Trina Schurman - Director-Investor Relations Blake W. Nordstrom - Co-President & Director Michael G. Koppel - Chief Financial Officer & Executive Vice President James F. Nordstrom - Executive Vice President and President, Stores Peter E. Nordstrom - Director, Executive VP & President-Merchandising Erik B.

Nordstrom - Director, President-Stores & Executive VP.

Oliver Chen - Cowen & Co. LLC Charles P. Grom - Sterne Agee CRT Lorraine Maikis Hutchinson - Bank of America Merrill Lynch Esteban Gomez - JPMorgan Securities LLC Dorothy Senghas Lakner - Topeka Capital Markets Edward J. Yruma - KeyBanc Capital Markets, Inc. Jeff S. Stein - Northcoast Research Partners LLC Neely J. N.

Tamminga - Piper Jaffray & Co (Broker) Paul Swinand - Morningstar Research Paul E. Trussell - Deutsche Bank Securities, Inc. Michael Binetti - UBS Securities LLC Bridgette Taylor - Barclays Capital, Inc. Kimberly Conroy Greenberger - Morgan Stanley & Co. LLC Matthew Robert McGinley - Evercore ISI Bob S. Drbul - Nomura Securities International, Inc..

Hello and welcome to the Nordstrom First Quarter Conference Call. At the request of Nordstrom, today's conference call is being recorded. All lines will be on listen-only mode until the question-and-answer session. I will now introduce Trina Schurman, Director of Investor Relations for Nordstrom. You may begin..

Good afternoon and thank you for joining us. Today's earnings call will last 45 minutes and will include 30 minutes for your questions. Before we begin, I want mention that our speakers will be referring to slides, which can be viewed by going to Nordstrom.com in the Investor Relations section.

Today's discussion may include forward-looking statements, so please refer to the slide showing our Safe Harbor language. Participating in today's call are Blake Nordstrom, Co-President and Mike Koppel, Chief Financial Officer, who will discuss the company's first quarter performance in addition to outlook for fiscal year 2015.

Joining during the Q&A session will be Co-President Pete and Erik Nordstrom and Jamie Nordstrom, President of Stores. With that, I'll turn the call over to Blake..

Thank you and good afternoon, everyone. As you know, our customer strategy is squarely focused on serving customers on their terms and delivering the high level of service they expect from us.

While we are uniquely positioned to serve customers through multiple ways, full-price, off-price, stores and online, we know customers simply view us as Nordstrom. To support our number one goal of improving the customer experience, we are focused on a one-Nordstrom approach that links our businesses with service, products and capabilities.

This is important for our customers and critical in generating long-term profitable growth. We've shared our sales ambition of over $20 billion by 2020. To achieve this, increasing customer acquisition and cross-shopping are important outcomes to improve our relevance with both new and existing customers.

We've made notable progress over the last year, achieving our strongest gains in new customer growth in recent history. We've also seen increased cross-shopping across our businesses, reflecting our efforts to give customers more choices in how and where they would like to shop.

Turning to our first quarter performance, we're pleased with our results, which were in line with our expectation, our top-line momentum continued with total sales growth of 10% and a comp sales increase of 4.4%. Results reflect the disciplined execution and planned growth initiatives. Later, Mike will provide more color on our performance.

We are encouraged with our ongoing rollout into Canada, which over time represents a $1 billion sales opportunity. In March, we opened our second store in Canada in Ottawa, Ontario. This fall we will open our flagship store in Vancouver, which we expect to be one of our largest volume stores.

This effort will also strengthen our capabilities leading to our upcoming flagship stores in Toronto and Manhattan. In addition to six full lines stores announced in Canada, we also look forward to introducing Nordstrom Rack in the fall of 2017. In March, we also expanded our full-line presence in our store opening in San Juan, Puerto Rico.

In October, we will add to our 116 full-line stores in the U.S. with our second store in Minneapolis and our first in Milwaukee. We are also relocating our South Bay store in Los Angles to the nearby Del Amo Fashion Center. With respect to the Rack, we are on track with our accelerated growth plans, opening 10 stores this quarter.

These stores exceeded our expectations and contributed to Rack's 12% total sales growth. Just last week, we opened another Rack store in Dublin, California with 16 more planned this fall. A year ago, the HauteLook team launched Nordstromrack.com to elevate the Nordstrom experience – the customer experience.

