諾德斯特龍百貨 (JWN) 2007 Q3 法說會逐字稿

Hello and welcome to the Nordstrom third quarter 2007 earnings release conference call.

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

All lines will be in a listen-only mode until the question-and-answer session.

(OPERATOR INSTRUCTIONS)

I will now introduce Mr.

Chris Holloway, Director 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 in Seattle are Blake Nordstrom, President of Nordstrom, Inc; Mike Koppel, Executive Vice President and Chief Financial Officer; Pete Nordstrom, President of Merchandising; and Erik Nordstrom, President of Stores.

This afternoon, Blake will lead off with a review of the Company's business and strategy; Mike will review our third quarter results; and then we will open up the call for questions.

Please note that today's discussion will contain forward-looking statements which are subject to risks and uncertainties that could cause the Company's actual results to differ materially from the expectations and assumptions discussed due to a variety of factors that affect the Company including the risks specified in the Company's most recently filed Form 10-K and Form 10-Q.

On the call today we will refer to most of our financial measures on an adjusted non-GAAP basis.

These adjusted financial measures exclude the gain on the sale of the Company's Facconable business.

We believe that because the gain on the sale of Facconable is nonrecurring in nature the use of these non-GAAP financial measures enable management and of investors to evaluate and compare from period to period the Company's results from operations in a more meaningful and consistent manner.

Our reconciliation of reported GAAP amounts to the adjusted non-GAAP financial measures is included at the end of our third quarter earnings release.

Now I will turn the call over to Blake.

Thank you, Chris, and good afternoon, everyone.

Today we reported a 2.2% comp source sales increase for the third quarter with total sales advancing by 5.3%.

All areas of our designer business continue to show strong results as well as our accessory and men's apparel divisions.

Our customers have been clear in their desire to shop with us on their terms whether it's online, or in one of our stores.

We continue to find we are best served not underestimating our customers.

Our breadth of merchandise allows us to serve the growing affluent customer base as well as those who appreciate quality products and experiences.

Within the marketplace we're encouraged by the unique position we find ourselves in and the amount of market share available for us to take advantage of giving us tremendous head room to improve.

We've worked hard to stay focused on our strategy to drive meaningful comp store sales gains, continued improvement in our merchandise content coupled with an unwavering focus on servicing the customer have been and will continue to be our main priority.

We are excited about our ability to evolve this strategy and layer in more information to focus our resources on what matters most to our customer.

The capital structure of our Company along with the specific tools and capabilities that have been implemented allow us to take advantage of opportunities over the long run.

I personally have mentioned on many occasions that you should hold us accountable to the things within our control, those being offering our customers superior product and service, inventory management, and expense control.

About the time we started to experience a softening in overall sales we found ourselves with merchandise inventory levels rising, particularly in women's apparel.

We take full accountability and are confident that our team is taking the necessary steps to put us back in a position of strength.

In fact, today we are back on track with our inventory plans.

We also think we're well positioned for the important holiday sales time period.

In closing we are encouraged about the long term.

Here are some highlights.

The roughly $3 billion in capital committed to investments in our business over the next five years is the highest in our Company's history.

It is highly weighted towards customer facing investments and we believe it represents the highest value use of our shareholders' money.

Our core customers as a group are growing.

We're committed to keeping a laserlike focus on giving customers a well edited selection of luxury and quality brands.

We continue to grow our presence in the top markets and locations around the country.

We currently are in 44 of the top 55 markets today and by 2011 we'll be in 51 of those markets.

In fact, this past quarter we opened three new stores, our first store in the Boston area at Natick Collection, a second store in Novi Michigan at 12 Oaks mall and a third store in the Denver area at Cherry Creek shopping center.

Collectively, these stores are well ahead of plans in sales and income contribution.

We are particularly encouraged by this as we move into 2008 with eight new full line store openings and one relocation.

Finally, our multichannel approach is another significant opportunity for the future of Nordstrom.

We've made investments such as enabling our salespeople to access inventory online for their customers' needs, aligning our merchandise between our stores and online, and allowing easy returns in our stores.

These things and future enhancements will continue to deliver meaningful returns over time.

We're excited about the strategy we have in place and by planning the business appropriately we think we can respond to our customers to produce the results we all know are possible and that we expect.

Now I'll turn it over to Mike.

