諾德斯特龍百貨 (JWN) 2015 Q2 法說會逐字稿

Greetings and welcome to the Nordstrom second-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder this conference is being recorded.

At this time, I'll turn the call over to Trina Schurman, Director of Investor Relations for Nordstrom.

Thank you, you may begin.

God afternoon and thank you for joining us.

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

Before we begin I want to mention that our speakers will be referring to slides which can be viewed by going to Nordstrom.com in the Investor Relations section.

Today's discussion may include forward-looking statements, so please refer to the slides showing our Safe Harbor language.

Participating in today's call are Blake Nordstrom, Co-President, and Mike Koppel, Chief Financial Officer, who will discuss the Company's second-quarter performance in addition to outlook for FY15.

Joining during the Q&A session will be Erik Nordstrom, Co-president, and Jamie Nordstrom, President of Stores.

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

Thank you and good afternoon, everyone.

As we previously shared with you, our customer is at the center of our strategy as we focus on creating a differentiated experience in each of our businesses.

While we have been pursuing distinct strategies to grow each business we're also working to link them together to provide our customers with a seamless experience.

This is important because we know that when customers engage with us across multiple touch points, their lifetime value and spend increase significantly.

Our second-quarter performance demonstrated the ongoing execution of our customer strategy, which is driving continued strength in our business.

We achieved total sales growth of 9% and a comp increase of 4.9%.

The Anniversary Sale, our largest event of the year, performed on plan and was consistent with our trend, led by strength in Cosmetics and Women's Apparel.

This past May, we announced our strategic credit partnership with TD Bank.

We are pleased to be partnering with a premier financial institution that shares our customer focus and is aligned with our approach of having Nordstrom employees serve our customers directly.

We're planning to wrap up the process by the end of the year, and Mike will provide more detail in his remarks.

As we mentioned, we are focused on further integrating our businesses through service and experience, product and capabilities.

Our recent initiatives around stores and mobile, along with our Trunk Club acquisition, are ways to create a more relevant experience with our customers.

We consider full-line stores to be the core of our brand, providing our customers with the high level of service they expect from us.

Not only are we serving more customers through new stores, we are benefiting from synergies across our channel.

For example, when we opened in Calgary and Ottawa we saw a meaningful increase in online sales in those markets.

With two stores open to date, our Canada business is performing ahead of plan.

Next month, we will open our Vancouver flagship store with an elevated service offering.

We plan to open three stores in Toronto over the next couple of years and introduce Racks in the fall of 2017.

In the US, this October, we will also open full-line stores in Minneapolis and Milwaukee, and relocate a store in Los Angeles.

The growth of the Rack is also an important element of our strategy to gain new customers and increase engagement across channels.

As we mentioned before, the Rack business now represents our biggest source of new customers, attracting around 4 million in 2014.

The Rack also serves as an entry point to the Nordstrom brand, providing an opportunity for customers to cross shop.

For example, last year, we had 1 million Rack customers start to shop at our full-line stores or Nordstrom.com for the first time.

We are on track with our Rack growth, with 16 openings planned in the third quarter for a total of 194 stores by the end of the year.

Mobile is an important enabler of convenience as customers increasingly desire a more seamless shopping experience.

Of the US population, two-thirds own a smartphone and roughly one-half shops on their device, presenting a meaningful opportunity for us with over 90% of our customers using smartphones.

To evolve with our customers' rapidly changing expectations, we're rolling out new features at a rate three times faster than last year.

In addition to our ongoing mobile enhancements we launched a unique text-to-buy feature for our salespeople, enabling customers to buy product via text.

As customers continue to want a more integrated shopping experience, we view mobile as a long-term priority to provide a richer experience for our customers.

Roughly a year ago, we acquired Trunk Club, a personalized innovative clothing service for men.

Trunk Club is planning to roughly double its sales this year with opportunities to leverage our existing capabilities and resources.

Additionally, Trunk Club stylists have collaborated with our buying teams to pilot Trunk Club's service to women with a full launch expected in September.

We're excited about the shared synergies, similar to our experience with the launch of Nordstromrack.com last spring when we combined HauteLook's e-commerce talent with Rack's merchant expertise.

From a merchandising perspective, we're also focused on integrating our business to provide our customers with a differentiated offering.

This is enabled by our vendor partnerships, where we can offer a one-stop shop for distribution across channels and categories.

