諾德斯特龍百貨 (JWN) 2005 Q2 法說會逐字稿

Hello and welcome to the Nordstrom's second-quarter 2005 earnings release conference call.

At the request of Nordstrom, today's conference call is being recorded. [OPERATOR INSTRUCTIONS] I will now introduce Miss Stephanie Allen, Director of Investor Relations for Nordstrom.

Miss Allen, you may begin.

Thanks.

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

Joining me by phone this afternoon are Blake Nordstrom, President of Nordstrom, Inc.;

Mike Koppel, our Executive Vice President and Chief Financial Officer; and Pete Nordstrom, the President of Full-line Stores.

This afternoon, Mike will lead off with a review of our second-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.

We maintained solid top-line momentum throughout the quarter and delivered significant gross margin and expense improvements.

In addition, we retired 96 million in debt using cash on hand, announced a 31% dividend increase and split the stock two for one.

All are good indications of the financial health of our business and the strength of our competitive positioning.

Second-quarter net income was 148.9 million compared to 106.9 million the year before.

Earnings per share increased 43% from $0.37 to $0.53.

Second-quarter sales are dominated by our half-yearly and anniversary sales which occur during the months of June and July.

These are large-volume events that materially impact overall quarterly results.

This year we are pleased to report that all three events delivered mid-single-digit same-store sales increases.

Still more encouraging were our regular-priced sales trends which were strong throughout the quarter.

Even during the sale events.

For the quarter overall, total sales grew 7.8% to 2.1 billion and same-store sales increased 6.2%.

All geographic regions delivered same store sales increases with the strongest performances coming from the south and the southwest.

The strongest merchandise categories were cosmetics, accessories, men's wear and the designer and junior segments of women's apparel.

Quarterly gross profit expanded 110 basis points compared to the prior year on a percent of sales basis.

Merchandise margin was 45 basis points higher due to strong sales and lower markdowns.

The remaining 65 basis points resulted from sales leverage on buying and occupancy costs.

As for SG&A, we gained 120 basis points of rate improvement in the quarter.

The fixed components of our expense base were either on or under budget and in combination lowered our expense rate 100 basis points.

The variable components, mainly selling, labor, and some benefits, accounted for 20 basis points of rate reduction.

Receivables growth resulted in 2 million of additional credit card revenue for the quarter, we are continuing to experience improving write-off trends which is reflected in lower year-over-year bad-debt expense.

Similar to last quarter, net interest expense of 10.9 million was slightly lower than expected due to higher interest income.

During the quarter, approximately 917,000 shares of stock were repurchased for a total of 26 million.

This leaves 426 million remaining on the current authorization.

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

Our inventory levels declined 3.5% in the quarter from 1 billion to 990 million.

Inventory per square foot declined about 4.5% on both a total and same-store basis.

Overall, inventory's in good shape as we head into the fall selling season.

Our content is current and productivity continues to improve.

We retired the remaining portion of our 6.7% medium-term notes when they matured in July.

This 96 million reduction lowered total debt for the quarter to 929 million.

Total capital was 2.9 billion and debt to total cap is 32% compared to 36% this time last year.

At the end of the quarter, cash and short-term investments totaled just under 500 million.

Preliminary net CapEx for the quarter was 67 million and depreciation and amortization totaled 68 million.

Now let's look at the remainder of the year.

We currently expect third-quarter earnings in the range of $0.30 to $0.35 per share with same-store sales increasing 3 to 5%.

There are a couple of additional factors impacting third-quarter results.

First, we are opening two stores in September and one in early November.

These openings will result in incremental expense in the third quarter on a year-over-year basis.

In addition, we will be rolling out markdown optimization in September and October.

Past experience implementing our current markdown management tool suggests that we could have higher markdowns during the initial transition period.

Our third-quarter outlook includes an estimate of this potential impact.

For the full year we are raising our previous guidance of $1.70 to $1.75 to an updated range of $1.80 to $1.90 per share.

This is a year-over-year increase of 30 to 38%.

Our updated forecast assumes mid-single-digit same-store sales for the full year.

In addition, we expect 40 to 50 basis points of gross margin expansion and 90 to 100 basis points reduction in expense rate compared to the prior year.

