諾德斯特龍百貨 (JWN) 2010 Q3 法說會逐字稿

Hello, and welcome to the Nordstrom 2010 third quarter conference call.

At the request of Nordstrom, today's conference 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 third quarter 2010 performance and outlook for 2010.

Joining us for the Q&A are Pete Nordstrom, President of Merchandising; and Erik Nordstrom, President of Stores.

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

Thank you, Rob.

On behalf of the team here we're pleased to report on our results.

We had a very solid third quarter and our performance is a continuation of our improving trend over roughly the past two years.

October marked our 13th consecutive month of total Company comp store gains.

We now are approaching or exceeding some of our best performances on a number of key metrics, including inventory turn, gross profit, and regular-priced selling.

This is a real testament to our merchandising teams and their ability to execute during challenging times.

Additionally, our customers continue to respond favorably to our ongoing pursuit of a more seamless shopping experience.

These efforts are giving the customer the ability to shop with us on their terms, regardless of channel.

I did want to take a moment to emphasize our inventory management.

During our August conference call, I pointed out that we were slightly over and had some pockets within merchandising divisions that we felt needed addressing.

Our general merchandise managers and their teams responded immediately and worked through this in a thoughtful and measured way.

As a result of their efforts, here we are one quarter later back in our desired position of sales growth exceeding inventory growth.

We're encouraged by how our rigor and focus on inventory management gives us the flexibility to respond to the customer appropriately.

Our customers are highly receptive to newness and fashion in spite of the soft economic climate.

We will continue to maintain and pursue this strategy of improving turns, which allows us to flow in new, compelling product for our customers.

During the third quarter, our Rack division opened nine new stores.

Each of these stores opened strong, and we've been receiving considerable positive feedback from customers in those communities.

Just this last week, we opened our 17th and final Rack for 2010 in Peoria, Arizona, bringing us to 86 Racks.

These are highly productive stores and deliver sales per square foot that are more than double that of our competitor's average.

Additionally, the return on this investment is one of the best we have as a Company.

As investors, you should know that we are confident about the gains we are making with market share and new customers overall through the Rack.

We recognize that for the third quarter we had a 2.2% comp store decrease in the Rack.

There are a number of things we're working on to address this, but the overall picture of the Rack is a positive one.

While we're seeing some sales transfer with our new stores, they are helping us achieve more total sales.

Comp store sales performance is an important metric but we view the Rack in a larger context and we like our prospects here.

We believe in Rack store growth and expect to open 16 to 18 additional Rack stores in 2011.

We're encouraged by our performance overall and outlook for the balance of this year and as we enter 2011.

We think we're in a strong position given the relationship we have with our customers, our people, our financial strength, our capabilities within IT, our supply chain, and the team's consistent demonstration of strong discipline across inventory and expense management.

We recognize we have opportunities to further grow the business.

We want you to know that we're looking at growth in a broader sense given our strengths and our commitment to be a customer-centric organization.

We have many doors open to us, and we will keep you apprised of our progress as we have updates to share.

We've proven that if we stay focused on our customer strategy and our ongoing efforts to improve service we can earn more of our customer's business and gain market share.

Mike will now give some more insight on our results and then we look forward to answering any questions you have.

Thanks, Blake and good afternoon, everyone.

As Blake discussed, we are pleased with our results for the third quarter in which we continued our momentum from the first half of the year and maintained focus on the fundamentals of our business.

This resulted in the fifth straight quarter of same-store sales and earnings growth.

While we continue to focus on growing our business, we believe there is still some uncertainty in the current economic environment and we do not anticipate any meaningful change in overall consumer spending over the near term.

Third quarter earnings per diluted share were $0.53, and earnings before interest and taxes, or EBIT, totaled $221 million.

This is an increase of 39.5% in diluted earnings per share, and an increase of 29.3% in EBIT compared with the same period in 2009.

Total retail sales increased to $2.1 billion, up 11.7% and same-store sales increased 5.8%.

Multi-channel same-store sales increased 7.3% compared with the same period in fiscal 2009.

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

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

Total Rack store sales increased 17.9%, and same-store sales declined 2.2% during the quarter.

This business continues to be a key part of our growth strategy.

Our new store openings have been strong.

Our market share is expanding.

And our investment in this business generates some of our highest returns.

