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Operator
Hello, and welcome to the Nordstrom 2012 fourth quarter and full-year 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.
Rob Campbell - Treasurer and VP, IR
Hello, 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-K and 10-Q.
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 full-year performance and the outlook for fiscal 2013.
Blake is traveling today, so he is participating in the call, but not with us at our headquarters.
Before we begin, I want to mention that similar to last quarter, we are using slides to supplement our remarks.
If you are listing to this conference call as a webcast, you should already see the slides.
If you are listing by telephone, you can view the slides by going to the Investor Relations section at Nordstrom.com.
And now, I'll turn over the call to Blake Nordstrom.
Blake Nordstrom - President
Thanks, Rob, and good afternoon, everyone.
The fourth quarter and 2012 results we announced earlier today reflect the ongoing consistent strength of our performance.
2012 marked our third consecutive year of double-digit total sales and EPS growth, our third consecutive year of adding over $1 billion in sales, and our third consecutive year of same-store sales growth of over 7%.
This accomplishment is largely attributable to the high level of execution we've achieved across all channels, and to the investments we've made to fuel this performance.
Our number one goal is to provide a superior customer experience.
We aspire to be the retailer of choice wherever and whenever customers choose to shop with us, and we understand that our customer's definition of service is changing.
We are excited about how we're combining our people, culture and technology, along with new capabilities, to expand our relationship with our customers, both in-store and online.
This focus on being a leader in delivering a superior customer experience has created multiple growth opportunities.
And as we've shared with you over the last couple of years, we're aggressively taking action.
All of them are in support of our overarching strategic priorities of, improving the customer experience, enhancing the merchandise offering, increasing relevance with existing and new customers, aggressively growing our online capabilities.
More specifically, on this call a year ago, we shared with you five specific goals for 2012.
Number one, build out our IT infrastructure to fuel our e-commerce growth; number two, enhance the overall web and mobile experience; number three, expand online merchandise selection and develop a more customized approach to all aspects of our engagement with customers; number four, add to the functionality of mobile point-of-sale devices, and expand their usage in full-line and Rack stores; and finally, number five, begin implementation of enhanced tools to improve the initial allocation and assortment of inventory.
During the course of the year, we made progress on each one of these initiatives.
Increasingly, we are using technology as an enabler in improving the service experience for our customers across all fronts.
We've made notable improvements to the web and mobile experience.
As examples, we've made enhancements to search, navigation and checkout.
We've added numerous features, including updated recommendations, and 360 video on certain product pages.
We've improved the speed of fulfillment and delivery, and we provided early access online to our Anniversary Sale.
Going forward, we plan to further elevate the shopping experience with features that provide more interaction and personalization.
Customers are increasing their usage of mobile devices in shopping with us.
On an average day, more than 100,000 unique customers access Nordstrom on a mobile device, with nearly twice that amount during the holidays.
In 2012, sales from a mobile device accounted for over 20% of Direct's total sales, compared to less than 4% in 2010.
There is more we can do here to build on the customer mobile experience to make it even more compelling.
Our online merchandise selection has expanded by over 50% and now is virtually at parity with our full-line selection.
The selection will further expand to have the appropriate depth and breadth in our online offering.
In our stores, we are enhancing the service experience through the use of our mobile point-of-sale devices.
In the third quarter, we successfully launched mobile devices in all of our Rack stores to make the checkout process faster.
In the first quarter of 2013, we will remove a portion of our cash registers in our Rack stores, which will add incremental selling space.
In our full-line stores, our mobile devices now have virtually the same functionality as our cash registers.
Their usage has increased, and our goal is to be largely mobile by 2014.
On the merchandise front, we started to see improvement in our Women's Apparel business in the latter half of the year.
We also launched Topshop in 14 stores and online, with its fast-turning, on-trend fashion at accessible prices, which is helping us deliver a more relevant shopping experience.
We anticipate continuing improvement in our Women's business in 2013 and an expansion of Topshop into more stores.
We continue to benefit from improved buying tools to better customize the offering by stores.
Going forward, we will invest in scaling our merchandise systems to support our future growth.
During the year, we enhanced our Fashion Rewards program to simplify it and make the benefits more accessible to our customers.
In response, we've opened 1 million new Fashion Rewards accounts in 2012.
This program continues to help us reach new customers and deepen our relationships with existing ones.
So we've made meaningful progress on our stated priorities of a year ago.
It's noteworthy that even with all of the investment spending associated with the strategic initiatives we've undertaken, our ROIC of 13.9% represented an increase over 2011 and was the highest in the last five years.
