諾德斯特龍百貨 (JWN) 2006 Q3 法說會逐字稿

Hello, and welcome to the Nordstrom third quarter 2006 earnings release conference call.

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

All lines will be on a listen-only mode until the question and answer session. [OPERATOR INSTRUCTIONS] I will introduce Mr. RJ Jones, Manager of Investor Relations for Nordstrom.

You may begin, sir.

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 third quarter results.

Pete will make a few additional remarks and then we'll open it up for questions.

Please note that any forward-looking statements we make in our comments 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, RJ, and good afternoon, everyone.

We are pleased to report our third quarter performance.

Top-line growth exceeded 12%, attaining a level we have not reached since the first quarter of 2004.

Sales growth accelerated across our Full-Line and Direct channels compared to the first half of this year as our customers responded favorably to our merchandise offering for the fall season.

These results are indications that key elements of our strategy, improving women's apparel, building our designer business, and creating an integrated approach to multi- channel retailing, are progressing forward.

We believe these initiatives continue to build positive momentum, creating long term value for our Company.

Our women's apparel division is better meeting our customers' style and occasion needs.

For the first time this year, the category as a whole achieved positive same-store sales growth.

Later in this call, Pete will discuss more details about the developments in the women's business.

On the bottom line for the third quarter, earnings per share increased 33% to $0.52 versus $0.39 last year.

Our pre-tax margin rose to 11.8%, 203 basis points higher than last year.

Net income for the quarter increased 26% to 135.7 million compared to 107.5 million last year.

Total sales grew 12.4% to 1.9 billion and same-store sales increased 10.7%.

In the Full-Line stores, the strongest regional performance was in the Midwest.

All major merchandise categories achieved same-store sales growth above our low single-digit plan.

Key categories that performed ahead of plan were women's apparel, accessories and designer merchandise across all categories.

Our Direct division achieved sales growth of over 30% for the quarter while the Rack delivered an 11.6% same-store sales increase.

Gross profit margin increased 156 basis points for the quarter over last year.

The majority of this improvement came from higher merchandise margin due to improved markdown performance, primarily in women's apparel, men's apparel and women's shoes.

In addition, we continue to see stronger sales results in higher margin categories such as accessories.

Sales leverage on buying and occupancy expense also created rate expansion.

In SG&A, we gained 17 basis points of rate improvement versus the prior year.

Our overall expense performance was in line with our plan for the quarter, excluding an increase in expense due to the significant improvement in our share price.

Variable expenses rose consistent with our above planned sales growth while the majority of our fixed overhead costs were on plan.

As our stock price appreciated over 38% in the third quarter, compensation costs tied to stock performance increased ahead of our expectations.

This impacted our plan for the quarter by approximately $8 million or $0.02 per share in comparison to last year by 12 million or $0.03 per share.

SG&A rate was impacted by approximately 40 basis points to plan and 64 basis points versus last year.

Third quarter SG&A also included $4 million in stock option expense which had a 19 basis point impact on the SG&A rate.

Year-to-date, our SG&A rate has improved 43 basis points versus last year.

The Other Income line of the P&L increased 12 million for the quarter, primarily as a result of growth in our co-branded VISA card program.

Net interest expense of 11 million was 1 million higher than last year, primarily due to an increase in our average interest rates.

We repurchased 896,000 shares of stock during the quarter for a total of 32.6 million.

The resulting reduction in weighted average shares outstanding had no impact on diluted earnings per share this quarter.

Inventory levels were on plan resulting in a 5% improvement in our turn for the quarter.

Faster turn and improved aging reinforce our ongoing commitment to inventory productivity.

In the fourth quarter, we will go live with our new merchandise planning system.

This represents another step forward in our inventory management capabilities.

Our goal is to enhance our planning, assortment and allocation of inventory in 2007 and beyond.

Turning to the balance sheet for the third quarter.

