Q3 2019 Earnings Call
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Greetings and welcome to the Nordstrom third quarter earnings Conference call. At this time, all participants are they listen only mode. We will begin with prepared remarks, followed by a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad, if anyone should require operator assistance during the conference. Please press star zero on your telephone.
Keypad as a reminder, this conference is being recorded.
This time I'll turn the call over to Trina Schurman director of Investor Relations for Nordstrom you may begin.
Good afternoon, I think deeper joining.
Todays earnings call will last 45 minutes and will include 30 minutes for your question before we begin I watch collection that will be referring to fight, which can be viewed by going to the investor Relations section on north from Dot com.
Our discussion May include forward looking statement. So please refer to slide showing our safe Harbor language.
Dissipating and today's call Erik Nordstrom co President and Anne Bramman, Chief Financial Officer, who will discuss the Companys third quarter performance and outlook for 2018, joining during the Q1 day session will be Pete Nordstrom co president with that I'll turn the call over to Eric.
Thank you for joining us today.
We're pleased with orbital.
Our work on strategy is transforming our business model, how we're serving customer.
<unk> mix about that.
Oh price off price.
Stores and online and we're further linking our businesses to serve customers and differentiated way.
The success of our strategy in Los Angeles after a confidence as we expand to work top 10 market.
We recently achieved an important milestone with the opening up in New York City flagship store significantly increasing our presence in the world's talk regional market.
Turning to our third quarter result.
Our earnings exceeded expectation demonstrating substantial progress.
Delivery of our strategy and strength of our operating discipline.
There were a customer focus we drove broad based improvement and top line trends at more than 200 basis points relative to the first half a year in particular, the off price business delivered positive sales growth and increased profitability through strong inventory and expense execution.
We're encouraged by the momentum in our full price and off price businesses as we execute our holiday strategy toward established Nordstrom I think gifting destination for customers.
We're focused on driving top and bottom line. We've made notable changes to chew p. about our anniversary sale at holiday.
We discussed previously the priorities for anniversary hard to improve customer satisfaction drives sales and increased profitability.
Customer feedback from this year that what positive significantly raising satisfaction scores.
We curated assortment by building more depth and she brand and item driving higher sell through.
As a result, we had fewer markdowns on anniversary product in the third quarter, which contributed substantially to merchandise margin.
For the holidays are meaningfully expanding our gifting offer across all price and off price and making it easier for customers to buying gifts by recipients and price point.
Also making shopping more convenient with services such as three next day shipping 24, seven order pickup and complimentary gift wrapping.
The momentum in our off price business delivered positive sales growth and less inventory.
Also increased turns for the eighth consecutive quarter and exceeded bottom line expectations.
We've been purposeful about improving inventory flow refining product allocation and emphasizing merchandise that's seasonally relevant.
Our favorable inventory position allows us to be opportunistic in the marketplace and leads to having a good flow of new product for customers to discover.
Another way, we're leveraging inventories grew our market strategy.
Investments in digital capabilities, along with assets of people product and play.
Enable us to serve customers the on their terms.
Our goal is to gain market share, while driving customer engagement and inventory efficiency.
There are two elements to the strategy.
First we're giving customers greater merchandise selection with faster delivery without increasing inventory level.
Second we're engaging with customers by offering expressed services, such as order pickup returns and alterations and additional locations.
We first launched our market strategy in Los Angeles, our largest market where results are exceeding expectations.
Third quarter sales growth outpaced other markets by 100 basis points.
In L.A. the growth in customer shopping in stores and online was also a 100 basis points higher than our average.
We anticipate that these customers will increase their spend by four times.
Additionally, merchandise sell throughs were higher in these stores than in other markets.
Attributing to profitability.
We recently rolled out our market strategy in New York City, San Francisco, Chicago and Dallas.
And the broader New York City market customers now have faster access to inventory across eight full line stores, including our flagship and our fulfillment center.
This represents seven times more selection available for same day pick up or next day delivery.
Leveraging existing store assets and digital capabilities enabled us to implement the shared inventory approach without making additional material investment.
