諾德斯特龍百貨 (JWN) 2005 Q1 法說會逐字稿

Hello, and welcome to Nordstrom's first-quarter 2005 earnings release conference call. [OPERATOR INSTRUCTIONS].

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

Now, I'd like to introduce Ms. Stephanie Allen, Director of Investor Relations for Nordstrom.

Ms. Allen, you may begin.

Thank you.

Good afternoon, everyone, and thank you for joining us on the call today.

Joining me here in Seattle this afternoon are Blake Nordstrom, President of Nordstrom, Inc.; and Mike Koppel, Executive Vice President and Chief Financial Officer.

Peter Nordstrom, the President of Full-line Stores, is joining us from a remote location.

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 operating performance.

For the first quarter, earnings increased 56% to $0.75 per share, ahead of expectations.

Top-line momentum consistently outpaced our low-single-digit same-store sales plan, which resulted in incremental leverage on both the gross profit and the operating expense line of the P&L.

Net income for the quarter was 104.5 million, compared to 68.7 million, or $0.48 per share in the prior year.

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

Total sales grew 7.7% to 1.7 billion, and same-store sales increased 6.2%.

Our strongest regional performances were in the Southwest and Southern states, and our best performing merchandise divisions were cosmetics, accessories, the designer and junior segments of women's apparel, and men's apparel.

The 20-basis point increase in gross profit for the quarter was in line with Company's expectations.

We planned and experienced modest merchandise margin deterioration, due to slightly higher markdown levels than the prior year.

This was more than offset by buying and occupancy expense leverage.

As for SG&A, we gained 130 basis points of rate improvement versus the prior year. 75 basis points was due to leverage on better-than-planned sales.

The remaining 55 basis points resulted from lower-than-planned expenses.

We are continuing to achieve efficiencies in our supply chain operations, as demonstrated by improved labor cost for the quarter.

In addition, our credit card business is continuing to experience improving write-off trends, which resulted in lower bad debt expense.

Credit card revenue, which is included in the other income line of the P&L, increased $3 million for the quarter, as a result of receivables growth.

Net interest expense of 12.6 million was slightly lower than expected, due to higher interest income.

The $24 million variance to last year reflects debt retirement activity that occurred in the first quarter of last year. 880,000 shares of stock were repurchased during the quarter for a total of $48 million, which leaves $452 million remaining on the authorization.

The resulting reduction in weighted average shares outstanding was not significant enough to materially impact earnings per share this quarter.

Inventory levels are in line with expectations.

At quarter end we had just over 1 billion in inventory on the balance sheet, which is about flat to last year.

Total inventory per square foot declined 1.7%.

On a same-store sales basis, inventory levels increased about 2%, on a 6.2% increase in same-store sales.

Total debt at quarter end was $1 billion, and total capital was 2.9 billion, resulting in a debt to total cap ratio of 35%.

Our 6.7% medium-term notes are due in July.

This is $96 million of debt that we plan to pay off using cash on hand.

The reduction will bring our debt to total cap down to about 33%.

We ended the quarter with 316 million in cash, net CapEx for the quarter totaled 43 million, and depreciation and amortization was 69 million.

Our current dividend policy aims to maintain a payout ratio of around 20%, and a yield that is in line with industry average.

The 31% dividend increase we announced earlier today supports these stated targets.

Our updated earnings outlook for the full year is $3.40 to $3.50 per share, up from $3.25 to $3.35.

Excluding the 2004 lease accounting correction, this represents a 20% to 25% year-over-year increase.

Our low-single-digit same-store sales expectation for the full year is unchanged.

However, we now expect gross margin expansion of 20 to 30 basis points, and expense rate improvement of 50 to 70 basis points.

In addition, based on ongoing share repurchase activity, we currently expect our diluted share count at year end to be between 137 and 138 million.

Our interest expense and service charge income assumptions for the year are unchanged.

For the second quarter, we are planning low-single-digit same-store sales and expect earnings in the range of $0.85 to $0.90 per share.

Now, I'll 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 quarter as well as provide a brief update on a few initiatives.

We just completed another outstanding quarter.

The combination of solid top-line momentum, along with ongoing operating improvements is translating into consistently healthy earnings increases.

In fact, for the past eight quarters, year-over-year earnings per share has increased 75% per quarter on average.

These results reflect the Company's ongoing focus on refining our merchandising, improving inventory productivity, and reducing expenses.

Our stated goal is to deliver industry-leading results across a range of key performance metrics, such as pre-tax margin and return on invested capital.

We -- we intend to achieve this goal by sustaining positive same-store sales momentum, continuing to improve our operating efficiency, and pursuing value-creating growth opportunities.

For Nordstrom, successful top-line performance depends on the quality of the experience each customer has at point of sale.

Years in the business have taught us that a shopping experience is the sum of many elements.

But we believe the most important are customer service and compelling fashion merchandise.

We have a talented merchant team, and they are committed to providing customers with a merchandise assortment that is unique, high-quality, and trend right.

Our same-store sales and gross margin performance over the past year reflect continued progress refining our assortments.

Today, we have better information and better tools to help us deliver more of the right product to our customers.

Our team has yet to fully realize all the benefits of our existing systems.

Yet we are moving ahead with the rollout of additional system enhancements.

This past quarter, we installed replenishment optimization.

