諾德斯特龍百貨 (JWN) 2008 Q2 法說會逐字稿

Hello, and welcome to the Nordstrom second quarter 2008 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 Chris Holloway, Director of Investor Relations for Nordstrom.

You may begin, sir.

Thank you.

Good afternoon, everyone.

And thank you for joining us on the call today.

Today's call will last approximately 30 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 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.

Here to discuss Nordstrom's strategy, second quarter performance and business outlook are Blake Nordstrom, President of Nordstrom Inc., and Mike Koppel, Executive Vice President and Chief Financial Officer.

Also joining us for Q&A are Pete Nordstrom, President of Merchandising, and Erik Nordstrom, President of Stores.

With that I will turn the call over to Blake.

Thank you, Chris, and good afternoon, everyone.

I would like to jump right into a high-level review of our results.

You will hear more details from Mike in a few minutes.

Our comp store sales decrease of negative 6% was in line with our plans for the quarter.

It is not satisfying to report a decrease, and while we believe we managed our business well, no one around here is happy about negative results.

We achieved the low end of our original earnings plan for the quarter at $0.65 per share.

Margins were impacted for the quarter, and we believe we'll see margin pressure for the remainder of the year.

Our goal continues to be to grow profitable market share.

Today, I would like to give you a brief update on our primary initiatives to support this.

First and most importantly, service is always our number one priority, and we are committed to offering our customers a great shopping experience regardless of how they choose to shop with us.

Under that service umbrella, as you know, three important priorities are merchandise strategies, a seamless multi-channel offering, and new store growth.

In regards to our merchandise offering, innovation, newness, and fashion still drive our business.

But consumers are, in aggregate, are spending less in this climate.

The competitive environment is highly promotional, and customers are more cautious today.

However, we see no evidence that they are trading down.

Our focus is to bring the best merchandise available to our customers.

Merchandise is both a quantity subject and a content subject.

We've made great progress in our planning process, which aids open to buy and a fresh flow of compelling merchandise.

By having our inventories in line, we have a higher probability of addressing content issues.

Women's apparel continues to be the toughest part of our business.

We continue to work hard on women's apparel, and while we are seeing relative strength in contemporary and better trends in juniors, there is still opportunity to improve our execution overall.

We continue to make good progress in our multi-channel capabilities.

Customers who shop in multiple channels spend considerably more with us than customers who shop one channel.

And we continue to see the number of these multi-channel customers grow.

This year, they have grown 7% over last year.

We're improving the tools available to customers and employees to enhance the shopping experience.

For example, last quarter, we launched buy on-line, pick up in store.

This service is functioning great, both on-line and with our in-store execution.

Buy on-line, pick up in store is a terrific service for our customers who can order on-line, receive a confirmation within an hour, and pick up their merchandise any time after that confirmation.

This is a great example of how we are working to not only maintain but improve the service we offer our customers.

We are excited to communicate more specifics about this service to our customers in the coming months.

Finally, a key driver to increase market share is investing in new stores.

To date, through 2012, we've announced 34 new full-line and Rack stores.

This investment continues to be the most productive use of capital, and overall provides great returns for our shareholders.

With strong margins, cash flow, and a healthy balance sheet, our strong financial position allows us to capitalize on good real estate opportunities like Santa Monica Place in the Los Angeles area, a store we recently announced, as well as some new Rack locations including the Beverly connection in L.A.

and Overland Park Place in Chicago.

For the remainder of the year we will open a new store in Thousand Oaks, California, on September 5th, our second store in Indianapolis on September 19th, our first stores in Pittsburgh and Naples on October 24th and November 7th respectively.

As for relocations, we are excited to relocate our Tacoma, Washington store where we have been serving customers for 40 years on October 3rd.

We also recently announced the relocation of a store in Los Cerritos, California where we've served customers for 27 years.

In both of these cases, we will move into new buildings in the same malls, which will dramatically improve our ability to take care of customers.

We remain well positioned to weather this slowdown.

In fact, we continue to strengthen our position through new investments and better processes.

Our reputation is our strongest asset.

And although we will continue to take a rigorous approach to controlling costs, we will not put our standards of customer service or relationships with customers at risk.

Ultimately, we are focused on maximizing our results in the near term, while continuing to invest in our ability to improve the service and merchandise we offer our customers.

With that, I will turn it over to Mike who will walk you through the details of the quarter and our plans for the rest of the year.

