諾德斯特龍百貨 (JWN) 2009 Q1 法說會逐字稿

Hello, and welcome to the Nordstrom first quarter 2009 conference call.

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

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

(Operator Instructions) I will introduce Rob Campbell, Treasurer and Vice President of Investor Relations for Nordstrom.

You may begin, sir.

Good afternoon everyone, and thank you for joining us.

Today's earnings call will last approximately 30 minutes, and we will allow time to answer your questions.

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 10k.

Participating in today's call are Blake Nordstrom, President of Nordstrom, Inc., and Mike Koppel, Executive Vice President and Chief Financial Officer, who will discuss the Company's first quarter performance and business outlook.

Joining us for the q-and-a are Pete Nordstrom, President of Merchandising, and Erik Nordstrom, President of Stores.

Blake, Pete, and Eric are traveling today, and have called in from different cities.

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

Thank you, Rob, and good afternoon everyone.

Mike will review the financials, and some of the specifics with all of you in a moment, but I want to take this opportunity on behalf of our team to share with you how we are managing the business and achieving results at this time.

This afternoon, we reported first quarter net earnings of $0.37 per share; these numbers include a tax benefit of $0.06 per share, from the closure of the Company's 2007 federal tax return audit.

Separate of this benefit, our performance for the quarter was $0.31 per share, which is down from $0.54 last year.

Total sales declined 9.2%, and on a comparable store basis, sales were down 13.2%, in line with our plans.

But we are not satisfied with decreases.

Our performance is the result of a concerted effort by our leadership team to focus our planning and resources to improve the business, in what continues to be a challenging environment.

In the fourth quarter, in which we were in a defensive position reacting to changing conditions, we quickly updated our plans to meet the daily realities of our sales results.

We are now benefiting from those actions, with plans that are in line with sales trends, and are able to get in front of the business.

We are in a proactive position today, being assertive about our business.

While we don't know what lies ahead, we are well positioned to continue to efficiently manage our business during these times.

Our first priority continues to be offering our customers the best possible service and merchandise.

We continue to work on what is taking place at point of sale, by enhancing our relationships with the customer, and encouraging our sales people to improve their business with the tools they have available.

It's critical that we manage our inventories in this current sales environment.

By keeping inventories in line, we are able to maintain flexibility, ensuring we have a good flow of merchandise, with product that meets and exceeds our customers expectations for quality, fashion, and the most sought-after brands.

It is also essential that we continue managing expenses both on the selling floor, and in particular, back of the house.

Overall, our actions relating to inventory, expenses, and capital expenditures are positioning us well for when the Retail sector improves.

During the quarter, we opened two new Full-Line stores, relocated one Full-Line store, and opened four Rack stores.

Collectively, these stores are exceeding our plan.

These openings were a great experience for our Company, because they were reflective of the type of excitement, energy, and crowds that are consistent with our store openings over the last five years.

It was heartening to see these customers respond positively to these new stores, our people, and our merchandise offering.

Certainly the results prove customers will respond, if given the reason to buy something new.

We believe we have a solid plan in place, against which we are executing well, despite external conditions.

The various metrics we use to monitor the business indicate our team is not only rising to the occasion, but also positioning the Company to gain market share over time.

Our continued strong financial position, coupled with our strategy, gives us optimism that we will emerge stronger from these times.

With that, I would like to turn the call over to Mike.

Thanks, Blake, and good afternoon everyone.

Over the last several months, we have seen business trends moderate with our performance more aligned with how we plan our business.

By taking a realistic approach to our sales plan, aligning both our expenses and inventory, and being disciplined in our execution, we achieved performance in line with our planned sales, and better than our planned earnings.

But while the Retail portion of our business is becoming less volatile, our credit card trends were worse than planned.

As a result, earnings for the quarter include an above-plan increase to our bad debt reserve.

First quarter earnings per diluted share were $0.37, down 31% from last year, which was better than we anticipated.

The first quarter included a benefit of approximately $12 million, or $0.06 per share, related to the closure of our 2007 federal tax return audit.

Our earnings before interest and taxes, or EBIT, were $146 million, EBIT as a percentage of total revenues 8.1%.

Total Retail sales declined to $1.7 billion, or 9.2%, and same store sales declined 13.2%.

Top performing merchandise categories were dresses, junior women's apparel, and cosmetics, while the South and Mid-Atlantic regions were the top performing geographic areas.

Gross profit rate decreased 215 basis points for the quarter.