Total balance sheet debt at quarter end was 732 million and total capital was 2.7 billion, resulting in a book debt to total cap ratio of 27.2% compared to 32.4% at this time last year.

The decrease in the ratio versus the prior year was driven primarily by debt retirement.

The current figure remains within our 25 to 40% target range.

As we had previously discussed, our current dividend policy aims to maintain a payout ratio of 18 to 20% and a yield that is approximately 1%.

Our quarterly dividend of $0.105 is unchanged from the last quarter and currently is consistent with these targets.

As we look to our overall return on capital, we continue to achieve high returns.

Return on invested capital on a 12-month basis was 19.5% compared to 15.7% at this point last year.

We believe these high return levels position us to further, to drive further value growth as we look to grow our capital base.

Consistent with this goal, we recently completed our five-year capital plan for 2007 through 2011.

Total budgeted CapEx for that time period is approximately 2.8 billion with about 550 million planned for 2007.

Approximately 80% of this capital is in our store base which includes new stores, relocations and remodels.

We remain committed to our existing and future technology, earmarking 10% of the plan for this purpose.

The remainder will be used for general maintenance purposes.

Today, we announced three additional new Full-Line stores and one more relocation.

This capital plan now includes a total of 20 announced new sites and four relocations.

Taking into account our visibility into potential future opportunities, we have included additional new stores in our plan.

The resulting projected compound annual square footage growth rate in this plan is approximately 4 to 5% through 2011.

We will continue to remain flexible as other opportunities arise.

As we have shared in prior quarters, we are planning to refinance our consumer credit receivable securitization.

We would like to take a moment to first review the related financing activities that took place during the third quarter and then to share our plans on these asset based borrowing programs.

During the third quarter, our 300 million private label securitization matured.

We made the principal payment and retired the debt.

The balance sheet and cash flow impacts of these activities are reflected in our financial statements and will be further explained in our upcoming 10-Q.

Looking to the first quarter of 2007, when our 200 million VISA securitization matures, our goal is to combine both the private label and VISA receivables into one securitization program.

We anticipate the level of the associated long-term debt to be approximately 700 to 800 million, which will bring our total long term debt outstanding to 1.3 to 1.4 billion.

Incrementally, this represents an anticipated 200 to 300 million increase in leverage.

Under this combined program, the VISA receivables and the debt issued by the VISA trust will all be recorded on the balance sheet.

Currently, the amount of the VISA receivables that exceeds the trust debt is recorded as an investment in asset-backed securities on our balance sheet.

When we make this transition, we will set up a reserve for bad debt that will impact the P&L as a one-time charge which we estimate will be approximately 25 million in the first quarter of 2007.

Our updated earnings outlook for the full year is $2.46 to $2.51 per share, up from $2.31 to $2.39 per share.

Including a $0.06 per share impact of stock option expense in this year's results, we expect our EPS to increase 24 to 27% year-over-year.

This puts us on track to reach our three-year goal of a 12.5 to 13% earnings before tax margin by the end of this year.

For the full year, we continue to estimate a mid single digit same-store sales increase.

We now expect expansion in gross profit margin of 40 to 50 basis points and SG&A expense rate improvement of 40 to 50 basis points versus last year.

Other Income is unchanged from our previous outlook for the year and is anticipated to increase 30 to 35 million.

Interest expense is assumed to improve 2 to 3 million due to lower debt levels.

The expected effective tax rate for the year is now 38.7%.

For the fourth quarter, we are planning a low single digit same-store sales increase and expect earnings per share in the range of $0.79 to $0.84 versus $0.69 last year.

Included in both the annual and fourth quarter earnings per share outlook is the estimated impact of the 53rd week which we anticipate to be approximately $0.02.

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

Thanks, Mike.

Before opening it up for questions, I would like to make a few comments about our recent performance.

We are encouraged by our results this quarter as we continue to show progress in all of our merchandise divisions.

Over the last few years, we have seen some pretty strong results in most of our major categories including accessories, cosmetics and men's apparel.

