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Operator
Hello, and welcome to the Nordstrom fourth quarter 2008 conference call.
At the request of Nordstrom, today's conference call is being recorded.
All lines will be in 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.
Chris Holloway - Director, IR
Thank you.
Good afternoon, everyone, and thank you for joining us on the call.
Today's call will last approximately 45 minutes, which includes time for questions and answers.
Please limit yourself to one question so that we can respond to as many people on the call today as possible.
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 Form 10-K and Form 10-Q.
Additionally, there be a non-GAAP reconciliation document posted on Investor.Nordstrom.com, which will detail any non-GAAP metrics discussed on today's call.
Here to discuss Nordstrom strategy, fourth quarter performance and 2009 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.
Blake Nordstrom - President
Thank you Chris, and good afternoon everyone.
I will leave the bulk of our 2008 comments to Mike.
However I would like to make some brief remarks about the current environment, and what we are doing to meet the needs of our customers, and operate our business.
This afternoon we reported 2008 net earnings of $1.83 per share, a decrease of 36% from the prior year.
The full year results were impacted by a decrease of 9% in same-store sales.
Needless to say this was a challenging year.
From a high level, here are some general comments on how we are approaching business during these difficult times.
First, customer service will always be our #1 priority, our sales people strive to deepen the connection with our customers through their product knowledge, ability to offer solutions, and save the customers time.
Our level of customer service isn't limited to our full line stores.
It extends to Nordstrom Direct, Nordstrom Rack, and our credit business.
The investments we have made in the last five years to enhance the one on one relationships our sales people have with our customers, are more important to our business than ever.
Capabilities like Personal Book, Buy On Line, Pick Up In Store, Fashion Rewards Program, and the ability for sales people to find inventory anywhere in the Company, all of these things help serve the needs of our customer better, through all of our channels.
We continue to work on adjusting our merchandise mix to the times.
We are not going after a different customer or changing our strategy.
But her circumstances have clearly changed over the past year.
Our customers still wants newness, fashion, quality, and brand.
In fact the most search brands through Nordstrom Direct this past holiday season, were virtually identical to the list from one year ago, our product offering is broad, and we can make adjustments to the mix, without changing who Nordstrom is, or how we are positioned in the market.
Our merchants are working hard with our vendors to provide the right balance of quality, value and price points for our customers.
In addition to our efforts on people and product, we have made good strides in 2008 on the key drivers with our business model.
We have reacted quickly and effectively to changing sales trends in 2008, and ended the fiscal year with inventory levels well aligned to sales.
We also had a disciplined approach to finding and executing on expense reduction opportunities, and we will continue these efforts.
Our CapEx plans are also significantly reduced.
First, by reducing the number of major remodels, from an average of about 6 per year, to about two per year, until economic conditions improve.
We have not cut maintenance capital because it is important that we maintain the look, feel, and experience of shopping in our stores.
Second, several of our new full line stores were delayed or canceled by our real estate development partners.
This year we anticipate opening three new full line stores, and relocating one full line store, which is down from eight new stores, and one relocation in 2008.
We remain in a strong financial position to weather these times, and take advantage of strategic opportunities.
We believe we are well-positioned to deepen our connection with customers, maintain a disciplined cost structure, and have a strong financial foundation to position us for the future.
Now I will turn the call over to Mike.
Mike Koppel - CFO, EVP
Thanks Blake, and good afternoon everyone.
Today I will review our fourth quarter results, and then spend the majority of my time discussing our plans for 2009.
Although the retail operating environment was challenging in the fourth quarter, we continue to effectively align the key drivers of our business to current trends.
Inventories are now aligned with sales trends.
We continue to make good progress on reducing expenses, and sales were slightly better than our expectations.
We are beginning 2009 with a healthy balance sheet, credit ratings well into investment grade territory, and access to significant liquidity.
For planning purposes, we are assuming that the trends we experienced in the fourth quarter will continue through 2009.
Our actions on inventory, expenses, working capital and capital expenditures, will enable us to generate positive free cash flow in 2009, and position the Company well when the economy recovers.
Moving on to the review of our results, earnings per diluted share for the full fiscal year of 2008 were $1.83, a decrease of 36% from $2.88 last year.
Earnings before interest and taxes, or EBIT, were $779 million, a 37% decrease compared to last year's EBIT of $1.2 billion.
Total sales decreased 6.3%, driven by a 9% same-store sales decrease.
For the fourth quarter, earnings per diluted share were $0.31, a decrease of 66% from $0.92 last year.
