諾德斯特龍百貨 (JWN) 2007 Q4 法說會逐字稿

Hello, and welcome to the Nordstrom's fourth 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.

We are scheduled-- we have scheduled today's call to last about 45 minutes, which includes time for questions and answers.

Before we begin, let me remind everyone that today's discussion will contain forward-looking statements which are subject to the risk 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.

With me on the call today 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 fourth quarter results and 2008 outlook, and then we'll open the call up for questions.

Please limit yourself to one question so that we can accommodate more callers.

With that, I will turn the call over to Blake.

Thanks, Chris, and good afternoon, everyone.

On behalf of our Executive Team, I'm pleased to share our results with you today.

For the fourth quarter, we had a 0.7% comp sales decrease, ending up about where we thought we'd be.

While we got inventories in line with current trends, there was a trailing effect from the previous quarter, resulting in more markdowns in the fourth quarter than in previous years.

That, coupled with a softer environment impacted our bottom line.

When looking at the year, the first half was successful for us in terms of sales.

Continuing the kind of results we've seen over the past several years.

While we had our share of challenges in the back half of the year, we still realized some record performances.

2007 marked our sixth consecutive year of comp store sales increases.

As we finished the year up 3.9%, but record high revenue of $8.8 billion.

Our SG&A rate improved for the seventh year in a row at 26.7%, improving by 9 basis points over last year.

Earnings before interest and taxes also improved 8.5%, and we recorded our highest sales per square foot ever, at $402.

As we look ahead to 2008 and beyond, we are focused on executing our long-term strategy of increasing market share with our core customers by offering great service and the best merchandise the market has to offer.

We are in a position of strength financially, which allows us to take advantage of opportunities that may come our way as well as weather any current challenges we may face.

We feel our long-term strategy is the right one for a number of reasons.

We know that our core customers are expected to spend more.

In fact, at twice the rate of the U.S.

market for apparel.

While we want to take care of everyone who walks through our doors, the Company is well served by our merchants targeting their strategies and merchandise buys around increasing share of wallet, with our core customers.

Ultimately gaining overall market share.

To that end, we remain focused on all our Full-Line stores.

In the short-term, we face challenges in our business, in particular, in women's apparel and regionally in California.

In a softer economy, we know it's more important than ever to provide our customers with a reason to buy something new.

The driver of our business today is new receipts.

Our merchandising teams continue to strive to achieve the right balance of assortment.

So we turn quickly with a constant flow of new merchandise, our customers have responded well.

We have areas of business where our merchants are being successful.

For instance, our TBD department, our women's apparel department, which carries premium denim and contemporary trend items, had an excellent year.

We believe an important part of every buyer's role is to seek out new resources and anticipate our customers' needs and wants.

We also believe our buyers must sharply edit the best of what the market has to offer, while staying grounded in realistic plans.

Our difference is really in our assortment.

We offer our customers a breadth of merchandise that serves the way a modern customer dresses.

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

We plan to open eight Full-Line stores, and relocate one store over the course of this year.

Two weeks ago, we opened the first store of the year at Aventura Mall in Miami, our eighth store in Florida.

We're pleased to report it has exceeded our plans to date.

In two weeks, we are opening our first Full-Line store in Hawaii at the Ala Moana Center in Honolulu, one of the best malls in the country.

Additionally, we will be opening our second store in the Boston market in Burlington next month.

We are most interested in the very best opportunities rather than seeking to increase our square footage by a certain amount just for growth's sake, and we're happy with the commitments we've made.

New stores are the most productive use of capital available to us.

Today, we have 102 Full-Line stores, and our plan is to 140 to 150 stores by 2015.

We are pleased with the performance of the three stores that we opened last fall.

We have confidence we can grow in new markets and add source in existing markets.

If we're doing our job right with our service and merchandise offering, we'll gain market share.

We continue to invest in remodeling our existing stores, as it is our belief that we must keep the experience fresh and relevant to customers.

Our Mall of America and downtown Portland stores are both good examples of remodels that occurred this past year resulting in significant volume increases.