Now the improved performance in women's is having a meaningful impact on our comp store sales results as well.

Our women's apparel business is just starting to turn around for the better.

The team supported by Loretta Soft deserve a lot of credit for how things are, have been going so far this year.

Over time, this category has been the toughest one for us to improve.

We are focused on what more we can do to keep the positive momentum going.

I would like to share some highlights from a few of our women's departments that are showing the most improvement.

Overall, regular price selling across women's departments has really changed for the better.

Newness and regular price selling are increasingly fundamental to our merchandise strategy.

Our Studio 121 department is running the highest comp sales increase year-to-date among the women's departments.

Their performance has been driven by a combination of an improved wear-to-work offering and a streamline casual wear assortment for our classic bridge customer.

Career wear is also driving better performance in our Point of View department as well as the cleaned-up casual offering that is wearable in style and fit for our updated better customer.

Our Narrative department has also performed well.

The casual offering for our classic better customer continues to address what our customers are looking for in styles ranging from expressive to more traditional.

Our coats and dresses business is doing very well across style and price points.

Our TVD and Savvy departments, which serve our contemporary customers with new fashion and on-trend merchandise, have continued to perform well.

Today's results in our women's business show that the adjustments we have made to our strategy are taking hold and we are confident that we are moving in the right direction.

This is an ongoing process and we'll continue to update you on our progress.

Our Designer business has done better than we planned year-to-date.

As we've discussed before, Designer represents the brands we carry at the highest end of the luxury scale.

Right now, the category has achieved the largest percentage of growth over plan compared to our other businesses.

The approximately 25% of our Full-Line stores with a more developed Designer offering are also performing above our plans.

Overall, we are excited about the future of the Designer business and we continue to seek new ways to best serve our customers in that area.

Our results over the last few years support our belief that our customers want the very best merchandise the market has to offer.

We will continue to pursue our current merchandising strategy as we see more upside potential within all of our categories.

With that, we will open it up to any questions you have.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is from Stacy Turnof and please state your company name.

Thank you.

Stacy Turnof, Merrill Lynch.

Congratulations on a good quarter.

Could you talk a little bit about, you're giving out low single digit comp forecasts for the fourth quarter.

Given the robust trends that we're seeing, it seem a little bit conservative.

Is there anything else going on there that we should know about?

Stacy, this is Mike and thank you.

As has been our prior practice, we share what our operating plan guidelines are when we look at our next quarter performance.

That being said, we, our trends continue to be fairly strong through the end of October and we are hoping they continue and I think if you just track us along based on our monthly sale releases, you can adjust accordingly.

Okay, great.

Can you give us any color on how the Half-Yearly sale went?

Well, yes, this is Pete.

I will speak to that a little bit without giving you exact numbers on that which wouldn't be appropriate at this time.

I think it's fair to say that we have seen a continuation of a trend that we've noticed over the last couple years, and that is that our regular priced selling and flow of new merchandise seems to be what's driving the business more than anything else.

Clearly we have merchandise we need to clear seasonally.

But as we've had Markdown Optimization really kick in over the last year, more frequent markdowns are happening.

We don't have as much saved up for these clearance times and plus, just our customers have really been more interested in our regular price offerings so we have been achieving our plan but I think we'll continue to evolve the offering in that sale to reflect what our customers want.

Great.

Thanks so much.

Thank you.

The next question is from Adrianne Shapira.

Please state your company name.

Thanks, from Goldman Sachs.

Mike, given the impressive margin expansion, can you just talk about the opportunity going forward?

It sounds like we're in the early stages of this women's turnaround and merchandise margins was pretty mixed because of the performance over the last few quarters.

So just give us a sense of how much opportunity there is to recoup going forward?

Well, thanks, Adrianne.

I think in terms of going forward, we are still learning, obviously, when we went into this quarter, we did not anticipate that kind of margin expansion and as our business evolves and we're seeing regular price sell-through improve and markdowns go down, we're learning.