EBIT was $156 million, a 59% decrease compared to last year's EBIT of $384 million.
Same-store sales for the quarter decreased 12.5%.
By channel, full line same-store sale decreased 15.8%, and Nordstrom Rack same-store sales decreased 1.5%.
Sales for our direct segment continued to be healthy, increasing 9.7%.
Our gross profit rate for the quarter declined 561 basis points, driven by a combination of higher markdown rates, and deleverage of buying and occupancy costs.
Our merchant and store teams responded well to the intense competitive environment, and held market share in the mist of unprecedented competitive markdowns.
Year end inventory per square foot was down 12% from the prior year, which is in-line with fourth quarter same-store sales of negative 12.5%.
Our SG&A expense reduction efforts yielded 25 million of savings in the fourth quarter.
These efforts partially offset 58 million of increased SG&A, from higher bad debt reserves and new stores.
Wrapping up our review of the income statement for the quarter, finance charge and other income increased $14 million, primarily due to growth in our Accounts Receivable.
Net interest expense of $33 million was higher than last year, due to changes in our capital structure made in the fourth quarter of last year.
Turning to the balance sheet, we believe we are beginning the 2009 fiscal year with an appropriate level of inventory.
Our receipts are planned in-line with our sales plans, and we will monitor sales closely for any changes in trends.
During the fourth quarter we had 250 million of long term debt mature.
We paid those notes using the commercial paper market, and at the end of the fourth quarter, we had 275 million of commercial paper outstanding.
We are continuing to monitor the credit markets, to determine the best time to refinance these short-term borrowings with long-term debt.
We ended the year with 72 million of cash, and 675 million available in short-term borrowing capacity.
Our next debt maturity is a $350 million securitized note due in April of 2010.
Total debt at quarter end was 2.5 billion, which yielded an adjusted debt to EBITDA ratio of 2.5 times.
This amount of leverage is low for our industry, and supports our plan of maintaining an investment grade credit rating.
Our access to liquidity and credit ratings provide the financial strength and flexibility to support our business.
Next I will discuss our outlook for fiscal year 2009.
Our variable cost business model provides flexibility to align cost drivers, and protect cash flow during periods of challenging business.
While our model adjusts to changing sales trends, we are taking additional actions on the key drivers of our business, to generate positive free cash flow, maintain a strong balance sheet, and mitigate operating margin deterioration.
We are assuming that the trends experienced in the fourth quarter will continue through 2009, and are planning same-store sales to be negative 10 to negative 15% for the year.
This plan delivers earnings per share in the range of $1.10 to $1.40 for the full year.
We expect the first half of 2009 to be the most challenging, with same-store sales 300 to 400 basis points below the outlook for the fiscal year.
We expect our 2009 gross profit rate to be 150 to 250 basis points lower than the rate in 2008.
Gross profit rates are likely to be under continued pressure, until we lapse the significant markdowns taken in the back half of 2008.
We expect our SG&A expenses to be 100 million to $175 million lower than 2008, although lower sales volume will increase the SG&A rate by 40 to 70 basis points.
We have been focused on continuously finding and executing on cost efficiencies since the fall of 2007.
Over the course of 2008 and planning for 2009, we have reduced our expenses by approximately 260 million, which have more than offset additional SG&A from new stores of 125 million, and bad debt of $75 million.
We have been rigorous in reducing fixed expenses, with targeted reductions in labor, salary increases, discretionary spending, marketing, and technology.
Finance charge and Other income is expected to increase 55 million to 60 million, as we will have a full year of the credit card pricing changes we implemented in 2008.
Our credit card business is a crucial part of our integrated business model, and we strongly believe our credit card products and service enhance our ability to earn, and retain the loyalty of our customers.
However, we have observed a continued softening in underlying credit trends, and ended the quarter with a total delinquency rate of 3.8%, and net charge-offs of 6.8%.
The worsening unemployment trends will continue to put pressure on credit card metrics, and our 2009 plan assumes that unemployment rates exceed 9%.
Finally, net interest expense is anticipated to be higher by 20 to 25 million, due to higher cost of debt, and higher average net debt levels.
We have reduced 2009 net capital expenditures to approximately $325 million, from our original plan of approximately $560 million.
75% of capital expenditures will be spent on new stores, remodels, and relocations, and we plan to relocate one full line store, and open three new full line stores in 2009.
The remaining capital expenditures are for technology, maintenance, and general purposes.
Depreciation and amortization will be approximately $275 million for the full year.
I would like to take this opportunity to discuss our communication practices.
