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Operator
Hello, and welcome to the Nordstrom fourth quarter 2005 earnings release conference call.
At this time, all participants are in a listen-only mode.
After the presentation we'll conduct a question-and-answer session. [OPERATOR INSTRUCTIONS] At the request of the Company, this conference is being recorded.
It is now my pleasure to turn the meeting over to your host, Ms. Stephanie Allen, Director of Investor Relations for Nordstrom.
Ma'am you may begin your conference.
Stephanie Allen - Director, Investor Relations
Thanks, Wendy.
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 Merchandising; and Mike Koppel, Executive Vice President and Chief Financial Officer.
This afternoon Mike will lead off with a review of our fourth 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.
Michael Koppel - CFO
Thanks, Stephanie, and good afternoon.
Before I get started, I'd just like to acknowledge that this is Stephanie's last call with us as Director of Investor Relations and we appreciate everything you've done and the great job.
And going forward R.J.
Jones will be taking over Stephanie's position.
Stephanie Allen - Director, Investor Relations
Thanks, Mike.
Michael Koppel - CFO
You're welcome.
We're pleased to report another year of strong operating performance.
We ended 2005 with an 11.5% pre-tax margin, 240 basis points higher than last year, and on the high end of the goal we set out to achieve by 2007.
Our operating model continues to perform with efficiency as gains and comparable store sales provide consistent flow through to the bottom line.
We remain focused on improving our capital efficiency, which is yielding an increasingly favorable spread between the Company's cost to capital and return on capital.
Overall, these results indicate that we continue to embrace the disciplines needed to achieve higher levels of performance.
For the full year, we reported earnings of $551 million or $1.98 per share, a 40% increase from the prior year.
The full year results were driven by a 6% same-store sales increase, 64 basis points of gross margin expansion, and 113 basis points of SG&A improvement.
For the fourth quarter, earnings increased 36% to $190 million, or $0.69 per share.
Strong top line momentum, along with gross margin and SG&A improvement, generated 150 basis points of pre-tax margin expansion in the quarter.
Sales trends were positive throughout the quarter, with all of our geographic regions and most major merchandise categories posting same-store sales increases.
Total sales grew 9.3% to $2.3 billion, and same-store sales increased 5.8%, ahead of our low single-digit comp plan.
Our strongest regional performance was in the Southern states, and our best performing merchandise divisions were cosmetics, accessories, women's and kids' shoes and men's apparel.
The quarterly improvement in both gross profit and SG&A was primarily the result of strong sales volume.
Gross profit increased 81 basis points, or $90 million compared to last year, due to sales leverage on buying and occupancy costs.
Merchandise margin was slightly lower than last year, as we experienced mark down pressure in some segments of women's apparel.
As for SG&A, we gained 70 basis points of rate improvement versus the prior year, primarily due to sales leverage on non-selling labor and advertising costs and a reduction in worker's compensation expenses.
These improvements were partially offset by stock-based incentive expenses that were higher year-over-year due to share price depreciation.
The other income and finance charge line of the P&L increased $15.8 million for the quarter, about $6 million of this resulted from higher year-over-year credit card revenue.
In addition, we recorded $8 million of income from gift card breakage.
Following recent changes in unclaimed property legislation, we now recognize income from outstanding balances on aged gift cards.
Going forward we intend to recognize gift card breakage on outstanding balances over five years old.
As a follow-up to our previous disclosure, during the fourth quarter we did not record any income related to the Visa/MasterCard settlement.
We had previously expected to receive a $5 million to $6 million benefit in other income but now the timing of the settlement will be during our 2006 fiscal year.
Net interest expense of $11.5 million was in line with expectations and lower than prior year due to increased interest income on higher cash balances.
During the quarter, we repurchased 1.1 million shares of stock for a total of 41 million, which did not reduce shares outstanding enough to materially impact quarterly earnings per share.
The remaining balance on our current authorization is approximately $213 million.
In this quarter's earnings press release, please note that we're now including a balance sheet and statement of cash flows.
From these we would like to highlight a few key measures.
Average inventory per square foot for the year was approximately 2.3% lower than last year and annual inventory turnover improved 7%.
Total debt at quarter-end was $935 million, and total capital was $3 billion, resulting in a debt-to-total cap ratio of 30.9%, down from 36.5% this time last year.
Over the course of the year we retired $96 million of debt, repurchased $287 million worth of stock, and ended the year with $517 million in cash in short-term investments.
Our strong cash flow and low debt levels placed us in a position of flexibility as we consider our strategic options for deploying capital.
We are pleased to share that our Board of Directors recently approved a 24% increase in our quarterly dividend from $0.085 to $0.105 per share.
Our current dividend policy aims to maintain a payout ratio in the range of 18% to 20% and a yield of approximately 1%.