At this point, I think it is fair that we are not getting too far ahead of ourselves in terms of gross margin opportunity as there are multiple other categories that still need to at least maintain the current rate they are at.

So I think at this point, I would just say that we are learning and that we are hoping that there is still some further opportunity but that is still to be determined.

Okay, great.

And then just Pete, following up on the Half-Yearly.

It sounds as if given the strength of October, November, we should expect sort of modest comps.

Can you give us any sense in terms of, obviously the low single digit for the quarter.

It sounds like it is going to be much more back end loaded given the fact that inventory is not there.

Is that the right way to think about it?

I don't know that it is really appropriate for me to speak to that specifically so I don't think I am going to.

We are in the middle of it so --

Can you clarify your comment on the inventory?

You said comment about inventory not being there and back end loaded?

Yes, I was just, the strength of October.

It sound like the customer is much more interested in regular price selling and so it's such a strong comp ahead of the Half-Yearly, it seems like and looking back the past few years, whenever you had a strong October, November seemed a little bit softer.

I think our pattern over a couple, several years now, has been that our clearance months, June and Half-Yearly in November, have not operated at the same level as the other months.

But we will share our results when the sales come out.

Thank you.

Our next question is from Deborah Weinswig and please state your company name.

Citigroup.

Can you talk about the performance that you saw in the midwest?

Do you think that any of the market share gains there were a result of what you're maybe seeing with regards to disruption from the competition or is there something specific that you did in that market?

Well, I think it is difficult for us to measure that in a real precise way.

We've had good solid business in the midwest but it is not unlike what we have had in other regions.

We've had some pretty good consistency across all regions so it doesn't really stand out dramatically.

I think, particularly in Chicago with the transition of Marshall Field's, I'd like to think that that created some opportunity for us but it is difficult for us to quantify that.

Okay, and then with regards to the expanded Designer offering which many of us have seen in the store, do you, would your sense be that your, and obviously I would assume you have the data with regards to your credit card, are you getting a new customer in the store or do you think your existing customer's just shopping more of the store or both?

Well, there's some new customers coming but for the most part, it's just the people that have been shopping Nordstrom and want to buy these kind of products from Nordstrom and just us doing a better job of fulfilling that want from them.

So, I think most of it is just really focusing on the customers that we have and getting a greater share of wallet.

Great.

Thanks so much.

Thank you.

The next question is from Bob Buchanan and please state your company name.

A.G. Edwards.

Congratulations.

Thanks, Bob.

Correct me if I am wrong but for these, for the Half-Yearly sale, the women's and kids which ended yesterday, you do flow in a fair amount of fresh receipts in conjunction with that sale, so you're not totally relianced on heavily marked down merchandise.

You mean in terms of of the special purchase that we bring in as part of the sale offering or just regular priced merchandise.

Yes, okay.

So there is that additional flow that's planned and that comes in.

Yes.

Okay.

I am trying to get, even if your sales weren't that strong on the clearance portion of the sale, the sale theoretically could have been strong?

Well, let's not theorize yet until we release our results but certainly those are high volume periods for us and we are going to ensure that we meet our plan.

I would be interested to see the results.

I am just worried about some people jumping to erroneous conclusions on the call.

Also wanted to ask you about the new merchandise planning system, if you can articulate who wrote the software, how the implementation has gone and what the timing looks like here coming into holiday.

Okay.

Bob, in terms of the product we are using, it is a retech product so it worked very well with all the effort and infrastructure we had already put in place and real simple, what it's going to allow us to do is to do assortment and allocation planning at a unit level which has something that we historically have not been doing and we believe over the next couple of years will allow our organization to have better insight in terms of how we plan our business and continue to gain more efficiency in our inventory investment.

Okay.

Will that be a weekly, as opposed to monthly, assortment in allocation?

Well, it will have the potential to do it at a weekly level.

Okay.

Okay, and then lastly, with regard to St. Louis, just wondering, the thinking on adding a store in St. Louis?

