諾德斯特龍百貨 (JWN) 2009 Q3 法說會逐字稿

Hello and welcome to the Nordstrom third-quarter 2009 conference call.

At the request of Nordstrom's 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 Rod Campbell, Treasurer and Vice President and 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 45 minutes and will include about 30 minutes for your questions.

As a reminder, all forward-looking statements on this call 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 forms 10-Q and 10-K.

Participating 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 third-quarter performance and business outlook.

Joining us for the Q&A are Pete Nordstrom, President of merchandising, and Erik Nordstrom, President of stores.

And now I'll turn the call over to Blake.

Thank you, Rob.

I'm down in our San Francisco Center store today and the rest of the team's in Seattle, so after I share with you my brief remarks I'll be turning it over to Mike and then he'll be our point person for the questions you have and we look forward to answering them.

Just a month ago we were talking about our September results, and after that, some of you shared some nice congratulations and it didn't feel so good on the one hand, having a roughly 2.5% decrease and getting a pat on the back because our business works when we have gains.

No question we were pleased with the improvement.

It's therefore gratifying for me to be, on behalf of our team today, talking about our October results and what's happened with our third quarter.

While we recognize that last year at this time there was a precipitous drop with the economy -- we dropped just over 15% -- a win is a win, and so 6.5% up is really helped and it's done wonders for the morale of our folks in all of our stores.

Many of our people are now in the money for some of their incentive compensation, and it is just a lot different and better environment for us to be managing and supporting with a little bit more positive reaction from the customer.

We have been saying for some time how important it is that the customer's responding to fresh, new, compelling product, and we think that really accelerated in this last year, year and a half.

We are encouraged by this gain, but I think it is really important that we emphasize to all of you that we do not see a material change with our customer.

The customer's continuing to have confidence issues and there's no question that the economy and other key factors of that had a dramatic impact, but what the customer saying if there is a compelling reason to shop and it's predominantly around fashion and great product then they're responding, and so we're encouraged by that and we continue to try to enhance the discipline of the things in our control to enable us to stay close to the customer and react accordingly.

I think it was maybe two months ago where I read where [Michael Eckstein] pointed out astutely that literally every major retailer was talking about their ability to control expenses and labor and capital, and inventory, and the questioned or pointed out when are these -- or which retailers are going to break ahead by taking advantage of some opportunities and showing some top-line gain, and there's no question that our business works when we're having increases.

And I give Mike Koppel and Rob and financial our team tremendous credit for working with all of our leaders throughout the Company to understand the key financial drivers and we really believe being a good buyer, being a good merchant is being a good business person and I think we've come a long way with our disciplines.

And so we recognize that many businesses are talking about this, but we hope you're seeing it now consistently in our numbers.

So, expenses for last month and for the quarter we feel were strong.

Our inventory position and our execution in the store, we've tried through this last year maintain or enhance as the customer has and literally everything else we do question as a means to we can improve or do it differently.

And really in essence what I would like to share with you today that I submit, there's a paradigm shift, and I want to give you examples of that.

What I mean by that is our old preconceived notion of how to run the business.

For Pete, Erik and myself we were raised in the shoe business and for many, many years, it was always understood that an appropriate churn to do the volume you need to do and take care of the customer was relatively a two-time churn in shoes.

Well, now led by Jack Minuk we are considerably higher than that and we don't look at it as, well, we can't do more.

All of our merchants now look at some of their key metrics and drivers, like churn, with a curiosity, with an interest on how it can improve because that's where the customers responding.

When we're able to flow in fresh goods every day it definitely makes this thing work, and so our ability to listen and respond and react and we're just that much better or smarter the closer we are to it.

So last month one of the questions that came up was, are you concerned or do you run the risk in this inventory management of maybe being too low.

We actually think the opposite.

And, again, we think this is a paradigm shift.

We went from if you want to have a 10% increase, you planned inventories for a 10% increase.

Through the last couple years we felt that a delta in between there give us the flexibility, so if you wanted to be flat you might plan down three.

Well, today we think that can be even larger and we don't know how high is high.

And so whether it's the systems and the tools and the new rhythms, working with our vendor partners, there's just so many exciting things taking place that enable us to be more efficient, and again most importantly, give better service to sell more to our customers.

So I really want to take this opportunity to applaud Pete and our general merchandise managers for really making significant headway.

So across the board, whether it's expense and our execution of stores, there's been tremendous gains.

But from -- percentage wise, from a discipline, we think our merchants have made some of the most headway.