This new tool analyzes rates of sale by SKU, by location, and recommends optimal replenishment settings.

Over time, this will help us more efficiently manage our replenishment inventory.

Our ability to sell merchandise through multiple channels represents yet another opportunity for us to drive incremental sales volume.

We are continuing to take steps to better integrate our Internet, Catalog, and Full-line Store operations, with the goal of delivering a seamless shopping experience across channels.

This is going to be a multi-year process.

The first major step came at the start of this year, when we realigned our direct buying team to report directly into our Full-line merchant organization.

We also merged our Direct and Full-line Store creative teams.

These changes will improve the coordination of merchandise execution and branding across channels, as well as better support our new catalog strategy.

This next step begins in July in conjunction with our anniversary sale.

For the first time, we plan to mail one consolidated catalog for the event.

From that point forward, the featured merchandise in our catalogs will be available both in our Full-line stores and our website.

This will result in better alignment between our different channels, and we expect our catalogs and website to begin to have a look and feel that is much more consistent with our Full-line Stores.

Our current sales plans for the second quarter and the remainder of the year assume that there will be a transition period during which catalog sales temporarily decline.

We are confident that this will be more than offset over time, as we firmly believe we have more market share to gain if we leverage our resources and expertise to tell the Nordstrom story consistently across full-price channels.

Improving our operating performance continues to be a key area of focus.

Our progress to date has everything to do with exercising better spending discipline, developing and implementing best practices, and properly aligning incentives to drive desired outcomes.

Today, we are making better choices of how to leverage limited resources, which is resulting in expense reductions, meaningful improvement in operating margin, and, most importantly, return on capital.

Competitively and financially, we are well positioned to accelerate new store growth.

We remain optimistic that ongoing industry consolidation will result in additional expansion opportunities.

Although it is too soon to know specifically what that could mean for us.

In the meantime, we remain committed to reviewing our dividend and share repurchase programs with a commitment to maximize shareholder value.

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

Thank you. [OPERATOR INSTRUCTIONS].

Our first question comes from Deborah Weinswig from Citigroup.

Your line is open.

Thank you.

Good afternoon and congratulations on a great quarter.

Thank you, Deborah.

Thanks, Deborah.

Mike, I think in your prepared comments you talked but the fact that you planned and you experienced modest merchandise margin deterioration.

Can you talk about what part of that was planned and why?

Well, it was -- it was primarily a function of the year before when we transitioned in the first -- into the first quarter of '04 with our inventory levels very, very clean and, actually, somewhat light.

And so the markdown experience we had in Q1 '04 was, I would call it, unusually low.

And so as we planned into Q1 '05, it was more of a normalized pace.

Now I would also say that in addition to that, we did experienced a few pockets of business where we had above-plan markdowns.

At this point, we feel that our inventory levels are in good shape and don't anticipate any significant pressure going forward.

And also, I think you talked about in the last quarter that shrink was better than you had expected.

Did you see that again in the quarter?

Well, we're still operating under, Deborah, our shrink provision.

We don't take inventory again until August.

So we haven't -- we haven't determined any new results since the last time we took it in January.

Okay.

And then also, in terms of maybe just helping us understand in terms of what you're saying -- kind of, traffic versus ticket and any inflation that you saw in the -- in quarter as well?

I would say that there hasn't been any significant change in terms of the average ticket.

Our comps continue to be driven more on unit sales than any kind of change in average ticket price.

Okay.

And last quick question.

In terms of the home business, can you help us understand what percentage of the business that it is now?

And maybe if we look out, kind of, whatever time frame, three to five years, what, maybe, your hopes and plans are?

Pete, can you take that question, please?

Yes.

I'm not smart enough to tell you exactly what the percentage is, but it's relatively small.

We called out at the beginning of this call that accessories was one of the top divisions we have going in terms of comp-store increases.

Within that division is our At Home department.

Now we're not having increases currently in At Home, but I think the point is, is that it's not a big enough part of our business, that even if that's not at an increase, that it will slow down the total accessory division, per se.

Now, we've learning a lot.

I think we're making a lot of progress there.

We just introduced the Heavenly Bed from Westin, and that's -- that's gotten off to good start.

And so I think we're optimistic about where we can go based on what we've learned.

But the good news is, is it's not such a big part of our business that we can't afford to experiment and try some things and learn as we go.

Great.

Thanks, so much.

Thanks, Deborah.

Our next question comes from Neely Tamminga From Piper Jaffray.

Great.

Thanks.

And let me add my congratulations on a great performance.

Thank you.

Thanks, Neely.

I think my question is really, maybe, for Pete here.

Just give us an update with respect to what's going on in women's, some of the contemporary brands.

Maybe if you could call out some of the specific brands that are working well for you.

I know that Free People is considering doing hard shops within their stores.

Is that something that Nordstrom is considering in their locations?

And just maybe give us an update of what's working well there.

It's interesting you mentioned Free People, because they would be one of the brands that we're doing well with and have enjoyed good results the first quarter, and we carry that in our TBD department.

In terms of what that means, shops and what have you, almost every vendor we work with would like to have a dedicated shop of some sort in our stores.

But most of you know from being in our stores, we don't really do that.

We -- we try to make the presentation of our stores flexible to what's going on with trends and brands so that we're not locked into a certain square footage on floors, certain fixtures.

And that has served us well.