As always, we remain committed to communicating clearly, and transparently with all of our stakeholders.
With this objective in mind, we will continue to provide our expectations for annual results, and we will update those annual expectations with each quarterly earnings release.
As the economy has weakened and become more unpredictable, our ability to accurately predict near term results have become more difficult.
Given this uncertainty, we do not feel it is appropriate to continue providing quarterly EPS estimates.
We believe that continuing to provide our annual expectations and line item detail, combined with the continued release of monthly sales, will enable stakeholders to effectively monitor and assess the Company's performance.
While 2009 is likely to be another challenging year, we are focused on the factors in our control, and are constantly striving to enhance the customer experience.
Our current financial plans is focused on generating positive free cash flow, maintaining a strong balance sheet, and mitigating operating margin deterioration.
We remain confident in our long term value growth strategy, and look forward to the future.
Now we will open the call up for questions.
Operator
Thank you.
(Operator Instructions).
Our first question from Deborah Weinswig with Citi.
Your line is open.
Deborah Weinswig - Analyst
Thanks Blake.
Can you please give a little bit of color, I think on the third earnings call you talked about lowering the regular price in over 800 styles.
Can you talk about how that worked, and how we should think about 2009, in terms of pricing and your offering at different price points?
Blake Nordstrom - President
I will take a moment to comment on those remarks, and then also maybe have Pete weigh in, if I don't cover it all.
I did comment on the November call that at that time we took roughly 800 styles, and on average reduced them 22%, and that was in response to the times that we were facing then, and trying to address the quality/value relationship, right in the middle of our half yearly sale as well.
So we are trying not to be prescriptive on that, but our merchants are working hard with our vendors, to ensure that we have the right balanced offering.
So Pete, what would you maybe add to that?
Pete Nordstrom - President, Merchandising
The only thing I would add to that is that our desire is to be a full price retailer, and what that means is getting the price right up front.
That was really an attempt to make sure that we are being as sharp as we can be right up front, and not have to sell things through any kind of promotional activity, or gimmicks.
It is a little hard to say exactly what that did for us, because we don't have the ability to contrast if we did nothing.
I think how it really played out is it really is just an extension of the philosophy we have always had, and that is to try to be a regular priced retailer, with the best possible value up front, and not be under sold.
So it is really a continuation of that.
I would say the tangible benefit of this is it really created a good platform for our sales people, to have a conversation starter with their customers, to be able to entice them about an item that they had on the floor that was really a great value, as we had it spread throughout the whole store.
So we are going to continue to work with our vendors, and to scrutinize all of this internally to make sure that we are being, offering the kind of value that sells something at the first price.
Deborah Weinswig - Analyst
Okay, that is extremely helpful.
And then Mike, in terms of very impressive with regards to SG&A in '08, and obviously the guidance for '09 is pretty incredible, in terms of thinking about the ability to cut costs.
How should we think about the biggest buckets, how can we really measure you against your goals?
Mike Koppel - CFO, EVP
Thanks Deborah.
In terms of the biggest buckets, when you look at the savings, it has been roughly half related to what we would call our variable cost component, which is primarily related to our selling costs, and the associated cost that go with the selling activities, and the other half is around areas of overhead.
And that would include all ranges from labor to discretionary costs, and marketing and technology.
The approach we took, it is very clear that the direction that the business the cycle is in right now, is that we are heading back to sales per square foot productivity levels, that are roughly where they were in 2003, and we targeted to get back all of our, what I would say support and headquarter costs back to those levels, and we were successful in doing so.
So that has allowed us to improve the leverage of the Company, and to ensure we have positive free cash flow.
We continue to look for opportunities.
I don't think the journey is over.
We think we are in a very difficult environment, and we will continue to look for the right things to do to ensure that we have a very healthy company.
Deborah Weinswig - Analyst
Great.
Thanks so much and best of luck.
Blake Nordstrom - President
Thank you.
Operator
Our next question from Neely Tamminga with Piper Jaffray.
Your line is open.
Neely Tamminga - Analyst
Comp guidance for the first half, is that reflective of current trends?
Is it just built-in conservatism, or is there some sort of calendar shift that we need to be aware of, and then I guess related to calendar, just curious on the timing of the Anniversary Sale.
I know it kind of shifts around from time to time, or rather the half yearly, just wondering how we should be thinking about that this summer?
Mike Koppel - CFO, EVP
Hi Neely.
This is Mike.
In terms of comps, our thinking around the first half of the year is a continuation of current trend, and as you may recall last year, the front half of the year, we were roughly at a mid-negative single digit, and it accelerated pretty materially in the back half.
