Q4 2019 Earnings Call
Greetings and welcome to the Nordstrom fourth quarter earnings Conference call. At this time, all participants Arnie listen only mode. We will begin with prepared remarks, followed by a question answer session. If he would like to ask the 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 at this time I'll turn the call over to Trina Schurman director of Investor Relations for Nordstrom you may begin.
Good afternoon and thinking for joining.
Todays earnings call will last 45 minutes and will include 30 minutes for your question.
Before we begin I want to mention that we'll be referring to slide which can be viewed by going to an investor relations section on north from Dot com.
Our discussion May include forward looking statement. So please refer to the slides doing our safe Harbor language.
Participating on today's call, our Erik Nordstrom, Chief Executive Officer, and Anne Bramman, Chief Financial Officer, who will discuss the company's fourth quarter performance and outlook for 2020.
Joining during like doing exceptionally well be peak Nordstrom president of North <unk>, Inc., and Chief brand officer with that I'll turn the call over to Eric.
Good afternoon, everyone and thank you for joining us today.
We ended 2019 position of strength and have momentum heading into 2020.
During the second half a year, we met or exceeded the operating and financial goals. We had previously sherborne here.
We also made significant strides and delivering on our strategy and we're encouraged by our customer response.
We're proud of our came from many accomplishments.
First we meaningfully improved customer satisfaction scores in many areas of our business, including loyalty Oh price off price and during our two key events anniversary at holiday.
Second we accelerated the role while corporate market strategy to five of our top markets.
New York, Los Angeles San.
San Francisco Chicago Dallas.
Resulting an outsize cause my gauge, Matt and I lived in sales trends up 80 basis points in the fourth quarter compared to other markets.
Third we successfully executed plans to drive our topline as evidenced by a 400 basis point a proven in the second half of your relative to the first half.
And finally, our operating discipline, it's delivering strong results.
During the year, we realize $225 million and savings exceeding our plans by 10%.
Maintained a favorable inventory position and delivered operating cash flow, except for $1 billion for the 11th consecutive year.
Our competitive advantage is our ability to serve customers seamlessly across multiple touch points.
This includes our two brands Nordstrom can nordstrom rack in stores and online.
We have a high quality store portfolio, but 95% upper 116 full line stores located in a mall and most of our 240, Iraq and off mall centric.
Our established a growing digital business now makes up one third of fail.
Roughly 30% for a customer shopping across more than one of these touch point.
And as a result of this engagement we know these customer spend for 211 times more on average.
We also see increased spending growth engagement with our services.
For example, customers, who use alterations horse filing surfaces and three to five times more on average.
This level of engagement supports our strategy to integrate trunk club within the Nordstrom styling, a cooks and stuff.
Which will discuss shortly.
Also appreciate the convenience of order pickup doubling their spend over time.
Its service literature inventory in the market, making it our most profitable transaction.
In the fourth quarter order pickup sales grew more than 100% and contribute to more than half a full price digital growth.
The five markets, where we rolled out our market strategy order pickup sales grew 160%.
Our focus on offering customers a curated assortment of the best product, we're continuing to innovate with existing and new partner.
Recent examples include rental runway gone T.J. scams and our re commerce concept figure tomorrow.
Moving to fourth quarter results, we delivered on our topline expectations through the execution of our holiday strategy.
We increased the assortment of giftable items, particularly in the lower price point.
Which had an outside sales growth and higher sell throughs, both full price and off price.
We are providing customers with new offers an experiences including gift card loyalty and shipping incentive and we're pleased with their response.
Going forward, we have opportunities to refine our operational execution to gain efficiencies and scale.
The strength of our off price execution also contributed positively to result.
The team's focus on inventory efficiencies enabled a constant flow of new product.
Customers responded well leading to a meaningful improvement in underlying sales trends.
Yeah parts business increased profitability for the year and inventory turns for the nine straight quarters.
October we significantly expanded our presence and the New York market with the opening up our flagship.
We view this overall market as a 700 million dollar incremental sales opportunity over time.
We're already seeing an acceleration and trends.
Our aspiration of having a world class store as a cornerstone of our mass market strategy.
Encouraged by the positive feedback from our customers and brand partners.
