諾德斯特龍百貨 (JWN) 2005 Q3 法說會逐字稿

Hello.

And welcome to the Nordstrom third quarter 2005 earnings release conference call. [OPERATOR INSTRUCTIONS] I would now like to introduce Ms. Stephanie Allen, Director of Investor Relations for Nordstrom.

Ms. Allen, you may begin.

Thanks.

Good afternoon, everyone.

And thank you for joining us on the call today.

On the line with me this afternoon are Blake Nordstrom, President of Nordstrom Inc.

Pete Nordstrom, President of Full-line stores, and Mike Koppel, Executive Vice President and Chief Financial Officer.

This afternoon, Mike will lead off with a review of our third quarter results.

Blake will make a few additional remarks.

And then we will open it up for questions.

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

Now I will turn the call over to Mike.

Thanks, Stephanie.

And good afternoon, everyone.

Our third quarter results represent continued strength in our business and efficiency in our operations.

Earnings were $0.39 per share, compared to $0.27 this time last year.

Strong sales momentum, along with gross margin and expense rate improvement, generated significant pre-tax margin expansion compared to last year.

Sales trends were strong throughout the quarter.

Total sales increased 8% to 1.7 billion, and same store sales increased 5.9%.

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

The strongest merchandise categories were junior women's apparel, accessory, menswear, women's designer apparel and cosmetics.

We are continuing to see favorable regular price trends and customer traffic remains strong, which both validate our underlying health of our business.

As a percent of sales, quarterly gross profit was 34 basis points higher than last year, primarily due to buying and occupancy expense leverage.

Both markdown rate and merchandise margin were flat year-over-year.

We completed the rollout of markdown optimization in October as planned.

Being in place for only a part of the quarter, the new systems impact on quarterly gross margins was minimal.

SG&A expenses were on budget, which resulted in 130 basis points of year-over-year expense rate improvement.

Bad debt expense was higher than expected, due to an acceleration in bankruptcy filings leading up to the new bankruptcy legislation that went into effect in October.

This was more than offset by favorable performance in other expense categories.

Over time, we expect the new legislation to result in lower bankruptcy write-offs.

Total receivables growth generated 2.4 million in additional credit card revenue for the quarter.

Our write-off trends are stable, factoring out the bankruptcy situation I just mentioned.

Net interest expense was in line with expectations, at 10.2 million.

Income tax expense was 6.3 million lower than expected, due to the completion of our 2004 tax return, and tax audits for 2000 and 2001.

This was a $0.02 benefit to the quarter.

Going forward, we expect our effective tax rate to be around 38.8%.

During the quarter, we repurchased approximately 4.7 million shares of common stock, for a total of 172 million.

The resulting reduction in weighted average shares outstanding increased earnings per share approximately $0.01.

As of the end of the quarter, we have approximately 254 million remaining on the current authorization.

We ended the quarter with an inventory balance of 1.2 billion.

This is a 2.2% decline from the previous year.

Inventory per square foot declined 5% in total, and 3.8% on a same store basis.

Overall, inventory is in good shape as we head into the holiday season.

Content is current and productivity continues to improve.

Debt to total cap at quarter end is 32%, reflecting 935 million in debt, and 2.9 billion in capital.

This is a reduction from last year when debt to cap was 36%.

Cash and short-term investments totaled 240 million at quarter end.

Preliminary net CapEx was 53 million.

And depreciation and amortization totaled 67 million.

We recently completed our three year capital plan for 2006 through 2008.

Total budgeted CapEx for that time period is approximately 1.1 billion, with about 300 million planned for 2006.

The allocation of spending over those three years is approximately 45% on new stores, 30% on remodels, and 15% on technology.

The remainder will be used for general maintenance purposes.

The capital plan includes 10 new Full-line stores, which we have previously announced, and five Full-line store relocations.

At this point we have not included potential investments in new stores resulting from the current industry consolidation.

To the extent that these opportunities arise, we are prepared to act and have ample capacity to fund the additional capital required.

We currently expect fourth quarter earnings in the range of $0.60 to $0.65 per share, assuming a same store sales increase between 1% and 3%.

Our fourth quarter outlook includes a $5 to $6 million benefit related to the Visa Master Card settlement, which we expect to recognize in the fourth quarter.

For the full year, we are raising our previous guidance of $1.80 to $1.90 to an updated range of $1.90 to $1.95 per share.