Thanks, Blake, and good afternoon, everyone.

Today I will provide a detail on some of the significant factors that impacted our financial performance in the third quarter of fiscal 2007 and review our targets for the remainder of the year.

During the quarter we continued to make progress in line with our growth strategy despite operating in a more challenging environment.

Our ongoing focus is to provide a compelling merchandise offering, selectively enter new markets, and gain market share with our core customers.

We feel confident about our customer and the long term growth potential of our business with them.

For the third quarter earnings per share were $0.68.

Excluding the gain on the sale of our Faconnable business adjusted earnings per share were $0.59, an increase of 13% compared to last year's $0.52.

Our adjusted pre-tax margin was 12.1% for the quarter, an improvement of 25 basis points over the third quarter of 2006.

Adjusted net earnings for the quarter rose 7% to $145 million compared to $136 million last year.

We are encouraged that our operating model is working and that we were able to expand profit margins in a slower sales environment.

Total sales for the quarter grew 5.3% to $2 billion year-to-date sales have increased 6.5% to $6.3 billion.

Same store sales were 2.2% in the quarter which was within our revised low to mid single digit plan.

Year-to-date same store sales have increased 5.8%.

In the full line stores the strongest regional performances for the quarter were in the South, Midwest and Northwest regions.

Major merchandise categories performing ahead of the full line store average for the quarter were our designer offering across categories as well as our women's accessories and men's apparel divisions.

Our Nordstrom Rack division had same store sales of 7.8% for the quarter while our direct business grew 10.1%.

Gross profit margin for the quarter decreased 38 basis points from last year's rate.

We enter the third quarter with inventory levels above planned and experience higher markdowns during the quarter as we move to realign inventory levels with slower sales trends.

The increase in markdowns was partially offset by higher than expected vendor allowances and lower incentive costs in buying and occupancy expenses.

Our SG&A rate decreased 70 basis point over prior year due to reduced performance base incentives which was partially offset by provisions for bad debt.

As we plan going into 2007 and consistent with what we have discussed during the year, our financials reflect higher costs over previous years due to a change in the way we account for our credit business.

In addition to the accounting change we have observed an increase in delinquency rates.

Our delinquency rates remain well below industry rates and are consistent with rates we experienced prior to the bankruptcy law change in 2005.

We are confident in the quality of our overall credit card portfolio as over 90% of our credit card spending is done by prime or super prime customers.

During the quarter we completed the sale of our Faconnable subsidiary and realized an after tax gain of $20.9 million or $0.09 in diluted earnings per share.

Our income was flat for the quarter compared to last year.

Excluding Faconnable, our total ending adjusted inventory per square foot was approximately 2% higher than last year which is in line with our 2.2% comp increase for the quarter.

We are focused on tightly managing our inventory and made good progress since the end of the second quarter when inventories were 7% higher per square foot than previous year.

Our merchant team worked well with our vendor partners to adjust receipt flow and with our Rack division to move excess inventories.

Although our inventory per square foot remains higher than last year the majority of the increase is planned and continues to support the growth of our designer business in apparel, accessories and shoes.

We will continue to monitor sales trends to ensure that our inventories stay at appropriate levels.

We continue to achieve high financial returns and our trailing 12 month return on invested capital is 20.7% compared to 19.5% at this point last year.

These high return levels reflect a strong strategic and financial position of the Company.

We have a strong pipeline of high return capital projects and recently completed our five year capital plan for 2008 through 2012.

Total plan CapEx for that time period is approximately $3 billion with about $525 million planned for 2008.

Approximately 80% of the total capital plan 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.

Our commitment to returning capital to shareholders remains and as we have previously discussed, our current dividend policy aims to achieve a payout ratio of 18 to 20% and a yield that is approximately 1%.

Our quarterly dividend of $0.135 is unchanged from the last quarter and is in line with these targets.

In addition to quarterly dividends, we have been consistently proactive in returning capital to shareholders through share buybacks.

Our Board of Directors has just authorized an additional $1 billion of share repurchase on top of the $1.5 billion we announced on August 21.

The increased share repurchase program reflects our confidence in the Company's long term growth opportunities and our commitment to returning value to shareholders.

During the quarter Nordstrom repurchased 16.4 million shares at an average price of approximately $46.