This is the second time within 12 months that we've increased our dividend in support of these stated targets.
As far as our outlook for 2006, we are currently forecasting earnings per share in the range of $2.15 to $2.23 for the full year, a 12% to 16% increase over last year, after normalizing the $0.06 impact for stock option expense.
This range assumes low single digit same-store sales growth throughout the year.
In addition, we expect sales leverage on buying and occupancy costs to drive 25 to 35 basis points of annual gross margin expansion.
We also anticipate an SG&A expense rate decline of 30 to 40 basis points, primarily from sales leverage on fixed expenses.
This rate improvement is on a comparable basis to last year, excluding stock option expense.
Interest expense should decline $8 million to $10 million and credit card revenue is assumed to increase $25 million to $30 million.
As a reminder, our capital plan for the coming year is approximately, $300 million net of developer reimbursement, 40% of which will be spent on new stores, 30% is earmarked for store remodels, and 15% for technology.
The remainder is for maintenance and general corporate purposes.
Depreciation will likely be around $290 million for the full year.
We currently expect inventory levels to remain fairly consistent with last year on a per square foot basis.
For the first quarter, specifically, earnings are expected to be in the range of $0.39 to $0.44 per share, including a $0.01 to $0.02 impact from stock option expense.
During the first quarter, our SG&A plan contains additional expansions related to new store operations and IT projects.
This results in approximately a 6% increase in SG&A in the first quarter, versus our planned increase of 3.5% to 4% for the year.
Lastly, I wanted to take this opportunity to update our intermediate term goals for SG&A and pre-tax margin.
Our current three-year plan is targeting an expense rate between 26% and 26.5%, and pre-tax margin range from 12.5% to 13% at the end of 2008.
These targets are based on low single-digit comp sales.
Now I'll turn the call over to Blake for some additional remarks.
Blake Nordstrom - President
Thanks, Mike.
Good afternoon, everyone.
Before opening it up for questions, I'd like to make a few comments about this past year and the year ahead of us.
Several years ago, we set a goal to sustain positive same-store sales momentum and to improve overall operating efficiency each year.
We're pleased to report that we have made continued progress toward this goal.
In 2005, our pre-tax margin ended the year at 11.5%, which is the highest level since the Company went public in 1971. 2005 was also our fourth consecutive year of positive comp stores sale growth.
In addition, our gross margin reached an all time high and our SG&A rate declined to an 11-year low.
One of our core beliefs is that top line performance starts and ends with the experience each customer has in our stores.
For us, the essence of this experience is desirable product, coupled with personalized service.
Our ongoing focus revolves around these two tenants of our business as we believe they will contribute to the longterm success of our Company.
As we look ahead to 2006 and beyond, our top priority is to gain market share through existing stores and channels, as well as new stores.
We have a solid foundation in place to support growth.
Our people continue to gain proficiency and experience with our technology platform, and they are hungry to become even more sophisticated and to reach higher performance levels.
We continue to progress in operating efficiency, disciplined execution, and strengthening our financial position.
Building our capacity to push ourselves further than we've gone before is vital to our future success.
In support of our top line priority, we've identified three areas of focus that each hold unique opportunities.
First, is reenergizing women's apparel.
Second, is multi-channel integration.
Third, is enhancing our designer business.
Women's apparel represents about one-third of our total sales, and serves a range of individual tastes and styles.
Over the past six months, we have been working to develop more targeted merchandising strategies for our various women's departments.
A thorough analysis of objective customer information has helped us better understand our customers' needs and shopping priorities in terms of style, price, fit, and occasion.
We're now in the process of determining how our lifestyle departments should evolve to better serve our women's customers.
Initial findings indicate that we have several opportunities to enhance our women's apparel offering.
We are excited to start taking action on a few of them.
One is expanding our contemporary and modern segments.
Building on the success of our tvd, Savvy, and BP departments over the last few years.
We also have an opportunity to improve our wear-to-work offer, an effort that will most directly affect our Point of View, Studio 121, and Individualist departments.
This kind of assessment is part of an ongoing process for us as we strive to stay relevant to our customers.
We'll keep you informed on our progress through the year.
Multi-channel integration is another key area of focus for us.
Out of all of our customers, the most productive are multi-channel shoppers.
Our website is a valuable tool for attracting new customers who ultimately become full line shoppers.
We have learned that our customers want more and easier access to us in ways that work best for them.
In 2005, we started to make changes in our direct business that better align our online shopping environment and catalogue with the customer experience in our full-line stores.
In 2006, we'll begin migrating the direct inventory system onto our full-line stores platform.
These ongoing changes will take several years to combine supporting systems and create a more seamless merchandise offer and experience for our customer.
Our next key focus area, Designer, is a critical part of our business because it contributes significantly to the aspirational nature of our brand.
