Nordstrom's (JWN) Q2 2014 Results - Earnings Call Transcript

Aug.15.14 | About: Nordstrom Inc. (JWN)

Nordstrom Inc. (NYSE:JWN)

Q2 2014 Earnings Conference Call

August 14, 2014, 4:45 PM ET

Executives

Rob Campbell - Treasurer and Vice President of Investor Relations

Blake Nordstrom - President of Nordstrom

Mike Koppel - Executive Vice President and Chief Financial Officer

Pete Nordstrom - President of Merchandising

Erik Nordstrom - President of Direct

Jamie Nordstrom - President of Stores

Analysts

Ed Yruma - KeyBanc Capital Markets

Paul Swinand - Morningstar Equity Research

Dorothy Lakner - Topeka Capital Markets

Lorraine Hutchinson - Bank of America-Merrill Lynch

Kimberly Greenberger - Morgan Stanley

Paul Trussell - Deutsche Bank

Oliver Chen - Citigroup

Jennifer Black - Jennifer Black & Associates

Joan Payson - Barclays

Michael Binetti - UBS

Barbara Wyckoff - CLSA

Neely Tamminga - Piper Jaffray

Liz Dunn - Macquarie

Operator

Hello and welcome to the Nordstrom Second Quarter Conference Call. At the request of Nordstrom, today's conference call is being recorded. (Operator Instructions)

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

Rob Campbell

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 fiscal 2014.

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 nordstrom.com in the Investor Relations tab.

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

Blake Nordstrom

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 customers 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 and is 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 our anniversary, for the second quarter, total sales were up 6.2%. And on a comp store basis, we had 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're particularly excited about our first store in Canada in Calgary opening on September 19th. A lot of work has gone into it. And we recognize how important this is for the company and we're anxious for the opportunity to start serving customers in Canada. And 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.

I 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 on 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/him. So whether that's partnering, working on something internally or doing an acquisition to improve our capabilities, that's the focus and the filtering lens that we use. As we look at Trunk Club, there 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. And we felt given it would probably take a year or two for us to take a sizeable 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 up 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 loved 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 really resonates with us. So we're 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.

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

Mike Koppel

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 in 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 the 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 the 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 the 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'd 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 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 was in our core strategy. First is speed to market. Although we have some of the elements necessary to develop this offering, it would have 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 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 the foundation that can support its independent 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 due expansion of its existing channels of Trunk's showrooms and custom fitting events.

Trunk Club will largely operate independently over the near term, which is similar to the approach we've taken with HauteLook. That said, Trunk Club will be able to immediately scale its business by leveraging our operational capabilities, which include supply chain, greater breadth in 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 12 to 18 months. We'll provide an update once this process is complete.

In wrapping up the first half of the year, we are 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.

Rob Campbell

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.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Ed Yruma with KeyBanc Capital Markets.

Ed Yruma - KeyBanc Capital Markets

You have a tremendous amount of insight into the US consumer, given your various banners and price points. I guess 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 two as a follow-up, in terms of the Canada launch, is there anything we should think about in terms of expense cadence for 3Q and 4Q?

Mike Koppel

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.

Operator

Our next question comes from Paul Swinand with Morningstar Equity Research.

Paul Swinand - Morningstar Equity Research

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? Or how should we think about that?

Mike Koppel

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. And when we get all that, we'll certainly disclose those details. But it really a combination directionally of several tranches. One is the issuance 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.

Paul Swinand - Morningstar Equity Research

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

Mike Koppel

Yes.

Operator

Our next question comes from Dorothy Lakner with Topeka Capital Markets.

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.

Pete Nordstrom

As you've 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. And I think what we've learned over time going to appreciate is the dynamics are very similar kind of end-to-end. And the best way for us to be successful is really the synergy of how it all goes together. And so that's new and it's not going to represent a huge change, but I think over time it will help us leverage our strength better.

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. We will be growing that. I don't have any specific plans to tell you exactly, but we're aligned with our friends at Topshop to continue to grow this business and there's more opportunity for us there. And the good news about that is that that's not really measured in isolation.

We have Topshop in the store and we have success. It's really kind of lifting all boats in the women's apparel. So I would say generally we've had good progress at women's. We're happy about our plans there and we feel like we'll continue to have growth.

Operator

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

Lorraine Hutchinson - Bank of America-Merrill Lynch

I wanted to follow-up on the growth in inventory this quarter and specifically the planned growth in full price. Is that just new stores, or is that making that's in other categories?

