Q2 2019 Earnings Call
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Greetings and welcome to the North from second quarter earnings Conference call. At this time all participants are in a listen only mode will begin with prepared remarks, followed by a question and answer session.
If youd 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 at this time I'll turn the call over to Trina Schurman director of Investor Relations for Nordstrom you may begin.
Good afternoon, and thank you for joining US todays earnings call will last 45 minutes and will include 30 minutes for your questions.
Before we begin I want to mention that won't be referring to slide which can be viewed by going to the investor Relations section on north from Dot com.
Our discussion may include forward looking statements. So please refer to the slide showing our safe Harbor language.
Participating in todays call Erik Nordstrom co President and Anne Bramman, Chief Financial Officer, who will discuss the company's second quarter performance and outlook for 2019.
Joining during the <unk> session will be Pete worked from co president.
With that I'll turn the call over to Eric.
Thank you for joining us today, the second quarter, we delivered strong bottom line results, demonstrating our inventory and expense execution, we exited the quarter with inventory levels in a favorable position and made significant strides in productivity.
We are implementing key learnings from the quarter to drive our topline and deliver bottom line results.
In the second quarter sales were down 5.1%.
Which was around the low end of our expectations.
Full price decreased 6.5% and off price decreased 1.9%.
We anticipated first quarter trends to continue however, we had a slow start to the second quarter and softer results in both full price and off price.
Last quarter, we emphasized our top line focus related to loyalty digital marketing and merchandising.
We've seen good outcome from our efforts, including improvement in Nordstrom note redemption.
From a merchandise perspective.
Well proving our in stock levels and addressing a gap between our opening at higher price points.
We ended the quarter and a strong inventory position, giving us the ability to better align our assortment and the second half of the year.
Now I'd like to provide insight into two drivers of our business performance, our coal price anniversary sale and our off price business.
Starting with the anniversary. This is a unique event featuring new arrivals at reduced prices for a limited time.
Our anniversary strategy focused on three objectives.
Increasing customer satisfaction, driving sales and improving the economics of the event.
We're seeing early indications that are then resonated well with customers.
That said, we plan to anniversary consistent with current trends.
The sales were softer than expected.
Based on customer feedback, we terminated our anniversary assortment to highlight their favorite brands, which drove higher sell through of anniversary product relative to last year.
We expect this to benefit merchandise margins in the third quarter and will have a complete assessment of our overall anniversary results at that time.
While we increased depth and top brands that has become even more concentrated around key items. We did not have enough depth in key items and we are actively addressing this in the second half, particularly with our talk gift ideas for the holidays.
During anniversary, we improved our operational metrics around satisfaction scores delivery times in key markets and site performance.
This includes initial survey feedback from our top loyalty customers value the enhanced benefits such as earlier access to merchandise.
We also leveraged our digital and physical assets through buying online pickup in store.
Which increases customer engagement and is one of our most profitable transaction.
Turning anniversary sales from order pick up more than doubled over last year with nearly half coming from customers using this service for the first time.
Customers, who engage through order pickup tend to doubled their overall spend.
Turning to off price, we are pleased with our profitability results.
Whatever sales fell short of our expectations earlier. This year, we made changes to improve our bottom line, which included reducing less profitable flash events.
Because these events helped drive meaningful traffic to our Nordstrom rack network side, we are increasing the number of high quality flash events in the second half.
We're also accelerating our marketing efforts to drive traffic such as the upcoming launch of our Nordstrom rack television brand campaign.
The off price business ended the quarter and a strong inventory position improving turns across all merchandise divisions.
As we head into the second half, we're being opportunistic in the marketplace.
Plans to accelerate fall receipts.
This dynamic retail environment, we are evolving our business to create a seamless shopping journey.
Historically, we know that more than a third of customers who placed an online order.
Visited a store to help inform that purchase.
And half of our customers, who make a purchase and our store work per spend time on one of our digital properties.
Our local market strategy, Leverages, our physical and digital assets to provide greater access to merchandise selection.