Our goal is to have a complete Designer offering and at least one store for every major market we serve.
We have identified select stores where, in 2006, we are working to expand our Designer assortment.
Our Director of Designer Merchandising, Jeffrey Kalinsky, is helping us create a full Designer offer across footwear, apparel and accessories categories in these stores.
Further contributing to top line growth expansion opportunities and new and existing markets continue to emerge for us.
In addition to our previously announced Natick store, last week we shared plans to open three more new stores in Boston.
We have wanted to be part of the Boston community for almost 25 years, and we're very pleased to be able to enter this market starting in 2007, and ending with the four stores in place by mid-2010.
We will continue to pursue selective real estate opportunities that support our strategy.
Today the foundation is in place for us to bring more innovation and creativity into offering a differentiated shopping experience for our customers.
By focusing on our people, merchandise, new stores, remodels, and technology we have laid the groundwork for future longterm growth.
Our people deserve all of the credit for how far we have come and where we will go.
Our Company is made up of many talented, competitive individuals, whose unwaivering commitment to servicing our customers is our most valuable asset.
Now I'd like to open it up for any questions you may have.
Operator
Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Bob Buchanan of A.G. Edwards.
Robert Buchanan - Analyst
Yes.
Congratulations on a great quarter and a great year.
Blake Nordstrom - President
Thank you, Bob.
Robert Buchanan - Analyst
Just a few data points for starters.
CapEx, I missed that number, Mike.
And, have you guys given a dollar number for inventory at year end?
Michael Koppel - CFO
Bob, the CapEx number for next year is $300 million and on the release that we shared we did have a balance sheet and the inventory number is $956 million.
Robert Buchanan - Analyst
Okay.
Fine.
Just the one question I had, is regard to multi-channel.
Are there any business process improvements that you anticipate making, or any key software that you will use in the integration process?
Michael Koppel - CFO
Blake, you want to take that?
Blake Nordstrom - President
Sure.
Hi, Bob, this is Blake.
Robert Buchanan - Analyst
Hey, Blake.
Blake Nordstrom - President
We have, as you know, in the full-line stores the Retek platform and to date we've been utilizing the [common tree], which is what we started with the catalogue business, and so we're migrating now, is my remarks, to a Retek platform and there probably might be some adjustments for some differences like the planning aspect of a direct business.
But this is probably going to be a about a two-year or three-year process of really getting these systems right within our direct channels so that they can speak efficiently to the full-line store and back and forth, for ultimately, you know, more seamless experience for the customer.
So, unfortunately, this doesn't happen overnight and--
Robert Buchanan - Analyst
Sure.
Blake Nordstrom - President
We need to limp along with our existing system while we are on a parallel track bringing this on board.
Robert Buchanan - Analyst
Lastly, on the Federated store situation, what is going on there?
Are there books out on those various stores that are available?
And where do you stand on that process?
Michael Koppel - CFO
Bob, this is Mike, again.
Well, the original process which we participated in on the 26 stores that the Attorney Generals had targeted, that was part of the group of, the Boston stores are part of that group.
We continue to evaluate, you know, opportunities for, that makes sense for us, based on what hits our hurdles and what makes sense for our geographic strategy.
We're continuing to look at that and our sense is that it is probably going to carry out over the next year before we have total clarity on the final situation.
Robert Buchanan - Analyst
Okay.
Thank you very much.
Michael Koppel - CFO
Thanks, Bob.
Operator
Dana Cohen, Banc of America Securities.
Dana Cohen - Analyst
Hi, guys.
Congrats.
Couple of questions.
Just starting on the stores, what does it now look like the number of stores will be for '07 in total?
Michael Koppel - CFO
Total '07, Dana, will be five new stores.
Dana Cohen - Analyst
Five new stores.
It's my understanding that those three in Boston are, Simon's is taking them back and then you'll get them via them?
Michael Koppel - CFO
That's correct.
Dana Cohen - Analyst
Okay.
And, any preliminary sense of the CapEx, then, for '07?
Michael Koppel - CFO
Well, the CapEx plan for the three-year period that we talked about last quarter was roughly $1.1 billion.
And with some of the additional stores that we just layered on, that we announced most recently, it brings it up closer to about $1.3 billion and that's spread out over that three-year period.
Dana Cohen - Analyst
Okay.
And then just doing the math on the pre-tax target, clearly you're assuming some improvement in gross margin.
How much of that is at the merchandising margin level, and how much of that is sort of leveraged on buying and occupancy?
Michael Koppel - CFO
It's primarily leverage on buying and occupancy.
Dana Cohen - Analyst
Okay.
And, then, can you just clarify in the other income item, I know it is a small thing, but, the $8 million from the gift cards.
Michael Koppel - CFO
Yes.
Dana Cohen - Analyst
Is that in the 16?