I think we can do it and still call out what the important trends and brands are without literally having to almost act like a landlord and have their own shops there.

So we're not looking to do built-out shops.

I do think it's important that we can call out what the brand name is in the context of the department.

But you -- mentioning Free People, is a good one.

That's done well.

I'd say, in the same kind of vein, Lacoste has been good for us, both in men's and women's.

But the knit trend has been very good.

When it comes to other brands, outside of premium denim, which there's several brands that are doing very well, both in men's and women's, it has more to do with categories than it does with a specific brand.

That's great.

And if I could just follow up with respect to productivity.

I know in some of your stores you've been repurposing some space to improve store productivity.

Can you just give us a sense of -- on how some of those changes have beared for you most recently, and what your -- the plans are, maybe, by the end of the year in terms of repurposing some of that space, where your selling square footage is at the beginning of the year, and what you're looking for at the end of the year?

Well, I think, intuitively, there are some things that we've done to capitalize on some of these trends.

Most of it's happened, really, in an accessory area.

The two examples I'd like to point to are designer sunglasses and then high-end watches.

And where we've been able to pull that together and really make a demonstrative statement about that business, it's done very well for us, and has really been an additive part of the business.

In the woman's area, you've got, kind of, this give and take at all the times where certain categories or businesses are trending up, and some are trending down.

So there is always kind of this flex and push and pull happening there.

But it would be difficult for me to quantify that for you.

But I do think that the two best examples would be designer sunglasses and high-end watches, where we're really doing a job there.

I think if you were to look in apparel, probably premium denim would be the place where we've expanded most as a category.

Great.

Thanks, and good luck this summer.

Thank you.

Thanks, Neely.

Our next question is from Emme Kozloff from Sanford Bernstein.

Hi there.

A question for Mike.

Can you give us some more color on the efficiencies realized in SG&A?

What drove those savings?

What will continue to be the drivers?

Are there other areas of opportunity?

I mean, Blake, I know you went into some of that.

But if you could give us some color as to what you think will lay out in terms of those efficiencies through '05?

Thanks.

Sure, Emme.

Thanks for the question.

Well, as I said in my comments, one -- one area that we're continually seeing progress in is in the supply chain area.

We started talking about a year or so ago that that was one our primary focal areas because we now had the ability to start to eliminate ticketing within our DCs.

And as of the end of this quarter, we're roughly 80% pre-ticketed, and our cross stock is in the range of 40% to 50%.

So we're starting to see some real progress in the terms of the cost of moving goods through our supply chain.

In addition to that, we did call out some good experience we're having in credit.

Now that's, obviously, a tough one to predict that we're going to say that that's going to continue for the year.

But we've seen very solid performance there, and we expect that not to put any additional pressure on us.

And then I would say, overall, our -- our support areas, in terms of the amount of resource that we need to get the job done continues to -- to either stay the same, or we get slight improvements in the cost of getting the same amount of work done on a much higher sales base.

Our central purchasing area has -- there's a number of examples where we've been able to lower costs in service purchase and a variety of different areas.

So I think there's a number categories where the Company is focused on and operating.

And then on top of all that, we're getting sales.

And so, our ability to hold those fixed costs flat and somewhat down is creating the kind of leverage we're getting.

Great.

And then just on some housekeeping on guidance.

Full-year guidance was raised about $0.15, and the upside on Q1 was $0.08.

Where should we be thinking about putting the other $0.07?

I am sorry, the -- we raised $0.15 for the year, and we were, roughly, I think, $0.12 to $0.14 over the original guidance in the first quarter.

So that's where most of it came from.

All right.

Thank you.

Okay, Emme.

Our next question comes from Filippe Goossens from Credit Suisse First Boston.

Yes, good afternoon.

Also, from the [indiscernible] site here, congratulations, for another great quarter.

Thank you.

Two housekeeping questions, and then I have, like, three questions.

First, what is the budget again for CapEx for '05 please?

The budget for '05 is roughly 300 to 325 million.

Okay.

And then, how much do you have left under the current share buyback authorization?

452 million.

Okay.

And then the three questions I really had.

With regard to the credit card portfolio, how are you currently matched from an interest rate perspective?

Is your -- the rate you're charging on the cards, is that a floating rate so it kind of matches what's happening with the Fed's own (ph) rate, or you have hedged that in some other fashion?

It floats to Prime.

It floats to Prime.

And that's for the entire credit card portfolio, correct?

Not -- not 100%, but -- but the majority of it.

Okay.

Then the second question I had is -- Currently, if you look at your credit ratings, Moody's is still a little behind the curve there with Baa1 rating.

Have you had any conversations with them to see when they will raise that so you would be more in line with what Fitch and S&P has?

The last conversation we had relative to that was -- was during the fourth quarter.

We continue to periodically share our information and discuss our current credit ratings with Moody's.

But, obviously, that is -- that is something they need to determine and we're going to continue to perform, and hopefully they'll respond appropriately.

Okay.

And then my final question, which is probably the most relevant at this moment from a fixed income perspective.

If you look at your stock price, it has done well, obviously, very well, almost up 23% year-to-date, significantly outperforming Federated.

If you look, however, at the credit markets, the story is just the reverse.

If I look at your five-year credit swap exposure, it is about 62 basis points versus Federated at 48.

My thinking is that the fixed-income people are concerned that you might do something like Neiman Marcus Group, which, obviously, would be great for shareholders but very bad news for bondholders.

