諾德斯特龍百貨 (JWN) 2009 Q4 法說會逐字稿

Hello, and welcome to the Nordstrom 2009 fourth quarter and full-year conference call.

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

(Operator Instructions).

I will now introduce Rob Campbell, Treasurer and Vice President of Investor Relations for Nordstrom's.

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 filed Forms 10-Q and 10-K.

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 fourth quarter and fiscal year 2009 performance and outlook for 2010.

Joining us for the Q&A are Pete Nordstrom, President of Merchandizing, and Eric Nordstrom, President of Stores.

And now, I will turn the call over to Blake.

Thanks, Rob, and good afternoon everyone.

Mike will provide details about our fourth quarter and year-end results.

I'd like to share with you our view on some of the more significant developments in our business this past year, and then close with a few thoughts about our outlook.

Overall, we are very encouraged by our business, and how we have adapted to the changing environment.

We believe our business is in a much stronger position now, than it was going into the downturn that began roughly two years ago.

It's gratifying to see such strong fourth quarter results and to end the year with improved earnings.

But it was our focus on the customer that led us to major improvements in our business.

It is because of our service commitment that we are better positioned financially, competitively, and most important, with our customers.

Our multi-channel improvement is one example.

Customers don't see a difference between a Nordstrom store and Nordstrom.com.

To them, it is just Nordstrom, and they want a service experience that lives up to their expectations, no matter how they shop.

In fall of last year, we launched a new inventory platform that dramatically improved our ability to help more customers.

We now have the ability to truly share inventory between all our full-line stores and Nordstrom.com.

We can fulfill online orders from any Nordstrom store, anywhere.

As always, the key is how all of this -- this benefits the customer.

We are better able to satisfy our customer's demand no matter how they choose to shop.

Customers have access to more of our merchandise online, Ultimately we are saying yes more often to more customers.

This new capability meant we were able to take our inventory efficiency to a whole new level.

We increased sell-through rates, inventory turns improved dramatically, and are now on par with our highest levels ever.

In addtion to our multi-channel efforts, a significant contributor to our success has been the performance of our merchants, resulting in an improved offering.

We stayed balanced, which gave us the flexibility to evolve with our customers.

As sales improved, we had open-to-buy, which enabled our merchants to react quickly to the feedback from our customers about hot items.

We moved up receipts, the steady flow of fresh merchandise gave customers more reasons to visit us in our stores and online.

Customers continued responding to the newness in our stores, which further drove sales.

As a result, our merchandise is now as fresh, compelling, and current as it's ever been.

Another key factor was our discipline in managing expenses, while continuing to invest in our future.

We were thoughtful about expenses, questioned the things that didn't clearly help us take care of customers, while not compromising areas that enhance the customer experience.

We also recognize the importance of opening more stores in top retail markets across the country.

We opened three new Nordstrom full-line stores, relocated a another, and opened 13 new Nordstrom Racks.

In 2010, we will continue opening more full-line and Rack stores, while also getting back to a more regular schedule for remodeling existing stores.

As we look ahead, we believe that though trends have improved, customers remain cautious.

We believe our biggest opportunity is improving execution at point of sale, and feel we are well positioned to gain market share.

We have learned a great deal from this difficult environment.

We think the adversity has made us better.

We're more efficient, and operating more profitably than before.

We are finding new ways to better leverage our multi-channel capabilities.

We are seeing more regular priced selling, as customers continue responding to our newness, value and quality.

Our margins are solid, and we have strengthened free cash flow.

Most important, we continue to do everything in our power to elevate our focus on the customer.

Our challenge is to keep building on this momentum.

Our number one goal firmly remains improving customer service.

We think we have an opportunity through our merchandise assortment, service, and new tools, to gain more of our customers trust and business.

Ultimately, we hope this will enable us to meet or exceed the goals we've laid out for 2010.

Now I will turn the call over to Mike.

Thanks, Blake.

And good afternoon, everyone.

As Blake commented, we are encouraged by our performance during the fourth quarter, and for all of 2009.

We entered the year with uncertainty, given the volatility of the retail environment in 2008, and are exiting 2009 with greater confidence in our ability to manage our business effectively in challenging times.