Based on these expectations, it appears likely that we will achieve our pre-tax margin target of 10.5 to an 11.5% by the end of this year.

Two years ahead of our schedule.

We will be updating our medium-term targets as part of our three-year planning process, which is currently in the early stages.

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 provide a brief update of a few of our initiatives.

For nine straight quarters now our results have demonstrated steady ongoing improvement across key operating metrics as well as a level of financial consistency that suggests our business is being managed in a balanced and disciplined manner.

All of the initiatives we've been working on are contributing to our positive results.

We will continue to take steps to ensure the long-term success of our company and believe that each quarter takes us one step closer to our goal of delivering industry-leading performance.

To that end, we are working hard to improve operating efficiency while continuing to deliver a unique shopping experience for our customers.

Key elements of that experience are compelling fashion merchandise and a commitment to offering superior customer service.

These will always be key areas of focus for our company, both are inherently challenging to perfect which means opportunities for improvement will always exist.

We are continually looking for ways to improve service at point of sale and we are pleased to report that success stories with our new personal book tool have begun to emerge.

Year-to-date we are seeing a correlation between comp-store performance and personal-book utilization, an indication that usage is resulting in incremental sales volume.

When it comes to fashion, our goal is to develop the best merchandising organization in the industry.

That means being a leader in the marketplace with product and trends and having an updated offering for all our customers.

It also means being disciplined and efficient in the planning and execution of our merchandising strategy.

Ultimately, it's about striking an appropriate balance between the art of selecting great product and the science of determining the optimal mix of sizes and quantities store to store.

Our top-line performance demonstrates that good progress is being made.

As you may recall, we installed replenishment optimization during the first quarter.

The expected benefit from this is inventory productivity improvement.

We are pleased to report that we are already seeing signs of progress.

Since implementation, our in-stock percentage for replenishment merchandise has improved almost 500 basis points.

In addition, replenishment inventory has decreased almost 6% while sales have increased the same amount.

Markdown optimization is the next system enhancement.

We are planning to roll-out one division at a time starting in September and wrapping up in October.

Before the start of the holiday season.

We'll keep you posted on this as we progress.

We launched our new catalog strategy about a month ago.

As we stated on our last conference call, our sales plans for second quarter and the remainder of the year assume that there will be a transition period during which catalog sales decline.

Over time we expect this will be more than offset by incremental sales in our full-line and internet channels.

We did experience decreased catalog sales in July but that's all we're really able to report at this point.

I'd like to reiterate that we expect a path towards multichannel integration will be measured in years not months and we'll be providing updates along the way.

In the meantime, we remain confident that this strategy will ultimately result in market-share gains.

One final topic is the implication of Federated's recent announcement regarding real estate dispositions.

For obvious reasons we will not be disclosing specifics but we can tell you that there are stores on their list that are of interest to us and we are pleased to finally have tangible details to work with.

We remain hopeful that ongoing industry consolidation in general will result in additional square-footage opportunities for Nordstrom over the next few years.

All in all, we continue to make tremendous progress.

Our people are improving day-to-day execution and remain focused on driving ongoing improvement across every dimension of our business.

We believe we can continue to gain market share by leveraging our core business and expect to achieve and sustain industry-leading performance.

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

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Emme Kozloff of Sanford Bernstein.

Hi there.

My question is in terms of your comp guidance.

Can you tell us what caused you to move it up to 3 to 5% from low single digits?

What makes you more optimistic now versus three to six months ago when you were planning it more conservatively?

Particularly given you did have a softer comp versus trends just last month and you just made some comments on the catalog and I've got a follow-up.

Thanks.

Okay.

Hi, Emme.

This is Mike.

Thanks for the question.

I -- I think there was a couple reasons for that.

Number one is we have had a sustained period of some pretty successful comp performance and it's been primarily driven by our regular-priced business.

So while July looked like it was a little soft at 3.6%, the underlying trend in regular price continues to be fairly strong and so based on that we felt it was appropriate to guide a 3 to 5% comp.

Okay.

And then the other question was on actions that you might be taking in the Bridge and special sizes businesses.

I might be wrong, but I think maybe they were weaker components in your comps.

Sure.

Pete, can you take that question, please.

Sure.