What comfort can you give to the fixed-income community that you have no interest at this moment in going private as a Company?

I know it's a kind of a tough question to ask, but it's one that comes up on a regular basis with my investors, so I thought I'd just try to get some clarification.

Sure.

Well, I think our -- our primary focus has been around maximizing shareholder value, and we've continued to do that.

And we have no plans or intentions to take the Company private.

That's fair.

Thank you, very much

Okay.

Thank you.

Stacy Turnof with Merrill Lynch.

Your line is open.

Good afternoon.

You guys have mentioned before about identifying 50 potential store locations.

But I'm wondering if you guys have spent a little bit more time looking at the stores from Federated and May and have made any type of interest in the number of stores that you might want to possibly look at?

Hi, Stacy.

This is Mike.

I think it's pretty clear to everybody who's paying attention to this what the potential opportunities are.

Certainly, as it relates to what May and Federated could look like in a merger situation and what opportunities might make sense for Nordstrom.

We are -- we are -- we're looking at that very closely.

At this point, it's tough to tell what's going to happen until after the merger is complete, but we feel that we are prepared, both from a resource and financial standpoint, to respond to the best of our ability.

Okay.

My second question is from a merchandising perspective, I know that you had added a new designer -- a new designer department, and I was wondering how that's been performing, and is that an area that you plan to increase your exposure in?

Pete, you want to take that?

Yes.

I think you're talking about the Via C Department.

Exactly.

And just to give you on the call that aren't familiar with it, what it really represents is kind of the rising star designer part of our business in women's that would act between maybe where Savvy is and Collectors is.

And we rolled this out a few years ago.

It's doing well, and it is -- it is definitely part of any kind of plan we have when we're building stores and looking to revent -- renovate and do something additive.

It's been a good business for us.

It's grown.

I think it allows us to capitalize on the fact we -- we have a youthfully-oriented fashion customer that wants to buy new and emerging lines from us.

And it -- it fits very well with our overall strategy, making sure that we're being current and we're chasing the fashion.

Would you plan to increase the square footage in that area?

Well, like I said, as we have new stores that we're building or renovations done in existing stores, if we didn't have that department, we would look at it in almost every circumstance I can think of.

It is definitely part of our overall strategy.

So I think it's fair to say that we would look to increase it where appropriate.

Thank you.

Teresa Donahue from Neuberger Berman, your line is open.

Hi, guys.

I had a couple of questions, if you don't mind.

That's fine, Terry.

First of all, on the catalog.

Where does that inventory show up, because I guess to put it tactfully, your stores are considerably more further along the fashion curve than the catalog?

And secondly, I was wondering if you could give us a better -- a sense, Mike, for what the budgeting process is like for the store labor these days versus what it might have been a year ago?

And then I had a question on the guidance where your tone or something made it seem like there -- that something was different.

And yet, when I look back at my notes in the last press release, it doesn't look much different in terms of the components.

Okay.

Well, first, in terms of the catalog, I -- I think your question, Terry, was around the content of the merchandise.

Yes.

Pete, could you answer that please.

Sure.

Where do the markdowns go?

Well, we've been talking internally for a while of our desire to have more of a one-customer focus, which would mean that we would consolidate a little bit and not be -- I think the people that follow this really closely -- we've had a relatively different offer in the catalogs than we've actually had in our stores.

And that's created some -- we've done some business that way, but it's created some confusion with the customers, too.

Sure.

And we just believe that we have an opportunity to capitalize on the fact that customers all across the country want to be current and fashionable, and that's really where we've had the success in the stores.

So we're going to take that extra step.

What it means in terms of the merchandise we may own that we have to clear in the catalog, since we've been talking about this for a while.

It's fair to say that we -- we're positioned well for this event that's going to happen here in July, starting with the anniversary sale, then -- and then, obviously, in August with the new catalog.

So, I think by the time we get to that point, there may be some markdown exposure, but on the whole, it's something we built into our plans and shouldn't represent some kind of unforeseen change.

Thanks.

Pete.

I mean, is it fair to say that there was some of that in the quarter?

I don't know , specifically.

Mike, could you speak to that at all?

I don't think there would.

No, no, not necessarily in the first quarter from catalog.

It had more to do with the year-end.

We, again, towards fourth quarter, really wanted to ensure that we ended the year clean.

And so it was predominantly in fourth quarter, a little bit in first quarter.

But we think, today, we're in a pretty good position.

Okay.

Thanks.

Terry, your second two questions, the one on store labor, has anything changed relative to our budgeting?

And, no, nothing -- nothing has.

We continue to plan our labor cost in the stores consistent with the way we have for a number years now.

Okay.

And then as far as guidance, I think -- I think what I was getting across is that the -- that the margin improvement in both gross profit and SG&A is slightly better for the year than what -- than what we had discussed in the first quarter.

That's what I thought, thanks.

You're welcome, Terry.

Thank you.

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

Ms. Black, please press your mute button.

Hi.

Hi, Jennifer.

Hi, Jennifer.

Hey, congratulations.

Thank you.

I have a couple of questions as well.

I wondered if you -- if the number of your top-tier spenders has grown as a percent to your total when you're looking at your customer base?

You want us to start that question?

Or do you want to give them all first?

Yes, I was just going to ask one at a time, unless you want me to ask them all.