This is a year-over-year increase of approximately 40%.

We expect to end the year with a mid single digit same store sales increase for the full year.

In addition, we anticipate 40 to 50 basis points of gross margin expansion, and 110 to 120 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 11.5%, by the end of this year, two years ahead of our schedule.

We plan to update our medium term targets on our next conference call.

Two final notes.

First, we recently completed an in depth review of various strategic alternatives related to our credit operations.

We continue to believe that our credit operation is a key strategic advantage for us.

And that there are additional value-creating opportunities from both an operational and customer relationship perspective.

We will continue to review this subject periodically.

But at this time, we plan to retain the business.

Lastly, we will adopt FASB 123R and begin expensing stock options starting in the first quarter of 2006.

We are currently estimating about a $0.06 impact to annual earnings per share related to this change.

Now, I will turn the call over to Blake for some additional remarks.

Thanks, Mike.

And good afternoon, everyone.

This was another great quarter for our Company.

Regular price sales trends remain healthy.

And our team is continuing to exercise good inventory and expense management discipline.

These results are continuing evidence of the positive momentum within our Company and the confidence we feel about the opportunities we see ahead of us.

For the past few years, we've been taking steps to ensure the long-term success of our Company.

To that end, we have improved our merchandise execution, made appropriate and necessary technology investments, and worked hard to improve overall operating efficiency.

Today, relative performance indicates we are in a position of competitive and financial strength.

In the coming years, we intend to build on our current success by fine-tuning our merchandising, striving for continuous improvement in operating performance, and pursuing value creating growth opportunities.

Maintaining positive same store sales momentum is our top priority.

Our efforts in this area ultimately boil down to understanding what our customers want to buy from us.

And providing them with an exceptional shopping experience through better service and compelling fashion merchandise.

Our monthly same store sales performance has been strong, suggesting that our merchants have been selecting more of the right merchandise.

In addition, we are seeing hard evidence that our new personal book tool is enabling our sales people to improve service at point of sale, which in turn helps drive volume.

Currently, we are focused on several key volume driving opportunities.

First and foremost, we are well aware there is no finish line for offering good service.

Improving the service experience we offer our customers is always our biggest opportunity.

Going hand in hand with service, is our ability to offer compelling and fresh merchandise to our customers.

To that end, we are working to develop more targeted merchandising strategies, starting in women's apparel.

Lastly, we continue to work on maximizing our merchandising systems, as well as leveraging our multi-channel platform.

None of these opportunities involve revolutionary changes.

But rather, ongoing refinements to current practices.

In addition to sustaining positive sales momentum, we are making steady progress delivering operating performance improvements.

There are a couple of factors driving this.

First, our point of view on spending has evolved considerably over the past five years.

Today, our people better understand our fixed and variable costs.

This is leading to better decisions about how to use limited resources.

Second, we continue to find ways to operate more efficiently.

The result is a lot of small cost reductions, all over the Company, that in combination add up to meaningful savings.

Lastly, we continue to develop our planning capabilities, which focus on striking the right balance between operating improvements, working capital efficiency, and returns on capital.

We believe there will always be opportunities to improve our operating performance.

And that by adopting a continuous improvement mind set, we can continue to make good progress in the years ahead.

All of our efforts leave us well positioned to continue to grow the business.

Over the next three to five years, with we continue to believe there is a lot of upside opportunity from simply executing better in our core Full-line store business.

Productivity gains in existing stores along with incremental volume from new stores will drive solid earnings growth in the coming years.

All in all, we're making tremendous progress.

We believe that by remaining true to what we do and who we are, and the customer we serve; we can build on our success and achieve and sustain industry leading performance.

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

We're ready to take questions.

Thank you. [OPERATOR INSTRUCTIONS] And our first question comes from Deborah Weinswig.

Your line is open.

Thank you.

And good afternoon.

Congratulations on a great quarter.

Thank you.

In terms of the comp guidance for the fourth quarter, I believe your guidance for the third quarter was 3% to 5%, and you obviously exceeded that.

Can you help us understand the kind of background on the 1% to 3% guidance for the fourth quarter?

Deborah, this is Mike.

Thanks for the question.

Absolutely.

Well, we've been pretty consistent in our low single digit guidance for most of the year.

We're going into what is our largest volume period for the quarter.

And we believe planning our business at that level makes the most sense to give us the flexibility we need to ensure that we maximize profitability.