Mike Koppel

The full price primarily is the growth in direct. We continue to see that business growing in the mid to high-20s range. And so that's the continuing funding of that business. We do have some new stores that we plan to open, but the impact on the overall inventory levels at this point is relatively minor.

Pete Nordstrom

We did make a purposeful increase in inventory plans related to specifically the cosmetic division where we feel like we're returning a little too fast and maybe we were out of stock. And as we've done that, it's really helped improve the business. And in fact, cosmetics is the top comp sales division for us year-to-date. So that's been a purposeful investment in what we're doing.

Operator

Our next question comes from Kimberly Greenberger with Morgan Stanley.

Kimberly Greenberger - 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 to grow to outpace sales growth into the future? And does that mean that a slower level of inventory turnover is what you expect going forward? Or do think we'll get some sort of the normalization in Q4, six, eight quarters where you would start to see revenue actually outpace your inventory growth?

Mike Koppel

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, we've launched Nordstromrack.com and I think as we've done a more integrated approach with our top brands and 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. And the pack-and-hold has been something we continue to invest in. And clearly what you're 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 we're going through this inflection point as we've adjusted some of our operating techniques and our strategic that we are able to accelerate the growth of the inventory.

Operator

Our next question comes from Paul Trussell with Deutsche Bank.

Paul Trussell - Deutsche Bank

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.

Blake Nordstrom

The question is about Nordstromrack.com?

Paul Trussell - Deutsche Bank

Yeah, just about each of your website banners, the performance on what you saw.

Erik Nordstrom

One of the great values of HauteLook acquisitions and the launch and the support of Nordstromrack.com on their platform and that team did a terrific job of making that happen very, very quickly. So very happy with the speed of that. Our integration of rack and HauteLook to Nordstromrack.com, there's a couple that we really benefited from. One is on the technology and getting it quicker to the merchandise. As our team is able to go to market, the story in the marketplace, the value of the vendors these different businesses and the synergy it creates is really resonating. So our quality of the content is starting to be more and more influenced by our rack merchandising team. So our merchandising teams of rack and HauteLook are working together.

The content is just starting to come. Up to now, the bigger chunk has been from the HauteLook. So we're still learning a lot with Nordstromrack.com. We're pleased with the launch there, but we've got lots of opportunity to get better. The HauteLook business itself has been very consistent from the demand standpoint, running about 30% increase in demand. What's changed for us is the return rate. Again, this goes to integration points of why we like the HauteLook business. In the 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 coming to our rack stores. It is a better customer experience. I think it separates HauteLook from other flash sale competitors. And it's a tremendous traffic driver for our rack stores.

So within HauteLook silo, the return rate has gone up quite a bit, 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 in first quarter and second quarter were the amount of promotional activity. First quarter, the industry was having more promotional activity and we're matching price. We saw a fairly significant increase in demand and also the corresponding reduction in gross margin. Second quarter, not as much promotional activity, so we didn't get the lift in demand, but we also didn't get the hit to the gross margin.

Paul Trussell - Deutsche Bank

As we move into the second half of the year, obviously tough to gauge the competitive response going forward. But just help us understand what your thought is on gross margins and promotional intensity for 3Q 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?

Mike Koppel

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're guiding for the back half of the year, I think that says how we feel about it. One other thing I'll add to about the direct performance, if you look at both the first and second quarter on a two-year basis, we're 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 20s comp.

Operator

Our next question comes from Oliver Chen with Citigroup.

Oliver Chen - Citigroup

Regarding your prior and your current outlook, the tweak in the comp store sales, taking towards the high-end as well as editing the gross profit on basis points, what were the main dynamics that drove those changes? And a follow-up was on the full line comps. What would you prioritize as the biggest opportunity just to see improvement in that business?

Mike Koppel

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

Blake Nordstrom

One thing I want to remind you when we talk about the full line business is that we have a customer strategy, not a channel strategy. So we do have a number of things we're working on and opportunities we're pretty encouraged about to improve our service and improve our productivity within our full line stores. But 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're really looking at how we serve customers in the future that it's not about what we really need to do this thing in our full line stores to get the comps go in that channel. We need to look at our entire business and say how can we provide a better customer service and hopefully drive more customers into our stores.