Through these partnerships, we've been able to better serve customers by complementing our curation in store with breadth online.

For the past several years, we've expanded online selection by over 20% annually through key brands that are resonating with customers.

These brands also help us create excitement and attract new customers.

In particular, we're having success in our younger customer-focused departments, which are now among our fastest growing categories.

As recent examples, we are expanding Topshop, Madewell, and Brandy Melville to more doors this year.

These unique brands are increasing our fashion relevance with customers, in addition to creating synergies and strength across Women's Apparel.

Lastly, we're building on our enterprise capabilities to support a seamless customer experience.

Over the last decade, we have made significant investments to develop our multi-channel capabilities.

Today, we're also focused on offering our customers faster delivery.

This will be enabled by our third fulfillment center which opens this month and will be fully operational by holiday.

This center is expected to increase our fulfillment capacity by over 50%, supporting our long-term growth.

In closing, we are confident in our ability to execute our customer strategy as we evolve with our customers, focusing on service and experience, product and capabilities.

With that, I'd like to turn it over to Mike.

Thanks, Blake.

This quarter marked continued progress executing our customer-based strategy and evidence that we are on track to reach our growth ambition of $20 billion by 2020.

To achieve this long-term growth, we made a strategic decision several years ago to accelerate our investments to gain market share and strengthen our capabilities.

These include generational investments in Canada and Manhattan, as well as our strategic investments in Trunk Club and HauteLook.

Technology is also an integral enabler of the customer experience, representing a critical element in linking our enterprise.

Just as importantly, we are investing to assure a strong technology platform that delivers the necessary flexibility and scale to achieve our growth ambitions.

Given the dynamic nature of customer expectations and its impact to our business, we are committed to evolving our financial model to insure that we deliver sustainable, profitable growth over the long term.

In the near term, we are seeing benefits from our investments, which are driving top-line strength in our business.

Our 9% sales gain marks the fourth consecutive quarter of high-single-digit sales growth.

We've invested in new markets and concepts with our entry into Canada and the acquisition of Trunk Club and the Nordstromrack.com launch.

In the second quarter these new businesses collectively added over $100 million to our top line.

We are also seeing continued strength in our existing business.

Our combined full-line store and Nordstrom.com business delivered mid single-digit comp increases over the past year.

The growth in our off-price business continues with Rack's total sales increase of 13%, which represented 26 consecutive quarters of double-digit growth.

Rack had a comp increase of 1.7%, on plan for a low-single-digit comp for the year.

Nordstromrack.com and HauteLook grew 50% in the first half of the year, on track to reach half a billion by the end of the year.

As discussed previously, we're evolving our clearance strategy to make these events more relevant for our customers.

Historically, our merchants had category-specific strategies to clear goods.

Over the past year, we recognized an opportunity to leverage and scale our business by having all categories participate in clearance events, aligning with the seasonal markdown cadence during major holidays.

We believe this is an opportunity to drive more trips and improve sell-through with fewer days on clearance.

This year we are moving towards 20% fewer clearance days relative to a couple years ago, with another 25% reduction planned next year.

The quarter demonstrated good execution with respect to inventory and expense.

Our gross profit rate was comparable to the prior year.

We ended the quarter in a good inventory position on plan and current.

Our inventory growth of 11% reflected planned growth and was roughly in line with our sales growth of 9%.

The underlying inventory trends of our existing business continue to be healthy, reflecting inventory levels and turns in line with our expectations.

Our SG&A rate increased roughly 85 basis points, primarily due to our planned investments in Trunk Club and Canada.

Our Nordstrom Rewards loyalty program is an important way for us to create new and strengthen existing customer relationships.

With 4.5 million customers in our program, sales from members increased 10% and represented roughly 44% of our volume this quarter.

In addition, Early Access to shop the Anniversary event continues to be an important benefit, attracting 7% more new members.

As we look ahead, we are planning to expand our program to include a tender-neutral option for customers, which is targeted for next year.

Next, we would like to provide additional color on our capital framework.

We maintain a strong financial position, ending the quarter with a cash balance of $425 million, and adjusted debt to EBITDAR of 2.1 times.

Maintaining balance capital allocation year-to-date, we incurred $425 million in net CapEx, paid $140 million in dividends, and repurchased $265 million in shares with $735 million remaining under current repurchase authorization.