Approximately half of the decline in rate was attributable to the impact of fixed buying and occupancy expenses as a percentage of reduced sales.

Our markdowns versus first quarter last year, were reduced both in dollars and as a percentage, which is another indication of buying discipline and reduced volatility in the business.

Quarter end total inventory per square foot was down 12% from prior year, which is better than our total Company sales trend.

Retail selling, general, and administrative expenses decreased $46 million, compared with last year's first quarter.

Since the first quarter 2008, our Retail square footage grew 6%, which added $17 million in additional cost from new stores.

Adjusting for these new store expenses, total comp stores and headquarter costs decreased $63 million.

Approximately half of the SG&A reduction from last year came from lower variable expenses, consisting primarily of selling costs, with the other half due to a reduction in overhead.

Retail SG&A rate remains flat to last year, as the reduction in sales was matched by a reduction in expenses.

Our expense performance was solid in Q1, and we will remain focused on it throughout the year.

Turning now to the credit business.

As we have stated in the past, the credit business is important to us.

It provides a way to connect and build long-term relationships with our customers, who on average spend more with us than non-Nordstrom card holders.

It's an extension of our brand that we value.

That said, the deterioration in economy over the last 18 months clearly has had an unfavorable impact on our credit results.

For the quarter, credit card revenues increased $16 million from last year, mainly due to the increase in APRs that we implemented in the fourth quarter of 2008, and a 6% increase in outstanding balances.

Credit card SG&A increased $42 million year-over-year, reflecting higher bad debt expense.

Our delinquency rate increased 147 basis points to 4%, and write offs rose 377 basis points to 8.7%.

Although the Q1 writeoffs were consistent with our plan, the increase in delinquency rates were worse than planned, a trend indicative of higher future writeoffs.

As a result, we increased our bad debt reserve by $23 million over the fourth quarter of 2008.

We will continue to pay close attention to these metrics as we go throughout the year.

Net interest expense of $31 million was flat to last year, due to increased debt levels offset by lower variable rates.

In the fourth quarter of 2008, we had $250 million of long-term debt mature, which we funded by issuing commercial paper.

At the end of the first quarter, we had $265 million commercial paper outstanding.

We are monitoring the credit markets for an opportune time to refinance these short-term borrowings with long-term debt.

We ended the quarter with an adjusted debt to EBITDA of 2.7 times.

Although this ratio has increased from year end, it is in line with our plan, better than industry average, and remains well within the range to maintain our investment grade rating.

We ended the quarter with $78 million of cash and $685 million available in short-term borrowing capacity.

Overall, our first quarter performance exceeded our expectations.

Based on this performance, we are increasing our annual earnings per share guidance from the original range of $1.10 to $1.40, to a revised range of $1.25 to $1.50.

This includes the favorable impact of $0.06 per share related to the closure of our 2007 federal tax return audit.

The increase in our guidance reflects better than planned results for the first quarter, and achieving our plan the remainder of the year.

As our customers remain careful about their purchasing decisions, our focus continues to be on building customer relationships and loyalty through a superior service and product offering.

With that, I would like to turn it over to questions.

Thank you.

(Operator Instructions) One moment for the first question.

Our first question today is from Robert Drbul, from Barclays Capital.

Hi, good afternoon.

Good afternoon, Bob.

A couple of questions, first can you give us an update on where you are with the sharper price point strategy, and how that's unfolding as the year continues on?

Pete, can you take that, please?

Yeah, I would be happy to.

We work at this pretty hard, as you know from some of the reaction to the business in the fourth quarter, and we have been able to impact it on a go-forward basis.

And right now where we sit, we have been able to change our average regular price point.

When you [exclude] cosmetics, which has remained about the same, and you roll up all the other merchandise divisions, we are actually down a little over 10% on our average price.

So I do think it's important that we keep that in context.

In the last few years, our average price point rose a bit, and that was really in reaction to what our customers wanted to buy from us, and the adjustment we are seeing currently is, with the same customers, just reflecting their buying moods and what is it they're interesting in buying from us and what they value.

We are right on top of that.

Because our inventories are in a good position, we are able to be really responsive to it, and so yes, we're in pretty good shape there.

Okay, great.

Mike just a question on the credit card, given the continued challenges there, have you guys re-evaluated or thought about perhaps potentially selling that business or getting you of the credit business overall?

Bob, the answer is no.

We still believe very strongly in the strategic importance of our credit card.