Customers have responded well to our service and experience offerings, including expressed services at our flagship and our Nordstrom locals and racks.
Next the building up our store design also enables us to apply learnings to refine our merchandise offering.
Our store opened for four months, we're early in our journey for further opportunities to leverage this valuable asset.
With momentum from our market strategy here.
The strength of our digital and physical assets allow us to better serve customers, while increasing efficiency.
Our goal is to gain market share, while driving customer engagement and inventory turn.
To achieve that we're leveraging our assets of people product and place to serve customers on their terms. This means expanding merchandise selection that is available next day without increasing inventory levels, while extending convenient access to our services.
2020 is about scaling our market strategy in 10 of our top markets, which represent more than half of our sales.
In several key initiatives planned for this year.
First we're rolling out our strategy and five additional markets, Philadelphia, Washington, DC, Boston, Seattle, and Toronto, utilizing our existing technology platform to get the customers up to seven times more merchandise selection available next day.
Second.
Increasing convenience with additional Nordstrom local neighborhood surface hub, and L.A., and New York and offering full price Express services order pickup returns and alteration at more than 50 rack stores.
Third we are launching a dedicated ecommerce site for customers in Canada to create a seamless shopping experience across stores and online such an order pickup and return.
Fourth we plan to ramp our supply chain network and the second half of the year to ultimately improve delivery speed on the west coast, which represented 40% of our customer base.
Finally styling is a key differentiator for Nordstrom.
To further leverage this capability, we are fully integrating our truckload service to enable a superior experience for customers drive more business and gain efficiencies, we're now, bringing together nordstrom and truckload capabilities across merchandise technology loyalty personalization people and physical.
Oh location.
Our plans include relocating clubhouse styling to nearby Nordstrom store to reach more customers, while continuing to offer our core trunk based services.
This decision resulted in a non cash charge in the fourth quarter, which animal discuss.
We're excited by this opportunity to bring together our styling program I look forward to rolling out this cohesive cohesive styling experience to customers. This fall.
Before we wrap up I'd like to comment briefly on Corona virus.
We're monitoring is fluid situation closely with the wellbeing of our customers and employees at the top priority.
We have a team focused on monitoring planning for and responding to any potential impacts the virus may call up to our business.
We're accessing potential implications for both traffic and supply chain.
Our private label business makes up around 10% of sale when left less than 30% sourced from China.
We're communicating with our vendors and brand partners as it relates to merchandise deliberately deliveries.
We're looking at this on a case by case basis and planning accordingly.
Finally today, we announced the transition of the co president titles to a sole chief Executive Officer.
Well served as CEO and Pete will serve as president of Nordstrom, Inc. and Chief brand Officer.
This is not about IR team. These titles help clarify our respective roles as we strive to maximize our impact both have individual leaders and it's a team.
Okay, and I are grateful for their dedication and commitment of our teams. We've made tremendous progress this past year to execute our market strategy accelerate our sales trends and maintain our inventory and expense discipline.
As we continue this momentum into 2020, we remain focused on driving profitable growth for connecting with customers and serving them on their term.
Ill now turn it over to add to discuss our financial results and outlook.
Thanks, Eric our fourth quarter results demonstrate its further top line momentum and continued operating discipline.
We successfully executed plans to accelerate our sales trend expand merchandise margin increase inventory turn and reduce our cost structure.
Fourth quarter EPS of $1.23 included a 15 cents impact primarily related to trunk club noncash integration charges.
In addition to four cents a debt refinancing costs.
Excluding these charges to core earnings were inline with our expectation.
Our ongoing efforts to improve customer service on delivering on our top and bottom line drove strong second half results.
We improved sales trends by 400 basis points.
EBIT by more than 3% when excluding the charges.
Our fourth quarter sales were inline with expectations driven by four areas Liberty digital marketing merchandise assortment and the opening of our New York flagship.
Sales increased 1.3%, reflecting strong holiday performance with growth in full price of 1% and all priced at 1.8%.
Our top line momentum reflected our ability to constantly Jeff lever.
Marketing loyalty and fulfillment.
Well the customer response to our holiday offers with even greater than anticipated we have further opportunities to refine our execution and a drive additional efficiencies.