Return on invested capital of 11.9% decreased from 13.2% a year ago, primarily reflecting the acceleration of our growth investments.

Our credit card portfolio remains healthy with delinquencies and write-offs around pre-recession levels.

Moving on to the credit transaction, the sales of receivables will improve our capital efficiency.

We expect to receive approximately $1.8 billion in net proceeds at closing.

Because we are planning on fully funding our long-term growth through our current operations, we're not intending to apply the proceeds to our incremental investments.

While we are currently evaluating our plans we are committing to maintaining our capital structure using a balanced approach.

In terms of the financial impact of the transaction, we reclassified our receivables as "held for sale" in the second quarter resulting in the reversal of the allowance for bad debt.

In addition, under the program agreement with TD Bank, we will be entitled to a substantial portion of net revenue generated by the portfolio.

We estimate the cash impact of this revenue share agreement, while maintaining our credit operating expenses, will result in roughly 50% of credit EBIT retained.

This is based on our current level of receivables.

We believe that going forward, this EBIT gap could narrow due to future growth in the portfolio.

Lastly, we are working through the details of the transaction and its related accounting treatment.

An update of the overall financial impact will be provided following closing which is expected by the end of the year.

Now let's turn to our 2015 outlook, which remains on track for the year.

Relative to our prior outlook, we narrowed our EPS expectations to the high-end of the range before factoring the second-quarter credit impact.

Our top-line expectations reflect the continuation of current trends with total sales growth of 8.5% to 9.5% and a comp sales increase of 3.5% to 4.5%.

In closing, we're making progress in executing our strategy in achieving our growth ambitions, which is centered on our goal of delivering a superior customer experience.

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

Thank you, Mike.

Before we get started with Q&A we would like to ask that you limit to one question.

If you have additional questions please return to the queue.

We will now move to the Q&A session.

(Operator Instructions)

Our first question comes from the line of Jeff Stein with Northcoast Research.

Good morning, guys.

One of your competitors recently indicated they do about 5% of their sales in tourist destination type markets and that's had a pretty material impact on their comp store sales.

Just curious if you've looked at your business that way.

And if you could just give us some indication what percent of your sales would be in markets such as Los Angeles, Seattle, Chicago, and so forth.

Jeff, this is Mike.

We certainly, in those markets, do have tourists that visit our stores.

We really haven't commented or, frankly, paid particular attention to the amount of tourists we have in those individual stores.

We're focused on running our business and having the best product and to-date it really hasn't been a discussion point for us.

Got it.

Can I ask a follow-up question then?

Wondering on Trunk Club for women, is there going to be an incremental spend?

In other words, was that part of your original plan when you targeted the estimated losses that you indicated in your Q4 release or will this be incremental?

It's not incremental to the current projections that we shared.

Got it, thank you.

Our next question comes from the line of Charles Grom with Stern Agee.

Hi, thanks, and congrats on a good quarter.

Mike, just to clarify your comment here on the percentage of EBITDA you're going to retain, the 50% of your credit, is it 50% of the credit income you're going to retain?

Is that all-in or is that less the loyalty reward expense?

Can you just explain that in a little bit greater detail for us?

Basically the credit EBIT that we currently report that we segment out in our financial statements, it will be 50% of that reported amount.

In terms of the loyalty we continue to retain all of the costs of our loyalty program.

Okay, good.

And just on credit, can you explain how the $51 million that you received here in the quarter, how did that get accounted for?

Sure.

Basically, it was roughly $64 million of the gain related to the reversal of the allowance for doubtful accounts.

And in addition to that we had some expenses related to the transaction.

And also we had impairment of an asset that we had on the books.

Okay, and then just my last question, real quick -- the guidance that you're giving on the forward guidance, that does not include anything from credit going forward, right?

I'm sorry -- in terms of the credit sale.

It doesn't include any additional amounts, that's correct.

It's just what we've recorded to-date.

Okay, great, thanks very much.

Our next question comes from the line of Neely Tamminga with Piper Jaffrey.

Great, thank you, and congratulations on a well-executed quarter.

Just wanted to ask a little bit more about Anniversary Sale, two questions.

What fashion dynamic did you see in Anniversary Sale that's beyond just dresses and coats, that you could share with us on early fall, that gives you confidence in the back half?