It's clear we are going through a difficult cycle, and that end of the business is seeing I think some tougher innings than some others, but we continue to have customers in our portfolio that spend more than those who have other cards.

We continue to build better relationships through the rewards program.

And as this cycle turns around and when it does correct itself, we expect that business to be back to where it was.

So, no, we are still very excited about having the business.

Thank you very much, good luck.

Thanks, Bob.

Thank you.

Our next question is from Jennifer Black, from Jennifer Black and Associates.

Good afternoon, and congrats on running your business really well considering the environment.

Thank you Jennifer.

Can you talk about the real estate and the scaling back of mall developers, and how that may impact your business or not impact it?

And I know in many cases you don't pay rent, and I wondered if you could ever foresee a time where you are actually paid to take a space as an anchor in a mall Thank you.

Eric, do you want to talk about the developers please?

Sure.

As you well know, there is a fairly significant pull back from development activity, mall development activity, and our store opening schedule has been pulled back accordingly.

To your specific question, do we ever see a time we would be paid to take a space, honestly, I don't know on that.

The biggest factor for us in evaluating locations is not the amount of money a developer will give us, it's the volume potential of the location, because ultimately the volume, the sales per square foot, drives so many factors in our business that to get into a bad spot because of a high developer contribution just doesn't pay off for news the long run.

And with the economy being tough, there are a number of projects that look good to us, and now when we run the numbers on them, the volume potential comes under our hurdle.

So we are not going to reach for locations that are below our hurdle rates just to fill out our schedule.

I would anticipate that these locations, when the economy recovers, would become attractive again and ultimately will be there.

Okay, great, and can I ask a follow-up question?

Sure.

I wanted to know how you are re-energizing the men's business, including the Brass Rail and thanks a lot.

Okay, Jennifer.

Pete you want to take that?

Yes, that's a really good question.

Men's is a challenging and interestingly challenge across all the different categories.

So I think that our best chance to re-energize the business has to do with getting our inventories in position where we can be proactive about it, and not just trying to be reactive.

And because, again, we took the difficult steps and had the discipline over the past few months, we are in pretty decent shape with that, even though we had a fair amount of erosion there, we are really looking at business that's kind of aligning with what we planned.

So we are hopeful that the Half Yearly Event will be a good event for us, just because there is a lot of value placed on the seasonal mark downs that we are going to be able to take, and then Anniversary, which, as you know, is a real telling event for us as we turn the corner into fall.

And speaking to all our men's merchants, I think they feel good about what we have to offer there, and we will just keep battling, and being responsive to what customers expect from us.

Okay, thank you, and good luck.

Thanks, Jennifer.

Our next question is from Deborah Weinswig from Citi.

Good evening, a few questions.

Mike, can you go into some of the details in terms of how you thought through your credit revenue guidance?

The credit revenue guidance, basically Deborah, that's a result of the APR increase we had last November.

The yield we are getting on that has been higher than what we originally thought back in February, and then a small part of that is the higher AR balances.

Okay, very helpful.

And then, can you talk about anything your vendors are doing to offer customers lower price initial points?

We are hearing that from some other retailers.

Pete, can you address that please?

Yes, I mean it's kind of across the board.

Where we have the most opportunity to control price points is with our own product, and we done a pretty good job on our own label, sharpening prices, and that's paid off, our item business has been really pretty good where we've been able to do that.

But, we have been actually pleasantly, I don't know, surprised, but we've been happy that our vendor partners have been really collaborative with us in trying to create value.

I have seen it; I've been in a few of these meetings, from people all at the designer level all through the better price point level, people talking about magic price points and how to get to place where things can sell at regular price.

So I think there is a lot of give and take on both sides to arrive at a solution that works best for the customer.

So, I don't have any real specific things, other than to say it's pervasive, it's across the board in every category.

Okay, and then any changes to the half yearly event besides the day change.

Well, we will pro probably make sure to take a hard look at our first markdown to make sure that we can sell at the first markdown price.

I think just given what else is going on out there with competitive issues, in the past where we might have been able to sell something at 25% off, that may not do it right now, just given what customers expect.

So we will be able to respond to the competition.

I think we'll take a good hard look at it, and we'll make the decisions as we get right close to it, what's going to be the price it's going to take to sell it, so we can mark it down once.

Can I squeeze one quick one for Mike?