Faster delivery at a lower cost to us.
Then strategy focuses on gaining market share in our most important markets by leveraging inventory and increasing customer engagement through the services we offer.
Our business is highly concentrated in our top markets with a top 10 accounting for 60% of our sales.
This year, we scaled our local market strategy in Los Angeles.
Our largest market, we're seeing compelling results and predictive metrics for customer engagement and inventory efficiencies.
We're seeing higher customer engagement and spend at our north from local neighborhoods surface hub.
Customer spent two and a half times more on average.
Service, how to account for 30% of order pickup and alterations increased by more than 10%.
In addition product returns are coming at eight days faster turn driving greater inventory efficiencies.
To leverage inventory across the broader LNG market, we began offering customers up to seven times more selection. That's available next day. This contribute to sales from order pickup nearly tripling in July .
We are pleased with our results in L.A. and are accelerating key elements of our local market strategy is more of our top market.
Our next milestone is expanding our presence in New York City currently our largest market for online sales.
This fall, we will significantly expand our presence with the opening of our flagship store and to Nordstrom local.
We anticipate that the combination of our physical and digital assets will drive a meaningful sales lift in this important market.
We will also leverage our seven locations in New York City, including Nordstrom rack and truck trunk club locations to take care of our customers through services, such as returns order pickup and alteration.
In closing, we're focused on driving our top and bottom line results and we are well positioned for the second half.
Nordstrom has managed through many cycles and we will continue to evolve our business to better serve customers on their terms no matter, how they choose to shop.
I'll now turn it over to and to provide additional color on our financial performance and outlook.
Thanks, Eric our second quarter earnings demonstrating our continued inventory and expense discipline.
We are in a strong position to rebalance, our merchandise assortment with customer demand across price points and key items.
We also made significant progress in sending the extent curve mitigating our sales shortfall.
Second quarter sales reflect the consistent traffic trends, while conversion was softer relative to the first quarter.
Heading into the second half, we continued to take aggressive action related to loyalty digital marketing and merchandise.
Our progress in the second quarter implants for the second half give us confidence in our ability to turn around our current trend.
Beginning with loyalty.
Can you to grow the program with 12 million active customers, increasing 12% over last year, and making up 64% of second quarter sales.
Weve addressed the execution related to Nordstrom note.
And redemptions are in line with expectations.
Enrollments are up over last year, and importantly, we saw a significant improvement in customer satisfaction scores during the quarter.
With respect to digital marketing, we increased our level of investment in full price and have further plans to accelerate off price.
For example in the first half we had a 25% year over year reduction of flash events and plan to get back to prior year levels high quality event.
And third in merchandising, we made initial investments in women's apparel to address the gap in our assortment our price point perspective.
We are encouraged by the sell through performance and were accelerating plans for the second half.
In addition, we're applying our anniversary learnings to increase that's a key item.
Specifically for the holidays, we're amplifying our gift assortment across categories and increasing the mix of more accessible price point.
For the second quarter, our gross profit rate decreased 50 basis points from last year due to occupancy de leverage.
Q2 merchandise margin rate relative to last year improved sequentially from Q1.
And Mark down levels were consistent with our expectations.
We ended the quarter any solid inventory position, reflecting two consecutive quarters of positive spreads to sale.
Expense performance well exceeded our expectations.
Our SNA rate in Q2 increased modestly by 26 basis points, reflecting fixed cost leverage on lower sales volume.
As soon as expense was down 4% compared to the previous year.
This was primarily due to our expense savings in addition to performance related adjustments.
Today, we have delivered expense savings of $100 million tracking ahead of our annual plan for $150 million to $200 million.
Our efficiency initiatives include realignment of our support structure in stores.
End to end process improvements in supply chain and technology and lower discretionary spend.
These initiatives represent permanent reductions to our cost structure that position us well for strong EBIT flow through.
During the second quarter also managed variable expenses well in a tough sales environment and maintain flat overhead expenses.
Expenses related to digital capabilities marketing technology and supply chain relatively flat to last year.