In the third quarter, gross profit as a percentage of net sales increased approximately 100 basis points to 36.2%.

Over half of this improvement was driven by merchandise margin with the remainder attributable to leverage from buying and occupancy costs.

Our continued improvement in merchandise margin is a reflection of our ability to sell merchandise at regular price.

Our regular-priced sell-through rate for the third quarter is nearing historical highs, and we believe we have continued opportunities to improve this.

We ended the quarter in a good inventory position.

Total sales per square foot, up 6.5%, grew faster than inventory per square foot with an increase of 4.5%.

This is an improvement over last quarter where inventory growth slightly outpaced sales growth.

The content and age of inventory at the category levels are improved over last year, and we continue to carefully monitor overall inventory commitments as we transition to tougher sales comparisons.

Entering the upcoming holiday season, we believe we are in a good position and are confident that we can end 2010 with our highest inventory turn to date.

This would represent over five years of improving trends.

Retail SG&A increased $69 million over the same period last year.

New stores and volume growth accounted for the majority of this increase with the remainder coming primarily from increased investments in online marketing and technology.

An example of the increase in technology would be the addition of Wi-Fi capabilities in our stores.

Having this technology in place gives us the flexibility to further enhance the customer in-store experience.

These investments reflect our intention to be well-positioned as the definition of service and experience continues to evolve.

Other non-customer facing expenses were at or below our internal plans.

EBIT totaled $221 million for the quarter, which represents a 29.3% increase over last year.

For the past few years, we have been prudent in our SG&A spending.

As our overall business has improved, we have made targeted investments in certain areas where we believe there will be long-term benefit.

As a result, our EBIT flow-through for the third quarter was 23%, slightly below our targeted range.

Our flow-through for the year is still expected to be within our targeted range of 25% to 35%.

I now want to discuss some of the recent trends that we have seen in consumer credit behavior.

We have been experiencing six months of improving credit card trends.

The key driver in this change has been the substantial increase in customer payments relative to outstanding balances.

This ratio is back to pre-recession levels.

This has resulted in continued improvement in delinquency rates and write-offs.

The one offset to this good news is that the acceleration of payment rates has reduced balances and, thus, we are realizing lower than planned finance charge revenue.

This business is back on track as we continue to open high quality accounts at record levels as we believe our cards provide a good service and value to our customers.

That said, our third quarter credit card revenue was relatively flat compared to the same period last year.

Delinquency rate at the end of the third quarter was 3.5%, flat to the second quarter of 2010, and down from 4.9% at the end of the third quarter of last year.

Write-off dollars decreased $7 million year-over-year to a rate of 8.2% of average accounts receivable which was better than last year and our internal plans.

As a result of these continued positive trends and improved expectations, we are, as we did in the second quarter, reducing our bad debt reserves by $15 million, or approximately 9% of the total reserve balance.

We will continue to monitor these trends closely and make adjustments to our bad debt reserve as appropriate.

The improvement to the credit business had a net impact on third quarter earnings per share of roughly $0.01 relative to our expectations.

This reflects lower than anticipated credit card revenue as payment rates improved, which was more than offset by a reduction in our reserve for bad debt.

We finished the quarter with an adjusted debt-to-EBITDA ratio of 2.3 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 third quarter with a cash balance of $1 billion and generated year-to-year free cash flow of $86 million.

During the third quarter, we repurchased approximately 900 shares at an average price of approximately $35 for a total of $31 million.

The remaining balance on our current authorization is $469 million.

Last quarter we spoke about holding larger cash balances than we have historically, reflecting both lingering economic uncertainty and a desire to maintain a certain amount of flexibility in managing our business.

This continues to be the case as we strive to achieve the right balance of investing profitably in the business and returning value to shareholders.

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

Given the current results, we are updating our annual guidance from a range of $2.50 to $2.65 to a range of $2.60 to $2.65.

We believe we are well positioned on many fronts.

Our execution has been solid, reflected in five quarters of earnings improvement despite the tough environment.

We have financial flexibility and are growing our store base, remodeling existing stores and funding growth where we see opportunity.

In addition, we continue to invest in new ways to drive efficiencies and involve how we serve customers, in order to provide an outstanding customer experience however and whenever our customers choose to shop with us.