We were able to increase our designer merchandise offering in both stores as a result of the remodel, and customers have responded enthusiastically to the improved offerings.

We currently plan to remodel roughly six stores a year.

We also are very encouraged by the continued growth we experience with our direct business, which has grown to over $600 million.

However, this number underrepresents the true value of the channel.

We gain additional value from the volume attributed to the Full-Line division from sales initiated online in our stores.

As well as immense value from being a multi-channel retailer, satisfying customers the way they want to be served today.

We believe it's a great way to connect with our customers, both as a convenience to serve their shopping needs, but also as a way to reach new customers in a very efficient manner in existing markets where we have stores.

So we do this successfully, these customers spend more with Nordstrom.

We also know that many customers research online at nordstrom.com, and then come into our one of our stores to purchase.

We continue to make improvements to our site to make shopping easy, and we're using it to help give our customers a richer Nordstrom experience, like featuring Jeffrey Kalinsky in videos wrapping up New York Fashion Week.

We will continue to enhance our multi-channel experience as we move forward.

We'll also continue to use technology as a tool to improve the service experience we offer our customers.

In the second quarter, we're excited to share with you that we'll have a single view of inventory across Full-Line stores and direct giving us service improvements and efficiencies.

Ultimately, our focus is on offering our people the best resources and tools possible to improve the service experience and merchandise offering, in turn, benefiting our customers.

Another tool that's helped us gain share of wallet is our Fashion Rewards program.

We know that customers who participate in the program simply spend more with us.

While there may be current economic issues faced by the industry and our customers, we feel we are well positioned now and for the future.

We have plenty of room to improve market share and share of our customers' wallet.

We are in a strong financial position to respond to opportunities that may present themselves.

In closing, we remain dedicated to our customers, and we believe we can weather the economic challenges we face, and are optimistic for the long term.

With that, I'll turn the call over to Mike to review our results at a more detailed level.

Thanks, Blake, and good afternoon, everyone.

Today I will provide detail on some of the significant factors that impacted our financial performance in the fourth quarter and full year of fiscal 2007.

I will also review our targets for fiscal year 2008, and then we will take your questions.

The fourth quarter of 2007 was a more challenging period for our industry.

Consumers spent more cautiously and retailers continued to align their product flows and inventories with sales trends.

Despite operating in this environment, we achieved the lower end of our sales plan for the fourth quarter and maintained disciplined inventory levels.

We continue to focus on the factors within our control, and that begins with serving our customers one at a time.

We are in a position of competitive and financial strength, with industry-leading profitability, a healthy balance sheet and strong operating cash flows that are more than sufficient to fund our long-term strategy.

Although the near-term market may be slower and uncertain, we continue to see high-return investment opportunities and are confident about our core customers long-term prospects, and the growth potential of our business with them.

For the full fiscal year of 2007, earnings per share were $2.88.

Excluding the $0.09 gain from the sale of the [Fosanal] brand earnings per share were $2.79, a 9.4% increase from the prior year.

Total sales increased 3.1% and were in line with our original plan driven by a 3.9% same -store sales increase and the opening of three new Full-Line stores at the Natick Mall in Natick, Massachusetts, the Twelve Oaks mall in Novi, Michigan, and the Cherry Creek Mall in Denver, Colorado.

For the 2007 fourth quarter, earnings per share increased 3.4% to $0.92.

Our share repurchase activity during 2007 benefited fourth quarter earnings per share by approximately $0.06.

During the fourth quarter, we added leverage to our balance sheet as we moved to a more efficient capital structure.

As a result, we believe earnings before interest and taxes or EBIT is the most relevant measure of our performance.

For the fourth quarter, EBIT was $384 million a 1% decrease compared to last year's EBIT of $387 million.

Same-store sales in the quarter decreased 0.7% in line with our revised plan of approximately flat comp sales.

By channel, full year-- Full-Line stores, fourth quarter comps were negative 2%, Nordstrom rack comps grew 6%, and our online store sales growth was 12%.

Our strongest performances by geographic region were in the Northwest, South and Midwest.

Our best performing merchandise divisions were designer across all categories, accessories and women's shoes.