Order pickup is our most profitable transaction and the fourth quarter accounted for 40% of its volume.
This represents a meaningful opportunity to increase convenience for customers during the holidays and at a lower cost for us.
Going forward, we're accelerating this strategy to our remaining top 10 markets by the end of 2020 through continued focused on shared inventory and access to services.
This includes plans to open more Nordstrom local service hub in Los Angeles, and New York, We will leverage additional rack locations.
Offer expressed services such as order pickup returns and alteration.
And finally, we opened our New York City flagship store on October 24th we've seen strong customer response with 85000 visits during the opening weekend alone.
City represents our largest online market and we expect to see a halo effect when we open a physical location.
Already the sales uptick in the men's store is exceeding expectations.
In addition, one of Nordstrom the key points a difference because the breadth of our merchandise assortment, which creates an inclusive shopping experience.
Customers at this store have responded to our offering and top performing brands include Nordstrom made labeled Topshop Nike, Canada Goose moved in China and Valentino.
Opening this flagship has been perhaps the most important milestone era companies long history.
The culmination of efforts across so many people and we are grateful to them. All first of all to the many Nordstrom alumni who over the years to establish the reputation with customers and as an employer that allowed us our opportunity to be there for us.
And to our current team across the company our business is about team and this has never been more true we're proud of their dedication and passion and bring this store to life.
Ignite deal more most fortunate to work with so many talented caring and hardworking people.
I'll now turn it over to add to discuss our financial results and expectations for the remainder of the year.
Thanks, Eric.
Third quarter, we reported EPS of 81 cents.
Seeding our expectation.
We made meaningful progress in improving the customer service and continuing our operational discipline.
[laughter] strength of our inventory and expense execution contributed to EBIT margin expansion for the quarter, we are delivering on our strategy, while driving top and bottom line result.
Third quarter sales decreased 2.2% inline with expectations.
Full price decreased 4.1% and off price increased 1.2%.
Sales trends improved by more than 200 basis points from the first half of the year.
We saw broad based improvement across full price and off price driven by actions, we're taking related to loyalty digital marketing and merchandise assortment.
Digital sales represented 34% of our business.
300 basis points from a year ago.
We saw sequential improvement in digital trends throughout the quarter, most notably at Nordstrom Dotcom.
Customer satisfaction score on our loyalty program continued to rebound and digital marketing efforts are driving traffic.
We rebalanced our merchandise assortment, we are increasing death in key items in full price and accelerating seasonal receipts in off price.
Oh merchandise divisions in both businesses improved relative to the first half for the year.
Our gross profit rate increased by 100 basis points over last year, we had fewer markdowns and the result of disciplined inventory management and off price and higher sell through an anniversary product in full price.
We ended the quarter any favorable inventory position down 2.7%.
And we maintain a positive spread between sales and inventory for the third consecutive quarter.
Our strong expense discipline drove our third quarter earnings be.
Expenses were down 2% from last year, excluding the credit charge in 2018 and pre opening expenses for the New York City flagship.
As a reminder, we plan to $35 million and Preopening expenses increased roughly $10 million was incurred in the first half and $25 million in Q3.
We continue to reduce our fixed cost by realigning our support structure in stores.
Making end and process improvements and supply chain of technology and minimizing discretionary spend.
Year to date, we've achieved $170 million and savings and expect to well exceed our plan of $150 million to $200 million for the year.
Our financial position remains strong.
We apply a consistent approach the balance of the reinvesting the business and returning capital to shareholders.
For the past several years, we've made significant investments in new markets, and then digital capabilities to fuel future growth.
With the opening of the New York City flagship or exiting this generational investment cycle.
As a result, we expect capex to slow down from 6% of sales this year than 3% to 4% beginning in 2020.
This reflects a normalized level inclusive of our market strategy investments related to technology supply chain and additional Nordstrom local.
We anticipate that moderating capex will accelerate free cash flow next year.
We remain committed to our investment grade credit rating.
Adjusted debt to EBITDA was 2.8 time, and we expect it to be roughly 2.7 times, but the ended the year in line with 2018.