Yes, I think it's fair to say that relatively we've struggled a little bit in some of the women's apparel categories and special sizes would be one of them that's really been an opportunity for a little while for us.

Particularly in the petite side.

The encore side's been good but the petite side has not been as good.

In terms of Bridge it's a little bit of a mixed bag to call that whole category not good because we have certain categories that are doing extremely well.

I don't think it would be fair to portray Bridge as doing poorly.

I think all in all it's -- it's below the Company average.

But again there are segments of that business that are performing really well.

But in terms of what you're doing?

Pardon me?

In terms of what you're doing to improve performance?

Well, it's like anything else.

I mean, you keep applying yourself to what you see going on out there.

There's still some real universal truths out there with our business and that's flow and newness is really getting the job done.

I think one of the things that hurt us a little bit in Bridge and in some of the other women's apparel areas is we hit fall probably a little too early in terms of some of the weights -- weights of the fabrications and what have you and I think given as hot as it's been around the country and in most places I just don't think customers have the same kind of appetite for buying things and putting them in their closet for a couple months.

Where we did well is we were able to get updated colors and trends and silhouettes that pointed towards fall without super heavy fabrication so that was one of the things we learned.

Great.

Thank you.

Our next question comes from Deborah Weinswig with Citigroup.

Blake can you talk a little bit about your new catalog strategy and should we expect that to result in the higher margins on catalog sales going forward?

I tried to -- thank you for the comments, Deborah.

I tried to refer my remarks that this is a little bit unchartered territory for us so it's hard for us to predict specifically what kind of results we're going to get.

Because we are committed to improving our integration efforts and we have made some pretty significant steps with our catalogues compared to what we've done in previous years.

We started this initiative almost a year ago and it just started to play out with last month with the anniversary catalog and releasing I believe this week, this catalog in August, an offering that the goods are all represented in our stores.

And so there are different approaches, at least there have been from our point of view and what we see with some of our competitors on some real traditional tried and true catalog retailers and then what we're trying to achieve as a total company and with all the channels we have.

We want to be sensitive and supportive of the core part of our business, which is the full-line stores.

It's the heart and soul.

So the catalog's designed to support that effort well and we also think it will continue to enhance our web sales.

We do believe from a catalog-only point of view we're going to have some erratic performance going forward until we take some of these learnings and make adjustments from a margin point of view we don't have any plans whether it's our direct channel or full-line stores with our budget to make any changes with margin due to this correction.

Okay.

And then in terms of -- very impressive gross margin performance this quarter.

Can you talk specifically about what drove the lower level of markdowns?

Well, I think Pete you'd probably be best to handle that one.

Do you want to take that.

Well, it's a combination of a few ingredients that make up the gross margin as you know.

I think in some cases with the markdowns specifically, it's just that we're turning faster and we -- our inventories have been in good position all year long and we're on a real good streak of having sales outpace inventory growth by considerable margins for months and months in a row now and that more than anything else helps keep markdowns in check and help improve the profitability.

I think specifically on the last quarterly conference call that markdowns were actually cited as one of the reasons gross margins didn't improve more, so I was just wondering if there was a delta between the two quarters?

You know, Mike I don't know.

Do you have a comment on that.

I think Deborah, I think the biggest difference was our sell-throughs regular priced sell-through for the quarter in a quarter where we have a lot of promotional activity continue to show improvement.

So we actually had a higher proportion of regular-priced selling than we did promotional activity and that helped.

And then I think if you look at the inventory levels at the end of the quarter, you'll see that they were fairly clean.

Okay.

And then last question in terms of with the markdown optimization what type of training are the buyers going through and when is that occurring?

Deborah, this is Mike again.

We're going to start implementation in the middle of September and continue through roughly the middle of October in terms of rolling the various areas onto the system and then of course it'll be a period of time after that for us to really get our arms around good execution and best practices but in terms of the actual system turn-on it's a roughly 30-day period beginning in September.

So it'll basically be hands-on training.

Yes.

Okay.

Thanks so much and congratulations.

Thanks, Deborah.

Thank you our next question comes from Adrianne Shapira of Goldman Sachs.

Thank you.

My question getting back to a comment you had made earlier, Pete, as it referred to Bridge, bringing in some of those heavier weights, could you comment given the fact that being in stores it looks as if you're taking a bigger denim bet.