It doesn't mean that by saying that we're crossing it of our list, nor does it mean in any shape or form that we've got it figured out and it's not fragile, could go the other way, but we do believe that it's getting more engrained into how we do business and that gives us a lot of encouragement going forward.

So as we look at the balance of this year, and at this time of the year we're in the process of how we plan the following year, we really don't see a material.

And again, we think we're very well served, planning our expenses, our labor, our capital, our inventories in a prudent and conservative manner to again give us that flexibility and to give us that upside.

Multichannel, some of you noted when we announced our October sales, when we released full-line and Rack, that the Direct division had a good month.

Part of that was.

in September we had an additional release where the inventory system in Cedar Rapids, our Direct division, is now the same and linked to our stores.

So we have one view and so it increased greatly the availability, the depth and breadth of inventory and, again, enhances the service level we can give our customers.

So over time we've been able to evolve on this multichannel front.

We've talked a lot about it.

Again it's grounded in the customer, it's how the customer wants Nordstrom to operate seven days a week, 24 hours a day.

That's our strategy, that's how we're applying our resources.

And so being able to, for the customer, buy online and pick up and store, having our sales people being able to, if we're missing an item, do what we call the DTC, direct-to-customer, finding it in our store.

For the customer to go online and look at our inventory in Cedar Rapids and now to be able to leverage the entire inventory throughout the Company, it just represents tremendous opportunities.

There's significant learnings that are coming from this about our allocation of inventory and again our supply chain.

but we view it as a real positive and view it as another confirmation on behalf of the customer and the feedback that they're giving us, that this multichannel strategy is super important to our future growth.

We really think at this time it's not a function of what are we going to do next, there's a lot of opportunities in front of us.

We still think we have an opportunity to be what good buyers do, and that's to edit and so how do we stay focused, how do we take our limited resources and apply them to the areas that the customer values the most.

So in addition to our platform and our strategy we are trying to, at this moment in time where things are improving slightly, to see what areas we dan get on the offense and see where we could maybe accelerate some things.

So, again, things like the multichannel we're encouraged.

Our Rack division, as you know, has had a number of years of success, starting with Laurie Black and the strategy and her team put forth to really try to address and improve the experience that a customer has in the Rack through ensuring that our stores are easy to shop, that the size get filled in, that we have the best brands, the best price at the best value, and that we have quick checkouts.

That's good customer service with the customer.

About three years ago Scott Meden, who now leads our Rack division, got with the team and felt like there was some upside and so we have taking advantage of that the last two or three years and you've seen that with some of our growth in the Rack and we're encouraged by that.

So in some respects it compliments the full-line stores and it's a means to efficiently clear merchandise from them, but it really is an independent strategy focused on our customer and we see a lot of opportunities there.

I've already mentioned the multichannel, and I think it's also important to point out our Credit division.

You probably saw the notes and Mike will talk about it in more detail that we felt it was prudent with unemployment popping up a little bit to look at our future reserves and I believe we took another $6 million, but separate of that the Credit division is important to our strategy.

It enables us to stay close to our most supportive and loyal customers.

Their spend is significantly more when they use our card and we believe our service levels are better.

So by having a Credit division we think we can improve our relationship, the loyalty, the spend and the retention of our best customers, so we're encouraged by that, too.

So, as we look forward, we're not economists, we don't know what's going to happen the balance of this year and next year, but we are really encouraged about the position this Company is, whether it's financially, whether it's the content or aging or quantity of our inventories, whether it's the expense disciplines or how we're applying the shareholders dollars.

In some respects, though it's a difficult economy, we may be as positioned as well as this Company has ever been.

Again, it doesn't assure our success going forward, but it gives us the best opportunity, we think, to win and succeed and we're looking forward to continuing to demonstrate that through our actions and show it to you in our results.

With that I'd like to turn it over to Mike.

Thanks, Blake, and good afternoon, everyone.

As Blake commented, we are encouraged by the results in the third quarter.

We experienced an improving sales trend in each month of the quarter and generated increases in year-over-year transactions in the months of September and October.

That said, we recognize that much of this improvement reflects comparisons to the deteriorating sales trends of a year ago.

While we continue to make progress on improving our service and product offering, it's our view that customers remain cautious in their purchasing and as a result, we continue to be prudent in how we plan our business.

Third-quarter earnings per diluted share were $0.38 and earnings before interest and taxes, or EBIT, totaled $172 million.

This is an increase of 15.2% in earnings per share and an increase of 34.9% in EBIT compare today the same period in 2008.

Total Retail sales increased to $1.87 billion, up 3.5%, and same-store sales declined 1.2%.

A number of categories generated positive same-store sales results during the quarter.