Thanks, Blake, and good afternoon, everyone.

Blake has shared with you a few of the highlights for the quarter and an update on our strategic agenda.

I will now take you through the financial results for the second quarter.

Second quarter earnings per diluted share was $0.65, and earnings before interest and taxes, or EBIT, totaled $269 million.

This is a decrease of 8% in EPS and a decrease of 13% in EBIT.

Total sales of $2.3 billion declined 4.3%, and same-store sales declined 6%.

Our strongest relative regional performances were in the South, Northwest, and Midwest, and our best performing merchandise divisions were cosmetics, accessories, and women's shoes.

Overall results in full-line stores continue to be challenging as same-store sales decreased 9% in the quarter.

Our toughest areas of business, California and women's apparel, experienced trends similar to the first quarter.

Nordstrom Rack continued its strong sales growth with a same-store sales increase of 6.3%.

The Rack division has had a multi-year run of strong performance with solid mid single digit to double digit same-store sales in each year since 2002.

Sales for our direct segment, which is our on-line business, were also strong, increasing 15% in the quarter and 10% for the year.

We expect direct to exceed $700 million this year, which would be 8% of our total sales.

These results reflect continued progress in our multi-channel strategy and the percentage of our sales coming from customers who shop across multiple channels is now 32%, up 400 basis points from 2007.

The second quarter rivals the fourth quarter in sales volume with three of our five annual events held during the quarter.

Consistent with the industry, we clear end of season product in the second quarter with our half yearly sale for women and kids and half yearly sale for men.

Our anniversary sale, held in July, is the biggest event of the year, where we offer new fall season merchandise at significantly reduced prices before the season begins.

Sales results for the events exhibited small improvements over trends in non-event periods.

With the slower pace of business, we are focused on controlling inventory and ended the quarter with inventory per square foot 13% below last year.

Approximately 3% of this decrease is due to the sale of our Faconnable business, which occurred in the third quarter of 2007.

Although inventories remain well controlled, the competitive environment is highly promotional and consumers are responding more to discounted product.

The combination of lower sales trends and higher markdowns resulted in our gross profit rate decreasing 168 basis points for the quarter.

We continue to execute against the revised expense plan we shared in the first quarter.

As a result of the variable nature of our operating model and focused on efficiencies, SG&A dollars decreased $32 million to $604 million and our rate improved 21 basis points.

Although we are highly focused on controlling costs, we will not risk our ability to provide high service levels to our customers.

Finance charges and other income increased $4 million, with growth in receivables offsetting lower interest rates.

Receivables at the end of the quarter were 13% higher than the second quarter of 2007, due to the continued success of our fashion rewards program, which drove a higher penetration of card usage in our stores and increased spending on Nordstrom Visa cards.

Overall, our credit card performance remains relatively solid.

Our delinquency rate was 2.5%, consistent with first quarter rates with an increase of 53 basis points over the second quarter of last year.

Write-offs increased 38 basis points versus the first quarter to 4.3%, which is an increase of 134 basis points over last year.

We monitor this business carefully and continue to have the lowest delinquency and write-off rates among major card issuers and are seeing lower rates of increase as well.

We believe our consistent strategy to drive customer loyalty and spending in our stores versus credit card earnings growth has kept our portfolio risk relatively low.

Net interest expense of $34 million was $17 million higher than last year, due to changes in our capital structure made in the fourth quarter of last year.

We finished the quarter with an adjusted debt to EBITDA ratio of 1.9 times, which is consistent with our capital structure goal of 2 times.

Cash flow from operations remained strong in the quarter at $218 million.

During the second quarter we repurchased 1.5 million shares it at an average price of $32 for a total of $50 million.

Second quarter repurchases had a minimal impact on second quarter earnings per share.

Turning to our outlook for the second half of the year, our sales plan remains unchanged from last quarter.

However, we expect gross profit pressure to continue, and for the annual rate to be down 110 to 140 basis points from 2007 rates.

All other line items on the P&L remain unchanged from the outlook issued in the first quarter of 2008.

Based on our revised gross profit expectations, we expect earnings per share for the full year to be $2.55 to $2.65, down from $2.65 to $2.80 from the previous quarter.

Turning to the third quarter, we are planning for a same-store sales decrease of negative 4 to negative 6%, and an earnings range of $0.49 to $0.54 per share versus $0.68 in 2007.