Throughout the year, the Company demonstrated discipline in it's management of inventory and expense, complementing the continued focus on our customer.

The buying organization maintained inventory levels that were well aligned with sales volume, allowing for constant flow of new merchandise into our stores, and the flexibility to increase receipts as business improved.

This resulted in improving same-store sales in every quarter, positive same-store sales in every month of the fourth quarter, and an increase in market share.

Despite an annual decline in same-store sale, the Company achieved higher net earnings than in 2008, and the highest inventory turnover in recent history.

For the full-year, 2009 earnings per share were $2.01, an increase of 9.8% from $1.83 last year.

Earnings before interest and taxes, or EBIT, were $834 million.

This represented a 7% increase compared with last year's EBIT of $779 million.

While the earnings growth gets us back on track, it was roughly $130 million below our average EBIT over the last five years.

Clearly, there is an opportunity for further increases.

Total net sales decreased 0.2%, including a 4.2% same-store sales decrease.

Fourth quarter earnings per diluted share were $0.77, compared with $0.31 last year.

EBIT for the fourth quarter of 2009 was $310 million, an increase of $154 million, or 99% compared with last year's EBIT of a $156 million.

Total retail sales in the fourth quarter increased to $2.54 billion, up 10.3% and same-store sales increased 6.9%, compared with the same period in 2008.

Most of our merchandise categories generated positive same-store sales results during the quarter.

Highlights for multi-channel sales which include full-line stores and Nordstrom Direct combined, were Women's Better Apparel, Women's Shoes, and Jewelry.

The Midwest, South and Northwest regions were the top performing geographic areas for the full-line stores on a year-over-year basis.

Combined, multi-channel same-store sales increased 7.1%.

Finally, Nordstrom Rack continued it's sales growth for the fourth consecutive quarter, with a same-store sales increase of 4.6%.

Fourth quarter gross profit as a percent to net sales, increased approximately 530 basis points, recovering most of the 560 basis point decline we experienced in the fourth quarter of 2008.

Merchandise margin was by far the largest driver of this improvement, although the increase in sales allowed for some leverage in buying and occupancy costs, despite higher performance-related expense.

Markdowns were reduced considerably from last year's fourth quarter which was a highly promotional period with weak consumer demand.

We ended the quarter with sales per square foot up 6.7%, and inventory per square foot down 4.1%.

Retail SG&A increased $56 million compared with last year's fourth quarter.

Adjusting for new store expenses, retail SG&A increased $43 million.

During the quarter, our fixed expenses decreased $18 million year-over-year, but our performance related costs and variable expenses increased due to the improved sales and earnings results.

Last quarter, we discussed the concept of EBIT flow through, which measures our ability to produce earnings on incremental sales.

Based on recent history, we have achieved average flow through of between 25% to 35%.

This quarter, our flow through was well above this range, due to the significant reductions in markdowns this year.

Although we benefited from this situation in 2009, this elevated level of flow through is not sustainable, and we would expect to return to a 25% to 35% level as the operating environment stabilizes over time.

Now on to our credit business.

As we stated in the past, our credit business is strategically important to us because of its focus on building customer loyalty.

Our card holders visit our stores twice as often, and spend 20% more each visit.

While this benefit is not captured in the credit P&L, it lifts the performance of our Company, while helping to establish and deepen the connection with our customers.

That being said, we continue to experience challenges in the consumer credit business.

Fourth quarter credit card revenue increased $16 million over the same period last year.

Our delinquency rate in the fourth quarter was 5.3%, which is higher than our third quarter rate of 4.9%.

Write off dollars in the fourth quarter increased $22 million year-over-year to a rate of 10.5% of average receivables, which was higher than our third quarter rate.

During the fourth quarter, we increased our reserve for bad debt by $20 million up to $190 million.

A key driver is the continued weakness in California, relative to other geographic regions.

Coupled with uncertainty about the overall economic environment, and it's impact on credit performance, we believe that the increase to the reserve is appropriate.

With respect to our overall financial position, today it is significantly stronger than during the last economic downturn.

During 2009, we continued to see improvement in the cash generated from our business, ending the year with a cash balance of $795 million.