Well why these learnings to improve our flow through for the next holiday season.
We continue to see broad based improvement across our full price and off price merchandise divisions.
Driven by giftable items, and higher and stock level.
We fully addressed our execution related to the rollout of our enhanced the loyalty program last fall, resulting in a rebound and customer satisfaction scores and redemption rate.
We now have 13 million customers and then already club who contributed two thirds of our sales in 2019.
Our gross profit rate decreased by 110 basis points, which exceeded our plans for modest de leverage.
We expanded merchandise margin, which nearly offset higher cost from growth in our loyalty program and occupancy from our New York flagship.
Despite a highly promotional environment, we have lower markdowns relative to last year as a result of maintaining a healthy inventory position.
We ended 2019 with inventory down, 3%, marking four consecutive quarters sales growing faster than inventory.
Turning to M&A, we incurred charges of $32 million in Q4, primarily related to non cash write downs of intangibles and clubhouses.
Excluding these charges are SGN a rate was flat to last year.
We realized 55 million and expense savings in Q4 for a total of $225 million for the year.
Good morning expense discipline, we will continue to make permanent reductions to our base cost structure, enabling us to reinvest in the customer experience and increased flow through.
To recap 2019, we improved the customer experience.
Seller in sales trends.
And continue the strength of our inventory and expense discipline.
We built momentum in the second half of the year, expanding EBIT margins by roughly 20 basis point when excluding the integration charges.
With the opening of our New York flagship 2019 marked the end of our generation investment cycle.
Overall, these investments delivered $2.1 billion in sale and achieve our bottom line expectations for the year.
And 2020, we expect ongoing EBIT improvement as we continue to scale.
As part of our market strategy or further leveraging these investments to improve the customer experience and gain efficiency.
As Eric mentioned this includes combining trunk club into a holistic norcen spelling offer and watching and dedicated ecommerce site in Canada.
As we further integrate these investments into our business, we will assess our overall performance using a market perspective, and measure success barbelling to gain market share improve customer satisfaction.
An increase customer engagement.
Turning to our outlook I'd like to address how we're positioned relative to our target shared during our investor day in 2018.
Well our top line results in 2019 set of behind on the sales and EBIT margin target.
We remain on track to deliver increases on free cash flow and return on invested capital.
We are successfully executing our key strategies and to the aggressive actions during the year to drive sale accelerator expense savings plans and expand merchandise margins.
We plan to providing further update on our strategy and long term targets at our Investor event in New York City. This fall.
Our 2020 bps outlook range of $3.25 to $3.50 is based on sales growth of 1.5% to 2.5%.
We're planning growth and full price and off price, which is equally driven by the scaling of our market strategy inclusive of our newer flagship and continued top line momentum.
For EBIT, we expect a range of $815 $855 million, which implied EBIT margin of 5.4% at the midpoint.
When excluding last year's integration charges. This assumes a flat EBIT margin.
We're planning gross savings of 200 to 250 miles for productivity initiatives.
When a vast majority benefiting us unit.
These savings help offset higher depreciation form your flagship and supply chain investments as well as the lapping of prior years performance related adjustments.
For gross profit, we expect modest de leverage due to higher occupancy costs from these investments.
Our savings plan includes merchandise margin expansion from leveraging inventory in addition to increase efficiencies from our loyalty program.
Moving to of Cnf, we expect modest leverage when excluding last year's integration charges.
Most of our savings plan represents continued reduction in our based cost structure, including end to end productivity improvements and overhead procurement and generational investments.
In addition to greater fulfillment and marketing efficiencies.
Net interest expense is estimated to be approximately $120 million.
This represents an increase of around $20 million from the prior year due to lower capitalized interest from the completion of our New York flagship.
In terms of cadence, we expect first and second half EBIT margins at the midpoint of our guidance to be flat to last year.
When excluding integration charges in 2019.
This reflects annualizing, the New York flagship lapping softer sales trend.
And performance when adjustments in the first half and ramping our west coast tighten network in the second half.
We continue to have a strong financial position generate operating cash flow of more than $1 billion the 11th consecutive year.
We have a balanced and disciplined capital allocation approach to reinvest in the business and return capital shareholders, while maintaining an investment grade credit rating.