Share repurchases totaled $750 million in the quarter which was roughly half of the original $1.5 billion authorization.

We funded third quarter share repurchases from operating cash flow and the proceeds from the divestiture of Faconnable plus borrowings under our commercial paper program and credit cart securitization program.

Following six years of significantly decreasing the Company's overall leverage management and the Board have conducted an extensive review of the Company's capital structure.

In keeping with our long term goal of maintaining an efficient capital structure we have concluded that Nordstrom should add a moderate amount of leverage.

this action should lower the Company's weighted cost of capital by approximately 50 basis points and recognize the greater debt capacity associated with our credit card business while maintaining a strong balance sheet.

Going forward we intend to manage our debt levels to an adjusted debt to EBITDA ratio of roughly 2 times.

A leverage target that maintains an efficient capital structure.

This should allow the Company to continue executing its operating plan while preserving flexibility for future strategic initiatives.

Our targeted ratio of 2 times will provide the Company with continued access to liquidity and the capital markets and should support the current range of credit ratings which are a low single A rating with Standard & Poor's and a Baa1 with Moody's.

Finally I want to spend a moment discussing our outlook.

All the earnings per share numbers I'm going to reference exclude the $0.09 gain from the sale of Faconnable.

On our second quarter earnings conference call we indicated our earnings per share expectations for the full year would be $2.91 to $2.97.

On October 11, we lowered our third quarter earnings per share expectations by $0.11 which lowered our full year expectations to $2.80 to $2.86.

Our current earnings expectation for the full year is slightly lower at $2.78 to $2.82.

We surpassed our revised third quarter expectations by $0.06.

This was primarily driven by two items.

First we received markdown allowances from vendors earlier than we expected adding approximately $0.02 to $0.03.

Second, we had lower incentive costs driven primarily by the decline in our stock price during the quarter which impacted earnings per share by approximately $0.02.

Given lower sales trends we are adjusting our fourth quarter sales plan.

For the fourth quarter we are planning same store sales to be approximately flat reduced from 2 to 3%.

Based on this revised sales plan our earnings expectation for the fourth quarter is $0.88 to $0.92.

For the full year our same store sales expectation is now 3 to 4% and we expect gross profit margins to be consistent with 2006 levels.

Our annual SG&A expense rate is expected to increase 10 to 25 basis points over last year.

Net interest expense is now assumed to increase by 20 million to 25 million due to lower expected interest income from decreased cash balances.

In closing we are monitoring business conditions closely with the goal of efficiently managing our investments, inventory and expenses to maximize returns even in a changing environment.

Now we will open the call up for questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question today is from Michelle Clark and please state your company name.

Morgan Stanley.

Thank you.

Looking at your most recent credit card data there continues to be an uptick in the delinquencies.

Any regional read on the data where is the biggest uptick coming from?

And then secondly fourth quarter EPS guidance, does that include or not include share prepurchase assumptions?

Thank you.

Hi, Michelle.

This is Mike.

In terms of geographical credit data, we have not seen material changes by segments within the country.

There are slight deviations but nothing material to the overall portfolio and in terms of Q4 EPS we have not incorporated any Q4 share repurchase activity in that number.

We have incorporated the impact through Q3.

Okay.

Great.

Thank you.

Thanks, Michelle.

Thank you.

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

Jennifer Black & Associates.

Good afternoon.

I wondered if you -- I have two questions.

I wondered if you can give us a little more color on the women's business Point of View, Narrative, and Studio 121 and since you that said that's a troubled area?

And then secondly, you have an aggressive store opening plan next year and my question is more about how are you going to translate the culture in opening the number of stores?

Thank you.

Hey, Jennifer, this is Pete.

We've had probably the most amount of challenge in the women's better price point segments and women's is a large business for us.

So that's where we've experienced some of the sales challenges and I think when you mention Point of View, Narrative, and Studio, those would typically be in that range.

There's obviously factors that we own of namely the fact that we over receipted our plans in the third quarter which created some markdown pressure but I think the ongoing issue is related really to the sales and our ability to have compelling product for the customer in those departments and that's something that we need to continue to work on.

Is one department like worse than another of those three?

Well, yes.

Which one?

I don't really want to get into it by department that specifically.

I think that to tell you just in general we have the most amount of challenge at the better price points in our women's offerings.

Okay.

And then the question about the new stores was what?