Mike can you talk about your systems investments, I think you were doing something to re-define by store inventory, and also there was an investment in the direct business that was going to be finished up in the fall of this year?

Yes, sure, Debra, this fall we are completing what has been a multi-year plan to upgrade all of our systems to support our direct business, and so at that point, that business will be fully scalable and it be on new contemporary operating systems, and I think that's going to be a real plus for us, to help us run a more efficient and measurably bigger business.

The second piece is we are working toward improving the way we allocate and assort our units through our merchandise planning process.

And as a result, we are developing some new practices within our teams and we're going to be using the tools that we already have, but I think using them to the extent that they will help us improve on that planning and allocation at a much higher level than what we are getting today.

Thanks so much and best of luck.

Alright, thanks Debra.

Thank you.

Our next question is from Michelle Clark from Morgan Stanley.

Thanks, and good afternoon everyone.

How are you guys?

Good, how are you?

Good thanks.

The first question, looking at your outlook for 2009, credit selling SG&A, an increase of $35 million to $45 million, can you break out for us the two components, which is one bad debt expense, and second that operational and marketing expense?

The SG&A for retail was flat, and we broke out separately the bad debt.

Yes, no, sorry, the guidance go forward.

I'm sorry Michelle, I'm not following your question.

So in your press release, there is guidance for your credit SG&A, $35 million to $45 million for the full year, I'm trying to get a sense of, embedded within that, what is your estimate for bad debt expense increase year on year.

Oh, the estimate for bad debt.

That is all related to bad debt, going - -

Got it, the entire increase.

Such that you are going to keep the operational and marketing expense related to the credit card flat?

Yes.

Okay.

That's fair.

Okay, thanks.

If that makes sense, and then the other question was, you had guided to SG&A [states] for the full year of 100 to 175.

Yes.

Any update there?

No.

Other than the fact that that number is a little lower because of the increase in the SG&A for the remainder of the year, but in terms of everything else, we are frankly on track and a little bit ahead of our plan with our SG&A results.

Okay.

Great.

Thanks.

Thanks, Michelle.

Our next question is from Lorraine Hutchinson, from Bank of America.

Thank you, good afternoon.

I was hoping that you would talk a little bit about traffic trends through the quarter, and how they trended in different regions.

Eric you want to take that?

Okay.

Traffic is off.

There is no doubt that we have fewer customers coming into the stores.

We don't have traffic counters in even the majority of our stores; we have have them in a few.

But we can get customer counts through our transactions and they continue to be down.

They have been down for quite sometime now.

So we really don't have a great specific breakout by region, but I guess the one comment I would make, in looking at it regionally, is California is not conspicuously at the bottom of our regions as it has been for the last couple of years, we are seeing a little more normal trend of more evenly dispersed regional performance month to month.

It's one region may be down at the bottom one month, but then the next month it's another region, where for the last two years, almost two years, it has been our three California regions pretty exclusively at the bottom.

Thank you.

And you had spoken on prior calls about trying to get your inventory down to a level where you'd be able to chase best selling product, are you there now, and do you expect to be in that position for the holidays?

Yes, I think we are there to the extent we can predict what is going on with the business.

We plan our go-forward inventory plans based on recent, most recent trends.

Even though I think most people talk about the opportunity to improve in fall, given what we are going against, this fall, we still have our merchandise inventories planned down to the current sales trends that we are dealing.

So we are giving ourselves some cushion there.

Last month we actually had sales growth that exceeded inventory growth, and so we are in a pretty good space right now, and if something were to change dramatically, obviously that's another story.

Where last year we were reacting to try and get our inventory levels down because we hasn't planned that way, now we're in a position where, if things moderate some as Mike eluded to and become somewhat more predictable, we actually have sales plans and inventory plans that are in line with that, so it doesn't require further adjustment.

So just we firmly believe that to keep our inventories fresh, keep the inventory turning, is our best opportunity for success, and it's really what our guiding discipline has been.

Thank you.

Thank you.

Our next question is from Charles Grom from JPMorgan.

Thanks, good afternoon everybody.

If I recall Mike, on your fourth quarter call, you didn't anticipate an increase to your bad debt reserves, yet you guys took about $41 million here in the first quarter.

Looking at your guidance, it doesn't suggest that you are going to take any more reserves over the balance of the year, so I'm just wondering if you could flush that out, where you are getting comfortable on that for us.

Actually, the overall bad debt expense was up $41 million; the actual increase in the reserve for the quarter was about 23, 24.