Why don't you give them to us all straight, and we'll go from there.

Okay.

Then I wanted to -- you to talk a little bit about your personal books and some of the success that you're seeing with those and where you think you can go with those.

And then, do you think you can handle the volume the first three days on the Internet, since you're going to -- you're going to have a 360-degree brand, and you're going to -- going to start the sale?

Because people will be able to get on, and I'm wondering if you'll be able to handle the traffic.

And then, lastly, I wondered if you'd seen a huge response when you offered your $5 shipping as a -- on the regular basis for the catalog?

I mean, for the Internet, sorry.

Hi, Jennifer.

This is Blake, and I'll try to respond to those.

Your first question had to do with the number of top-tier customers, and have we seen a rise in that?

I think, today, we're in a better position to understand be able to understand it better and to quantify it a little bit better.

So it's hard to give an historical perspective because we were flying blind there a little bit.

But, I think, today, with things like personal book, which is one of your questions, we think that our best people, and all of our salespeople, are enhancing the relationship they have with their customers.

And so I think it's fair to say that that is growing as a part of our sales.

But to give specifics on it, I don't think we'd have those full details yet, and that's not something that we've shared publicly.

Secondly, you talked about the personal book.

As you know, last year was a year of implementing the new point of sale, and then also installing this new personal book tool.

Again, one of, we believe, our points of difference and one of our strengths is the great salespeople we have, and the relationships they have with their customers.

And we believe a way to enhance that relationship and improve that service is this tool.

And so, we're fully implemented with the tool, and this year, '05, is all about all of our folks finding, with their own style, the best way to fully maximize this tool to improve service.

So there are a number of stories where follow-through has been improved, or if there are designer events or vendors that were able to communicate more efficiently with our customers, those targeted audiences.

And so we're on a very steep learning curve with it, and we hope to, towards the end of the year, be able share more with you on specifics.

But we're encouraged by it, and we're committed to stay focused on it.

Your third question was the Internet.

And you have a good memory, because as you recall, last year for our anniversary, our system went down.

And what a time for it to go down, but when that volume spiked, we had some real problems with the Internet and even our ability to handle it on the 1-800 number as well, and we lost a lot of customers on that.

So we took a number of steps at that time to address it.

So, though we are moving towards a more integrated approach, we believe we've done more of the necessary groundwork, or legwork, to ensure that our systems won't be a barrier.

So we're confident that we'll be able to handle that volume.

That -- your last question had to do with the direct division in testing and trying a flat fee to -- to freight.

And it's a $5 fee.

And at this point, it's been well received.

I would say one the things that's very beneficial is the simplicity of it.

It's very easy to communicate, very easy for our people to execute.

It's something we're trying, and over time, will take a look at and see if we will continue with it in that area and whether something like that would appeal in other areas of our business.

I think the key thing throughout all the challenges that we have is we want to be competitive with our goods and services, and that's one thing we're trying.

All right.

Thank you, very much, and good luck.

Thanks, Jennifer.

Mr. Robert Drbul with Lehman Brothers, your line is open.

Hi.

Just a couple of questions.

Good afternoon.

First question would be, when you guys provided the updated guidance for the full year, have there been any more accruals that we should account for in terms of an incentive comp, given the strong performance that you guys are tracking so far this year.

Bob, this is Mike.

Every quarter we evaluate where our performance is year-to-date and relative to our incentive program.

And -- and the -- and the results that we have indicated include what would a normal provision for expected payouts based on current performance.

So, the answer is, yes, it's included, and it's part of our normal accounting policy.

Great.

The next question would be, around the sales productivity levels throughout the store, can you just update us where you think you could go within the store?

And I guess the biggest opportunity's still within the box that you think you have, maybe, by categories or departments?

Pete, would you like to take that one?

Boy, that's such a broad question.

It's fair to say that everybody's got opportunity to improve.

So we've not tried to be surgical about the goal or the focus on improving productivity.

It's, really, it's applied everywhere.

And we've always been able to get good traction on our top performers, because they just -- they're so motivated, these pacesetter-type people.

But what we've been able to do is, I think, raise the bar for everybody else to get out of the mind-set of I'm trying to make draw to really hitting targets that are more goal-oriented.

And we seem to be getting good traction on that.

And we have good information.

So I think the answer to this, and it's probably going to be more general than you want, is that our goal was to try to just lift everywhere with our productivity, and not get super surgical about it.

I think, again, that our top 10% of salespeople are going to find out -- figure out a way to sell a lot, regardless of what we're doing.

It's everybody else that we're trying to increase the level of expectation.

And Pete -- and, Bob, this is Blake.

In addition to that, from a sales per certain division point of view.

We look at it from a total sales-per-square-foot productivity measurement.

We're still not back to historical highs.

It was close to $400, and I believe we're roughly around the $350 range right now.

And so the thing that we committed is that we need to see continuous improvement in our productivity.

And when we see that, we think we can get it to the bottom line.

So we see lots of years in front of us for continuous improvement.

And as Pete said, there's just countless pockets of the business throughout every store and every division where we think we can improve.

Great.

One final question, Blake, if I could, would be -- Can you talk a little bit about the performance of some of the stores that you've remodeled the last few years and how those are going, and sort of your plans for this year?

Updates on that?

Well, Bob, I appreciate you giving me that one.

Pete, actually, is a little bit closer to that, with the Full-line Stores.