On November six we issued $500 million and debt and in early December we expect to use the proceeds to fully retired outstanding May 2020 note.
A one time financing charge of approximately four cents in the fourth quarter is not included in our revised EPS outlook.
Turning to our expectations for the full year, we updated our EPS outlook by raising the low end of our range by five cents.
We're maintaining our annual expectations for sales decrease of approximately 2%.
We expect FCB dollars to be down roughly 1% for the year when excluding last year's credit charge.
Gross profit rate is expected to be relatively flat.
As you May recall, we planned sales growth in the second half to reflect a 400 basis point improvement from the first half and we're on track to meet these expectations.
For the fourth quarter, and New York City flagship is expected to contribute approximately 150 basis points of growth.
And the remainder in evenly weighted across three drivers merchandise assortment loyalty and digital marketing.
As a reminder of gross profit as expected de leveraging occupancy cost for the New York City flagship.
Merchandise margin rate is planned flat, which contemplates a continued promotional environment.
To wrap up we're pleased with our third quarter results.
We made significant strides and delivering on our strategy and we're encouraged by the customer response.
Our achievements, including strong off price execution improved anniversary economics.
Seth of our market strategy and the New York City flagship reflect continued focus on the customer and operating discipline.
I'll now turn over Trina for today.
Thank you and before we get started with M&A, we would appreciate it.
One question to allow everyone attempt to ask a question.
Also as a reminder, the company does not plan to comment on an 8-K filing on October 28, well now moved to the today's session.
Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation to indicate that your line is in the question Q you May press Star too if you would like to remove your question from the Q for participants using speaker equipment and may be necessary to pick up your handset before pressing the star Keith.
Thank you. Our first question is from Omar Saad with Evercore. Please proceed with your question.
Thanks for taking my question nice quarter I.
I wanted to ask some follow ups around the omni channel initiatives, what you're seeing in local market strategy.
Even a little bit deeper on New York and I think you now rolled out San Francisco Dallas Chicago.
You know what's different in New York Mason from what you've learned in.
Yes Angeles and it seems to be really feeding into this kind of overall improvement in the profitability the company as these.
Abilities come online is that the right way to think about it in the next year as you expand even further market the new markets. Thanks.
Thanks Omar.
Let me start at the end I think a way to think about number one is it resonates with customers.
These strategies work and that doesn't resonate with customers a lot of customers.
Certainly our customers like more selection.
And receiving the faster.
But a good chunk our customers a white the control of picking up in store.
Okay apartment without a doorman or things against strong author porch or are they want to try it on.
Before they are taken home.
After that alternative means a lot.
Secondly, how you should think about I'm sure customer relevance.
It's really about leveraging for the most part existing assets that we have.
The surgeon customers better so, it's it's really efficient for us.
Our biggest investment is inventory.
And inventory.
In stores in particular.
And then inventory in stores close to customer so being able to leverage that inventory.
Give customers bigger selection at a faster delivery.
Terrific and but it also helps.
Conceive of our inventory significantly.
I think yes will be what we've learned in New York So far.
And I think it makes sense, but.
We opened the two local service Hudson and September .
And the traffic to those have ramp as both those as ramped up much faster than what we saw in Los Angeles.
It's just more intuitive to customers, who live in New York.
That.
They're not getting in there as you be and driving to a parking lot.
So to be able to have a neighborhood service, where they can do returns.
Pickups and alterations.
Customers get it immediately in our traffic in those locations of local have.
He has been very strong.
It's also.
Yes, we're utilizing our Manhattan rack locations as well for those services and the uptake on those services is significantly exceeded our expectations.
That's really helpful. Thank you.
Thank you. Our next question is from Oliver Chen with Cowen. Please proceed.
Thank you very much congrats on New York regarding rebalancing the assortment and the merchandise what are your thoughts about that opportunity ahead and will that continue to be an opportunity and into next year and as we think about digital and both digital marketing in your digital sales growth how should we model that line.
And what inning are UN with refinement of digital marketing, which I'm sure is very dynamic.