Erik mentioned returns going into our rack stores. That's a great example of things that we can do that might not make one P&L for one business, but different or better in another one, but it's a win for the customers. So we're really focused on those things and again really encouraged by number of opportunities we got in front of us to improve service there.

Operator

Our next question comes from Jennifer Black with Jennifer Black & Associates.

Jennifer Black - Jennifer Black & 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. And then as a follow-up, can you talk about what you think your areas of opportunity are for next year's anniversary sale?

Pete Nordstrom

I don't know that we actually had more literally in terms of regular priced inventory, but we're definitely conscious of how important it is to have new regular priced inventory when there's that many people in the stores. So I know that there's always efforts that we have to have a good regular priced 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 a good flow of new regular priced. So that's certainly part of our strategy.

I think one thing that we did a particularly good job this year and this has 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. And that 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 try to raise the word with customers that are maybe more casual Nordstrom customers or acquisition type customers at what a great event this is and why it's special and different. And there is a lot of opportunity with that specifically. So that's I think something we're trying to layer on for next year and that should help us grow the event.

Blake Nordstrom

Jennifer, one thing to add to Pete's comments there is in the second quarter, as we've seen this whole year, is we're acquiring customers in our rewards program at an accelerating rate. In the second quarter, I think we were 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.

Operator

Our next question comes from Joan Payson with Barclays.

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? And then 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 Nordstrom

Regarding the current 230 store goal or objective we've had for 2016, we are close. At this juncture, we could fall short. What we are finding is there some cyclical nature to it in terms of availability of the stores. So one year, we might have plan to have 25 store openings and we might fall short of that. And the next year we might come up above that. But I think from a long term point of view, we feel really good about the growth of the rack and the opportunities there, but there could be some nuances that 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 passion and trends. And so there is a correlation if the full line stores have a category that it tends to correspondence well within the racks. So there is a complementary approach there. And we said earlier too and I would just reiterate that 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. And 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 are really encouraged with the quality of product that we're able to provide for our customers.

Operator

And your next question comes from Bob Drbul with Nomura Securities.

Bob Drbul - Nomura Securities

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

Mike Koppel

Well, Bob, we're really not going to break down by category of what that looks like. But suffice it to say, we continue to believe that it's providing us with great opportunity. And I think the other thing to keep in mind about that too is I think we got 16 rack stores that we're opening next quarter. So that's also an element of the growth of that investment. But it's relatively broad in terms of the opportunities.

Blake Nordstrom

There is really kind of three elements or drivers to access to products. It's from our full line stores that transfers its close out merchandise from our top vendors and its ability to have when there is a void make up some product as well. Again, I've mentioned earlier in the previous question we're really encouraged. We are getting more, more first call and more access to great product as time goes on. So as we have gotten larger with scale, it's really helped in this pack-and-hold ability to be able to go to our top vendors and be able to buy all the product they have in this season and then hold it for a couple of months and then bring it in our stores. It provides much better flow, better sizes and again more trend-right merchandise. So it's been a real win, win.

It does impact in the short run kind of apples and oranges comparison, i.e., what we had in pack-and-hold last year versus this year. And as Mike said, some of that's driven by the new store opening cadence. And that's a key point of filling those stores at that right part. We use pack-and-hold. But at this juncture, we're really encouraged about that avenue of product.

Operator

Our next question comes from Michael Binetti with UBS.

Michael Binetti - UBS

I'm curious about a couple of things with Trunk Club, since it'll probably be a focus here for the next few weeks. I'm curious about your comment about how you said there 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.

Erik Nordstrom

We've been looking at that business model for the last couple of years in particular. And it's just smack dab in the middle of what we do. It's about fashion, 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 that are foundation, is the guy who doesn't want to go to the store. Either he doesn't have time to go to a store or simply doesn't like going to stores. And they use a multichannel offer to do that. That is in so many ways close to what we do. Yet, it's complementary. I think we purchased HauteLook that while we're in the off-price business, we concluded that this flash sale model was of significant scale and that certain customers certainly liked it. And it wasn't why it's for us to try to force them into the one off-price model. If we had it, why it's for us to offer the customer the choice that they want. That's very similar here. It's another way of serving customers that's about fashion, it's about great service. Yet it is different from what we do.

So the model got us more excited. We looked at it. And it's something that we feel that category is going to grow, that we're uniquely positioned to be a leader in it. But if we didn't do it, someone else would and would take a bigger chunk. It's pretty clear where we can help them through things inventory, supply chain, intraoperations, things like that right off the bat that we can add appeal to their growth.