Our Direct business, which generates the highest return and where we have been investing heavily, contributed to this improvement in ROIC.
At this time last year, we communicated our intention of expanding into Canada.
Today we have more clarity on our expansion plans, with an initial announcement in 2012 of 4 full-line stores and a view that we ultimately could have between 8 to 10 full-line stores and 15 to 20 Rack stores.
We've announced Karen McKibben as President of Nordstrom Canada to lead this effort, and she has building a dedicated team.
We look forward to serving both existing and new customers in these new markets.
At this time last year, our plan was to open roughly 15 Racks per year.
Today, the plan is to double the number of Rack stores to more than 230 over the next four years, with roughly 24 openings in 2013 and more than 30 in 2014.
Rack's total sales were up 20% in 2012, with same-store sales up 7.4%.
Its sales productivity, even with the 15 new stores, reached its highest level in recent years, over $550 per square foot.
Our Direct business increased nearly 30% in 2011, and in 2012, grew 37%, generating $1.3 billion in sales.
It's our fastest growing channel and is expanding our reach to existing and new customers.
We see substantial opportunities for outside growth to continue, as we further improve the online customer experience.
At this time a year ago, we were still searching for a Manhattan full-line store location.
Today we have a great location near Columbus Circle, with a planned opening in 2018.
During the year, we also announced future full-line openings in Houston, Jacksonville, Minneapolis and Milwaukee.
Our ongoing focus on providing a superior customer experience and increasing our relevance with existing and new customers has positioned us well for the significant growth opportunities we are pursuing.
To be clear, we are a growth story, with a business and operating model consistent with that.
It is these growth opportunities, whether Canada, Rack, e-commerce, Manhattan and other new full-line stores, and the improvements to our existing stores, that drive the investments we're making.
Some of these investments yield immediate benefits, while others will benefit the future.
We are confident that in total, they will provide a platform for sustainable, profitable growth, which we characterize by high single-digit total sales increases, and mid-teens return on invested capital.
Now, I'll turn the call over to Mike.
Mike Koppel - EVP and CFO
Thanks, Blake.
As we look back on the year, we have surpassed our financial expectations and successfully executed against our long-term growth strategy.
As Blake mentioned, we are positioned for growth through our aggressive pursuit of multiple strategic opportunities.
We believe the continued momentum in our business, which is reflected by three consecutive years of double-digit sales and earnings growth, is driven by these ongoing investments to serve more customers and deliver a superior experience.
At this time last year, we shared with you our 2012 financial plans, including adding over $1 billion in sales and achieving earnings per share of $3.30 to $3.45.
We exceeded those plans by delivering sales growth of 12%, or $1.3 billion, and earnings per diluted share of $3.56.
In 2012, we reached a record high in total sales productivity of $470 per square foot.
An even more notable accomplishment was that our sales per square foot, excluding e-commerce, of $417 surpassed 2007's peak of $405.
This demonstrates our continued belief that a well-executed multi-channel strategy is about growing all channels.
As Blake noted, we increased ROIC to 13.9%, which represented our highest return over the last five years.
This was particularly meaningful, since we accomplished this while making capital investments of over $2 billion during this period.
Now I'd like to highlight our fourth quarter performance.
Our results exceeded our expectations, with sales growth of 13%, same-store sales increases of 6.3%, and growth in earnings per share of 26%.
You can find more detail of our financial performance for both the quarter and the year in the performance summary document which is posted on our website.
Our Fashion Rewards program played an integral role in contributing to our overall results.
A year ago, we made improvements to our program to provide increased customer flexibility and to make the benefits more accessible.
In response, we opened 1 million new accounts during the year, with card holders continuing to spend more and shop more with us than non-members.
In 2012, sales from our Fashion Rewards members increased over $800 million, or 23% over last year.
We now have 3.3 million active members, which increased 27% from last year.
Nordstrom card penetration reached nearly 36%, up from 32% a year ago.
Our execution in recent years has put us in a strong financial position.
In each of the last four years, cash flow from operations exceeded $1 billion, and we have ample liquidity.
Our capital allocation practices are disciplined and balanced.
Additionally, our credit business is healthy, with key metrics having improved to pre-recession levels.
Next, I'd like to share our current thinking on our growth plans over the next several years.
Our ongoing focus to provide a superior customer experience, coupled with our execution and strong financial position, has enabled us to undertake multiple growth initiatives.