2020 is a pivotal point of free cash flow infection from exiting our generation investment cycle.
We expect free cash flow to increase by approximately two and a half times from 2019 with Capex moderating 6% of sales to 4% sale.
We will continue to invest and digital capabilities to improve both the customer experience and operational efficiencies with more than half of our plan allocate technology and supply chain.
We ended 2019 with an adjusted debt to EBITDA ratio of 2.8, consistent with our expectations when excluding a 10 basis point impact related to the integration charges.
Turning debt leverage of one and a half to two and half time, we expect to be around the top end of our range by the end of 2020.
In terms of direct returns to shareholders, we continue to target dividend payout, 30% to 40%.
Our EPS guidance assumes future share repurchases of $300 million to $400 million in 2020.
And finally, we expect an increase and return on invested capital from improved profitability.
Our 2020 guidance does not include potential impact across the virus.
As we continue to monitor this dynamic and rapidly evolving situation, we remain flexible and agile and adjusting our inventory expense and capital allocation plans accordingly.
We have a strong financial model, which is supported by a healthy balance sheet and cash position.
In closing, we're very encouraged by the progress we made in 2019.
We demonstrated our ability to accelerate or sales trends through our focus on the customer.
Our ongoing inventory and expense discipline meaningfully contributed to our bottom line results.
As we continue our momentum into 2020, our teams proven ability to execute combined with our business model to serve customers, how when and where they want to be served positions us for long term success.
I'll now turn over Trina for Q.
Thank you and before we get started with today. We would appreciate you can limit to one question to allow everyone. A chance to ask a question, we'll now move 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 total indicate that your line is in the question Q you May press star too easy we'd like to move your question from the Q4 participants season speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Thank you. Our first question is from Oliver Chen with Cowen and company. Please proceed with your question.
Hi, Thank you regarding your guidance and calling for merchandise margin expansion what are your thoughts on where the inventory can be more efficient and also as you more broadly think about a year product assortment. How are you thinking about what the customer wants in terms of price points and mix when you consider.
What are the buckets of good better best.
I would also love your views on re commerce more broadly and how you're balancing.
Very strong interest here relative to profitability.
Yes, Hey, this is Pete in terms of the inventory.
Make sure I got your question Ray was just how to make more effective use and deploy it more efficiently as that was that the question.
The question is about the merchandise margin expansion assumption and what will happen in the year ahead, and then also as you think about as good better best in price point, yet, how you're looking to execute along that line.
The.
Big driver that we have going for us relative to inventory is to try to speed up the turn and just be more efficient with it and try to to place the supply of inventory is close to customers as we can and we know through the market strategy the ability to be able to leverage.
Different buildings that have inventory or multiple stores across the via may that makes for a more efficient inventory and better sell throughs.
In particular, we've been able to speed up our turns in the rack division.
Over the last year or so and then there is plans we can continue to do that which should provide some margin expansion as well. So this.
It's the same thing we worked on for years and years in May we have to have a lot of discipline around the way we flow inventory and make sure we have just enough to sell and.
Being in a fluid position, so we can react and respond and we've been able to do that with a lot of success. So we have confidence we'll be able to.
People are mark and solid there in terms of product of the price points.
What we've done is we've layered on a much more.
Data influenced.
We have managing that in the past, we largely just chase the businesses that were the hottest businesses and some of what we've seen is in terms. The unintended consequences. We may end up with a bit of it out out of balance situation. Like for example, lever, let's talk a lot about how we're designer business has grown.
Quite a bit quarter after quarter really year after year end point that affects your mix in overall balance your price points and.
What we know is that we need to be a little bit more prescriptive in terms of how we plan on our five mix should we've got the appropriate balance price points.
This is something that again, it's much more informed by data than it's ever been taking a lot of opinion out of that and we feel like we're on a great path to be.
It will do a to ensure that we have.
A balance it's going to serve our customers.
Thank you in the last part which is Rick how much more broadly and how you see that evolving as part of your overall strategy and your thoughts on Incrementality and as well as profitability in managing.
Total business.
Sure Oliver this is Eric.
Yes, it's an interesting test for US right now, it's a were new into it and it is a test.
Both to see what the customer interest is in there.