It's how are you going to maintain your culture?

This is an aggressive number of stores.

The Nordstrom culture so that you give the same service in some of the new markets you're going into.

Hi, Jennifer.

This is Erik.

I'll take that one.

Well, nothing really changes.

You well know we've long believed in promoting from within to manage our stores and we continue to do that.

I think the change we have to make in going up to eight is to really tap into the total Company to support these openings as opposed to the one region supporting their one new store and Boston would be a good example of that.

It was our first store in the area and obviously a very important one with three more stores coming open the next couple years there.

So we made a concerted effort to tap into the total Company and ended up moving managers and assistant managers from all over the Company to open that store, really are excited about the team we have there and we brought a few more people out there, more assistant managers who will be in a position to open up the second store in Burlington this spring.

So I guess it's just a little ramping up of our previous practice.

Okay.

Thank you very much.

Thanks, Jennifer.

Thank you.

Our next question is from Adrianne Shapira and please state your company name.

Thanks.

Goldman Sachs.

Mike, could you just spend a little bit of time on the management there and perhaps, we understand last year obviously it was a hit to SG&A we quantified by about 12 million the stock link compensation costs a year ago.

So we understand you weren't hit by that this year, but if you could help walk us through the bonus reversal, the bonus accrual reversal this year, how much that further helped the quarter, that would be great.

Sure.

Well, Adrianne, I'm not going get into the specific dollars but suffice it to say through the second quarter of this year we had had pretty strong performance trends and our expectations on our incentive plan was fairly high and with the slowdown in the third quarter that changed and so as a result, we did have some reversals of some of those bonus accruals in the third quarter and obviously we'll continue to monitor that through the fourth quarter.

Last year you're right, we are up against what was pretty significant increases in both Q3 and Q4.

So we should see benefit from those both in the quarter we just completed and in the fourth quarter.

Okay.

And then just -- that's helpful.

Stepping back in terms of what changed from the guidance you gave us a few months ago, the downward revision by about $0.11 for the quarter and now recouping.

I mean you kind of walked us through a through, the vendor allowances, now reversal of the bonus accruals but can you give us a sense from what changed because it seems like you recovered a lot more than I guess you had expected at that point.

What was the biggest swing?

Well, I think those like we said earlier were the two most significant.

Obviously you always have some smaller things that will go one direction or the other that are difficult to predict, but in terms of a collective variance at a fairly large amount, those two items and the vendor allowance issue, at the time that we had updated our expectations we had just completed taking markdowns to realign inventory primarily in women's, we did not have visibility that we would be able to collect that level of VAs by the end of the quarter.

And then secondly, we have a fair amount of both incentive and deferred comp that's tied into stock price and obviously the capital markets didn't treat us very well during the quarter so, that affected it as well but those were the two large items.

Okay.

To us that comes up to about $0.05.

Well, it's about $0.05 to $0.06.

Okay.

And so the incremental, I mean it seems like you're sort of $0.09 off the bottom.

Well, we were I think roughly off the midpoint we were roughly about $0.06 to $0.07.

So like I said earlier, there was some miscellaneous items, expenses came in a little better than we expected, but if we didn't have those other two large items I think we would have been within a very reasonable range of what we said.

Okay.

And then just the last question.

It seems like you did a great job in terms of getting the, cutting inventory ending pretty clean on the quarter.

I'm just wondering in terms of the fourth quarter guidance why then the cut?

The cut in?

In what?

The fourth quarter, taking numbers down in the fourth quarter given the fact that your ending inventory is so clean.

Well, that's primarily due to an adjusted point of view on sales.

Our original plan for the quarter was 2 to 3% and we're saying roughly now it's about flat.

Okay.

So all sales driven, now sort of margin--?

It's primarily -- there's a little bit of margin risk in that as well but I think in terms of anything as impactful in the third quarter it's not the same magnitude.

Great.

Thank you.

You're welcome.

Thank you.

Thank you.

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

Great, thanks.

It's UBS.

Yes, congratulations on the inventory position.

I was wondering if you could give us a little more color on any kind of specifics by channel or category, how clean are you specifically in women's and where are you in terms of the Rack as you've been able to put a lot of inventory through there?

And then in addition to that, any kind of color on trends you've seen November to date as the weather has improved?

Thanks.

Well, this is Pete.