Competing with hits, a rebalancing assortment and I will.
Hi teams of digital marketing sure.
Overpaid.
In terms of balancing our assortments and wrote to price points and.
I guess, what I would say about that is we're really early innings of it because we really landed on the strategy and tactically got after a couple of months ago, but lead times are pretty long, particularly the full price part of the business and it's not something you can affect.
Very short term because largely what to deal with our MSR pieces of if not how we bring to choose to market down it it's coming at regular price and so it really has to do with the assortment in the selection of Brian .
I think as long as weak and we will we will do those continue to ground or our efforts.
And actions around customer data, so that we ever more objective view. It I think it's good tickets, but right place than what you should expect to see.
Continuous improvement on those lines over the next several months.
We're going on here to declare victory that we get all aimed at this moment, but we I think we have a clear understanding of how to more surgically implement our five.
In a way that's going to benefit the business. So we feel good about what we're working on there.
Let me take a stab and you can follow up.
The digital subs, yes.
Yes, that's a big drivers and our digital felt growth loyalty digital marketing and merchandising.
Talked about the last couple of quarters, where revenue the journey on those.
Royalty has made significant progress all through the year our program there and we're seeing that.
We're decrease engagement online with our loyalty customers a digital marketing it is.
Is becoming more productive for us we're seeing increased traffic online.
And we believe there's still some runway there the merchandise piece, having the right balance sheet just touched on.
The other comment I'd just make on our digital sales is we view.
Digital sales as a means to an AD as opposed the end up in of itself.
And what that means is we look at our digital assets like or other assets, how do we get.
Before we can serve customers better and often in unique ways that kind of ties back to our market strategy.
I think some good examples of.
How much order pickup in stores is driving.
Online sales growth.
So overall for the quarter, one half of our digital sales growth came from order pickup and in Los Angeles, where were most advanced our market strategy. It was two thirds of our digital sales growth came from.
In store or pick up so.
Thats going to be a big part.
Moving forward and we are.
Early in the first ending on that one.
Thank you Thats really helpful. Just a follow up new York's a competitive market and you've been really holding your own what are your thoughts regarding the promotional environment in New York and Department store closures that we've we've been having here.
Thank you best regards yes, thanks Pete.
You know the promotional thing is something that we've got to be reactive to in there's all kinds of factors going on out there.
It's probably and I think am I mentioned.
One of the wildcard in terms of how we predict where I, we're going to end up to this next quarter, we like the momentum that were on and everything but it's difficult for us to predict exactly what's going to happen with the promotional part of the business. So.
I guess, what I can tell you about that as we pay close attention. We're monitoring what's going on everywhere, we're working closely with vendors to.
Make sure to whatever jetsons, we need to make we can make and quickly and so that customers.
Feel like they can trust our pricing everything Thats, just part of our ongoing long term strategy about making sure the really staying close to it and I wish I had a cleaner answer for you there.
There are there are factors that would be happening with others that really are in our control. So we have to get a bit of react.
Thank you very much best regards thanks. Thanks.
Thank you next is Edward Yruma with Keybanc capital markets. Please proceed.
Hey, good afternoon, guys and congrats again on New York.
Real quickly.
On the digital sales and are you guys had indicated that sales that accelerated intra quarter I know that you've been doing tweets performance marketing and loyalty, but kind of any anymore color you can give on wide performance accelerated and then as a follow up in the previous questions on local.
You think about the longer term opinion rollout local.
Hi, how quickly do you think you can move now that you've had a test miss and different types of cities and markets. Thank you.
To your digital sale of I guess.
Sure.
Comment Olivers question.
In stock rates has been another area numbers I've mentioned focused on it.
Good progress on that or last quarter definitely attributed to part of the momentum.
In our results.
First the speed of the local rollout.
We ended the quarter our plan was too.
And that our market strategy to New York.
So, adding Chicago, Dallas and San Francisco.
Was something we were able to do ahead of our plans.