Highlights for multichannel, which includes full-line stores and Nordstrom Direct combined, were fashion jewelry, women's better apparel and shoes.

Full-line same-store sales decreased 4.2% in the quarter, an improvement over the 12.3% decline experienced in the second quarter.

The mid-Atlantic and south regions were the top-performing geographic areas for full-line stores on a year-over-year basis, with the mid-Atlantic and Northeast achieving the largest sequential improvements over the second quarter.

Sales in our online Nordstrom Direct business increased 16.4% in the quarter.

During the third quarter, we updated our inventory platform to allow online orders to be fulfilled from our stores.

This continues our ongoing efforts to improve our customers' experience by providing them with greater access to more of our inventory whenever and however they want to shop.

We believe this enhancement in serving our customers had a positive impact on our Direct sales for the quarter.

Finally, Nordstrom Rack continued its sales growth, with a same-store sales increase of 3%, the third consecutive quarter of positive same-store sales.

Gross profit as a percentage of sales increased approximately 90-basis points for the quarter.

The improvement in merchandise margins were partially offset by the impact of an increase in performance-related expenses included in buying and occupancy costs.

During the quarter we experienced an increase in demand that was greater than planned.

We ended the quarter with inventory per square foot down 10.7% and sales per square foot down 1.2%.

Having a fresh flow of receipts into the stores to provide customers with newness and fashion is critical to our business.

We continue to focus on flexibility and managing inventory.

We've demonstrated that we can achieve an improvement in sales while maintaining inventory discipline, and we're confident that we'll have a solid flow of merchandise throughout the holiday season.

Retail SG&A increased $10 million compared to last year.

Adjusting for new store expenses, Retail SG&A decreased $2 million.

During the quarter our fixed expenses decreased year over year, but our performance-related costs increased due to the improved sales and earnings results.

Our ongoing emphasis on expense management, along with the improved top line, led to Retail SG&A as a percent of sales decreasing 37-basis points over last year.

I'd like to take a moment and talk about longer-term earnings expectations.

For some time now we have focused on leveraging our business model to achieve greater earnings efficiency.

A metric we use in our business is EBIT flow through, which measures our ability to produce earnings on incremental sales.

During the period of 2002 to 2007, due to combination sales growth and EBIT flow through of 25% to 35%, we achieved peak operating margins and return on invested capital, or ROIC.

As our business gets back to a more normalized pattern of sales growth we expect to achieve the 25% to 35% EBIT flow through, and as a result, increase our overall profitability and return on invested capital.

Third-quarter credit card revenue increased $21 million over the same period last year.

Our delinquency rate in the third quarter was 4.9%, which is higher than our second quarter rate of 3.7% and also above our internal plans.

The majority of this increase in delinquencies was caused by a change in the timing of payment due dates.

We made this change during the third quarter in order to comply with new regulatory requirements.

We believe that this increase is temporary and our delinquencies will adjust within the next few quarters.

Write-off dollars increased $22 million year over year to a rate of 9.3% of average receivables, which is in line with our plans and lower than our second-quarter rate.

In the past we have stated that there is a correlation between unemployment rates and our write-off rates.

Since the first quarter we have been using an unemployment projection of 10% to 10.5%, in calculating our bad debt reserves.

While we still believe this is a reasonable range, the speed at which we reach this range has accelerated.

As a result, we have increased our bad debt reserve for the quarter by $6 million.

Now I would like to comment on our debt and cash position.

In the beginning of the third quarter we finalized the renewal of our three-year $650 million senior unsecured credit facility.

We plan to complete the renewal of our one-year $300 million variable funding note in the fourth quarter.

We believe these actions, coupled with steps already taken this year, provide us with ample liquidity for the foreseeable future.

We finished the quarter with an adjusted debt-to-EBITDAR ratio of 2.8 times.

While higher than our two to 2.5 long-term target it was in line with our expectations, lower than the three times from the second quarter and well within the range to maintarn -- maintain our investment-grade rating.

We believe that we can return to our target adjusted debt-to-EBITDAR range of two to 2.5 within the next 12 months.

We ended the quarter with $484 million of cash.

This is an increase of $416 million compared to the same period last year.

As evidenced by our cash balance we continue to see improvement in the cash generated from our business.

Through improved earnings, working capital initiatives and lower capital expenditures we ended the third quarter with year-to-date free cash flow of $287 million, and expect free cash flow to exceed $300 million for 2009.

Net capital expenditures should total approximately $280 million for 2009 and between $325 million to $375 million for 2010.

We expect to open three full-line stores and approximately 15 Racks next year.

We plan to return to remodeling five to six stores in 2010 after scaling back to two remodels this year.