And then Christiana Mall, is that a takeover of a former Lord and Taylor store as well?

Okay.

This is Pete.

I will take the St. Louis part first.

Essentially, we went into that market a few years ago at West County because it is a good market to be in.

We took the opportunity that was available to us at the time.

One of our goals with our real estate strategy is to be in the best centers in the country.

And St. Louis Galleria would probably rank up there in one of the better centers in the country, and we just figured now that we had that opportunity to get in there, that we really should pursue it.

It is not dissimilar from when we first went to Dallas.

We went to the Galleria Mall first and ended up working our way into NorthPark later when that opportunity became available.

I think if all things had been equal, we probably would have gone to NorthPark first and I think if we could rewind the clock on the St. Louis opportunity if we had the option of being in any mall there, we might have gone to that mall first.

That being said, we believe there is plenty of opportunity for us to have two stores in that market, a fantastic center, we want to be there.

And the Christiana Mall store, Pete, is that a Lord and Taylor takeover or is that a new build?

Bob, this is Mike.

It was a former Strawbridge location that came out of the May Federated merger.

Oh, okay, thanks a lot.

Thank you.

The next question is from Neely Tamminga and please state your company name.

Great, it's Piper Jaffrey and let me just add my congratulations on your performance.

A couple more questions here.

In terms of the merchandising planning system that you spoke to going live next quarter, is that going to be for all categories and for what season will you be going live with in terms of the planning?

Neely, this is Mike.

Yes, we are going live with all categories and we will begin with spring '07 planning.

Okay, great.

And then with respect to the real estate, certainly appreciate the willingness and desire to have flexibility with respect to new locations for '09 and for 2010, but do you think that you are starting to get to the position for 2009 where it's only adding maybe one or two additional stores because of human capital or do you have some other initiatives underway for those years?

Well, currently, in '09, we have announced five new stores and two relocations.

We think we have a little bit more capacity in '09.

We start to, as far as that human capital resource, start to push a little bit when we get into 7, 8 range.

But we have a little bit more room there.

Okay, that's good.

And just one quick housekeeping.

On the comp guidance that you gave for the quarter, for fourth quarter, is that on a 13 week or a 14 week basis?

Well, it is on a 13 week.

We are reporting comps on an apple for apples basis.

Okay, great.

Thank you so much and good luck.

Thank you.

The next question is from Michelle Clark and please state your company name.

Morgan Stanley.

Congratulations on a great quarter.

Question for you on your, the credit quality of your credit portfolio.

Can you comment in terms of, if you're seeing anything, in terms of either your delinquency rates or your charge-off ratios?

Michelle, this is Mike.

No, at this point, we have not seen any significant shift in aging or charge-offs.

Okay, so nothing to call out there?

No.

Okay, and then the 4 to 5% square footage growth guidance, that is on a net basis?

A net?

Describe net basis.

After any store closings, if any.

Yes, we currently don't have anything planned right now for closings.

Okay, and then just one last question.

The deal with GGP, was there any benefit that you guys received from booking three deals at once?

With General Growth?

No.

Okay.

Thank you.

Thank you.

Our next question is from Dorothy Lakner and please state your company name.

Thanks, CIBC World Markets.

I just wondered if you could update us as to where you are in the rollout of more designer product across your stores and then also, I am just going back to the real estate questions.

When you think longer term, what do you think is the ultimate potential out there for Nordstrom stores as you look at what you have got and what markets are available, given that some of the smaller markets, some smaller markets you're going into and also, with the smaller stores like the Naples, the smaller format.

And then finally , if you could also just speak to, 2008 it looks like you've got a lot of stores on the docket versus '07 where they're, you are stepping up the pace from '06 and I just wondered if some of those stores might slip into '09.

It looks like a lot of stores are opening in the '08 time frame and then finally, just remodeling.

If you can just update us as to what your plans are for store remodels over the next few years.

How many out there you'd like to, you're going to need to do over the next few years.