We believe these plans for future growth will provide a sustainable platform for achieving top quartile total shareholder returns.
Over the next five years, we plan to nearly double our capital expenditures relative to the last five years, due to investments in Canada, Manhattan, e-commerce and Rack.
Our current five-year capital plan is $3.7 billion.
Roughly 20% represents entry into Canada and Manhattan, and approximately 55% is planned for a combination of new full-line stores, Rack stores and remodels.
The remaining 25% relates to e-commerce and technology investments, including initiatives to improve our e-commerce delivery and fulfillment, online and mobile experience, and personalization.
We are confident that these investments are creating significant long-term shareholder value, and they are changing the dynamics within our P&L.
For example, our growth is altering our sales mix.
We believe that within the next five years, Rack, Direct and Canada will make up approximately half of our sales.
Our stores, which create the most visible representation of our brand, will continue to represent the majority of our overall business, but customers will clearly use e-commerce in the future, more than they are today.
Given the infrastructure investments to support expansion into Canada, and incremental growth-related costs associated with the Rack, and higher depreciation expense from ongoing e-commerce investments, we expect no expansion of EBIT margin over the next several years.
EBITDAR, which strips out the growth-related expense components of depreciation and rent, is expected to grow faster than EBIT and illustrates the impact of these investments.
Operating leverage in our existing stores continues, and collectively, their EBIT margin is planned to increase in 2013.
We are not relying on EBIT margin expansion to create value.
As our financial model evolves with our growth, our overarching focus is on achieving high single-digit sales growth and mid-teens return on invested capital.
We know these factors, combined with our growing capital base, will drive significant shareholder value.
Now, I'd like to discuss our 2013 plan.
To provide you with an apples-to-apples comparison, we removed the impact of the 53rd week from 2013 comparisons to 2012.
We expect sales growth between 6% to 8%, with same-store sales increases between 3.5% to 5.5%.
This reflects low single-digit growth in full-line and Rack stores, and over 20% growth in Direct.
Our plan achieves earnings per diluted share of $3.65 and $3.80, representing an increase of 4% to 8% over 2012.
Included in our guidance are upfront infrastructure expenses for Canada, as well as organizational and incremental pre-opening expenses related to Rack store expansion.
In 2013, we expect these costs to be approximately $20 million to $25 million.
The 53rd week will impact the quarterly cadence of 2013 compared to 2012, including the shift of our Anniversary Sale event between the second and third quarters.
Our earnings release provides additional color on these impacts.
With respect to our line item guidance, which is compared to 53 weeks in 2012, gross profit rate is expected to decline between 10 and 30 basis points, primarily due to accelerated Rack growth and higher expenses associated with the growth in our Fashion Rewards program.
Retail SG&A as a percent of sales is expected to improve 10 to 30 basis points, due to leverage on higher sales volume.
The increase in Credit SG&A reflects the absence of the $30 million reduction in bad debt reserves in 2012.
Turning to capital, we anticipate net capital expenditures in the range of $750 million to $790 million.
This is a significant increase from $455 million in 2012, and is primarily related to Rack and full-line store growth, improvements in e-commerce delivery and fulfillment, and our Manhattan store development.
We expect net depreciation and amortization in 2013 to be approximately $390 million, up from $366 million in 2012.
Free cash flow is planned to be approximately $130 million for 2013.
This is down from $340 million in 2012, due to our capital expenditures.
We expect cash flow from operations to be approximately $1.3 billion, up from $1.1 billion in 2012.
In closing, we are pleased with our progress to date, we're excited about the numerous opportunities ahead of us, and confident in our ability to successfully execute our growth initiatives.
We remain disciplined in our approach, while moving faster in our execution.
Overall, we believe our relentless desire to provide a superior customer experience will lead to continued growth in our business and increasing shareholder value.
With that, I'll turn the call over to Rob.
Rob Campbell - Treasurer and VP, IR
Thank you, Mike.
Before taking the first question, we want to ask that each person ask one question and if necessary, one follow-up, in order to give as many of you as possible an opportunity to ask a question.
If you have additional questions, please return to the queue.
Now, we will take the first question.
Operator
Thank you.
Deborah Weinswig, Citi.
Deborah Weinswig - Analyst
Thanks so much, and congratulations on a great quarter.
Mike, can you discuss the gross margin performance in the quarter?
Maybe just give us a little more color?
Mike Koppel - EVP and CFO
Sure.
Well, our gross profit benefited this quarter by an improvement in mark downs year-over-year.
