諾德斯特龍百貨 (JWN) 2010 Q2 法說會逐字稿

Hello and welcome to the Nordstrom 2010 second quarter conference call.

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

All lines will be on a listen-only mode until the question-and-answer session.

(Operator Instructions).

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

You may begin, sir.

Good afternoon, everyone, and thank you for joining us.

Today's earnings call will last approximately 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 second quarter 2010 performance and outlook for the remainder of 2010.

And now I will turn the call over to Blake.

Thanks, Rob, and good afternoon, everyone.

I wanted to let you know that both Pete and Eric Nordstrom have previous commitments that prevent them from being on this call today, so Mike and I will do our best in our remarks and in the Q&A section to address any questions you may have at this juncture.

On behalf of our team, we feel we had a solid second quarter and the first half of the year has exceeded our expectations.

We're particularly encouraged by our sales results and how the customer is responding to our merchandise and services.

Our merchants continue to strive to have an offering that is compelling with fresh, fashionable goods while also striving to provide a seamless, multi-channel shopping experience.

July typically represents the second highest sales month of the year, reflecting the impact of the Anniversary Sale.

It was a great event overall.

Throughout the event, we offered a quality mix of merchandise with strong brand names at attractive prices that resonated with our customers.

We also benefited from having a shared inventory platform for both our full-line and direct channels, including having more Anniversary Sale items in our direct fulfillment center, which allowed us to better fulfill customer demand.

This helped us achieve an Anniversary event multi-channel same-store sales increase of 9%.

For some time now, we've worked hard to maintain strong disciplines in both inventory management and SG&A.

Some of you may recall that last year at this time we found ourselves slightly below our plans on inventory and we were chasing a few things.

As the first half of the year progressed, our merchants made some adjustments to their inventory plans for the Anniversary Sale that in aggregate was closer to our peak performance from 2007.

So though we had a very good performance with a 9% comp store gain, our actual inventory came in a little higher.

We've been very forthcoming about how critical the content, balance and quantity of our inventory is to our bottom line results.

While we continue to be very disciplined with our overall inventory management, we do recognize there are some pockets that need some adjustments.

We're able to address this very quickly.

On the expense side of the business, Mike will give you some more detailed information in his comments.

I would note that at the beginning of the year we felt it prudent to budget a slightly higher expense level for the year to address some initiatives that we felt were important with our business and our customers.

At the beginning of the year, we gave you our year-end guidance and we still feel good about meeting or beating those plans.

Obviously, one of the big questions is the economy and the overall state of the customer.

From our point of view, we have not seen any change throughout this year, nor do we expect in the foreseeable future a change upward or downward with our customers.

We're fully prepared to continue to operate in that market and feel good about the strengths within our portfolio to take advantage of those opportunities.

We've often shared with you how our customers are choosing those establishments that provide an efficient, seamless multi-channel experience.

For over five years now, we've been behind the scenes investing capital and people towards this.

The Anniversary Sale and the first half of the year are reflective of our ability to respond to the customer in that manner, and their appreciation of this functionality.

We're serving the customer in more ways as a result of our one view of inventory, and able to say yes more often to the customer.

By no means have we arrived or exhausted what needs to be done.

As a matter of fact, we're even more committed to pursuing those initiatives that will continue to allow our Company to operate as the customer expects from us.

We're learning every day new rhythms, approaches and where we should be focusing our resources to best execute.

It's an exciting part of the business.

I want to emphasize again on behalf of our team how encouraged we are, but mindful of the economy, our customers and the challenges we face.

I'd like to now turn it over to Mike and then we look forward to answering your questions.

Thanks, Blake.

And good afternoon, everyone.

Our second quarter performance was a continuation of the positive trends we've seen in our business since last fall.

We experienced a same-store sales increase of 8.4%, resulting in a 37.5% increase in earnings per share compared with the same period in fiscal 2009.

This marks the fourth straight quarter of sales and earnings growth, giving us momentum as we approach the back half of the year.

