諾德斯特龍百貨 (JWN) 2014 Q2 法說會逐字稿

Hello and welcome to the Nordstrom second quarter conference call.

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

(Operator Instructions)

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

You may begin, sir.

Hello, everyone, and thank you for joining us.

Today's earnings call will last 45 minutes and will include about 30 minutes for your questions.

As we get started, I'd like to refer you to the slide showing our Safe Harbor language regarding forward-looking statements.

Participating in today's call are Blake Nordstrom, President of Nordstrom, and Mike Koppel, Executive Vice President and Chief Financial Officer, who will discuss the Company's second-quarter performance and outlook for FY14.

Joining during the Q&A session will be Pete Nordstrom, President of Merchandising; Jamie Nordstrom, President of Stores; and Erik Nordstrom, President of Direct.

Before we begin, I want to mention that Blake and Mike will be using slides which can be viewed by going to www.Nordstrom.com in the Investor Relations tab.

With that, I'll turn the call over to Blake.

Thank you, Rob.

As has been customary over these last couple of quarters, we think it's important to start by talking about our strategy.

You'll note on the first slide that it's got the customer squarely in the middle.

And though that may sound or appear simple, it really is critical for our business, and it provides clarity as we think about allocating capital and leadership talent to the various opportunities to serve the customer in the manner they expect from Nordstrom.

Second quarter is important for our Company in that it's materially different than many other retailers due to the Anniversary Sale, which is a unique event within our industry and one that over the years, our team continues to build upon.

Before touching on Anniversary, the quarter -- for the second quarter, sales growth total sales were up 6.2% and on a comp store basis we had a 3.3% increase.

For the Anniversary event, we saw an increase of 3.6%.

This was in line with our plans and slightly ahead of our trend of the last 18 months and as well as last year's Anniversary Sale.

In addition, I want to talk about new store openings in the third quarter.

We have three full-line stores coming, including a second store in Houston, one in Jacksonville, Florida, and we are particularly excited about our first store in Canada, in Calgary, opening on September 19.

A lot of work's gone into it, and we recognize how important this is for the Company, and we are anxious for the opportunity to start serving customers in Canada.

Finally, our Rack continues to grow at a good clip.

We've opened 11 stores so far year-to-date, and for this fall, we have 16 more stores planned to open.

Would like to talk about the recent announcement of the acquisition of Trunk Club.

Trunk Club is a terrific business and one that we've been monitoring for some time.

This area of the business is an area that a number of customers are interested in, and we've been super impressed with the five years that Trunk Club and their team have been focused on the business and what they've been able to accomplish.

With our strategy that I talked about earlier, it's less about acquisition, and it's all about the customer and how we can best serve her or him.

So whether that's partnering, working on something internally or doing an acquisition to improve our capabilities, that's the focus and the filter and lens that we use.

As we looked at Trunk Club, it was something that we felt was important to some of our customers.

We have a dominant Men�s business, and by layering in Trunk Club, it really allows us to service more customers in the manner they'd like to be served.

It's something we felt we could do, but they had made tremendous progress, and one of the key elements in our business is speed.

We felt, given it would probably take a year or two for us to take a sizable portion of capital and some of our leadership team to get this business up and running, that we were best served acquiring Trunk Club to get off and running ASAP.

There's a number of synergies that Mike is going to go through.

I guess I would add, in addition to those synergies on both sides, that for our executive team that was involved with the due diligence, we really left taken by the culture that Brian Spaly and his team have worked on.

It really resonates with ours.

It's focused on the customer; it's high touch; it's a full-price business; and they have a strong pay-for-performance culture there that, again, really resonates with us.

We are excited about the connection with Trunk Club and look forward to, over time, sharing with you how that best serves our customer and how that's a good fit for our business.

Now, I'd like to turn it over to Mike so he can give you more specifics both on Trunk Club and the quarter.

Thanks, Blake.