In terms of the first part of your question again, is -- I just want to get this all straight, inventory by channel, well, we were, most channels again in the women's better priced areas mostly as a result of just over receipting.

We did pay a price for that.

You can see it with the markdowns that we took and what we tried to do is get ourselves in a position where we can get through it as quickly as possible and set ourselves up for success going forward.

So we've been able to have a tighter view of our sales trends and using that to right size our sales plans going forward, we think we're in a pretty good position there and are reviewing those weekly.

I don't know if I'm answering your question.

Well, I guess the question is is the inventory, I mean overall it looks pretty clean.

Is it relatively clean also now in women's apparel, as I understand that was the biggest issue?

And then also, part of it was sending the stuff to the Rack.

So just trying to see whether you've actually sold it out of the Rack channel as well now and the inventories in the Rack are where they should be?

Okay.

We're in pretty good shape in terms of being clean right now given the current sales trends.

If that were to change, then that obviously would impact our inventory levels.

Where we do have some more inventory than we had last year as Mike had mentioned in his comments were planned areas, mostly related to designer and luxury where we're actually getting good sales lift by that investment.

So that's been as planned.

In terms of what's happening in the Rack, they did receive more than they would have typically planned and there's a little bit of a lag time between when we mark that down, clear it through our system, get it in the stores, but we're actually doing pretty well in the Racks right now.

Our sales are pretty darn healthy and I think if you were to ask anybody from the Rack division they always like receiving those full line store transfers.

It is definitely a catalyst to driving their sales.

That's great, thanks.

And then any color on what you've seen so far in November as far as business, any improvement as the weather has improved?

They're not going to let me do that.

He's shaking his head.

We'll talk about that more when we report November sales.

Okay.

Fair enough.

Thanks, guys.

Thanks.

Thank you.

Our next question is from Liz Dunn and please state your company name.

Hi.

Good afternoon.

Thomas Weisel.

Was there -- a first question, was there anything related to the return reserve in the quarter?

I know that was an issue last quarter.

And then on inventory I want to know what new sort of process has followed the mistakes that were made in the second quarter and then finally if we look at, I believe you said that you booked or that you received the vendor allowance early.

Does that mean some of the vendor allowances come out of the fourth quarter?

What are you expecting for vendor allowances in the fourth quarter?

Thank you.

Hi, Liz, this is Mike.

First in terms of the return reserve, we did get a benefit from that in the first month of the quarter and we had reflected that early on in our expectations.

I think it was roughly a $0.01 impact.

So that didn't affect any of the final numbers relative to what we had shared earlier and then I'll also take the third part of the question.

I'll also take the third part of the question, I'll let Pete take the second.

In terms of the VAs, yes, primarily the VAs in women's apparel was an acceleration of some dollars that would traditionally have been received in the fourth quarter and we have reflected that in our expectations for the fourth quarter.

Mike, I know you share in your annual report the magnitude of annual vendor allowances.

Is there any color you could provide on the quarterly vendor allowances in total?

I will say that for the third quarter they were up materially higher than they were over the previous year and that should even itself out by the end of the year.

Okay.

Thanks.

And then on the inventory?

And Pete.

Yes.

Our major ache with inventory really came from just over receipting our plans and then that was coupled with the fact that the sales declined through the quarter, but beyond that what we've done just in terms of the mechanics and the process is really nothing new or revolutionary, but it's just doing the math of making sure that we've got our sales trends that -- our recent sales trend that we're using to create our go forward sales plans and then not getting overbought to those plans.

So it's just more discipline on the execution of an open to buy.

We have some -- had I should say some visibility challenges with the new merchandise planning tools that we have and some of the reporting and what this has allowed us to do going through this time is get much more focused on a subset of metrics and visibility reports that will help us manage this better going forward.

So we paid our price to do that as you saw with the markdowns but we think that we definitely got everyone's attention when it comes to the process and the execution of merchandise planning.

Okay, great.

Great job on the inventories.

Thanks.

Thanks, Liz.

Thank you.

Our next question is from Christine Augustine and please state your company name.

It's Bear Stearns.

Thank you.

Mike, what sort of goal do you have for inventories for the end of the year?

Maybe if you'd be willing to just sort of give a general range either total or per store and then could you repeat what you said about the percentage of the customers that are prime and super prime?