Or is that separate?
Michael Koppel - CFO
That's in there.
Dana Cohen - Analyst
It is eight out of the 16?
Michael Koppel - CFO
Yes.
Dana Cohen - Analyst
And that eight, because another company made a similar announcement this morning, and it sounded, and this is the limited, they said that it was a cumulative effect from the time that the gift cards had started.
So they actually -- is it different for you?
They classified it one-time thing.
Michael Koppel - CFO
No.
Ours actually, we, because of a number of changes, one, is in legislative changes in the state that we used to be required to [INAUDIBLE] and, two, because the SEC got active this year in terms of giving guidance as to how to account for these.
We established a five-year policy and, basically, that $8 million reflects a smaller amount that's anything older than five years, and then what we'd normally take into income at five-years.
So, on an ongoing basis, you know, we've included in our results next year, roughly $5 million to $6 million assumed in there.
So it is pretty close to an annual rate.
Dana Cohen - Analyst
Okay.
Great.
Thanks so much.
Michael Koppel - CFO
Thanks, Dana.
Operator
Jennifer Black, Jennifer Black & Associates.
Jennifer Black - Analyst
Good afternoon.
And let me add my congratulations.
Blake Nordstrom - President
Thanks, Jennifer.
Jennifer Black - Analyst
I wondered if you could first talk a little bit about, it seems like you've done a great job balancing your private label brands with the brands that you carry.
And could you talk a little bit about how you feel about Classique versus Facconable and where you stand in what you're thinking about with what you just talked about as far as your new strategies?
That's my first question.
Blake Nordstrom - President
Hi, Jennifer, this is Pete.
Jennifer Black - Analyst
Hi, Pete.
Blake Nordstrom - President
Hi.
I think, we have had some success with NPG with our own products, and we continue to let it seek its own level in terms of how, the total makeup of our entire merchandise offering.
The most success that we've had this last year, really is more kind of category.
In departments like men's and accessories and lingerie and BP, and not so much with the specific brands like the Classique's, the Halogen's, and the [Kasnor's].
They're still a very big part of the business and if we're going to have success in women's like Blake talked about here, we have to improve those brands.
And we're definitely working in tandem with NPG to make sure that we have a synergistic approach to how those brands will fit into the lifestyle departments we have.
We've done okay there, but we could certainly do better.
That's part of our plan.
Jennifer Black - Analyst
Is Facconable in your longterm plan?
Blake Nordstrom - President
Yes.
Jennifer Black - Analyst
Okay.
Blake Nordstrom - President
It's a big part of our business.
And we had good success in men's, not as good in women's this year.
It wasn't always that way.
But it kind of depends year by year.
But, it is a big brand that our customers really like and we're going to continue to make it as good as it can possibly be.
Jennifer Black - Analyst
Okay.
And, then, lastly, can you give us an update on where you are, I know petites was starting to get better and plus sizes.
Can you talk a little bit about that?
Blake Nordstrom - President
Plus sizes is stronger than petites and it has been for a few years.
Jennifer Black - Analyst
Right.
Blake Nordstrom - President
Petites is probably one of the more challenging segments for us and you've heard us have these calls the last couple of years talking about that.
You know, we -- it has to complement the entire women's strategy so it is part of the work we're going through, too, to make sure it is complementary and we have opportunity to improve in petites, still.
Jennifer Black - Analyst
Great.
Lastly, are you finding places in your organization where you can continue to streamline or move people around where it makes more sense?
Is that also part of your plan?
Blake Nordstrom - President
In what regard when you say "move people around"?
Jennifer Black - Analyst
I don't know.
If you find you have redundancies in one region, you know, I'm sure you probably got everything under a microscope as far as how you can best utilize your dollars, and, yet, I know that your -- that you will not go to the major system, that's totally out of the question.
But I just wondered if there were -- there was more low hanging fruit as far as that goes?
Blake Nordstrom - President
You mean in terms of vendors that we're working with?
Jennifer Black - Analyst
No, not vendors, but your own people.
Blake Nordstrom - President
Well--
Jennifer Black - Analyst
In better ways to utilize them, or do you think you've maxed that out?
Blake Nordstrom - President
Oh, I don't think we've maxed that out at all.
We're getting better and better and more capable with the information we have as a result of these systems that, you know, Mike has been talking about.
That affords us opportunities to become efficient and leverage our most talented buying people.
So that's an ongoing process that we'll really never stop.
But, you know, the goal is to continue to do more with less.
But, it is a little different division by division.
Michael Koppel - CFO
Jennifer, this is Mike.
In addition to that, you know, one of the things that -- and we've talked about this for several years, is that as our learning curve continues to move up, we continue to find ways to do things, not only more efficiently, but with greater value.
And, you know, we're going to continue to do that.