So we are thinking of those two factors as we consider the pace of business for 2009.
In terms of calendar for anniversary --
Blake Nordstrom - President
It lines up both half yearly will line up after Memorial Day and Anniversary lines up with last year as well.
Neely Tamminga - Analyst
Any impact from the Easter shift then as well?
Blake Nordstrom - President
That is all captured in the first half.
Neely Tamminga - Analyst
Okay.
Great.
Thanks.
Operator
Our next question from Jennifer Black with Jennifer Black and Associates.
Your line is open.
Jennifer Black - Analyst
Good afternoon and congratulations on managing your inventories and expenses.
I wonder if you have any data that actually tells you how many of your charge card customers also have accounts with Saks and Neimans, and then I wondered also if you doing any kind of research on any of your customer base, as well as charge card customers?
Thank you.
Mike Koppel - CFO, EVP
Hi.
This is Mike.
In terms of your first question, certainly we do have information for all of our customers that are on our Visa account, we know shopping patterns, not only with Saks and Neimans, but with a variety of other competitors.
We understand that, and to the extent we can we use it for marketing, but that at this point in time that is as far as we go.
Jennifer Black - Analyst
Okay.
Are you doing any kind of research?
Mike Koppel - CFO, EVP
No.
Not in particular on that.
Jennifer Black - Analyst
Okay.
And then one other thing.
Did you give out D&A?
Mike Koppel - CFO, EVP
Pardon me?
Jennifer Black - Analyst
D&A, Depreciation and amortization?
Mike Koppel - CFO, EVP
Yes.
275 million for the year.
Jennifer Black - Analyst
Thanks.
Good luck.
Mike Koppel - CFO, EVP
Thank you.
Operator
Our next question from Charles Grom with JPMorgan.
Your line is open.
Charles Grom - Analyst
Thanks.
Good afternoon.
Mike on the finance charge line, it looks like it was up 20% in the fourth quarter, in the third quarter it looks like it was flat.
I know some of it is APR, some of it is Receivables.
I wonder if you can dig in a little bit for us for that?
Along those lines, it looks like you are outlining 2009 to be up close to 19% another increase.
I wonder if you can kind of flesh that out for us?
Mike Koppel - CFO, EVP
Sure.
Finance charge part of the decline is a result of just the slowing in the Receivable growth year-over-year.
We are just starting to see the impact of the increase in pricing, which went into effect in the middle of November, and started to bill out some time in the middle of December.
So we are going to see the majority of that impact pricing change over fiscal year 2009.
Charles Grom - Analyst
Could you just detail what that pricing change was?
I just haven't seen it.
Mike Koppel - CFO, EVP
It was basically the way we priced our credit card, we price it tier priced based on, primarily based on quality of card and FICO scoring, and it was a tiered increase that averaged roughly an overall 3% increase in APR for the portfolio of the cards.
Charles Grom - Analyst
Okay.
And just on the SG&A what is embedded in your outlook for bad debt, the accrual that you guys will be running for the year?
Mike Koppel - CFO, EVP
For 2009 the bad debt is roughly equal to what it was in 2008.
In 2008 the total bad debt expense was about $180 million.
Charles Grom - Analyst
Okay.
And along those lines your outlook for charge-offs?
Mike Koppel - CFO, EVP
Like we said in the comments, our model is built on, the key driver is unemployment.
We are assuming that the model is going to be driven by unemployment, index that is greater than 9%, and then we should see the growth in the charge-off align roughly to the change in unemployment.
In terms of the charge-off rate, we haven't disclosed that specifically.
Charles Grom - Analyst
Okay.
Thanks very much for the details.
Mike Koppel - CFO, EVP
Thank you.
Operator
Our next question from Michelle Clark with Morgan Stanley.
Your line is open.
Michelle Clark - Analyst
Good afternoon.
Thank you.
First question embedded in your gross margin assumptions for 2009, what is your IMU outlook?
And then the second question is on the credit card, how do you feel about current reserves levels?
Mike Koppel - CFO, EVP
Okay Michelle, this is Mike.
In terms of IMU, the plan is for IMU to be slightly down for next year, and then I am sorry the second part in terms of credit card?
Michelle Clark - Analyst
How do you feel about current reserve levels?
Mike Koppel - CFO, EVP
Yes.
Based on where we are right now, like I said, our reserves at the end of the year were based on an expected 9% unemployment in 2009, we calculate reserves based on a projected 12 month forward activity, and it is that activity that reflects that unemployment rate.