And at this point in time, we believe that's the most realistic assumption.

Okay.

But, would you kind of deem your outlook for holiday as cautiously optimistic or how should we just think about your outlook for holiday?

I wouldn't say we are cautiously optimistic.

Our trends continue to be - - they continue to be consistent as they've been most of the year.

And then with regards to - - I know two areas of women's business which have been challenging, not just for you for the industry, have been kind of bridge and special sizes.

You can also give us an update on how those are trending and what initiatives are in place to drive those businesses?

Pete, you want to take that, please?

Sure.

I think some of the challenges we've had are probably similar to what may have happened - - may be going on in the industry.

We are working on this and we continue to.

I think the biggest issue for us - - and those are just two examples, our women's area, is to continue to try to drain the customer segments that we're trying to serve there.

And we're actually making some efforts to better quantify that objectively.

So, we have a more objective way of pursuing this business and really trying to obtain market share.

We've got a lot of great information now and we're trying to add to that a little bit.

So really, I think we're in a position where in some of those women;s business, we need to evolve our strategy.

But before we do that we need to have a little bit better information.

I'm hopeful that the next time we talk, we'll probably have some things to talk about a little more specifically.

But we are definitely aware of our opportunity in women's and we continue to work to evolve that.

And then last question.

With regards to gross margin, Mike, you talked about what is happening on the markdown.

Optimization and some retailers have mentioned, and that is first fully implemented, that there are some hiccups on the gross margin side.

Can you talk about kind of what direction has been given to buyers et cetera in terms of how to work with the software?

Well, yes, we have been - - we finally got everybody live on it at the end of October.

And the direction that we've been given is we need to work through and understand how to set up the variables within the system.

And we have a variety of different businesses that all behave differently.

And it is going to take a while before we fully understand that.

We had a number of examples where some of the suggested - - the recommendations just weren't consistent with what we knew about the business.

And so, we still have a learning process to go through there.

But in terms of any direction, we're going to do whatever is right to ensure that our inventories are current and clean and allow us to move forward.

Okay.

Great.

Congratulations again.

Thank you.

Our next question comes from Barbara Wyckoff of Buckingham Research.

Hi, everyone.

Great quarter.

Thank you.

Handbags and accessories, have been key volume drivers for some time now.

What do you predict will be the winners in accessories, fourth quarter this year?

The bag business holding up, I know Marc Jacobs bags were good last year, Coach, et cetera.

Is jewelry business holding up?

What other the classifications do you think will be important?

And what are going to be the must-have items for this year?

Pete?

Those are good questions.

I wish I had all the perfect answers for that.

I think what you've alluded to in terms of the strength in handbags and jewelry is continuing on.

There has not been a big change there.

We've done well with coveted brands.

And we've done well to supply newness there.

Both the jewelry area and the handbag area continue to trend pretty considerably above our Company averages.

In terms of the specific items, I would really rather talk about it in terms of categories.

But I think there are a lot of the tried and true types of categories.

You look at boots or you look at sweaters, for example, and cashmere has been good for us.

We've made bets on this kind of stuff.

And we think it is going to pay off.

We obviously have some early read on that.

And now that the weather in a lot of parts of the country has changed, it has been really showing the business.

Okay.

And specifically in accessories?

Well, like I said, I don't really want to get so much specifically into the brands.

But we continue to sell those luxury brands.

You mentioned the Marc Jacob's, and the Chloe's, and those kinds of people, we do very well with that.

Okay.

Thanks.

Our next question comes from Bob Buchanan of A.G. Edwards.

Yes, good afternoon.

Way to go.

Just a couple of questions.

First of all, you guys do such a great job of tailoring assortment from store to store.

Just wondering how do you that, if you've got an additional layer that the buyers - - excuse me, that the store managers can talk to?

And then secondly, regarding the Jeffrey acquisition.

Is there some desire on your part to maybe take the fashion content and the quality up over time?

Pete, you want to take that, please?

Sure.

Okay, the Jeffrey part first.

It is pretty early to know exactly what our explicit plans are.

Although, I will tell you, we've had a chance to spend quite a bit of time with Jeffrey over the last handful of weeks.

He has been on the job, what is, it Mike, 90 days or something now?

Yes.

And in that time, he has had a chance to literally work shoulder to shoulder with some of our buyers literally buying product together.