Our gross profit rate for the quarter declined 66 basis points.

As we continue to realign inventory levels to slower sales trends and experience higher levels of markdowns as a result.

The increase in markdowns was partially offset by leverage in buying expenses due to lower incentive costs tied to Company performance.

We are comfortable with our year end inventory position of $47 per square foot, a decrease of 6% compared to the end of 2006.

We are beginning the 2008 fiscal year with the appropriate level of inventory, but continue to monitor sales closely for any changes in trends.

Our SG&A rate improved 68 basis points over prior year due to reduced incentive costs tied to Company performance, which were partially offset by higher provisions for bad debt.

In light of the current environment surrounding consumer credit, I'd like to spend a few minutes discussing our credit card business.

Our credit card business has historically contributed 5% to 7% of our annual earnings and is a crucial part of our integrated business model.

We strongly believe our credit card products and service enhance our ability to earn and retain the loyalty of our core customers.

However, we have observed the softening in underlying credit trends that negatively impacted our 2007 earnings per share by approximately $0.11.

Fourth quarter credit results were in line with our expectations, as delinquency rates increased 54 basis points year-over-year to approximately 2.6%, and write-offs increased 139 basis points year-over-year to 4.4%.

Overall, our credit card portfolio remains high quality, as over 90% of spending on our credit cards is by superprime and prime customers, and delinquency trends remain well below the industry average of approximately 4.3%.

We have heard a desire from many of you to have more details about this business, and we will take steps to enhance our disclosure, beginning with our 2007 10-K, which will be released in late March.

Returning to our review of the financial statements, 2007 fourth quarter finance charge and other net income increased $11 million due to growth in our accounts receivable and to the change in accounting for our Visa credit card program.

Net interest expense of $30 million was in line with expectations and higher than last year due to increased debt levels.

Total debt at quarter end was $2.5 billion, which was within the capital structure guidelines we shared on our third quarter call.

As you may remember we have a target ratio of two times adjusted debt to EBITDAR, and this target is consistent with our goal of maintaining our current credit ratings.

We ended the year with $358 million in cash and short-term investments.

Our liquidity levels and credit ratings provide the financial strength and flexibility to support our long-term growth objectives.

We continue to generate strong operating cash flows and remain committed to returning excess capital to shareholders.

Our capital allocation framework has a balanced approach to returning capital over long periods of time.

Over the past five years, we have more than tripled our quarterly dividend and repurchased almost $3 billion in stock.

More recently, we announced that our Board of Directors approved a 19% increase in our quarterly dividend from $0.135 to $0.16 per share.

During the fourth quarter of 2007, we repurchased 11 million shares of stock for a total of $388 million at an average price of $34.

For the fiscal year of 2007, we repurchased 39 million shares, for a total of $1.7 billion at an average price of $44.

Our current authorization has approximately $1.4 billion and two years remaining.

Next I will discuss our outlook for fiscal year 2008.

Due to the uncertainty in the economy, we are planning our business accordingly.

Our business model provides flexibility which helps protect margins and cash flow during periods of changing trends.

For example, our inventory turns on average five times per year, which is faster than most of our peers and gives us the flexibility to align inventory levels more quickly to changing sales trends.

Our private label penetration is relatively low for the industry, which allows us to work with our vendor partners to adjust inventory levels and receipt flows closer to the selling season.

On the expense side, most of our compensation structure is tied to performance, whether through our commission sales force or through the performance based incentives of Management.

In addition, we are careful to ensure that our planning processes prioritizes the investments that are highest value and closest to the customer experience.

While we believe we can adjust the changing market trends, we are taking a cautious approach to 2008 and are planning same-store sales to be approximately flat to negative 2% for the year.

This sales plan yields earnings per share in the range of $2.75 to $2.90 for the full year, a negative 1% to positive 4% increase over 2007 earnings per share excluding the gain from [Fosanal].

We expect the 2008 gross profit rate to be 30 to 60 basis points lower than the rate in 2007 primarily due to increased occupancy costs from new stores in 2007 and 2008.