This quarter demonstrated our continued focus on the execution of our current business while looking forward and building our capabilities for the future.

The customers' view of a great service experience is rapidly evolving, and we believe strongly in serving customers on their terms.

The acquisition of Trunk Club represents our most recent example, providing an innovative way of serving customers.

The transaction aligns with our strategic priorities of accelerating our speed to market, increasing relevance with customers, and strengthening our capabilities.

We believe there are synergies between our companies that will generate significant long-term growth by enhancing the customer experience.

We are very excited about the opportunity and partnering with such an exciting and innovative team.

Before providing details of the acquisition, we'd first like to provide some additional color on our current performance.

Our second-quarter performance was in line with our expectations.

Earnings per diluted share of $0.95 increased 2.2% over last year.

Our results include planned investments and our entry into Canada this fall.

Sales trends were generally consistent with the first quarter.

We achieved total sales growth of 6.2%.

Comparable sales in our full-price business increased 2.7%.

The Rack continues to deliver accelerated sales growth of 18% with comparable sales increasing 4%.

Our gross profit rate decreased 7 basis points from last year, primarily due to higher occupancy expenses related to Rack's growth.

The heightened promotional environment that we experienced in the first quarter moderated over the last several months, resulting in comparable gross margin rates versus last year.

On a square-footage basis, ending inventory growth of 19% over last year outpaced sales growth of roughly 3%.

This was driven primarily from planned growth in our off-price business, with Nordstrom Rack and the recent launch of NordstromRack.com.

The growth of these businesses is creating additional opportunities for us to procure great product.

The increases in inventory also reflect planned investments in our full-price business, including fueling growth online and funding well- performing merchandise categories.

As we exit the quarter, our inventory is current and at an appropriate level to support the business.

With respect to expenses, our SG&A rate increased by 66 basis points over last year, largely driven by planned fulfillment and technology investments and the upcoming entry into Canada.

In addition, last year's results included a reduction in variable expenses associated with Company performance.

Now, we would like to provide additional color on the Trunk Club transaction and the opportunities we see.

We have entered into an agreement to acquire the company for $300 million [Company clarification: Later the speaker made a correction.

The initial purchase price was $350 million.], payable in Nordstrom stock, a portion of which is retention-based and subject to vesting.

In addition, we established a long-term management incentive plan of up to $100 million based on Trunk Club's performance.

Achievement of any portion of this plan will result in significant upside value.

We expect the acquisition to be dilutive to earnings-per-share over the next several years, largely as a result of share issuance, performance incentives and amortization of intangibles.

Based on preliminary numbers, we estimate the dilutive EPS impact to be 3% to 5% in the current year.

We plan to provide more details after we close the transaction, which is expected to occur in the third quarter.

As to our strategic rationale supporting the acquisition, there were several considerations in assuring that the business fit within our core strategy.

First is speed to market.

Although we have some of the elements necessary to develop this offering, it would've taken us several years to match the level of execution of Trunk Club.

Their business has been solely dedicated and very successful at serving customers in this differentiated way for the last five years.

We believe that speed matters, generating value from our-- I'm sorry.

We believe that speed matters, generating value from our rapid entry into this market, along with access to a customer base that is incremental to those we serve today.

Second, Trunk Club has successfully built a foundation that can support its independence growth while allowing for additional opportunities in partnership with our business.

We are looking at how we can combine our collective learnings and capabilities in a way that allows us to serve customers more fully across our business.

Third, we found the financial profile of Trunk Club to be attractive.

The business delivered positive operating cash flow in 2013 and is on track this year to achieve over $100 million in annual sales and reach operating profitability.

With the projected topline increase of roughly 150% in 2014, Trunk Club is expected to sustain outsized growth, through expansion of expansion of its existing channels of trunks, showrooms and custom fitting events.

Trunk Club will largely operate independently over the near term which is similar to the approach we have taken with HauteLook.