Theres been a lot of talking a lot of interest in re commerce for a while balancing let us to do this path.
Also for us to learn about the business model.
Ultimately for us.
Well if anything we do it comes out to the synergies with our other businesses and that's what we're.
We have interested in learning more about re commerce, how does it fit in with our other businesses, how does that lead to things like traffic.
Engagements span.
So it doesn't have to be just about the economics of that specific business, but how it fits in with us as a total.
Thanks, Congrats on New York, Thanks, Eric Thanks, Pete.
Thank you.
Thank you Matt is Dana Telsey with Telsey Advisory group.
Good afternoon, everyone. As you think about this you have 2020 in rolling off of the general generational investments.
What are the learnings sopore that you've learned from from New York that can be applied to other stores that could help you drive sales and also helped drive efficiencies with margins how do you see that outlook. Thank you.
Are those P.. That's great question I think for right now that our primary focus in the order because just making sure that we can learn and be agile to respond quickly and that largely as a do with our assortment and as I talked about before kind of that are curious to offer in the balance that's implied what's going to work best for us in New York.
I think it's true really in all of our stores that we can sell the best the world has to offer but it is important that we don't get ourselves and an unintended consequence place.
Moving to balance the price points.
Some of things that we've learned in New York.
It's not as much about the product, but did just confirms that the idea that where we create our biggest point of difference differentiation is the way that we serve customers.
And.
The way that we sell and this is something that's really been sharp focus for us so.
I think what the work has really done is proved that if we.
Hey attention to that if we focus on the execution of the way that we serve customers Theres a lot opportunity for us to grow would improve I'd say the thing is we tried some different concepts, whether theres restaurants, and you've got different poppins and stuff like that and that the ongoing.
Idea there is that those are things that we should be able to leverage in order to apply as we think about remodeling stores across our fleet.
Yes, I would just that.
Yes pick back up you'd comment it is our most experiential store, we have and thats been encouraging.
But.
The other big oriented and as our market strategy as the second.
Market that we rolled out too.
So we view in New York as a total market and certainly deflation.
Hugely important piece to it but.
We've learned a lot with book to local Vera we've opened up the customer engagement, both locals ramped up quite a bit faster than we saw in Los Angeles and really encouraged with our deployment. There. That's all for the first place that we had full price services.
Returns order pickup in alterations in Iraq stores are two racks in Manhattan.
And again the customer.
Take on that has exceeded our expectation. So that's there's been a lot orders for our market strategy that we can apply to other markets.
Okay, and just one last quick thing anything more on Corona virus and.
And your seat of goods from vendors and how do you plan to arrived this year versus years past, how do you see the inventory unfolding. Thank you.
Okay.
So David Thanks for your question on kind of arc does this time, we haven't really seen.
Very material change to the our disruption to the supply chain and we are having a lot of conversations with our vendors and it's Eric talked about in his opening comments, our private label business.
Relatively speaking is is pretty small.
As per total JADAK facilitate OEM total company.
Having said that I think.
Did the discipline in the operating pieces that we put in place in 19 as we saw some of the early half headwinds in our and our year I think are really going to service well given the fluidity of the environment kind of viruses. So I think what you saw from our team.
<unk> RAC frequently with one off inventory perspective on expense perspective, and how to make sure. We have them, we prioritize the right product right in stocks right price point.
And so as we have the that discipline and learning we're going to carry that through this year as we see any disruption.
Thank you.
Okay.
Thank you next is mark Altschwager with Baird.
Good afternoon. Thanks for taking my question I wanted to ask about the RAC business. So rack showed a nice change in trajectory in the second half of the year rushed to the first half you about looking at one into your basis.
What are the biggest factors that you think it contributed to that that change and do you think the learnings from the past one to two years and really the volatility that that business has seen can really enable you to return to more consistent positive comp trajectory or I guess, maybe asked of us slightly different ways. There anything structurally that you think it's keeping that business from return.
Me too low to mid single digit type of growth trajectory.
Hi, This is Eric.
Yeah, we're certainly encouraged with our rack business execution flasher was very strong our team went into the year.
They thought they had a lot opportunities.
To drive a better bottom line and in particular through inventory efficiency.
We had.
It is too much inventory in the system.