And, secondly, I know from time to time you guys will comment about how people will purchase fuller-priced products during sale moments, whether it's clearance or Anniversary Sale.

Could you give us some characterization of that behavior, as well?

Thank you.

Hi, Neely, this is Erik.

I'll take that one.

Anniversary was executed really well for us.

I'd start with some context.

It is an enormous amount of volume for us in a month that is a very slow month in the industry.

So, it's big part of our year, every year.

A lot of planning goes into it.

And it helps a lot the flow of our year.

One thing that has changed a bit over the years, our customers are more and more interested in buy-now, wear-now merchandise.

So, it's less about selling merchandise that our customers put away in their closet for October and November than it used to be.

In that regard it's not quite the predictor of more true fall selling.

But it is brand new merchandise that customers are choosing to buy-now and wear-now.

Our top-performing divisions for the sale were Beauty and Women's Apparel, across Women's.

In particular our younger customer departments really had a terrific event.

We continue to see a lot of strength in Topshop, Brandy Melville extended distribution helped, and we launched cupcakes and cashmere online and in t.b.d.

So, there was a lot of newness in Women's and a little more around the inner customer that got traction.

Again, Beauty, both treatment and fragrance, proved to be really strong.

Thank you.

Our next question comes from the line of Oliver Chen with Cowen and Company.

Hi.

Congratulations on an awesome quarter.

Regarding the evolving clearance strategy, the slide's really helpful.

I just wanted to get a sense of the over arching theme here.

Is the objective to increase merchandise margins?

And I was wondering the implication of driving trips and having less days, like, what's the longer-term vision for how these work better?

They do seem more customer-centric.

This is Jamie.

I'll take that one.

As Mike said, we've been consolidating what used to be different categories' clearance events.

We'd have a Women's clearance event and then a few weeks later we would have a Men's clearance event.

We've consolidated those into fewer bigger events that, I agree, I think they are a more relevant way for customers to shop.

And they do coincide with how our industry traditionally receives and moves on to the next season.

Yes, we definitely see an opportunity to improve our turns and our margins.

That's not really the point, though.

I think it's about maximizing our ability to have a flow of fresh new goods into our stores.

That's what drives our business more than anything else.

And certainly driving trips is part of that but we hope to drive trips by having stuff the customers want to buy.

So, the more we can execute that flow of fresh new stuff, hopefully that will drive trips overall.

Okay that's awesome.

And your comments on mobile were really helpful about those details.

As we analyze mobile and the holiday season, what would you say would be the most incremental year-over-year changes that the mobile customer is going to experience this year versus last?

Oliver, this is Erik.

A couple things we've launched in the last quarter.

Text-to-buy would be one we're pretty excited about where I believe we're the first to have the functionality to where customers can buy through texting with their salesperson.

We launched a personalized homepage on our mobile site.

We have integration with our loyalty program.

We launched an Android app.

And we also launched near-store notification, so when you're driving by our store we have relevant notifications we can send to our customers.

Those, I think, would jump out at me as the biggest differentiators versus last year.

Okay, great, thanks.

Best regards and good luck for holiday.

Thank you.

Our next question comes from the line of Matthew Boss of JPMorgan.

Hi, guys, great quarter.

You're one of the few retailers out there that's seeing positive brick-and-mortar sales.

It's a pretty tough question but do you think maybe we've seen a potential floor in terms of the shift that you'd been seeing from brick-and-mortar towards e-commerce?

And with that, any change in traffic patterns at brick-and-mortar in terms of some of the changes you've made to the promotional strategy?

I'll take that.

This is Jamie.

We've been focused for a number of years on really trying to create a seamless experience for our customers, whether they're shopping online or in the store or on their phone.

We made, and we continue to make, progress on that.

We don't think the customer is loyal to channels.

We don't hear customers talk about channels very much.

Customers value experiences.

The more successful we're at in creating a great shopping experience, no matter how they're choosing to shop, I think the better our business will be.

So, we're talking about mobile and the things we're doing there.

The sale can happen all over the place.

They might be shopping in a store and buying on their phone.

The customer doesn't care where the sale gets recorded.

They just want the best stuff and they want to have the best experience on their terms.

The more we're focused on that and less on the channel I think the better our business will be.

Great.

And then just a follow-up, as we think about the profile on a go-forward basis, Mike, can you help bridge for us the delta between potential return to mid-teens ROIC over time versus today's low-double-digits?

