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Nordstrom, Inc. (NYSE:JWN)

Q3 2006 Earnings Call

November 20, 2006 4:30 pm ET

Executives

R.J. Jones - Manager of IR

Mike Koppel - EVP and CFO

Blake Nordstrom - President

Pete Nordstrom - President of Merchandising

Analysts

Stacy Turnof - Merrill Lynch

Adrianne Shapira - Goldman Sachs

Deborah Weinswig - Citigroup

Bob Buchanan - A.G. Edwards

Neely Tamminga - Piper Jaffray

Michelle Clark - Morgan Stanley

Dorothy Lakner - CIBC World Markets

Christine Augustine - Bear Stearns

Richard Jaffe - Stifel Nicolaus

Bob Drbul - Lehman Brothers

Dana Cohen - Banc of America

Barbara Wyckoff - Buckingham Research

Jennifer Black - Jennifer Black and Associates

Presentation

Operator

Hello and welcome to the Nordstrom Third Quarter 2006 Earnings Release 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 Mr. R.J. Jones, Manager of Investor Relations for Nordstrom. You may begin, sir.

R.J. Jones

Good afternoon, everyone. And thank you for joining us on the call today. On the line with me this afternoon are Blake Nordstrom, President of Nordstrom, Inc.; Pete Nordstrom, President of Merchandising; and Mike Koppel, Executive Vice President and Chief Financial Officer.

This afternoon, Mike will lead off with a review of our third quarter results, Pete will make a few additional remarks, and then we’ll open it up for questions.

Please note that any forward-looking statements we make in our comments this afternoon should be considered in conjunction with the cautionary statements contained in our SEC filings.

Now, I’ll turn the call over to Mike.

Mike Koppel

Thanks R.J. And good afternoon, everyone. We are pleased to report out third quarter performance. Top-line growth exceeded 12% attaining a level we've not reached since the first quarter of 2004. Sales growth accelerated across our full-line and direct channels compared to the first half of this year, as our customers responded favorably to our merchandise offering for the fall season. These results are indications that key elements of our strategy improving women's apparel, building our designer business, and creating an integrated approach to multi-channel retailing are progressing forward. We believe these initiatives continued to build positive momentum creating long-term value for our company.

Our women's apparel division is better meeting our customer's style and occasion needs. For the first time this year, category as a whole achieved positive same-store sales growth. Later in this call, Pete will discuss more details about the developments in the women's business.

On the bottom line for the third quarter, earnings per share increased 33% to $0.52, versus $0.39 last year. Our pre-tax margin rose to 11.8%, 203 basis points higher than last year. Net income for the quarter increased 26%, to $135.7 million, compared to $107.5 million last year. Total sales grew 12.4% to $1.9 billion, and same-store sales increased 10.7%.

In the full-line stores, the strongest regional performance was in the Midwest. All major merchandise categories achieved same-store sales growth above our low single-digit plan. Key categories that performed ahead of plan were women's apparel, accessories and designer merchandise across all categories. Our direct division achieved sales growth of over 30% for the quarter, while the rack delivered an 11.6% same-store sales increase.

Gross profit margin increased 156 basis points for the quarter over last year. The majority of this improvement came from higher merchandise margins, due to improved markdown performance, primarily in women's apparel, men's apparel and women's shoes. In addition, we continue to see stronger sales results in higher margin categories, such as accessories. Sales leverage on buying and occupancy expense also created rate expansion.

In SG&A, we gained 17 basis points of rate improvement versus the prior year. Our overall expense performance was inline with our plan for the quarter, excluding an increase in expense, due to the significant improvement in our share price. Variable expenses rose consistent with our above-planned sales growth, while the majority of our fixed overhead costs were on plan.

As our stock price appreciated over 38% in the third quarter, compensation costs tied to stock performance increased ahead of our expectations. This impacted our plan for the quarter by approximately $8 million or $0.02 per share, in comparison to last year by 12 million or $0.03 per share. SG&A rate was impacted by approximately 40 basis points planned and 64 basis points versus last year.

Third quarter SG&A also included $4 million in stock option expense, which had 19 basis points impact on the SG&A rate. Year-to-date, our SG&A rate has improved 43 basis points versus last year. The other income line of the P&L increased $12 million for the quarter, primarily as a result of growth in our co-branded VISA card program.

Net interest expense of $11 million, was $1 million higher than last year, primarily due to an increase in our average interest rates.

We repurchased 896,000 shares of stock during the quarter for a total of $32.6 million. The resulting reduction in weighted average shares outstanding had no impact on diluted earnings per share this quarter.