During the second quarter, we held three of our five annual sales events consisting of the Men's and Women's Half-Yearly sales and the Anniversary Sale.

These events had very good results, reinforcing our efforts to improve the customer experience and merchandise offering.

While we are pleased with this momentum, there are economic factors that remind us to be cautious as we plan the remainder of the year.

Second quarter earnings per diluted share were $0.66, and earnings before interest and taxes, or EBIT, totaled $272 million.

This is an increase of 37.5% in EPS, and an increase of 31.6% in EBIT compared with the same period in 2009.

This increase in earnings per share includes an approximate $0.04 impact due to the reduction of our bad debt reserve.

Total retail sales increased to $2.4 billion, up 12.7%, and same-store sales increased 8.4%.

Multi-channel same-store sales increased 9.9% compared to the same period in fiscal 2009.

Top performing multi-channel merchandise categories were jewelry, dresses and women's shoes.

The top performing regions for our full- line stores were the Midwest and South.

Throughout this past year, we have talked about our business from a multi-channel basis, as opposed to discussing separate full-line and direct business channels.

We are going to continue to focus reporting on a multi-channel basis and will eventually phase out any differentiation between the full-line and the direct channel.

This is how the customer thinks of our brand and it is how we internally think about our business.

Same-store sales in our Rack division declined 0.9%.

While we are disappointed with this result, our Rack continues to be a productive business model and our new stores are performing above plan.

As we increased the focus on procuring the best brands, improving the overall merchandise offering and communicating the value it represents, we are confident this business will continue to grow.

In the second quarter, gross profit as a percentage of net sales increased 133 basis points to 35.2%.

Merchandise margin accounted for the majority of this improvement, along with slight leverage from buying and occupancy cost.

We ended the second quarter with sales per square foot up 8.3%, and inventory per square foot up 8.7%.

Since a peak in sales and inventory per square foot in the second quarter of 2007, our inventory per square foot has declined 16.7%, versus an 11.9% decline in sales per square foot.

Our focus continues to be to improve our turns and ensure our customers are experiencing the most current and fresh offering available.

We have made slight adjustments to our inventory plans and expect to achieve continued improvement in inventory turns over the second half of the year.

Retail SG&A increased $82 million over the same period last year.

Over half of the increase is volume and new store related.

Marketing and information technology account for the next largest component, or approximately $30 million over the same period last year.

As part of our 2010 plans, we have made thoughtful and intentional decisions to invest in certain areas including online marketing, social media, an updated website and infrastructure for improved merchandise allocation and assortment.

These are all long-term investments focused on improving our customers' experience and necessary to connect with customers as their shopping habits continue to evolve.

The remaining portion of the higher retail SG&A expense is reflective of increased fulfillment costs with more items shipped to customers as a result of having a shared inventory platform between our full-line and online stores.

Although we've had this capability since last September, the impact on SG&A was not meaningful until this quarter as a result of increased multi-channel fulfillment activity experienced during the Anniversary Sale.

We expect over time that this activity will moderate as we improve our assortment and allocation tools.

Earnings before interest and taxes, or EBIT, flow-through for the second quarter was 24%, at the low end of our targeted range of 25% to 35%.

We expect flow-through to be below this range for the third quarter while the fourth quarter should significantly improve and will be above the range as we anniversary the increases in both the reserve for bad debt and in performance-related expenses that we incurred in the fourth quarter of last year.

Moving on to credit, we continue to see improving credit metrics.

Second quarter credit card revenue increased $11 million over the same period last year.

Our delinquency rate at the end of the second quarter was 3.5%, down from 4.2% at the end of the first quarter of 2010, and 3.6% at the end of the second quarter of last year.

Write-off dollars decreased $500,000 year-over-year to a rate of 9% of average accounts receivable, which was better than our internal plans.

Payment rates also continued to improve, moving back to normal levels.

As a result of these trends and improved expectations, we are reducing our bad debt reserves by $15 million or approximately 8% of the total reserve balance.

We will continue to closely monitor these metrics and re-evaluate the bad debt reserve as appropriate.