Our Q2 EBIT margin of 5.7% de leveraged by 47 basis points over last year, a meaningful improvement from Q1.
EBIT from four generational investments met our expectations.
Moving to the full year, we lowered the top end of our prior outlook for revised EPS range of $3.25 to $3.50.
We expect a sales decline of approximately 2% for the year versus the prior outlook range between a 2% decrease to flat growth.
The impact of terrorists has not been incorporated into our outlook, but we believe it will be relatively immaterial for the year.
Now I'd like to provide color on our assumptions for the second half.
Sales are expected to be flat at the midpoint.
Reflecting roughly a 400 basis point improvement from the first time.
This incorporate for sales drivers all of which are weighted equally.
First our merchandise plans include rebalancing, our assortment increasing depth of key items and accelerating opportunistic buys for off price.
Second we are accelerating our marketing efforts, including our Nordstrom rack television brand campaign.
An additional flash events in off price, while continuing digital marketing investments in full price.
Third we will lap last year's Naughty club launch with respect to Nordstrom note with most of the impact in the fourth quarter.
And fourth sales from the New York flagship opening on October 24th.
Primarily benefit the fourth quarter.
For the third quarter, we expect sales to improve modestly from the first half.
We expect gross profit rate expansion from improved sell through anniversary product.
We also expect our SGN a rate to de leverage from fixed cost, which includes pre opening expenses for New York flagship.
Third quarter EBIT margin is expected to be relatively flat.
During last years estimated credit related charge.
For the fourth quarter, we expect in New York City flagship opening to contribute sales in the fourth quarter as well as occupancy de leverage.
Taking a step back our framework to drive shareholder value remains consistent.
Gain market share improved profitability and return.
And maintain a disciplined capital allocation approach.
We're focused on driving the topline leveraging inventory and sending the expense.
Over time, we expect our generation investments to further scale and contribute to improved profitability and return on invested capital.
We have a strong balance sheet and maintain a consistent approach to capital allocation.
As we exit this year is heavy investment cycle, we expect moderating capex and accelerating free cash flow beyond 2019.
Capex levels are expected to moderate from 6% this year.
3% to 4% of sales an appropriate level to fund our strategic objective.
In terms of the long term financial targets, we shared a year ago, we're focused on delivering on our current your expectations.
And intend to revisit those targets after we finish the year.
In closing our priorities are to drive our topline improve profitability and execute key strategies to enhance the customer experience.
I'll now turn over to Trina for Tonight.
Thank you Anne before we get started but today. We would appreciate if you can limit to one question to allow everyone a chance to ask a question.
Also as a reminder, the company does not plan on market rumors or speculation.
We will now move to the company.
Thank you.
If you would like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question queue.
Press Star two if you would like to remove your question from the Q.
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Thank you. Our first question comes from Edward Yruma with Keybanc capital markets. Please proceed.
Hey, good afternoon, and thanks for taking the question and thanks for all the insight an anniversary.
I know you indicated that you do your strategy and kind of deeper in brands with a customer lives seemed to have worked well just try to help us understand a little bit some of that conversion issues you experienced.
And you obviously indicated that the presale did well or at least a customers responded to it. So I guess just kind of what did the consumer not like about anniversary that contributed to the soft top line. Thank you.
This is Eric.
Yeah, we did go into the event.
Okay narrower and deeper on brands, we edited out.
Some of the long tail of our brands and went deeper in our customers' favorite brands.
That being said, we didnt go far enough.
We simply ran out of our top items.
Also we have a long history with anniversary sale, there with the change this year and customer behavior.
Certainly, we we always see a highly disproportion amount of demand on our top items.
What was different this year was.
The proportion how deep that disproportion amount was we saw more demand on our top items.
Than we've seen previously and.
We simply ran out faster our top items than we had planned.
So we're encouraged that.
I think our buyers is a great job of picking the right items.
And Tim.
Putting the dollars and the best items.
We just should have could have.
A better job of going deeper on those type of top items.