And any changes we should consider as it relates to the credit transaction in terms of the ROIC?

Sure.

Yes, Matt, we should see over the next 12 months the impact of the investment cycle start to flatten out on the ROIC, and then we should see it start to progress back up.

In terms of the impact of the credit transaction, once that cash gets fully deployed we should expect a several hundred basis point improvement in the ROIC.

Great.

Best of luck, guys.

Thank you.

Our next question comes from the line of Joan Payson with Barclays.

Hi, good afternoon, and congratulations on the strong quarter.

I was hoping you could talk a little more about the reduction in clearance days.

Are you expecting any short-term disruption to comps from that just given the optics will look a little bit different to the consumer?

And then also, in line with that, we've been hearing from a few vendors and brands out there that they're working on becoming less promotional in the department store channel, or resisting a little bit the off-price exposure to some degree.

Has that affected your business at all in the rack or in terms of changing the promotions?

Joan, this is Jamie.

I'll take that one.

I think if you look at our top-line and overall performance over the last few quarters, you can infer that our evolving clearance strategy is driving part of that.

We're pretty happy with our progress there.

Clearly, we're moving some sales around on the calendar, and the history gets a little mixed up but overall we're pretty happy with the performance so far and the results we've had.

In terms of promotion, we're not really a promotional retailer.

We do compete in an industry that is pretty promotional.

We do often have to compete on price when another retailer might get promotional on a certain brand or classification.

We would certainly hope that, as an industry, there is less promotion and we get more focused on service and differentiated product assortments.

We think that's what drives the healthiest business over time, and not the short-term promotion.

But we would certainly welcome that and we hope that does happen.

Great, thank you.

Our next question comes from the line of Kimberly Greenberger with Morgan Stanley.

Kimberly, your line is live.

Really nice quarter.

I am wondering -- we heard yesterday from Macy's that they were seeing some signs of more promotional activity.

They indicated, really at the Bloomingdale's level, the higher-end department store level.

I'm wondering if you're seeing any of that in your business?

And maybe you can just update us on the success of your price matching strategies that you're working on.

Thanks so much.

Sure.

Jamie do you want to comment again on the promotional end?

Yes.

As I mentioned earlier, over the last couple of years I don't think it's been a secret that our industry has been more promotional than historical levels.

I can't speak to any particular competitors out there what they're doing.

We're pretty focused on our deal and our customer and what works for them and how to best serve them.

So, I can't really speak to that.

The second part of your question was on --?

Price matching.

We've long believed for many years that we don't want to be undersold, that if a product that we sell is available for less out there, then that's the price the market is at and we need to be there.

It is part of the nature of our business that if you can buy something we sell cheaper somewhere else, if we don't match that price you're probably not going to buy it from us.

We think it's just good customer service and part of earning our customer's trust that we have market prices.

We set our prices fairly.

We're a full-price retailer.

We sell that merchandise at regular price until it's time to clear it out.

When there is a promotion that we need to match we'll match it.

But it's all about earning the customers' loyalty and earning their business over the long term.

And, Kimberly, I would just add that in terms of the impact year-over-year, our overall merchandise margins were relatively flat year-over-year, so any perceived increase in promotional activity did not have any significant impact to our margin performance.

Great, thanks.

Thank you.

Our next question comes from the line of Ed Yruma with KeyBanc.

Hi, guys, thanks for taking my question and congratulations on a great quarter.

First, Mike, just a quick clarification on your commentary on capital structure.

Are you saying simply that the existing cash balance is the way we should think about framing it going forward or are you targeting your current leverage ratio?

And as a follow-up you guys have had great growth in eCom, obviously investing against a lot, that growth opportunity.

At what stage do you begin to leverage some of those investments so that eCom margins improve?

Thank you.

Sure, Ed.

The comment around capital structure is, frankly, about those two items you mentioned but it's also about how we deploy capital.

I think one of the things you might have noticed in the last quarter that the amount of capital we invest in was almost equal to the amount of capital that we deployed back to shareholders.

The inference there is that we want to continue to have a very strong balance sheet and we want to allocate our capital in a way that delivers the best returns, both by reinvesting in the business and returning it back to shareholders.

So, that's basically what we're saying.

In terms of the leverage of the investment, certainly our intent and what we do is we wouldn't make these investments unless we thought we were creating value.

And we still expect them to create value.