Regarding expenses in 2008, we anticipate an SG&A expense rate increase of 60 to 80 basis points, driven by a lower same-store sales plan and continued investment in our long-term growth.

Our operating model normally leverages SG&A expense with low single-digit same-store sales.

The combination of a lower comp sales plan and new stores and related pre-opening costs are causing deleverage to our 2008 SG&A rate.

We will continue to invest in high-return projects, including new stores, which will create long-term value far beyond the short-term impact today.

Net interest expense is anticipated to be higher by $55 million to $60 million due to higher average debt levels.

Finance charge and other income is expected to increase from $50 million to $60 million.

Our capital plan for the coming year is approximately $540 million, net of developer reimbursement, 80% of which will be spent on new stores, remodels and relocations.

The remainders for technology, maintenance and general purposes.

Depreciation will be approximately $320 million for the full year.

For the first quarter, we are planning for a decrease of 3% to 5% in same-store sales.

Net earnings for the first quarter are expected to be in the range of $0.49 to $0.54 per diluted share.

We expect an increase in our SG&A rates in the quarter as we support strategic plans for growth in new stores in our online business.

To conclude, I want to take this opportunity to update our intermediate term profitability goals.

We are targeting an earnings before interest and taxes margin of 13.5% to 14% by the end of 2010, which is based on an assumption of low single-digit percent, same-store sales increases.

While 2008 may have its challenges, we are focused on the factors in our control, and are constantly striving to enhance the customer experience.

We remain confident in our long-term value growth strategy and look forward to our future.

Now, we'll open the call up for questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question is from Christine Augustine from Bear Stearns.

Thank you.

Good afternoon, everybody.

I'd like to know if you can talk about the expenses going forward?

And particularly, could you just describe, on the net service charge income, why do you expect that to be up so much in '08 with the credit card trends?

Hi, Christine.

This is Mike and I'll take that question.

The first, on the expenses going forward.

Going into next year, we've had multiple years of improvement in margin, and I think we've said in the past that our model leverage is well at a low single-digit comp.

Going into next year obviously with a plan of flat-to-down, we're seeing about half of the deleverage coming from just the lower sales plan and the other half mostly coming from the impact of new stores and the related pre-opening expenses.

In terms of the service charge income, a portion of that growth relates to the onetime expenses related to the change in accounting in 2007.

So is --

And so we're getting some benefit from that plus in addition just the normal growth of the AR.

So just to clarify that, Mike, the-- is-- was the onetime charge approximately $20 million?

It was roughly $20 million to $25 million in finance charge income.

Okay.

Thank you.

Thanks, Christine.

Thank you.

Our next question is from Deborah Weinswig from Citigroup.

In terms of thinking about 2008, in terms of your overall earnings plan and sales plan, are you expecting improvement in the back half of the year, or can you just kind of walk us through the year as much as you can give us details at this time?

Sure, Deborah.

This is Mike again.

Yes.

As -- I think, if you just look at the performance in 2007, you'll see the front half of the year, we had some pretty robust comp performance, and it's slowed down in the back half of the year.

And the way we're planning our business is soft to negative comp sales trends in the front half with improving trends in the back half.

And also, women's has been an area of weakness for you.

Is there anything that you're doing there specifically where we could also expect to see improvement in the back half of the year as well?

This is Pete.

I think, to Mike's point about our comparisons in the second half of the year, it probably provides us with our best opportunity to have some success in women's.

We continue to focus down on the-- on our targeted customers, and making sure that we're just delivering compelling products.

In the second half of '07 we got ourselves in a position where we got overbought, we had to cancel orders, we did a lot of scrambling and work that really didn't apply itself to selling and getting after the best new product.

But we believe that we have a good opportunity to improve our situation, mostly just by staying focused on the targeted customer and keeping discipline in place to not get ourselves overbought.

And that should help us there.

And, Blake, designer has been such a win for you.

Is there anything that specifically that you'll be doing kind of more of in 2008, and also can you update us on your penetration as of the end of 2007?

This is Pete.

Well, designers are really a growing part of our business, and relatively as just a subset has continued to grow faster than any other category we have, and that's across all merchandise categories.