He has had a chance to meet with all of our merchandising heads in the areas that he's involved with.

He has probably been to about I think 10 of our stores now.

And we've had him actually meeting with crews and talk about selling.

And the guy, he is terrific, and I think there is a lot of things we can do to leverage what he has to offer.

And I've already seen it.

I've actually had some vendor appointments with him, too, and it definitely makes a difference having him be a part of this.

So in terms of what that does for the overall mix over time, we made a stated intention that we want to be a more meaningful player in the true designer part of the business.

And you know if you've been following us, that we've had good growth in those categories.

So it is our intention with working with him that we would continue to expand on that category.

And I think we can do did in a way that doesn't come at the expense of anything else that we have.

But it just layers on new business for us.

And we've got some ambitious plans about how we think we can grow that.

But it would be way to early to be explicit about what that is because we're just kind of getting started together.

And Pete, I appreciate that.

And just thinking about how good you are at tailoring the assortment by door, be it the Grove, Michigan Avenue, Fifths Plaza, wherever.

Is there a separate group that helps with that micro merchandising by door?

Well, we've got regional buyers.

And when I say regional buyers, I'm talking about a group of maybe six different buying organizations to our Company in most of the categories that we serve.

A lot of the categories that we serve are national.

But what all of the areas have is what we call a regional merchandiser.

And this is a person that is literally the link between the stores and the merchandising area.

And they will have a group of stores regionally and then report directly up to the merchandising division.

But their whole life is spent literally in the stores, helping to create division and the execution around the presentations we need to tell the stories around the merchandise.

But also to make sure that there is a reciprocal feedback methodology that allows us at the buying end to hear what is going on.

And we have great information now and we know what we're selling.

But we still don't ever know exactly what you're not selling and the things that are opportunities.

And I think we've got a good system in place that assures that that communication flow is happening.

At least that's our intention.

We're working on that.

It shows.

Thank you.

Thanks, Bob.

Our next question comes from David Berman of Berman Capital.

Yes, Hi, guys.

It is Steve [Santer], how are you doing, Blake?

Hi, Steve.

There is one question, with your -- it is a follow-up on Deb's question, with your adoption of profit logic.

And with you really only having three sale events a year, let's say with the semi annual sale, with the women's sale that you had earlier this month.

How do you - - historically, you accumulate merchandise, put it on sale at this event.

Using profit logic, you're going to be marking these things down all through August, September, October.

So, how are you going to make these events as meaningful as they have been in the past?

And what can -we expect going forward?

Hi, Steve.

This is Blake.

Pete has been talking to all of us about that and how over time, our results have clearly reflected the customers' response to fresh new merchandise.

And these clearance events that you talk about originated from our shoe days and are twice a year.

And so as things like the markdown optimization dictate, amongst other reasons, why we should be taking maybe markdowns sooner or steeper, it may imply some of the past practices with how clearly we need some adjustments.

And that's something that our merchandising team now with these great facts are able to take, and hopefully apply to future events.

But there is definitely something there and an opportunity.

And we're watching and monitoring that.

And hopefully making the necessary adjustments.

Okay.

But in the - - in the interim period, as you go through, you just bring in special merchandise for those sale events?

Well, the sale has always been a balance of regular price.

The clearance, where have you, to at the end of the season, move these goods, and turn the corner a new season.

And then when there is some voids in that balance, supplement it or augment it with special purchase from these key vendors that have some closeouts in the season.

I think that what the merchandising team is fair to say is putting more and more focus on doing everything they can, and this is not easy, to buy the best regular-priced merchandise.

And so that over time probably will start to maybe slowly de-emphasize the special purchase part of it.

Because that is not necessarily our strength.

And more importantly, it is not what the customers really excited about at this point.

Okay.

Thanks very much.

Thanks, Steve.

Our next question comes from Stacy Turnof from Merrill Lynch.

Good afternoon, everyone.

Going back to the 1% to 3% comp for a second.

A number of retailers have said that November sales have been somewhat soft, just driven by the warmer weather conditions throughout the country.

Is that another factor that might have led to the 1 to 3 versus the 3 to 5?

No, no it hasn't.

We were looking at the quarter in the aggregate.

Okay.

And then my second question about markdown optimization, any idea when we might start seeing some noteworthy impact from the system?

Is it more going to be a 2006 story or should we maybe see some positive impact in the fourth quarter?