I don't think our sense is that this is something that we reach a final end point on.
Jennifer Black - Analyst
Okay.
Great.
Michael Koppel - CFO
I hope that helps.
Jennifer Black - Analyst
No, that helps.
One last thing.
Are you looking to bring in new designers into the NPG groups?
Blake Nordstrom - President
Well, Jim O'Neal heads up our NPG area and I know his primary focus over the last 12 months, and going forward into '06, is really our design capabilities in NPG.
He's worked, you know, since he has had that job the last few years on the efficiencies around process and what have you, and, I think, for us to be able to be as successful as you want to be the design element has to be really scrutinized and held to the highest possible standards.
We're working on that, too.
Jennifer Black - Analyst
All right.
Good luck.
Michael Koppel - CFO
Thanks, Jennifer.
Operator
Barbara Wyckoff, Buckingham Research Group.
Barbara Wyckoff - Analyst
Hi, everyone.
Great year.
Great quarter.
Blake Nordstrom - President
Thanks, Barbara.
Barbara Wyckoff - Analyst
I have two merchandising questions.
I guess, you talked a little bit about this, Blake.
The Missy business has been struggling for so long, what do you see happening here?
Is the market weak?
Is there just a lack of ideas and execution?
Is it a competitive situation?
Where some of the business moving over to migrating over to contemporary or specialty stores, and, then, I guess, is there any hope, you know, in the near future for a turn around here?
And, then, I have a second follow-up question.
Blake Nordstrom - President
Okay.
Pete, you want to take that one?
Yes.
I got it.
Well, as you can appreciate it is probably, it's all of those things you mentioned, it's complicated.
And it's a huge part of our business so it has a lot of our attention.
I think that the challenges that we may have had in those areas are probably most within our control.
We have to continue to evolve what we're doing in those areas and the price that we're offering, we're always encouraged every time we go to market, all of the of the things there are to buy.
Sometimes we get burdened, maybe, by, you know, history or what have you, and the risk of having to move on to new things.
But that's just the nature of fashion retailing.
I think, now we've got better information, we just -- we have a higher level of confidence in being able to continue to evolve this.
So, I don't think what the market has is at all a barrier for us to be successful.
As a matter of fact, I think that we ought to capitalize on continuing to bring newness in here and continuing to allow those departments to evolve.
Where we've had most of our success is probably in the categories that would be most often defined as contemporary, or modern, but it's not so much about an age as it is about a styling and a fit and how we can apply that across the different price points we serve.
So we've really worked on the women's initiative to figure out our strategy along four key points, and that's fit, price, style, and occasion.
That applies really to all of the different segments in women's we're involved with.
There's clearly good merchandise to buy out there, if we get our mind in the right place on it.
Barbara Wyckoff - Analyst
Okay.
Thanks.
Question about accessories.
It's been such an explosive category the past few years.
What's going on this season?
Beginning of spring.
What do you see for fall that looks good, are handbags going to hold up?
Is it going to move to something else?
Blake Nordstrom - President
Well, you know, the whole accessory business has been such a great way for the customer to be able to update their look with regards to fashion.
As you've heard us talk about the last couple of years, that anything around newness or fashion is what our customer has really been responding to, and I think our team in accessories has just done an excellent job of giving the customer a compelling reason to buy something new.
So whether it's a fabrication story or a color story, anything that just continues to allow that to evolve has been positive for us, so we've had good results in jewelry, we've had good results in handbags, one of the things that's gone with our success in handbags is layering on more kind of a designer in the luxury part of the business where we've had good success.
Things like our sunglass business and our watch business.
Both of those have grown, disproportionately compared to the success we've already had in the accessory division.
So we'll continue to layer on those elements that give the customer the ability to update their look.
Barbara Wyckoff - Analyst
Thank you.
Blake Nordstrom - President
Thanks, Barbara.
Operator
Christine Augustine, Bear, Stearns.
Christine Augustine - Analyst
Thank you.
I'm wondering if you could talk about traffic and transaction trends in the quarter?
And, then, as you look out to '06, based on your plan for a low single-digit comp increase do you anticipate it to be kind of an even balance between traffic and ticket?
Do you think, maybe, are there certain categories where you feel there's room to even have higher average unit retails?
Thank you.
Michael Koppel - CFO
Hi, Christine, this is Mike.
Christine Augustine - Analyst
Hi, Mike.
Michael Koppel - CFO
On the first part of your question, you know, in terms of traffic, we haven't historically measured traffic counts in the stores, but I think suffice it to say our traffic continues to be healthy.
During the quarter, our average transactions were actually up and we saw that trend for really just about all of the year.
You know, in terms of going forward, you know, we like to focus more around whether or not we're getting the right product on the floor and we're selling it at a regular price.