Inventory levels were on plan, resulting in 5% improvement in our turn for the quarter. Faster turn and improved aging reinforced our ongoing commitment to inventory productivity. In the fourth quarter, we will go live with our new merchandise planning system. This represents another step forward in our inventory management capabilities. Our goal is to enhance our planning, assortment and allocation of inventory in 2007 and beyond.

Turning to the balance sheet for the third quarter. Total balance sheet debt at quarter end was $732 million and total capital was $2.7 billion, resulting in a book debt-to-total cap ratio of 27.2% compared to 32.4% at this time last year. The decrease in the ratio versus the prior year was driven primarily by debt retirement.

The current figure remains within our 25% to 40% target range. As we've previously discussed, our current dividend policy aims to maintain a payout ratio of 18% to 20% and a yield that is approximately 1%. Our quarterly dividend of $0.105 is unchanged from the last quarter and currently is consistent with these targets.

As we look to our overall return on capital, we continue to achieve high returns. Return on invested capital on a 12-month basis was 19.5% compared to 15.7% at this point last year. We believe these high return levels position us to drive further value growth as we look to grow our capital base.

Consistent with this goal, we've recently completed our five-year capital plan for 2007 through 2011. Total budgeted CapEx for that time period is approximately 2.8 billion with about 550 million planned for 2007. Approximately 80% of this capital is in our store base, which includes new stores, relocations, and remodels. We remain committed to our existing and future technology earmarking 10% of the plan for this purpose. The remainder will be used for general maintenance purposes.

Today, we announced three additional new full-line stores and one more relocation. This capital plan now includes a total of 20 announced new sites and four relocations.

Taking into account our visibility into potential future opportunities, we have included additional new stores in our plan. The resulting projected compound annual square footage growth rate in this plan is approximately 4% to 5% through 2011. We will continue to remain flexible as other opportunities arise.

As we have shared in prior quarters, we are planning to refinance our consumer credit receivable securitizations. We would like to take a moment to first review the related financing activities that took place during the third quarter and then just share our plans on these asset-based borrowing programs.

During the third quarter, our 300 million private label securitization matured. We made the principal payment and retired the debt. The balance sheet and cash flow impacts of these activities are reflected in our financial statements, and will be further explained in our upcoming 10-Q.

Looking to the first quarter of 2007, when our 200 million VISA securitization matures, our goal is to combine both the private label and VISA receivables into one securitization program. We anticipate the level of the associated long-term debt to be approximately $700 million to $800 million, which will bring our total long-term debt outstanding to $1.3 billion to $1.4 billion. Incrementally, this represents an anticipated $200 million to $300 million increase in leverage.

Under this combined program, the VISA receivables and the debt issued by the VISA Trust will all be recorded on the balance sheet. Currently, the amount of the VISA receivables that exceeds the trust debt is recorded as an investment in asset-backed securities on our balance sheet. When we make this transition, we will set up a reserve for bad debt that will impact the P&L as a one-time charge, which we estimate will be approximately $25 million in the first quarter of 2007.

Our updated earnings outlook for the full year is $2.46 to $2.51 per share, up from $2.31 to $2.39 per share. Including a $0.06 per share impact of stock option expense in this year's results, we expect our EPS to increase 24% to 27% year-over-year. This puts us on track to reach our three-year goal of 12.5% to 13% earnings before tax margin by the end of this year.

For the full year, we continued to estimate a mid single-digit same-store sales increase. We now expect expansion in gross profit margin of 40 to 50 basis points and SG&A expense rate improvement of 40 to 50 basis points versus last year. Other income is unchanged from our previous outlook for the year and is anticipated to increase $30 million to $35 million.

Interest expense is assumed to improve $2 million to $3 million due to lower debt levels. The expected effective tax rate for the year is now 38.7%.

For the fourth quarter, we are planning a low single-digit same-store sales increase and expect earnings per share in the range of $0.79 to $0.84 versus $0.69 last year. Included in both the annual and fourth quarter earnings per share outlook is the estimated impact of the 53-week, which we anticipate to be approximately $0.02.

Now, I will turn the call over to Pete for some additional remarks.

Pete Nordstrom

Thanks, Mike. Before opening up for questions, I would like to make a few comments about our recent performance. We are encouraged by our results this quarter as we continue to show progress in all of our merchandise divisions. Over the last few years, we have seen some pretty strong results in most of our major categories, including accessories, cosmetics, and men's apparel. Now, the improved performance in women's is having a meaningful impact on our comp stores results as well.

Our women's apparel business is just starting to turnaround for the better. The team supported by Loretta Soffe deserves a lot of credit for how things have been going so far this year. Overtime, this category has been the toughest one for us to improve. We are focused on what more we can do to keep the positive momentum going. I would like to share some highlights from a few of our women's departments that are showing the most improvement. Overall, regular price selling across women's departments has really changed for the better. Newness and regular price selling are increasingly fundamental to our merchandize strategy.