Thanks.

Okay.

This is Pete.

We are furiously taking some notes to make sure we got all these questions ready.

I will start with the Designer part of that.

We've got a long ways to go.

We're making a lot of progress but I think it just speaks to, when you see the results that we are having, our customer's appetite for the product and we have known this for awhile now, and we are just out there doing the best we can to fulfill that demand.

We identified essentially about a quarter of our stores so that we have at least one store in every major market we serve that we've got a complete end to end offering of Designer.

And it kind of depends on which one of those stores you're in.

Some are farther along than others so I guess the answer to that would be while we have made a lot of progress, we have a long ways to go still.

And are there categories, I mean the children's area, for example, seems to be one where you've also kind of stepped up to the plate in terms of what some might call luxury offering.

Are you kind of discovering that there are departments that can be part of this whole process?

Well, it all starts with the customer.

And you know our children's customer is really just a subset of people that are buying other things in the store so it stands to reason that if they wanted more luxury type of products for the other things they might be purchasing, that they might want that in kids too.

So whether it is bringing in Prada shoes for kids, which we have in a couple stores and that's performed well, or we're doing a pretty good job with Burberry, for example, in kids' apparel, I think it's just a continuation of wanting to try to bring the best the market has to offer to our customers.

Dorothy, this is Mike.

I will talk to the real estate questions.

In terms of ultimate potential, we really haven't put a limit on anything like that at this point in time.

We extended our capital plan from three to five years this year because we have more visibility and we see opportunities even beyond that five year plan.

So at this point, we are not putting any kind of line in the sand as far as ultimate.

In terms of new stores in 2008, we currently have seven and at this point, we don't foresee anything slipping.

That is a fairly high amount like we've shared in the past but at this point, we're committed to that plan.

And then as far as remodels, our current plan has us remodeling roughly six to seven stores a year.

Our goal is that by 2011, we will have a very small percentage of our stores over 12 years old that will not have either been new or remodeled.

So we're really committed to keeping that store base fresh and exciting for our customer.

Great.

Thank you and good luck.

Thank you. ur next question is from Christine Augustine and please state your company name.

It's Bear Stearns.

Thank you.

Mike, could you just confirm that, for your CapEx this year, it is about 300 million or is some of that going to slip into '07?

That's about right.

The 550 is the number that we see landing currently in '07.

And does the 550 in '07 incorporate some of the stores that you're opening in '08?

Yes, it does.

Yes, it does.

We are on roughly a 14-month construction cycle and so you're always going to have overlaps in years for new store construction.

Great.

And just on the inventory, at the end of the quarter, it was up a little over 5%, you're guiding a low single digit comp, you're going to annualize to, I think, like 1% footage growth this year.

Is that just kind of a timing difference in terms of when the receipts came in at the end of the quarter?

Yes, it was.

So that just to clarify, do you mean then that they came in a little earlier than last year?

Yes, we did have some higher level of receipts at the end of the quarter versus last year.

Thank you.

And my final question is juniors, is there any update that you can provide us there?

I know the comparison's, I believe it's November, where they start to get much easier.

Any progress on that front?

Thank you.

Yes, we are making some progress in juniors which has been, year to date, our toughest area specifically in the women's apparel area.

But we've made a lot of progress there.

We are not quite where we want to be yet but we are encouraged by the process.

Pete, do you think that you might see a positive comp trend in that business sometime within the next six to 12 months?

Yes.

Okay.

Thank you.

Thank you.

The next question is from Richard Jaffe and please state your company name.

Thanks very much.

It is Stifel Nicolaus.

Just a follow-on question.

It really sounds like the women's is back on track.

But if we were to look at all the merchandising efforts today and say what's the next women's, where is the under-performing categories or the less strongly performing categories that could benefit from the kind of attention women's received the last 18 months or two years, and if you could tell us what the out look is for that category, that would be most helpful.

This is Pete.