The momentum continues with our online off-price business, which delivered tremendous sales growth at 50% in the first quarter.

From a merchandise perspective, we are responding to our customer's desire for fresh, relevant brands, with the introduction of Charlotte Tilbury, Madewell, Brandy Melville, and several others including those offered in our curated Pop-In Shops. We're making progress in providing our customers with a shopping experience that is seamless and relevant.

For example, we've experienced outside growth in our BP, Topshop, and Savvy departments, particularly where we've created strong adjacencies in our stores. Topshop continues to be a terrific partnership for us, attracting new customers with on-trend fashion at accessible prices. Three years ago, we started with an offer of 15 doors and online.

Based on strong sales performance and customer demand, we plan to expand to roughly 90 doors by the end of the year from 67 today. Our personalization efforts are another way for us to elevate the customer experience. In 2014, we saw tangible results from our mobile enhancements to make shopping easier and more convenient.

We've added location-based features that are driving in-store sales and enabling a more seamless experience. More recently, we integrated our rewards program to make it more convenient for customers to receive notifications, as well as check and redeem their rewards.

As we look ahead, in addition to our upcoming store openings, we are on track with our other initiatives to improve the customer experience. This fall, we look forward to providing our customers with faster delivery enabled by our third fulfillment center located in Pennsylvania.

Additionally, we will roll out our expanded multi-tenant rewards program to all stores and online in the second half of the year. In closing, our customer strategy is guided by customer expectations around speed, convenience and personalization.

We believe we are well positioned to deliver an exemplary experience for our customers, no matter how they choose to shop with us. With that, I'll turn it over Mike..

Thanks, Blake. Our first quarter performance was on track, as we continue to focus on executing our customer strategy. Reinforcing Blake's comments, our number one goal is to improve the customer experience.

Knowing customers increasingly expect both a personalized and convenient experience, we will continue to make investments that enable us to serve customers on their terms. Our first quarter earnings per diluted share of $0.66 were in line with our expectations.

We delivered strong top-line results, achieving total sales growth of 10% and a comp increase of 4.4%. Over the past several years we've been making strategic investments in Canada, Trunk Club, and HauteLook. In the first quarter, these businesses added $100 million in sales.

As Blake mentioned, our online off-price business generated an impressive 50% increase, significantly accelerating since the launch of Nordstromrack.com a year ago. Our full-price business generated a total sales increase of 5%. This included full-line stores' comp increase of 0.5%, reflecting improving trends over the last year.

Additionally, Nordstrom.com's momentum continues with a 20% increase. In off-price, the store and online businesses grew 16%. Rack sales were up 12%, reflecting above-planned performance in new stores. Rack had a slight comp decrease of 0.2%.

We believe these results are temporary and are maintaining full-year expectations of low single-digit comp increases at the Rack. Our EBIT performance in the first quarter reflects planned growth initiatives, including Trunk Club and Canada. These initiatives are expected to have a relatively larger dilutive impact in the first half of the year.

With our first quarter performance on plan, we are reiterating our full-year earnings outlook of $3.65 to $3.80 and sales growth of 7% to 9%. Our first quarter performance was consistent with expectations, notably in gross profit, inventory and SG&A. Gross profit increased slightly over last year by 7 basis points.

Our SG&A rate increased roughly 140 basis points over last year, due to our planned investments in Trunk Club, Canada, fulfillment and technology. Inventory grew 19% over last year compared with sales growth of 10%. We continue to make the necessary inventory investments to fuel our store and online growth.

We ended the quarter on plan and current across our businesses. Now we'd like to provide additional color on our long-term growth plan. Our strategic investments are a critical driver behind our ambition to deliver a best-in-class customer experience and long-term profitable growth.

Over the next five years, we plan to invest $4.3 billion in CapEx, or roughly 5% of sales, which we plan to fund through our current operations. Approximately $1 billion, or 25%, is planned for Canada and Manhattan. We view these projects as generational investments to meaningfully elevate our brand and gain market share over the next several decades.

We are also investing for growth in existing channels. As our stores represent the core of our brand and the foundation for a multi-channel experience, 40% of our plan will support new store growth and reinvestment.

Additionally, technology and fulfillment are key enablers in creating synergies across our business, making up the remainder of the plan at 35%. We previously shared with you this year's CapEx plan of $1.2 billion, or 8% of sales. As we stated, we expect 2015 to be the peak investment year due to the concurrent timing of multiple growth initiatives.