So based on the information we have today, best available and best sense of the direction of the business, we feel pretty good about the reserve.
Michelle Clark - Analyst
Thank you.
Mike Koppel - CFO, EVP
Thank you.
Operator
Our next question from Lorraine Maikis with Bank of America Merrill Lynch.
Your line is open.
Lorraine Maikis - Analyst
Thank you.
Good afternoon.
I was just hoping for more detail on the initiative to lower price points on those 800 units?
Can you just share with us, did you sell those products through at a faster rate, or require lower markdowns?
And then any more granularity on your plans for moving that price point down in 2009 would be helpful.
Pete Nordstrom - President, Merchandising
Yes.
It is our belief, this is Pete, that it helped sell the products, and as I mentioned, was a good conversation starter to engage customers.
What we have noticed though is our selling on current products, on clearance items is a higher percentage than it has been for us really in the recent past.
And so clearly the customer is interested in comparison pricing, and some of these lower prices were black line items that we were able to create a comparison on, but again in the long run, it is really not in our best interest to create comparisons for the sake of creating comparisons.
We think to earn the customers confidence with our pricing over the long haul, we need to price it the right way going in.
So I guess it is fair to assume that our assumption through all of this is that we would be able to mitigate some markdowns by pricing it right going in.
Lorraine Maikis - Analyst
Thank you.
Operator
Our next question from Robert Drbul with Barclays Capital.
Your line is open.
Robert Drbul - Analyst
Good afternoon.
A couple of quick questions.
When you look at the store opening program for '09, and looking forward to 2010, can you talk about meaning exactly how many of the stores that you had that will be delayed, or how many of them have been cancelled?
And when you look at 2010, is that the four to five, is that still a good number, when we look out a little bit further now?
Erik Nordstrom - President, Stores
This is Erik.
As was mentioned we have three new stores for '09, and I think that is the pace you should expect from us for the foreseeable future, is around three stores, maybe four stores a year.
I don't have exactly what that, I guess it depends, it has fallen off from when your starting point was.
The store opening calendar has changed quite a bit in the last 12 to 18 months, really it is being driven by the developers not being able to execute these projects, either from lack of financing, or being able to lease the projects, all sort of factors related to the economy.
But there is still, from our perspective, the long range subject hasn't changed, in that we still have plenty of head room to grow the Company.
Obviously the environment is not conducive to that in '09.
Will it change in '10?
We are making no plans at this point, but our planned horizon in new stores is at least three years, so we still expect to reach the growth potential of this Company, and that really hasn't changed, it will probably just take longer to get there.
Robert Drbul - Analyst
Would you guys address how your stores in California are performing, versus the rest of the chain?
Erik Nordstrom - President, Stores
California continues to lag the rest of the Company.
Robert Drbul - Analyst
Is it dramatically different than the comp store sales trend?
Erik Nordstrom - President, Stores
I don't think I would say dramatically.
It has lagged for, boy, 18 months now, and it has been fairly consistent.
Our sales by geography match fairly well with the fall in the housing markets around the country, and California, again has been at the bottom for us.
Robert Drbul - Analyst
Great.
Thank you very much.
Erik Nordstrom - President, Stores
Thanks Bob.
Operator
Our next question from Richard Jaffe, Stifel, your line is open.
Richard Jaffe - Analyst
A couple of quick follow-up questions on the new stores schedule looking out, the new emphasis, or renewed emphasis on the Rack stores, and it obviously makes sense, particularly given your success there.
But thinking about the full line stores and the ability to perhaps manage that growth downward if the environment remains tough, and then as a follow-on to that, the New York market growing more attractive every day.
It is something that was high on your priority list not too long ago.
I wonder if that is something you would consider revisiting opportunistically?
Blake Nordstrom - President
Richard, this is Blake.
As you noted in the Racks, we do see some opportunities there, and I think it is important to note that about 24 to 36 months ago, we started working internally about our Rack business and it's opportunities, and some of the fruits of labor are starting to bear now.
We do have more flexibility than we do with our full line store model, in terms of lead time.
We had purposely held back the Rack growth while we focused on the core part of our business with the full line stores, and we just think there are some opportunities to kind of right size that balance if you will.
So we have been playing catch up a little bit, and again it is built in with the flexibility of that there is really about a 12 month lead time on those stores, where as Erik mentioned it is 36 to 48 months with a full line store.
In terms of your question of Manhattan, we have looked at that in the past.
There were some rumors, what have you.
We haven't gotten close to announcing any type of deal, and there is nothing at this point that we can comment at all, and certainly that whole part of the country is changing now, just like the rest of the country.