In closing, we are focused on improving our execution across the business and remain confident in our growth strategy, the long-term prospects of our core customers and believe we have a differentiated offering that will allow us to profitably gain market share with our customers.

We are in a strong competitive position, with a healthy balance sheet and cash flow that will allow us to continue to invest in our customer service capabilities and build long-term relationships with our customers.

Now I'd like to turn it over to questions.

(OPERATOR INSTRUCTIONS) Our first question today is from Deborah Weinswig from Citi.

Good afternoon.

Mike, on the guidance for the remainder of the year with your same-store sales guidance unchanged but your gross margin obviously lower, can you just walk us through the thought process in regard to your updated guidance?

Sure, Deborah, thank you.

I think it's fairly straightforward based on what we said.

Our overall sales trends have remained fairly consistent with what where we had planned the business back in the first quarter, but what we saw is continuous pressure on margins as a result of a challenging and competitive environment.

And so with that, we took that into account, and we felt it was appropriate to plan the back end more conservatively to ensure that our pricing and our promotional strategy is appropriate for the environment we're in.

Okay.

And I think that both you and Blake in your comments mentioned that the environment is highly promotional.

With that as backdrop, is there any thought process in terms of changing your promotional cadence or any thought process in terms changing how you approach communicating with your customers?

No, Deborah, at this point we're not planning on adding or changing the cadence of our promotions, but what we are seeing is that we do need to be a lot more deliberate and focused on taking timely markdowns and ensuring that we have the appropriate sell-throughs to keep the floors fresh with new merchandise.

So that's really our thought process behind.

That we don't want to see the floors backed up with old merchandise.

Okay, and then last question.

Blake, you had mentioned that there was still an opportunity to improve execution overall, specifically as it related to women's, can you elaborate on that?

Women's is such a big part of our business, and we've been talking about for some time now that it's been lagging the average, so there's been consistent questions from you and others about our plans there and when we see improvement.

There are pockets of it, because it's a pretty diverse business, but overall it is the most challenging within our portfolio.

And there are some -- at least some people talk about some challenges in women's throughout the industry.

We're focused on what our customer is telling us and the things that we can do at point of sale and execution.

We see some positive things with contemporary and the juniors, but there's other of our lifestyle departments that there are a number of things that we can do to execute better through our merchandising and through our service, and that's what our teams are 100% focused on.

And for us to achieve the goals or results that we need, we have to have women's doing better.

I know that obviously bridge has been a challenging area.

Is there an opportunity to utilize private label to maybe kind of enhance the offering there, or how do you think about continuing to see improving trends in that business?

Well, this is Pete.

Private label is a big part of our business, but it's -- it tends to be more and more prevalent in more the better price point zones than the bridge price point zones.

I don't know if that's just more of our competency or what, but we have a pretty high reliance on branded product out there, and the things that we do in-house with our own labels, usually the lead times are a little bit longer and there's more risk there.

So I think for us to be able to get the success we want there in the bridge categories, we're pretty reliant on what's happening out there in the industry.

The good news, as Blake mentioned, there's always pockets of some things that are working.

And that's what we're focusing on.

Thanks for the color.

Best of luck.

Thanks, Deborah.

Thank you.

Our next question is from Charles Grom from JPMorgan.

Thanks.

Good afternoon.

The Rack business, as you alluded to, has been somewhat of a saving grace.

Just I was wondering if could remind us on how the margin structure differs versus your full-line stores and if the mix of product that the Rack stores is receiving today has changed at all in the second quarter relative to the first and maybe a year ago.

Charles, this is Blake.

The Rack has two components of its merchandise mix.

There's the transfers from the full-lines stores and there's merchandise that we buy from our top vendors that are in our full-line stores as well, and we call that special purchase.

And that mix hasn't changed dramatically over time.

We are fortunate to have the Rack because we're able to, again, utilize it in a way to move these goods even quicker, because they do a terrific job of clearing them in an efficient manner so that we have open to buy in our full-line stores and we're not backed up with it.

The margins result from that special purchase and the initial purchases from the full-line stores.

So those components haven't changed as well over time.

That Rack formula, if you will, we've had for some time, but the last four or five years it's been a real consistent performer for us, and in some respects, is the beneficiary of some of the opportunities in the full-line stores, but it is contributing overall to our business, and I announced earlier that we have announced a few additional Rack stores.

We purposely kept that number low over the years, and we feel it was an opportunity to grow alongside with the full-line store growth that we have currently.

Okay.