That's what's going to drive those metrics, rather than the metrics driving the decisions that we make.
So you know we'll continue to look at that and hopefully as a result of us continuing to do the things we are a doing in merchandising that will drive those metrics up.
Christine Augustine - Analyst
Just on that topic, since you brought it up, about sell-through rates.
What's the update on profit logic?
Michael Koppel - CFO
On the mark down optimization?
Christine Augustine - Analyst
Yes.
Michael Koppel - CFO
I would say we are continued in a pretty deep learning mode there.
You know, it is helping us make better decisions.
It is highlighting opportunities for us to work through, slow merchandise and issues we have.
But we are still, I would say, a ways from really saying that we've -- we truly understand it and we're effectively using it.
Christine Augustine - Analyst
So have you anticipated, in your guidance, any benefit from it in '06?
Or is that something that really, we should think about for '07 and beyond?
Michael Koppel - CFO
You know, we haven't tried to put a number on that and included it in guidance.
It is really tough to get your arms around that.
I mean we do expect benefit.
We've said all along, Christine, that, you know, we don't expect this to be a dramatic benefit to our margin that it is, you know, it's much more of a nominal to moderate benefit.
Hopefully, as we continue to work forward on this as we see results, we'll share them with you.
But, no, we haven't included them in our expectations.
Christine Augustine - Analyst
Thank you.
And, good luck.
I hope you have a great year.
Michael Koppel - CFO
Thanks, Christine.
Blake Nordstrom - President
Thank you.
Operator
Stacy Turnof, Merrill Lynch.
Stacy Turnof - Analyst
Good evening, everyone.
Could you give us an update from mark down optimization to [INAUDIBLE] recently rolled out?
What kind of benefit are you seeing to your gross margin line at this point from the system?
Michael Koppel - CFO
Hi, Stacy.
This is Mike, again.
We just spent a couple minutes discussing that.
But, just, in summary, at this point in time, we haven't seen any measurable benefit to the margin.
Stacy Turnof - Analyst
In terms of forecast going forward, is it more, you know, you know, say, two years out?
Or a year out?
Michael Koppel - CFO
We haven't included that in any projections at this point.
I think we've stated before that the impact of it, while it is going to create some value for us, it is probably going to be nominal to moderate.
Stacy Turnof - Analyst
And then I've got one other question.
In terms of your integration, mid-year, you spent time consolidating your catalogue, and, you know, in terms of, you know, some of the performance between that and the catalogue and the full-line stores, what kind of impact are you seeing on the business?
Blake Nordstrom - President
Yes.
We did make some changes with the content of the catalogue and that was mostly around trying to make sure that we had the similar offer available online in the catalogues that we do in our stores and we tried to take a bit of a more aspirational tone with those books to help drive as much business as possible into the full-line stores and we've had some success there.
But like anything else, you learn more after you do it.
We know more today than we did six, seven months ago when we embarked on this.
Those catalogues will continue to evolve.
I think in the perfect world what we're looking to be able to do is not only highlight, you know, trend and make it very compelling to look at, but we literally should be able to sell from it, well, too.
We're finding the places where we can do that well.
Stacy Turnof - Analyst
And my final question is, are you basically complete with the pre-ticketing initiative?
Blake Nordstrom - President
I'm sorry, I didn't hear.
Stacy Turnof - Analyst
Sorry.
Pre-ticketing, sorry about my laryngitis.
You were basically 80% there at the end of the third quarter, would you say you're basically complete at this point?
Michael Koppel - CFO
I would say that we've achieved the majority what have we wanted to accomplish there.
Stacy Turnof - Analyst
Great.
Thank you.
Michael Koppel - CFO
Thank you.
Operator
Dorothy Lakner, CIBC World Markets.
Dorothy Lakner - Analyst
Thanks, good afternoon, everyone.
Michael Koppel - CFO
Hi.
Blake Nordstrom - President
Hi.
Dorothy Lakner - Analyst
We've been very impressed with the new designer merchandise that's -- that's really appeared recently in accessories and footwear.
And I wondered, just, what's the biggest category for opportunity in that business?
Now that you are working with Jeffrey Kalinsky, and also how far along are you in the process of identifying the stores you want to designate in each region?
Blake Nordstrom - President
Well, hi, this is Pete.
I think in terms of the categories, they're all fairly equal.
You know, we've been in probably the women's apparel part of it longest and have the most complete offer in terms of the amount of stores and the depth that we have there and established business.
You know, we've been in the shoe business forever, but, there's a lot of room to improve there, too.
I think most of the -- well, it is pretty equal.
I would say shoes and, really, the handbag business is where we've had, you know, kind of the exponential-type of growth and I think as long as we continue to concentrate on this there's opportunities to continue to grow that for the foreseeable future.
I'm sorry, what's the second part of your question?