With that, I'll now turn the call back to Rob.

Thank you, Mike.

Just one correction.

During the third quarter, we repurchased approximately 900,000 shares at an average price of approximately $35 for a total of $31 million.

So, 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 is from Ed Yruma from Keybanc.

Hi, thanks very much, and congratulations on a good quarter.

Thanks, Ed.

You addressed Rack and you spoke a little bit about the comps being somewhat on the weak side.

Can you talk about the steps you're taking to stabilize the comp and/or produce a positive a positive comp for 2011?

Ed, this is Blake.

I tried to, and Mike did as well, give a little more context about our Rack business because we're sensitive to that.

We're focused and obviously intent on trying to have comp store gains.

But we think overall when we look at the numbers the amount of new customers that are participating within the Rack division and the amount of volume we're doing and share of our core and aspirational customers, we really feel it's a positive thing and they're very productive stores.

So there's been some transfer business and so there are some initiatives taking place within the Rack division to address the comp store declines of late.

But they're small in nature and we think in aggregate over time we're confident that we'll get back on the plus side.

Great.

Thank you.

Thanks, Ed.

Thank you.

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

Good afternoon.

And let me add my congratulations as well.

Thank you, Jennifer.

Thanks, Jennifer.

I wondered what kind of reaction you had to the testing of the Rack Online and then my second question is can you give us an update on the progress that you've made with t.b.d and Savvy?

I know that's been a little bit tougher than the rest of the business and I'm just curious to know how that's progressing?

Thank you.

Hi, Jennifer.

This is Blake.

I'll take the first on the Rack and then Pete will follow up on the merchandising question.

On the Rack we did start a couple weeks ago with the functionality of having Rack Online with some clearance product.

It's not all SKUs.

It's a limited step and so, so far we've gotten really good feedback from the customers but it's early and again, it's a narrow view of it.

We felt it was important to try to address what the customers were asking for in terms of clearance or sale product online and, again, this is a first step, we hope amongst many to add to that functionality.

So I'll turn it over to Pete.

Hi, Jennifer.

In terms of t.b.d and Savvy, that's true that that segment of our business, if you look at the total year, has been not quite up to par with what we've been doing in women's apparel in general, but I would say in the latter part of the third quarter we started having better results in t.b.d in particular and we're running increases there now.

A big part of what's helped us there is I think we've got a better balance of tops and bottoms and a third piece was the sweater or jacket and also NPG has performed for us really well in that department.

Savvy, we still have a little way to go but what's encouraging there is it tends to turn pretty fast and we have a chance to react when we have an opportunity.

The business is on the right track and moving in the right direction.

Great.

Thank you and good luck.

Thank you.

Thank you.

Our next question is from Deborah Weinswig from Citi.

Great.

Thanks so much and congratulations on a great quarter.

Thanks, Deborah.

Mike, on the SG&A front, can you please provide more details around the increased investment in marketing and technology?

Well, Deborah, I think the story's been pretty consistent over the last couple quarters.

We made a commitment this year to accelerate some of the work we would be doing in technology and that would include things like the upgrade to the website.

We just indicated in my notes that we put Wi-Fi in the stores.

In addition, we continue to on, our forward progress on our planning, our assortment and allocation planning tools.

So those are examples of a few things we've accelerated.

In terms of marketing, most of the additional spend has been in the online marketing world.

Just so we continue to reach out to more customers on the Internet and build our customer base through that vehicle.

Great.

An then on the gross margin front, what are you doing in terms of reducing your buying and occupancy cost?

What are we doing to reduce it?

Well, right now the buying and occupancy cost has been growing because we're adding square footage.

That's been the biggest factor to date.

What's primarily in that number is the four-wall real estate costs and our actual buying and merchandising costs.

Both those areas are not areas that are necessarily reducing right now.

Thank you.

Our next question is from Lorraine Hutchinson from Bank of America-Merrill Lynch.

Thank you.

Good afternoon.

In the gross margin discussion you were talking about improving your regular-priced sell-through at two or above historical highs.

Can you just give us a little bit more detail on programs or, I guess, how you're planning to do this?

This is Pete.

I think mostly it's just in reaction to what customers want to buy from us.

It's pretty simple, actually.