Our Studio 121 department is running the highest comp sales increase year-to-date among the women's departments. Their performance has been driven by a combination of an improved wear-to-work offering and a streamlined casual wear assortment for our Classic Bridge customer. Clear wear is also driving better performance in our point of view department as well as the cleaned up casual offering that is wearable in style and fit for our updated better customer.

Our Narrative department has also performed well. The casual offering for our classic better customer continues to address what our customers are looking for in styles ranging from expressive to more traditional. Our coats and dresses business is doing very well across style and price points. Our TVD and Savvy departments, which serve our contemporary customers with new fashion and on-trend merchandize, have continued to perform well.

Today's results in our women's business show that the adjustments we have made to our strategy are taking hold and we are confident that we are moving in the right direction. This is an ongoing process and we will continue to update you on our progress.

Our designer business has done better than we planned year-to-date. As we have discussed before, designer represents the brands we carry at the highest end of the luxury scale. Right now the category has achieved the largest percentage of growth over plan when compared to our other businesses. Approximately 25% of our full-line stores with a more developed designer offering are also performing above our plans. Overall, we are excited about the future of the designer business, and we continue to seek new ways to best serve our customers in that area.

Our results over the last few years support our belief that our customers want the very best merchandise that market has to offer. We will continue to pursue our current merchandising strategy as we see more upside potential within all of our categories.

With that we will open it up to any questions that you have.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from Stacy Turnof. And please state your company name.

Stacy Turnof - Merrill Lynch

Thank you, Stacy Turnof, Merrill Lynch. Congratulations on a good quarter. Could you talk a little about -- you are giving a low-single digit comp forecast for the fourth quarter. Given the robust trends that we are seeing, it seems a little bit conservative. Is there anything else going on there that we should know about?

Mike Koppel

Stacy, this is Mike. And thank you. As has been our prior practice, we share what our operating plan guidelines are when we look at our next quarter performance. That being said, our trends continued to be fairly strong through the end of October and we are hoping they continue, and I think if you just track us along based on our monthly sales releases, you can adjust accordingly.

Stacy Turnof - Merrill Lynch

Okay, great. Could you give us any color on how the half yearly sale went?

Pete Nordstrom

Well, yeah, this is Pete, I'll speak to that a little bit, without giving exact numbers on that, which wouldn't be appropriate at this time, I think it's fair to say that we have seen a continuation of a trend that we've noticed over the last couple of years and that is that, our regular price selling and flow of new merchandise seems to be what's driving the business more than anything else. I mean clearly we have merchandise we need to clear seasonally but as we've had markdown optimization really kick in over the last year, more frequent markdowns are happening, we don't have as much saved up for these clearance times, and plus, our customers have really been more interested in our regular price offering. So, we've been achieving our plans but I think we'll continue to evolve the offering in that sale to reflect what our customers want.

Stacy Turnof - Merrill Lynch

Great. Thanks so much.

Operator

Thank you. The next question is from Adrianne Shapira. Please state your company name?

Adrianne Shapira - Goldman Sachs

Thanks, from Goldman Sachs. Mike, given the impressive margin expansion, can you just talk about the opportunity going forward, it sounds like we are in the early stages of this women's turnaround and merchandise margins was pretty mixed because of the performance over the last few quarters. So, just give us a sense of how much opportunity there is to recruit going forward?

Mike Koppel

Thanks Adrianne. I think in terms of going forward, we are still learning. Obviously, when we went into this quarter we did not anticipate that kind of margin expansion and as our business evolves and we are seeing regular price sell-through improve and markdowns go down, we are learning. At this point I think it's fair that we are not getting too far ahead of ourselves in terms of gross margin opportunity as there are multiple other categories that still need -- at least maintain the current rate they are at. So, I think at this point I would just say that we are learning and that we are hoping that there is still some further opportunity, but that’s still to be determined.

Adrianne Shapira - Goldman Sachs

Okay, great. And then just, Pete, following up on the half yearly, it sounds as if given the strength of October-November, we should expect sort of modest comps. Can you give us any sense in terms of obviously low single digit for the quarter, it sounds like its going to be much more backend loaded, given the fact that inventory is not there, is that the right way to think about it?

Pete Nordstrom

I don't know whether it's really appropriate for me to speak to that specifically, so I don’t think I am going to. We are in the middle of it, so --

Mike Koppel

Can you clarify your comment on the inventory, you said comment about inventory not being there and backend loaded.