That said, Trunk Club will be able to immediately able to scale its business by leveraging our operational capabilities which include supply chain, greater breadth of inventory and in-store alterations.

Erik Nordstrom will lead these efforts partnering with various business leaders.

Before I talk about the 2014 outlook, I'd just like to make a slight correction.

I believe I said that the initial purchase price was $300 million.

It's $350 million.

Thank you.

Now, let's turn to our 2014 outlook.

We remain on track and have narrowed our full-year earnings per diluted share outlook to a range of $3.80 to $3.90.

This incorporates our second-quarter results as well as the full-year impact of share repurchases to date, but excludes the acquisition of Trunk Club, which is expected to reduce earnings per share by 3% to 5%.

Our topline expectations reflect total sales growth of 6.5% to 7.5% and a comparable sales increase of 3% to 4%.

Finally, the process regarding the potential sale of our credit card receivables is going as planned.

As we shared with you last quarter, we expect the process to take a total of 12 to 18 months.

We will provide an update once this process is complete.

In wrapping up the first half of the year, we were encouraged with our progress executing both our current operations and strategic initiatives with the overarching goal of delivering a superior customer experience.

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

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.

Lisa, let's take the first question.

(Operator Instructions)

Ed Yruma, KeyBanc Capital Markets.

First question, you have a tremendous amount of insight into the US consumer, given your various banners and price points.

The high-end has been very resilient.

Are you starting to see some of those upper middle income and middle income consumers beginning to heal?

And then as a follow-up, in terms of the Canada launch is there anything we should think about in terms of expense cadence for Q3 and Q4?

Thanks.

Sure, Ed, this is Mike.

Thank you for calling in.

In terms of the health of the consumer, our trends have been pretty consistent.

If you look at -- since the beginning of the year, we've been in that 3% to 4% range, and while there's been some macro news in terms of the health of the consumer, I think the way the consumer is behaving, certainly in our space, continues to be relatively consistent.

In terms of Canada, I think we shared previously that Canada would have roughly a $35 million impact to our earnings this year.

Through the first half of the year we've incurred roughly one-third of that.

And we expect the other two-thirds to be incurred in the back half of the year.

Paul Swinand, MorningStar.

Some clarification.

It looks like about $0.15 dilution on the acquisition.

Is that mostly on the share issuance and including the $100 million in sales, but even breakeven operating margin?

How should we think about that?

Paul, this is Mike.

The first thing I'll say is that we haven't finalized all the details.

Hopefully, we expect to close this quarter, in the third quarter.

When we get all that, we'll certainly disclose those details.

But, it really is a combination, directionally, of several tranches.

One is the issue of stock this year.

Another is the amortization of intangibles after we finish the accounting, and another would be the estimate of any performance against the long-term incentive plan.

The amortization, obviously, would be non-cash, but that would be spread out over a few years?

Yes.

Okay.

Thank you.

I will let somebody ask a question.

Good luck.

Dorothy Lakner, Topeka Capital Markets.

You've obviously now made a nice acquisition to supplement or complement your Men�s Apparel side of the business, but you've also made some great strides on the Women�s Apparel side.

I wonder if you could update us on how you think that's doing, along with the Juniors business, which is now under the same leadership.

So just an update on where you are in the Women's side of the business.

This is Pete.

As you mentioned, we now have leadership that really spans the entire breadth of what we do in Women's from Juniors all the way through Designer.

That wasn't always the case.

I think what we've learned over time and grown to appreciate is the dynamics are very similar kind of end to end way, and the best way for us to be successful is really the synergy of how it all goes together.

And so, that's new.

It's not going to represent a huge change, but I think, over time, it will help us leverage our strengths better.

Tricia is a really good leader.

More specifically, with regards to women's, we've had really good growth still with Topshop.

It's really an important part of our ongoing plan to be meaningful to that younger fashion contemporary customer.

We have 52 stores with Topshop in them now.

