The company is currently at the peak seasonal borrowing period and ended the quarter with cash of $68 million and short-term borrowings of $252 million.
- Despite the strain in the credit markets, the management recently increased short-term borrowing capacity by $150 million.
- In total, the company has $950 million of short-term borrowing capacity and expects borrowings to be minimal at year-end.
- In terms of long-term debt, the management has $250 million coming due in January 2009 and no additional maturities until a $350 million note expires in April of 2010.
- The company continues to monitor the currently unattractive band markets.
- If the bond markets continue to be challenging, the company would expect to use free cash flow and a portion of the $950 million in short-term borrowing capacity to repay the $250 million note.
The company ended the third quarter with an adjusted debt-to-EBITDA ratio of 2.3 times, which is higher than the target of 2 times.
- This amount of leverage, while above the target, is relatively low for the industry and still supports the strong investment grade credit rating.
- Overall, the company remains well-positioned with industry-leading profitability margins, return on invested capital that continues to exceed cost of capital, and a conservatively managed balance sheet.
Given the prevailing unprecedented times, the management felt it was appropriate to take additional steps to ensure positive free cash flow and retain the company’s strong credit profile.
- Firstly, the company suspended its share repurchase program during the third quarter and may not resume the program until economic conditions improve.
- Secondly, the management has reduced the net capital expenditures to approximately $350 million in 2009 from the plan of approximately $560 million.
- The company had three full-line store projects originally scheduled to open in 2009 be delayed by developers and expect to experience more delays and changes to the new store opening plans.
- The management now expects to relocate one full-line store and open three new full-line stores in 2009, and open four to five new full-line stores in 2010.
- This is a reduction from the 12 new stores we originally planned to open over the two years.
- The management is taking a more conservative approach to remodels over the next two to three years.
- The company will reduce major remodels from about six per year to approximately two per year until economic conditions improve.
- However, the management has not reduced maintenance capital expenditures and will continue to keep the stores well-maintained and a source of competitive differentiation.
- Over the next five years, these changes will result in a CapEx plan of approximately $2.5 billion, which is down from the $3 billion plan shared same time last year.
In addition to reductions in CapEx, the management continues to focus on improving profitability.
- The variable expense model adjusts to slower sales trends but management has also been focused on finding additional efficiencies in other aspects of the business.
- The savings expected in 2008 will exceed $100 million and the company is focused on capturing similar levels of profit opportunities in 2009.
Fourth Quarter 2008 Outlook:
- For the remainder of 2008, the management expects the current tough economic conditions to continue.
- The fourth quarter plan assumes that same-store sales decrease 13% to 16%, yielding an EPS for Q4 of 35 cents to 45 cents.
Fiscal Year 2008 Guidance:
- Same store sales are forecast to record a decrease in the range of 9% to 10%.
- The gross profit is expected to register a decrease of between 250 basis points to 280 basis points.
- The full year effective tax rate is anticipated to be in the range of 37.2% to 37.7%.
Key questions and answers from the third quarter fiscal 2008 earnings call conducted by Nordstrom on November 13, 2008.
Neely J.N. Tamminga (Piper Jaffray): Can you talk about any potential trend you may be seeing in terms of returns for the direct business?
Michael G. Koppel: As far as the direct business, we do track all activities between both channels, direct and the stores and know the return levels. Overall in the company both in the stores and direct, we have seen an increase in return levels.
Deborah Weinswig (Citigroup): Concerning the additional marketing events, how should we think about planning of the marketing calendar for 2009 especially in light of the fact that the competition has been so aggressive?
Erik B. Nordstrom: The changes that we have made so far have been with our rewards program. We have some enhanced that’s the triple rewards twice a year and those have been very successful for us. We’re in double points right now. We are not planning on repeating that for next year but it is something that we can roll out quickly if need be and clearly these are uncertain times and we need to be responsive to what is going on and we will do that. Currently, the only additional marketing events we have are the two triple rewards points.
Deborah Weinswig (Citigroup): With regard to the specifics around the store openings in 2009 and 2010; the 5 down to 3 and the 8 down to 4 to 5, how many of those stores have been permanently put off versus just delayed into the out years?
Erik B. Nordstrom: We haven’t announced any of those yet but we are still in constant conversations with our developers and as you can imagine, their plans are changing rapidly so we don’t have anything to announce on that yet. We are confident that at least a number of stores will slide but it’s safe to assume that a portion of those will go away.
Deborah Weinswig (Citigroup): Can you go through some of the initiatives that are driving the significant performance of the Rack division?
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