We did not reduce maintenance capital expenditures and will continue to keep our stores well maintained.

We also plan to maintain our technology spend year over year at approximately $40 million to $45 million.

Over the next five years, assuming two to four full-line store openings and ten to 15 Rack openings annually, we anticipate capital investments of approximately $2.1 billion, which is a decrease from the $2.5 billion plan we shared at this time last year.

Overall the third-quarter performance our internal plans and continued improvement in our sales trends.

Given these results and the comparisons against the tougher business conditions experience in last-year's fourth quarter we are updating our annual earnings per share guidance from a range of $1.50 to $1.65 to a range of $1.83 to $1.88.

As a reminder, our annual guidance includes the $0.06 tax benefit we received in the first quarter of this year.

With that I'd like to turn the call back to Rob.

Thank you, Mike.

Before taking the first question we want to request that each person limit himself or herself to one question and, if necessary, one follow up in order to give as many persons as possible an opportunity to ask a question.

If you have additional questions we'll ask you return to the queue.

WIth that, we'll take the first question.

Thank you.

(Operator Instructions).

Our first question today is from Edward Yruma from KeyBanc.

Hi, thanks so much for taking my question.

I'm trying to piece together two comments that you made, first on changing the amount of inventory turns in select departments, and two, the online integration with the in-store inventory.

Over time how should we think about your inventory levels and your ability to take on inventory from the stores?

Thanks.

This is Pete.

That's a good question.

We've always measured it in their own individual styles with relation to Direct or full-line stores so we've got to combine that and I think Mike and Rob, in future dates, will probably be able to give you more indication exactly how the numbers play out, when you combine them.

I think Blake was right that there are some -- there's some new context being set for us in terms of how to plan most effectively and efficiently given we have the ability to leverage and access all of the inventory that we can now across all the channels, so it's going to be an interesting time for us.

This is Mike.

I would just add just a couple other thoughts on to that and that is, with the implementation of the latest release of our multichannel inventory platform we're still learning and there's a lot we've learned this quarter and there's going to be more we're going to learn going forward, so we believe, as Blake implied, that the way we're going to think about turns is going to change.

But at this point, in terms of putting any value to that, I think it's still too early.

Great, thank you.

Okay and thank you.

Thank you.

Our next question is from Charles Grom from JPMorgan.

Thanks, good afternoon.

Just some questions on your SG&A line, Mike.

In the third quarter you gave us a couple of the buckets, a total up $10 million, the preopening costs up $12 million.

Can you give us the break down between the dollar amount of fixed expenses that are down versus the performance base that we're up so we can look at the whole pie?

Yes.

Charles, first just to clarify one thing, the $12 million that was up was the cost of the stores being opened, not the preopening costs, so those are permanent costs.

Okay.

But in terms of breaking out, we normally don't break out the layers of what was performance and other items, but what I will say, I think just to give it a little more context, is that our programs to reduce our fixed and overhead costs continue to perform very well.

They've actually been performing better than the original plans all year.

Okay.

And my second question has to do with just, again, on the overall SG&A.

You were formerly thinking about $100 million to $150 million decrease, you're now thinking $50 million to $40 million decrease.

Right.

Can you give us a little bit of sense of how much of that is because of the better sales and they're therefore variable expenses?

Well, a portion of that is due to higher sales volume and thus it's related to selling costs, and the other portion is due to the incentive costs related to the improved overall sales and earnings of the Company.

Okay, fair enough.

Thanks.

Thanks, Charles.

Thank you.

Our next question is from Michelle Clark from Morgan Stanley.

Yes, good afternoon.

Mike, if you could just clarify -- just to follow up on Chuck's question -- just the portion of the increasing SG&A that that's coming from higher sales versus an increase in the incentive comp, a rough breakout?

We really haven't broken that out, Michelle.

Okay.

And then in terms of a pick up in the business, if you can just detail for us where you're seeing the greatest pick up versus year-to-date trends.

Is it coming in your good, better or best price points?

This is Pete.

Actually I was looking at that break out by our largest vendors and interestingly, of the top ten increases from our largest vendors seven of those vendors would be bridge price-type vendors, which I guess if you had that three-tiered example you talked about it'd be middle tier for us.

Clearly not our least-expensive stuff, so I think that's really encouraging.

We're just -- we're trying hard to maintain a balance and all our merchandise strategies are really centered on the customer and we're going to evolve along with them.

And price is clearly more important than it has been in the past, but it doesn't mean that, as Blake alluded to, the newness and the fashion and all of that, almost regardless of price, that that's working, as well.