Well, it is possible that we will start to see some impact in the fourth quarter.

It is tough to tell at this point exactly what the timing is.

There will probably be some level of acceleration, and then going forward after that, we should get some benefit.

But it is really tough to quantify exactly how much and exactly when that is going to occur.

But we would expect over the next couple of quarters we will have a little bit more transparency into that.

Great.

Thanks so much.

Thanks, Stacy.

Our next question comes from Christine Augustine with Bear Stearns.

Thank you.

I was actually wondering with profit logic, if because you're so good already at regular price sell-through;

I was actually trying to figure out how much of a benefit you could really get from it?

And is it that there are certain areas of the business, like bridge and better, where you're not trending as well as the rest of the store?

Where that would - - you would see sort of a major impact, there but maybe not so much in other parts of the store?

Christine, this is Mike.

That's a very good point.

And we have said all along that we didn't expect that there would be a dramatic lift from profit logic in terms of the aggregate margins of the Company.

But we did express pretty clearly that based on what our investment was in it, it was well worth it for us to make the investment.

So, I wouldn't expect any dramatic changes to our margin over time specifically from profit logic.

But certainly, we believe that in certain categories, where this system works very well with, that we will get some improvement.

So just to clarify, in the guidance you've given us for the fourth quarter, are you anticipating some acceleration of markdowns in light of the rollout of profit logic?

There is some minor recognition of that.

Okay.

And then could you address so far what you're seeing with your more integrated catalog and Web strategy, please?

Christine, this is Blake.

That's something that we talked about that we really launched this summer, and started at the beginning of the year of putting a stake in the ground of ensuring that the direct mail pieces that we send out from the Company were reflective of the core customer we were aspiring to attract and what our Full-line stores were trying to achieve.

And so now we have a couple of months under our belt and I can tell that you we're learning a lot as a team.

It has really helped.

And it is hard to measure this completely, but we think the interaction between all the channels and particularly to the Full-line stores.

And our Web business continues to see very healthy percentage increases.

I think the $64,000 question is what is the right level of balance from sales and productivity from each of these channels, and how do they interface together?

So what we've tried to say all along is; we've made this decision and this step.

But it is going to be a learning process.

And with the catalog, you can't turn on a dime, because you are purchasing and developing these products with some lead time there.

So we hope to, over this spring and summer, make some slight adjustments.

But it is fair to say that we're pleased with the initial steps.

And again, we're learning a lot, and we're committed in the long run to really improving the integrated and multi-channel retailer.

Thank you very much.

Our next question comes from Richard Jaffe of Legg Mason.

Thanks very much.

And Blake, you mentioned a comment about focusing on the women's apparel area.

We know about Jeffrey and at the high end.

Is there initiatives in place or do you envision putting more energy in the special sizes business, the more mainstream, or average price business?

What are the other opportunities in the women's side if you could give us some detail what you're doing to capitalize on them?

Richard, this is Blake and I did make reference to it in my comments but I would like Pete take this moment to briefly address your question.

Yes, the stuff that Jeffrey is mostly involved with is the designer part of our business.

But as most of you know that is just part of what we do, so much of it is all this other stuff.

And we've relatively underperformed, I should say in women's.

We've had some good results in women's.

But on the whole, as a category, it hasn't been at the same level, so we've had shoes and accessories in men's.

We've actually made a leadership change there.

We promoted the gal that was responsible for the TBD segment, which if have you been following this couple of years has performed very well.

Her job now, she is responsible for total women's apparel except for designer.

So, she is responsible for all the bridge and better segments.

Now, that in and of itself is not the panacea or the answer.

But we got a lot of confidence in this gal.

Her name is [Loretta Soft.] And she has been working, as I mentioned earlier, to try to get some more objective information so we can add all this anecdotal stuff that we have with some better facts.

Not only from the selling facts we have but some literal customer - - we're mining some customer data that's just available out there in the universe of customers that we are trying to sell.

So we can quantify this a little bit better.

I honestly believe in the next few months we will have something a little more concrete to talk about.

We're just really getting going on this.

So I would hope that the next thing we can talk we can tell you a little bit more specifically about some of the stuff we're working on in women's.

But it it is fair to say is that it has our attention and we're working to improve it.

Thank you.

Our next question comes from Dana Cohen of Banc of America Securities.

Great.

Hi, guys.

Just following up on that question, are there some areas within the women's apparel business - - like where within sort of the bell shape do different categories come out?