And then 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 well positioned to test things like that. And we just thing there's tremendous upside going forward.

Michael Binetti - UBS

Of the $0.15, I think that's backed us out to about $45 million in cost, how much of that is ongoing 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.

Mike Koppel

We'll give more visibility into that as we get to the closure. But 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 to the closing process.

And then I think the second part was why stock, stock was just currency that made sense for both parties. And it helped to facilitate us to get the deal done. So clearly, it also fits within our overall capital policy in terms of how we manage our capital. So it's frankly kind of a moot point.

Operator

Our next question comes from Barbara Wyckoff with CLSA.

Barbara Wyckoff - CLSA

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?

Jamie Nordstrom

We're opening our first store in Canada on September 19th and our team up there has been very active in the community for a number of months. Clearly there has been some hiring that's been going on as we build that team. And Calgary is a great county. We've been sponsoring things. We sponsored the big breakfast up there where we feed 50,000 people breakfast on one morning. And what we're really trying to do is wherever we've opened stores, which is really try to learn what's important to the community, so that we can be part of the community. We're only opening one store in Canada this year. And our entire team at Nordstrom is focused on getting it right. And 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 doors there in a few weeks that we make a great first impression.

Denim, both in women's and men's is solid. It's pretty solid. I wouldn't say it's spectacular. But I think it's fair to describe is pretty good and at least a plan for us. So it's a healthy part of the business. In terms of women's active, we have had a lot of discussions around here recently about that. And we've had some really outstanding growth in particular with our Zella brand that's an MPG brand that we do ourselves. It's been quite good and I think it's reflective of not only how great that product is, but the opportunity it represents more broadly in that category. So it's a hot topic around here. We're talking about ways that we can continue to add on to that momentum. So yeah, it's a very positive part of our women's business right now.

Barbara Wyckoff - CLSA

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

Mike Koppel

Roughly 30%, Barbara.

Operator

Our next question comes from Neely Tamminga with Piper Jaffray.

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 learnings that they would like to share that might be impacting strategy. 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 Nordstrom

The main reason behind Erik'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 capabilities to serve them on their terms. But Erik and I over the last year or so really felt that we were kind of hitting a bit of glass ceiling in terms of organizationally how we were able to get after some of the stuff. And to put it simply, in some ways, we weren't being very customer-centric. We were actually being channel-centric. And our customer doesn't care about channels. You never hear a customer say the word channel. And Erik and I felt that by us switching jobs, we could support our teams more effective 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. And we've got some big ideas of how we can improve our business in the future. We think we're pretty well positioned and Erik and I are really excited about how we can better support our team towards those goals.

Erik Nordstrom

While I've been a keen observer from outsider, it's being there day to day. It's a very impressive team. Especially the last three years, Jamie's team added a lot of people, many from outside the company that have capabilities we didn't have, pure e-commerce capabilities that the team is very impressive. And they're experienced in e-commerce and it's a very well run e-commerce business. But I would echo Jamie's comments, 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 eight to nine months before we did the switch. Jamie and I worked more together than we ever had. And that's just continued after the switch, and we think there's some tremendous opportunities for us to serve customers in better ways that I'm not sure anyone else can, given the different businesses we're in. And Trunk Club is an example that we can serve customers and that it fits in between the silos of businesses. And that's where we think the big opportunities are.

Neely Tamminga - Piper Jaffray

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.

Mike Koppel

It's in total HauteLook.

Operator

And our final question comes from Liz Dunn with Macquarie.

Liz Dunn - Macquarie

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. Could you just flush that out for us a little bit?

Mike Koppel

I think what we're implying is that we continue to expand the selection and the product offering that's driving more business.

Liz Dunn - Macquarie

Does that mean there's been some sort of slowdown in traffic or conversion? Is it just less dropped baskets or less unavailable merchandise?

Mike Koppel

No, yeah.

Rob Campbell

Thank you for joining us today. As a reminder, a webcast replay of this call along with our slide presentation will be available for one year on the Investor Relations section of nordstrom.com under Webcast. In addition, we provided an overview of our performance and growth strategy at the end of our slide presentation. Thank you for your interest in Nordstrom.

Operator

This does conclude today's conference. Thank you for participating and you may now disconnect.

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