Good afternoon and welcome to Nordstrom’s first quarter 2008 conference call. (Operator Instructions) I would now introduce Mr. Chris Holloway, Director of Investor Relations for Nordstrom; sir you may begin.
Good afternoon everyone and thank you for joining us on the call today. We have scheduled today's call to last about 30 minutes, which includes time for questions-and-answers. Before we begin, let me remind everyone that today's discussion will contain forward-looking statements which are subject to risks and uncertainties that could cause the company's actual results to differ materially from the expectations and assumptions discussed due to a variety of factors that affect the company including the risks specified in the company's most recently filed Form 10-K and today’s earnings release.
With me on the call today are Blake Nordstrom, President of Nordstrom, Inc.; Mike Koppel, Executive Vice President and Chief Financial Officer; Pete Nordstrom, President of Merchandising; and Erik Nordstrom, President of Stores.
This afternoon Blake will lead off with a review of the company's business and strategy, Mike will review our first quarter results and updated 2008 outlook and then we'll open the call up for questions. Please limit yourself to one question so that we can accommodate more callers.
With that I will turn the call over to Blake.
Thanks Chris and good afternoon everyone. On behalf of our team here, thank you for joining our call today. The environment we find ourselves in continues to be challenging. Though we are disappointed with our 6.5% decrease in same-store sales in the first quarter, we are pleased with our ability to control inventories and expenses and to deliver earnings at the high end of plans.
We have an experienced team that has managed through several economic cycles and knows how to drive results. We have a fairly flexible business model that allows us to make adjustments to ensure we’re operating affectively through these cycles. Managing inventory is challenging when sales trends are unpredictable, however, our fast inventory turns, experienced team and information tools allow us to react quickly. In addition our expense model is disciplined and well understood by our people.
We have a compensation system which is performance-based from the sales people who work on commission to management which is incentive-based. We are also disciplined in controlling fixed expenses which allows us to produce our desired results. While we are diligently managing today’s business we believe we must remain committed to a high quality customer experience and to high value customer-facing investments such as new stores and existing store remodels. We remain committed to finding opportunities in the best markets and shopping centers in the country.
New stores have consistently been our best use of capital and over the last five years our store openings have positively and significantly contributed to our bottom line. We believe that in times like this our service commitment is more of a differentiator than ever. The way we handle returns is perhaps one of our biggest points of difference. We know, it creates a lot of trust with our customers and gives them a reason to shop with Nordstrom. Customers are being more selective today and have raised the bar on their desire for great product and service and what we need to do as well.
We have a legacy around service and we have always strived to take a humble approach to this subject but today we have a greater opportunity than ever to separate ourselves from the competition and we believe we can do so. We consider technology to be another tool we can use to enhance the service experience. We continue to work on giving our sales people the tools they need to create a great shopping experience with each and every customer. Tools like personal book, and we continue to find ways to better marry various parts of our business to improve execution.
For example, we recently completed a major technology project to integrate the inventory platforms of our retail and online businesses. Our vision is to have the breadth of Nordstrom’s inventory investment from full-line stores and direct available to each customer point-of-sale. We believe this will improve customer service as well as improve the efficient use of inventory; our largest ongoing investment.
Finally we believe we are well positioned both strategically and financially to make greater strides improving our customers’ experience. We are encouraged as the management team by the opportunities that lie ahead. Ultimately we remain confident in our company’s long-term strategy and believe we are well positioned to weather short-term challenges.
Now I’d like to turn the call over to Michael Koppel to review the first quarter in more detail.
Thanks Blake and good afternoon everyone. As Blake indicated the first quarter was a challenging period for consumers and retailers. Our same-store sales for the quarter were approximately 250 basis points below our plan. As the quarter progressed, it became clear that achieving our sales plan was not realistic. In response, our team reviewed their plans and with a disciplined approach to our inventories and expenses, we were able to mitigate the impact of lower sales and meet our earnings plan.
We focused on non-customer-facing areas and implemented tighter controls over expenses. We remain confident in our long-term strategy and are committed to our investments in new stores, remodels of existing stores and improvements to our overall customer experience. In the short-term we will continue to rigorously monitor our inventory and expense plans to deliver the best outcome in this current business cycle.