I think one of the challenges we all face right now, we're still in relatively early stages, particularly in the e-commerce space, in terms of understanding how that model is evolving and the elements of that model that we need to find to be more productive.

So, we do expect to continue to create value.

We have a long-term aspiration to get back to that mid-teens ROIC, and that will come from these investments starting to generate some additional profit.

Great, guys, thanks so much.

Our next question comes from the line of Dorothy Lakner with Topeka Capital.

Thanks and good afternoon, everyone.

Congrats also on the quarter from me, and certainly all of the efforts to bring new product into the stores.

You've had tremendous success with some of the younger departments, as you said.

Just wondered if you could update us on where we're going to end up in terms of expansion of those brands by year end.

I think you'd said last quarter Topshop would be at 90 by year end, but also just wondered about Brandy Melville and Madewell, which is relatively newer.

And then also you've put six Shoes of Prey boutiques into some of your larger stores and I wonder how that's going and whether you plan to expand that?

Hi, Dorothy, this is Erik.

I'll take a stab at that.

Topshop, we were six doors in the second quarter to get to 73.

And, you're right, we plan to be at least at 90 by year end.

That business is doing terrific.

I would highlight on that, our growth in Topshop is not just coming from new doors.

Our top store, some of our best business has been our original doors, at that.

They've been a terrific partner and have made, as great merchants do, those subtle adjustments to really deliver what the customer is looking for.

So, great shape in Topshop.

Brandy Melville we've launched in 15 doors.

I don't think we've announced any plans for expansion past that but it certainly would be our intention to have that be successful and get into some more doors.

Madewell -- I don't have -- 30?

15 to 30.

And then Shoes of Prey?

To date, we've been pleased with that test or that partnership.

And we're continuing, our shoe team led by Scott Meden, to work with those folks about future opportunities.

But today I think both sides are happy with how that's going.

Great, thank you, and good luck.

Our next question comes from the line of Paul Trussell with Deutsche Bank.

Good afternoon.

Good quarter, guys.

When it comes to Nordstrom Rack, you had a difficult compare from a year ago.

Just wanted to know, are you guys pleased with the 1.7% comp performance this quarter, how you think about the business in the second half of the year?

And are we already seeing perhaps seeing the dot-com business maybe take a small bite out of the in-store sales?

Paul, this is Blake.

Yes, we are very happy with our Rack business.

My comments were -- and it was in the slides, I believe, as well -- that we saw 13% growth.

In Mike's comments, as I recall, he highlighted that we've had 26 consecutive quarters of double-digit gains totally.

The big headline there is that that we're gaining market share there and it is meeting and exceeding our plans.

It's a terrific investment for the Company and our shareholder, and continues to be highly productive.

We recently just did some post audits in some of our newer stores and they are outperforming.

It's interesting, you talked about the online or e-commerce part of that business, we are new at Nordstromrack.com, and that it's married with HauteLook.

When you put those two together it was a 16% gain for the quarter.

The low single-digit comp increase was an improvement in the second quarter from the first quarter.

It's in keeping with our plans and we fully expect to meet our plans at year end.

So, so overall the Rack business is very strong and healthy and contributing in many ways.

That's helpful, thank you.

And then you have a very detailed slide in the 2Q presentation that outlines the margin impact of growth initiatives and breaking out the Canada and Trunk Club versus the enablers.

As we think about that drag from the East Coast fulfillment center, Mike, and the expanded loyalty program, is that something that rolls over into 2016, as well?

Or is Q3 and Q4 the heaviest points of investment?

And then, similarly, on Canada and Trunk Club, the drag seems to lessen as we move towards the fourth quarter.

Is that just a function of it being the holiday period in Q4?

Or directionally should it continue to improve in terms of contribution as we turn the corner?

Sure.

Paul, first thing is, I won't go into too much detail as it relates to 2016.

We like to share more of our thoughts on that plan in the coming February.

But that being said, starting with the East Coast fulfillment center, that's going online in the third quarter.

And the reason you see that large incremental change starting in the third quarter is because the asset goes into service and we start to recognize both the depreciation, as well as the cost of running that building.

Now, early on, that building isn't going to be quite as productive as it will be as our business continues to expand, so we will see some drag from that.

In terms of Trunk Club, Trunk Club is starting to anniversary the recognition of the acquisition accounting because we acquired that business last year at this time.