We have an ongoing process where we do strategy work to determine the next handful of years, with every merchandising category.

So it is an ongoing process.

It isn't like we cross off a list and we're done.

Given the size of women's, that is roughly a third of our business, I think it is fair to say it's a mine.

We could be working on this one for awhile and still have quite a bit of room for up side.

So I'd say we just looked at besides the business and the progress that we have had, that once we get past some of this in women's, I'd say there is probably opportunity in cosmetics for us to be a little, to mine a little bit deeper, even though we've had good solid results there for quite some time.

I think shoes is probably an opportunity, even though we have high market share there and we tend to do well.

It is something that we want to be really good at and so we have to keep working on new ways to challenge ourselves there.

So I guess I don't really have a specific answer other than we don't see any end to our ability to be able to try to execute better in all the categories we currently participate in.

That's a good answer.

Thank you.

With women's, are you in the second inning or bottom of the eighth?

How do you see that business unfolding or the improvements that you've been able to implement so far?

We haven't gotten to the relief pitcher yet.

I think we're still not in complete game status so maybe second or third inning on that.

We've got quite a ways to go.

Great to hear.

Thanks a lot and congratulations, guys.

Thank you.

Thank you.

The next question is from Bob Drbul and please state your company name.

Lehman Brothers.

Good afternoon.

Hi, Bob.

I guess just maybe two questions.

Can you talk about any notable trends in averaging or retail, maybe throughout the categories, and the second question would be, are you seeing any price ceilings that you're hitting in any of the higher priced merchandise in the women's business and the different areas?

Bob, this is Mike.

On the first part of the question, for the third quarter, we saw our sales increase was roughly half due to averaging at retail and half due to just increase in units.

But most of that average unit retail, there is really two things driving that.

One is that we are just selling more regular price and the other is the continued growth in our Designer business is driving some of those averages up.

This is Pete.

In terms of price, I guess we really haven't thought about that specifically.

There obviously is a relevant size, relative size of business for each one of these areas that we participate and all we know is that there is more room for us there.

But it would be way premature for us to say that there's a limit to how far we can go there.

Okay, and then just one follow-up.

Can you talk a little bit about the penetration or the percentages of brand exclusivity or private label in the business right now?

Yes, well, private label and I think we speak to this specifically.

I mean you're talking about the range of the lower teens in terms of our total offering, representative and private label.

Beyond that, products that are exclusive, I don't know that I could quantify that exactly for you.

But we don't really focus on that specifically as its own measurement.

I think ultimately we just want to carry the products our customers want to buy from us.

And again, whether something is exclusive or not, hasn't tended to be very relevant to whether it sells or not.

Okay.

Thank you very much.

Thank you.

Our next question is from Dana Cohen and please state your company name.

Hi, guys, congrats.

Couple follow-ups.

I think you said it was seven stores in '08.

I just wanted to reconfirm as well the numbers for '07.

'07 is four new stores and one relocation.

So what is the square footage, if you have that in front of you, for both years?

The total square footage?

Gross, yes.

In 2007, it looks like it is roughly 450 and in 2008?

It's a check.

It's a quiz.

It is a pre-Thanksgiving quiz.

It is a million something.

Maybe you can do that for me.

We will get that one back to you, Dana.

Okay.

No problem.

And then just going back on Designer.

What percentage is it in the total business and what is the differential in stores where you have really invested or some of the renovated stores, where it really looks like, for example in San Francisco, you've doubled the amount of square footage.

What is the spread in terms of penetration?

Okay.

In terms of the percentage that it makes up of our business, part of it depends how you want to define it.

But as we define it, it's a relatively small, it's a low single digit percentage of our business and we've got goals of where we want that to go.

I'm sorry, the second part of your question?

So is your goal sort of double that?

Because it certainly seems like in certain stores, it's very small and others, the department could be at least two to three times that.

Right.

Well, what we are trying to do is focus on those roughly 25% of our stores that we're really making a concerted effort to have an offering there.