This includes Canada, Manhattan, several flagship remodels, and a third fulfillment center. We expect CapEx in subsequent years to normalize below our plan average of 5% of sales. Finally, we'd like to comment on the potential sale of our credit receivables.

As a reminder, we started this process a year ago with the goal of maintaining the important relationship we have with our customers, while allowing for improvement in our capital efficiency. We are nearing the end of the process and will be in a position to provide an update in the second quarter.

In closing, our focus on serving more customers while delivering an exemplary experience is driving both top line sales growth and shareholder returns. We're excited about the momentum in our business and look forward to the opportunities ahead. With that, I'll turn the call over to Trina..

Thank you, Mike. Before we get started with Q&A, we'd like to ask that you limit to one question. If you have additional questions, please return to the queue. We'll now take the first question..

Our first question comes from Oliver Chen, Cowen & Company. Your line is now open..

Thank you very much. We just had a question related to the Rack.

In terms of that assortment, which product categories you think have more opportunity for potential improvement going forward? And then also, just on the consumer environment and your strategies around sales, could you just update us on what's happening with respect to the semi-annual sale and price matching in the environment? Thank you..

Oliver, this is Blake. I'll take the Rack part of it. As I mentioned, we're very pleased with the growth and how the new stores are performing. I've commented that we had a very slight decrease in the first quarter on a comp-store sales basis. Our plan and goals for the year are consistent with our trends previously of low single-digit comp increases.

We saw improvement throughout – towards the end of the quarter there, and we feel really good about our plans and we're committed to that. And so, if you ask specifically about what departments are doing better than others. We have a pretty balanced approach in terms of the contribution.

There's nothing really that I would call out, one area that's leading another, we feel good about our Rack business and what the team's doing there..

Yeah and this is Jamie. I'll take the clearance question. I think we've been talking about it the last couple quarters.

We typically, given our five to six times inventory turns to clear merchandise out, roughly six times a year, varies a little bit depending on department and we've found that we have opportunities to be more effective and how we clear that merchandise out, clear out the old stuff to make room for the new stuff.

Our business is at its best when we have a consistent flow of fresh, new goods. So, as I think we've been talking about, we're trying to make improvements with the clearance bit to make it more efficient, more compelling for customers and ultimately we'll have less days of clearance over time. We're on track to do that this year.

We are going to be making some changes with what they look like, how they look online, what we call them, how we communicate to customers. We see some pretty exciting opportunities to make those more effective and that will evolve over the rest of the year..

Thanks. Congrats on solid results. Best regards..

Thank you..

Thanks, Oliver..

Thank you. Our next question comes from Charles Grom, Sterne Agee CRT..

Hi, good afternoon. Just to follow-up on Oliver's question. We noticed that you guys look like you're doing a half-yearly sale at the end of May for 10 days across a few categories of business.

When we thought I think you guys had abandoned the half-yearly sale, so I was just wondering if you could clarify exactly what you're promotional strategy is going to be going forward? Are you going to continue to do the half-yearlys or are we going to do the six clearance events? Just some clarity on that would be helpful. Thanks..

Sure, Charles. This is Jamie. I'll take that. Just to be clear we're not a promotional retailer, we're a full-price retailer. We only have one promotion a year, that's our Anniversary Sale in July.

But the half yearly clearance events are just that, it's a clearance event and we've experimented a little bit with communicating those clearance events using different titles, different marketing techniques. Half yearly is a brand that we used over the years to communicate what that event is all about.

But we typically use that last weekend, Memorial Day Weekend, in May to clear out a big chunk of our early spring assortment and make room for the anniversary goods that are coming. So really nothing has changed about that. We are going from having that late May event from just women's and kids to include men's as well. So it's an all-store event.

And again that will continue to evolve and we think that over time, surely by the end of this year, we'll be able to be more effective with how we can clear that merchandise out and ultimately have less days of clearance in our stores throughout the year..

Okay, great. Thanks..

Thank you. Our next question here comes from Lorraine Hutchinson, Bank of America. Your line is now open..

Thank you. Good afternoon.

With the understanding that some of the specific investments related to fulfillment and others are front-end loaded, are there any other factors that we should consider in forecasting a nice acceleration in earnings growth in the back half?.