So there's a real sensitive balance that we continue to manage every day.

Thank you.

Our next question is from Lorraine Hutchinson from Banc of America.

Thank you, good afternoon.

Just wanted to follow up on the Credit SG&A guidance, you took that up about $20 million to $25 million and I was wondering what your initial expectations had been for the delinquencies and some of the write-offs and then, what we should look to in terms of the unemployment rate or the metrics you're tracking, to build expectations for the next few quarters?

Sure, Lorraine, this is Mike.

Clearly I pointed out that delinquencies were higher than we expected.

We believe and know that a good portion of that is temporary but we did see an increase after we had seen some leveling off for about a quarter or so.

Interestingly enough, our write-offs were slightly below last quarter and roughly where we thought they would be, so no surprise there.

But I think the thing that gave us some caution is the acceleration of unemployment, and with unemployment seemingly being higher than anticipated just last week, we did adjust our models and as a result required higher reserves.

In terms of going forward, I think that relative unemployment rate is still something we're looking at but it feels like we're getting there sooner and perhaps we might be there a little longer and we factored that into our models.

But I don't think anything has changed materially in term of the numbers, it's more been in terms of the speed with which we've gotten there and the length with which we'll stay there.

Thank you.

Thanks, Lorraine.

Thank you.

Our next question is from Neely Tamminga from Piper Jaffray.

Great, thanks.

Just right here on the Rack, two things I want to ask about.

One is managing the flow of goods for Rack.

Obviously, inventories are tight and I think it's a noble cause to really manage for past returns and flow, but just wondering how the balance (inaudible) in Rack works with your inventory and are you going to be comp constrained to be able to deliver some good comps over at Rack?

Maybe talk a little bit through that with this new strategy on turn.

And then secondly related to Rack, could you just talk about the reach of the concept overall and has any of that really changed for you guys as you look into the years ahead?

Thanks.

Hi, Neely, this is Erik, I'll take that.

The Rack have two main components to their inventory; the full-line store transfer goods and special purchase.

And that is -- if we do a good job of buying special purchase that can be quite flexible,, so as we have more goods to clear from full-line stores our full-line store percentage can go up and if we have less that percentage can go down.

The key is really in the quality of the special purchase buy and the Rack has been doing a terrific job of that, of getting the brands that our customers want in our stores.

So that -- it's another real strength of the Rack business model that there's a flexibility there to not only support the full-line stores in keeping our full-line stores clean and able to bring in new merchandise, but also in driving their business.

So we don't see -- as that percentage goes up and down we don't see that materially affecting our Rack sales results.

You had a second question, what was that.

About the reach of the concept in terms of what markets and MSAs you can go into with Rack?

Well, our Rack model works best when it's close to our successful full-line store.

We are testing some [alone] markets with the Racks, we're not in a big way.

The vast majority of our Rack growth will be filling in and following on where we have full-line store growth.

Thank you.

Our next question is from Deborah Weinswig with Citigroup.

Hi, it's actually [Tina White] on behalf of Deb.

Just wondering, on the CapEx guidance for this year it looks like it has gone from $325 million down to $280 million now for the year, and I was wondering if you can clarify what drove the decrease in expectations there?

Yes, Tina, it's Mike.

It's primarily just overall coss of several projects that have come in lower than what we had expected.

Okay?

Okay.

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

Good afternoon and congratulations.

In a tough environment you guys are doing great.

Thank you.

I wondered if you can talk about -- in more detail about the women's business.

You've done a great job and are there any departments that you feel have significant opportunities?

That's my first question and then I have a follow up.

Okay, Well, this is Pete.

We have opportunity in all the women's departments because if you look, again, over our longer historical context we have some ground to make up and we've lost some there over the years, as you know as we've talked about, with -- gone with our women's business, but we're on a good pace now with sales momentum.

The women's divisions have collectively been out performing the full-line store total for a little while now, that's really encouraging to see, particularly given it's such a large segment of our business.

I think, in particular, the better price point have performed pretty well.

The My-Point-of-View department would be one where we're having pretty solid increases in, but we're also having some pretty good increases in some specific areas (inaudible).

Namely I'd say the individual departments work well.

A lot of that related to strength that we're having with Classiques, which is Jennifer's one of our own brands.

So there's some thing to focus on that are working, but I would say collectively we're not particularly satisfied with our women's results yet.

We've got a ways to go and we still think we have quite a bit of head room to keep improving.

Which department is doing the poorest of the women's?

Well, women's designer apparel would probably be the toughest spot, and that's probably isn't going to come as big surprise.