So we keep investing.

I think you'll see that continue to grow really just to meet the demands of our target customer base.

Okay.

Great.

Thanks so much, and congratulations.

Thank you.

Thank you.

Our next question is from Adrianne Shapira from Goldman Sachs.

Thank you.

Mike, if we could just spend a little time on the gross margin.

Can you shed some light in the fourth quarter in terms of how much of the gross margin contraction due to the higher markdowns and deleverage in terms of occupancy and buying?

And then similarly, when you talk about the '08, the 30 to 60 basis point of contraction expected, how much would you expect from occupancy leverage versus merchandise margins?

Sure, Adrianne.

The first part, in the fourth quarter the majority of the deterioration in gross profit was from merchandise margin and primarily due to increased markdowns, as we saw continued slowing business trends, and we were clearing our inventories.

In terms of 2008, it's a little bit of a different story.

We expect overall for the year, somewhat flat performance in gross margin, and most of the deterioration in gross profit is from the additional occupancy costs from -- partially from the new stores in '07, from all eight stores in '08, and the fact that we have a slight amount of deleverage there.

Okay, Mike.

So just to be clear, so the inventory planning in the back half, you think mitigates any sort of further merchandise margin vulnerability to gross margin?

In the front half, that's correct.

Okay.

And then just a follow-up on the comps.

It seems as if the first quarter guidance down 3 to 5 seems like somewhat of a downward step function from what we've been seeing.

Could you give us a sense of what do you expect to see on traffic versus ticket?

We don't-- in terms of a point of view on traffic versus ticket, we don't have specifics on that, we can share with you.

But I think what the first quarter does reflects is a trend that we continue to see following the month of January and wanting to be prudent in terms of planning our inventories and expenses coming out of the beginning of the year.

Okay.

And then just lastly on the bad debt provisions, could you quantify how much that cost you in the quarter?

During the quarter, the increase over last year was roughly $0.04.

Thank you.

Thanks, Adrianne.

Thank you.

Our next question is from Charles Grom from JPMorgan.

Thanks.

Good afternoon.

Mike, could you quantify the impact or the benefit in SG&A from the lower incentive costs?

Not only for the fourth quarter, but also if you could remind us of what it was in the third quarter?

Well, Charles, in terms of the fourth quarter, the majority of the positive leverage we got was from the benefit.

And just to back up a little bit, it was a combination of a fourth quarter last year, which was very robust, where we saw very high comp sales and we saw a steep appreciation in the stock price.

This year, obviously, with the softening business, we didn't, we didn't have quite the same costs, and compared to last year, it was a fairly significant spread.

So I'll tell you most of the leverage partially offset by the bad debt was a result of that benefit costs.

Okay.

I understand.

And then, just to follow up, obviously inventory is in great shape, but a little bit different than your peers.

Can you comment on the components of the inventory by channel, by category?

I don't think we're going to break it out in that manner right now, Charles.

Thank you.

Okay.

Thanks.

Okay.

Thank you.

Our next question is from Jennifer Black from Jennifer Black & Associates.

Hi, congratulations on doing well in a really tough environment.

Thank you, Jennifer.

I wondered how you're doing as far as fixing Brass Plum, Petites and Cosmetics and what we should expect throughout this next year?

Actually our Brass Plum business, I think I mentioned it on our last call has started to improve some relatively from where it was at.

As you know in, the past 18 months or so, it's been relatively challenged, and we've made some progress there, and actually I give a lot of credit to our merchandising team who have had to do just a real sharp job of editing the buys to the most compelling stuff.

It seems kind of obvious, but when business is tough like that, they were really forced to take a good hard look at the business.

And so relatively, that has started to improve.

Some Petites, I would say again we were just looking at the context of all of women's, is about average there.

And then the last was what?

Cosmetics.

Cosmetics.

Cosmetics has been performing right near the Company average as well.

So it's -- I wouldn't say it's done relatively poorly.

I mean, it's just -- it's kind of riding the same way that the entire Company is.

And would you expect that going forward?

Cosmetics in particular is such a large category that I think it's going to be at least in that ballpark.