So, I'd like him to answer that.

In terms of the remodels?

Is that the question specifically?

Yes, yes.

Well, any time you go into a remodel situation, it's a little difficult to quantify if you're just changing carpets and fixtures and you're literally not adding space.

But we do get the chance when we renovate stores to adjust space slightly and to bring the newest concepts that allow us to sell certain categories and trends better.

And it would be something like, for example, with denim, where just -- we sell a lot more denim now than, maybe, we did ten years ago when some of these stores were built 10, 15 years ago.

And the kind of fixturing you need to sell the denim is different than maybe a standard rounder would be for whatever pants we may have sold before.

And when we're able to display things in a way that speaks to that specific category, it definitely helps improves sales.

So there's a couple things that goes with it.

There's that.

I think there's understanding the density of product that we need on the floor.

And then, it's just the overall lift that you get in the stores when salespeople feel proud of their environment because they know we've invested money in it, and they get excited about it, and customers get excited with it.

I'm not -- I'm literally standing here today at our downtown San Francisco store.

We're in a middle of one of these things.

And it's exciting to see where we've completed some of this and we're having some good results.

And even departments where they've got duct tape on the floor, and it's in process, what you -- what you find out is, if our people are still serving customers well, and we have a great flow of new product coming in, it doesn't matter if we have duct tape on the floor.

I mean it -- we still keep going.

And this store is actually having some really good results in the middle of what you would kind of expect to be kind of a challenging period with construction going on.

So, I think just on the whole, there's certainly a qualitative aspect that gives a lift to everybody.

But there are, certainly, specific things as it relates to the departments that we would expect to see a lift as a result of.

And could you talked mainly on the -- on the comp side of it in terms -- are the remodeled stores getting a nice lift in comp versus the rest of the chain?

Are they still below sales productivity levels?

What kind of kick are you getting from that standpoint?

Well, they weren't below -- I mean, that's something -- that a store's getting remodeled isn't because it was below.

I mean, we do it more on how old a store might be in terms of getting it updated.

So it would be difficult to say from that point of view.

I don't think that just a remodel in and of itself is an indicator of an improved business, unless we're add some space.

And in most cases, again, we're not .

So if we actually even flex within a store, one department gets bigger and other one gets smaller, the net result of that probably isn't enough to plan much differently, I guess, than where we would be with current course of speeds and your basic, relative current trend of that store.

So, I guess the answer to your question is it isn't necessarily something that's a big difference from our trend had been going into the remodel.

Great.

Thank you, very much.

Thanks, Bob.

Our next question comes from Mr. Rob Wilson with Tiburon Research.

Yes, thank you.

Blake, could you talk more about this catalog strategy that's going to change this summer?

And are these catalogs more geared towards driving store traffic versus in the past?

And give us some color, maybe, on the page counts.

And, Mike, I had some questions about your co-branded Visa program.

I'm assuming that those costs hit costs of goods sold.

And are those costs given that the -- the receivables are increasing, are they dragging down gross profit margin in any way?

Okay.

I'll start, Rob.

Your question regarding the catalog.

As I mentioned that in August, we start with one mailing representing, for the most part, all of our departments, with a consistent and clear message about what Nordstrom -- what we're trying to achieve.

Not too long ago, I believe we had 72 different mailings that went out in the year, and literally millions of these went out.

And each one of these vehicles you could look at individually and see that they were effective, but they might have sent different messages about Nordstrom and were confusing to the customer, and it made it difficult for us to execute.

And so whether it was coming from the Direct Division or from Full-line Stores, totally or from a single division.

And so, it will be one booklet starting out in August, very regularly.

Again, the page count, in some cases, is going up.

And, certainly, the mailings is fairly similar to last year, but we just think it's much more targeted, and hopefully more effective.

And as you talked about, the goal is -- the heart and soul of our business is the Full-line Stores.

And for the Direct Divisions, they're to be a support to that.

And so they are making a number of changes and adjustments, both, whether to the web or the catalog to complement and support the Full-line Stores.

Mike, you want to take the next question?

Sure.

Rob, I think your question is -- is related to the cost of our loyalty point program.

Right.

Yes.

The accounting for loyalty points changed roughly a year or so ago.

But I will tell you that the impact to the margin is comparable on a year-over-year basis.

And so there was no significant or incremental impact to our gross profit year-over-year as a result of the loyalty point program.

But even -- even as the receivables are increasing and maybe the points are increasing?

You know what?

On a year-over-year basis, it just hasn't been significant.

Okay.

Fair enough.

And two other quick questions.

What was the Direct Division up this past quarter, sales growth?

And also, I noticed in your 10-K, the sales return reserve increased in '04.

Could you maybe speak to that?

Yes, Rob, this is Mike.

We don't -- we don't normally break out the sales growth in the Direct Division on a quarterly basis.

We're now including those comps within Full-line Stores.

And then -- I'm sorry your second question was -- ?

Was your sales return reserved increase?

Oh, the sales return reserve.

The sales return reserve is based on historical return patterns, and we reset it every year.

And it happened to be that the -- that the returns that we based 2004 reserve on was based on slightly higher returns in the prior year.

That gets reset every year based on actual performance.

Okay.

Thank you.

Thanks, Rob.

Our next question comes from Patty Edwards with Wentworth Hauser and Violich.