We finished the quarter with an adjusted debt to EBITDAR ratio of 2.4 times.

This is in line with our plans, better than the industry average and well within the range to maintain our investment grade rating.

We ended the second quarter with a cash balance of $1.1 billion and generated year-to-date free cash flow of $162 million.

As we continue to grow our cash balances, we have had ongoing dialogue with our senior Management team and Board regarding our capital structure.

Our historical range of adjusted debt-to-EBITDAR continues to make sense for us, enabling us to maintain an investment grade rating and ensuring that we have sufficient liquidity to weather economic challenges and to take advantage of opportunities that might arise.

We continue to look for opportunities to profitably reinvest in our business.

This, coupled with lingering uncertainty about the macro environment, suggests that holding more cash on our balance sheet than historically has been the case.

We will continue to maintain the right balance and flexibility as it relates to managing our business and creating and returning value to shareholders.

Overall, our second quarter performance was in line with our expectations.

We are maintaining our previous annual guidance range of $2.50 to $2.65, with minor line item adjustments as noted in the earnings release.

We have not reflected any additional reduction of our bad debt reserve in the annual guidance.

Although credit trends continue to improve, it is difficult to project the magnitude and timing of the possible reduction to the reserve, due to the remaining economic uncertainty and the high credit exposure to California.

In closing, we are well-positioned as we approach the second half of the year.

We continue to see improvements in both the top and bottom line and while we don't expect significant market growth in the near-term, we believe we have opportunities to enhance our execution to increase our share of the market.

With that, I'll 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 that you return to the queue.

With that, we'll take the first question.

Thank you.

Our first question today is from Deborah Weinswig from Citigroup.

Thanks so much.

As we look at the back-half of 2010 and into 2011, we hear a lot about inflationary pressures, not only in terms of cost of the garments but also in terms of shipping.

Can you just talk about your outlook?

Hi, Deborah.

Thanks for the question.

This is Mike.

We've been reading the same things.

At this point in time we haven't seen anything that would materially affect our business or our plans going forward.

So we'll continue to monitor it.

But in terms of any adjustment to the back-half of the year or next year, there's nothing material to report.

Okay.

And then a follow-up that has nothing to do with the first question.

Can you just talk about what your plans are and what you're doing in terms of, not only your private label business, but also exclusives as well.

Hi, Deborah.

This is Blake.

We've talked in the past about, from an exclusive point of view, I think we just start with the premise with our merchants to aspire to try to procure the best product that's out there, period, and that's hard enough doing that let alone then trying to find something that's exclusive in nature.

What makes the compelling assortment is that culling or editing process in our lifestyle departments that we think the customer really values.

Certainly our private label division, which we call NPG, Nordstrom Product Group, does, though, represent a point of difference and an exclusive for us and we feel strongly that brands should be our primary focus, but the private label part of the business has been improving.

Our team there is highly integrated with the merchandising team and our full-line and direct channels and we are seeing improvement there, and so we'll allow the customer to give us feedback as to how we will buy and assort that mix.

Thank you.

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

Thank you.

Good afternoon.

Just wanted to ask a quick follow-up on the credit card reserve take-down.

What are the key factors that you're looking for and what should we try to monitor going forward to see how that reserve will trend?

Sure, Lorraine.

This is Mike.

Thanks for the question.

Traditionally, it's the basic forward-looking metrics of the business.

One is delinquencies.

We monitor the 30-plus day delinquencies.

Obviously internally we do that regularly, and from our external trust reports or from our quarterly reports, you can monitor that externally.

The trend in our write-offs in particular, we look at it by segment.

As of right now, what we're focusing on is the continued trends in California as a sign that we think the overall portfolio continues to improve.

But those are the two main ones and then I think a third one that does have an importance but leads to the other two are the payment rates, and one of the good things we are seeing is that our customers are becoming more consistent and paying a higher percentage of their outstanding balances.

All good signs relative to the health of the portfolio.

Thank you.

It looks like you reduced your estimate a little bit for credit card revenues for the year.