We've identified a lot of things that are on the upswing there with relation to types of products, the way customers are being served and new lines that are growing very rapidly for us.

So I think that there's always things to focus on there that are positive and give us hope that the business will continue to be good.

Okay.

Just one last question, can you talk about what your gift card trends were over this last year?

Yes, Jennifer.

This is Mike.

We actually saw in the fourth quarter, an increase of over 10% in both purchases and redemptions in gift cards.

So that was a business that definitely continues to help us, especially through the holiday season.

Great.

Thanks a lot, and good luck.

Thank you.

Our next question is from Michelle Clark from Morgan Stanley.

Yes, good afternoon.

The first question, if you can give us your inventory outlook for 2008, where do you expect inventories to be on a comp store basis at the end of the first quarter and then at the end of fiscal year '08?

And the second question is on your receivables growth in the portfolio.

What are we assuming in terms of receivables growth in '08?

Thanks.

Michelle this is Mike talking.

In terms of inventory I'm not going to quite break it out by quarter, but our assumption is that our inventory levels on a comp basis should be relatively flat, and obviously our goal is to always to continue to try to improve our turns.

In terms of receivable growth, the current assumption in the model is a high-single to low double-digit growth rate in the receivables.

High single-digit to low double-digit?

That's correct.

Okay.

Thank you.

Thank you.

Thank you.

Our next question is from Barbara Wyckoff from Buckingham Research Group.

Hi, everybody.

How should we be looking at pre-opening expense by store and, I guess, by month?

What's the average per store?

And then the second, is do you anticipate any glitches from consolidation of the inventory and direct in the Full-Line stores?

Barbara, this is Mike.

In terms of by store, I would share with you, for the year, that total pre-opening expenses are roughly in the range of $13 million and $14 million, and they vary by store.

We have a predominant amount in the first quarter, as we have four stores opening, and they basically will be roughly ratably based on the number of stores opened by quarter.

Okay.

And the second part of your question, please?

Do you anticipate any glitches from the consolidation of the inventory in direct and Full-Line stores?

Well, this is Blake.

I don't know if consolidation is the right word.

It's just more that we have the ability to efficiently our salespeople access inventory.

So we're not physically moving the inventory from channel to channel.

We're just breaking down any barriers that might have been there so our people can service their customers better.

Is there a systems change?

There's an enhancement within direct specifically that now enables the Full-Line stores to easily access it without having to jump through another hurdle on the screen.

Okay.

Thank you.

Thanks, Barbara.

Thank you.

Our next question is from Liz Dunn from Thomas Weisel.

Hi.

Good afternoon.

My question relates to return on invested capital.

Can you just update us where you finished the year and what your outlook is for 2008, whether or not you think that you'll be within your targeted range?

Yes.

While we haven't published our final number, we finished the year over 19% in return on investment capital.

Our expectations going forward, that especially during the growth period of '08 and somewhat beyond that, that those ranges will come down roughly in the 16% to 18% range primarily due to the increase in the asset base range, and the slower sales volume.

Just in the near term, but is that a longer-term target or just your near term?

No long term target, we're still looking for the upwards 18% to 20%.

Okay and then just one last question, if I could sneak one in.

Is there any concern about retention, given the fact that compensation has declined pretty significantly with incentive compensation being a large portion of how people are compensated throughout the organization?

Hi.

This is Blake.

When we made the comments about compensation, that's for total Company.

And so our best performers throughout the Company are still receiving incentive based type compensation.

We wanted to try to share with all of you that it has flexibility to it, and it's not a fixed cost, and so we're able to adjust according.

Certainly our Senior Management Team that's accountable for total Company performance, it's ratcheted back, but we think that the incentive plan does continue to reward our best performers, and we haven't -- I mean, at this early date had any feedback or seen any cases of our folks hurting morale or their ability to reach or exceed their goals.

Okay.

Great.

Thanks.

Good luck.

Thanks, Liz.

Thank you.

Our next question is from Teresa Donahue from Neuberger Berman.

Hi, guys.

My question has been answered.

Thanks.

Thank you.

Thanks, Teresa.