So, you're going to start to see the year-over-year impact of that start to fade.

But we'll certainly play that out more for you when we talk about 2016.

Thanks a lot.

Good luck, guys.

Our next question comes from the line of Lorraine Hutchinson with Bank of America.

Thank you, good afternoon.

It looks like you took the SG&A rate a little bit higher for the year.

I was hoping you could give us some context around what the additional expenses were driven by.

Yes, Lorraine, this is Mike.

The majority of that increase is related to fulfillment cost.

As we continue to see the online segment of the business growing at an accelerated rate, we're seeing variable costs related to that business go up.

Thank you.

Our next question comes from Michael Binetti with UBS.

Hey, guys, good evening.

Congrats on a great quarter.

Mike I wanted to see if I could pick you apart on the gross margin outlook just a little so I understand what you're thinking for the second half.

If I put together a few of the data points here, I think you said that the gross margin on Trunk Club in Canada was only about 1 basis point better than reported.

So, those seem to have similar gross margins to the total business.

But you point to the enablers becoming a bigger drag in the back half but those seem like they would hit gross margin more.

I'm trying to think if you're telling us that the merch margins are going to improve since you're basically guiding gross margins flat in the back half.

Michael, you did pick us up a little bit on that.

We didn't quite go into that level of detail the way you explained it.

But what I will say is that part of the issue in the gross profit line, while we have seen some mixes within the business, we also see the Rack growing at a rate that's faster than the rest of the business, which on that line, on that gross profit line, does have an impact of putting a little pressure on that line.

But in terms of those other components, we really didn't get into that level of detail.

And I think what we guided for the balance of the year is consistent with where we expected business to be just several quarters ago.

All right.

And then let me just ask you a quick follow-up, then.

I think you said last quarter -- you said you wanted to keep your current capital structure -- but I think you said last quarter that you don't really love accelerated share repurchases.

But it seems like your investors could participate in a pretty big slingshot in earnings over a five-year outlook if you were to somehow direct a majority of the $1.8 billion to lowering the share count as you start rolling off peak investments in Canada and Manhattan and e-commerce and the Rack acceleration this year.

Can you just help us think about what vehicles are the most efficient for you at this point?

I don't feel like you're pointing us to some kind of a one-time dividend that would pay people a cash sum today.

That doesn't seem like it's as efficient as what you would look for longer term.

Well, that's kind of a leading question Michael.

What I'll say to that is that we continue to evaluate all our options on there.

We have a diverse base of shareholders and we've gotten input at various levels of input and we're evaluating that.

We haven't made a decision yet as to exactly what we're going to do.

But I think keeping in line with the fact that we like to keep things balanced and we like to consider all our alternatives, those that you mentioned are part of that.

Okay, thanks a lot, guys.

Our final question comes from the line of Richard Jaffe with Stifel.

Thanks, guys.

Can you talk about some of the other categories that performed well or perhaps under-performed dramatically that you see as an opportunity in the second half?

And then if you could also comment on Trunk Club's thinking regarding inventory and the opportunity to blend the Nordstrom inventory and the Trunk Club offering.

Sure, Richard.

On the categories, as we mentioned, there are customer departments that were a standout.

Dresses were good.

We saw strong business in denim, Women's in particular.

Men's tailored clothing was a stand out in our Men's area.

Below our average I think two areas that have gotten some attention, watches and handbags, two areas that had a number of years of outsized growth have been below the average.

I think that's pretty cyclical.

It's hard to be above the average every single year.

But those areas I would call out.

For the Trunk Club's inventory, to-date it's been a Men's business.

They buy their own inventory.

We have found some opportunities for our merchandising group to help them.

But Trunk Club for women is really a transformational effort for our two teams, much like launching Nordstromrack.com was for our HauteLook team.

That was an initiative that really brought our teams together.

It had to be executed in a highly integrated way.

Trunk Club for women is the same.

To execute that successfully our teams need to work together.

We will be leveraging our women's inventory to support that business.

We'll be buying a little bit extra for it but mainly leveraging our Nordstrom.com inventory that is housed in our Cedar Rapids fulfillment center.

We've been piloting Trunk Club for women since the beginning of the year, slowly ramping that up.

The customer response has been very encouraging.

And we're on track, as Blake mentioned, to have a full launch in September.

And we're darned excited about it.

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