Through improving earnings, working capital initiatives and lower capital expenditures, we generated free cash flow of $579 million, in 2009.

We finished the quarter with an adjusted debt to EBITDAR ratio of 2.5 times.

While at the upper end of our 2 to 2.5 times target, it was better than our expectations, lower than the 2.8 from third quarter, and well within the range to maintain our investment grade rating.

We believe that we could return to the lower end of our target adjusted debt to EBITDAR range within the next 12 months.

Next I will discuss our outlook for fiscal year 2010.

As in the past, our approach to providing annual guidance is consistent with how we plan the business.

In 2009, we demonstrated our ability to plan the business at a level at that reduces our down side risk, and then execute with the flexibilty to adjust quickly, if trends change.

Clearly, there is momentum from our fourth quarter performance that can carry over into 2010, built we recognize that the second half of the year could be tougher, as it overlaps with the improving trends from the latter half of 2009.

Additionally, there is lingering caution with customers given the overall state of the economy.

For 2010, we are planning a same-store sales increase of 2% to 4%, with the first half of the year 300 basis points higher than the second half.

This plan delivers earnings per share, in the range of $2.35 to $2.55 for the full-year.

We expect our 2010 gross profit rate to be 20 to 60 basis points higher than the 2009 rate.

Gross profit rates are planned for greater improvement in the first half of the year compared to 2009, as relatively weaker sales trends in the first and second quarters of last year increased markdown pressure.

Retail SG&A expenses are anticipated to be $125 million to $175 million higher than 2009, with a decrease in the retail SG&A rate of 10 to 20 basis points.

Over the last two years, we have taken steps to flex our operating model to adjust to changing sales levels.

For example, although our sales per square foot in 2009 declined to a level equal to what we achieved in 2004, we effectively manage our expenses per square foot below 2004 levels.

This flexibility in managing our business, and the ability to adjust quickly to changes in trend, has put us in a healthy position heading into 2010.

Credit card revenue is expected to increase by $35 million to $45 million, as our accounts receivable are expected to show moderate growth.

Our credit SG&A is expected to decrease by $10 million to $25 million, due to lower bad debt expense.

There is a strong correlation between write-offs and unemployment rates.

We currently have an average unemployment rate projection of approximately 10.5%, for all of 2010.

Interest expense is anticipated to be lower by $15 million to $25 million, due to lower debt levels, reduced interest rates, and lower borrowing facility fees.

It is likely that we will retire the $350 million securitization debt with available cash when it matures in April of 2010.

We expect 2010 capital expenditures of approximately $325 million to $375 million.

This is approximately $100 million higher than 2009, due to a number of remodels, and Rack openings.

In 2010, we expect to open three full-line stores and approximately 16 Racks.

Roughly 70% of all capital expenditures will be spent on new stores, remodels, and relocations, while the remaining capital expenditures are for technology, maintenance, and general purposes.

Depreciation and amortization will be approximately $275 million for the full-year.

In 2010, we anticipate generating approximately $300 million in free cash flow.

We will use our cash primarily to reinvest in the business, and to maintain an appropriate capital structure.

In closing, we begin 2010 with greater flexibility than a year ago.

We are solid financially, which allows us to invest in the business.

Our business model is more efficient, we are coming off a year of improving performance, and we are striving to improve execution and grow our market share.

We continue to take what we believe is a realistic approach to planning our business.

One that promotes editing and prioritizing in terms of capital, inventory and expense, but allows us to realize significant upside if increases over plan materialize.

With that, I will now 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 will take the first question.

Thank you.

(Operator Instructions).

Our first question today is from Michelle Clark from Morgan Stanley.

Thank you.

Good afternoon.

The first question is on the credit piece, can you just give us a sense of what your outlook, in terms of delinquency rates and charge offs are for 2010, is the first question?

And then secondly, in the prepared remarks, you talked about the business running more efficiently than it has heading into the downturn.

Can you give a sense how to think about the longer term operating margin goal of the Company over the next few years?

Thank you.

Okay, sure, Michelle, thank you for your question.

This is Mike.

First on the credit piece.

Clearly we saw after some moderating performance in the middle of the year, with delinquencies and writeoffs, we saw some acceleration in the fourth quarter in both delinquencies and in write-offs.