What really seems to continue to drive our business is when we have flow of new product that comes in and also we're more efficient with our inventory levels so we tend to have less clearance than we used to.

So the regular-priced merchandise really kind of becomes the star of our whole merchandising strategy and customers responded great to that so we're just going to keep going with it.

Great.

Thank you.

Thanks, Lorraine.

Thank you.

Next question is from Adrianne Shapira from Goldman Sachs.

Thanks.

Mike, a question.

If we think about the updated 6% comp for the year, and we try and back into the outlook for the fourth quarter, we come up with flat comps.

Are we thinking about that right?

And that would seem to suggest a pretty dramatic deceleration.

Is that just conservatism on your part or help us think about flat comps for the fourth quarter?

Sure, Adrianne.

Well, the sales guidance does imply a flat to slightly up comp and the way we've thought about that is if you look at the first two quarters of the year on a two-year basis, we were down roughly 1% to 2%.

In the third quarter, we were up roughly 4% to 5% and with a flat to slightly up in the fourth quarter on a two-year basis, that's almost a 7% to 9%.

So we're showing accelerated growth on a two-year basis throughout the year and I think based on what we're seeing today and how we believe it's appropriate to run our business, we think that's the right way to plan it for the fourth quarter.

And, of course, if we outperform those plan levels, you can track us month-to-month, you should expect us to get additional earnings.

Okay.

Just a follow-up on that.

If the flat to low-singles does seem conservative, how then should we be thinking about SG&A?

You talked about the flow-through, 25% to 35% is the right way to think about for the year.

But how do we think about it for the fourth quarter?

Yes, you'll see our EBIT flow-through within that 25% to 35% range for the quarter.

It should be on the high end of that.

Thank you.

Our next question is from Liz Dunn from FBR.

Hi.

Good afternoon.

Just to follow up on the SG&A question, as I look at your prior guidance on SG&A, it does look like you're tweaking up SG&A guidance by about $10 million versus the high end of your previous.

But all the other metrics seem to be sort of just in line with the high end of your previous guidance, so previously the high end was a 6% comp.

You're expecting that previously.

The EPS guidance, you're kind of at the high end of that now.

Right.

Can you sort of help us think about -- I understand volumes have been better but what else is happening in the SG&A that was not maybe anticipated last quarter?

Well, most of the difference in the SG&A versus last quarter, to your point, is the fact that we've achieved a high end of our sales results and most of that's volume related.

The only component of SG&A and I think we pointed it out last quarter is that it's been growing faster than we anticipated earlier, is the fulfillment cost because as we've done the store fulfill, we've seen that our shipping costs are a little higher because that activity is higher than we expected.

But in general everything else is pretty much in line with what we thought other than volume-related activity.

Okay, great.

Thanks.

Good luck for the holiday.

Thank you.

Thank you.

Our next question is from Bob Drbul from Barclays Capital.

Hi.

Good afternoon.

I guess the question that I have is on the merchandising side.

As you go into the fourth quarter, given some of the trends, can you talk about some of the trends in outerwear and how that's been performing for you as well as how you're sort of comping the boot numbers from last year as well?

This is Pete.

I'll start with the boot numbers.

Actually, it's been good.

It was a really strong boot year last year and our buyers were confident in what they saw for this season and we went for it again and it's playing out well so far.

I think what's particularly positive about that, it's not necessarily been because the weather has cooperated either.

It's just the fashion trend lends itself well to the boots and we're selling them across the country regardless of weather.

In terms of outerwear, we're in the same boat as everybody else, waiting for some of those weather issues to turn and that's happened obviously in the last few weeks.

So we anticipate that we're going to have a good outerwear fourth quarter.

We're prepared for it, that's for sure.

Great.

And then just a question on the incentive comp, Mike.

How should we think about that sort of within the guidance and sort of where you are for the fourth quarter and how you're planned?

Sure.

Well, for the entire year on a dollar basis, the incentive comp should be roughly where it was last year and what's impacting -- a big piece of impact in the positive flow-through in the fourth quarter is the fact that last year we had to accelerate our accrual for incentive comps because of our performance, whereas this year we're much more evenly accrued in the fourth quarter.

We're actually going to get expense benefit this year over last year.

Thank you.

All right, Bob, thanks.

Thank you.

Our next question is from Neely Tamminga from Piper Jaffray.