We saw some significant improvement in our Women's Apparel business, which was reflected in that.
And that was partially offset by the increased cost as it relates to our Fashion Rewards program.
But overall, a relatively good merchandise margin performance.
Deborah Weinswig - Analyst
Okay.
And as you guided for the future, you talked about not relying on EBIT margin expansion to drive future growth.
Obviously, there's a lot of moving pieces, Internet growth and growth in the outlet -- or in the Rack business.
As we look at all the moving pieces and not much full- line growth, how should we think about one offsetting the other?
Mike Koppel - EVP and CFO
Well, I think the first way to look at is the chart that we shared that showed the change in the growth in the businesses and how they're contributing to the overall sales of the Company.
You know, I think in terms of the EBIT margin expansion, the most important thing to remember is over the next several years, we're going to be investing to ensure we have a long-term sustainable growth platform.
And the investments, such as the accelerated technology investments, the upfront investments required to move into Canada, the acceleration of the Rack, all those things have a medium-term impact on our margin performance, but are there to assure that we've got a platform to deliver much larger dollar earnings growth over the long-term.
Operator
Thank you.
Jennifer Black, Jennifer Black and Associates.
Jennifer Black - Analyst
Good afternoon, and let me add my congratulations.
Mike Koppel - EVP and CFO
Thanks, Jennifer.
Blake Nordstrom - President
Thanks, Jennifer.
Jennifer Black - Analyst
My first question is on Savvy.
In some stores where you've reconfigured the department and brought in merchandise at very sharp price points, I just was curious to know the reception to that?
And I'm not sure how many stores you have done that in.
Blake Nordstrom - President
Jennifer, this is Blake.
The Savvy departments, as you know, have gone through a transformation, and we've been working on it for some time.
And the official launch in the stores was February 15.
It's all stores, and we've taken a pretty dramatic change with the merchandise offering.
And so the goal is to try to help attract customers that maybe we didn't have an offering before, or wasn't as compelling.
And part of that was keeping the fashion forward trend part of it, but trying to make the price points more accessible.
And it's a pretty dramatic change average price from what Savvy was before to this new Savvy concept.
And so we've only got a couple days under our belt, but I think we're really excited about that offering and the early reception we've gotten so far.
Jennifer Black - Analyst
Great.
A my follow-up is, if you could talk about California, Southern Cal, OC LA, San Diego, Northern Cal.
Thanks.
Blake Nordstrom - President
I happen to be on the phone at our Grove store right now.
So I am in Los Angeles right now.
Southern California, and California in general, has consistently over time represented some of our most productive stores.
And in the last couple of years, with the cycles in the economy, it's has some impact there.
In addition to Women's Apparel improving, we've been pleased with California improving, as well.
Southern California still represents some opportunities for us, but the most important thing is the trend's improving.
And so we're encouraged.
Operator
Neely Tamminga, Piper Jaffray.
Neely Tamminga - Analyst
Great.
Good afternoon.
Congrats, as well.
Very well executed quarter.
Mike Koppel - EVP and CFO
Thanks, Neely.
Neely Tamminga - Analyst
So, Mike, a little bit of insights on Rack for my first question.
And the second follow-up would just be a little bit more on the e-commerce delivery fulfillment initiatives.
So I think you guys have listed about 16 Rack stores.
Could that number actually end up being higher this year?
Would that higher -- more Rack stores actually already be contemplated than in the CapEx indications that you're giving to us?
Mike Koppel - EVP and CFO
Yes.
Those are the stores that have currently been announced.
Our CapEx plan has allocated for more stores for 2013.
Neely Tamminga - Analyst
Okay.
It seemed to me, I think at one point, you guys were talking about getting to about 230 by 2016, and that would suggest maybe a mid- to high 20 sort of number for Rack.
Is that about the right way to look at that?
Mike Koppel - EVP and CFO
Yes, that's in the range.
Neely Tamminga - Analyst
Okay.
Cool.
And then on the -- can you give us some specific insights on the initiatives?
You guys had cited specifically e-commerce delivery and fulfillment.
Are these physical centers, or what specifically are those initiatives that you are allocating some capital for?
Mike Koppel - EVP and CFO
Sure.
You know, in terms of the fulfillment and the 2013 allocation, it's about additional square footage to improve our fulfillment base.
And it's also about improving some of the -- we have to increase capacity in Cedar Rapids, just because of our unit flow-through has gotten so large, we have to install some new equipment.
So it's about staying ahead of the curve, because we're seeing some pretty accelerated growth in that channel.