Could you just talk a little bit about that?

Yes, we did.

And that is a direct result of the higher payment rates.

We're just seeing lower outstanding balances than we -- than our plans had earlier in the year and as a result, we're earning less credit card revenue off that.

Thank you.

Thank you.

Our next question is from Michelle Clark from Morgan Stanley.

Hey, guys, it's actually Chris Cuomo here filling in for Michelle.

Hey, Chris.

I just wanted to circle back on the inventory question.

I think you had called out pockets that needed adjustment.

I was wondering if you could just give us some color on that, whether it's from a category and/or geographic perspective?

And then looking forward, how should we think about inventory in the back-half of the year on a year-over-year basis?

Chris, this is Blake.

On the inventories, we were -- I was trying to relay that from an aggregate, in total.

But what we did want to share is that it's not material to the point where we think there's going to be adverse impact ie down the road to like markdowns and what have you.

So we think we're addressing this soon, but there were some areas within women's, accessories and others that, in essence, were going back to their peak performance in 2007, and though we had a total good result, they fell a little short of what the inventory plan was.

And so that means some adjustments are taking place.

We've got some great vendor partnerships, so there's some things taking place there.

We have our Rack division, but we don't think that is very material in terms of we already have a natural flow and rhythm there.

We've got some replenishment inventory stocks that were a little heavy that over the next 30, 60 days will get adjusted.

So we just wanted to be as transparent and forthcoming with you that they were slightly higher.

What's driven our business the last two or three years is maintaining a slight open to buy, keeping it fluid and being able to react to the customer.

The key thing today is our inventories are as current as they've ever been, we think they're fresh, we think we're making those adjustments so that 30, 60, 90 days from now we're not in a position we're don't have open to buy and can't respond.

Because clearly in this environment the customer is responding to newness.

Chris, this is Mike on the second half of your question, regarding inventory, the back-half of the year.

We're planning our inventories consistent with how the math would play out on our overall sales for the year.

And that is a very low single-digit sales plan for the back half and that's how our inventories are being planned.

And if I may, just one -- very helpful answer.

If I may, just one quick follow-up.

I think last quarter you had called out momentum within designer categories.

Could you talk about whether or not that momentum in fact continued?

I think what we tried to share last time and I think it would be continued now is that we got a question about price that has been, for the last two or three years with some of the challenges in the economy, is the customer having a pendulum swing with price, and some of the pockets that have really shown some of our biggest gains have been in more the designer areas that are reflective again of fashion and contemporary offerings, and I think that was true throughout the second quarter and especially through the Anniversary.

So it's less about price but it is everything about the total value, and value can be the brand and the quality, value relationship and the sizes and the color and the quality of the fabrication.

Is this product exceeding the customer's expectation?

And when our vendors are able to partner with us on that, We're just getting a very enthusiastic response.

Thank you.

Our next question is from Edward Yruma from KeyBanc.

Hi, thanks very much for taking my question.

You mentioned California within the context of your credit business but I was wondering if you could address maybe that market or just kind of specific regions in general, particularly as it relates to the weakness, I think, that they had been comping below the Company average for some period of time.

Thanks.

Sure, Ed.

This is Mike.

Yes, in terms of the -- from a retail sales perspective, California continues to comp below our multi-channel or our full-line comp store average.

Probably a little softer Southern California than Northern California.

Now that being said, in the aggregate California continues to be one of our stronger geographic regions from a sales productivity standpoint but clearly that's an area where we have a number of metrics, whether it's retail sales or our credit metrics that tell us that that geography and that market is still slowly recovering.

I would add, we're not seeing it decline.

It's improved slightly.

But it's still, as Mike said, below our average and because of its strength or penetration or productivity, it's an important part of the business.

Great.

One follow-up if I may.

I know that you've taken up the number of Racks relative to full-line stores in recent years as the Rack business has grown.

Has the recent performance of the Rack caused you to rethink that ratio?

Thank you.

It's a good question.