We will be growing that.

I don't have specific plans to tell you exactly, but we are aligned with our friends at Topshop to continue to grow this business, and there's more opportunity for us there.

The good news about that is that's not really measured in isolation.

Where we have Topshop in a store, and where we have success, it's kind of lifting all boats in the Women�s Apparel area.

I would say, generally, we've had good progress with women's.

We're happy about our plans there, and we feel like we are going to continue to have growth.

Lorraine Hutchinson, Bank of America.

I wanted to follow-up on the growth in inventory this quarter, specifically, the planned growth in full-price.

Is that just new stores, or is that making bets on other categories?

This is Mike.

The full-price primarily is the growth in Direct.

We continue to see that business growing in the mid to high 20%s range, and so that's the continuing funding of that business.

We do have some new stores opening, plan to open.

But, the impact on the overall inventory levels at this point are relatively minor.

This is Pete.

The only thing I would add to that, we did make a purposeful increase in inventory plans related to, specifically, the cosmetic division, where we felt like we were turning a little too fast, and maybe we were out of stock.

As we've done that, it's really helped improve the business.

In fact, Cosmetics is the top comp sales division for us year-to-date.

So, that's been a purposeful investment and well worth doing.

Thank you.

Kimberly Greenberger with Morgan Stanley.

I just wanted to follow-up on Lorraine's question on inventory.

I know that you have been building inventory for the last several years for all the various initiatives you have.

Is it your view that we should just continue to expect inventory's growth to outpace sales growth into the future?

Does that mean that a slower level of inventory turnover is what you expect going forward?

Or, do you think will get some sort of a normalization in two, four, six, eight quarters where you will start to see revenue actually outpace your inventory growth?

Kim, this is Mike.

That's a great question.

Our overarching goal is always to improve the GMROI on our inventory, and clearly one of the components of that is turn.

That said, as we've expanded our off-price business, as we've launched Nordstrom Rack.com, and, I think, as we've done a more integrated approach with our top brands in procuring product, we've been able to do a much better job in the marketplace at being the first ones at the table to get the best product.

The pack and hold has been something we've continued to invest in, and clearly what you are seeing there has been some great opportunities for us to get the best off-price product out there that we believe will certainly continue to drive those sales in the off-price space.

We don't expect that over the long run, that it's going to continue to outpace the sales.

But clearly, were going through this inflection point as we've adjusted some of our operating techniques and our strategies that we are able to accelerate the growth of the inventory.

Thanks so much, Mike.

Paul Trussell, Deutsche Bank.

I just wanted to ask about the performance of the Nordstrom Rack, as well as HauteLook and Nordstrom.com, just get some breakdown amongst those websites' performance in 2Q.

The question is about NordstromRack.com?

Just about each of your website banners, the performance and what you saw.

Okay.

Erik, do want to talk about that, please?

Sure.

One of the great learnings and values of the HauteLook acquisition has been the launch and the support of Nordstrom Rack.com on their platform.

They did a terrific job of making that happen, very, very quickly.

Very happy with the speed of that.

Our integration between Rack and HauteLook and Nordstromrack.com, there's a couple others where we really benefit.

One is the technology and getting it quicker.

The biggest would be merchandise.

As our teams have been able to go-to-market, the stories in the marketplace, the value for the vendors of these different businesses we are in and the synergy it creates is really resonating.

So, the quality of the content for HauteLook is starting to be more and more influenced by our Rack merchandising team, so the merchandising team between HauteLook and Rack are working together.

That content is just starting to come in.

What's been a NordstromRack.com, up to now, a bigger chunk has been from the HauteLook team.

We are still learning a lot with NordstromRack.com.

We are pleased with the launch there.

But, we've got lots of opportunities to get better.

The HauteLook business itself has been very consistent from a demand standpoint, running about 30% increase in demand.

What's changed a bit is our return rate.

Again, this goes to the integration points of why we like the HauteLook business and where it brings value.

