we can evolve and attract new customers all the time.

It's becoming more and more a part of how we do business.

And Pete, as you mentioned earlier, some of the categories that you were -- that have been working, have been more competitive with some of the specialty stores in the mall.

Is that where you think you're gaining some of the traction with this new customer?

Taking her away from some of the specialty stores in the mall, versus the department stores?

Well we believe that's where we lost some of the market share before.

So, if we're doing better now, presumably it might be because we're competing better with some of the specialty store people.

The way our stores are set up, and because we act as a specialty store and have all these lifestyle departments within, it gives us some really great comparisons, kind of department by department, on how things are going out there and who we should be competing with.

So, I think that we've really continue to improve our focus around that competitive set.

And there's some great competitors out there, and that keeps us sharp.

And so, yes, I hope we're competing better.

That's certainly our intention.

And then just a last question on Home.

Any update there in terms of how -- is that still in test mode?

And how -- what the early reads are and how the rollout is progressing?

Well, we've -- we basically put everyone off for a whole year talking about it.

Because we wanted to see what we can learn.

And so I guess I can't put anyone off anymore.

So, it's really been a good year for us, we've learned a lot.

And I think it's given us confidence that we can continue to go forward with our strategy.

But it's fair to say that there's been some lessons learned in this last year, that we feel like we can improve upon and improve our results.

So, it's just -- it's been kind of a wholesale change for us in what we're trying to do there.

It's a relatively small part of our overall business, and so it does afford us the opportunity to try, without really damaging the overall results.

But I think it's fair to say that it's something we're going to continue to work on.

We don't feel like we've got it figured out at all, but I think that we're progressing on the right track.

How many stores is it in today?

Are we in?

About half, about 40.

Valerie, we have got time for 1 more question.

Wayne Hood, Prudential Financial.

Yes, thanks.

At the risk of being repetitive, congratulations, you guys.

Thanks, Wayne.

Blake, I had a question for you.

And then Mike, just a couple for you.

Blake, just among the 50 locations that you've identified that you potentially want to be in, how many do you think would produce over $40 million a store, 370 in a foot, just so we can think about the total portfolio and it's impact if you were to get some of those?

Well, Wayne, I think what we have learned over the past few years is that we don't do very well operating below 30 million.

So we've got that number 1 to start with.

We have also, as you know, enhanced our internal rate of return and our criteria for deploying capital for new stores.

So there is a number of criteria that we put forth before we will commit to a store.

And we don't have a game plan, as you know, just to have a store count or square footage.

We've even gone as far to say that there will be a year we don't open any stores, if it doesn't meet our internal criteria.

I think it's fair to say that out of the 50 stores, that 25 looked very strong for us.

The other 25, again, if some things were to occur, become more attractive, but they are predominantly stores, 35 million and above.

All right.

And, Mike, just a couple of questions for you.

There was a lower grouping or lower tier stores that were producing numbers that were below the Company average.

Can you talk a little bit about how you've closed the gap there?

Or are they equal to the Company average now, with the lower tiered stores?

Well, on a sales per square foot, no, they aren't near the Company average in -- on a sales per square foot basis.

But I will say that those lower tier stores have had comp sales performance that have outpaced the Company average, and so we're making some good progress there.

Okay.

And then final 2 questions.

The -- on the expense side, your in-store transfer expense was pretty high relative to industry standards.

And I'm just wondering what progress you made in that in '04, and how much that will help drive the expense rate down over the next few years?

That's 1 of the initiatives as it relates to our supply chain and the number of touches.

There has been some improvement in our supply chain expense that has been from that.

More of it came from the Rack, where we did -- where we were pretty active at minimizing the amount of times we were moving goods between stores.

In terms of Full-Line, we still have opportunity there.

And I think that starts with improved up-front allocation and then ultimately improved allocation will result in less transfers.

But that's still an opportunity for us for the next several years, Wayne.

And finally, Mike, if you looked at your '05 guidance, I'm assuming that's without any buyback in it.

And it looked like, also, that you could raise your capital spending level to '04 levels, which is -- was at a high in terms of openings and spending, and still be able to buy back 500 million more or -- or more in equity in '05.

And I'm just wondering if the logic behind that makes sense.

Well, I think the logic in your cash numbers is realistic.

You're right, that the EPS does not include any share repurchase at this time.

We're not authorized to do anymore, although we are going to have those further discussions.

All right, thanks.

Thanks, again.

Okay, Wayne.

Thanks for your questions.

Thanks, everyone, for participating in our call this afternoon.

If you have additional questions or need further information, I can be reached at (206)303-3262.

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Thank you for your interest in Nordstrom.