Dorothy Lakner - Analyst
Just how far along are you in that process of identifying the stores in each region that you want to designate as designer stores that might not be already carrying designer merchandise?
Blake Nordstrom - President
Well, we've identified them already.
Dorothy Lakner - Analyst
Okay.
Blake Nordstrom - President
But, to the extent we've been able to change their offer, is something you would see, that's kind of a work in progress.
I think over the next couple of years we're really going to be in a place where we'll have something to show for that.
It is -- that list of stores, it is not super definite or finite.
It can evolve and merge as we have opportunities.
There's a combination of factors that come into play there.
One, is that is it a store with the opportunity with the customer that we have there to be able to do this business well?
Secondly, can we get shipped all of the real desirable designer products that we want.
And those two things have to fit together.
Dorothy Lakner - Analyst
Uh-huh.
Blake Nordstrom - President
Things evolve and change overtime.
You have the, kind of, the obvious locations for us.
The downtown Seattles, the South Coast Plazas, the Michigan Avenues, which have had this and will continue to have it, we'll expand upon it.
But we also have places like Minneapolis, for example, Mall of America, where we have a very strong store and we believe that market is underserved in terms of the ability to deliver the luxury product, and so we've actually had quite a bit of success working with our vendor partners to be able to expand our offer in true designer in that store, and you'll see that, probably, within the next 12 months things coming in there and we're pretty excited about that.
Dorothy Lakner - Analyst
Great, thank you.
Blake Nordstrom - President
Thank you.
Operator
Richard Jaffe, Stifel Nicolaus.
Richard Jaffe - Analyst
Thanks very much.
I guess on a smaller topic, the specialty store business, either Jeffrey's business, is it a Facconable free-standing stores, do you see that as, either Jeffrey's or Facconable as a further growth opportunity, and are there other concepts, I guess, percolating that you can share with us?
Blake Nordstrom - President
This is Pete.
Right now we don't have any plans to expand the stand alone Facconable stores in America or the Jeffrey stores.
They've both doing fine.
But the concentration of our efforts, in terms of where you can create the most value for the shareholder really has to do with what we can do in the stores and using, in the case of Jeffrey Kalinsky, his knowledge in expertise to not only keep his stores going but to contribute to our stores and that's where we've had a lot of real positive success so far.
I think only going to be that way for the foreseeable future.
There's more to come.
Richard Jaffe - Analyst
Great.
Thank you.
Operator
Maureen Depp, Luma Sales.
Maureen Depp - Analyst
Yes, hi, thanks.
I just wanted to ask about the comment made about SG&A expenses being higher in the first quarter than the full year.
Are there any special projects or initiatives going on that we should know about?
Michael Koppel - CFO
Hi, Maureen.
This is Mike.
Maureen Depp - Analyst
Hi, Mike.
Michael Koppel - CFO
It's nothing more than what we've shared.
You know our big initiative right now is multi-channel integration.
We're embarking on new planning systems for our merchandising group.
It is really just a timing of how some of the investments are being made.
The other component of that, too, is that we're just anniversarying a number of new stores that were not in the first quarter last year, so that's causing a rise in the expense rate, as well.
Maureen Depp - Analyst
Okay.
Thanks.
Michael Koppel - CFO
Thanks, Maureen.
Operator
Neely Tamminga of Piper Jaffray.
Neely Tamminga - Analyst
Great, can you hear me?
Blake Nordstrom - President
Yes.
Neely Tamminga - Analyst
Great.
Good morning -- good afternoon.
I also have a cold here today.
Two things.
Mike, can you talk a little bit about, in terms, I guess this is really for Pete, in terms of the women's changes that is occurring, you know, can -- I'm trying to get my head around this.
Are you actually, physically, changing the spaces?
Obviously, you're going to be upgrading some of the assortment that's in there, and changing some things around, potentially, could you be repositioning brands within some of the women's departments, similar to what you've done with Free People, and I'm just trying to get a sense of, you know, just coming off of [magic], it's very clear to me there's a major overhaul coming down the pike here in the Fall.
I'm just trying to get a sense of what that is going to look like?
Blake Nordstrom - President
Yes, that's a great question.
We believe we have the appropriate amount of departments and the appropriate amount of space allocated to the women's segment and really across all the different lifestyle issues we talked about with fit, price, occasion, and style.
It really is much for the subject of around the actual content and getting that right, first.
You know, I think it will continue to evolve, our space needs, based, you know, as the customer demand dictates it.
Obviously, different today than it was five years ago and I would anticipate it would continue to evolve five years from now, so we're just trying to be as nimble as we can and really looking forward more than looking backwards in terms of how we create strategy around women's.
I think you're right, it will continue to evolve and there's opportunity out there to improve, for sure.