And I didn't quite hear you brought up the early access portion as we mentioned we had a lot of good customer feedback on the changes we've made this year.
But again, I think where could we have done better.
We could have had.
Deeper positions our top items.
Great. Thanks, so much.
Thank you. Our next question comes from Omar Saad with Evercore. Please proceed.
Thanks for taking my question.
One of the follow up on a lot of the detail and commentary you made on the Los Angeles market locals.
Maybe you can elaborate elaborate what it is about this experience where you're seeing the call your loyal customer who gets free shipping and returns go into the store order online pick up in the store.
And how do we make sense of that and in the E Commerce shipping World and then what does it what are the inventory implications on the other side.
At least within the Los Angeles market, and maybe you know at least theoretically thinking about it longer term as you expand this kind of strategy is to other markets. Thanks.
Thanks Omar.
Yep.
There's clearly.
Being able to have a broad the broad selection that customers are coming are custom to online, but being able to pick it up in stores resonates with lots and lots of customers.
Just looking at a lot of retailers results. This last couple of weeks.
Seems to me there is a pretty common threat there are some successes.
In various categories.
A company in doing this.
Yeah, we had focus capabilities for quite some time.
We did make some changes and.
Most impactfully in Los Angeles.
We greatly increased the selection that customers have and doing a biomarker pick up in store for next day.
Specifically, we are able to leverage the entire markets inventory that we have in stores and let the customer choose where they want to pick it up we're able to move around that inventory very efficient efficiently between our stores and the market get there quickly.
And customers love it.
Our customer satisfaction scores on that service are amongst the highest we have of anything we do.
And you mentioned inventory implications of that.
Part of our local market strategy.
Yes, getting to a different level of inventory efficiency in particular, having.
The capabilities of holding back inventory.
And and allocating it as needed to be in stores or be into customers homes.
We havent done that yet we're still working on that we've done some testing.
We're getting in position to do that but we certainly think that's the next step.
Nordstrom local is.
Getting even bigger selection to customers, having fewer out of stocks.
And for us, reaching another level of inventory efficiency.
Thank you.
Thank you.
Our next question comes from Oliver Chen with Cowen and company. Please proceed.
Hi, Thank you regarding the the product opportunity ahead, and thinking about rebalancing in key items in the investments you need to make it very different on the full price side versus RAC and how as you do approach holiday.
A key topic is value as well as re commerce and sustainability and would love your thoughts.
Yes. This is Peter I think for us.
Just being more thoughtful and purposeful how price.
Packs.
Our offering and that.
Particularly clear.
All day, when we've been able to get some objective information about how customers.
Purchase gifts and.
The prices that they are really looking for from us and.
We just we're going to be much more purposeful and having the proper amount of inventory. It first of all in the gift classifications that makes sense, but also at prices that working for us.
We're really looking more at the 50 to 150 or $200 kinds of price points and.
So we have a pretty broad.
Range of prices that we have to offer and it doesn't service, while just have kind of a democratic approach across every category that we're in we we do need to step back and figure out where to invest that money to be a better gift destination for customers that I can just tell you know what our experience has been around our this feels like the most purposeful attempt for us to prove and being a gift destination. So we think we've learned a lot and as Eric mentioned.
Anniversary I think it was helpful to understanding yep.
So.
We feel good about our chance to have a good holiday as a result of that.
As you talked about price and what happens in off price and full price its.
And there's a version of it thats applicable in both places and we're trying to be thoughtful and surgical about how we're doing so.
No I just think it puts extra focus.
Our ability to be good editors generators.
Something we've been able to approach.
With some more objective information, we have better data than we've ever had before so again I think from our point of view it feels like the less opinion based.
Thing and if it's much more purposeful around objective information.
Okay, Great and would love your thoughts on re Commerce Nordstrom has been really ahead of the curve with what customers one and I know you have an innovative partnership with rent the runway.
Yeah, well you know.
The radically.
So abundantly clear that the whole sustainability subject is really important to lots of customers and so it's important to us and I think of the re commerce thing plays right into that and.