Operator
Edward Yruma, KeyBanc Capital Markets.
Edward Yruma - Analyst
Hello.
Thanks for taking my question.
Congratulations on a great your.
Mike Koppel - EVP and CFO
Thanks, Ed.
Edward Yruma - Analyst
Can you talk a little bit about the return on invested capital profile of both Direct and of the Rack business?
And particularly as it relates to the step-up in CapEx, is it expected that ROIC can continue to improve despite CapEx being stepped up so meaningfully for 2013?
Mike Koppel - EVP and CFO
Sure, Ed.
Well, as we stated, our long-term goal is a mid-teen return on invested capital.
And I think what one of the interesting factors has been over the last several years, with adding an accelerated capital of over $2 billion, we've still increased the ROIC.
So we do expect to see forward progress there.
In terms of the profile of the channels, as we've stated before, Direct, because of the way the technology investment behaves, we have more up front expense.
A faster write-off tends to have a lower capital base and thus has a higher return on capital.
Rack is a more traditional return, because we do have to capitalize the leases, tends to have a more longer-term fixed base, and does operate at a higher than Company average, but at a more traditional return on invested capital.
Edward Yruma - Analyst
Got you.
And you've given us from time to time metrics on what your Fashion Rewards customer looks like relative to your normal consumer.
But what does your multi-channel consumer look like, relative to someone that shops strictly in your physical channel?
Thank you.
Mike Koppel - EVP and CFO
Sure.
Well, clearly, I think one of the things that we've shared is our customer -- the customer who's shopping online, shopping mobile, tends to have a slightly younger profile, as is the Rack customer.
Our multi-channel customer is, I would say, an aggregate of our best customers.
And I don't believe there's any particular profile in terms of how you'd categorize that demographically, other than they happen to be our best customers.
Operator
Erika Maschmeyer, Robert W. Baird.
Erika Maschmeyer - Analyst
Hello.
Thanks.
And I'll also add my congratulations.
Mike Koppel - EVP and CFO
Thank you.
Erika Maschmeyer - Analyst
Can you give a bit more detail around the complexion of your infrastructure investments into Canada?
How much of that is labor, distribution, pre-opening, other pre opening expenses?
Thanks.
Mike Koppel - EVP and CFO
Sure, Erika.
Just to step back, the $20 million to $25 million that we called out for 2013, roughly two- thirds of that relates to Canada.
And it's mostly around the development of our technology infrastructure to support that business, as well as the build out of the team that's going to run that business.
We're starting to build out the merchandise team and the operating team there.
And so that's basically what hits 2013.
In 2014, we'll start to see that expand, and some of the other costs that you're suggesting will come to light in 2014.
The balance of that investment relates to pre-opening and accelerated Rack growth, both organization and the pre-opening costs required to open more stores.
Erika Maschmeyer - Analyst
That is very helpful.
And just a follow-up to one of Jennifer's questions.
How are you communicating the new Savvy concept to the customers that you might not have been attracting before?
Mike Koppel - EVP and CFO
Blake?
Blake Nordstrom - President
You bet.
We're taking a multi-pronged approach.
We've been bringing this merchandise in over the last month or two.
So there's been a transition.
And so working with the existing customers in the store, we're using all forms of communications, all the different channels within social.
This is not about running a traditional ad or TV program, but it is trying to utilize the strong foot traffic in our stores and the various means that we stay communicated with our customers, and how our customers have shared with us how they want us to communicate with them.
And so, again, I think already in a couple of days, we've had a terrific reception.
So in many cases, it's less about having kind of a formal word out.
It's more about executing in the department of the merchandise offering, and having the sales people and the product knowledge and the fashion expertise to help our customers.
So those vendors that were in Savvy, 70% to 80% of them have been moved into other departments.
So we've really retained, for the most part, that merchandise, we've just allocated it in different lifestyle departments.
And we think we really are starting to fill a void with some of these aspirational price points and higher fashion trend items that maybe was lacking a little bit in our offering.
Operator
Lorraine Hutchinson, Bank of America.
Lorraine Hutchinson - Analyst
Thank you.
Good afternoon.
Can you talk a little bit about how you formulate your comp plan?
And if there is upside to the same-store sales growth in 2013, is there some opportunity for SG&A leverage?
Mike Koppel - EVP and CFO
Hello, Lorraine.
This is Mike.
In terms of the comp plan and the overall operating plan we shared, it's consistent with our internal operating plans.