It was end of last year that we started taking HauteLook returns in our Rack stores and over 70% of HauteLook returns are now coming physically to our Rack stores.

Customers come into our Rack stores.

It's a better customer experience.

It separates HauteLook from other flash sale competitors, and it is a tremendous traffic driver for our Rack stores.

So, within the HauteLook silo, that return rate has gone up quite a bit, which is hurting their sales.

But overall for the Company, it's a clear win for us.

As far as Nordstrom.com's performance -- I guess the biggest difference between first quarter and second quarter was the amount of promotional activity.

In first quarter, as the industry was having more promotional activity, we were matching price, we saw a fairly significant increase in demand and also a corresponding reduction in gross margin.

Second quarter, not as much promotional activity, so we didn't get that lift in demand, but we also didn't get the hit to the gross margin.

Just to follow-up on that, thank you for that color, but to follow-up on that, as we move into the second half of the year, obviously tough to gauge the competitive response going forward.

Just help us understand what your thoughts is on gross margins and promotional intensity for Q3, specifically.

I mean, there was a big gap between your first quarter and second quarter gross margin performance.

Is the thought to expect the second half to be somewhere in between?

Paul, this is Mike.

Our guidance reflects our expectations as to how we feel about our ability to achieve our margin.

We definitely saw, the first quarter was impacted by some pretty severe weather patterns coming out of the winter season.

That caused a lot of promotions in the first quarter.

We saw that moderate in the second quarter.

We clearly are very conscious of what's going on out there.

But I think if you look at what we are guiding for the back half of the year, I think that says how we feel about it.

One other thing I will add, too, about the Direct performance, if you look at both the first and second quarter on the two-year basis, we are up almost 60%, almost equally in both quarters.

So we continue to see that business operating at our expectations, which is roughly that mid to high 20%s comp.

Oliver Chen with Citigroup.

Regarding your prior and your current outlook, the tweak in the comp store sales and taking it towards the high-end as well as editing the gross profit on basis points, what were the main dynamics that drove those changes?

And our follow-up was on the full line comps.

What would you prioritize as the biggest opportunity, just to see improvement in that business.

In terms of the adjustments, it really just reflects the fact that we got two quarters behind us now.

There's more certainty and clarity into what the year is going to look like.

There's nothing more in those adjustments other than that.

In terms of the full-line comps --

This is Jamie.

I think one thing I want to remind you, when we talk about the full-line business, we have a customer strategy, not a channel strategy.

So we do have a number of things we are working on and opportunities we are pretty encouraged about to improve our service and improve our productivity within our full-line stores.

The line between where the demand occurs and where the sale gets reported is so blurred today, and the expectations the customers have around the service that they want are so dynamic that we are really looking at how we serve customers in the future, that it's not about boy, we really need to do this thing in our full-line stores to get the comps going in that channel.

We need to look at our entire business and say how can we provide a better customer experience and ultimately drive more customers into our stores and more customers in our website?

Erik mentioned HauteLook returns going to our Rack stores.

That's a great example of things we can do that might not make one P&L for one business look different or better than another one, but it's a win for the customers.

So we're really focused on those things.

Again, we're really encouraged about the number of opportunities we have in front of us to improve service there.

Jennifer Black, Jennifer Black and Associates.

Congratulations on solid business trends.

It appeared that you had much more as far as full-price merchandise on the floor during Anniversary Sale, and I wondered if that was correct.

And, if customers responded favorably to the merchandise assortment.

As a follow-up, can you talk about what you think your areas of opportunity are for next year's Anniversary Sale?

Thank you very much.

Jennifer, this is Pete.

I don't know that we actually had more, literally, in terms of regular price inventory, but we are definitely conscious of how important it is to have new regular price inventory when there's that many people in the store.

I know there's always efforts that we have to have a good regular price offering, and I can tell you the divisions that did the best are the ones that were able to, not only have good sale merchandise, but have good flow of new regular price.