We've talked about that for a little while that the designer segment was particularly challenged during -- well, all this economic stuff that's gone on.

But gosh, I'd say more specifically -- I would say maybe our plus size business.

We have some opportunity there.

We've had a little bit of softening in our contemporary business as it relates to the TBD department, more specifically and I'd say that is really just the shift about what is happening with bottoms.

Premium denim still matters, but I think that there's more pressure on a balance of prices there.

So while we may be selling the same amount of units it might be at lesser price points than we did in previous years.

And then, also, we're selling a lot of skinny pants and leggings and, frankly, leggings are a lot less expensive than premium denim.

So there's some price point evolution there that I think has made things a little bit challenging in TBD.

Thank you.

Our next question is from Liz Dunn from Thomas Weisel.

Hi, good afternoon.

My question relates to gross margin, can you provide the break out of merchandise margin versus the deleverage on comp, and then also just some color on average unit retail and IMU?

Sure.

Liz, this is Mike, as you know we don't usually break out the specifics that are in gross profit, but I will say that the improvement in gross profit was all driven by merchandise margins and it was partially offset by the increase in incentive costs that are in buying and occupancy.

And so that definitely was the driver of the gross profit.

In terms of the AURs, Pete, you want to cover that?

Yes, I would say that in terms of the price [own], what we're offering on the floor this last quarter, if you exclude the cosmetics out of that that's stayed pretty flat.

We're down about 10% in average price that we're offering to the customer.

I would say that that wasn't a top-down decision made literally a year ago, it's just another example of our model responding to the evolution of where our customers are wanting to buy stuff and that's where we've settled in of late.

But have your IMUs gone down as much, or have you -- what's happening IMU (inaudible)?

Well, no.

Interestingly, I think when this first started we tried to really sharpen our pencil in terms of operating and great value, but what's happened over time is that'sjust not clearly in our court, it had to do with what the vendors are offering.

as well.

So I think the vendors have found ways to take costs out of product, I think we've found ways to tighten-up mark-ups and all of this is balancing itself out.

But in genera, if you just look at the IMU part of it, it's not changed much.

Thank you.

Our next question is from Bob Drbul from Barclays Capital.

Hi, good afternoon.

Hi, Bob.

Mike, I guess the one quick question that I have for you is, on bad debt expense I think you gave us the additional $6 million.

I think last quarter you said $215 million to $225 million, clearly up from there.

Is there a number that you're thinking about for the full year now in these expectations?

I think with that additional $6 million it starts to put it up in the $225 million to $230 million range for the bad debt expense for the year, but clearly, we'll continue to monitor what's going to happen in the fourth quarter and any changes in the pace of business will dictate that.

Okay.

Then just a quick question on the inventory, with the tighter inventories, how are you thinking about spring buying going into next year at this point of time in terms of maybe on comp inventory or total inventory plans?

This is Pete.

What we're trying to do is not look at it so much in terms of a comparison to last year because last year was so challenging and such an anomaly, particularly as it relates to our inventory efficiency and our margin and mark-down rate.

So we've used some historical context over the last four or five years to try to plan in an area that we know works well for us and can drive results.

So I -- we feel like we've reconciled the inventory level to the demand.

We're in good shape with that and we actually have had to raise our plans a little bit of late because our -- as you know from the sales we'ver reported here, we've exceeded those plans.

That's a good new story for us and it's given us the opportunity to really focus where we want to add the inventory.

We've been able to do that through replenishment items and some really key items and trends and so we're feeling good about the quality of our inventory right now.

Great.

Thank you.

Thanks, Bob.

Thank you.

Our next question is from Christine Chen from Needham & Company.

Thank you for taking the question.

Just wanted to tee back off of a comment when you answered Jennifer's question about premium denim and I guess the contemporary space, in general, is it really price point, or is she looking for fashion, and if the fashion is there is price point an issue, both on the bottoms and tops side?

Well, it's all of that.

Premium denim's still a great classification, and we're selling lots of it.

There's some transition in silhouette, but if the skinny pant thing is working really well a lot of that has to do with someone saying, hey, I want something new .

It might be in the form of a ponte pant or knit legging or something like that, which just almost every time is at an average price quite a bit less than a pair of premium denims.

So it's not that they don't like denim, it's just keeping us with whatever's going on with that trend and how to bring newness to their wardrobe.

So it's great that it's new and that's creating a lot of sales for us, but just in terms of item for item average, price against average price it's probably going to be a bit less in that bottoms

And what about on the tops side in contemporary?

Well, tops, actually is a place where we might have an opportunity to improve some.

There's a lot of good business with sweaters still, and coats have been strong, as third piece to what a woman's wearing in her wardrobe, the boyfriend blazer an idea.