Back in the fourth quarter, Charles, our point of view was that we thought unemployment was somewhere in the nine-plus range and that the look of that curve was not going to be as long, in terms of the expected length of the unemployment.

I think more recent data over the last several months, and then the increase in our delinquency rates, certainly it changed our thinking, and what we are currently basing our reserves on is an un employment factor in the 10% to 10.5% range, which is a big driver of our writeoffs and an expectation that that really is not going to flatten out until sometime in the beginning of next year.

And so those two, I think changes in point of view and information that we were seeing out there, it just felt appropriate and prudent to make those adjustment in this first quarter.

Now how things play out and whether or not we make additional increases in reserves is entirely a function of how the portfolio continues to perform, and what happens in the general economy.

Okay, go ahead.

I was going the say, so we will continue to monitor that.

Okay.

Continuing on the credit theme here, just wondering could you talk through the drag that you're seeing to your comps as you guys continue to write off receivables?

I mean have you guys been able to quantify that, how much longer does that continue to be a drag?

At some point, as you start to stop writing off receivables, I imagine you start to get a comp lift.

So just wondering where the potential inflection point is there?

I'm not quite sure I follow.

But the write off of the receivables is not reflected in our comp sales; it's reflected in the SG&A.

No, I know, but at the end of the day, some of the private card receivables are impacting your sales, so I'm just wondering how much it's historically benefited your comp, if you've been able to quantify that?

No, I haven't been able to quantify in this sense.

But I will say that that relationship, if anything that could potentially impact, is that people start to get over extended in their credit, and their open to spend isn't as great as it used to be.

That could have an impact, but that's not what we are talking about here.

Okay, and then last one, if you could maybe talk to the promotional environment, what you guys are seeing from Barney's, Neiman, and Saks, and whether that's above or below what you thought you were going to see a couple of months ago.

Pete, do you want to take that?

Yes, well there's more activity than there would have been last year at this time, but isn't anything like it was in November, December of the fourth quarter that we most recently went through.

That being said, we haven't quite gotten to the exact rhythm of the markdown timing that you would expect.

So, it will be interesting to see how it all plays out actually over the next month, in terms of what might be happening there with markdowns.

But we've got a competitive position, we are not going the be under sold, but we don't have any new promotions planned or anything.

But I think it's worth it we stay on top of what our competition is doing, and we will see.

Okay.

Thanks very much.

Thanks, Charles.

Thank you, and our final question is from Adrianne Shapira, from Goldman Sachs.

Thank you.

Mike, just talk about on comps you had talked about the last quarter 10% to 15% for the year, but you were expecting the first half to be worse by 300 to 400; obviously, Q1is not worse in that range, so maybe update your thoughts as we head in to Q2?

Yes.

I don't think, Adrian, anything changed materially from where we were at the beginning of the quarter.

We still feel the first half of the year is going to be roughly worse than that 10% to 15% range by 300 to 400 basis points in the back half, roughly better by that range.

We were fortunate enough starting in the month of April, I think the trend was a lit bit better than our plan.

But I think it's obviously way too early to call anything else out ,and as we said in our guidance that we are holding to that sales, and we are holding the rest of our business plan to that, our inventory levels and expenses.

So I don't think there is anything new from where we were three months ago.

Okay.

Just follow-up question on your new margin expectations, 130 to 200 basis points, it looks as if lower decrease than we saw in your guidance for last quarter, we got 150 to 250, and yet same-store sales unchanged.

It would seem as if it's all related to perhaps merchandise margin improvement?

Yes, it's primarily related to that.

I think, as Pete was talking about, the condition that our inventories are in and that we've kept them very prudently at the right level or relative to the sales trends, and as I said in my comments, the markdown dollars were actually below last year for the first quarter.

So we are seeing a little benefit of that, we can only get so much leverage out of that based on where sales are, but we certainly think there is just a little bit more opportunity there than we thought three months ago.

And in terms of the inventory, we saw it down 12%, should we expect, at what point do we stop to, I mean, what would you expect the back half in terms of inventory planning, the same sort of declines or that starts to moderate a bit?

As Pete suggested, we are currently planning our receipt plans consistent with current trends.

And until we see some material changes and sales going in another direction, that's what you should expect to see.

Okay.

Thank you.

Okay.

Thanks Adrian.

Thank you for joining us today for our first 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 interest in Nordstrom.

Thank you, and this concludes today's conference.

You may disconnect at this time.