In particular, we are seeing continued high write-off rates in over 50% of our write off dollars coming from California.

So taking that all into account, we are looking at our performance next year from a write-off standpoint to be somewhat consistent with where it is this year, which is the reason why we ended the year with higher reserve.

We don't see any significant improvement, nor have we planned any going through next year.

And we continue to remain cautious until we see a material movement in the delinquency rates.

In terms of the efficiency of the model, you may recall that if you look at our pretax margins as they exist right now coming out of 2009, on an equal sales per square foot basis which we were similar around 2003 and 2004.

Our pretax margin rate is better than it was back then.

So, our ability to generate earnings on -- as a percent to every sales dollar, is greater than it was five or six years ago.

So we believe going forward, there's an opportunity for us to achieve some of those peak margins.

But it is going to be reliant on our ability to sustain a --several periods of -- I would say mid single digit comps.

Thank you.

Thank you.

Our next question is from Wayne Hood from BMO Capital Market.

Yes, I just had two questions actually.

How are you building up the AUR around the 2% to 4% growth in comps for the year?

And then can you discuss kind of initiatives or potential improvement that you can see in the mid Men's business, which I think Blake or Pete, was about 15% of the business, and have been under performing a little bit.

And does that have the potential to help (inaudible).

Thank you.

This is Mike.

I will take the first half.

As far as the AUR, we have seen an increase transactions, but we haven't baked in any kind of increase in the AUR, as we go through next year.

So it is going to be mostly from increases in transactions.

Yes, this is Pete.

In terms of the Men's business, last year, in total was pretty difficult as it stacks up relative to the other divisions.

But I would say in last few months of the year, the trend improved pretty dramatically.

And just the point, at least to where you are comparing it to the year before, it is right in line with the other divisions.

So, I think the momentum is started to shift back to the positive in Men's.

And we would anticipate that we have some, some ground to make up there, and we should be doing better in Men's.

Is there anything behind that you can point to, and what do you expect it to do in 2010.

Well, I mean ultimately for us, just understanding our customers better.

And where we've had success across the board of merchandising is where we have gotten much more in line with the customers desires around price, occasion, fit and style.

So I would say for Men's in particular, a lot of our work is around really trying to understand his occasions, and what he's wearing.

For example work, work isn't just suit, it is other things clearly.

So I think we can do a much better job of being responsive to what our male customers are willing to buy today.

Okay.

Thank you.

Thanks, Wayne.

Thank you.

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

Thank you.

Good afternoon.

Just to follow up on some of the credit questions.

Just curious, what are you looking for, what metrics are you using to determine when you'll start releasing some of those reserves down the line.

Also your revenue guidance increase, is that just simply from higher accounts receivable at the same rates that you are charging now, or are there any rate increases incorporated in that?

Sure.

Lorainne, this is Mike.

In terms of the metrics, it is pretty straightforward.

The most obvious ones that we look at weekly are the delinquency metrics, of which we are able to parse out by age bucket.

So we keep a very close eye on those.

In addition we look at the current period write off trends.

And the last thing, in terms of forward looking, we look at what expectations are around unemployment, as we set up our reserves.

So I think the most important thing is we have to start to see our current period delinquency trends start to roll into the later periods, which is going to suggest that those bad debt levels are going to start to reduce.

And to date, we haven't seen in happen yet.

And then the second thing in terms of revenue, those revenue numbers do not preclude any kind of increase in APR.

It is purely based on growth in the receivable balance.

Thanks.

Thank you.

Thank you.

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

Good afternoon.

And you've made great progress.

Thank you.

Thanks, Jennifer.

I have a couple, I have two questions.

I understand you are doing some testing online for example, secret sales are at a given time period in the day.

I wondered what kind of response you're seeing from the events.

And have you received any additional information from these customers that can be be applied to your full-line stores as well?

And then, my other question is, do you foresee the Racks going online, and if so when, and what are your international plans for online?

Thank you.

Hi Jennifer.

This is Blake.

I will try and take a stab at those.

Those events or those tests you refer to, have to do with the private sales subject that has been testing with some of our competitors.