Neely Tamminga - Analyst
And, then just separately, if I may, if Blake or Mike could talk a little bit about some of the leadership changes that have been going on, with Dale's pending retirement, here I think next week, maybe you, and talk a little bit what's going on with the Rack leadership and plans for Rack this year and for next year?
That would be great.
Blake Nordstrom - President
Okay.
Hi, this is Blake.
Let me touch on the Rack and then Pete can take the merchandising and full-line store area.
The Rack, and Pete will touch on this, Laurie Black has been leading that division for the past couple years and has done an excellent job, and she is now overseeing our cosmetic area, taking Dale Cameron's place.
We took who we feel is one of our best divisional merchandise managers, [Scott Madine], from the women's shoe division to follow Laurie and continue with the strategy that she and her team has built and, so, obviously, we hope to continue to build upon the great platform that Laurie has done.
Pete, you want to talk about, maybe, some regional or at least merchandising adjustments that have been made?
Yes, you know, it's just pretty much a natural evolution of what happened to the people that have been with us a while.
In Dale Cameron's case, she's been with us for over 35 years and put herself in a position where she could retire completely on her own terms, and we're proud of her for that and she's been just sensational.
What's gone on along with that is her sense of responsibility to make sure she left the division in great shape and that we had people capable of carrying the torch and moving forward.
And you know we have had the benefit over the last month of Laurie Black literally working side by side with Dale in transition as Dale is getting ready to retire and Laurie is moving into this new position.
Frankly, Laurie isn't new to full-line store merchandising issues.
She had had full-line store merchandising jobs before and was very successful at it, even though cosmetics is relatively new, she has a lot of main floor-type of experience for us.
And actually cites Dale as mentor of hers and has worked with her directly with her over the years.
So we anticipate that's going to be a smooth transition.
Laurie is a fantastic merchant.
In the case of women's designer, where [Sue Patt] had a similar story to Dale Cameron, been with us over 35 year, has done very well, and has decided she wanted to retire.
In her case, she had pretty much her right hand person who has been that same person for, gosh, probably about 10 years, and has grown up in the designer division, and has been with us over 20 years, and, so, time is right for her to accept some more responsibility.
I know Sue has a lot of confidence in her and so do we, and her name is Jennifer Wheeler.
I think that these will be seamless transitions.
It will be exciting for the new people in there.
It will breathe new ideas in.
I think that's ultimately good for everybody and we'll do our best to manage it well.
Neely Tamminga - Analyst
Fantastic.
Thank you guys, and best luck in 2006.
Blake Nordstrom - President
Thank you.
Thank you.
Stephanie Allen - Director, Investor Relations
Wendy, I think we have time for one more question.
Operator
Thank you.
Adrianne Shapira, Goldman Sachs.
Adrianne Shapira - Analyst
Thank you.
Mike, just wondering on sales per square foot, your former peak was about $395.
What's the new margin targets predicated on?
Michael Koppel - CFO
The new margin targets?
Adrianne Shapira - Analyst
Yes, your pre-tax margin.
What sort of sales per square foot do you think you need to to get to to achieve those?
Michael Koppel - CFO
Well, they're based on low single-digit comps, which would put us, I'm going to say, roughly in mid-370s to 380 range.
Adrianne Shapira - Analyst
Okay.
So, it is not even getting back to your former peak levels?
Michael Koppel - CFO
Not -- not for the next year or two.
Blake Nordstrom - President
Not yet.
Adrianne Shapira - Analyst
Okay.
Question about your men's half-yearly sales event, it seems to be much more successful than the women's.
Why is that?
What sort of best practices can you take from that and apply it to the sale events going forward?
Blake Nordstrom - President
That's a really good question.
Our clearance events are in a transition, too.
We just, since we have better information, mark down optimization, all of these things, we don't do nearly as much saving up for a clearance time as we did before.
We're to clear goods in a more timely fashion and so when we come to these traditional clearance events, we do tend to buy some more things, special purchase.
So, with regards to men's, boy, that's a really good question.
I think there probably are some things to be learned there.
One thing we know for sure, is that the major amount of success that we've had in transitions in season at clearance time is our ability to be able to bring in new, regular priced products.
So that was particularly true in January, where, you know, it's been really traditionally a clearance time, but with people having gift cards in their hands and anxious to buy new product, we were fortunate that we were able to have our inventories in line and be able to respond to that, and not really be burdened by a whole bunch of clearance activity in that month and that served us pretty well.
Adrianne Shapira - Analyst
Great, thank you.
Blake Nordstrom - President
Thanks, Adrianne.
Stephanie Allen - Director, Investor Relations
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If you have additional questions or need further information, please contact our manager of Investor Relations, R.J.
Jones, at 206-303-3007.
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Thank you for the interest in Nordstrom.
Operator
Thank you for participating.
You may now disconnect.