Hi, great, good afternoon.

Just a question for you guys on the technology.

Obviously, you guys have been really leapfrogging your competition with respect to some of the technology investments and just wondering -- we've noticed that you've picked up some brands in prestige beauty that were sold by other competitors a year ago.

Just wondering if there's other brands that are also captivated by some of the technologies that you guys are offering and if that's opening up some additional opportunities and discussions?

This is Pete.

I think it's a real fluid situation.

I think as we continue to demonstrate that we're good at this part of the business and there's a lot of customer demand there, then the opportunities come our way.

There's really nothing like just the results of what we have to help compel others to sell us.

I don't have anything specific to announce there, but we talk about this all the time, our efforts to be able to describe our capabilities on the online and multi-channel world and how our customers really like that.

And we've got a pretty good story to tell and we find that most vendors are very receptive to it.

Great.

Good luck, you guys.

Thank you.

Thank you.

Our next question is from Wayne Hood from BMO Capital.

Yes, Mike.

Just on the credit side, just looking at the metrics there, it looked like the net interest margin was slipping a little bit sequentially into the third quarter.

And can you comment what is behind that and is that something that's going to continue to slip as we go forward?

And the second question related to credit was, it looks like in the last two quarters you're provisioning less than you're writing off and typically you would want to provision at least one times last 12 months write-offs.

I know delinquencies are improving but historically you've been one times or even greater.

Do you still feel comfortable at reserving at that level?

Yes, Wayne, thanks.

First, on the net interest, I think what you're seeing there was the comment that we made in that our finance charge revenue has been falling off because our balances on a gross basis are actually less than last year.

The payment rates have been a lot better.

The performance by the consumer's been better and so we're -- our yields are roughly the same but we just have less balance that we're earning on it, and that's mostly what you're seeing there.

In terms of the provision, I think what you're seeing with the reduced provision is that's the net impact of reducing the reserve that's included in that provision number.

And so, yes, we're very comfortable with what we've been doing.

Our reserves had been as high as $190 million, and I think they're down to $160 million now.

And that's a result of what we're seeing going forward, and if you look at our -- when we look at our weekly and monthly and quarterly write-off rates it certainly is very supportive of what we've done to date and if the trends should continue the way they are, most likely we'll be looking at that again.

Okay.

Just a follow-up on that.

So should we be thinking about the net interest margin continuing to slip maybe below 15% on annualized basis and write-offs maybe being $45 million in the fourth quarter just to help us to look forward?

Yes.

In terms of the interest margin, Wayne, I'm not going to really comment as to where I think what direction that's going.

Clearly, it's not at an accelerating level and we're learning as we move forward on that based on where the customer's paying.

In terms of that write-off level, that's pretty much in the ballpark, what you said.

All right.

Thanks, Mike.

Okay, Wayne, thanks for your question.

Thank you.

Our next question is from Michael Exstein from Credit Suisse.

Good afternoon, gentlemen.

Two questions.

One is can you talk about the buyback?

You sounded very enthusiastic about the buyback and then didn't execute very much in the quarter.

And then, secondly, can you talk about the press announcements in New York about a second store here?

Thanks.

Sure, Michael.

This is Mike.

I'll take the first part of that.

You're right, when we originally announced the share buyback, we thought it was another leg in our strategy to try to manage our capital and we had set out a 10b5-1 plan early in the quarter and based on the share price performance that's how the 10b5-1 plan performed.

We'll re-evaluate this quarter in going forward and we still believe strongly in that program and we'll execute accordingly.

And then, Pete, you want talk about New York?

Yes, in terms of the second store, what exactly are you referring to?

The published reports in New York that you picked up a temporary store with an option to renew down in Soho.

Oh, yes.

Okay.

Yes, that's kind of a unique one-off for us.

It's 350 West Broadway.

It's an 11,000-square-foot space and our intention there is to do something that is really completely independent of Nordstrom.

Obviously, it's going to be retailing but we haven't worked out the details of our merchandising strategy yet other than we know that we're going to -- it's going to be based on kind of a charitable aspect in that we'll give all profits to charity in that store.

And what we're hoping is that, first of all, we get a chance to have more exposure in the biggest market in the US, in New York, and be able to learn some stuff in anticipation of hopefully having a full line store there some day and being able to get in touch with that customer in more of a grass roots way by having a small store that's much more nimble and just different from what we might want to do here.