Turning to our financial results, first quarter earnings per diluted share decreased 10% to $0.54 from $0.60 per share last year. Our earnings before interest and taxes, or EBIT, declined 13% to $227 million and EBIT margins declined 126 basis points to 12.1%. Total sales declined 3.8% to $1.9 billion and same-store sales declined 6.5%. Our strongest regional performances were in the South, Mid-West and Northwest, and our best performing merchandise divisions were cosmetics, designer products across all categories, women’s active wear and intimate apparel.
Gross profit rate decreased 57 basis points for the quarter and we ended the quarter with inventory per-square-foot 7% below last year. Approximately 3% of this decrease is due to the sale of our Faconnable business which occurred in the third quarter of 2007. Merchandise margins declined primarily due to lower sales and were partially offset by lower buying and occupancy expenses.
SG&A dollars were below plan primarily due to lower variable costs, both sales and incentive related and a general reduction in our expense plans. While SG&A rates increased 169 basis points the primary drivers were negative leverage from below plan sales and new stores. We opened eight new stores within the last year and while it is still early, they continue to meet our expectations on sales and earnings. Our retail square footage grew 5% over last year, while SG&A dollars grew only 2% which is reflective of our focus on expenses.
Finance charges and other income increased $16 million as we complete the last non-comparable quarter since moving our VISA credit card portfolio on the balance sheet. Receivables at the end of the quarter were 13% higher than the first quarter of 2007 as the success of our fashion rewards program drove a higher penetration of card usage in our stores and increased spending on Nordstrom VISA cards.
Our delinquency rate increased 59 basis points to 2.6% and write-offs increased 110 basis points to 3.9%. These increases were consistent with our expectations, did not have a material impact on profitability versus our plan and represented less of an increase than we are seeing industry-wide. Many of you have asked for more information on our credit card business and as reported in our 2007 10-K, we have made significant enhancements in our credit disclosure.
Our credit card business is an important part of our strategy and the Nordstrom customer experience but a relatively small contributor to our earnings. EBIT from our credit segment was $11 million in the first quarter, which represented 5% of the total company’s earnings. Net interest expense of $31 million was $24 million higher than last year due to increased debt levels and support changes we made to our capital structure. As we have previously indicated we are targeting a debt to EBITDAR ratio of 2x and finished the quarter with a ratio of 1.9x.
During the first quarter we repurchased 4.6 million shares at an average price of $36.00 for a total of $162 million. First quarter repurchases impacted first quarter earnings per share by $0.01 and the balance remaining on our current authorization is $1.2 billion.
As we plan for the balance of the year, we are assuming that the uncertainty in consumer spending will continue and we are adjusting our near-term outlook accordingly. Instead of same-store sales expectations of negative 2% to flat, we are now planning negative 4% to negative 6%. This plan assumes modest improvements from current trends as we begin to face easier comparisons in the second half of the year. We believe these adjustments to our plans will mitigate inventory and earnings risk and will provide upside leverage when trends improve.
Our earnings expectation for the full-year is now $2.65 to $2.80 per share, down from $2.75 to $2.90 per share. The lower earnings per share is driven by the lower sales plan, partially offset by reduced expenses. Compared to fiscal 2007, gross profit is now estimated to be down 60 to 90 basis points instead of down 30 to 60 basis points. The SG&A rate is expected to be up 25 to 60 basis points for the year instead of up 60 to 80 basis points.
Consistent with past practice our earnings per share plan does not include any impact from future share repurchase activity. Given the slower sales environment we are pleased with our efforts and progress in controlling inventory and expenses. Despite a lower sales plan, we not expect our SG&A rate to be lower than our original plan for the year. Our variable operating model works well within a certain sales range, but when we experience negative comps in the mid single-digit range, we need to address fixed costs to mitigate the impact to earnings. This is exactly what we have done, focusing on expenses with minimal customer impact and delaying or reducing expenses where we can.
We have not done anything to risk our relationships with customers and will not cut back on service levels or the overall customer experience in our stores. Our priorities continue to be providing unparalleled customer service and offering our customers the most compelling, fresh and unique merchandise.