And it reflects that we can move pretty quickly on it there is not a material capital investment to expand this to other margins. It is mostly a story of leveraging existing assets. There is some work to be done we can't just flip it on bidders.
Theres some systems work and certainly some operational work.
To prepare to our plan is to.
Or in five of our top 10 markets now.
And our plan is too high.
I have this market strategy rolled out to the rest of our top 10 markets by the end of next year, and we will be pushing that as fast as we can.
Thank you.
Thank you next is Alex Molpus with Goldman Sachs. Please proceed.
Hi, there. Thanks, so much for taking the question here.
A question on the on the inventory management coming in and again below sales. This quarter can it can you talk about how happy you all with the composition of the level of that going into that into the holiday period.
And then just related to that I think that you said that Dan the much margin guide was around flat. So the fourth quarter and can you talk about the puts and takes that.
And.
Kind of surprises one way or another what would be to what would be the driver.
Yeah.
Take a first half that Alison Peter you will fit at a time.
Enhanced.
Answers now on the holiday so coming into the our inventory position overall were very very pleased I think is as both arrogant I referred to in our comments.
In particular off price business is done in a remarkable job of increasing their inventory turns much.
More fluid flow model.
Okay very opportunistic in the marketplace targets seasonal relevant goods in off price today, and that's really reflected in what we're seeing in the topline and Bottomline results. So we talked about that we often talk about the fact in Q3.
On the sell through in our anniversary potash.
Mark on the sell through which really high which is very intentional part of our anniversary strategies. It certainly helps our merchandise margin rate in Q3, and we did see a highly promotional environment, but those two factors between anniversary markdown and our off price business really helped offset any promotional headwinds you might have seen and in that quarter in the fourth quarter going into from holiday perspective.
We've actually pull forward some of our holiday receipts at least that holiday gifting. If you go on our side or on our stores, we'll see that we have a very different I think I'm getting at certain price point just for the customer what they're looking for because we know from our customer feedback.
People buy uncertain times for certain people at certain price point than Weve really tailor the strategy in inventory levels to match that and so you're seeing that both in our off price business in a full price business and fill and I'd also say that we've got we're very encouraged by the early reads, we're seeing in our gifting strategy as we said.
Earlier than we did last year, yes. This is Pete the only color I would add to that as.
Our mark for our inventories are really good position because we got there in the right way, we didnt do it through a bunch of markdowns to get ourselves and wider canceling a bunch of things as Dan mentioned, because we've been.
Given our plans and having a lot this disciplined around our or execution of our plan is allowed us to pull inventory forward to be responsive, what's going on with the traffic of stores and it's certainly helpful to our topline and being in a fluid position as we go forward like this.
Just creates so much more flexibility and I think opportunity for us.
We feel good that we've gotten there and it really healthy way for the business mix should should pay benefits as time goes on to.
Fantastic. Thanks, so much for all the Carla.
Thank you next is Paul Trussell with Deutsche Bank. Please proceed.
Thank you and good afternoon.
You spoke to the off price business, having some better execution during the quarter, obviously, turning positive on the topline, but also having some.
Better than expected bottom line results could you just discussed at a bit more.
Sure.
I'll start with the we went into the year.
Seeing no actually more opportunity.
On the bottom line them and the topline.
Plenty initiatives around both.
But.
We had good we've had good performance profitability wise in off price all through the year, but third quarter, the topline really changed its trajectory.
And.
It really is broad base so it starts with.
Having sales increases on less inventory and and touched on this and off price in particular.
Being fluid so you can be opportunistic.
For buys in the marketplace.
And I think in particular the environment, we're in right now.
There's great merchandise at great prices out there if you have the open divided it after at our team certainly did that.
The result of that is we have more newness in our mix, it's more seasonally relevant.
And again, we're seeing.
Faster turns and higher margins.
There's a elements in the store and execution that we've seen.
And conversion improvements.
There's elements online our rack dot com and outlook business.
Through digital marketing I guess in the merchandise offer through flash events.
Really across the board improvements and traffic and conversion.
Thank you and just to follow up on the updated outlook.
Is the adjustment to EBIT and EPS solely a reflection.