Hi, guys, great quarter.

Thank you.

Thank you, Patty.

Couple of questions for you.

First of all, Pete, you guys used to mention on a fairly regular basis and not for good reasons how the special sizes were performing.

And I haven't heard much about that in a while.

I was wondering how those were doing?

And then I was also curious, and I don't know who will want to answer this, but if we were to put this back in baseball terms -- I keep coming back to this -- with your systems, what inning of the ball game do you think you guys are in, as far as the improvements that you expect to see?

Okay.

With the special size division, and we're just speaking about women's apparel here, both petites and encores, which is our plus-size area.

That -- we've done better in encore than we have in petites.

Okay.

So that would probably be the best way I can quantify that.

We've actually had some nice growth in encore.

Petites, we're still working on it, and there's a lot of issues to try to figure out.

And when you're talking about a size, it's different than our other departments where you're literally talking about a lifestyle and a price point.

So we're trying to do -- could possibly do all ages, price points, lifestyles within one department there.

And that's where our challenge is.

So we're -- we're continually working on our balance to make sure that it's working for us as well as possible.

So, we're -- we're still working on that one.

Patty, this is Mike.

I'll take the inning question.

We kind of like to prefer to think about this as a process that, that doesn't have an end to it.

And so to try to put an inning on it suggests that there's an end.

I think every quarter and month that goes by that we experience the new tools we have, we keep learning more.

And at this point, we don't -- we don't see that there's a definite end to our ability to learn and to improve our business.

I think the magnitude of the change is probably going to be slower than it was a year or two ago, but I think the improvement's going to continue to be there.

Fair enough , thanks.

Thanks, Patty.

Our next question is from Adrianne Shapira from Goldman Sachs.

Thank you.

Blake, you had mentioned there's an opportunity to coordinate the message across your catalog and websites, especially with the anniversary sale.

I'm wondering, is there any opportunity to leverage marketing expenditures as you speak to customers with a consolidated voice across your catalog and websites?

Adrianne, most definitely there is.

But I don't think the specific goal is to see where we can find the cost savings, in this case, marketing.

I think it's to be more efficient with the limited resources and get a bigger bang, if you will.

And so, there are some slight just -- changes with these adjustments, but Linda Finn that oversees our sales promotion team has -- is using those funds, in some cases in different ways, to ensure that the experience at point of sale is being enhanced.

And we really believe that's a significant part of our marketing, versus, let's say, some medium like TV or what have you.

That we really try to focus a lot of our energies on what's happening in the environment and with our salespeople and with the product.

And so we'll continue to evolve and try things there.

Okay.

So we shouldn't think of this as a source of expense savings that Mike was talking about?

Correct.

Okay.

And then, Blake, you had mentioned an opportunity -- you're still not back to your former peak levels of 400 sales per square foot.

Can you give us an idea of the range of productivity across the store base and where are you focused?

Are -- is there a handful of stores doing 300 that should be doing 350?

Can you give us a sense where the opportunity is?

Well, Adrianne, I don't believe we've ever publicly gone out store-by-store or even given the specifics of the range from the low to the high.

We are fortunate that within our store base of roughly 95 Full-line Stores, that we don't have a store that's a negative drain on the total.

We do some stores that, obviously, are below the average that represent some pretty good opportunities for us, and certainly allow two or three years percentage-wise.

Some of these stores have been contributing a larger percentage-wise to the total.

And so, we think there's a real opportunity in all stores.

And we started talking a couple of years ago to all of you about really focusing in on a couple of stores that maybe were underperforming or a smaller store.

And I think we've really tried to evolve that to a wider sense, because sometimes that same focus, or those resources on one of our higher-producing stores or areas can -- and sometimes provide even a bigger dividend.

So it's something that we're not trying to, kind of, put in a box.

We really think there's opportunities across the board.

And we're committed for continuous improvement.

Okay.

And then question for Pete.

You talked about the opportunities across the store are pretty -- pretty big.

I'm wondering -- a lot of the callouts, in terms of what has been working has been the stronger fashion and newness.

And looking at Narrative and Point of View, has that fashion or newness opportunity trickled down to those departments yet?

Yes, it does.

I mean, when you talk about fashion, it's really a relative thing for each individual area.

And what we spend a lot of time talking about is -- just because fashion newness is selling, doesn't mean that has to do with a specific age or price.

It applies to all the departments.

So, we've gotten better on this.

And you always -- I mean, it's what's you work on all time.

But where we've seen improvement in Narrative and Point of View, or any of these other departments, is where we've been able to bring in new things for that customer.

And you still have the customer aspirationally looking to find ways to be fashionable, to be current, as long as it fits their body and fits their wallet, what they want to do.

And I think when we're successful, is when we can be much more focused that way about what the relative fashion is for the customers.

So it definitely applies in all departments, and where we can bring in newness, it has worked.

Okay.

Then, just the last question.

With the Full-line so strong, could you just comment on the Rack?

What is left for the Rack?

Well, this is Blake.

I'll take that one.

Our Rack division, led by Laurie Black, has been one of our better performers.

And the last year or so they've really made some strides with their strategy.

And so we're pleased with the results there.

We haven't been necessarily growing that base because we're sensitive to the amount of Full-line Store merchandise in it.

And as the merchants do a better job of being more efficient with their inventories and turning it better, there hasn't been the need to accelerate the growth with the store.