And so we look at it in terms of it is a very major retail market where we don't have a store, but it is still very important that it meet our hurdles, for us to sign up for something there.
So there is nothing close that we can talk about.
Richard Jaffe - Analyst
Thanks a lot.
Operator
Our next question from Liz Dunn with Thomas Weisel.
Your line is open.
Liz Dunn - Analyst
Two questions.
One relates to competition.
What are you seeing with Saks promotional posture, and as we sort of fast forward here a little bit, do you see any opportunity with any retailers who are closing stores to take some of their space?
And then my second question, actually two questions that are just maintenance.
Why was CapEx higher than expected, and why is depreciation and amortization going down year-over-year?
Thanks.
Pete Nordstrom - President, Merchandising
This is Pete, and I will address the promotional pricing situation.
It was really unprecedented for us in the fourth quarter.
We compete across a fairly wide spectrum, so we have obviously competed with Macy's in the past on price, and all the way through to Neimans.
But usually the pressure comes more on some of the lower priced stuff that we carry, more of the department store world, that is has with Saks and Neimans for example, but it was much different for us in November and December, and if you are looking at our competitive markdowns, which we track in terms of a reason code of how the markdowns come about, it was actually ten times more in December than it was the previous year, based on a competitive situation.
So yes, it had a big impact on us.
We are not going to be purely just reactive.
We want to price right going in, but we also aren't going to create promotions just out of desperation to just generate cash.
I think listening to what Mike talked about in terms of financials, that is not the position we are in, but if we are carrying the same products, and dealing with the same customers and the same markets, we obviously are going to be competitive to that.
So I think it remains to be seen how that will play itself out.
I mean, hopefully, that was just an adjustment that some of our competitors took to get themselves in-line with their inventory.
As you can see from our plans and our results, our inventories are basically in-line with our sales trends.
So we don't foresee at least on our end having to do a bunch of new promotional activity, but we are going to be responsive to what is happening in the marketplace.
I guess that is probably the best way to put it.
In terms of taking advantage of other retailer's space that might become available, that is highly speculative.
We haven't considered that at all.
The one thing I would say that we are going to continue to be opportunistic.
Erik talked about the head room to be able to grow, and if opportunities come along that is great for us, we will consider that, but we have absolutely nothing that we are considering now, as a result of what may have transpired over the last few months.
Liz Dunn - Analyst
Okay.
And then on the CapEx and D&A?
Mike Koppel - CFO, EVP
Sure, hey Liz, this is Mike.
As far as the D&A, the D&A is not lower, in fact it is slightly higher, and it is right around where we expected it to be, as well as CapEx.
Our CapEx for the year actually came in at a little bit below where we thought it was last quarter, and then obviously for next year in 2009 it is significantly lower than our original plan that we had a year ago, and that is just because of the changes we have had in openings and remodels.
Liz Dunn - Analyst
I am sorry.
I should clarify.
I had 302 million in D&A this year, and 275 next year.
I was wondering about the decline year-over-year expected for 2009, and I had in my notes that you were expecting 510 million as of November in CapEx, and came in at a bit higher than that.
Was that just a mistake on your part?
Mike Koppel - CFO, EVP
Yes.
Maybe we could just take it offline and just fine-tune those numbers.
Liz Dunn - Analyst
Okay.
Mike Koppel - CFO, EVP
Thank you.
Operator
Our next question from Adrianne Shapira with Goldman Sachs, your line is open.
Adrianne Shapira - Analyst
Mike I just want to dig into the cost savings a little bit.
Last quarter you outlined about 100 million in cost savings for '09, and it sounds like you are assuming bad debt levels are flat year-over-year.
Help us understand where the incremental perhaps 75 million savings is coming from, and how much of that is variable, and how much due to lower new store openings?
Mike Koppel - CFO, EVP
Sure.
Well, I think the difference between where we were last quarter and this quarter, as we continue to roll through the planning process, we wanted to make sure that we had the most realistic plan and were in a reactionary mode for next year.
So we did take a deeper dive into our plans, into our cost structure to generate some more savings.
I would tell you that on average, the incremental dollars that we have gotten, whether it is versus last year, or versus what we said last quarter, is roughly half variable and the other half is fixed related.
All of those fixed related are not related to changes in new stores.
They are related to additional programs, whether it be labor changes, or cutting back on other investments or discretionary costs.
And like I said earlier, we continue to look at that, and we have a very fluid process, and our goal is to assure that during this very tough period, that we have got a plan ahead of us, to keep the Company at a strong cash flow level, and at a reasonable operating margin.