The comp plan was built on a low single-digit comp for our full-line and Rack stores, and a slightly greater than 20% comp for our Direct business.
In terms of any leverage, we could get leverage if sales outperform.
And that's consistent with how we've shared in the past.
We will update that on a quarterly basis if we think we're going to get more operating leverage from our sales performance.
Lorraine Hutchinson - Analyst
Great.
And then, as you look to your new Rack openings for this year, can you talk about the maturity curve of the new stores and how you're planning that from a cash flow perspective over the next couple of years?
Mike Koppel - EVP and CFO
Well, in terms of the maturity curve, overall the Rack stores tend to mature at roughly a three-year point, and then they get to a more normal growth.
In terms of cash flow, I don't have any granular guidance to give you in terms of the individual store performance, other than the fact that it's our overall ability to generate cash, as we said with 2013, is consistent with the way it's been in prior years.
And as a matter of fact, in 2013 it's slightly better.
Operator
Paul Trussell, Deutsche Bank.
Paul Trussell - Analyst
Good afternoon.
Just to follow up, Mike, on your top line commentary, is the low single-digit comp for the full-line and the Rack and the 20% growth for Direct, is that just your baseline view?
Or is there something that you've seen in the business that's kind of leading to that 3.5% to 5% comp view?
Just given that if we adjust for your Anniversary Sale last year, you guys haven't had a comp below 5.8% since you were negative in 2009.
And obviously, we saw acceleration in the Rack last year, we saw acceleration in Direct sales last year, and both those segments are becoming bigger pieces of your business.
So if you can add any color to that, that would be helpful.
Mike Koppel - EVP and CFO
Yes, I'll repeat what I said earlier, and that is it's reflective of our internal operating plans.
We like to plan our business in a way that helps us gain as much leverage when we do have upside, and to instill discipline within the organization around inventory and expense.
And that's consistent with how we've done it.
And if we do beat those plans, that our intent is to be able to drive additional earnings from that plan.
Paul Trussell - Analyst
So there's no change in your thoughts around the macro environment or your core consumer?
Mike Koppel - EVP and CFO
There's nothing at this point that would suggest any change in our customers' behavior.
Operator
Matthew Boss, JPMorgan.
Matthew Boss - Analyst
Good afternoon.
Could you talk to merchandise margins in the quarter?
And also, where merchandise margins stand today versus long-term peak?
And finally, with Credit Rewards and Rack becoming a larger piece of the pie, how should we think about gross margins over the long-term in the model?
Mike Koppel - EVP and CFO
Sure.
In terms of margin for the quarter, as I stated earlier, we had a very good merchandise margin performance in the fourth quarter, and a lot of that was driven by the improvement in the Women's Apparel business.
We're starting to see much better sell throughs in Women's Apparel.
That is a strong business for us, and we expect it to continue.
In terms of long-term, we have a number of dynamics that are affecting merchandise margin.
One is the fact that as Rack continues to grow and accelerate, it has a lower merchandise margin than full-line.
Now, it has an equal to better bottom line margin, but it's going to affect the geography within the P&L.
Our merchandise margins right now are at or around their all-time highs.
We don't expect any significant expansion there.
Clearly, we've seen a little bit of contraction from Fashion Rewards.
But on the other hand, Fashion Rewards is generating a tremendous amount of top line value for us and, as importantly, long-term customer value.
So in terms of merchandise margin, our thoughts around that are not to expect any kind of significant increases.
Matthew Boss - Analyst
Okay.
And then, last is on longer-term store growth, as you think about the full-line, what is the best way for us to think about it, in terms of longer-term, and are there -- do you see opportunities for potential closings, as well?
Mike Koppel - EVP and CFO
Well, in terms of long-term, our expectations around full-line are low single-digit comp over time.
In terms of closings, we periodically evaluate stores, as operating agreements do come up.
At this point in time, from an economic standpoint, there's nothing that would suggest that we should be proactively closing stores.
But if a store happens to be in a situation where the operating agreement is up and we believe there's a better opportunity in the same market, we might make a change there.
But nothing material, from a store closure basis.
And overall, from a full-line standpoint, Canada is a huge opportunity.
We tend to talk about full-line in terms of the four wall US, but long-term, Canada has a lot of upside for us.
Operator
Kimberly Greenberger, Morgan Stanley.
Kimberly Greenberger - Analyst
Great.
Thank you.
Good afternoon.
Mike Koppel - EVP and CFO
Hello, Kimberly.
Kimberly Greenberger - Analyst
I'm wondering about the inventory.