Well, without getting too specific, where we've had the relative strength is the junior express.

And then the more contemporary sides of the business, which would be TBD, kind of that better price point.

And then as you move up in price point to the savvy, BSC and the designer.

And anything that has really been locked into the more modern contemporary side of the business lass been good.

We've had some more challenges.

And frankly, the better segments and some of the bridge areas, special side sizes as you've heard too.

I don't know that this unique to us.

But it doesn't matter, it is a big segment of our business and we are not going to be satisfied until we have it working better.

So, I think there is enough positive things going on out there.

And we do have some really talented people and this gal Loretta that really has this overall responsibility, she's very capable.

And we have every reason that she will have a positive impact on this business.

And are there any other areas within the business where you think there is opportunities, or is women's apparel really the major focus?

We have opportunities everywhere.

It has been gratifying to see some of the improvements we've made over the last couple of years.

But all have you to do is spend time in the stores and you can see there are just things that we can be doing better.

And I don't mean that to sound trite.

But it's - - we all have work that we can accomplish here, and I think it has to do with just doing what we do better, but adding on new businesses as well.

We've done it with things like sunglasses, where we made a much more concerted effort to try to layer on this business and we've done that, without the expense of anything else.

We've layered on some additional handbag business over the last couple of years.

There is ways that we can do this not only as it relates to designer but categories.

And so that's really the focus.

And again, understanding the customer better so that we can really nail it on this particular customer segments that we're serving.

Great.

Thanks so much.

Our next question comes from Scott Frost of HSBC.

Yes, could you give your total debt levels at quarter end?

Total debt at quarter end was a little over 900 million.

Could you also comment on the importance of your debt ratings here and do you feel like you have sort of maybe some unused capacity there that you could borrow some more or lever up the balance sheet some more to also drive returns?

Our current debt to cap is roughly 30%, 32%.

We've stated that we would like that debt to cap to be in a range between 25 and 40.

We're comfortably in that range.

At this point, we have no plans that say we're going to purposefully leverage up the Company.

But certainly, as opportunities come our way, for expansion of the Company, we would like to know that we've got the capacity to do that.

Great.

Thank you.

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

Let me add my congratulations as well.

Thanks, Jennifer.

I just have a follow-up as far as the Internet business and then one other question.

I wondered as the Internet business grow, because there aren't the same costs associated with it, as far as selling, will - - and you're looking three years down the road.

And I know that is something that is probably you would rather sell more merchandise and have great service.

But it seems as though that it would impact selling costs as more and more people do use the Internet.

Well, Jennifer, this is Blake.

We view it as kind of one and the same and complimentary.

And so, though there are different models in terms of cost and fulfillment with running a store or running a Web or Internet site.

We hope that it is a seamless experience for the customer.

And that we are allowing the customer to interface with Nordstrom as she or he sees fit, 7 by 24.

And so one of the things obviously that is emerging is they may want to have product knowledge information, or availability, or fashion from the Website.

And they will turn around and take that information and make it a decision in our store, we want to do what is best for Nordstrom.

And so we're very fortunate to have a platform there that we think we can build upon.

We know that there is going to be a journey here over the next couple of years.

But we're pretty excited about; if we do there right, what it could mean for the customer, and what it could mean for our results.

Right.

I know all of that.

But it just seems like if are you a really good Nordstrom customer and you start ordering off the Internet that your costs would come down, just because you don't have the selling costs.

Well, there's other costs that go with it.

Whether it is the fulfillment and buying in advancement and it in a warehouse and it is not exposed to customers like it would be in a store, whether it is just the photo costs or maintaining the Website or keeping that live and current.

Got it.

Okay.

There is a little bit apples an oranges there.

Got it.

Okay.

And then my second question is;

I was curious to know if you guys got a big push, no pun intended, in the lingerie after Oprah did her show the other day?

Pete, you want to take that?

Yes.

That's my answer.

All right.

Good luck.

If we could leverage Oprah better under our control anyway, we would certainly do that.

It is - - when it comes around, we're opportunistic about it there is no question that she is impactful.

And we're just trying to make the most of those opportunities.

But it has been fun to be a part of that.

Great.

All right.

Well, good luck you guys.

Our next question comes from Dorothy Lakner of CIBC World Markets.

Thanks.

Good afternoon, and congratulations.