Adrianne Shapira - Goldman Sachs

Yes, I was just -- the strength of October, it sounds like the customer is much more interested in regular price selling. And so, with such strong comps ahead of the half yearly, it seems like -- looking back the past few years, whenever you had sort of a strong October, November seemed a little bit softer.

Mike Koppel

Yes. I think our pattern over a couple of -- several years now has been that, our clearance months, June and half yearly November, have not operated at the same level as the other months. But we will share our results when the sales come out.

Adrianne Shapira - Goldman Sachs

Thank you.

Mike Koppel

Okay.

Operator

Thank you. Our next question is from Deborah Weinswig, and please state your company name.

Deborah Weinswig - Citigroup

Citigroup. Can you talk about the performance that you saw in the Midwest, do you think that any of the market share gains there are a result of what you are maybe seeing with regards to disruption from the competition or is there something specific that you did in that market?

Pete Nordstrom

Well, I think it's difficult for us to measure that in a real precise way. We have had good solid business in the Midwest, but it's not unlike what we've had in other regions. We have had some pretty good consistency across all regions, so that doesn't really stand out dramatically. I think, particularly in Chicago, with the transition with Marshall Fields, I'd like to think that that created some opportunity for us, but it is difficult for us to quantify that.

Deborah Weinswig - Citigroup

Okay. And then with regards to the expanded designer offering, which many of us have seen in the store, would your sense be that your -- and obviously I would assume you have the data with regard to your credit card, are you getting a new customer in the store or do you think your existing customer is just shopping more of the store or both?

Pete Nordstrom

Well, there is some new customers coming, but for the most part it's just the people that have been shopping at Nordstrom and want to buy these kinds of products from Nordstrom and just us doing a better job of fulfilling that want on them. So, I think most of it is just really focusing on the customers that we have and getting a greater share of wallet.

Deborah Weinswig - Citigroup

Great, thanks so much.

Mike Koppel

Thanks Deborah.

Operator

Thank you. The next question is from Bob Buchanan and please state your company name.

Bob Buchanan - A.G. Edwards

A.G. Edwards. Congratulations.

Mike Koppel

Thanks Bob.

Pete Nordstrom

Thanks Bob.

Bob Buchanan - A.G. Edwards

Correct me if I am wrong, but for these -- for the half yearly sale, the women's and kids which ended yesterday, you do flow in a fare amount of fresh receipts in conjunction with that sales, so you are not totally reliant on heavily marked down merchandise?

Pete Nordstrom

You mean in terms of special purchase that we bring in and that's part of the sale offering --

Bob Buchanan - A.G. Edwards

Yes.

Pete Nordstrom

Or just regular price merchandise.

Bob Buchanan - A.G. Edwards

Yes, okay. So there is that additional flow that's planned and that comes in.

Mike Koppel

Yes.

Bob Buchanan - A.G. Edwards

Okay. I'm just trying to get -- I mean, even if your sales weren't that strong on the clearance portion of the sale, the sale theoretically could have been strong?

Mike Koppel

Well, let's not theorize yet until we release our results, but certainly those are high volume periods for us and we are going to ensure that we meet our plan.

Bob Buchanan - A.G. Edwards

Okay. I mean, I would be interested to see the results. I mean, I'm just worried about some people jumping to erroneous conclusions on the call. Also wanted to ask you about the new merchandise planning system, if you could articulate who wrote the software, how the implementation is going and what the timing looks like here coming into holiday?

Mike Koppel

Okay. Bob, in terms of the product we are using, it's a Retek product, so it worked very well with all the effort and infrastructure we had already put in place. And real simple, what it's going to allow us to do is to do assortment and allocation planning at a unit level, which is something that we historically have not been doing and we believe over the next couple of years will allow our organization to have better insight in terms of how we plan our business and continue to gain more efficiency in our inventory investments.

Bob Buchanan - A.G. Edwards

Okay. And would that be a weekly as opposed to monthly assortment and allocation?

Mike Koppel

Well, it will have the potential to do it at a weekly level.

Bob Buchanan - A.G. Edwards

Okay. And then lastly, with regard to St. Louis, just wondering -- just thinking on adding a store in St. Louis? And then Christiana Mall, is that a takeover of former Lord & Taylor store as well?

Pete Nordstrom

This is Pete. I'll take the St. Louis part first. Essentially we went into that market a few years ago at West County and it's a good market to be in. We took the opportunity that was available to us at the time. One of our goals with our real estate strategy is to be in the best centers in the country, and St. Louis Galleria would probably rank up there in one of the better centers in the country. And we just figured now that we had that opportunity to get in there that we really should -- we should pursue it. It's not just similar when we first went to Dallas. We went to the Galleria Mall first and working our way into NorthPark later when that opportunity became available. I think if all things have been equal, we probably would have gone to NorthPark first. And I think if we could rewind the clock in the south, in the Saint Louis opportunity if we had the option of being in any mall there, we might have gone to that mall first. I mean that being said, we believe there's plenty of opportunity for us to have two stores in that market.