Turning to the second quarter, we are planning for a same-store sales decrease of negative 5% to negative 7% and an earnings range of $0.65 to $0.70 per share. Our decision to move the timing of the women’s and kid’s half-yearly sale from June into May will impact the cadence of same-store sales during the quarter.
We expect May sales to be 1,500 to 1,700 basis points above the quarterly plan and June sales to be below the quarterly rate by 1,300 to 1,500 basis points.
In closing, the uncertainly in consumer spending continues to be challenging and we feel it’s appropriate to align our short-term plans accordingly. However, our long-term strategy remains unchanged. We remain confident in our growth strategy, the long-term prospects of our core customers and believe we have a differentiated offering that will allow us to continue to profitably gain market share in our customers.
We are in a strong competitive position with a healthy balance sheet and cash flow that will allow us to continue investing in the long-term best interests of our customers, employees and shareholders.
Now I’d like to turn it over to questions.
Your first question comes from the line of Jennifer Black - Jennifer Black & Associates
Jennifer Black - Jennifer Black & Associates
I wondered if you could give us a little bit more color on California, like Southern California versus Northern California and just how you feel about that, what you see going for the next couple of months.
California continues to be our toughest area. It’s been about, we’re coming up on about a year where we saw a downturn in California and its been below our company average since that time. There really hasn’t been much of a change in the first quarter from that trend. We do see weaknesses in some of the tougher housing markets of the West, California, Arizona, Nevada and we continue to deal with it. I guess the good news for us as you know, we’ve been in California a long time, and it’s been a big, big chunk of our business. We do well in California and we’ve been through these cycles in California before and its always come back and we just want to really focus not on things out of our control like housing, but focus on what’s in our control so when it does come back, and it will, that we’re in the best position to take advantage of that.
Jennifer Black - Jennifer Black & Associates
Okay, it sounds like maybe you think things will flatten out just as time goes along.
I don’t know. I think all we can do is focus on what’s in our control which is respond to the current trends, get our inventories at the right levels, get our expenses at the right levels, but still especially in our stores, just really stay laser focused on what’s in our control and that’s giving great service and having great merchandise.
Your next question comes from the line of Michelle Clark – Morgan Stanley
Michelle Clark – Morgan Stanley
Can you provide us with some more color on specifically where you’re taking the reduction in SG&A expenses, I’m surprised to see such a dramatic decrease from the guidance that you gave last quarter given the lower sales plans?
I would frame the SG&A in two pieces. One is items that are variable and relate to how we perform both in sales in the stores and general overall profitability where we have an incentive driven program. And a piece of that came down just because we’ve seen our business deteriorate and we’re at the low level of achieving our targets. That’s the first piece.
The second piece is frankly we went back to our teams and looked at our overall operating plans within the environment we’re in and went back and made choices around areas that we felt were less value to our customer and also areas that we felt did not drive any additional marginal value relative to the investment. And so that second piece was really a reopening of the operating expense plan, I’m not going to give any specifics on the dollars but suffice it to say I think we’ve made some good adjustments to be more efficient in terms of how we do things and to delay or suspend any projects that haven’t had marginal value.
Michelle Clark – Morgan Stanley
Okay I know you said you wouldn’t get into specifics in terms of dollar terms, but could you just breakout some buckets for us that would fall within that second category?
I would say in the second category roughly a third to a half of it was related about around being more efficient in terms of how we’re conducting ourselves in our business every day and the balance was around delaying expenses in areas such as technology and marketing.
Your next question comes from the line of Adrianne Shapira – Goldman Sachs
Adrianne Shapira – Goldman Sachs
Mike can you just talk about the merchandise margin, I know in the past you had mentioned obviously you expected flat margins, your merchandise margins, you’re obviously doing a good job on inventory, is the change in terms of the lower gross profit margin expectation a function of now merchandise margins expected to be down?
The major driver there is the fact that when you have lower sales and we take markdowns, we take permanent marks and we’re just getting less leverage on the margin component. Our actual dollars were slightly over planned for the quarter but when you have lower sales you just get the deleverage effect on the margin line.
Adrianne Shapira – Goldman Sachs
Okay so on the merchandise, so it’s more of a buying and occupancy issue?