I'm wondering, going back to the women's apparel issue, if the segments that haven't done as well could be related to perhaps not as much of an influx as new brands as you've done in so many other areas of the store accessories and footwear and cosmetics and even women's designer apparel?

I wonder if that might have anything there?

And if you could comment on that?

And then just secondly, could you give a little bit more color in terms of how the personal book is working, and what that is really giving to the sales associates?

Thanks.

Pete, you want to take that one with the apparel question?

Yes, there is a lot of reasons for what may be happening in the business there, but it is usually a bunch of little things stacked up.

It is in the that big and obviously.

And I will say that it seems to me that the people that have success in some of those better categories and the women's are the ones that might be more vertically integrated.

And I think for us to be successful, we got to have a good compliment and balance of brands and products that we develop on our own that are doing well.

You don't have as many of those challenges in the designer area because it is purely a branded thing.

And that's working well for us.

And I would say that is true in some of the accessory areas that we're talking about as well.

But what happens is, if a category or trend is hot, you will see everyone migrate toward it regardless of fit and price point and what have you.

And that's not always the best thing for the customer.

I think for us to be successful, we're going to have to keep in mind a balance that really gets delineated based on fit and price and really kind of the occasion for the customer - - what occasion they're buying it for.

And that's where I think if we stay true to that over time and become more predictable to the customer, rather than just blowing like the wind, with whatever trend is coming up.

I think that in the long run that will serve us better.

And this is stuff that we've tried to do over the years but with better information that we have now, I think we have a chance to improve upon that.

So, you are speaking physically to the private brands that you have and just doing a better job really making sure they're consistent and not just trying to follow each fashion change as it flows through the the door.

I think that is a good point.

If are you going to be effective in your private label, it can't be "gee, here's is some good stuff out here and we are going to look at those samples.

And now we will go to market and make them and then we'll have them in available in nine to 12 months".

By that time it is yesterday's news.

And so we - - to be in this business and be successful at it you, definitely have to be in the game right now.

And we have some areas in our private label that do that really well.

But I think on the whole we can raise the bar and make sure that the stuff that we have to offer there is really contemporaneous and current.

Right.

Dorothy, this is Blake.

I think your second question referred to the personal book.

We've talked a couple of quarters now about that tool.

And it is fair to say that when the various systems come across our way in terms of approval and for CapEx, we're mindful of what the impact will be with the customer.

And our ability to improve service.

Which ultimately our goal is how do we improve our volume?

Which is these efforts in my personal book we believe enable our people at point of sale to enhance their relationship and the trust they have with their customers.

And it is just a more effective way for them to operate.

And so now that we have some time belt, we're learning a lot about this tool.

And so we've got an organization of roughly 50,000 people, and the majority of that are selling and on the floor.

And everyone is utilizing the tool but they're at different degrees of effectiveness.

And we're learning things.

Each individual takes their own style and utilizes these tools to enable maybe a better follow-through, fashion, just a number of things to offer better service to their customers.

And so we fully expect, like the perpetual inventory subject that we talked about a while ago, that this will be a multi-year kind of continuous improvement subject.

And we're very pleased with how our folks are embracing this tool and starting to use it.

Great.

Thank you.

Our next question comes from Emme Kozloff of Sanford Bernstein.

Hi there.

I just had two questions.

The first one is why do you not think you're getting any merchandise expansion?

Are you looking at it from a strategic pricing decision or is it something else?

The other thing is it looks like mail order was a drag on Q3 comps given that the full line and the rack above the reported comp number.

Can you update us on when you think this should normalize in terms of the top line?

Emme, let me take the first part on the merchandise margin expansion.

We've had some pretty dramatic improvement over the last 2.5 years or so, I think roughly 300 basis points.

And so that is a pretty significant improvement we've had.

And that was primarily a direct result of better disciplines around our inventory and using our tools better.

Right now, we're at the point where we're peeling the onion back and getting more specific by category.

And we think that there is pockets of opportunities, certainly some of the softness in women's apparel has affected that somewhat.

And we think as we improve that, that could help.

But I wouldn't expect to see dramatic improvements in that line over time other than the leverage of buying and occupancy expense.

And Emme, this is Blake.

You talked about mail order, direct mail, and potential of it being a drag on comps.

I think we've made that clear that we have been having some challenges in that specific area.

But we look at it in conjunction with both the Internet and the Web and in total with the Company.