It looks like it's up about 18% year-over-year.
I'm wondering if the 53rd week had any impact on your year-over-year inventory growth?
And how do you think about planning inventory relative to your sales plan, just as we look out to 2013?
Mike Koppel - EVP and CFO
Sure.
The impact in inventory is not from the 53rd week.
It's primarily from the growth in the Rack.
Just to give a little color on that, part of our success with the Rack last year is, we have taken a more aggressive posture in terms of procuring product for the next season.
It's called pack and hold.
We're doing it with our top brands.
That has been the most significant driver of our inventory increase.
If you look at our full-line and Direct business, the turns are roughly even with what they were last year.
They're in line with sales.
So that is mostly about the Rack.
In terms of next year, our expectation is that growth in the pack and hold is going to start to moderate.
And so we should see that growth start to level off, as we go forward.
And our goal has always been to continue to improve our turns.
Kimberly Greenberger - Analyst
That's super helpful, Mike.
I'm wondering if because of the shift in your Anniversary Sale from straddling Q2 and Q3, if there will be any sort of quarterly volatility that we should think about in your inventory levels, particularly as we finish Q2 and go into Q3?
Mike Koppel - EVP and CFO
Sure.
Well, as you recall last year, we had the last week of anniversary go into August, which means the third quarter benefited from that from a P&L standpoint, but the second quarter saw higher inventory levels, because we still had a full week of anniversary left.
So what you'll see this year is the inventory levels come out of the second quarter should be down versus last year, because we'll have a full week of that high selling within the period.
Operator
Dana Telsey, Telsey Advisory Group.
Dana Telsey - Analyst
Good afternoon, and congratulations, everybody.
Mike Koppel - EVP and CFO
Thanks, Dana.
Dana Telsey - Analyst
As you think about the investments you're making in Direct, and we keep hearing more and more going towards mobile, what are you seeing in terms of mobile purchasing, in terms of pricing, does -- is it a different -- an average transaction or a category?
And just lastly, on the Fashion Rewards, how are you thinking about Fashion Rewards in terms of SG&A and margin go forward?
Thank you.
Mike Koppel - EVP and CFO
Sure, Dana.
Thanks for your question.
You know, in terms of mobile, I think Blake stated in his comments that this past year, we saw 20% of our online volume come from mobile.
So we continue to see that as a large channel within the channel for growth.
I mean, the growth in people who have smart phones in the next year or two is projected to surpass desktop computing.
So that's an area that we've invested very strongly, whether it's mobile in the stores with checkout and service, or whether it's our iPhone app or our iPad app.
We're going to continue to invest in that.
And I think long-term, it's going to be about creating a more personalized experience, whether you're online or in the store or whether you're using mobile or at a desktop.
And those are the areas that we continue to put our investments.
And then, I'm sorry, in terms of the Fashion Rewards, could you please repeat that?
Dana Telsey - Analyst
Sure.
How do you see that, the long-term impact on sales and margins for Fashion Rewards?
Mike Koppel - EVP and CFO
Sure.
Thank you.
You know, with the investments we've made in 2012, clearly our existing customers and new customers love our Fashion Rewards program, and we expect to continue to find ways to deliver more benefits to our customers.
This past fall, we tested a non-tender base program in our Cosmetics business.
Going forward, we're going to continue to look for opportunities to offer Fashion Rewards to more customers, and not just those that choose to have one of our tender.
So we think it's terrific for our customers and it builds a long-term loyalty value there.
In terms of its impact to margin, we have seen an impact to that measured in the multiples of tens basis points.
Over time, that should level off.
But clearly, it's driving some pretty significant top line growth.
Dana Telsey - Analyst
Thank you.
Mike Koppel - EVP and CFO
Yes.
Operator
Richard Jaffe, Stifel Nicolaus.
Richard Jaffe - Analyst
Thanks very much, guys, and a great quarter, but --
Mike Koppel - EVP and CFO
Thanks, Richard.
Richard Jaffe - Analyst
My pleasure.
A question on Fashion Rewards.
What percentage of your sales is coming from the Fashion Rewards program?
You mentioned 36% on the card, but I assume that meant your credit card, not Fashion Rewards.
Mike Koppel - EVP and CFO
Well, Richard, just to clarify, all of our current -- all of our Fashion Rewards customers have one of our tenders, whether it's our co-branded Visa, our private label, or our debit card.
So that 36% is representative of sales on any one of those three tenders.
Richard Jaffe - Analyst
And obviously, it would all be Fashion Rewards then.