That's helpful.

One more if I could.

Could you just speak to the new store productivity in your most recent full-line opening and maybe a couple of the ones in Boston.

And then also remind us what the pre-open and CapEx are for those full-line stores.

This is Erik.

I'll take the performance of the new stores.

Our new stores have not been immune from the challenging environment out there, so it's been a little tougher, but our new stores continue to be terrific investments in the use of our capital.

We have a significant spread between our cost of capital and the return we've been seeing the last, five, ten years out of our new stores.

And we're still encouraged with the returns we're seeing at new stores, although the sales have been overall affected a bit.

Boston, you mentioned, has really been a bright spot for us.

Natick, in particular, our first store in the Boston market continues to exceed our plans.

Charles this is Mike.

Just to follow up on the other part of your question, the pre-opening expense related to the new stores this year is roughly an incremental $13 million to $14 million.

Okay and then just quick follow-up.

When you accrue for those pre-opening expenses, how far out do you accrue for them?

Is it a quarter, is it two quarters?

I'm just trying to get a sense for the upcoming accruals, since you have a big -- I think like 16 stores over the next rolling four quarters.

It's basically as incurred.

Okay, great.

Thanks very much.

Thank you.

And as a reminder, please limit yourself to one question.

Our next question today is from Lorraine Maikis from Merrill Lynch.

Thank you.

Good afternoon.

You've done a good job of leveraging SG&A in a tough environment.

Can you just give us some examples of what you're pulling back on and any impact that's had had on the business?

Sure, Lorraine.

This is Mike.

I would frame our response with a couple of points.

One is that we have a fairly significant variable cost structure.

About 40 to 45% of our SG&A is variable and the majority of that relates to our commission sales force, as well as the various expenses that it takes to support the business based on volume trends.

So that's been an element of it.

Another element has been our focus on overhead and fixed costs, which is something we began last quarter as we saw the business soften up.

And I would categorize that as choices we've made on various activities that are furthest away from the customer experience, and examples might be IT projects that are not supporting the front line sales or various marketing activities that we believe are low return.

That's just been a process that has multiplied throughout the organization.

And we continue to get new ideas and find new savings and I think our team here very well understands the situation we're in and are responding very well.

Have you seen any increased level of turnover as some of the sales people's commissions go down?

This is Erik.

No, what's important to know with regards to our commission, while that is a large chunk of our expense, it is very important for us to make sure we are the store of choice for great sales people to work at.

Our sales people make more money than other stores, and that continues this year.

So we really manage our hours so our best people have the opportunity to increase their earnings.

So that's what we've been seeing this year.

We've been managing our hours, and our earnings per sales person is actually up from over last year.

Thank you.

Thank you.

Thank you.

Our next question is from Dana Cohen from Banc of America.

Hi, Dana.

On the gross margin in the second quarter, how much of the deleveraging was buying and occupancy versus merchandising margin, and then help me to understand going forward, given where the inventories have been, what is driving the promotional activity?

Because it's not like there's a major spread between the inventories and the comp.

And then conversely on SG&A, given the guidance, it doesn't sound like you're expecting the reduction in dollars that you saw in the second quarter and why should it be different?

Okay.

Dana this is Mike.

I'm going to try to tackle all three of your questions.

It's really three in one.

The first one on merchandise margin, it was primarily -- on the gross profits, primarily merchandise margin.

We actually were able to get some -- offset some of the reduction in sales in buying and occupancy and hold the leverage the same.

As far as inventory, you're right, our inventory levels are down, so it's not so much a question of excess inventory as it is just a question that the competitive environment, our competitors, other retailers, have become a lot more promotional.

Customers are expecting sharper pricing, and more promotional activity, and so that has slowed down sell-throughs and forced us to be more aggressive with markdowns.

And the third piece on the SG&A, part of the improvement we're seeing year-over-year in the first half is last year the first half of the year was very strong.

So our incentive expense was much higher last year.

And this year in the first half it's lower.

And so you're seeing the benefit of that in the first half of the year whereas in the second half of the year you're not going to see.

That so I hope that answers your three questions.

Thanks so much.

You're welcome.

Thank you.

Our next question is from Barbara Wyckoff from Buckingham Research.

Hi, everyone.

Just going back to the sports -- women's sportswear kind of conversation, you said there was maybe some signs of life in contemporary and juniors.

Is that denim driven?

Or are there other things that are happening?