Thank you.

Our next question is from Michelle Tan from UBS.

Great.

Thanks.

I had a couple of questions on credit.

I guess one of them was just looking roughly at the impact.

I think you said $0.11.

Michelle, for the year.

Yes, for the year, from the credit deterioration.

It looks like that's about $45 million in pre-tax income.

I was wondering if there's any way you can split that out for us, understanding how much of that is bad debt, increases in bad debt, versus a step up in the reserves?

And then whether also any of it relates to these items of bringing the receivables on balance sheet, and also taking more -- higher debt levels against the portfolio, and whether it's excluded from that $0.11 impact?

Sure, Michelle.

This is Mike.

The numbers closer to roughly $40 million.

Okay.

And that is all bad debt expense, and the bad debt expense is reflective of the provisions we take to increase our reserves based on delinquency and write-off trends.

There is-- that number does not include the impact of any of the change in accounting or anything of that nature.

It's totally the experience of the portfolio and the growth in the overall receivables.

Okay.

I guess, when I look at your bad debt expense last year, I know it doesn't include the off balance sheet stuff, but it's been tracking, call it like $20 million or so.

Yes.

So I mean I guess how significant is this?

It's up $40 million.

It seems like it's up almost -- even if we assume pro rata for the other receivables, like 50%?

Is that about right as far as -- ?

That's roughly in the ballpark.

We felt -- if you look at the big picture, and you look at how we're performing relatively, a couple things I would point out.

Number one, that the overall impact of all that was roughly 3% on our overall results.

Right.

The second thing, if you look at our delinquency rates, they're measurably below what some of the industry averages and standards are.

We currently -- we have been performing within our expectations, and I think you'll find that we haven't called it out as "a surprise factor in our expectations," because our delinquency trends and write-offs have been pretty much in line with what we thought they'd be.

Okay.

Cool.

And then how are you planning that for next year?

Have you given, or can you give us any color on that?

Well, yes,.

The color I would give you is the reserves that are on the books at the end of the year reflect what we believe would be continued softening and delinquencies through the first half of the year and stabilizing in the back half of the year.

Okay.

Perfect.

And then just finally, one quick follow-up on an earlier credit question that was asked about the service charge income growing.

I think you were suggesting that the $25 million, or $20 million to $25 million of kind of double-counted bad debt from bringing the receivables on balance sheet last year and setting up the reserves--

yes.

Was in the service charge income line, is that right?

Because I thought all of that stuff flowed through SG&A and the service charge income was more just the revenues on the portfolio?

Hi, Michelle.

It's Chris.

Hey.

So the $25 million, part of that hits the SG&A line as bad debt.

Part of it hits the net finance charge line.

Okay.

It's split.

Okay.

There was a component that relates to the one time bill to the reserve that was in the finance charge line.

Okay.

Okay?

Okay.

Perfect.

Thanks for all the help.

All right, Michelle.

You're welcome.

Thank you.

Our next question from Richard Jaffe from Stifel Nicolaus.

Thanks very much, guys.

Just a question.

In the third quarter, you talked about vendor allowances, and the positive impact that had in the third quarter, and I'm wondering how this year versus last year the vendor allowance has shaped up, whether it's-- either specifically or just qualitatively if you found them a more important factor in your earnings?

Sure, Richard.

This is Mike.

We actually did perform slightly better in terms of absolute vendor allowances year-over-year, but obviously, with the increased markdowns it wasn't like there was a net improvement in the margin as a result.

But coming out of the third quarter, we did feel like we had some timing difference, but our merchants I think were able to do a very credible job in being able to get their fair amount of dollars in the market.

Got it.

Thanks very much.

Okay.

You're welcome.

Thank you.

Our next question is from Dana Telsey from Telsey Advisory Group.

Good afternoon, everyone.

Can you talk a little bit about marketing spend for next year with the new store openings, any adjustments to that that you're looking at?

And also with some of your growth initiatives like Rack and the multi-channel business, what are the plans there given the currently environment?

Thank you.

This is Pete.

I'll-- I guess I'll attempt that one.

With the marketing extent, we have a plan based on new stores and what we do.