Of exceeding your own expectations for the third quarter or has there been any adjustments made.
To your prior view.
For the fourth quarter and I noticed the interest expense I think is remains guided towards 110 million, but you've already done 66 million to date, maybe just touch on on the outlook. Please sure absolutely. So yes, you mentioned.
We did tighten the bottom none of our range and it really is an output from what we exceeded our own expectations for the quarter. So arch. Our view is not changed in the fourth quarter and as you've heard from the two inane from opening commentary.
We are executing and the levers that we've been pulling in the drivers that we have in our business.
We're continuing to deliver on what we set out for the second half of the year.
As the interest expense, you're right it fourth quarter desktop and just remind you that we do have large capital projects. We did have placed interest and I think you guys are aware, we opened a very large investment in New York in Q3. So is that comes on line.
That interested not be top line going forward.
Thank you best of luck. Thank you.
Thank you next is Jason Yes. Please proceed.
Great. Thanks, so much for taking my question just on the New York store.
Feel like it's opened up at.
100% of the productivity that you'll see or do you expected there'd be a ramp up period of a year or two.
And then secondly on just the United States by the end of for Q, well, if somebody had realized all well the run rate of savings beat I completely realized so I'll, just say 200 million or 210, whatever is going to be will that be it or will probably be more going into Q1. Thanks. So much.
All right. Let me take does today first and then Pete once you take New York, Yes, So and as you know there will be a tail going into 2020, we haven't quantified that will include that time between guidance.
End of next quarter, what I would say more broadly, though is that we're continuing to look for opportunities to drive productivity and efficiencies in our business I think you've heard us talk about this quite a bit Buckley.
Only with the generational investments as you continue to scale will get more flow through on that and we're also looking.
Taking a lot of investments in our digital capabilities.
We look for ways.
Scale and productivity.
And those areas as well going forward. So I would say we haven't we've had a very strong operating discipline on this year and that would seem or not.
It's pay relative to New York and the productivity of what they expect going forward and one of the benefits and Eric and I have as we've been around a lot of driving I think between the two maybe we've seen probably I don't know 80 store openings and our time and as result of that we have really good contacts and analog is around how do you expect to maturity of stores.
How long that picked up brand New York's got its own thing, but I think in terms of being able to grow into its full potential.
We got a few years there to be able to do that.
We're not rationalizing are settling for something anything less than the best we can possibly do between now and then but it's safe to say that.
After a great start everything that we fully anticipate that we will grow over the next call three or so years into more of a mature position and.
Theres still things to be learned there there's a lot improvements we can make and.
And customers getting I know, it's better so it's all fields Super promising right now.
Got it and then maybe I can just ask one more on the full price stores because it sounds like that digital was up seven overall price was down for you closed slot six stores year over year sort of what kind of contribution was closing the stores to that overall sales growth number for the full price stores for the for sorry for the full price business in total because.
Otherwise like it looks like a full price stores were down like high singles and sort of wondering if that's like the real run rate or if that sort of a combination of.
Different factors that don't really represent the comp which is obviously something that people are going to think about.
Yeah. So let me just cause additional sales number that we gave US total JW answer includes I'll be on a full price also include drop prices as well.
We did call out that we saw demand improvement throughout the quarter, particularly in northern dotcom and so as we when we look at closing stores, Steve I think we've talked you guys about how we look at this is generally at the end of an operating covenant or operating model, we look at.
Returning we get we invest in that store sounds like what's going on that market.
Mall, it typically stores it get closer pretty small volume stores and so it's not a significant impact to the top line overall for the company I would also remind you their stores all of our stores or cash flow positive so from a contribution margin and they actually.
How many that will be our cash flow naked and even the ones that decline.
I would just as Eric I'd, just add to it.
I wanted to our market strategy.
We're we're early days content, but we're seeing so far when we can connect to home markets.
The inventory.
Proportionally to small stores benefit than most and I think it makes sense, it's the biggest increase.
Inventory, what's available for next day delivery or next day buying store bottomline pick up in store.
So.