Adrianne Shapira - Analyst
Okay.
Thanks, that is helpful.
And then just following up on the appropriate promotional cadence.
As you mentioned, you have been on top of controlling what you can in terms of your inventory.
Others have not had such great success.
What do you think is the appropriate promotional cadence, you have been sticking with the two events per year.
I know this past year you were testing the incentive rewards for your best customer.
How did that fare?
Should we expect more tests going on in '09, to perhaps set a different cadence, in light of today's extreme discounting?
Blake Nordstrom - President
We do not have a new promotional events planned in terms of our big clearance times, as you mentioned the two half yearly sales, but we also are able to monitor the regular price sell through of everything that we own, and mark down accordingly, based on rate of sale, as all of our competitors would, but I think what we are going to try to do, is stick to the regular seasonal rhythms that have been going on in the industry for quite some time.
That is what we are anticipating, but again there will be some competitive forces, I am sure, that may change that.
The second part of the question was?
Adrianne Shapira - Analyst
Just --
Blake Nordstrom - President
Oh, Rewards.
What that enables us to do is if we feel like we need to do something to market our business, and create some kind of promotion, it is much different than just a blanket percentage off.
It is a way of being able to cultivate our best customers and being able to develop that relationship even further in a more targeted way.
So I think we have tried some of those things.
For the most part, I think they worked out well for us.
I think we will continue to explore those opportunities as we go forward, because it really works better I think for our long term strategy, about trying to be the store of choice for our target customers.
Adrianne Shapira - Analyst
And then Blake, I think in your prepared remarks you talked about adjusting the mix.
Could you just help us understand what that means in terms of how we should be thinking about categories, any sort of changes in terms of positioning and good, better, best, versus categories, how will the floor look differently as you adjust the mix?
Blake Nordstrom - President
I think, probably speaking within Pete's area, but it is important, what I was trying to convey is that these are not wholesale changes, and that we have a pretty broad and balanced inventory mix within each lifestyle department, and we believe there are some opportunities in adjustments, whether it is some editing, some depth, sharpening of some price points, but making sure that there is a balance offering across the spectrum, whether that is color, brand, sizes, price points.
There hasn't been a wholesale change from the customer.
The customer has pulled back a notch, but their expectations in terms of fashion and quality and newness, are as high as they have ever been, and I think our challenge as merchants is to ensure every dollar invested in our inventory is resonating with the customer, and it is difficult in this environment, when you are looking ahead six months, and placing that buy.
What is the appropriate mix, and what is creating the reason for the customer to buy something new, otherwise she is sitting on the sideline, or it is more promotionally driven.
Adrianne Shapira - Analyst
So it's not necessarily a quantification in terms of how you could share with us about how you think about the percentage of the mix, good, better, best, how that had shaped up, and that will look like going forward?
Pete Nordstrom - President, Merchandising
This is Pete.
I think to expand on that, what I would say is I don't think it will adjust the categories that we're participating in, in terms of getting in something new and getting out of something.
We are going to be in the same categories, and you heard mentioned that the demand from our customers in terms of brands they expect from Nordstroms, they are looking for from us, are the same as they have been literally identically from last year.
What we are tracking though, is the average price that we own something at, compared to the previous years, and that has gone up a bit for us in the last couple of years, even excluding the designer stuff that we have done.
And so I think it is fair for us to look at that to try to reconcile the balance subject, in terms of how we allocate across the breadth of everything that we carry, and I think we can bring our average price down a little bit and even more in line maybe where we were in the last couple of years, and we can do that without doing something remarkably different, in terms of the vendor matrix that we carry.
Adrianne Shapira - Analyst
Thank you.
Operator
Our next question from Michael Exstein with Credit Suisse, your line is open.
Michael Exstein - Analyst
Good afternoon, gentlemen.
A couple of quick questions for you.
I have been to a bunch of stores, and while I am sure your sales people are soliciting people with new lower prices, the signage doesn't seem to be calling it out, to those of us that shop by ourselves.
And I'm just wondering about how you are backing up that message to those that don't use a personal shopper, number one?
Number two, can you talk about the units in the store versus the dollars in the store, and at what stage of the game do you worry about not having enough units in the store?
Thank you very much.
Blake Nordstrom - President
Michael, your first question is about the signage I think.
In communicating our value, signing is part of it, we have over the last couple of years reduced the amount of signage we have in our stores, we are trying to be cleaner, have less clutter, we certainly prefer it that way.