No it’s more of a lower sales on a relatively fixed amount of either markdown or [BNO].
Adrianne Shapira – Goldman Sachs
Okay and then some of your competitors aren’t doing as great a job on their inventory and it seems like being pretty promotional out there at the higher end, could you just talk to what you’re seeing, obviously you’re doing a better job on the inventory management but as others aren’t, what that impact is having.
Our business model is a little different than some of the competitors that maybe you’re referring to in that we have the half-yearly sales and the anniversary sale, and we’re staying true to that. We did accelerate the June half-yearly sale to May just because it’s important that we remain competitive and some of these competitors are breaking a little sooner so that was the number one driver. The second driver was with that holiday weekend, the Memorial Day weekend, we wanted to be competitive through that as well. We’re not adding to the promotional calendar but we’re trying to ensure, I guess most importantly, that our merchandise, we’re responding to what the customer wants and what she is responding to is fresh, new merchandise so our ability to stay in line, be flexible and fluid and flow it through and then when we do need to clear it, take those markdowns, steep up front, move it on, get it to our rack; we have a terrific vehicle there to move those goods so that the full-line stores are flowing in fresh new goods.
Your next question comes from the line of Barbara Wyckoff – Buckingham Research
Barbara Wyckoff – Buckingham Research
What are you seeing now in women’s sportswear, are there any signs of life that might energize this business into fall?
Pete Nesvold - Bear Stearns
The women’s apparel part of our business continues to be challenging. We’ve had success all the way along in pretty much what you would categorize more contemporary parts of the business and in more specifically the premium denim part of the business has held up well. But the rest has been tough and I think it’s fair to say that we’re really waiting on or working with our vendors to see what kind of innovation they can come up with to create compelling product. Obviously we do some of that ourselves on our own label, but we have a high reliance on vendors, partners that we trust and its going to happen eventually here and we’ve got our inventories positioned the right way appropriately and so we’re in a position we can react as some positive trends start to develop.
Your next question comes from the line of Charles Grom – JP Morgan
Charles Grom – JP Morgan
Just question Mike on the other income line, looks like you took your expectation down about $20 million at the mid-point, just wondering if you could comment on that.
Basically that’s related to just slower growth in the receivable and a little bit lower yield as the interest rates have come down. Our cards are variable priced and as the market rates have come down we’re seeing the yields going down as a result of that.
Your next question comes from the line of Christine Augustine – Bear Stearns
Christine Augustine – Bear Stearns
I was wondering if you could talk about any sort of trends you might be seeing with price points, are you seeing, still seeing a deceleration of that more aspirational customer. We know designer has been good but I’m just kind of wondering what is happening with the rest of the price points. Maybe just speak generally about that and then is there a target Mike that you’ve got for year-end inventory that you could share with us.
There really isn’t a change within our core customer, she and he are still aspiring for fashion and for brands and quality and so we don’t have counters within our stores but there might be fewer customers but we don’t see them trading down and so there hasn’t been a change in our price points and there’s nothing that at this point would cause us to change our strategy in terms of our merchandise content. So we’re still focused on our core customer and trying to have the balance and breadth of inventory that they’re looking for. But I think the key thing here is we have to execute better. In this environment you can’t leave anything on the table and so its really important that each and every customer we’re greeting and approaching and maximizing to the best of our ability and being in a position of strength particularly when this things starts to emerge and get more on positive footing.
In terms of targets for year-end inventory our approach has always been we’ve been, to constantly improve the turn of our inventory and unfortunately in the cycle we’re in, we’ve been kind of chasing to maintain the turn. So our target to the end of the year would be we would like to try to keep up with where sales are going and maintain the turn. Obviously if you look at the last couple of quarters, we’ve been chasing that a little bit as things have continued to be tough but hopefully we’ll be able to keep that alignment between the inventory growth and sales growth as we approach the end of the year.
Your next question comes from the line of Liz Dunn - Thomas Weisel Partners
Liz Dunn - Thomas Weisel Partners
My question relates to inventory, can you talk about the freshness of inventory and is there anything in the inventory numbers that’s different units versus pricing and then also related to inventory, can you just walk us through a little bit how the Faconnable sale impacted inventory per foot, is it that you’re taking inventory ownership later or what exactly is going on there?