So that's given us a great opportunity to add multiple sales beyond just a top.

Thank you.

Our next question is from l=Lance Vitanza from Knighthead Capital.

Hi.

Can you talk a little bit about your ability to gain share at expense -- at the expense of the hiring guys, like Neiman and Saks?

And then a follow up, as well.

Well, this is Pete, I guess I'll take that.

We're just trying to do what we do and we're trying take care of our customers as well as we can.

I guess maybe that could come at the expense of some of our competition.

We don't really look at it so much that way.

I think the fact that we've had our inventories in line and we haven't had to play catch up with that it puts us in a position where we're well -- we're just well positioned going forward and we have a chance -- we've created some open to buy for ourselves and I think the newness and quality of our overall inventory position is pretty darn good right now.

So I can't speak to what it is like in our competition, but when you look at the fact that our inventories are fresher and newer and cleaner and that we have a bit more breadth, maybe, to our inventory offer than Neiman would that we think customers respond well to that.

Okay, thanks a lot.

Appreciate it.

Thank you.

Our next question is from Adrianne Shapira from Goldman Sachs.

Thank you.

Mike, I had a few questions.

First, perhaps give us an update on California.

You had called out some of the other regions, anything to call out in improvement in California?

Hi, Adrianne.

Well, California did show improvement, but the relative improvement was similar to what we saw in all of the other regions, so it's not like California has shown any accelerated improvement versus the other regions.

We are seeing a little bit more improvement in northern California than we are in southern, but that's about -- I think that's about the extent of what we're seeing there.

Okay, thanks.

Then, Pete, maybe on the sale events, we know you're in your half yearly now, maybe give us a sense, anything you could share with us in terms of how you're thinking about these events given the lean inventories, how you're planning them, how they're tracking the customer appetite?

It sounds if down 10% in terms of AUR is the right number, so maybe anything you could shed light in terms of the promotional cadence and how things are tracking?

Well, we're planning for the same promotional cadence.

I think what's changed, if you look at it really more over a ten-year period, is that where we used to use just a couple clearance events to clear out seasonal merchandise we markdown in real time now based on how things are selling with markdown optimization so there is always some product that we're clearing out to some degree on the floor.

And, again, this just creates an opportunity for us to trade that type of inventory for something that's new.

So this has been going on for a while and I think the outcome of that, if you were to just look at our bottom-line results and gross margins, that that's been a pretty good thing for us.

So we're going to continue on that track and try to be handling those inventory situations on a daily basis.

Thank you.

Our next question is from David Glick from Buckingham Research.

Yes, good afternoon.

Pete, a question on the footwear business, I was wondering if you could speak to the relative out-performance of it.

First, it's a total store trend, clearly, and given the high penetration of the business and the fashion trend going on in boots that it's probably a big overall comp driver for Company, and I was wondering if you could give us some color on that?

And then how does this -- does this trend translate to spring?

Obviously boots do not translate to spring, but do you expect the same type of momentum in footwear in spring?

Are you seeing any trends there that translates from a fashion perspective that's good in sandals, and how do you think about the business for spring relative to the overall plan?

You're right.

When shoe business is strong and there's a lot of good trends for us to capitalize on out there it's good for us because it's an important and large segment of our business and I think out people have done a pretty good job of executing there.

There's no question the boot thing has been important for us through fall and will continue to be through winter.

In terms of how that plays out for spring -- and, again, it's boots at all prices.

We're selling -- on all of our women's departments from the most expensive to least expense we have offer, we're selling boot categories or boot brands it sells well.

The boot thing should continue through spring.

It won't be as many as you have in fall, but it's still a relevant trend for us.

Just in talking to our shoe buyers and merchant leaders they're feeling pretty good about what the market has to offer and our ability to be able to deliver that for our customers, so I think you should expect to see the shoe categories perform relatively well for us as we go forward.

Great, thanks.

Just a quick follow up for Mike on the credit card revenue line, once we anniversary the rate increase from last year how do we think about modeling that going forward?

You guys have commented that you would -- you still expect to see some modest continued growth on the credit card revenue line, just wondering if you have any updated thoughts on how we should think about that line on the income statement?

Yes.

Well, David, we haven't quite anniversaried from changes we've made in our rating and won't until some time next year.

We'll give some more visibility into our expectation as to where we see card revenue for next year, but I think suffice to say, it's a function of balance growth and it's a function of payment activity.

We've seen a little -- some of our revenue growth has been due to some growth in the payment -- I'm sorry -- some growth in the actual balances combined with an increase in rate.