With the Rack, we talked about -- have been sensitive to its growth and the relationship with the full-line stores and the product offering mix in it and the integrity of our pricing, and the customer's been very receptive to it and over the last couple of years we've enjoyed some pretty good results.

I think most importantly, that model is a highly productive, efficient, strong model within our portfolio and the growth came about a number of years ago, even prior to this economic slowdown that we felt it was a good use of our shareholders' money.

One of the charms of the Rack is that the lead time on those new stores is very short.

So we're not happy with the fact that in the last 10, 12 months some of our competitors in that group have been slightly ahead of us from a comp store sales gain and then the last four or five months we've been low-single-digit decline.

And so the new stores, as we mentioned in our remarks, are beating the plans.

The comp stores, there are some opportunities.

Generally as these things go, it's a lot of little things.

It's not one thing contributing to it.

Our merchandising team is working on it within the Rack and our leaders there.

And we feel good really about our Rack division and it will continue to be an important part of the deal, but for the foreseeable future what we've announced in our new-store growth we're still very enthusiastic about.

Ed, I would just add one other thing to that.

If you look at the overall sales growth of the Company this year, which is going to be in the range of $850 million to $900 million, roughly a third of that is coming from the Rack.

So Rack continues to be a healthy area for us to continue to consider as a growth opportunity.

Thank you.

Our next question is from Charles Grom from JPMorgan.

Thanks, good afternoon.

Just a couple questions.

On the comp guidance, it implies a pretty big deceleration from what you've been able to do successfully so far in the front-half of the year.

Is this just because of tougher compares from a year ago or are you seeing something in recent trends that has you more guarded?

And then my second question is on SG&A, Mike.

Can you just explain why you're expecting to see less leverage in the third quarter and more leverage in the fourth quarter again?

Thanks.

Sure.

Yes, Charles, in terms of the comp guidance, no, it's nothing about anything we're seeing currently.

We pretty much maintained our expectations that we had in the first and second quarter through the -- where we felt it was at that point is similar to where we feel it is today.

So nothing there currently that would suggest any difference.

In terms of the SG&A, a lot of it relates to the timing of expenses this year but also the timing of expenses last year.

Last year in the back-half of the year, particularly in the fourth quarter, we had an acceleration of bad debt reserve and performance-related expenses that we're not going to have this year so it gives us a lot of year-over-year good news in the fourth quarter, and then in the third quarter we're still seeing some buildup and acceleration this year due to new stores and some of the other investments versus last year.

So it's all -- it's pretty much all about timing.

If you look at our SG&A guidance for the year, where it was at the end of May and where it is now, we're pretty much in the same range.

Okay.

Thanks very much.

You're welcome.

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

Good afternoon.

I've got two questions.

So I'll give you my first one.

I wondered if you could talk about the women's apparel businesses in the aggregate.

It seems like Loretta's made significant progress with her team and I wonder what opportunities you still have in the women's businesses.

Thanks.

Okay, Jennifer.

Hi, this is Blake.

Hi, Blake.

For women's, we talked about a common theme of contemporary and again a newness and freshness.

And, as you said, Loretta and her team have been really working on both the women's apparel strategy and the strategies within each lifestyle department.

And Point of View, which is a very important part for us as for the last, oh, nine months or so, really been contributing, Individualist, just to name a few.

TBD and Savvy have been two that have been underperforming a little bit of late and so we've got some work to do there to get more focused or zeroed in on our customer there.

But I think overall, women's continues to improve and, as you know, we went through a number of years where it was relatively flat or declining and as a percent to our total merchandise offering, wasn't contributing as much.

So Loretta and her team have really turned that around and they've been a lot better on the turn and the flow subject and so they've reduced markdowns greatly.

Their regular priced selling has considerably improved.

Great.

And then I wonder if you could talk about your viral marketing and also when will you be offering a mobile application?

I know that you're redesigning your website and it says there will be new ways to connect.

So I wondered if you could expand on that.

Those are good questions, too, and a good lead-in for our website that we've been working on for about 18 to 24 months, and I believe it's August 21 that we will unveil a new website or evolved website.