We do have signing in all of our stores about our approach to never being undersold, I don't know how much customers read those or not.
It is one vehicle of communication.
The other is engaging our sales people, and we certainly invest a lot in our sales people both in quality and quantity, to have them there available to customers.
Pete mentioned earlier a conversation starter with customers, and that is really important and that can be newness.
It can be quality, but it can also be price, and that is how we are communicating it, and we have found our customers are pretty darn savvy about prices out there.
Pete Nordstrom - President, Merchandising
The second half there, this is Pete.
I guess what I would say, when I mentioned our prices have gone up a little bit over the years, but what was going on with that is that our results were improving, our units went down, but the net-all was that we were doing more business.
But what happened here in the last six to eight months or so, is that our prices have gone up and the units were down, and down and up where the net of that didn't create increases for us.
As that relates to the way that we stock our stores, that is the delicate balancing act that we have to really look at, is to make sure that we have got a robust offering that is compelling, and doesn't look like we are too light in terms of units on the floor.
If we can adjust within the breadth of our current matrix in the business that we already do, particularly as it relates to replenishment type items, we tend to turn a little bit faster there, it is more profitable, and I think that we can be in a better inventory position, that and will help bolster some of the units that we have on the floor.
The point you bring up there, while we don't have a specific answer for it, it is something we are monitoring closely, and have actually spent a lot of time in the next month or so out in stores, to make sure that we can go beyond what it actually says on paper, to actually look and see what it feels like in the store, in terms of our unit density.
Michael Exstein - Analyst
Great.
Thanks a lot.
Blake Nordstrom - President
Thank you.
Operator
Our next question from Teresa Donahue, Neuberger Berman, your line is open.
Teresa Donahue - Analyst
Hi, everyone.
Good evening.
I was wondering, if you missed it I apologize, the gross margin in the quarter, how much of it was related to markdowns versus buying and occupancy?
And relatedly, how does the guidance for down 150 to 250 for '09 break down, between delevering of buying occupancy and expected markdowns?
Mike Koppel - CFO, EVP
Hi Teresa.
This is Mike.
In terms of the fourth quarter the impact to gross profit percent was roughly two-thirds related to merchandise margin, and a third of it was related to the deleveraging of buying and occupancy.
In terms of 2009, it is about half and half.
Teresa Donahue - Analyst
Okay.
Thanks.
Mike Koppel - CFO, EVP
Thank you.
Operator
Our final question from Maggie Gilliam with Gilliam & Company.
Your line is open.
Maggie Gilliam - Analyst
The store expansion, a number of developers have announced that they are not going to go ahead with several projects, and I am wondering if there is any scaling back and putting, I know there is, more effort going into existing properties, and if this by itself may have opened up new and perhaps less expensive and more desirable opportunities going forward.
Also can you quantify the preopening expenses, the savings that you will have in 2009 versus last year?
Erik Nordstrom - President, Stores
Hi Maggie, this is Erik.
On the new projects, certainly the bulk of our recent store openings have come from the consolidation going on in the industry.
I think seven of our last 11 stores that we have opened, have directly resulted from consolidation of the industry.
So that actually happened before the current economic downturn, just the dynamics of the mall anchor store industry in particular.
So I think opportunities will continue to present themselves with that.
Maggie Gilliam - Analyst
I was thinking Erik of Calvin is not going to do Oyster Bay, and on the other hand they are doing, Fairling, not Fairling, the one in Fairfax, Virginia, things like that.
Erik Nordstrom - President, Stores
Fair Oaks you mean?
Maggie Gilliam - Analyst
Fair Oaks, yes.
And of course general growth is not going ahead with Summerlin.
They have their own problems obviously, but several things that you still have up on your website are not going to happen.
Erik Nordstrom - President, Stores
Yes.
You are right.
Those are driven by the developers.
We haven't seen that yet, but I think that is probably a reasonable expectation that redevelopment of existing properties, would replace some new property development.
Right now it has been more of the new projects that have been pulled back, either delayed or canceled.
Maggie Gilliam - Analyst
Okay.
Mike Koppel - CFO, EVP
This is Mike.
The second part of your question on the preopening cost, it is roughly a $10 million savings year-over-year, due to opening fewer stores in '09.
Thank you.
Chris Holloway - Director, IR
We would like to thank you for joining us today for our fourth earnings call.
A replay of this call will be available on the Investor Relations section of Nordstrom.com under Webcasts.
Thank you for your time and your interest in Nordstrom.
Operator
This does conclude today's conference.
Thank you for participating, and you may now disconnect.