And in that particular channel, with a number of favorite players that just solely focus on how the private sale membership approach.

And since we have that functionality, and we were seeing some response from our customers around us that they like that, we thought we would try it.

And I would say in those first couple of early tests, that we were pleased with the favorable response.

And that we are going to, going forward continue to expand upon that, do a few more tests, and enhance our learnings.

Because the key to this is, we want to be there where the customer wants us to be, in terms of how we serve her.

And if that means a private sale, for those most loyal customers, and again we have that ability to do that, and we think as well as anyone.

So we are working on that.

The second you talked about, the Rack, and it's ability to be online.

And that's coming, it is harder for our bottle, because -- with that clearance, there's lots of broken runs.

And so that whole ability to have that merchandise, clearly pictured and relayed on the site, and to be with able to fulfill that, has been an opportunity for us.

But we are working on that, and we think that represents an opportunity both for Company, for the Rack and our multi-channel efforts.

So we are going to enhance our website this August, and the Rack functionality part of this, should be coming after that.

It is something we are working on.

Then lastly you talked about international business.

And I think you know that in November, we started an effort with a third party provider, that we are able to now online, much more efficiently and accurately service the customer on a global basis.

It's a small start, but there's some terrific learnings about customers that have been desirous of this.

And we hope to down the road give your a little more insight on it.

It is very early because it just started in November.

But with we are very encouraged.

Thank you very much.

Thank, Jennifer.

Thank you.

Our next question is from Deborah Weinswig from Citigroup.

Good evening, you were one of the first retailers to increase the value messaging on your selling floor.

Can you talk about your messaging for 2010, because it doesn't sound like we should expect it to take AUR back up if I am correct.

This is Pete.

Our marketing message is around style and breadth of price point and offer.

So where we have had success is, is where we have been able to say, here is really the hottest styles and classifications and here's the breadth that we have to offer.

So, I think one thing that is working to our advantage is that breadth is naturally in our selection anyway.

So we just found a way to play on that, by focusing on the style trends.

Okay.

And then, obviously your recent comp results, especially since October, has been impressive.

Can you discuss the results of your recent Personal Shopper program, and maybe the impact that's had on your top line results?

The Personal Shopper program?

Yes.

Well, I mean as you know, we always got this heightened focus around doing a better job at the point of sale.

And if you think about what Personal Shopper is, it is the foremost example of highly --of personalized service, and high touch service.

So what we try to do, aside from a lot of the acquisition of customers -- is around retention, and trying to get our best sales people connected with our best customer, it's really not much more complicated than that.

But, we've been pretty focused on that, and that has worked out well.

So I think, our -- hopefully our chance to be able to gain market share and succeed has a lot to do with the way we that we execute the service philosophy, one on one with the customers and personal touch and Personal Shopper and all of that has been part of it.

Great.

Best of luck in 2010.

Thanks, Deborah.

Thank you.

Our next question is from Barbara Wyckoff from Jesup & Lamont.

Hi, everyone.

Good job managing through last year.

I guess the question is, if you could do over for third and fourth quarter, what would you do over?

So Barbara, This is Blake.

We are kind of looking at ourselves a little bit with that question.

We talked about the second of the year and the year in total l.

And you were in town not too long ago, and we talked about the second half of the year, and the year in total.

And I think we were -- certainly our results exceeded our expectations and our plans.

And we couldn't be more pleased with our team's ability to enhance some of our disciplines, the focus on the customer, and we think our results are reflective of those efforts for a pretty broad time period, because we have been in this tough economy now 18 to 24 months.

And so we look at the third or fourth quarter, what we were most pleased with, is that our team responded quickly and maintained some enhanced disciplines with expenses, but particularly with inventory management.

We were much more fluid and able to flow in new goods.

And the customer was particularly receptive to that freshness and that fashion.

And so I think our challenge going forward is, how do we in business, improve and maintain that flexibility.

Okay.

Thank you.

Thank you.

Our next question is from Neely Tamminga from Piper Jaffray.

Great.

Good afternoon.

And I am going to add my congratulations to those as well for the past year.

Thank you.