I think the point there is we're learning a lot and the fate of small stores is.
Not field are the determined and it's part of what we're excited about with our market strategy is.
The convenience.
The intimacy of other smaller store customers like.
If we can materially change to the selections available to them that.
Those stores could be uninjured different trajectory and sorry, we still need to play that out.
See what happens there.
Got it very interesting thank you.
Thank you next is Conor, Kentucky with Robert W. Baird. Please proceed.
Hi, This is counter on for Mark. Thanks for taking my question I know you touched on the anniversary event in the prepared remarks, but any more color there and maybe some of the key learnings you can take into the holiday quarter.
Yes, it's Pete.
I think it's another example of where we use objective data and analysis to make smarter decisions.
No we've been doing the anniversary thing for a long time and you would think that that practical experience would give us all we need but the changing landscape relative to how much more online business. We've done in the past and it is deposit growth disproportionately and we have more online business at that time that haven't been anniversary also.
Happens at holiday that impacts.
The profitability of events so.
Yes.
I felt great that we went into it with the plan and.
To improve really the bottom line performance and that is word I will tell you that we weren't able to get after this plan early enough to fully impact I think what's possible with that event. So I think the good news is that event went very well and Theres a lot of reason to believe that we will be able to improve upon.
To begin for next year, because we have the full year to be able to plan for it.
Good so I think what that implies for holiday Theres, a lot of similarities and that their time bound events and there's very specific actions related to price and the category that are applicable from anniversary too.
The holiday time so.
We believe that that we've got some proof there that were on the right track and with the right strategy and.
It's nice to see kind of how our teams responded all that in their confidence about how to attack all being again anniversary next year on the heels what was the successful anniversary so.
Golf them, all and positive so far.
Thanks Best of luck this holiday season. Thank you.
Thank you Matt is Tracy Kogan with Citi. Please proceed.
Thanks, everyone. I was wondering if you could talk about our the performance of your stores in Canada, both the full line stores and the rack stores and how they perform relative to your expectations.
And then also what do you have four wall margins look like there compared to the U.S. and I just wanted to have.
A quick follow up on something you said about using your rack locations and your local strategy I was wondering if you could give more color on that thanks.
Yes, I'll take some of the Cana questions. The Aaron do you want to take the Iraq conversation. So in General We report Canada is part of our generational investments until we done specifically break out for example, Canada, we aren't going to break out in New York in particular, and then we have yet acute our generation investment our north from a couple of dotcom is.
Well as trunk club and so what I would say is in general when we look at our generational investments for the year, there axle inline with our expectations that we laid out earlier this year from both the top and bottom line perspective.
Is there anything specifically you could say about about the candidate stores.
Relative to your expectation just broadly.
Yes, I can I would just refer you back to our generational investments and that they're progressing as big and we've also talked about the fact that we're going to continue to get scale and leverage in those investments as we continue to grow.
Thank you.
Yeah.
Color to.
Comment on a.
Store role, our rack stores compared with our market strategy.
We did in New York.
Let's step back and say we approach to New York.
As expanding our market capabilities versus opening a for all store.
Now.
I think ship started as a tremendous assets tend to ask the market, but it's a prevention.
That is our largest market for online sales.
We opened two local service.
We had to.
Rack stores, there as well as the chart.
Yes.
So we've we've been expanding for a bit now of having express returns and rack stores, where customers can return a full price merchandise.
And in New York, we expand that to not only be able to do returns from our businesses, but too.
Pickup from any of our businesses, so nursing dot com buy online pickup in store.
And we have alterations available as well.
The response to that.
Has exceeded our expectations were going to be good.
And especially good so.
We are.
Plan together to roll that out to more rational, but we'll share that view once we have assets.
The other piece I would just remind you again, it's like everything starts with.
Giving customers things, they like and a lot of customers the convenience or going into Iraq.
They really appreciate.
But the business side.
Getting customer engagement across channels trends a lot of value when a customer goes from engaging with us and one of our businesses to to their spend with us increases.