Is what do you think is really happening in the classic sportswear area, more traditional?

Is it just the customer demand, or is it a market weakness?

I guess what's going on in the special side of the business.

I've heard at one point that the active business was good.

Is that still the case?

This is Pete.

We've had relative strength in the contemporary part of our business going back now probably for a couple of years, seems like we keep calling that out as an are that has performed relatively well.

And even categories like premium denim where there's been a lot of growth, and it's a pretty mature classification, it is still doing well for us.

And so that's been a part of the bright spot.

The other area that improved a little bit relatively is the junior apparel part, and that's been a development really over more about the last four to six months where that's started to improve.

In terms of the more kind of better price point, classic sportswear business as you're referring to, it's got to be a combination of what the market has to offer and the customer's desire.

I think it's a combination of both of those things.

Our job is to try to create a compelling reason for someone to buy something new, and we just can't stop with.

That we can't rationalize that maybe customers aren't as interested.

Granted, it's more difficult and they're not buying as much as they were, but we still have pockets where things are working well.

For example, our recent half yearly sale, we got a good indication on some trends that are happening in fall.

So we're able to leverage that and react accordingly, and hopefully we can build on that momentum.

Okay.

And then special sizes and active, sorry.

Special sizes and active, special sizes our business has been difficult.

I think it really is most commensurate with what's happening in kind of the better sportswear world for us.

So it's pretty well in line with our what our results are there.

And active, we've had some success.

Our swim business got a little bit better this summer.

We've done pretty well like in yoga categories, for example.

That's getting kind of specific, but that's again, another one of those areas, while we're not performing super well, there are things that are happening there that are promising, and we're just trying to invest in those categories as much as we can.

Great.

Thank you.

Thank you.

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

Good afternoon, and good job on your inventories.

I wonder if in hindsight there's anything you would have done differently for the anniversary sale.

I'm trying to get an idea of what opportunities there are for next year.

That's my first question.

Okay.

This is Pete.

I will try that.

I think our preselect program that we have has been really popular with our customers.

And so the challenges on a sale event like that is trying to balance how we're ordering and how much we're ordering with what the demand is going to be and it's hard to have a crystal ball for that, so we probably did more preselect business than we would have guessed.

I think in some ways that depleted our inventory levels for once the sale started.

This is something we can do a better job of managing we believe next year, and we've learned some things.

We've been doing this for a while but you keep learning stuff.

That's helpful.

Did you guys -- have you commented yet on men's?

No.

Men's is challenging.

Actually, we've been holding up all right in men's, but what we've noticed in about the last month or so is both the clothing and furnishing part of the business have taken a bit of a setback in terms of what the trends had been.

This is not dissimilar from things we've seen before in terms of the cyclical nature of how men's response, what's going on in the economy.

We're not going to use that as an excuse, but we've lived through some of these times before, and there's a high premium on making sure that we're offering great merchandise for customers.

It isn't just necessarily a price deal.

It's just making sure that what we have is super compelling, and it just forces to us be better.

Okay.

Well, I don't think I have any more questions.

Good luck.

Thanks, Jennifer.

Thank you.

Our final question is from Liz Dunn from Thomas Weisel.

Hi.

In under the wire.

I guess my question relates to your comp store sales results in the full-line business.

Do you have any way to share with us what your best customers, maybe the loyalty plan customers, what comp you're seeing for them versus non loyalty plan customers, like are your best customers faring just as badly as the rest of your customer base?

Good question, Liz.

This is Erik.

Our business of our best customers continues to improve.

Now, is that because they're holding up better in this economy or because we're focusing more on them?

I'm not sure, because we have for the last couple years focused more on our -- our resources on our best customers.

And things like preselect and our rewards program, the events that go along with the rewards program have proven to be successful.

And we continue to see increases on those events.

We really focus on our best customers.

We've seen gains from those efforts.

Okay.

And just one more, if I may.

Did you say, I'm sorry if I missed it, how much is inventory expected to be down for the back half per foot?

Liz, we didn't say that, but I think our overall expectations is that we'd like to hold -- continue to have inventories in line with our sales trends.

Okay.

Great.

Thanks.

Good luck.

We'd like to thank everyone for joining us today for our second quarter earnings call.

As a reminder a replay of this call will be available on the Investor Relations section of nordstrom.com under webcast.

Thank you for your time and your interest in Nordstrom.

Thank you, and this concludes today's conference.

You may disconnect at this time.