So, recent press you guys about the buying organization, it doesn't seem like it is very widespread if it is true, in terms of changes on the buying structure, but just wondering moving a little bit less away from regional, a little bit more to centralized.

Can you just maybe comment on that recent press, and maybe what the, if it is true then what the process change improvement, how that fits in with some of your bigger strategy?

Sure.

This is Pete.

This is something that we have been embarked on for about ten years and we have been really transparent about it all the way along, saying that our goal is not centralization or decentralization.

It is just how can we best leverage information to create a great shopping experience for our customers.

And because we have made a lot of investments in our inventory management systems, and just information systems in general, and consumer insight, we are just in a much better place to be able to be much more efficient about how we buy merchandise.

So we've had a kind of a natural evolution of -- with our structure as related to that.

And I think what you are commenting on, is some regards kind of the last step of a bunch of moves that have been already been made.

A big chunk of the Company is pretty darn centralized anyway.

So it is really not a story, it's just a continued evolution of what started about ten years ago.

Neely, this is Mike.

I want to add one other thing on to that, is keep in mind the effort that the merchant teams have made.

We are investing about $5 billion a year in inventory, and this is just another way for us to get more productivity there.

And it is all about, it is all about the top line and improving the customer experience, and the inventory productivity in the Company.

Thanks, again.

Good luck.

Thanks.

Thank you.

Our next question comes from Charles Grom from JPMorgan.

Thanks.

Good afternoon, just on the comp guidance, just looking back if my math is correct, it looks like the internet business added about or drove almost half comp in the fourth quarter, or about 3.5%.

So, I understand that the element of conservatism -- but if you can maybe just walk us through how you are building up to the 2.4% comp, not from an AUR perspective, but from a full-line Rack and what what you expect from the internet here, in the full-year?

Thanks.

Yes, well, Charles, this is Mike.

Just one point of clarity, it is 2% to 4%, 4% being the higher end of our sales guidance range.

We haven't really broken out how we built this by business.

But suffice it to say, I think our earlier comments to that -- the way we are sharing our expectations for 2010, the way we planned the business.

And consistent with the past, our ability to leverage that plan and to create additional earnings off of what we believe is an appropriate plan and inventory and expense structure, is clearly just how we are approaching it.

You should expect that, if we out perform that, you should expect to see that 25% to 35% leverage on to the bottom line.

So just to kind of close that, there wasn't any -- we are not going share any specific guidance by business, but suffice to say that we believe it is an appropriate plan that will allow us to further leverage our results for next year.

Okay.

And then one more, one more if I could, Mike, just on the second or fourth quarter, GPM performance, can you break down how much of that was cost of goods sold versus occupancy, you said the majority was for merchandising efforts and markdowns?

But can you give us sort of an effect?

Sure On the gross profit?

Yes.

I think it was a 530 basis point improvement, it was roughly 470 to 480 that came from margin, the balance was the leverage on the buying and occupancy.

Okay.

Is there different hurdle rates within SG&A versus the buying and occupancy within COGs or are they similar?

Different hurdle rates, Charles?

In terms of fixed cost hurdle rates.

Well, the buying and occupancy tends to be almost 100%, primarily fixed was with SG&A, 40% of the SG&A is variable.

If that answers your question.

That pretty much does, thanks a lot.

Thank you.

Thank you.

Our next question is from Edward Yruma from Keybanc.

Hi, thanks very much for taking my question.

As it relates to gross margin guidance for the year, I know that you still have a relatively easy comparisons of first half to the year, but obviously gets much tougher as the year progresses.

Does your guidance imply that gross margins actually contract in the back half of the year, and kind of how should we think of that cadence of improvement?

No, Ed, this is Mike.

The gross profit guidance doesn't imply that it contracts in the back half, but it does imply that we are getting more improvement in the front half.

Thank you.

Okay, Ed.

Thank you.

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

Good afternoon, everyone.

Can you talk a little bit about how you are thinking of inventory planning as you progress through the year, given the progress you have made in 2009, how do you see the increases building as you go throughout the year?

Thank you.

Hey, Dana.

This is Pete.

Hi.

One thing that's interesting for us going forward, is that it is kind of like we are in complete new territory given the fact that -- functionality around one view of inventory.