So there's a lot of learnings to be had and we're excited about it.

As we get more information, we certainly will share it with you.

Is it going to be a Nordstrom-branded store?

No.

Then how does it lay the groundwork for something bigger?

Mostly through our learnings.

I think people already know that we're attached to it.

It's been in all the press.

I don't think it's going to be a huge secret that Nordstrom is attached to this but we're not trying to leverage that in terms of what we're selling there and how we're doing business.

We're trying to set it up completely independently.

It's one of those things where I think we get a chance just to learn just by how the customer activity works and maybe trying some categories that we don't do a lot of here now currently.

It gives us that kind of flexibility.

And our next question is from Richard Jaffe from Stifel.

Thanks very much.

Obviously, I'm curious about New York on both levels, the charity store and your hopes for a flagship here.

Any update on the flagship?

This is Pete.

No, we have no update for that.

And if could you just clarify, the charity store will have no identifying Nordstrom but it will sell full priced new merchandise, is that correct?

It will sell full priced merchandise and, no, it will not have any obvious attachment to Nordstrom.

And what will it be called?

We have not announced that yet.

Okay.

Richard's is available if you'd like it.

(laughter)

Got it.

I got that one.

Okay.

Thank you.

(laughter) Thanks, Richard.

Thank you.

Our next question is from David Glick from Buckingham Research.

That's tough to follow.

Hi, David.

How you doing?

Good.

Just a question for Pete on the input costs.

You guys were pretty clear about spring of 2011 really seeing virtually no impact from your vendors.

I know your private brand penetration is, on a relative basis, low.

But as you start to conceptualize fall 2011 and talk to your vendor partners, obviously, the environment's a little bit different the last couple months and it's been a huge topic.

And you guys are less impacted than others, but probably still impacted.

Just wondering what your perspective is and what your strategy would be as you face higher product costs?

It's a great question.

It's a dynamic subject and it's something that we're paying a lot closer attention to, particularly since through our own product division we've got a lot of firsthand knowledge of how that's all working.

So in that part of our business, we're really exploring different alternatives on how we can source and make product so that we can continue to deliver the best value possible.

But ultimately, if prices go up on the wholesale side, our retail prices will probably go up to follow.

We don't have some type of strategy to hold prices flat regardless of what the cost of goods are.

That's not where we are.

But I think ultimately, and we've demonstrated this in the past, is we're going to be responsive to what our customers want to do and how they perceive value.

What kind of increase are you seeing preliminarily for fall?

Is it 10%, is it 5%, 15%?

I know it obviously varies by category.

But is there a sense that you can give us on what the early signs are?

Yes, I'd say the early signs really aren't really worth mentioning.

It's pretty negligible.

It certainly isn't anything like you described in terms of those larger percentages, at least at this point.

David, in addition, we're going to do all we can from a sourcing and operations side to mitigate any risk there as well.

So it's tough to call on any kind of specific number right now.

Thank you.

Our next question is from Ken Stumphauzer from Sterne, Agee.

Good afternoon, everyone.

Mike, just a question for you on SG&A.

To a certain degree, just given the acceleration of investments this year, you kind of underearned from an EPS standpoint, so I'm curious when you look at next year whether you feel like the acceleration of the expenses might have kind of lowered the comp hurdle in 2011?

Well, first, we feel like our performance and the earnings was what we expected and I think pretty respectable.

I guess we didn't feel like we kind underearned.

But as far as next year, we're in the middle of doing our plans as we speak and we're going to evaluate what our investments were this year and what investments we want to make next year, as well as what we expect to deliver in overall earnings growth, and we'll talk to you a little bit more about that in February.

Okay.

Thanks, guys.

Okay.

Thanks.

Thank you.

Our next question is from Charles Grom from JPMorgan.

Thanks.

Good afternoon.

Just a question, again, on the pricing and sourcing.

I'm wondering, Blake or Pete, if you could just discuss where you think you have greater pricing power within your chain, either at the full line or at the Rack stores, presuming you are going to see higher costs in the back half of next year?

I don't know exactly what you mean by pricing power, but I think in terms of pricing flexibility in terms of how we respond to costs, I would say the Rack probably has more flexibility that way.