And it was preventing the flow of newness that really is the driver of our business there.
So that played out all year long our team did a terrific job of growing sales faster than our inventory growth.
And that helped.
No we drive the bottom line that helped on the topline the back half of the year.
So you're going forward.
Operator is.
While the opportunities that we've already taking advantage of in full price through that synergies of our online and offline business.
We have rack dot com and homework.
Which is a big online business.
And pretty unique that way in the off price space.
And we get.
A lot of customer engagement.
Our stores from online customers, particularly with return to like the convenience of bring or turns into stores.
We still have a larger opportunities going forward.
To further integrate our inventories and our system to see a lot the inventory synergies as well as engagements synergies that we've seen in full price.
We have some of that so far but theres still more there.
We look at the business really not as a store channel and our ecommerce channel.
The total off price business and.
We are encouraged because we see opportunities to grow that topline.
Thank you and if I could briefly follow up just on the market strategy.
Sounds like you're seeing some very encouraging results, thus far how should we be thinking about the key risk factors as you go live in the five additional markets. This year or what are the important milestones we should be watching for there. Thank you.
Yes.
Well, thanks, a lot of risk.
It's important for.
No it.
Talked about the there's really not big investments to royalties out it takes work to roll them out there are some systems work there's process work to.
To rollout to additional markets, but.
The strategy is really about leveraging our existing assets leveraging the inventory we have in these markets and leveraging the services we have there.
So theres not a lot of risk of new investments.
And we are up to the scaling stage, we tested this for a couple of years in Los Angeles.
We're now in five markets and the results have been pretty darn consistent across all those of seeing lists and.
Order pickup is is a key metric there are or pick up in stores.
Is cross our company up in the fourth quarter, 100%.
In our market strategy markets, it's up 160%.
We know that engagement leads to higher spend that's that's super encouraging.
Overall, we continue to see a nice lift in total top line versus or other markets.
So there is a lot execution are on our part to do it well.
Okay.
We're confident that we've learned a lot from these tests and pilots and we're ready to scale.
Thanks for all the detail best of luck.
Next is Omar Saad with Evercore ISI.
Thanks for taking my question.
I wanted to follow up on the full price business Comped positively first time and several quarters.
I think about so many of the services and new capabilities you guys have build order pickup omnichannel all duration stylists.
The local markets that strategy tie in.
Feels very full price kind of customer oriented and looking ahead at your comparisons. The next few quarters for the full price business.
You know are relatively easy as well is it time to think about the full price business Comping more strongly positive in 2020 and beyond on being kind of a more consistent driver long term given all these initiatives and how well it fits with that full price customer.
I'm trying to take that from a modeling perspective, and then I Pete our everyone chime in from a more strategic perspective that'd be great. So.
We are really encouraged by the market strategy results and we're seeing and in the guidance that we gave for top line was used for the topline growth about half of that's coming from market strategy.
You step back and look at this between the full priced off price business is pretty evenly spread as far as the growth levers coming through so we do think there's growth in this and this area as potential as we continue to roll out market strategies.
Customers, even more engaged with us.
So again, we were relying we're relying and we are planning for both businesses can be delivering this year and positive territory.
Yes.
Your previous question about synergies.
We have synergies across full pressure off price as well.
And.
Launching express services in a rack stores that we did in New York.
Where we can do full price returns or pick up in alterations that rack locations.
Is it really good example.
No there really are not.
Full price customers or off price customers in general our best customers.
Shop, both those channels and and if we can leverage of assets a better we think we can get from growth in both those channels.
That's helpful and then a follow up on the market strategy rollout I think in your presentation, you mentioned 80 bips lift in those markets I.
Assuming that's not to be all and all you know where you expect the strategy to go can you give us a sense of where you are in consumer adoption and awareness and you kind of fully really ramping up those capabilities and as they become pervasive in the market or are we at that point already in those markets, where we are you entered in 2019. Thanks.
Sure.
Yes, we have more to go.
Just to.
To remind you the merchandise is really about.
Two general buckets, one is increasing engagement with service and channels, So byline pick up in store alterations.
Order pickups.
Styling.
We know we get lift from that engagement. The other is a bucket would be around.
Inventory efficiency and productivity or be able to have inventory in our stores.