Thats a bunch of things that we're working on that we're really not in a position to.
To fill you in on right now because a lot of things were flat, but I think it's fair to assume that as a major theme for our merchandising strategy that is right.
The hard on a lot of it it gives us a great opportunity to work collaboratively collaboratively with our brand partners to figure out how to satisfy customers better on that score.
Thank you best regards.
Thank you.
Thank you.
Our next question comes from Jay sole with Qbs. Please proceed.
Great. Thanks, so much.
Eric I appreciate your comments on the anniversary sale.
If you step back and maybe just help us understand no sales for the company were down 4.3% in the first half if you could take out maybe two or three real big picture things and explain why the sales. So the sales growth rate has slowed down so much from where it was historically going back five or 10 years would be really helpful. Thank you.
Sure.
First I'd start with what we talked about enter first quarter, we identified three areas, our loyalty program digital marketing and the balance of our merchandise assortment.
We made good progress on the first to the loyalty program and digital marketing.
We saw.
General.
Good traffic across our properties.
As we talked about the first quarter the merchandise assortment.
Takes longer.
AD buys in place.
Add around that we have opportunities and the balance of our price points.
And we have opportunities and.
Being in stock.
And then stop items that we've been talking about we've seen some encouraging signs there are those.
That rebalancing is underway.
But we expected that to have more traction in the third quarter and the fourth quarter and we did in the second quarter.
Yes, do you feel like that the company.
Organizationally is the right structure and what you feel is the key to sort of driving traffic back into the stores drug stores sales growth rate back to a higher level.
Well.
As you know we've been work our local market strategy for a couple of years now and.
That is progressing we started last year in L.A. really to.
We do a lot of testing with customers a lot of listening of how we can connect a car digital and physical assets to better serve customers.
This year, it's really been about scaling it in L.A., we started with our four stores.
We have now.
Expanded in particular that buy online pick up in store.
Greater selection for next day delivery across 16 stores in Los Angeles Orange County.
As well as our three local stores.
And we're seeing really tremendous Trent Trent traction on that service in particular.
But stepping back.
It is.
Looking at our physical assets.
As points of engagement as much as they are points of sale, we really don't care, where the sale gets to truck.
And we continue to learn that physical assets that that's when leverage.
Really our customers want make a tremendous difference there we've talked about buying online pickup in store.
We know that customers are you fed service spend doubled those that don't use it oh.
Well I heard us talked on alterations before.
Krish thoughtfully something that can't be done digitally.
And it's something we're really good at.
We're the largest employer retailers in North America, I think we have the best Taylor's there are out there.
And.
Customers are engaging our alterations area, there's been triples.
You know when a customer engages with the stylist their spend goes up fivex.
So that engagement is really what we're looking for b with services being across channels.
We know the more engagement, we get with customers preventative and.
Through our local market strategy in particular, we feel really good that weve found some ways too.
Leverage these physical assets that really resonate with customers.
Got it okay. Thank you so much.
Thank you. Our next question comes from the Alexandra Valdas with Goldman Sachs. Please proceed.
Good evening. Thanks, so much for taking the question I had a question clarifying the guidance you hopefully break down what the four drivers of the four point improvement in comps into the back half of <unk> likely to be.
I was wondering if you could clarify whether the.
Sales from the New New York flagship will be coming in the fourth quarter given that given the opening date.
Then a follow up question, there I think that implies some pretty strong sales.
This does square foot in that new store Im can you talk about the level of confidence there and perhaps you know correct.
Expectations on that.
Ken I'll implications of that specifically thank you.
Hi, Sandra on let's start with the the clarification on the guidance piece to it. So as you mentioned the store does open October 24, so there will be a very I mean tiny amount in Q3 and I would say.
Significant majority of what you would see with the Q4, which is how we ran the guidance on that.
And as far as you know again I hope, we're looking at New York and I think air compete can weigh in on this but.
To provide more color on this that we've really seen is as well we're open for business really entering a market and I think when the generic went through his slides and we had the slide talking about the seven point.