Give us a sense how that's been tracking given the hot weather we've been seeing.

I'll tell you, the weather has not slowed down denim sales whatsoever.

It's still a very robust category for us particularly when we're able to bring in newness and particularly at some of the higher price points.

It continues to sell very well.

I think we're out of the commodity type of business of denim and certainly in the fashion part of it and it's working well really across all categories, men's and womens so we don't see any slowdown in that category in the foreseeable future.

Okay.

Great.

And then Mike had a question about the share buyback.

It looks as if the pace of the activity has decelerated considerably from the first quarter.

Do you still expect to complete the authorization within the 12 to 18 months that you cited?

Yes, Adrianne, thanks for the question.

Yes, we obviously would still like to get back on pace.

The way we repurchase stock is we do it through a 10B 51 plan and based on the way our shares performed during the quarter, the plan was set at a sealing and we didn't get a chance to get in the market as much as we would like but going forward we'd like to get back in and certainly satisfy that plan over the next 18 months or so.

Okay.

And then the last question, Blake.

You had mentioned markdown optimization's coming but can you give us a sense -- I mean replenishment rollout has obviously been a tremendous home run, can you give us the magnitude of the markdown optimization?

Is it a similar type of opportunity or is it replenishment -- was it much bigger?

That's hard -- I think that's hard for me or any of us at this stage to try to quantify that, Adrianne.

I -- while we do believe that -- and we shared that with you earlier that replenishment represented some real opportunities for us, being able to have an information of facts for our merchants.

Every day they're learning things and making different decisions and we alluded that a little bit to the call today but most importantly you saw it in the results.

The number one thing with markdown improvement to date has been just having our inventories on-line and having open to buy and turning faster but this will help take us to the next level and be a little bit more strategic or surgical with the markdowns to improve this flow subject.

So we may see again a little bump or two up and down with markdowns, but markdowns is a huge cost to the overall business when you think about all the different levers, significant capital investments and inventory and inventory being in the fashion business is going to have markdowns.

And so our ability to manage that better starting with buying the right merchandise up front and allocating it better, they all should result in improvement.

So we definitely think over a multiquarter, multiyear time period we should see continuous improvement.

Great.

Thank you.

Thanks, Adrienne.

Thank you.

Our next question comes from Kevin Boler of Merrill Lynch.

Getting back to the higher comp guidance.

Considering the investments you'll be making in the third quarter with this markdown optimization system could you share just what comp you'll need to gain leverage on sales?

Well, Kevin this is Mike.

We've always felt that our model operates at roughly a low single-digit comp to generate leverage to the bottom line.

As far as the new systems going in, it is really way too early to put any kind of value to that because we're basically just turning the switch on.

Yes.

And we're turning it on and our people have to go through a lot of training very similar to what happened almost three years ago with Perpetual where we turned the switch on and we went through a significant learning curve.

So we're not at this point putting a lot of value on there other than the fact that we believe we could have a slight acceleration of some markdowns.

But we still believe even at a low single-digit comp that we can effectively leverage the model.

Great.

Just one other question.

Can you just share with us your thoughts on the high-end consumer here and whether the strength we saw from the consumer in the spring and the summer should continue in the fall?

Blake.

This is Blake.

I'm pointing at Mike saying why don't you take that one.

We get asked that question and -- well, I'll tell you as merchants we look at our business every day and any time I think we get beyond that information.

I mean, you and some of the audience on here probably have as good a feel or better feel than that.

There has been obviously a lot of discussion or focus on a luxury bubble or a consumer that's more affluent and more shopping and I think to some degree we have benefited from that.

But to try to quantify that or try to indicate when that's going to change.

It was interesting when we announced our sales for last month and that next day or two and a number of retailers had kind of a negative reaction to their results and there were some saying, ah ha, there must be some type of change taking place.

I think we think too much was read into that.

So we're sensitive to that.

We know it doesn't last forever.

But there's nothing in our end that indicates any change that would warrant changing our plans or approach to the business.

All right.

Thank you.

The next question comes from Neely Tamminga of Piper Jaffray.

Great.

Thanks and great job.

I have a question of clarification for you Mike on the markdown optimization.

I just want to make sure I'm hearing this correctly.