Yeah, Lorraine. This is Mike. A nice acceleration, I don't know if I'd gauge it as a nice acceleration. Clearly, for this year we've been pretty clear as to what the expectations are for the year.

We do believe that by the fourth quarter, a couple of the items, particularly Canada and Trunk Club will start to moderate in terms of the impact on year-over-year earnings, so we should see some improvement there.

But we continue to see our core business operating very well and delivering very strong returns and these investments we're making for the long term are putting a little short-term drag on those results, but clearly, they're starting to accrete to the top line, and so we believe over time they're going to get to the bottom line..

Thank you..

Yes..

Thank you. Our next question comes from Matthew Boss, JPMorgan. Your line is now open..

Good afternoon. This is Esteban on for Matt. Thanks for taking my call. New store productivity was strong in the quarter.

How indicative is this of your initial performance in Canada? And then anything new on learnings from your initial store rollout in the region?.

Yes. So, I'll talk about Canada. This is Jamie. I've been told I need to speak up. So I'm sorry if this a little quiet. As we've talked about in Calgary, we had a great start there and that continued; a little softer start in Ottawa. We opened that store in middle March, early March. Pretty cold up there and we opened with our spring assortment.

I will tell you that as it's warmed up over the last month, our business has improved. We're very, very encouraged at this stage about our performance there, both in Calgary and in Ottawa year-to-date. We're very excited about Vancouver opening September 19..

18..

18, sorry – September 18. As Blake mentioned, we think that has the opportunity to be one of our very best stores in our company and we've got a lot of work going on in there. So we continue to be very encouraged about Canada and very bullish on our future there..

And then....

Great..

Go ahead. I'm sorry..

No, I'm sorry. And then I was going to ask a question on buyback, but go ahead..

No, I just was going to say on store productivity, I thought you were also – this is Blake – being inclusive of the Rack, and as I mentioned, these new stores are outperforming and we've been pleased that as we accelerate the growth that the productivity of these stores are staying consistent.

We haven't seen any decline with the addition of these stores, so overall we're very encouraged..

Got it. And buyback was a little lower in the quarter.

Is there any reason for this or any change in how you're thinking about capital allocation going forward?.

Yeah. Matt (sic) [Esteban] (19:07), this is Mike. No, there's no change in our approach. I mean, we set up a buyback plan matrix ahead of time. It's governed through a 10b5-1 plan. It was purely a function of the repurchase amount that was set based on share price. So no, there's no change in our long-term view on share buyback..

Okay. Thanks, guys..

Sure..

Thank you. Our next question comes from Dorothy Lakner, Topeka Capital Markets. Your line is now open..

Thanks and good afternoon, everyone. Congrats on the strength in the top line..

Hi, Dorothy..

Just wondered, you've seen a real come back in the BP business and certainly it sounds like Topshop and Savvy, I mean those three together have really created some momentum for you. So I just wondered if you could speak a bit to that.

And then just you'd also spoken about an acceleration in cross-shopping, so I wondered if you could put a little color around that as well?.

This is Pete.

With regards to the improvement that we've had in women's apparel, most specifically around, I guess, what we would call our young customer zone that's inclusive of Topshop and BP and Savvy, I think the major catalyst there has been Topshop where we've had that and been able to integrate it and create the correct adjacencies related to BP and Savvy.

It's worked extremely well. And when you combine all those areas together I think it makes pretty powerful statement for that trend customer and so that's worked well. So I think the adjustments that have been made is our ability to be able to bring those departments next to each other.

And all of our stores are a little bit different in terms of how they're laid out. So it's taken some time to kind of create the synergy and adjacencies that we need to. And now that we mostly have that accomplished, you're seeing the benefit of that and the business is very strong. I'm sorry, and the other question was about..

On cross-shopping..

Yeah.

Cross-shopping between what?.

Between the channels..

On channels. Oh..

Yeah. Dorothy, I think you know in terms of the cross-shopping, a couple of things that I'll note there is we called out last fall when we launched Nordstromrack.com and HauteLook, the large amount of activity that we were driving back into the Rack stores through returns, that was a very good example of driving customers across channels.

We also have seen Rack acquire a substantial amount of new customers that ultimately migrate to our regular-price business. And, of course, over time we've seen a lot of shopping across between full-line stores and Nordstrom.com.