But when we talk about next year's numbers in February we'll give you some more insight into that for next year.

Thank you.

Our next question is from Richard Jaffe from Stifel Nicolaus.

Thanks very much, guys.

A quick question on the Direct business.

There appears to be a lot of opportunity there and I just wanted to hear your thoughts on expanding the choice if the customer opportunities, on internet or through e-Commerce, to be actually broader than the store offerings?

And then have you thought about -- or what do you think about some of the outreach opportunities, social networking, blogging, Twitter, celebrity ties-in, all the things that are happening through the electronic media?

This is Pete.

In terms of broadening our offer on Direct, it's a little early to say.

I think Mike put it well earlier that we're learning a lot of things right now and our ability to be able to leverage these different channels to maximum benefit for our business toward the customer, it probably wouldn't be a good idea for us to get too far off field and we're trying to be really aligned with our product offering between what's happening in the stores and what's happening online.

But there might be an opportunity, if there's a brand that we carry that we can carry more styles and SKUs online than we could literally in the store.

So we're going to keep working on that and to the extent we can do it efficiently and drive outcomes we'll keep trying to expand it.

In terms of the social networking of how to drive business for us, we're right there with everybody else, completely aware of the potential of that, but without really knowing exactly how to exploit to its maximum benefits.

So we're trying a lot of things.

I think we've got a healthy sense of curiosity about how it might be able to help us.

Our customers are there and they want to be communicated with in those venues, so we're going to keep working on some things to see if we can connect better that way.

Should we look for tweets from you guys or from some of your fashionistas?

Is that kind of thought process going on?

Or I could be an optimist.

I don't know if Blake's going to start tweeting or anything, but we do have some people that are tweeting in our Company.

We have some store managers and some merchants, so there's a bit of the this activity going on right now and we're just continuing to monitor it and try to be curious about trying new things to drive business.

Thank you.

Our next question is from Erika Maschmeyer from Robert Baird.

Hi, thank you.

I have a couple of follow-up questions.

You mentioned that Classiques was doing well.

Have you seen an increase in your penetration of private brands due to customers being more value focused?

This is Pete.

A little bit, but when you look at that the plans were made and the lead times required for our private label, our inventory really isn't in a position to have it outperform to any major degree, given that we scaled it back pretty far and can't just ramp it up that quickly.

We believe that there's an opportunity for us to do a better job with our private label and historically we have been any where between 11% to 20% of the full-line store business and we're down towards the lower end of that now.

But we would anticipate it'll improve some this next year and hopefully continue to grow a little bit because, to your point, it tends to offer good value to the customers and they'reresponding well to it.

That makes sense.

And then could you talk about are there any particular reasons why you think you saw the greatest sequential improvement in the mid-Atlantic and Northeast?

This is Erik.

Nothing in particular, it's -- really there's -- it's a tale of the West Coast is toughest and, again, improved business in the West Coast, as Mike said, but relative to the rest of the regions California plus the Northwest has lagged behind the average.

All the other regions of the Company have taken their turns at being at the top of the regions, so mid-Atlantic most recently and I think we, from an execution standpoint, have a lot of good things going there with our team there, but nothing from the market there that stands out.

Thank you.

Our next question is from [Ken Sumphauser] from Sterne, Agee.

Good afternoon, everyone.

Mike, I was wondering just if you could perhaps let us know if in the fourth quarter, considering where your gross margin guidance is and where inventory per square foot down 11%, if it's reasonable to infer that you're expecting merchandise margins to be up and consequently, if that's the case, if you're also expecting for the fixed cost component again to offset that to a certain degree?

Sure, Ken.

Well, yes, certainly in the fourth quarter our plans do imply an improvement in margin from last year's, which -- results, which I think everybody recalls were pretty difficult because of the deceleration in sales and the excess inventory that the industry had.

In terms of the costs offsetting that, I don't know if we're talking about costs totally offsetting that.

I think we are looking for some improvement in our earnings relative to what was implied in prior guidance.

If you were to look at the overall earnings flow-throughs that these numbers imply for the third and fourth quarter I think they're pretty good.

So, we expect to continue to leverage the P&L (inaudible).

I think previously you implied that merchandise margins were down 300 to 400-basis points last year.

Are you expecting to recapture all of that or just a portion of it?

No, we're not expecting to recapture all of it, just a portion of it.

Okay.

Thanks, guys.

Thank you.

Thank you, and I'll now turn the call back to the speakers for closing remarks.

Thank you.

This concludes the Q&A and this concludes our call for today.

Thank you for joining us.

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Thank you, and this does conclude today's conference.

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