That's certainly part of our strategy.

The second part -- the anniversary?

I think one of the things we did a particularly good job this year, and this is been a theme for us for the last couple, I think we've done a good job with our loyal, regular Nordstrom customers in making this event as appealing as possible and convenient and easy for them.

That's certainly showed in our results.

I think the opportunity for us going forward is while we continue to do that, that we also spread the word and have -- try to raise awareness with customers that are maybe more casual Nordstrom customers or acquisition type customers of what a great event this is and why it's something special and different.

There's a lot of opportunity with that specifically.

That's, I think, something we are trying to layer on for next year and that should help us grow the event.

Jennifer, one thing to add to Pete's comments, there, in the second quarter, as we've seen this full-year, we are acquiring customers in our rewards program at an accelerating rate.

In the second quarter, I think we are up about 18% in terms of new rewards customers.

So, that continues to be an opportunity for us as Pete said, to continue to engage customers at a higher level and also introduce new customers to our brand.

Okay.

Thank you.

Joan Payson, Barclays.

Just a couple questions on the Rack stores.

Is there anything more recently that you've been seeing that gives you increased confidence in that 230 store target for the long-term?

Also, in terms of category performance, do the Rack stores have the same category successes that the full-line stores do?

Or are there any differences there?

Blake, you want to take that question?

Sure, Joan.

Regarding the 230 store goal or objective we've had for 2016, we are close.

At this juncture, we could fall a little short.

What we are finding is there is some cyclical nature to it in terms of availability of the stores.

So one year we might have planned to have 25 store openings, and it might fall short of that.

And the next year we might come above that.

I think from a long-term point of view, we feel really good about the growth at the Rack and the opportunities there.

But there could be some nuances that we don't -- we may not be exactly at 230 at that time.

But, I think, over time, we'll hit that number and continue to go forward with that.

In terms of category performance, our Racks do mirror the full-line stores, and the customer is desirous of the same fashion and trends.

And so there is a correlation if the full-line stores have the category that's hot, it tends to correspond as well within the Rack.

So, there is a complementary approach there.

It was said earlier, too, and I would just reiterate, the general merchandise managers are just doing a terrific job working with our vendors and enhancing our partnership and looking at the four areas of our strategy.

The vendors are more and more thinking of us first, and when it comes to close out, it's really helping our Rack business.

So, we're really encouraged with the quality of product that we are able to provide for our customers.

Great.

Thank you.

Bob Drbul, Nomura Securities.

Had a question on the inventory.

I was wondering if you could comment a little more on the pack away inventory, the categories that you've seen.

It seems like just the magnitude, that's one of the larger ones that we've seen over the years, in terms of the commitment that you've made there.

Bob, we are really not going to breakdown by category what that looks like.

But suffice it to say we continue to believe that it's providing us a great opportunity.

I think the other thing to keep in mind about that, too, is I think we've got 16 Rack stores that we're opening next quarter.

So, that's also an element of the growth of that investment.

It's relatively broad, in terms of the opportunities.

Mike, this is Blake.

To add to that, there's really three elements or drivers to access the product.

If it's from our full line stores to transfers, it's close out merchandise from our top vendors, and it is the ability to have, when there's a void, make up some product as well.

What again I mentioned earlier the previous question, we're really encouraged by is, we are getting more and more first call and more and more access to great product as time goes on.

So, as we've gotten larger with scale, it's really helped and this pack and hold ability to be able to go to our top vendors and be able to buy all the product they have at end of season and then hold it for a couple months and then bring it in our stores, it provides much better flow, better sizes and again more trend right merchandise.

It's been a real win-win.

It does impact, in the short run, kind of an apples and oranges comparison, i.e., what we had on pack and hold last year versus this year.

As Mike said, of that's driven by the new store opening cadence.

It's a key point of filling those stores with the right product, we use pack and hold.