Was that 75%?

Sure, Christine.

First, in terms of that the end of the year on a per square foot basis we're pretty close to plan where we are right now of 2%.

So based on assuming sales trends are consistent with where our plan is somewhere in that range would be where we'd like to end up, but certainly, if sales were to soften, we would like to adjust those inventory levels accordingly, but based on our current plan that's where we'd like to be and then in terms of the prime and super prime, over 90%, 9-0, of our volume is with those customers.

That is 90% of the transactions, not the card holders per se but the actual transactions on the card?

That's correct.

90% of the sales volume.

Sales volume, thank you.

And then the only other question I had was just in light of the new same store sales guidance for the fourth quarter 0%, is there any change to how you expect the monthly progression to go?

I think you said November benefits from the shift, December, it's at least December that gets hurt, maybe January.

Do you expect -- are we going to see kind of huge swings between these months?

Well, the biggest swings will be between November and December because November picks up a week post Thanksgiving and December loses a week.

So we'll see a significant pickup in November and then we'll see a reduction in December and January should be approximately around where the quarter is.

Okay.

So not to put words in your mouth, but basically we're looking at some sort of a negative comp in December?

Most likely.

Okay.

Thank you.

Thank you.

Thank you.

Our next question is from Michael Exstein and please state your company name.

It's Credit Suisse.

Good afternoon, everybody.

Hi, Mike.

A couple quick questions.

Number one, the aggressiveness in which you undertook your additional repurchase was really quite interesting compared to some of your competitors and your affirmation of bringing down your credit rating is also very interesting.

What do you see in the capital markets that gives you comfort to go ahead and do it when others don't see it, number one?

And number two, did you talk about your transaction size versus number of transactions in terms of what drove the quarter?

Thanks.

Sure.

Michael, this is Mike.

In terms of our approach to share repurchase, it's more about how we feel about where we are and the future of the Company and the position we're in than it necessarily was capital market driven.

We began this discussion internally with our Board back in late spring and it's been going on for a while.

So, the real motivation behind this was to ensure that we had the most efficient capital structure along with and combined with that a debt structure that was more aligned to the cash flow that the business was generating.

So that would be my response on that piece.

In terms of the transaction, did you want to comment on the transactions?

I don't think we ought to get that specific.

Okay.

Hey, Michael, one other thing I do want to add to that is that we -- my comments indicated that our goal was to maintain our current credit ratings, not to allow them to go down.

So.

Just following up, Mike, I mean two of your biggest comparable companies have pulled back from share repurchase because they're afraid of liquidity issues in the overall market.

What gives you the different set of confidence that continuing leveraging?

Well, I think part of that was our feeling on current and future free cash flows and the amount of capacity that we have.

I think I read in some of those other companies that their expectations over cash flows were severely changing.

Okay.

Okay?

Thank you very much.

All right.

Thank you, Mike.

Thank you.

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

Citigroup.

Pete, you had talked about the weakness in women's better.

Can you elaborate on what you think's driving that?

Boy, I wish I knew.

It's always a cyclical market.

I think some of it's related to some of the issues of what's being offered in the market.

I don't think what you're seeing in our results is unique.

I think it's somewhat challenged out there in the industry, but we're going to stay focused on things we have control over and I think we just have to do a better job of staying aligned with our strategy through each one of those merchandise areas and this whole time has given us a chance to really get solidified on what that is.

So we feel confident on going forward that we've been able to address the shortcomings we've had and we can improve our results going forward.

And with the stores cleaner from the inventory perspective is that the major driver in terms of taking the comps in the fourth quarter from 2 to 3 down to flat?

No.

We have plenty of inventory if that's what you're asking.

No, no, because obviously the stores are cleaner than they were in the third quarter so how should we think about prior guidance?

What's changed from when you originally provided 2 the to 3% comp versus the flat comp now?

Just recent sales trends.

That's what's driving it.

Deborah, if you look at the third quarter, the progression of sale trends from August, September through October, we have seen a decline and we think it's prudent to adjust our plans going forward.

And has that been more traffic or ticket driven?

Well, we don't really measure traffic so much.

It's sales driven I mean which is ticket I would suppose.

Okay.

And then last question, Blake, can you just talk about the performance of your new stores versus expectations?

I mentioned that in my remarks.