So any historical measurement around turns, is probably a bit understated in terms of what is best for the business.

As you have seen, we have been able to turn business faster, and it has been a good thing for the business on the hole.

So, ultimately, we want to align sales and inventory growth a little bit more.

We've had a bit of a delta there because our business, our sales improved quite a bit during the fourth quarter.

So I think there's some inventory we can add, and I don't think we have to bring it so some level based on our history.

I think you should expect that we will have faster turns, as we go forward, because that's what we are capable of doing now.

Thank you.

Thanks, Dana.

Thank you, and our next question is from Bob Drbul from Barclays.

Hi, good afternoon.

Hi, Bob.

Hi, guys.

The one question that I have is around the sales for the fourth quarter, the full -- could you give us about what the full -- where comp was and sort of what was the average price point relative to the basket, and how much of that was the boot season that really benefited it, and high price side?

This is Pete, I am not going to give a detail about it.

I think it is fair to say our shoe performance is relatively good last year, as you stack up the divisions.

It's been consistently strong.

And it's actually been strong across all price points too, which is super encouraging.

The boot business was good, and that played a factor.

And if you looked at it that way, it would of averaged -- raised average price point some.

But our shoe business is strong, and we still think there is market share that we could gain there.

Okay.

And then if I could follow up on a different topic real quickly, when you look at the 2010 incentive comp plan, is it going be based again on sort of year-over-year EPS and combination of the stock price, or how should we think of that when we look at the guidance that you just gave?

Sure, Bob, this is Mike.

Well, our incentive base, is based on pretax earnings, and it is not on EPS.

And it's certainly going to be based on what we believe is an appropriate growth for the Company that is going to create measurable shareholder value.

In 2009, clearly our expectations were lower because we came off a very difficult year in 2008.

We were fortunate enough to actually generate earnings increases on sales declines.

But as far as 2010 is concerned, we are coming off of a different base with higher momentum, and we expect a better performance from the Company.

And is it on, Mike is it on growth in dollars, is it on growth percentages or dollar amount, in terms of the way that you will be reviewed?

Well, we have dollar -- we have earning dollar targets, that clearly are based on what we believe are the appropriate percentage rate growths of the earnings.

And then those get cascaded through the organization at a sales and margin level, and those are the biggest drivers within the Company.

Thank you.

Our next question is from Maggie Gilliam from Gilliam & Company.

Yes.

One of the things that is getting a little bit muddled with your common platform for your Direct and stores, is what actually is an internet sale?

How are you distinguishing orders placed in the store, and orders placed on the internet and picked up at the store?

Well, Maggie, this is Blake.

And we are blurring those lines.

And we are reporting multi-channel sales, which is full-line store and direct together.

And we have mentioned now on a couple of calls here in the past, that going forward, to just be cautious a little bit, and not just looking at a silo, when looking at the numbers when they're broken out, because we are most concerned about the outcome and the customer, and less interested in which area of our business gets the credit per se.

And so, you and I have talked about how that customer really wants to shop on her terms, seven days a week, 24 hour, and whether that is product knowledge or fashion or what kind of buyer or what kind of return it.

And we have made great progress along those lines, but it is has continued to evolve, which when you look at a individual number won't have the real impact or clarity for us.

So we have to be sensitive to how we incent and how we measure this.

But we think if we can keep it grounded in the customer it really serves us well.

I can understand how it has got to be internally.

But why even break it down when you report externally any more?

Well, there's --

Well -- (multiple speakers).

Mike is asking to respond.

I guess I wanted to chime in, too.

We were talking about that.

And we this last couple l of quarters are starting break it out, both separately and individually, and we're probably moving towards that.

But we want to be sensitive that we're communicating clearly, to all of you, and our shareholders, about the key drivers of our business.

But the best way to monitor and measure our business is from a multi-channel.

Yes, Maggie,this is Mike.

You may have noticed and others may have noticed the last several quarters, we've actually have been showing both Direct and full-line, and showing a combined number because we believe that's where things are going.

But until, until folks fully understand that, I think transparency is probably the key right now, and we will continue to work to educate.

Thanks.

Thank you.

Our next question is from Adrianne Shapira from Goldman Sachs.