In Manhattan that we're servicing customers, we're really approaching this as not only opening the power of our local leveraging our other touch points between trunk club and Mac wells.
And enhancements in our online.
Well.
Yeah I would.
Just to add onto that.
We think it's really important that with the opening of the towers that we have these other assets services coming online.
Around the same time, so I know, we've announced that we'll be opening to Nordstrom local service hubs one of the upper east side, one in the village.
And we're also able to execute and deliver the most popular services our customers have that we've seen in Los Angeles, our local which is returns online returns in particular.
Order pickup and alterations that are to rack locations in Manhattan.
As well as the trunk club clubhouse.
So we will have seven locations on Manhattan to be able to take care of customers and so theres really a synergy.
Between those assets inventory, we have entered the people we have their services, we are able to provide.
And so we've had a lot of proof points in Los Angeles, we're set up well to leverage that for New York.
I would reiterate ENHANZE point, and we had that one slide in my section, which showed a man in the southern locations really emphasize that that part of that and we are opening a market we have assets physical and services that.
We're excited to bring to the curve.
For the customer.
Great. Thank you.
Thank you. Our next question comes from Paul Trussell with Deutsche Bank. Please proceed.
Hi, good afternoon.
One margins as DNA dollars, where were nicely manage to just highlight some of the areas of savings and do you now expect.
To deliver.
Above the original 150 to 200 million.
Of of savings you originally outlined and also on gross margins can you just talk about the puts and takes please both in regards to what you experienced in the second quarter, but also your level of confidence in terms of expected expansion in the third quarter. Thank you.
Hi, Paul So let me take the scene 18 wells we've talked about.
We had three particular drivers driving or assuming a one is.
Realigning, our support structure and costs.
For the second what's really driving end to end productivity initiatives like new technology, and I would say to a lesser degree is more discretionary spend.
And I would say that's a small piece of all those things.
That was that.
Those are the three levers in pulling them working through.
As you mentioned, we are ahead of our plan. So when you look at our overall guidance for the year, we basically we had.
Do I kept our plan for the second half and bank.
So we are exceeding what we originally have thought.
So thats, how you get to the reconciliation.
On gross margin as we mentioned our merch margins were actually.
It's in line with our expectations as far as markdown within we had was de leverage on occupancy.
As we go through the rest of the year, we really didnt change any of our guidance assumptions on margin.
As Eric talked about how we thought about anniversary sale.
As far as having better margins in the third quarter. The anniversary. We are only data that was the plan that we made and were.
Progress on that.
So the only things changed our overall guidance.
Thank you.
Our next question comes from the line of Mark Altschwager with Baird. Please proceed.
Thanks, and good afternoon.
Nice job on the expense savings I was hoping you could dig a bit more into how the operating model is really changing at the store level and just really what you're doing differently I think thats, a big component of the cost savings that you've outlined and I. Also think this is the first anniversary sale period since you've put some of these operational changes into play. So just curious how that all played out during the higher volume period, and then any key learnings as you move forward to the holiday. Thanks.
Hi, Mark.
Yes.
Applications, our operating model, especially in our store are pretty profound.
Our stores.
Yes, we're going to leverage the inventory, we have in our stores to better serve customers.
It means our stores are increasingly becoming fulfillment centers.
As well as selling directly to customers. So.
We have had changes in our models and our store there too.
To do that we need more people handling both online orders are being filled as well as.
Returns coming back and getting that inventory only sellable as quickly as possible.
That's gone really well and in particular over anniversary were at such a.
Intense period of demand.
We saw significant improvement.
In our fulfillment rates in our stores.
As well as.
The speed of delivery to customers in our key markets.
Really good about that.
Thanks, and if I could just quickly follow up on a previous question. The implied sales guidance is quite a bit stronger for Q4 versus Q3 is there anything beyond.
The Manhattan store coming online that's driving that.
That difference if you could just talk about some of the drivers there that would be helpful.
Yes, so for what we tried to do is give you full year and then give you the Q3 assumptions as you can.