And so when we look at Full-line store comps and our Web improvement, I think Mike referred to, for Q3, that the total Nordstrom direct division, which is direct mail and Internet, I believe had a 7% increase.

So it is not as robust as it has been in years past.

We want to look at the total Company results.

We started this initiative really this summer with the anniversary catalog in July and in August, its first catalog.

So, if you look at it from that point of view, if you cycle that full year, we're just a couple of months into that.

But we fully admit every month we're learning something new with it.

And we hope to be over time continue to make improvements.

Because our number one expectation is to have increases.

Right.

And lastly, last year, you gave us some targets on year end sales per square foot.

Can you update us on that for 2005 or any longer term targets you think you can achieve?

Because obviously when investors are looking at the name they are looking at where can you go on the comps?

And the sale per square foot is obviously one of the key drivers of that.

Sure Emme, this is Mike.

Last year, I think we reached around $347 a square foot.

And I think if you looked at our progress to date where things are coming our, we are probably going to be in the high 360 - - mid to high 360's per square foot.

The Company at one time achieved roughly $395 per square foot roughly ten years ago.

We definitely have that as a goal out there, as something we would like to get back to.

Great.

Thanks a lot.

We've got time for one more question.

And our next question comes from Adrianne Shapira of Goldman Sachs.

Thank you.

Just had a question on the 5 to 6 million benefit you highlighted for the Visa Master Card in Q4.

Mike is, that in the guidance?

Yes, it is included in the number, Adrianne.

Okay.

Thanks on that.

And then the question following up on the sales per square foot, as you head towards the 360 by year end, should we assume that the gap between stores is being narrowed?

There was a time when there was a fair amount of stores that were underperforming to a significant degree.

Is the band narrowing?

It is.

The stores that we have been categorizing as our lower performing in the 20% to 25% tile of that have been improving at a rate faster than the rest of the stores.

Okay.

And then on consolidation, clearly real estate opportunities could be - - could clearly be a beneficiary.

But I'm just wondering how else could consolidation impact your business, both positively and negatively?

Well - -

We're looking at each other here, who is going to take that one.

Well, the first part you mentioned is the real estate, and certainly, we have seen - - there is opportunities out there that are greater than what we saw not too long ago.

And so that certainly is something.

And the other is with all the activity and attention being spent on combining companies, and all the effort around there we certainly would like to think that our ability to stay focused on driving the business forward, rather than putting one together would help us.

Okay.

Any opportunities with vendors, maybe improved terms or something like that, as others maybe pave the way?

Pete, you want to take that?

Yes, one more time, what was the question, I'm sorry?

Perhaps negotiated terms of your vendor base.

Well, I think it is important that we're really - - we're doing a very thoughtful job of that.

Because it is a partnership with these guys is important that we're all agreeing up front.

And so there is - - if we want to make sure we're not leaving any money on the table.

And we want to act as much as we can as a partnership with the vendors we work with.

And it has been our experience that the better information we have, it has gotten much easier.

So, we've actually been able to procure more money from the vendors that way.

But not because we're leaning on them in anyway, it's because we've got this really accurate information.

And they're actually proactive.

Because it serves them well to be able to help us move merchandise that is not performing and replace it with newer stuff that might be.

And so it has been a pretty collaborative effort.

And based around the fact that we've got much more actionable information.

Pete, do you think that with the consolidation of some of the competition, that that would have any effect on our - -

Oh, I'm sorry.

I didn't realize that's kind of where you're going with this.

Thanks, Mike.

You're welcome.

I don't know.

That's a good question.

It would be hard for me to say.

I could only really speculate.

I don't know.

That's probably not what you want to hear.

But I think what we're just trying to do is stay as close to it as we can.

I don't doubt that there could be some selling up and some clearance kind of opportunities based on what may be open or closed out there that we're going have to respond to.

But it has been our impression that our vendors are interested in working with us.

And I've not viewed anything that has happened from a consolidation point of view, as something that has been detrimental to us and our relationship with our vendors.

Thank you.

Thanks, everybody for participating in our call this afternoon.

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

The replay number for this call is 888-562-4353.

That number again is 888-562-4353.

There is no passcode required.

And the replay will be available for 48 hours.

Alternatively, an archived version of the Webcast will be available on the Investor Relations section of our Website for 30 days.

Thank you for your interest in Nordstrom.

Thank you for participating.

You may now disconnect.