And it's baked into our plans for the year, so there isn't anything new or different than what we've been doing for the last several years that's really kind of baked into our histories and how we open up the stores.

I would say probably the one place where we're probably spending a little disproportionately more would be in Hawaii just because it's our first store in that area, and it'll probably be the biggest single store of all the stores we open this year.

So that's probably fair to say.

And given the unique dynamics of Hawaii, that'll have a little bit larger expense to go with it with relates to marketing.

And what was second part?

The Rack and the multi-channel initiatives that you've been putting in place, what's the plan there particularly this year?

And do you see any new brands that you've been developing internally, any private brands that we should be watching for?

Hi.

Dana.

Hi.

In terms of the Rack and the multi-channel, as you know we've been calling that out about the last three years as an important initiative within our strategies and it continues to do so for '08.

So there isn't any wholesale change in those plans.

The Rack specifically, their growth has been somewhat limited the last couple of years as we refine that strategy compared to the Full-Line store growth.

But we'll continue to monitor that.

The good news with the Rack is it doesn't require the lead times that the Full-Line stores does to open stores.

So we have a degree of flexibility, but it has been a better part of our business, and continues to do so.

The multi-channel is a multi-year strategy, and the infrastructure continues to come online.

Most recently, we've literally doubled the size of the fulfillment center and call center in Cedar Rapids to be able to handle this growth.

And so their still probably 18 to 24 months out before we're 100% complete on all the infrastructure to try to achieve what we want in terms of it being a true multi-channel retailer.

But we believe it's very evident and clear from our customer that that's what they would like us to be pursuing, and so that's where our focus and resources are.

Thank you.

Thank you.

Our next question is from Neely Tamminga from Piper Jaffray.

Great, good afternoon.

A quick housekeeping.

Blake what was CapEx-- was CapEx expected to be on a gross basis, not on a net basis?

That would be one just quick clarification.

And then in terms of private label I'm not sure that it's fully addressed.

I get the sense there's not a lot of resources yet here in women's that are kind of helping you come alongside your customer and you really answer some of her needs.

Is it the paucity within the marketplace, just wondering what's the role of MPG and is Loretta looking to them to maybe increase some of the style choices for this year?

Hi Neely, this is Mike.

On first question, I think we said our net was 540, and we haven't broken out at this point between the gross and --

But you will report gross, right, on the balance sheet?

We will -- in the cash flow during the year, you will see the gross in the development reimbursement as it comes through.

All right.

This is Pete.

With regards to the women's strategy, the merchandise strategy, I'd say MPG is probably playing as important a role as it's ever played for us, and I think that's mostly the result of what's happened to the better price point market, domestic market that we've relied so heavily on in the past in the women's area, and it's still a huge part of what we do.

But clearly there's challenges out there for everyone in that whole segment, so we need to make sure that we have really compelling merchandise that we can offer the customer regardless of whether it comes from the domestic branded markets or internally, and we have good capabilities here, and Loretta works closely with the team to try to identify where we have those opportunities.

And I think particularly in departments like BP and Point of View, I think you'll see a fairly significant -- how should I say it, a proportion of the inventory made up from our own brands, and I think categories and brands that are performing really well.

When you just kind of look at the last few months, it's been some of our best performing products.

Okay and then Pete with respect to fashion just generally speaking, are you seeing newness coming from tops, from bottoms, are you seeing it come from novelty and colors, prints, patterns or fabrication?

Just kind of wondering what your perspective sense, I think you spent some time on the runways, too.

Thanks for asking.

Color continues to be important, but I think we would say that pretty much every time when you're looking to turn the corner from winter ino spring.

And so for us early indications on color have been very good, crop jackets have been selling pretty well.

We've actually had some improvement on bottoms as it relates to non-denim bottoms, and that's the first time we've seen that in a little while.

It's the denim category continues to be strong, but the non-denim fabrications are performing well, too.

Thanks.

Good luck to you guys.

Thanks, Neely.

I think that's it for today.

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Thank you for your interest in Nordstrom.

Thank you and this concludes today's conference.

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Thank you.