So, going forward, our Rack growth will be organic in relationship to the Full-line Stores.

But it's definitely a positive part of the equation at this point.

Thank you.

Thanks, Adrianne.

Our next question is from Steve Kernkraut from Berman Capital.

Yes, hi, guys.

Great quarter.

Thanks, Steve.

Thanks, Steve.

One question -- right.

One question that I had is that in your -- it seems that the merchandise margins for the quarter were down slightly, even though the overall gross margins were up, due to the leverage you have.

But in -- in the guidance for the quarter that we should have assumed that gross margins were going to be up.

So, when you gave the guidance, were you assuming you were going to have -- you were going to have down merchandise margins and you were going get leveraged the way it happened?

Or is there a change that occurred?

Steve, this is Mike.

We didn't give specific line-item guidance for the quarter.

We gave -- we gave guidance for the year.

And it was slightly up, I believe, for the year.

And so our performance for the quarter, frankly, we did expect margins to be slightly lower, but we did have a few extra markdowns that we did not plan.

And I think we talked about that a little earlier.

But the leverage on the sales outpaced that from the buying and occupancy.

So, there was -- there was a slight surprise in the unexpected markdowns, but I think we've got that mostly behind us.

Okay.

Okay.

Well, thanks a lot.

That was really the only question.

Congratulations, again.

Thanks, Steve.

Elizabeth Montgomery with SG Cowen, you may ask your question.

Good afternoon.

Hi, Elizabeth.

I have a question, I guess, about the -- the markdowns that you've been referring to as kind of a unplanned or higher than you had planned them.

Does that relate to any specific product category?

Or is that a function of the change that you're undertaking the catalog operation?

Pete, do you want to just take a second and comment on that, please?

Yes, I wouldn't say it's about the catalog operations.

Part of it is -- I mean, the biggest reason that you have markdown issues have to do with when you're overbought.

Now our inventory's been in pretty good shape.

We've had some accelerated markdowns due to some of the competitive issues that we -- we deal with, because we won't be under sold.

So if someone marks a group down and it happens to be a group we carry, we're marking it down, too.

And a lot of that stuff is difficult to plan and unexpected in some ways.

So there's been -- there's been some of that.

And we also are getting better about our markdown optimization in terms knowing when the most timely markdowns are .

And we've learned that, in many cases, you're better off taking them quicker.

So, on the near term, it may appear that it's inflated, but if you look over the course of a year, it -- it definitely should indicate an improved margin, because we probably sell through better our first markdowns.

So, there's a handful of different influences going on there.

And I think Mike is right.

It was -- they were subtle things.

They were somewhat of a disappointing circumstance.

But we -- we think our inventories are in really good shape, and our plans going forward reflect our trends, and so I -- I don't foresee us having any kind of ongoing markdown issue.

Okay.

Could you -- could you maybe give a bit more color as to which -- product categories they were in, like, women's sportswear versus men's or along those lines at all?

Boy, we had -- in several cases -- I would say where we have some of the most competitive issues as it relates to people breaking earlier on markdowns -- our competitors.

It seems to happen more in the bridge area than anywhere else.

Okay.

Great.

And then, just one, quick question.

I know you called out Lacoste as having a very good performance.

I wondered if you'd seen the knit trend taking any share from wovens or dress shirts?

Yes, that's a good point.

We -- we were just walking around the floor here today talking about it.

There's been an interesting transition with knits really coming on, and Lacoste is probably the best example, most well-known example of that.

But it's happening, certainly, in men's.

And it's happening in women's as well.

And we're still selling wovens very well.

But I think it's fair to say that you can see the transition coming, and we want to make sure we get ahead of the curve, and not only are we buying it in the proper proportions and anticipating where it is going, but that we give the customer a reason to buy something new.

Any time that you have kind of a shift in trends and categories like that, it's a great opportunity for us to sell more to a customer, because it just -- again, it gives them this motivation to buy new things, because the looks are changing.

And so it's an exciting deal for us to see the emergence of knits.

And, certainly, over time you would see that that would impact wovens.

Okay, great.

Thank you.

Thank you.

Stacy, we've got time for one more question.

Our final question is from Christine Augustine from Bear Stearns.

Thank you.

Is there any update on the rollout of ProfitLogic and potential benefits that you might be seeing now or, perhaps, maybe, you're thinking timing-wise that would be later this year into '06, '07.

And then, my second question is on markdown money.

How comfortable are you with your internal controls with regard to markdown allowances?

Thank you.

Hi, Christine.

This is Mike.

Thanks for the questions.

First on ProfitLogic.

We are -- we're currently on plan relative to our implementation.

We don't really go live until the third quarter.

And so relative to any recognition or any achievement of any kind of benefits from that tool, we're -- we're probably end of this year into next year, as far as really seeing that.

In terms of vendor allowances, that is a very hot topic.

We -- we are very comfortable with our controls there.

We -- we had evaluated them two years ago.

We -- we looked at them very closely as part of our 404 efforts.

We put additional controls in -- into place over the last 12 to 18 months as a result of some of the things we've learned.

And -- and as you may or may have seen, we enhanced our disclosure in our annual report around our vendor allowances, and, specifically, around those that we get for compensation, for markdowns, and cost of goods.

So we -- we're feeling like we're heading in the right direction there.

Thanks for the question.

Thank you.

Okay.

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