Four x. and if we get engagement all four full line stores merchant Dot com rack stores rack dot com their spend goes up a lot of attacks.
So there's a lot of value there that we're excited about.
Great. Thank you.
Thank you next is Michael Binetti with credit Suisse. Please proceed.
Hey, guys congrats on a nice quarter and on New York.
And I think you originally described second half sales to accelerate by 400 basis points and fairly evenly split between four initiatives, New York being one of them. It sounds like you now expect New York to me about 150 basis points. If I heard you right and it sounds like you saw rack accelerate a little more than what you're thinking in the quarter. You seem please there that compares get easier and the comparison racks.
Physical stores since we had that those data points last year get a couple of hundred basis points easier. So the momentum in a few key areas here is maybe better than you thought any new takes you tried to embrace as you looked at the year. They kept you from raising the target in fourth quarter per your comments earlier again, given the momentum in the business there.
Yeah. Thanks to the question so just to clarify the 400 basis points and for two in New York was 100 basis points for the second half.
So what I tried to do is looking a little more context, what the impact is fourth quarter and because the store in an open late last week or the quarter. After primarily the sales are in the fourth quarter pieces since you're trying to give you some context.
Levers to at the overall leverage if you look at second half haven't changed with the 100 basis points across the four things that we talked about as far as rack is doing well the business Ralston lumpy.
We have along the quarter left well all the airline to deliver the big holiday season, and we also took you know in my comments try to incorporate the fact that it's going to me it competitive and highly promotional holiday season, we believe a and so we wanted to make sure that we were continuing to deliver on our expectation.
Can I kind of follow up than an sq.
That directly.
On the merch margins I think you said you plan.
Slatter up in the fourth quarter I got that right.
Maybe just walk us through feeding components is is new York and is the impact from New York positives that merch margins and then maybe you could help us put some kind of a basis point quantification on how much better the margins are.
[noise] around the end of anniversary sale.
Said, there was lower inventories and you'd have to clear as much there in third quarter I think that goes away as a tailwind in for Q.
Guess around the competitive space, you've heard pretty conservative assumptions on merchandise margins I wanted to just check and see how you've built up to where you got to for fourth quarter.
Yeah. So we did guide that we thought merch margins will be relatively flat for the fourth quarter.
And we did include into that guidance, a competitive and high promotional environment I think you've heard from I think all three of us given their inventory position going in the quarter and given where we really focused on our gifting assortment.
And in particular the flow in sell through in off price and also in full price it hasn't really been executing the holiday strategy, leveraging the learning and the data and analytics anniversary in the holiday.
And some encouraging sign for seeing I'd be set holiday early we've incorporate all that into our guidance and feel very comfortable where we are.
Thanks, a lot.
Thanks, Michael well now take one more question.
Thank you our last question comes from Heather Balsky with Bank of America. Please proceed.
Hi, This is how they're on for Lorraine Hutchinson. Thank you for taking your question I.
I was hoping you could dig in a little bit.
In terms of the profitability impact you're seeing in L.A. from local strategy. What are you seeing in terms of any gross margin improvement.
And the Akshay levers that you mentioned that you're seeing better profitability from higher sales to just curious you can take into that.
Yeah, just directionally it is positive.
We're getting a higher sell throughs.
Yes.
It's more efficiency of our inventory investment.
Jim.
Extend that inventory investment thats in all of our stores there.
And and spread into demand for.
Next day delivery or next to pick up in store across all stores. So.
It's early.
We need to go through full year.
Certainly but.
Right now would you know we're seeing higher sell throughs that's encouraging.
Well, there's there's puts and takes off on the expense.
Part of it.
But.
Overall for us.
I would say, we have we see a significant upside and profitability and I think.
Part of the storage is of our.
Our execution of this.
Yeah and goes around inventory Arvixe investments inventory.
And our biggest cost can be markdowns so.
They are able to move that merchandise around it in a marketplace.
In almost every case.
Some extra handling to get an incremental sale.
And avoid a markdown is well worth it.
Thank you.
Again, thank you for joining today's call a replay along with a slide presentation and prepared remarks.
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