That is it.
Blocked that can be.
Connected with customers wherever they are out in the market in a very efficient fast way, but the result is we get a significantly larger selection to customers with faster delivery and a better economics for us. So that's that's all in place right now and it kind of encouraging the piece that's not in place.
Yes.
It is further and inventory capabilities around inventory hold back and forward deployment of inventory.
We are building those capabilities out we have our.
West Coast fulfillment center.
Oh, just about to open up here.
At that facility will ultimately provide both capabilities, where we think there's there's another step change if you hadn't our inventory productivity.
Thank you.
Thank you next is Matthew boss with Jpmorgan.
Great. Thanks on gross margin for 2020.
I guess, how would you weigh the embedded merchandise margin expansion opportunity. If we broke it down between full price in off price. This year and then just on your inventory exiting the fourth quarter any pockets of markdown risk or do you see inventory clean as we enter Tony Tony.
Hey, Matt is Dan so for the gross.
Merge margin piece I think you've dealt with for you know, we typically don't give guidance between the different business units I would just say in general.
Between market strategy and the continued inventory turns that we're seeing off price as well.
That kind of focus and discipline the full price business, we expect to see improvement across the business.
And as far as markdown opportunity I mean.
We have four consecutive quarters, where we had a positive spread between sales and inventory we feel like we've got the discipline in place there's always little small pockets here and there that's pardon me the fashion retailer, but we've addressed that and we feel very comfortable and confident as the exiting 2020.
Great Best of luck. Thanks.
Next is Alex Twelveth with Goldman Sachs.
Hi, guys. Thanks, so much for taking the question.
Question on the New York markets, So and four months in to the broader strategy in that market now I Wonder if you could share how much of a driver of growth that was specifically here in the quota and then perhaps you could share comment on how you're thinking has changed.
Developed on the Neil market given the experience to date.
Any update on the timeline to to get to the to the full market opportunity that.
Yeah, So Alex I'll start with the first question that you had I would just if I can say in general for the quarter.
We've talked about going into the core we have four levers to pull right. We had loyalty we had our.
Digital marketing better merchandise assortment and we had the opening of the flagship and we were inline with our expectation as far as what we deliver for the quarter. So you can.
Surmise that those four package.
What we thought we were able to drive as we exited the year overall I would also say that the market strategy and Eric talked about one is getting a lot of early traction is.
One of the biggest acceleration succeeded in that market.
Total market perspective.
I think that that store gives us a lot credibility in the market, but also it's got a halo effect for the rest that market as well. So it's it's early in the journey as you said format them, but overall I think we're very pleased with the responses have not markets I don't know your people in China, Yes.
No we're not going to comment about the specific store like we don't with any specific so relative to that exact performance, but as you heard us talk about before we believe there is a proxy of 700 million dollar incremental lift in that market combining our assets together.
Better market share, we can clearly see a path to achieving that so that I think we've confirmed that thats a reasonable thing for us to shoot for now the ramp time, all that you know I don't know if you look at our history of.
Stores that reach maturity, although certainly we've opened up over the years, that's more of a three to five you're kind of left to be able to get there.
I can tell you there is some stuff that's happening aside from that that makes New York Super valuable to US I guess sort of addition to that.
Thanks, actually specifically about New York when things we've noticed our conversion rate is very very good there amongst the highest of any stored our fleet I think that give us a lot of confidence that theres a lot of growth opportunity because when we get customers are we've done really a good job connector than we have we have really great people given great service there.
Having a physical asset in that market I'm not only is good because that's a big market Theres a lot of sales regenerated there, but what it does for us more broadly.
Is a noticeable of advantage for US now I'm just the fact that we've got a physical asset in that big market allows us to partner with brands in ways that may have been difficult or limited for us in the path host can be an example, we we launched the Skims brand by Kim car dashing the shape where brand that she is.
And I'm not sure we would have gotten that large couple of years go without a physical presence that are newer but having that they're lends itself well to everything that Kim kardashian, covering the table, Matt is at an enormous amount of media attention and media impressions.
Got over 2 billion I think actually it was so it was it was really remarkable we sold a ton in that store, but it also really help kind of lift around the company and again it improves our opportunity to collaborate with our important strategic brands to bring in watches and do new exciting thing.