The whole subject about mobile technology and social networking, we've been doing a lot of tests in the last 12 months and our technology efforts as a Company for the last 10 years have been really important to adding the tools and the ability to generate these kinds of returns.

I think some of the heavy lifting is starting to get behind us and now the technology efforts will be of the nature that you're describing, and we need to make sure that we're in lockstep with our customer and certainly some of our competition, or at least alternatives or options that our customers have, from whether that's online or a retail outlet like Apple, the customer is starting to utilize some of this functionality and we need to be there.

And so we think we've got the necessary groundwork being laid and we hope over the next 12 months to be able to articulate with you more, kind of our plans and how we will be taking advantage or building on our multi-channel platform.

So we won't see a mobile application in the near-term?

It will be a bit longer?

No, you have the ability right now to utilize some aspects of mobile technology, but to have a full-blown program from Nordstrom, and we talked about apps and other things, you won't be hearing that from us towards year-end about how we will be explicitly, hopefully taking advantage of those opportunities.

Great.

Thank you.

Good luck.

Thank you.

Our next question is from Adrianne Shapira from Goldman Sachs.

Thank you.

Question related to just the comp growth.

I know we've been hearing traffic has been the big driver of comps.

Maybe give us an update there in terms of trends and what you're seeing on-ticket in terms of AUR and perhaps units per transactions.

Thanks.

Adrianne, hi, this is Blake.

We don't have traffic counters in the stores.

We're certainly able to measure that online in other ways.

I don't think we feel like our traffic has gone up or down and that's both some facts and anecdotally.

But we do think we've done a better job with conversion and we think we're selling more units.

Our average unit retail hasn't changed dramatically.

We've talked about for the last year or two that our price points have been down slightly and they're more aligned with the customer purchases.

But there hasn't been any material change in 2010 with average unit retail, but it has been a function of more units.

Great.

Thanks.

And then, Mike, maybe just talk about on the -- on your gross profit expectations, it sounds like there's no change to guidance but obviously in the back-half we're lapping some pretty big improvement from a year ago.

Just help us think about, as we're heading into the back-half and it sounds like a little bit heavy on some pockets of inventory, how we should be thinking about margin opportunity?

Well, I think how we shared it in the guidance is very consistent with how we feel about it.

Last year we had a pretty substantial expansion in our margin.

So far this year, if you look at our plans right now it's pointing to, if not the highest, pretty near the highest margin performance that we've had historically, including in our top years of 2006 and 2007.

So we feel like we've made very good progress there.

With the back-half of the year there's not nearly the opportunity we had in the front-half.

In terms of the comments around the inventory and the pockets there, it really didn't have an impact on our margin expectations.

I think what we were trying to articulate was the fact that we're very sensitive to our overall disciplines around controlling inventories and we recognize there was a little bit of a blip there and we're dealing with it.

But nothing that's having an impact on financial performance.

Thank you.

Our next question is from Neely Tamminga from Piper Jaffray.

Oh, great, thanks.

Hey, Blake, I was just wondering if you could talk a little bit about the planning and allocation efforts that you guys have underway and what we can maybe expect from that from a returns or a lift perspective?

Why one would invest in signing allocations.

Just a very specific follow-up.

You had indicated TBD and Savvy were underperforming a little bit year-to-date and some opportunity to work there.

I guess the question if Pete were on the call would be, it's a very denim-heavy type of department, is it more of a denim cycle trend issue or are there other issues at work?

Thanks.

Okay.

Thanks, Neely.

As you know because we've talked, both on these calls and in different conferences, that at this juncture, that what we think can really add value and provide better service, because it's rooted in having the right item at the right time in the right location, is this allocation tool.

And so we still have a good 18 to 24 months to go internally on that, but those efforts really started some time ago and they're a natural progression of the steps we've been taking the last 10 years.

But the ability to be able to buy it right up front and have less touches, Mike commented briefly about some slightly higher fulfillment cost.