I think the other stores outside of that group, you will find some stores have some Designer product, some don't.

But we're really trying to create that synergy.

It just depends where you go.

If you were to visit our new store in Topanga, which we opened last month, very successfully, I might add, we have the largest percentage of Designer product in there of any store, I think, that we've opened, and our sales reflect that.

So we're encouraged by that.

It speaks to the fact that this is something that we can do in multiple locations, multiple regions.

It isn't just necessarily a Seattle thing.

So it's hard for us to quantify exactly what is possible there.

I just think that we're going to go as hard and fast as we can until we find what the limitations are but we're nowhere close to that right now.

And then just one nit question.

Can you, have you given or can you quantify the 53rd week impact?

Yes, Dana.

This is Mike.

It's roughly $0.02.

And just to the top line?

I haven't really qualified the top line at this point.

I am not sure of that.

Thanks so much.

Thanks, Dana.

Thank you.

Our next question is from Barbara Wyckoff and please state your company name.

Hi, everyone.

Buckingham Research.

Congratulations.

Question for Pete, couple of questions about accessories.

What were the key drivers in accessories during third quarter?

Do you see a major shift in classifications going into fourth quarter and maybe into spring and what do you think is going to be happening?

What are going to be the major drivers in holiday and spring?

And then lastly, how long will it take to elevate the accessory assortments in those stores where you are adding designer sportswear?

There seems to be a lag there.

And then I have just one follow-up after that.

Okay.

In terms of the third quarter, we've had a lot of growth in sunglasses.

I think you've heard us speak to that before.

We've added some more inventory there.

It's been a very good area for us.

Watches has been a very good category for us.

Handbags continues to be very strong.

We probably can talk about this for about three years now, it seems like.

Really in the accessory area, it's going, all pretty darn well.

Some areas are better than others.

So I think the ones I mentioned will probably outperform.

In terms, I'm trying to remember all the parts of the questions, the drivers going forward, you asked about that, in terms of what categories might be happening for the fourth quarter accessories, is that right?

Okay.

I think that you will see a continuation of what we have been experiencing and the things that happen to work well for gifts.

Jewelry really takes on a lot of importance this time of the year.

Than the cold weather part.

We're going to do a fair amount of business, I'm sure, on the cold weather wear as it relates to more luxury fabrications, cashmere specifically.

It's still a really good category for us.

Even though this isn't a jewelry subject but a shoe subject, but we're selling a lot of UGG boots again, a lot, and that's been encouraging to us because we planned to do that.

Handbags continues to be great.

It is always a good gift giving kind of item because you think that doesn't really need to fit specifically so it works well.

And now that we have a more complete offer, particularly in the higher ranges of the handbags, the Designer part of it, it, that part has been selling very well for us.

And then, I'm sorry was there another part to that question too?

Barbara?

Off track.

Thank you.

We have time for one more question.

Our next question is from Jennifer Black and please state your company name.

Jennifer Black and Associates and let me add my congratulations.

Can you give us a little color on petites, men's and the Brass Rail?

Thank you.

Okay, petites, men's, Brass Rail.

Petites, we've made some progress there and we've had to really get much more focus.

It just represents a size.

It doesn't represent a lifestyle.

And so for us, we have to make some decisions because to try to mean all things to all people just along a size is difficult.

So I think we've done a much better job of really homing in on the specifics of where we have the chance to be successful.

It isn't an out perform but it definitely is in the mix better than it was before and I think we have made some substantive improvements in petites.

You asked about the Rail, is that right?

I asked about men's and the Brass Rail.

Well, Rail, specifically, has been the best growth department in men's over the last year or so and that has not slowed down.

In men's, we are doing well in a lot of the same areas that happened to the rest of us and that has to do with introduction of brands and quality and luxury across the board.

So anywhere we have been able to bring in better designer type products, that has performed well for us too.

Okay, great.

Well, thank you very much and good luck.

Thanks, Jennifer.

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