You have the expenses related to the markdowns -- the additional markdowns but you don't have any benefits in the guidance, correct, for this year.

That's absolutely correct.

Okay.

One thing we do know Neely is that when you turn these systems on you learn a lot more and the likelihood is that you're going to accelerate some markdowns just because you have much more precision in the data but at this point we don't have really clear visibility into the future benefits.

Okay.

Great.

Okay.

And then in terms of the home category.

If you could give us an update as to how this is working for you?

Is it out of test mode or are you considering it as a go-forward and -- about how many stores is it in and how many do you hope to have it in by holiday.

Blake, can you take that, please.

I can.

We're in roughly half our stores -- a little more than half of our stores have at home.

There's no plans to add more or take them out.

I mean that's not something we do based on a couple months' selling.

Any time we make a floor move like that it's something that's much more permanent than a cyclical business trend.

I can say that at home did really well in July, particularly well.

It was mostly due to the fact that we -- we're carrying the West End Heavenly Bed now and it was part of our anniversary sale and it performed very well, beyond our expectations.

And so that was good.

But obviously a department has to have more than just one item to be successful over the long haul so I don't know -- when I say it's in experimental mode or not experimental mode it clearly is in a growth kind of mode and I think we have to continue to learn and build on the successes we have had.

The good news is is most recently we've had some pretty good darn successes.

Thanks and best wishes in the third quarter.

Thank you, our next question comes from Barbara Wyckoff of Buckingham Research group.

Hi everyone.

Can you hear me.

Yes.

Good quarter.

I guess this question's for Pete.

Could you talk about the trends during sales of third-quarter so far.

Is it running similar to second-quarter cosmetics, accessories, designer, junior apparel men's, et cetera.

You didn't call out TPD or Savvy what's going on in those businesses outside of denim.

Yes, they're doing really well.

I think when Mike gave you the comments about cosmetics, accessories, men's wear, designer, junior segments, women's apparel and we try to be a little bit more broad in our view and not get super specific but the departments that have been doing well all year continue to do well and junior's is obviously part of that and the more contemporary side of our business was TPD and Savvy continue to be very strong as well.

Okay and then I have a follow-up thank you -- a follow-up question for Mike.

Could you please update us on the SG&A improvement initiatives?

Are all departments being crossed off at this point and where are you in this process?

Hey, Barbara.

Thanks for the question.

Where we are right now is roughly 80% of our product is being preticketed and right now we're cross-stocking roughly 40% and we think that there's still a little bit more room to improve our cross-stocking there, although, a lot of that is going to be dependent on some -- on a variety of practices which we're addressing.

But I think on an overall basis from an expense standpoint we're still -- we continue to learn, we continue to take advantage of the technology that's been in the Company and how we can better leverage it as the Company gets bigger and then I think just from an overall planning and discipline standpoint what you're seeing is our teams developing some well-thought out plans and executing and us not getting major surprises on the expense side and that's why you're seeing the leverage.

Great.

Thank you.

Thanks, Barbara.

Thank you.

Your next question comes from Teresa Donahue of Neuberger Berman.

Hi, guys.

Hi, Terry.

Hi Terry how are you doing.

Good, how are you.

Good.

I had one sort of housekeeping question.

Why would you rollout markdown optimization and -- in the third quarter, which is fairly high volume?

Well, Terry, this is Mike.

I mean, obviously if you check off your opportunities for us, you definitely don't do it in the fourth quarter.

Yes, of course.

The second quarter for us is also challenging because of all our promotional activities, especially anniversary sale.

So frankly third quarter is -- probably represents the best window for us to get this done and backing into the timeline we had from when we committed to the product and our ability to execute it, that is when it made most sense for us.

Okay.

Thanks.

Okay.

Thanks for the question.

Thank you.

Our next question comes from Richard Jaffe of Legg Mason.

Thanks very much and very impressive results, guys.

Thank you.

Just trying to take a look at the credit card business and how that's improved year-over-year and if you see a traditional initiative to drive that proprietary customer?

And then I have a quick follow-up.

Sure.

Richard, this is Mike.

We've seen continuous improvement not only in the quality of our portfolio but then the resulting expense ratios around that and that primarily being our charge-off.