Bob Buchanan - A.G. Edwards

Okay.

Pete Nordstrom

A fantastic center we want to be there.

Bob Buchanan - A.G. Edwards

And the Christiana Mall store, Pete, is that a Lord & Taylor takeover or is that a new build?

Mike Koppel

It was -- Bob, this is Mike. It was the former Strawbridge's location that came out of the May Federated merger.

Bob Buchanan - A.G. Edwards

Okay. Thanks a lot.

Mike Koppel

Thank you, Bob.

Pete Nordstrom

Thank you.

Operator

Thank you. The next question is from Neely Tamminga. And please state your company name.

Neely Tamminga - Piper Jaffray

Great. It's Piper Jaffray and let me just add my congratulations.

Mike Koppel

Thanks, Neely.

Neely Tamminga - Piper Jaffray

And just a couple of more questions here. In terms of merchandising planning system that you spoke to going live next quarter, is that going to be for all categories and for what season will you be going live with in terms of the planning?

Mike Koppel

Neely, this is Mike. Yes, we are going live with all categories and we will begin with spring '07 planning.

Neely Tamminga - Piper Jaffray

Okay, great. And then with respect to the real estate -- I certainly appreciate the willingness and desire to have flexibility with respect to new locations for '09 and for 2010, but do you think that you are starting to get to the position for 2009 with only adding maybe one or two additional stores because of the human capital or do you have some other initiatives underway for those years?

Mike Koppel

Well, currently in '09, we have announced five new stores and two relocations, and we think we have a little bit more capacity in '09. We start to -- as far as the human capital we should start to push a little bit when we get in the seven, eight range. But we have a little bit more room there.

Neely Tamminga - Piper Jaffray

Okay. That’s good. And just one quick housekeeping, on the comp guidance that you gave for the quarter -- for fourth quarter, is that on a 13-week or 14-week basis?

Mike Koppel

Well, it's on a 13-week. We are reporting comps on an apples-per-apples basis.

Neely Tamminga - Piper Jaffray

Okay, great. Thank you so much and good luck.

Operator

Thank you. The next question is from Michelle Clark. And please state your company name.

Michelle Clark - Morgan Stanley

Morgan Stanley. Congratulations on a great quarter. Question for you on the credit quality of your credit portfolio, can you comment in terms of if you are seeing anything in terms of either your delinquency rates or your charge-off ratios?

Mike Koppel

Michelle, this is Mike. No, at this point, we haven’t seen any significant shift in aging or charge-offs.

Michelle Clark - Morgan Stanley

Okay. So nothing to call out there?

Mike Koppel

No.

Michelle Clark - Morgan Stanley

Okay. And then the 4% to 5% square footage guidance, that's on a net basis?

Mike Koppel

On net -- described net basis.

Michelle Clark - Morgan Stanley

After any store closings, if any?

Mike Koppel

Yeah. We currently don’t have anything planned right now for our closings.

Michelle Clark - Morgan Stanley

Okay. And then just one last question. The deal with GGP, was there any benefit that you guys received from booking three deals at once?

Mike Koppel

With General Growth? No.

Michelle Clark - Morgan Stanley

Okay. Thank you.

Operator

Thank you. Our next question is from Dorothy Lakner, and please state your company name.

Dorothy Lakner - CIBC World Markets

Thanks. CIBC World Markets. I just wondered if you could update us as to where you are in the rollout of more designer product across your stores. And then also, just going back to the real estate question, when you think longer term, what do you think is the ultimate potential out there for Nordstrom stores as you look at what you've got and what markets are available given that some of the smaller markets -- some smaller markets you're going into and also with the smaller stores like the Naples, the smaller format. And then finally, if you could also just speak to 2008, it looks like you've got a lot of stores on the docket versus '07 where there -- you are stepping up the pace from '06. And I just wondered if some of those stores might slip into '09. So it looks like a lot of stores are opening in the '08 timeframe. And then finally, just remodeling, if you could just update us as to what your plans are for store remodels over the next few years, how many out there you would like to -- you are going to need to do over the next few years? Thanks.

Blake Nordstrom

Okay. Pete has taken some notes to make sure we get all these questions ready.

Dorothy Lakner - CIBC World Markets

Thanks.

Blake Nordstrom

I will start with the designer part of that. We've got a long ways to go. We are making a lot of progress, but I think it just speaks to when you see the results [that was] -- having our customers' appetite for the product. And we've known this for a while now. We've started to doing the best we can to fulfill that demand. We identified essentially about a quarter of our stores, so that we have at least one store at every major market we serve that we've got the complete end offering of designer. And it kind of depends on which one of those stores you are in, some are farther along than others. So, I guess the answer to that would be, while we've made a lot of progress, we have a long ways to go still.