So we're able to, with the ability to find one view of inventory and get the item to the customer, it just might be more expensive or laborious behind the scenes to get them there.

So ideally you would have it in the right spot, whether that's a fulfillment center or a particular store.

And so the allocation tool has the ability to, again, improve our volume, improve service, help our vendor relationships get some more efficient supply chains, help with the amount of touches and reduce markdowns.

So that's something that you're not going to see a huge change in the next year to two, but the work that we're doing behind the scenes should start to, 18, 24 months from now, start to have an impact on our bottom line results.

So, as Mike said, we're starting to come up on some historical highs in margin.

This gives us confidence to continue to build upon that.

Your other question was TBD and Savvy and you're correct, particularly in TBD, that it's been highly weighted to premium denim.

We still have a very strong and robust premium denim business.

I think on average, it was mentioned earlier about AUR, those price points are down a little bit.

That's probably more acute than other areas of the business.

We still have a good denim business.

But we do think in TBD and Savvy that the bottom business needs to be expanded just beyond denim, which I think our team is doing.

But there's a lot of things in there that need some adjustment.

We don't think they're wholesale but our her merchants are aware of it.

They're close to their customers and those results should hopefully improve down the road with those initiatives.

Great.

Thank you.

Thank you.

Our next question is from Wayne Hood from BMO Capital.

Yes, Blake and Mike.

On the Rack division, given the compares that you're up against and the recent trend, would make it look like things may get worse before they get a little bit better; comps could be down 3% to 5%.

Should we be thinking that until you're able to get better inventory in those stores, or just kind of set up some expectations around the back-half of the year as we come into those difficult compares for Rack.

Thanks, Wayne.

On the Rack, it's certainly not a quantity subject.

Again, we enjoy good vendor partnerships and relationships and we have fairly good access to inventory and we haven't had a problem filling our stores, but it's always been to us, and I think it's probably more acute now, about having the most sought-after goods, and are we getting first crack at it and those supplies of that inventory, we're trying to watch our markdowns and our inventory risk and improve our flow and so are vendors, as well.

And so we think we're in a position, though, compared to some of the other alternatives out there, at least to be able to have the first opportunity to look at that merchandise.

We are anniversarying some tougher numbers but that is true of the full-line stores, too.

They have an opportunity just like full-line to work on the amount of units we're selling and maximizing share of wallet with each customer.

We don't have a crystal ball on that, your notion of 3% to 5% but it has been in the 1% or 2% down the last four or five months, and obviously we're hopeful over time that we get back on the plus side, because this thing works when we're having increases.

And for a long duration, having comp store declines really makes it difficult.

The positive, though, of the Rack is these are very high sales-per-square-foot, high productivity stores and they still provide a very good return for us.

Do you think, Blake, kind of related to this, it's going to require more human resources or more dedicated human resources capital to it to make sure you don't disappoint the customer, you can't absorb the growth and digest all of this.

It's not a human resource subject.

As a matter of fact, that was one of the things we were excited about is that we could leverage this foundation with scale a little bit.

There's a variable cost with the stores on the floor but the back of the house, buying and merchandising, for the most part, it's lean, being a Rack operation, doesn't need to have much of a change.

I think the opportunity is Geevy Thomas and the team that oversee the Rack are working closely with Pete and our general merchandise managers, that we're One voice in the marketplace and that across all channels that we're becoming the avenue of choice for our key vendors and we've made tremendous progress over the last couple years, which is demonstrating results with these vendors.

We just think there's continued more opportunities there and so we're going to keep working on that.

That's in our control.

It's encouraging for us to have the new stores being received so well.

So the model's strong but when the day's done, comps are a damn important measurement.

Thanks, Blake.

Our next question is from Richard Jaffe from Stifel Nicolaus.

Thanks very much and a follow-on question, I guess given the importance of comps and the inventory position where it is today.

Do you have an internal inventory turnover goal and how does that jive with driving top line with continuing comp momentum?

Richard, this is Mike.