Thanks.

I have two questions.

First, Mike as it related to the gross margin projection, the 20 to 60 basis points, can you shed some light in terms of much you expect the improvement to come from merchandise margins versus the buying and occupancy leverage?

And then my second question, related to you expect to end the year with about $300 million of free cash flow, can you give us a sense of what your plans are for that?.

Sure, Adrianne, first in term of next year's gross profit expansion will come from gross margin, we will get some leverage from buying and occupancy, but keep in mind we got some additional square footage that opened the back half of this year, and will open next year.

So that will put a little strain on our ability to leverage that.

And then the -- I'm sorry, the second part of your question was?

Free cash flow, the $300 million?

Yes, thank you, the free cash flow.

We are fortunate that we are in the position where are business is generating some pretty cash flow.

And I think what is appropriate for us as team is to understand what the appropriate capital structure is for our business is for the long term.

Not just next year, but next year and beyond.

Now that being said, we will continue to do what with we have always done, and that is reinvest back in the business, at rates that is continue to deliver value increases for the holder.

And to the extent that we can return excess capital with the shareholder we will.

But we need to continue to evaluate that.

Thank you.

Thank you.

Our next question is from Liz Dunn from Thomas Weisel Partners.

Hi.

Good afternoon, let me add my congratulations.

I guess I just wanted to understand your comp guidance a little bit better.

So when you say it will moderate in the second half, shouldn't it also moderate on more difficult comparisons, just in the second quarter?

So first quarter being the best, and sequentially get a little bit lower from there.

And then does your guidance to date suggest that you are running in line with kind of, if we take two to four, and add 300 basis points, is that where you are running?

Or is there anything else we should understand about February when looking at your guidance?

Thanks.

Sure.

Well, our comments regarding the sales were really generalized to first half/ back half.

And so you are right, if there's a little bit more clarity, by quarter based on what you have said, that's reasonable.

In terms of what we said, it has nothing do with how we are seeing February, or anything like that.

It purely has to do with how we envision the year, and how we plan the year out from an inventory and expense standpoint.

Okay.

So no comments on February sales.

No comments on February.

Okay.

Good try though.

Thank you.

Our final question today is from Richard Jaffe from Stifel Nicolaus.

Thank very much.

Just a quick thought about your marketing efforts and your promotional cadence.

Obviously your best marketing is in your stores by sales people, but wondering as the mix shift, and as the value becomes more evident to the consumer, is there an opportunity to take that out in print, more catalogs, or even television?

And then had, internally, the promotional cadence, the ability to shout sale or value throughout the season?

Well, this is Pete.

I guess I would address that by saying that we are getting back to a more normal rhythm and cadence around the percentage of our regular priced business and off priced business.

It was skewed there pretty heavily for about 12 months or so.

We were going through difficult times, but as we got in the fourth quarter, our regular price business, as a percentage of the total is right back in there with historical levels.

So there would be no reason for us to call out more clearance.

Frankly we don't have more clearance.

We have kept our inventories clean and we don't have a big story to tell around service.

It is a natural part of the business, and it will be back to the natural rhythms that you have grown to expect from us.

And so I think when it comes to marketing, what we want want to be able to do is continue to talk about great style, great fashion, newness, and kind of how it is successful across the breadth of price points that we kind of uniquely serve in our store.

And the marketing effort, just to call out and gain some market share in the department for suits?

Well, this is Blake, Richard.

I think in terms of channels, you mentioned TV, or print, or what have you.

We're definitely evolving, along with that kind of traditional, or more regular percentage costs to our business of how we reach the customer.

Because again, we are focused on the customer and there usings other mediums and other channels.

So the internet for for instance is a very strong acquisition tool, and a tool for us to communicate effectively with our customers.

So over time, that will grow but that thing is evolving and changing, and we are not wedded to any one aspect of marketing.

So, thanks everyone.

Thanks for joining us today on our fourth quarter and 2009 earnings call.

As a reminder, a replay of this call will be available for 90 days on the Investor Relations section of Nordstrom.com under webcasts.

Thanks for your interest in Nordstrom.

Thank you.

And this does conclude today's conference.

Thank you for participating.

You may now disconnect.