Great. Thanks, so much will look like.
Thank you next is Paul Trussell with Deutsche Bank.
Good afternoon Denture taken a question.
Just wanted to maybe talk about.
Expense discipline that you guys are really showcased over the past few quarters. I believe you said there was a total of about 225 million.
In savings in 19, and you plan to.
Signed another 200 to 250 million in.
In savings this year, if I heard you correctly, maybe just touch a bit more on.
Yes. It does come in some how are you able to kind of printing continue to reduce.
The cost structure.
Hi, Paul.
Yes, we are the team has done an amazing job delivering on that does this year as we entered the year, we talked about the goal of 150 200 million 19, and actually we deliver to 25 as really a testament to the discipline in the organization and when we get it we were focused on a couple of different ways. One are really.
Our guiding principle, we don't want to do anything the impact customer so anything customer facing is really.
Not that's not what we're trying to find efficiencies and we're going forward as productivity improvement and our tech and hi chain tighter controls around hiring and discretionary spend and then we made some changes in our store operating model back in early 19 that drove some savings as well as far as overhead and it's a regional support for 2020 Bath.
Majority of that savings coming through and I've seen a line and we're getting it through a number different. Thanks. So first of all we are starting to leverage our scale and efficiency in indirect procurement savings. So that is a big piece of what's starting to ramp up in 2020.
To see that going beyond 2020 is well.
Continuing that discipline on discretionary spend and hiring a and leaning in an area that we need to.
Can you to invest in capabilities also leaning into areas, where we can drive more automation and productivity and quite frankly, we're getting some efficiencies and some of the generation that's as they come online as well as our fulfillment marketing activities.
That's helpful. Thank you then just just general question as it relates to new store and a pipeline going forward across.
All the different categories, just how you're thinking about that.
Not just this upcoming year, but.
Just longer term as well.
Hey, Paul it's Eric.
For.
Our full price brand or we don't see a lot of new store growth there are and.
Outside of New York.
Last couple of years been pretty light on that printers.
I would tell you that there's not much new mall development going on in the country and were.
We have good present for the top 50 markets. So oh, that's much better rack.
We do think there could be opportunities there.
So we continue to look at that and evaluate different possibilities of some new store growth there.
Great well take one more question.
Our last question comes from Paul was way with Citi Research.
Hey, Thanks, guys.
Just curious on on the New York store.
If you saw any sort of a lift one big store opened to be saw a lift on the men's store.
So curious about the consistency of performance of that store relative to two the restaurant chain and also curious piggybacking comp.
Thats store once you anniversary, but perhaps was one honeymoon period on the store first open. Thanks.
Yes. This is Pete.
As you might imagine we've got a significant lifted our mens or womens open and we knew that would happen all along the synergy.
Let itself to that but it actually exceeded our expectations we.
We got very good lift in men's and Thats perform well I.
I want to make sure I understand the SEC. The second part was about the consistency of performance.
Just fluctuations week to week, how consistent as the performance of the traffic in that store and how does that compare to the rest of the fleet, which is sold during the quarter well you know what we're learning stuff I mean, it's different market there and.
The fact that we were able to open up mens or womens helped us understand some of the rhythm of the business but.
Thing for us to ultimately maximize the full potential the business. The we can do I think the biggest thing is to understand when the real busy times are how to serve people really well a lot of that just has to do with flown into product.
The appropriate way and I think you know we felt good about holiday this last year, but I can tell you that the general consensus with well that was good we know a lot more now on holiday will be better next year. So I guess I would just say that its really check back end with maybe after a year well do a business that as we understand the rhythm of the business.
Better more we think the big opportunities are.
Got it. Thank you and just just one follow up but that 80 basis point left can you talk about what sort of investment firm as Shane and Capex perspective.
Is required to achieve that today based on lift you spoke of.
Oh, that's not good morning strategy, how much how much investment for to roll market strategy at the very light investment.
Very light.
The local stores the local service hubs as part of market strategy. Those stores are not very expensive to build out.
The leveraging of our rack stores, obviously those are existing assets.
Very little expense to add on services in those stores.
So I would say its light.
Great. Thank you for the.
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