At this juncture, we're really encouraged about that avenue of product.

Thanks, Blake.

Michael Binetti, UBS.

I'm curious about a couple of things with Trunk Club, since it will probably be a focus here for the next few weeks.

I'm curious about your comment about how you said it was an opportunity to speed to market and maybe a little bit about why you felt the urgency to get into that category right now.

I have a follow-up.

Erik, do want to take that, please?

Sure.

Well, as Mike said, we've been looking at that business, both Trunk Club and just that business model, the last couple of years, in particular.

It is smack dab in the middle of what we do.

Their customer offer, it's about fashion, about the guy who wants to look good and who appreciates high level of service.

What's complementary to what we do, because those are two things, obviously, that's our foundation, what's complementary is that it's the guy who doesn't want to go to a store, who either doesn't have the time to go to a store or simply doesn't like going to stores.

And they use a multi-channel offer to do that.

That is, in so many ways, close to what we do, yet complementary.

Much like -- I think we purchased HauteLook, that while we are in the off line business, we concluded that this flash sale model was of significant scale and that certain customers simply liked it.

It wasn't wise for us to try to force them into the one off-price model that we had.

It was wise for us to offer the customer the choices they want.

It's very similar here.

It's another way of serving customers that's about fashion, it's about good service.

Yet, it is different from what we do.

So, the model got us more excited as we looked at it and it's something that we feel that category is going to grow, that we are uniquely positioned to be a leader in it.

But if we didn't do it, someone else would and would take it bigger.

Trunk Club in and of itself is on tremendous growth rate.

It's pretty clear where we can help them through things like inventory, supply chain, in-store alterations, things like that right off the bat that we can add fuel to their growth.

It's also clear that our two companies are better together than separate.

Things like -- even contemplating expanding that service to Women�s would be very daunting for either one of us to do it on our own.

Combined, we're are well-positioned to test things like that, and we just think there's tremendous upside going forward.

Okay.

Just a quick follow-up, might be more for Mike.

Of the $0.15 -- I think that's backed us out to about $45 million in cost --how much of that is on-going versus costs that will roll off like amortization?

If you could help us break that down and then maybe why the decision to pay in stock for the acquisition?

Michael, we'll give more visibility into that as we get to the closure.

Suffice it to say the business currently, in 2014 and going forward, is at an operating profit.

And we expect that to continue to expand as time moves forward.

In terms of some of the non-cash related items, we will see those start to pare off after the first couple of years.

But we'll give you more detail as we get through the closing process.

And then I think the second part was why stock?

Stock was just a currency that made sense for both parties, and it helped to facilitate us to get the deal done.

Clearly, it also fits within our overall capital policy in terms of how we manage our capital, so it is frankly kind of a moot point.

Barbara Wyckoff, CLSA

Couple questions.

What are you doing to announce your arrival in Canada?

Anything special?

Could you bring us up-to-date on performance in denim and Women�s Active?

And then I have one follow-up question.

Barbara, this is Jamie.

We're opening our first store in Canada on September 19, and our team up there has been very active in the community for a number of months.

Clearly, there's been some hiring that's been going on as we've built that team.

Calgary is a great town.

They've got a lot of stuff going on.

They've got the Stampede, which as we've learned is a big deal and a lot of fun.

Our team has been part of that.

We've been sponsoring things.

We sponsored the big breakfast up there.

We helped feed 50,000 people breakfast on one morning.

What we're really trying is -- like I think we've done in wherever we've opened stores, which is really try to learn what's important to the community so we can be part of the community.

We're only opening one store in Canada this year.

Our entire team at Nordstrom is focused on getting it right.

So, we want to make sure that we're listening to the customers up there and we're doing everything we can to make sure that when we open our store -- open our doors there in a few weeks, that we make a great first impression.

On the question specific around the merchandising areas, denim both in Women�s and Men�s is solid.

It's pretty good.