Mike Koppel - EVP and CFO
Yes.
Richard Jaffe - Analyst
So that's helpful.
Thank you.
Mike Koppel - EVP and CFO
Yes, that's correct.
Richard Jaffe - Analyst
Could you just comment on your efforts to develop the HauteLook business, perhaps efforts to integrate it into your existing businesses, your full-line and your Rack business, and the profit picture for that business, longer-term?
Mike Koppel - EVP and CFO
Sure.
Well, last year, HauteLook was able to generate roughly a 40% increase in its sales, and very nearly near a breakeven, exceeding its bottom line plan.
We continue to see opportunities there, as we're offering our customers various ways to do business with us, whether its flash sale, whether it's off-price in the store, regular price online.
And we do believe that over time our ability to use more of the resources available us to procure more product, to more effectively fulfill product to our customers, utilizing the resource we have at Nordstrom, Inc.
is going to help the HauteLook model.
So going forward, we definitely see opportunities for both companies to take advantage of the strengths that they both have to deliver a better offer to our customer.
Operator
Michael Binetti, UBS.
Michael Binetti - Analyst
Hello, guys.
Congrats on a good quarter.
Mike Koppel - EVP and CFO
Thank you.
Michael Binetti - Analyst
So I think the comment that the market is likely to focus on the next few weeks, obviously the EBIT margins over the longer term over the next few years, with all the investments you guys see.
Do you think as we look out to the out years, for those of us that are modeling the business, there's an opportunity for sales growth to accelerate based on these opportunities, or do we need to think about how the out year estimate's trending, like the earnings estimate's trending, call it, in the high single-digit range?
Mike Koppel - EVP and CFO
As of right now, our goals are to increase top line sales at high single-digit and return on capital in the mid-teens.
We believe that over time that's going to generate value.
If we're fortunate enough that we achieve those sales, then we might get more leverage out of that.
But right now, that is what our focus, and it's tough to see anything clearer than that in the moment.
Michael Binetti - Analyst
Okay.
Can you just help me think about the understanding of leverage a little bit, maybe between the channels.
Since you mentioned that your comp build-up is based on e-commerce at 20% growth, that's well below last year, the growth rate.
As it gets bigger, it's a bigger piece of the mix, obviously harder to grow.
But you're still putting a lot of investment power behind it.
So if that part of the business drives some upside on sales, Mike, is that when you would start saying you'd start to think about a little bit higher leverage in our models?
Mike Koppel - EVP and CFO
Well, frankly, all channels -- an improvement in sales in all channels is going to deliver leverage, not just the Direct model.
We've had years where we've had some very strong comps in our full-line stores and our Direct stores where we're generating leverage.
As a matter of fact, right now, in '12 and plan for '13, is we generated operating leverage in our traditional four-wall channels.
So we don't expect that not be the case.
But when you're investing at the level we are, as it relates to a brand-new channel offering like Direct, as it relates to a brand-new market like Canada, those kind of things are going to require multiple years of investments in order to get there.
And that, you know, subsequent to that, I think time will tell as to whether or not we get leverage long-term.
Operator
Liz Dunn, Macquarie Capital.
Liz Dunn - Analyst
Hello.
Thanks for taking my question.
Mike Koppel - EVP and CFO
Sure, Liz.
Liz Dunn - Analyst
And congrats on a great year.
I guess my main question is, does this change in your CapEx plan over the next couple of years -- it must change your viewpoint on buybacks and dividends.
I know you have historically managed dividends through a payout ratio.
Is that still the way to think about it, and how should we think about buybacks?
Mike Koppel - EVP and CFO
Yes, Liz.
Well, thanks for the question.
Our framework around our capital allocation is not changing.
We still look at that 25% to 30% dividend payout ratio.
That's still part of our decision-making.
In terms of repurchase of stock, we still do that based on an approach that looks at long-term value, long-term fair value of the Company.
So at this point in time, we don't see that having our capital plans negatively impacting those policies.
Now of course, that's all based on current course and speed.
If there's any significant change in the economy that we can't foresee, those are clearly levers.
Rob Campbell - Treasurer and VP, IR
Thank you for joining us today for our fourth quarter earnings call.
As a reminder, a webcast replay of this call, along with our slide presentation, will be available for one year, on the Investor Relations section of Nordstrom.com, under Webcasts.
Thank you for your interest in Nordstrom.
Good-bye.
Operator
Thank you.
And this does conclude today's conference.
Thank you for participating.
You may now disconnect.