I'd like to give that to Erik because he oversees our stores and can give a little more color on it.

Thanks.

The three new stores this fall have really been a highlight for us.

The three stores combined are well ahead of our sales plans and our income plans.

We're very pleased with that and I think it takes on more importance now than maybe other recent times in that we're on the cusp of rolling out eight next year, so to have a strong start with these three off season is encouraging for us?

Great.

Thanks so much and best of luck.

Thanks, Deborah.

Thank you.

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

Lehman Brothers.

Good evening.

Hi, Bob.

Mike, I guess the first question is with the aggressive nature that you took on the buyback program in the most recent quarter would you consider an ASR in current markets?

Well, Bob, we've done both.

We've done ASRs and we've done open market and we look at both alternatives as opportunities.

In fact, what we've learned is that in both cases over time we tend to come out with something that's fairly even.

So we'll consider both.

And then just on the sales trends, can you maybe touch a little bit on the kids business and the trends that you're seeing there as well as maybe the handbag category?

Kids has been pretty solid.

I would say it's been right in there with happening with average with all the departments, so no real breakout things to talk about there other than I think we've done a better job of managing inventories and editing our buys in kids and so we've got some improved margins there which has been helpful?

And then the last part of that question was what again?

Handbags.

Handbag business continues to be very strong and particularly in the designer and luxury segment of that business, very strong.

Thank you very much.

Thanks, Bob.

Thank you.

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

TAG.

Good afternoon, everyone.

Can you please talk a little bit about the Rack and what you see is the potential there in terms of expansion plans and also if you're thinking about the margin, initial mark-ups, private label, how you're managing the merchandise margin and what are you seeing there in your expectations for the future?

Thank you.

Hi, Dana.

This is Blake.

I'll take the Rack question.

We have purposely the past few years kind of really constrained the Rack growth as we've worked on a number of initiatives there and they've had terrific business.

We've always been sensitive to the balance of the full line towards the Racks and they have just done a super job and we are accelerating those plans.

As you know, we're able to implement or execute our opening of a Rack much more timely than a full line store.

It can be as soon as 12 months versus a typical full line store that can take up to four years.

So we expect in the next couple of years an accelerated growth plan with the Racks due to their success and due to what we're doing with our full line stores and our overall strategy.

We have time for one more question.

Wait.

I got to answer her.

In terms of our margin and how that gets impacted going forward given our mix, we really don't have a different stated objective with our own label program.

We've held to a fairly consistent percentage of the total there and it's going to find its own level.

I do think as times going on here, we probably are going to look to have more of our own label goods in some of the better price point categories just given a lot of what's happened out there in the industry.

I think to control our own destiny a little bit better, that's something that we're really going to be forced to do and then, let's see, mark-ups really aren't part of that agenda.

We don't have any stated purpose around improving margins through a mark-up kind of agenda.

It's much more about getting the best product in there and selling it through at regular price and all our focus is really there.

Thank you.

Thanks, Dana.

Sorry, Dana.

We have time for one more question.

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

Banc of America.

Thanks, guys.

Just a couple quick things.

First of all, what was the credit card penetration in the quarter this year versus last year?

Hi, Dana, this is Mike.

I didn't quote the exact amount, but I will say that for the last year plus our credit card penetration has been improving primarily to the success of our rewards program.

But no major shift here in the third quarter?

I wouldn't say anything that's material, no.

Okay.

And then the numbers look good on the inventories.

I just wanted to confirm that they're up a similar amount in units as well as dollars?

Well, they're actually down a little bit in units and they're up in dollars.

Okay.

And then just getting back to your comments about the business in terms of it being focused on problems in the better market, is that just apparel or is that other categories and conversely it sounds like designer has held up and hasn't seen an erosion.

I just wanted to confirm that.

Right.

It's mostly in women's apparel.

There are some issues related to accessories and shoes and there really aren't any in men's that we've seen, but if you look at the departments that are really just category departments like shoes or accessories they have the ability to allow their prices to swing according to how customers are responding, what they're buying and I think when you talk about the strength and the designer in the luxury parts of that, it's just we've had a natural migration over the last couple years to more of those types of price points surely because they're performing very well.

And then designer?

Designer is performing very well.

That's why you have a migration of price points to the design price point.

Okay, great.

Thanks so much.

Thanks, Dana.

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