I wouldn't say it's spectacular, but I think it's fair to describe it as pretty good and at least at plan for us.

It's a healthy part of the business.

In terms of Women�s Active, we have a lot of discussions around here recently about that.

We've had some really outstanding growth, in particular, with our Zella brand that's an NPG brand that we do ourselves.

It's been quite good and I think it's reflective, not only of how great that product is, but the opportunity represented more broadly in that category.

It's a hot topic around here.

We're talking about ways that we can continue to add onto that momentum.

So, it's a very positive part of our Women�s business right now.

Okay.

Thank you.

One last question.

What percentage of your customers shop full-line store and Rack both?

Roughly 30%, Barbara.

Okay.

Thank you.

Neely Tamminga, Piper Jaffray.

I was wondering if Erik and Jamie would lay in a little bit with their job switch and any sort of key additional learnings they would like to share that might be impacting strategy.

Just a quick housekeeping, Mike, for me.

Where exactly did those Rack.com sales go?

Are they in the Direct number that's up 22% or the Rack number that's up 18%?

Jamie --

I will kick it off.

As you may have known, as you may have known, the main reason behind Erik and I's job switch is that we felt we could do a better job as an organization in being customer centric.

I think we've made a lot of progress over the last, probably decade, in being really focused on customers and how they want to shop and investing in capabilities to serve them on their terms.

Erik and I, over the last year or so really felt we were kind of hitting a glass ceiling in terms of organizationally, how we were able to get after some of the stuff.

To put it simply, in some ways, we weren't being very customer centric, we were actually being channel centric.

Our customer doesn't care about channels.

You never hear a customer say the world channel.

Erik and I felt that by us switching jobs, we could support our teams more effectively to get after some of these bigger ideas that we think are out there in terms of whether it's how customers are shopping on their phones or all the things that happen in between a website and a store that frankly is where the magic is.

We've got some big ideas on how we can improve our business into the future.

We think we are pretty well-positioned, and Erik and I are really excited about how we can better support our team towards those goals.

I would just add, just my observation so far, in Direct -- while I've been a keen observer from the outside of bit, it's being there day to day.

It's a very impressive team, especially the last three years, Jamie and his team added a lot of people, many from outside the company to add capabilities we didn't have, pure e-commerce capabilities.

The team is very impressive in their skill level, their experience in e-commerce.

And, it's a very well run e-commerce business.

I would echo Jamie's comments.

Our opportunities are, we have to keep doing that and progressing on those e-commerce specific capabilities.

But, we feel there is another level to get to with leveraging our capabilities across the channels, and that's something, probably -- I don't know -- eight months to nine months before we did the switch Jamie and I worked more together than we ever had.

That's just continued after the switch, and we think there's some tremendous opportunities for us to serve customers in ways, in better ways than I'm not sure anyone else can, given the different businesses we're in.

Trunk Club is just one conspicuous example this last quarter, but it's another tool on our belt that we can serve customers better with and that, again, it fits in between these silos of businesses, and that's where we think the big opportunities are for us.

Neely, I wanted to make sure I understood your question.

Could you please repeat it?

Yes, sir.

Rack.com sales, do they show up on the Direct line, which was up 22% in the quarter, or did they show up in the Rack division sales, which was up 18% overall.

It's in the total HauteLook.

Total HauteLook.

All right.

Thank you.

Liz Dunn, Macquarie.

Most of my questions have been answered.

I just had one point of clarification.

I think you said something like the gross and direct was due to merchandise availability.

I didn't really catch that.

Can you just flesh that out for us a little bit?

Thanks.

I think what we were implying, that we continue to expand the selection and the product offer, and that's driving more business.

Does that mean there's been some sort of slow down in traffic or conversion?

Is it just less dropped baskets or less unavailable merchandise?

Just on the comment, I'm curious.

Yes.

All right.

Thanks a lot.

Good luck.

Thank you for joining us today.

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