In addition, we've been able to continue to grow the business and leverage the infrastructure that we do have, which is -- which is resulting in some benefit for us.

One of the biggest value programs we've had coming out of that business has been our loyalty program, which has been driven by the holders of our credit card and it's created a lot of loyalty in the stores and we believe it's lifting our sales.

So we continue to find ways to exploit that and to target it toward our best customers.

And just a quick follow-up on the private label initiative.

Any changes for fourth quarter as we look for an increased percentage of sales in the private label categories?

Pete, do you want to take that, please.

I'm sorry, what's the question again?

Are you going to be doing a lot more private label in the fourth quarter.

No.

There's no plans to take it up any more than the current demand indicates from our business.

We've been rocking along pretty steadily.

It's been, what, about 13% clip of MPG product to our entire mix and that's going to probably be about the same going forward for the remainder of the year.

And for next year?

Well, all we can predict and all we know is what we've kind of bought through and so I think when -- what I'm saying is that for the next maybe up to 10 months I think it's going to be about exactly the same percentage because that's what we've really bought through at this point.

Hello.

That was great.

Thanks.

Okay.

Thanks, Richard.

Thank you.

Our next question comes from Jennifer Black of Jennifer Black & Associates.

Good afternoon and let me add my congratulations.

Thank you, Jennifer.

I wondered if you felt that the great results that you've had have given you an even clearer vision for the all-important holiday season?

I know anniversary used to act kind of as your eyes to see what would be -- what you would have in the stores at holiday, that's my first question.

Pete, can you take that, please.

Sure.

Well, I think it gives us confidence.

What happened in the sale, particularly right at the beginning of the sale we had a really strong beginning of the sale and that was just -- it was a reaction to the new things that we had and any time we can bring newness in again it really seems to work and I think our buyers have grown in the confidence level given that we've had some success and so what we have planned in the fall and then holiday is a continuation of the same theme about giving the customer reason to buy something new and I know that's kind of a broad general stroke but we did well in some major categories that we think should bode well for our results going forward for the remainder of the year.

Okay.

Great.

And then my next question probably is for you, too, Pete.

Boots looked really, really hot and I wondered as a category, how they performed versus the rest of shoes and then I also wondered if you could comment on metalics.

Yes.

Well, you nailed two good categories there in shoes.

Metalics were great.

Western boots particularly sold really well.

We continue to sell wedges pretty well.

Again anything that gives you an updated look is important and continues to sell well.

And we've sold out boots well on the sale for example, yes, it's going well in shoes.

Is there anything that was particularly a disappointment?

Nothing that really stuck out.

I think what was disappointing in the sales -- given we do so much business there is some things that we may have underbought and just didn't fully capitalize on the opportunity that was available to us to take advantage of all the customers in the store.

So if you were able to do the sale again with a crystal ball, there's just some things that we would have bought more of.

I think like anything else there's always some things that didn't perform as well but in general if we had a disappointment, I think it was buying the best things in greater depth.

Was belts one of those categories.

Belts in particular.

Yes.

I couldn't speak to that exactly Jennifer.

I have not heard really from anyone that belts was a category that we missed or really took advantage of in a big way.

Just all that were left were larges, so--.

Well, then I guess in your experience that would probably be the case, yes.

I mean, we went through this and our sell-throughs were higher on anniversary merchandise than they were in the year before and sell-through's great but there's a point of diminishing returns, too, when your sell-through outpaces the customer demand and so we got to fine tune that and make sure that we're not leaving business that we should have.

Well, great job and good luck.

Thanks.

Thanks, Jennifer.

Thank you.

Your next question comes from Rob Wilson of Tiburon Research.

Yes.

Thank you.

Can we go back to the catalog real quick and can you tell us if the catalog is driving store traffic and maybe remind us, do you measure store traffic at the store level?

Pete, do you want to take it or do you want me to.

Yes, I'll try.

I think it's difficult for us to know in terms of traffic specifically.

We don't do store counters and we don't make that a real math problem.

I think you can just determine store traffic in our case just by looking at what's going on with the sales.

So our sales have improved.

We -- we had a good anniversary event and we just dropped in home this week our first integrated catalog -- full-priced catalog and I just think the reaction from the people in the stores and the customers in general has been very positive.

So it's too early to say.