Dorothy Lakner - CIBC World Markets

And are there categories -- I mean the children's area, for example, seems to be one where you have also kind of step up to the plate in terms of what some might call a luxury offering, are you kind of discovering that they are departments that they can be part of this whole process?

Pete Nordstrom

It all starts with the customer, and our children's customer is really just a subset of people that are buying other things in the store. So it stands a reason that if they wanted more luxury type of products for the other things they might purchase if they might want that in kids too. So, whether its bringing in Prada shoes for kids, which we have in a couple of stores and that's perform well or we are doing a pretty good job with brokerage for example, on kids apparel, I think it's just a continuation of wanting, try to bring the best the market has to offer to our customers.

Dorothy Lakner - CIBC World Markets

Great.

Mike Koppel

Dorothy, this is Mike. I will talk to the real-estate questions. In terms of ultimate potential, we really haven't put a limit on anything like that at this point in time. We extended our capital plan from three to five years this year because we add more visibility and we see opportunities even beyond that five year plan. So, at this point we are putting any kind of line in the sand as far as ultimate. In terms of new stores in 2008, we currently have seven and at this point we don't foresee anything slipping. That is a fairly high amount like we've shared in the past, but at this point we are committed to that plan. And then as far as remodels, our current plan has us remodeling roughly six to seven stores a year. Our goal is that by 2011, we will have a very small percentage of our stores over 12 years old that will not have either the new or remodel. So, we are really committed to keeping that store base fresh and exciting for our customer.

Dorothy Lakner - CIBC World Markets

Great. Thank you and good luck.

Operator

Thank you. Our next question is from Christine Augustine. And please state your company name?

Christine Augustine - Bear Stearns

Hi, it's Bear Stearns. Thank you. Mike could you just confirm that -- for your CapEx this year, it's about $300 million or is some of that going to slip into '07?

Mike Koppel

That's about right. The 550 is the number that we see lending currently in '07.

Christine Augustine - Bear Stearns

And does the 550 in '07 incorporate some of the stores that you're opening in '08?

Mike Koppel

Yes. It does.

Christine Augustine - Bear Stearns

Okay.

Mike Koppel

Yes. It does, we are on roughly 14-month construction cycle and so you are always going to have overlaps in years for new store construction.

Christine Augustine - Bear Stearns

Great. And just on the inventory, at the end of the quarter was up a little over 5%, your guiding a low single-digit comp, you are going to annualize to I think like 1% footage growth this year. So, is that just kind of a timing difference in terms of when the receipts came in at the end of the quarter?

Mike Koppel

Yes, it was.

Christine Augustine - Bear Stearns

So, just to clarify to you, do you mean then that they came in a little earlier than last year?

Mike Koppel

Yes, we did have some higher level of receipts at the end of the quarter versus last year.

Christine Augustine - Bear Stearns

Thank you. And my final question is, juniors is -- is there any update that you can provide us there? I know the comparisons, I believe it is November, where they start to get much easier, any progress on that front? Thank you.

Pete Nordstrom

Yes, we are making some progress in juniors which has been year-to-date our toughest area, specifically in the women’s apparel area. But we are -- we have made a lot of progress there. We are not quite where we want to be yet, but we are encouraged by the progress.

Christine Augustine - Bear Stearns

Pete, do you think that you might see a positive comp trend in that business, sometime within in the next 6 to 12 months?

Pete Nordstrom

Yes.

Christine Augustine - Bear Stearns

Okay. Thank you.

Operator

Thank you. The next question is from Richard Jaffe and please state your company name.

Richard Jaffe - Stifel Nicolaus

And thanks very much. It's Stifel Nicolaus. Just a follow-on question, it really sounds like the women’s is back on track, but if we were to look at all the merchandising efforts today and say, what’s the next women's, where is the underperforming categories or the less strongly performing categories that could benefit from the kind of attention women's received the last 18 months or 2 years? And if you could tell us what the outlook is for that category that will be most helpful?

Pete Nordstrom

This is Pete. We have an ongoing process where we do strategy work to determine, the next handful of years with every merchandising categories. So, it's an ongoing process. It isn’t like, we cross up the list and we are done. Given the size of women's that's roughly a third of businesses, I think it's fair to says it’s a mind -- and we could be working on this one for a while and then still have quite a bit of room for upside. So, I would say we just looked at the size of the business and the progress that we've had, that once we get pass some of those in women's, I would say there is probably opportunity in cosmetics for us to deal with -- to mind a little bit deeper even though we've had good solid results there for quite some time. I think shoes is probably an opportunity even though we have high market share there and we tend to do well. It's something that we want to be really good at and so we have to keep working on new ways to challenge ourselves there. So, I guess, I will have a specific answer other than we don’t see any end to our ability to be able to try to execute better in all the categories we currently participate in.