We talk about how we expect moderate largely getting better in Q3, and then some of the big drivers. The biggest driver outstanding driver with Q4, when I would assume is that as the four levers that we laid out how you're going to see do you see some improvement, particularly as we go through the second half.
Thanks, Dan.
Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. Please proceed.
Good afternoon.
Two quick things as you think of the women's apparel market and what you've been seeing there how does it did anything from the anniversary sale inform you or what should be in the store or other brands, what's happening with some of the existing innovative brands that you have to expand or to contract and bring in others and lastly, what does success mean to you for the New York store are there any metrics around that that you can place.
If we did a good job of identifying.
The key items and brands and styles that customers.
Responding to so we've always had a pretty aggressive program on trying to identify and amplify emerging brands I guess, what I can tell you is changes that the cycle on all that stuff is shorter than it's ever been and so one of the things we need to do is identify new emerging brands and amplify them quickly it isn't a matter test and learn over.
Couple of years, a couple of stores in time, so I.
I guess, what I can say just more broadly is that.
I think we have more confidence in our ability to be able to pour on the gas when things are working along the same holds true for perhaps some legacy brands that are declining and we have some.
Very big built up established businesses with some some legacy brands worth you know its going the wrong way so I just.
Our teams out to be really good at editors they got to be chairs and they can't really use last year. So much as a guy. So I guess the other thing I would say is thematic Lee really understanding the wafer price.
Impacts classifications and Doug.
And just getting sharper about that as help so.
You know, it's been kind of a tough go for a while and women's apparel, but I think it's fair to say, though we have optimism about our ability to to make some improvements there, particularly sorry back half of the year.
And then the other question was about sorry about New York, specifically is what.
How do you quantify that the New York still or what would you be looking at in a year. How do you think of the New York still what would what would make it in your mind to success is to the volumes match, Seattle or how do you think about it.
Yes, there is obviously a way of quantifying them, we don't breakout those numbers by store, but I think what Dan mentioned really the way that we look at it by a market.
And I think as we've mentioned all the way along or put it already is our largest online market I mean, we know when we add it's cool.
Assets to a market like that that we grow our our online business considerably as well, adding up the stores and the sales of physical stores as well so.
You know, what we'll probably have more to say about that as we get into but I think ultimately the way you guys should be keeping going at it looking for us to look at it in terms of a market I would say, though if you're asking us, particularly in the near term how we're going to view. The success I think it's really along the lines of can we deliver.
Great customer experience there in all the ways that I think customers would expect from Nordstrom entering the market.
There's plenty of places to buy things that are in New York and if we're successful there. It's because we do the little thing better and little things that are actually big thing just the way that we serve customers no more relevant more convenient way, we've heard that theme a lot.
And you know we've got a good team of leaders there werent ready to take that challenge on so I think we'll be we'll be getting a lot of indications about our ultimate ability to be successful there based on the reaction that we get from customers that are going to step up and.
And do Didnt deliver something that.
Thank you.
Thank you.
Our next question comes from the line of Matthew Boss with Jpmorgan. Please proceed.
Great. Thanks, So off price. This was the weakest quiet quarter on the top line I think in in five plus years, I guess, what's driving the magnitude of the slowdown what's the timeline to stabilize the concept and any change in your view regarding the long term size of the brick and mortar fleet for rack.
Yes.
Merely point to though.
Issues, we've had across our full price business.
Backdrop breakfast as well about the loyalty digital marketing and merchandise assortment no loyalty as we mentioned very good progress over the quarter. So we like the direction that were there the digital marketing, we're a little further behind at off price and we are in full price or we do have.
Still some some traffic opportunities and off price Oh, we feel.
We feel much better about that in particular, what's unique about off price, which we touched on her comments is flash we didnt deep dive at the end of last year and all our flash events. We had a number of flash events that were won categories that we don't carry in our stores and with the majority of our online returns coming back to our stores that that creates issues, but the number two.
They were unprofitable events. So we did a lot of editing these flash events.
