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Nordstrom Second Quarter Earnings Call
Author: Albena Toncheva
123jump.com
Last Update: 9:42 AM EDT August 20 2007

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The leading fashion specialty retailer of the US reported revenue of $2.39 billion, an increase of 5.2% from prior year. The sales in the quarter were boosted by the half-yearly sales and July anniversary sales. The revision to the accounting method of the VISA credit card business increased the expenses in the quarter substantially. For fiscal 20007, the company revised its projections upwards and now expects earnings of $2.91 to $2.97 per share, on same store sales growth of 5% to 6%.


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This summary is based on the second quarter fiscal 2007 earnings call conducted by Nordstrom Inc. (JWN) on August 16, 2007.

President: Blake Nordstrom
President, Merchandising: Pete Nordstrom
Chief Financial Officer: Mike Koppel
Investor Relations: R J Jones

Key Investors Issues

- The earnings per share rose to71 cents from 67 cents in previous year.
- Quarterly sales rose 5.2% over the prior year to $2.39 billion.
- For the third quarter, the company expects EPS in the range of 61 cents to 64 cents.

Second Quarter Fiscal 2007 Financial Highlights

The company reported net earnings of $180.4 million or 71 cents per diluted share, for the second quarter ended August 4, 2007.

For the same period last year, net earnings and earnings per diluted share were $178.8 million and 67 cents, respectively. Earnings per diluted share in the second quarter increased 6% compared to the same quarter last year.

Total sales in the second quarter were $2.39 billion, an increase of 5.2% compared to sales of $2.27 billion during the same period in fiscal 2006.

Second quarter same-store sales increased 5.9%. The 53rd week in fiscal 2006 created a timing shift in the 4-5-4 calendar for fiscal 2007, which has 52 weeks. The second quarter in fiscal 2007 began and ended one week later than fiscal 2006. With the first week in May having higher sales than the first week in August, this timing shift negatively impacted sales results for the second quarter of 2007.

In contrast with most retailers, the second quarter sales contribute significantly to the annual results and reach roughly 90% to 95% of the fourth quarter sales volume. The highest volume days of the year occurred during the firm’s sale events in the second quarter. In July, the company’s unique anniversary sale is the biggest event of the year where it offers new fall season merchandise before the season begins. This year, the company achieved a seven-year high same-store sales increase for this event. Consistent with other retailers, the firm also go through clearance activity in June with its men''s, women''s and kids half yearly sale events which delivered positive low single-digit comp results this year.

In the full line stores, the strongest regional performances were in the Midwest, Southern and Northwest regions. Major merchandise categories performing ahead of the full line store average for the quarter were the designer offerings across categories, accessories and men''s apparel.

Gross profit margin increased 36 basis points for the quarter over last year.

Improved merchandise margin drove results coming in above plan and higher than last year. Key divisions with increased sales and merchandise margin that contributed to the rate expansion were women''s apparel, kids, and designer apparel.

Offsetting gross profit improvement on a percent of sales basis, the SG&A rate increased 110 basis points versus the prior year.

The company’s operating plans included higher costs for this quarter than seen historically during this period. The company completed an $850 million securitization transaction for its co-branded Visa receivables in the first quarter. While its proprietary card receivables have always been on balance sheet, its co-branded Visa receivables were previously held in an off balance sheet trust. With the transaction, the firm began the on balance sheet accounting treatment for new Visa receivables and started recording provisions for credit losses and SG&A.

Primarily as a result of this transaction, the total provision for bad debt in the second quarter increased $22 million versus last year. Approximately $14 million of the bad debt reserve is non-comparable due to the previous mentioned accounting treatment for the co-branded Visa receivables that did not occur in the prior year. The remaining $8 million of the incremental provision resulted from growth in both the Visa and proprietary card receivables ahead of plan and from changes to assumed repayment rates versus last year. These changes stem from observed increases in early stage delinquencies. Despite this new data, the write off rates continue to be lower than they were prior to the 2005 change in bankruptcy legislation. The firm will continue to monitor its program for material behavioral changes in step with review of the authorizations for new accounts.

Also increasing SG&A expense was a series of projects that directly support strategic plans for multi-channel integration and growth in the company’s online business. These projects impacted areas across the company including IT, personnel, and services purchased. The other income line of the P&L increased $9.5 million for the quarter which was ahead of the firm’s plan. The increase came primarily from higher finance charge income as a result of growth in the co-branded Visa card and proprietary card receivables. The firm also realized a gain of $5 million from the disposal of an asset.

Net interest expense of $16.8 million was $4 million higher than last year.

This was primarily due to an increase in debt levels combined with lower interest income.

The firm repurchased 11.4 million shares of stock during the quarter for a total of $590 million.
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