Yes, we do have -- we measure our inventory productivity not only with turn but with Jim Roy, which is something I know you're familiar with as well, and yes, we do have targets for those.

Even though our inventories were slightly up this quarter, we still did have an improvement in turn year-over-year, although it was slightly below our internal plans.

So that's the reason we are concerned because we expected even better improvement, and going into the back-half of the year and going into next year, we continue to expect low-single-digit improvements in our turn.

So should we assume that your internal goal would be to grow sales faster than inventory?

That's always the internal goal.

It's a good one.

Just wanted to confirm.

Our next question is from Bob Drbul from Barclays.

Good afternoon.

The question that I have is, you talked about some of encouraging new store results, mainly on the Rack.

Could you talk a little about the New York store and what you've learned there so far since the opening, and ultimately when you look at the back-half of the year, I guess in both full-line and in the Rack stores, what are the biggest drivers that you see from like a category basis that is most encouraging that we should be looking for?

Hey, Bob, this is Blake.

On the Manhattan Rack location ,which is there in union square, we're very pleased with that store.

We've learned a lot so far.

We were really encouraged at the opening with the quality of people that we were able to attract as part of our team and they're far exceeding our expectations so far.

We've got a great team there, led by Leanne Herman, our store manager.

I think we probably -- this is minor -- but are guilty of sitting here in Seattle and maybe not planning it as accurately as we could because we underestimate the summer in Manhattan and what that does to some of the rhythm of the business.

It's a little bit different than the other stores in terms of the flow.

But for -- what we've seen so far and what our year end goals are, it's been terrific.

We've learned a lot about supply chains and how to flow the goods in because we don't have the same amount of stock space as we do in some of our other stores.

But the customers have been terrific so far and we're really encouraged by it.

Your other question was the second half of the year, I believe, you wanted me to -- oh, on categories , what would drive the business.

We're going against, which we talked about here, some improvement.

So we think it's less about one area having a dramatic impact and how does it across the board everyone contribute low-single digits to combine to an aggregate total to reach our goals.

And so we think there's opportunities across the board.

No question the thing that we're anniversarying last year around September was when we literally threw the switch with our one view of inventory from our direct business.

So for the customer and our team to be able to look at all the stores together and that really helped our comps towards the end of the third quarter and fourth quarter so we're going against that.

But we've learned a lot since then.

So I think what I tried to say in my remarks is on this multi channel platform, there's new things about the business every day, and in merchandising there's new approaches and tools.

And so I just think we've by no means we've exhausted the opportunities we have, and we still continue to believe it's less about what are we going to do next and how are we going to edit and stay focused and improve our

Great.

Thank you.

Thank you.

Our final question is from Erika Maschmeyer from Robert W.

Baird.

Hi.

Thanks.

Good afternoon.

Good afternoon.

Hi, Erica.

Could you talk about your recent learnings from your credit card in terms of customer spending behavior at Nordstrom versus other retailers?

Well, I can -- Erica, this is Mike.

I can comment more about our customers' behavior with our business versus others.

Interestingly enough, as you may know, we've got a -- we've had an enhanced fashion rewards program now for about three years and through the three major events of the second quarter, we saw continued increase in the amount of volume that we were seeing with our fashion reward customers at a pace faster than the average of all other customers.

So we continue to have a very, very high loyalty base with our credit card holders.

We -- interestingly enough, during a period like this, our new account openings have been -- continued to grow.

We're seeing a lot of customers that are attracted not only to the offer of our credit card but to solidifying their relationship with our retail business and as a result we're seeing more and more accounts opened.

The overall quality of the opening and the portfolio from a FICO score basis continues to improve, and so we're seeing what we believe are positive trends in terms of the quality of our portfolio and our ability to continue to create a great experience with our customers.

That's interesting.

Thanks.

Thanks, Erica.

Thank you.

I'll turn the call back to Rob for closing remarks.

Thank you for joining us today for our second quarter earnings call.

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

Thanks for your interest in Nordstrom.

Thank you.

This does conclude today's conference.

Thank you for participating.

You may now disconnect.