Richard Jaffe - Stifel Nicolaus

That’s a good answer, thank you. With women's, are you in the second innings or bottom of the eight, how do you see that business unfolding or the improvement that you've been able to implement so far?

Pete Nordstrom

We haven't gone to the relief picture yet. I think we are still not in complete game status, so work may be on second or third inning on that. We've got a quite ways to go.

Richard Jaffe - Stifel Nicolaus

Great to hear. Thanks a lot. Congratulations guys.

Pete Nordstrom

Thanks.

Operator

Thank you. The next question is from Bob Drbul and please state your company name?

Bob Drbul - Lehman Brothers

Lehman Brothers, good afternoon.

Mike Koppel

Hi Bob.

Bob Drbul - Lehman Brothers

I guess just maybe two questions. Can you talk about any notable trends in average in a retail maybe throughout the categories? And the second question would be, are you seeing any price ceilings that you are hitting in any of the higher price merchandize in the women's business in the different areas?

Mike Koppel

Bob, this is Mike. On the first part of the question, for the third quarter we saw our sales increase was roughly half due to average unit retail and half due to just increasing units. But most of that average unit retail, there is really two things driving that. One is that, we are just selling more regular price. And the other is the continued growth in our designer business is driving some of those averages up.

Pete Nordstrom

This is Pete. In terms of pricing, I guess we really haven't thought about that specifically. There obviously is a relevant size -- relative size of business for one of these areas that we participate, and all we know is that there is more room for us there. But it would be way premature for us to say that there is a limit of how far we can go there.

Bob Drbul - Lehman Brothers

Okay. And then just one follow-up is, can you talk a little bit about the penetration or the percentages of brand exclusivity or private label in the business right now?

Pete Nordstrom

Yes. Well, private label and I think we speak to this specifically, I mean, if you talk about the range of the lower teens in terms of our total offering represented in private label, beyond that products that are exclusive, I don't know whether I can quantify that exactly for you. But, we don't really focus on that specifically as it's own measurement. I think ultimately we just want to carry the products our customers want to buy from us, and again whether something is exclusive or not hasn't tended to be very relevant to whether it sells or not.

Bob Drbul - Lehman Brothers

Okay. Thank you very much.

Mike Koppel

Thanks Bob.

Operator

Thank you. Our next question is from Dana Cohen, and please state your company name.

Dana Cohen - Banc of America

Hi, guys, congrats. A couple of follow ups. I think you said it was seven stores in '08, I just wanted to reconfirm as well the numbers for '07?

Mike Koppel

Yes. '07 is four new stores and one relocation.

Dana Cohen - Banc of America

So what is the square footage if you have that in front of you for both years?

Mike Koppel

The total square footage?

Dana Cohen - Banc of America

Both, yes.

Mike Koppel

In 2007, it looks like it's roughly 450 and in 2008 --

Pete Nordstrom

Little math.

Mike Koppel

Yes.

Dana Cohen - Banc of America

It's a check, it's a quiz. It's a pre-Thanksgiving quiz.

Mike Koppel

We will get that one back to you, Dana.

Dana Cohen - Banc of America

Okay, no problem. And then just going back on designer, what percentage is it in the total business and what is the differential in stores where you've really invested or some of the renovated stores where it really looks like -- for example, in San Francisco, you've like doubled the amount of square footage. So, like what's the spread in terms of penetration?

Pete Nordstrom

Okay. In terms of the percentage that makes up our business, part of it depends how you want to define it. As we define it, it's relatively strong, low-single digit percentage of our business, and we have got goals where we want that to go. I am sorry, the second part of your question --

Dana Cohen - Banc of America

So, is your goal sort of to double that? Because it certainly seems like in certain stores it's very small and others the department could be at least two to three times that.

Pete Nordstrom

Right. Well, what we are trying to do is focus on those roughly 25% of our stores that were really making a concerted effort to have an offering there. I think, the other stores outside of that group you will find some stores have some designer products, some don't. But we are really trying to create that synergy, but just depends on where you go. You were to visit our new store in Topanga, which we opened last month very successfully. I might add, we have the largest percentage of designer product in there of any new store I think that we have opened and our sales reflect that. So we are encouraged by that. I mean, it speaks the fact that this is something that we can do in multiple locations, multiple regions, isn't just necessarily Seattle [Tacoma]. It is hard for us to quantify exactly what's possible there. I just think that we are going to go as hard and fast we can, and so we are fine what our limitations are. But we are nowhere close to that right now.

