Nordstrom, Inc.(JWN)
Q2 2008 Conference Call
August 14, 2008 4.30 pm ET

Executives

Chris Holloway – Director of Investor Relations for Nordstrom
Blake Nordstrom – President of Nordstrom Incorporated
Michael Bull – Executive Vice President and Chief Financial Officer
Pete Nordstrom – President of Merchandising
Eric Nordstrom – President of Stores

Analysts
Liz Dunn – Thomas Wizel
Jennifer Black – Jennifer Black and Associates
Debra Wineslick – Citi
Charles Grom – J.P. Morgan
Lorraine Mika – Meryll lynch
Dana Collin – Bank of America
Barbra Wyckoff – Buckingham Research

Presentation

Operator

Hello and welcome to the Nordstrom 2nd Quarter 2008 Conference Call. At the request of Nordstrom today’s conference call is being recorded. All lines will be in a listen-only mode until the question-and-answer session. If you would like to ask a question please press * 1. I will now introduce Chris Holloway; Director of Investor Relations for Nordstrom, you may begin sir.

Chris Holloway – Director of Investor Relations for Nordstrom

Thank you, good afternoon everyone and thank you for joining us on the call today. Today’s call will last approximately 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 10K and Form 10Q. Here to discuss Nordstrom’s strategy 2nd quarter performance and business outlook are Blake Nordstrom; President of Nordstrom Inc. and Michael Bull; Executive Vice President and Chief Financial Officer. Also joining us for Q&A are Pete Nordstrom; President of Merchandising and Eric Nordstrom; President of Stores. With that I will turn the call over to Blake.

Blake Nordstrom – President of Nordstrom Incorporated

Thank you Chris and good afternoon everyone. I would like to jump right into our high level review of our results; you will hear more details from Mike in a few minutes. Our comp store sales decreased of -6% with in line for our plans with the quarter, it is not fast fined reported decrease though while we believe we manage our business well, no one around here is happy about negative results. We achieved a low end of our original earnings plan for the quarter at $0.65 per share. Margins were impacted for the quarter and we believe we will see margin pressure for the remainder of the year. Our goal continues to grow profitable market share, today I would like to give you a brief update on our primary initiatives to support this.

First and most importantly service is always our number one priority and we are committed to offering our customers a great shopping experience regardless of how they choose to shop with us. Under that service umbrella as you know, three important priorities are merchandise strategies, a seamless multi-channel offering and new store growth. In regards to our merchandise offering innovation, newness and fashion still drive our business. The consumers are in aggregate are spending less in this climate. The competitor environment is highly promotional and customers are more cautious today, however we see no evidence that they are trading down. Our focus is to bring the best merchandise available to our customers. Merchandise is both a quantity subject and a content subject. We have made great progress in our planning process which aides able to buy and a fresh flow of compelling merchandise. By having our inventories in line we have a higher probability of addressing content issues, women’s apparel continues to be the toughest part of our business, we continue to work hard on women’s apparel and while we are seeing relative strength in contemporary and better trends in juniors there is still opportunity to improve our execution overall.

We continue to make process in our multi-channel capabilities; customers who shop in multiple channels spend considerably more with us than customers who shop one channel. We continue to see a number of these multi-channel customers grow; this year they have grown 7% over last year. We are improving the tools available to customers and employees to enhance the shopping experience, for example last quarter we launched Buy On Line Pick Up In Store, this service is functioning great both online and with our in store execution. Buy-On-Line Pick-Up-In-Store is a terrific service for our customers who can order on line, receive a confirmation within an hour and pick up their merchandise anytime after that confirmation. This is a great example of how we are working to not only maintain but to improve the service we offer our customers. We are excited to communicate more specifics about this service to our customers in the coming month.

Finally a key driver to increase market share is investing in new stores, today through 2012 we have announced 34 new full line Anne Rack stores, this investment continues to be the most productive use of capital and overall provides great returns for our shareholders, with strong margins, cash flow and a healthy balance sheet, a strong financial position allows us to capitalise on good real estate opportunities like Santa Monaca Place in the Los Angeles area and so we recently announced. As well as some new Rack locations including the Beverly Collection in L.A and Oreland Park Place in Chicago. For the remainder of the year we will open a new store in Thousand Oaks California on September 5th, our second store in Indianapolis on September 19th, our first stores in Pittsburgh and Maples on October 24th and November 7th respectively.

As for relocations we are excited to relocate our Decover Wash In Store where we have been serving customers for 40 years on October 3rd. We also recently announced the relocation of a store in Los Del Rio California where we serve customers for 27 years, in both of these cases we will move into new buildings in the same malls which will dramatically improve our ability to take care of customers. We remain well positioned to weather the slow down; in fact we continue to strengthen our position through new investments in better processes, our reputation is our strongest asset and although we will continue to take a vigorous approach to controlling costs we will not put our standards of customer service or relationships with customers at risk. Ultimately we are focussed on maximing our results in the near term while continuing to invest in our ability to improve the service and merchandise we offer to our customers.

With that I will turn you over to Mike who will walk you through the details for the quarter and our plans for the rest of the year.

Michael Bull – Executive Vice President and Chief Financial Officer

Thanks Blake and good afternoon everyone. Blake has shared with you the highlights of the quarter and an update on our strategic agenda. I will now take you to the financial results for the second quarter.

Second quarter earnings per diluted share was $0.65 and earnings before interest in taxes or EBIT totalled $269 million, this is an decrease of 8% in EPS and a decrease of 13% in EBIT. Total sales of $2.3 billion declined 4.3% and same store sales declined 6%. Our strongest relative retail regional performances were in the South, Northwest and Midwest and our best performance merchandise divisions were cosmetics, accessories and women’s shoes. Overall results in full line stores continue to be challenging as chain store sales decreased 9% in the quarter. Our tougher series of business California and women’s apparel experienced trends similar to the first quarter. Nordstrom rack continues to strong sales growth with the same store sales increase of 6.3%. The rack division has had a multi year run of strong performance with sold mid single digits to double digit same store sales in each year since 2002. Sales for our direct segment which is our online business were also strong increasing 15% in the quarter and 10% for the year. We expect directs to exceed $700 million this year which would be 8% of our total sales. These results reflect continued progress in our multi-channel strategy and a percentage of sales coming from our customers who shop across multiple channels is now 32% up 400 basis points from 2007.

The second quarter rivals the fourth quarter in sales volume with three of our five annual events held during the quarter. Consistent with the industry we clear end of season product in the second quarter for our half yearly sale for women and kids and half yearly sale for men. Our anniversary sale held in July is the biggest event of the year where we offer new Fall Season merchandise at significantly reduced prices before the season begins. Sales results for the event exhibited small improvements over trends in non-event periods. With a slower pace of business we are focussed on controlling inventory and end of the quarter with inventory per square foot 13% below last year. Approximately 3% of this decrease is due to the sale of our Oxnard Business which occurred in the third quarter of 2007. Although inventories remain well controlled the competitive environment is highly promotional and consumers are responding more to discount and product. The combination of lower sales trends and higher markdowns resulted in our gross profit rate decreasing 168 basis points for the quarter. We continue to execute against the revised sales plan we shared in the first quarter, as a result of our variable nature operating model and focussed on efficiencies, SG&A dollars decreased $32 million to $604 million and our rate improved 21 basis points. Although we are highly focussed on controlling costs we will not risk our ability to provide high service levels to our customers.