I don't know, Blake, if you have anything you want to add there?

No, I mean, as we get larger there's a little more scale but in that arena, the prices -- the competition -- competitive forces dictate what the price is, especially from a clearance point of view.

I do think, and it was mentioned earlier in the question, about spring of 2011 and we commented earlier when we were asked that we didn't see anything at that point.

There is some minor pockets for the back half of the year in 2011.

As Pete said, we'll respond accordingly and go from there, but there hasn't been anything to the degree that we're reading or hearing about that some others have been talking about, so we haven't called it out as being material or that are going to affect our margins.

Okay.

And then a follow-up for me is just within the -- for Mike, within the fourth quarter guidance of flat to up a little bit, how should we think about the Internet comps, particularly as we cycle some pretty strong numbers from last year?

Probably closer to the high-single-digit range, high-single to low-double-digit.

For total Internet?

Yes.

Okay.

Great.

Thanks.

Okay.

Thank you.

Thank you.

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

Good afternoon, everyone.

Hi, Dana.

Hi.

Can you talk a little about the credit card customer, what you're seeing there in terms of frequency of usage and new sign-ups, especially since more customers are paying off their balances quicker?

Sure, Dana.

This is Mike.

Well, like we mentioned in our comments, we're opening new accounts at a rate as high as we've ever opened them, and clearly these are high quality accounts.

We believe that that's a result of the way we've run our business and the value of our credit card and the benefits that are associated with it.

In terms of the general behavior, I think as has been consistent with the economy as a whole, they is a deleveraging going on and I think people are being a little bit more cautious about carrying high balances, so they're much more prudent about keeping them down.

For us it's a good thing because we like the idea that our customers maintain an open to spend rather than revolve and pay high finance charge rates.

So we're feeling good about the trend there.

And we're feeling very good about some of the new customers that have picked up our card.

Is the average transaction higher also?

The average transaction on our credit card is roughly the same.

(Operator Instructions) And our next question is from Deborah Weinswig from Citi.

Great.

So you had talked about looking at growth in a broader sense.

I didn't know if that meant looking internationally or if you could expand upon that?

Deborah, this is Blake.

I think what we recognize is that in the past we've benefited from some pretty attractive locations, predominantly malls, but even in urban centers as well as we've moved throughout the country.

And there are fewer opportunities that our developer partners are sharing with us.

So just to be wedded to full line store growth is going to have some limitations down the road.

So we're trying to look at it in a broader sense and having it grounded in our customer, and what the customer is telling us that they like and where they would like Nordstrom to be or operate and whether that's from a multi-channel point of view or product or just services.

And so I think what we were trying to share is that we're really encouraged by a number of strengths that gives us a lot of flexibility and the ability to ask those questions and potentially make some investments and have some learnings and have more flexibility to be able to evolve and grow with our customer.

And so we're doing a lot of work on that.

We don't have something to announce today.

But we did want to emphasize those strengths and that we are looking at it in a larger context.

Great.

Thanks so much and best of luck this holiday season.

Thanks, Deborah.

Thank you.

Our final question is from Ken Stumphauzer from Sterne, Agee.

Thanks for taking the follow-up.

I was just wondering on the gross profit margin, from a gross profit margin standpoint, if you could kind of frame for us where you guys are and what opportunities there are?

And part of the reason I ask that is just the movement, the increasing proportion of Rack stores and higher rent kind of obfuscates the actual gross profit margin, or the merchandise margin.

If you could just maybe talk about opportunities you have there?

Sure, Ken.

This is Mike.

Well, we -- there's two ways that we're going to expand that.

One is by expansion of the merchandise margin, which we've made some steady progress with that and we believe over time there may be some other moderate opportunity there.

And the second is to leverage the fixed cost.

And while we are adding more Racks, the productivity of those Rack stores do allow us to lever that number.

I think what you're seeing right now is because we've gotten acceleration in growth, it takes a little bit of time to catch that up again.

But with some level of a low-single-digit comp and some steady growth we should be able to continue to leverage that gross profit number.

Thanks, again.

All right, Ken.

Thank you.

Thank you for joining us today for our third 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 Webcasts.

Thanks, and good-bye.

This does conclude today's conference.

Thank you for participating.

You may now disconnect.