Dana Cohen - Banc of America

And then just one knit question. Can you -- have you given or can you quantify the 53rd week effect?

Mike Koppel

Yes, Dan, this is Mike. It's roughly $0.02.

Dana Cohen - Banc of America

And just to the top line.

Mike Koppel

Haven't really quantified the top line at this point.

Dana Cohen - Banc of America

Okay.

Mike Koppel

Can't share that.

Dana Cohen - Banc of America

Okay. Thanks so much.

Mike Koppel

Thanks, Dana.

Operator

Thank you. Our next question is from Barbara Wyckoff and please state your company name.

Barbara Wyckoff - Buckingham Research

Hi, everyone. Buckingham Research. Congratulations.

Mike Koppel

Thank you.

Barbara Wyckoff - Buckingham Research

Question for Pete, couple of questions about accessories. What were the key drivers in accessories during third quarter? Do you see a major shift in classifications going into fourth quarter and maybe into spring? And, what do you think is going to be happening, what are going to be the major drivers in holiday and spring? And then lastly, how long will it take to elevate the accessory assortments in those stores where you are adding designer sportswear, there seems to be a lag there? And then I have just one follow-up after that.

Pete Nordstrom

Okay. In terms of third quarter, we've had a lot of growth in sunglasses. I think you've heard us speak to that before. We have added some more inventory there. It has been a very good area for us. Watches have been a very good category for us. Handbags continues to be very strong. We are probably been talking about this for about three years now, seems like. Really in the accessory area, it is going all pretty darn well. Some areas are better than other. So, I think, the ones I mentioned will probably outperform. In (inaudible) other part of the question, the drivers going forward, you asked about that in terms of what categories might be happening for the fourth quarter in accessories, is that right? Okay, I think that you'll see a continuation of what we've been experiencing the things that happened, that work well for gifts. So, jewelry really takes on a lot of importance this time of the year in the cold weather part. We are going to do a fair amount of business, I am sure, on the cold weather wear as it relates to more luxury fabrications, cashmeres specifically, it is still really good category for us. Even though it isn't necessarily a jewelry subject and a shoe subject, but we are selling a lot of [goods] again a lot, and that's been encouraging to us because we plan to do that. Handbags continue to be great. It is always a good gift-giving kind of item because you think that doesn't really need to fit specifically, so it works well. And now that we have a more complete offer particularly in the higher ranges of the handbag, the designer part of it, it's that part has been selling very well for us. And then -- was there another part to that question too?

Mike Koppel

We're out of time.

Pete Nordstrom

Okay, thank you. We have time for one more question.

Operator

Our next question is from Jennifer Black. And please state your company name.

Jennifer Black - Jennifer Black and Associates

Jennifer Black and Associates and let me add my congratulations.

Mike Koppel

Thank you.

Pete Nordstrom

Thank you, Jennifer.

Jennifer Black - Jennifer Black and Associates

Can you give us a little color on petites, men's, and the Brass Rail? Thank you.

Pete Nordstrom

Okay. Petites, men's, brass rail. Petite, we've made some progress there, we've had to really get much more focused. It just represents a size, it doesn't represent a lifestyle and so for us we have to make some decisions because to try to mean all things to all people just along a size is difficult. So I think we've done a much better job of really homing in on the specifics of where we have the chance to be successful. So it isn't an outperform, but it definitely is in the mix better than it was before. I think we've made some substantive improvements in petites. You asked about the Rail, is that right?

Jennifer Black - Jennifer Black and Associates

I asked about men's and the brass rails?

Pete Nordstrom

Okay. Well Rail specifically has been the best growth department in men's over the last year or so. And that has not slowed down. In men's, we are doing well, and a lot of the same areas that happened to the rest of business that has to do with introduction of brands and quality and luxury across the board. So anywhere we have been able to bring in better designer type products that have performed well for us there.

Jennifer Black - Jennifer Black and Associates

Okay. Great. Well, thank you very much and good luck.

Mike Koppel

Thank, Jennifer.

Pete Nordstrom

Thanks Jennifer.

R.J. Jones

Thank you for participating in our conference call this afternoon. If you have additional questions or need further information, please contact me at 206-303-3007. The replay number for this call is 866-444-9038. That number again is 866-444-9038. There is no pass code required and replay will be available for 48 hours. Alternatively, an archived version of the webcast will be available on the Investor Relations section of our website for 30 days. Thank you for your interest in Nordstrom.

Operator

Thank you for participating. You may now disconnect.

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Source: Nordstrom Q3 2006 Earnings Call Transcript
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