Definitively and to quantify that but I think we're on the right track and obviously we believe that it will increase store business and traffic and hopefully over time we'll be able to quantify that for you.

Maybe Mike, could you talk about maybe traffic versus transaction size in Q2?

Yes, Rob.

When I -- in terms of our average retails, they were slightly up.

Most of what's driving our business is more units.

Okay.

More units per transaction or more transactions.

Just more units in general.

Okay.

Can we go back to catalog -- one more question.

Is there a -- can you speak to the vendor participation in the catalog?

In what regard?

Are they helping fund the catalog spend.

Yes.

In some cases they do.

Okay.

And one final question.

The southwest and south regions, I think it's the fifth straight quarter you brought those two particular regions out as exceeding the rest of the Company.

Could you speak to that?

Mike, do you want me to take that.

Yes, please.

Well, it's fair to say in the south -- southeast in particular we have the most opportunity for growth because we have the most -- our most immature stores there so particularly with the sale events and what have you as customers kind of figured out what the anniversary sale's all about it definitely gives us a big opportunity to do more volume.

So we expect to do better in those areas but then when you go to the southwest as an example where we've been for a long, long time the business continues to be strong.

At a certain point I think you got to tie it back to the quality of the people we have there, we've got some great managers and some great experienced buyers and they're doing a really -- a fine job.

And one final question, Mike.

The comp guidance of 3 to 5%.

I just wanted to make sure I have this correct.

Is that for the full year or is that for the back half of the year?

That was just for the third quarter.

Fair enough.

Thank you.

Thanks, Rob.

Thank you.

Our next question comes from Dan Geiman of McAdams Wright Ragen.

Good afternoon.

Regarding any of the sites you might have obtained as a result of the Federated May merger, can you provide a timeline at all generally what period of time is required from the time you sign a deal until the store opens?

Also, can you speculate at this point as to when those stores might come on-line.

Dan, this is Blake.

I'll try to answer that.

One way to give you a little kind of reference or color would be to refer to about 2.5 years ago when Lord and Taylor at the time announced that they were going to I think reduce roughly by 30 stores and here it is 2.5 years later and we've been able to sign up five of those stores.

So just -- the reason I give that as a reference is that it's not a simple or quick process.

Each of those stores were different and some required more remodeling than others and permit issues and developer issues so it's not a slam dunk that when Federated in this case the other day announces over 60 stores that they -- they announced it intended to try to look for alternatives that something quickly would happen from that or to what size.

So that just got announced.

We have ongoing dialogue with our partners in the developer community, each situation is totally different.

Some may represent the opportunity for us where we have an existing store to move into a different box instead of a remodel what we currently have.

Others may represent a chance to be in a market that we haven't been able to be in for a while.

But what we do feel is there are some opportunities there.

It's probably not as robust as some would consider on the outside.

This is a slow and difficult process.

The most important thing is we want to be in a position of strength, so when this consolidation is occurring in the industry, like the May Federated, that we're able to make the best decisions possible for our shareholders.

Okay.

Great.

Thanks.

Thanks, Dan.

Thank you.

Our next question comes from Ben Strom of Variance Research.

Hi.

Thanks.

Pete can you talk a little bit about the specific trends you've seen in the men's category here, just some of your expectations for fall fashion there and performance of men's tailored clothing in particular.

Taylor's been pretty strong for us.

We've done well with brands and really kind of elevating I guess not only the fashion component but just the -- even in some cases the price.

We've sold the upper end branded clothing pretty well.

We've done pretty well in furnishings as well.

So I think if I had to sum up kind of what's happening in furnishings and clothing I probably would say the fact that we've been able to do a better job of articulating brands and newness there.

In terms of other parts of men's and the Rail business, our denim business has done super strong and that's really helped drive that business.

In men's sportswear I think we've just done a really good job of trying to eliminate duplication or redundancies in our inventory, the replenishment optimization has helped with that.

We've just become more efficient with our inventory and we've freed up a lot of inventory dollars that allowed us to try new things and get into categories we might not have been in very deeply before active and some things like that and it's done well.

We've had some additive businesses.

There's also an example of that in men's furnishings with sunglasses for example,.

We've been able to do a better job of applying some -- replenishment-type dollars that might have been tied up in other categories into dollars that we could use for a category that's new for them like sunglasses.