The flip side is what what's really a plus about the flash model is the traffic generation engagement, mainly through email that we give the customers who sign sign up. These flash events is is terrific and helps us not only on the flash side, but helps us on the Iraq Dot com side as well.
So we felt the reduction in traffic from cutting back on those events. So we started the last time about the last three weeks.
Back on a more of a normal cadence there a flash events and the key to there's not just quantity of flash events, it's the quality of flash events.
And we feel really good about that so feel good about flash events going forward, that's going to be differentiated in the first half we feel good about the marketing is going to be different issue in the first half.
The other point to sure not going.
No. This year is the inventory position I mean, we're sitting here midway through the year with a lots of open to buy across our company, but particularly in off price and off price. The biggest driver off price business is having great merchandise and being opportunistic, especially in times like now that are tougher the industry. We're really excited about the position we're in too.
Really pick up some compelling merchandise for our customers and get them into our rack brand.
And and quick follow up any reason for the lack of share buyback this quarter and how best to think about capital allocation in the back half.
Yeah, Matt, we but we've been really consistent about how we approach capital allocation is first and foremost we look at investing in the business and we talked about this is a very heavy investment cycle here for us is a complete that payment and the investments, we're making in New York and that's the exit out of the year that Capex investment. She coming we can began a more moderated in Uh huh.
And then the second piece to it is of course, our dividend and also state. We are very focused on investment grade. So the way, we like to share buyback in the past.
Asked why I'm. So that's you know that's kind of the priory than how we look at our capital allocation.
Thanks for the help.
Great well now take one more question.
Thank you our last question comes from Chuck Grom with Gordon Haskett. Please proceed.
Thanks, I'm just just a few housekeeping things I guess first on the third quarter Guide can you quantify how much gross margin expansion, you're anticipating second would be on the second quarter could you, perhaps walk us through categories that either.
Outperformed or underperformed and then third on the note redemption issues or where you can speak to how much. It's improved maybe quantify how much of a drag it was in the fourth quarter of last year, given that you're gonna be cycling then I think thats part of your equation for an acceleration in sales later this year. Thanks.
Pete do you want to take the assortment question, yes sure.
In the second quarter, we had pretty significant improvement in the beauty area. I think we mentioned that before that we had some out of stock issues.
That's the beginning of the year.
Hurt us and so we believe that the curve there in beauty improved quite a bit.
To me, it's been a consistent story for quite some time as our designer business across all categories.
Positive are there continues to be a good growth opportunity for us.
Or MPG area did fairly well our own product that that showed some improvement. That's that's good to see you. Then lastly, I'd say that the laundry and active areas in women's.
Performed relatively better than the tougher areas for us is.
We had some slowdown in shoes.
I think that I think that represented a moment in time, we don't we shall see but that was a bit of a dip from where it was that she has it been performing strong strongly.
Men's.
Had some challenges I would say the biggest driver there that we've noticed and this is not a surprise been with balls are industry, but that is a continued kinda casualization of America.
That that impacts the men's business.
Quite a bit and so while we're still serving a lot of men and selling them things. The average price of what we're selling them oftentimes less than it was when they were buying.
Suits and ties and things of that nature. So.
You know theres theres adjustments, we need to continue to make but I think that those kind of represent the strongest performing categories relative to the.
Orban from last quarter.
And as far as your question on margin and the guidance. We gave that we thought gross profit Sienna deal would have like you leverage really driven on.
De leverage in occupancy.
Volume.
And so when we talked about Q3, what we said was that we thought given we've gotten worse margin would actually be improvement year over year because of the universe, we still sell through that we that we're expecting from how we planned anniversary and then just to remind you Q4, we'll actually have the occupancy from Citi baked into it. So I think from that you can kind of baked into your model as far as the Nordstrom No. We gave that have you know.
Roughly evenly for the second half you can probably.
I imagine if you.
Anniversary and that's a note redemptions and the time it takes for people to accumulate.
The cumulative effect it was not going to be completely even across the two quarters I'm glad for the second half its just refer back to me.
Great. Thank you again.
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