I’m trying to follow the question exactly about the inventory, are you talking about the quality of our inventory? I’m just trying to make sure I understand the question.
Liz Dunn - Thomas Weisel Partners
Quality and is it current, is it fresh, the level of sort of carry over inventory that you have right now versus last year and then also I want to know if there’s anything in the inventory reduction that has to do with a discrepancy of units versus pricing, like are units down as much as inventory?
Well we’ve been doing a pretty good job of staying on top of the aging reports so that we just don’t have inflated amount of inventory that’s older and not as desirable for the customer, so I’d say on the whole its looking pretty solid and our go-forward plans are definitely reflective of what the recent trends have been so I think we’re confident that we have a chance to maintain on the balance relatively fresh inventories and certainly in keeping with what we’ve been doing over the last couple of years.
The reason we called out Faconnable is because the reported inventory year-over-year on a per-square-foot basis is down 7% but 3% of that was because we sold Faconnable last year and so we just don’t have that inventory this year and we felt we needed to reconcile the GAAP number to what the true reduction in comparable inventory was.
Your next question comes from the line of Dana Telsey - Telsey Advisory Group
Dana Telsey - Telsey Advisory Group
Can you talk a little bit about the rack and the performance there which has been very good and your plans for expansion of the rack and how you’re planning inventory for the rack and what you’re seeing there? And then just new store productivity, how is the new stores openings?
In regards to the rack we’ve had a little over five years now, a very healthy and strong trend and that team has continued to refine their strategy. It has aspects or qualities of it that are different and unique compared to the full-line store and they are competing well we believe in that sector. They do a terrific job of efficiently within our model taking the goods from our full-line stores and getting it out in a more low-cost environment and selling it to the customer. They also balance that mix with our top resources and brands from an [off-price] or special value approach. So our Racks, when you look at the growth of our full-line stores, probably have been lagging a little bit as they’ve continued to refine that strategy and we believe that we’re in a stronger position that we can continue to have some growth now. And at this point we’re just trying to mirror the full-line store growth which we’ve announced for the next couple of years. What’s different is that the Racks can run much closer and so they can go as quickly as six, seven months out versus a full-line store that on average can be four years out so you will see over time us filling into that strategy and really following what the full-line store growth has been so there definitely is opportunities to improve the productivity in the Racks of the comp stores and to supplement that with new stores as well. So we feel about our Racks strategy and we should see that continue to add to our total results.
We’re pleased with our new store performance. We’ve opened eight stores in the last 12 months in aggregate those stores continue to perform ahead of our plans in both sales and earnings. It probably goes without saying that new stores are not immune to the tough environment that’s out there. But I think the point to be real clear on for us is we are not sacrificing returns for the sake of growth. Its quite the opposite. We continue to enhance our returns with these new stores and they continue to be the best use of our capital.
Your next question comes from the line of Neely Tamminga - Piper Jaffray
Neely Tamminga - Piper Jaffray
Blake, just a clarification, just to be really clear, these guys at Saks and Neiman are doing kind of unheard of sort of sale events, friends of family etc., just kind of breaking price in general, you philosophically are not going to go down that path right? I just want to just clear that up?
We will compete, but no we haven’t opened up the friends and family one-day only open to midnight sale, so no we’re staying the course.
Your final question comes from the line of Bob Drbul – Lehman Brothers
Bob Drbul – Lehman Brothers
I just want an update on the current real estate market, what are some of the remaining markets that you’re finding it difficult finding attractive real estate opportunities and has this changed given the current environment?
The real example there continues to be Manhattan, Manhattan tops our list of a place we want to be and just given the dynamics, its been on the top of the list for a long time and so we continue to look for a good spot in Manhattan and don’t have anything to announce at this point. Besides that, we continue to have good opportunities come our way. If you look in the last five years, most of those opportunities have come from the consolidation in the industry and we’ve not seen any slowdown in opportunities that avail themselves to us. So we’re encouraged by that.
Thank you very much for participating in our call and your interest in Nordstrom. Mike and I are around the rest of the day if anyone has any questions and again thank you very much.
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