Great.

One other question actually.

The -- I don't want to say this wrong.

The Faconnable?

Faconnable.

I saw it being sold in Canada.

Now can you just talk a little bit about I guess any changes in marketing in that brand and if there's any opportunity for additional stores in North America?

I'll let Blake take that one.

The Faconnable we acquired the rights to that roughly five years ago.

And so they are based out of East France and there are roughly 30 boutiques in Europe.

They also do wholesale sales globally.

And then we have within our own stores women's and men's business and there are five boutiques here domestically.

Yes, it was just announced I believe yesterday that we've gotten in with our partnership with an outfit that will be helping to distribute some of this merchandise in Canada where we didn't have any presence and was getting quite a few requests.

So does that answer your question?

Is there any way I guess just to quantify -- is there potential for more -- for any stores boutiques in Canada or in the U.S.?

Okay so in terms of Canada that's our first step and we would certainly need some time to see if there was any other opportunities there.

Regarding other expansion opportunities, we're really focused on kind of the core business that we currently have and until we really maximize that, I think we're hesitant to explore other expansion opportunities.

The good news is there are a lot of opportunities to do so.

We just want to be very careful with this brand because we think very highly of it.

Great.

Thanks a lot.

I think we've got time for one more question.

Thank you.

Our final question comes from Wayne Hood, Prudential.

Yes.

Mike, I was just curious on the markdown optimization you mentioned you had some expense embedded into that in the back half of the year, can you talk a little bit about how much you've assumed either in margin rate or dollars what that would be and how you came up with that forecast?

Hi, Wayne.

Thanks for the question.

I didn't really break out specific dollars.

When -- when we looked at how we're preparing our Q3 outlook we did plan the margin slightly lower than last year.

In anticipation of some internal forecasts that we put together.

But, I really didn't want to throw out a specific number because to be quite frank with you, we've got a lot to learn here and we just felt that it was important to be cautious knowing we were going to have some level.

Okay.

Can you talk a little bit about the low rate of departments in terms of which ones you will be rolling in the third and fourth quarter, what will follow in the fourth and which are the bigger lines where you have the most risk or benefit?

Sure.

Well, the areas that are being rolled out will be rolled out over a 30-day period beginning in the middle of September and we're starting with the women's apparel areas which will be rolled out between the middle and end of September and then in October we'll be rolling out the men's and the accessories areas.

And obviously the areas with the -- with the most fashion are the ones where you usually have the most risk and that's primarily in the apparel world.

Okay.

And then the last question I have is for Blake I guess.

When you look, Blake, at acquisitions that may become available to you and you look at returns on that versus going out and build new sites to whatever you -- measure you might want.

Are those returns in those dilutive versus a new store because of lack of developer support or would you expect them to be similar to a new store?

Well, we certainly have some pretty rigorous guidelines for capital in terms of IRR and so we follow that on a number of fronts.

Probably where we're more flexible obviously and maybe, if you will, break that rule will be remodels because remodels in themselves will have -- are a totally different game and it's important that we maintain these stores and we've been more aggressive with that.

We do build a very expensive store, we put up quite a bit of inventory, and a lot of effort with labor and marketing and what have you.

So we have a pretty high-cost model.

So we benefit from very vibrant shopping areas and so being part of a dynamic shopping center and when the developer partners with us is part of that model and really helps.

It's more difficult for us to do it alone in a freestanding store and some of these existing stores, each have their unique issues whether it's existing lease or existing issues with the construction.

And so each is so different it's hard to kind of generalize them and put them in a bucket but in terms of expectation from IRR, we're pretty rigid to -- when we're signing up for new projects that we're in the zone with our Board.

Is there a spread, Mike, or either one of you that you use between the two that you say okay this is the limit we won't go over 100 basis points difference between a new store and a take-over unit?

Wayne, this is Mike.

Not necessarily.

What we do look at is whether -- is whether or not the success of the existing location versus it being something that's in a newer market.

And we tend to feel more comfortable with an existing location and thus don't have as much of a risk premium in our expectation.

But that's basically how we would look at it.

Okay.

Great.

Thanks a lot and congratulations, guys.

Thanks, Wayne.

Thanks, Wayne.

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