So I think all the initiatives and the various strategies we put in place continue to bring those barriers down and make it easier for customers to shop..

Great. Thanks so much..

Sure..

Thank you. And our next question comes from Ed Yruma, KeyBanc Capital Markets. Your line is now open..

Hey, guys. Thanks for taking my question. I guess first on the Rack, obviously you commented about the strong performance in new stores.

Are you seeing any levels of relative maturation among some of your older classes, and maybe when you do some of these in-fill stores, are you seeing a negative impact on performance, one? And then I guess two, we've seen a lot of promotions in the handbag and watch markets.

Are you seeing any negative impact to those businesses within your store? Thanks..

This is Blake. I would take the Rack part of it, we opened 10 stores in the quarter and then just last week an 11th store, and some of these stores are in the training area of our existing stores, and so we do try to plan appropriate or accordingly to transfer sales. We don't see anything unusual there.

It did have a very slight impact to the first quarter comp store performance for the Racks, but it's not material enough, we believe, to call it out. So there's nothing unusual to transfer sales that we could speak to..

Yeah. I'll take the price promotion thing with watches and handbags. I think that's true. Increased price promotion is not different business as far as we're concerned. Jamie talked about it, and I would just reiterate the same thing that the best thing that we could have going for us for a healthy business is newness and not price promotions.

So yeah, that has had a bit of a negative impact, but there's always – there's a lot of hopeful things to be working towards, and I think the whole industry is interested in getting back to some more regular priced business, so it's been a good catalyst I think for discussions around newness and the ways that we could evolve this business, so that's compelling to customers to buy new things, and that's happening right now..

Great. Thanks so much..

Thank you. Our next question from come Jeff Stein, Northcoast Research..

Yes, a couple of quick ones, guys. First of all, I'm wondering, is – do you think there might be some cannibalization in your off-price online businesses and Nordstrom Rack, because it looks like you've seen some acceleration in the online segment, and at the same time deceleration in the stores.

And second question would be the impact of Trunk Club and an on-going entry into Canada, had a $19 million negative effect on Q1, so if you add that back, you were essentially flat, and I'm wondering how should we think about that if you back out those kind of incremental items?.

This is Blake.

In regards to HauteLook and Nordstromrack.com and any potential impact to the Rack itself, we've seen a real positive experience this last year with HauteLook and the Rack, in particular we can make it more seamless for the customer, whether it's – probably want to purchase or return, and we think that applies to Norstromrack.com as well.

So I understand the question and why you would want to pursue that further, but our focus is letting the customers shop how they want to shop. We look at it totally across the board when we put as an off-price, both online and in the stores.

We're really pleased with that gain and again we think it was just a very temporary number of issues that contributed to Q1 to being slightly down and we're committed to that growing. So, I think that question will be more prevalent if you saw in the future that continuing and we would need to expand upon that..

Okay.

And then the $19 million incremental spend from Trunk Club in Canada, again, adding that back that would only get you to kind of flat EBIT relative to last year?.

Sure, Jeff. This is Mike. You're absolutely right about that. There's a number of things going on that are part of our overall strategy. We continue to see an acceleration in the impact of our technology investments.

Those are assets that are coming online relatively quickly and have a relatively short life, so we can continue to see that adding more to the SG&A. We also opened a fair amount of new stores and when you open stores you have an increase in SG&A where you don't see the commensurate earnings as of yet.

So we continue to see some of the pressures of the things we're doing to grow our business and have the right foundation for the future..

Got it. Thank you..

Yes..

Thank you. Our next question comes from Neely Tamminga, Piper Jaffray. Your line is now open..

Great. Good afternoon. Just two quickies from me. In terms of mobile app for the loyalty program being better integrated for Nordstrom.

Are there plans to do that also with the Rack HauteLook app? In terms of better utilizing the notes et cetera and what sort of engagement are you seeing there? And then real quick on products, you've talked about NPG for a while and for what it's worth, Nordstrom Collection looks amazing right now and I'm just wondering if the consumers are actually demanding more private label from you and that's taking up some of your penetration from where you guys have been in the past? Thanks..

Neely, this is Mike. I'll take the first part of the question regarding the mobile app and Trunk Club and some of our newer businesses. Our plan is to, over time, certainly include those businesses on that program, but we're in the process right now of building out some new foundations for our loyalty program.

We're going to introduce a non-tender this fall and I think the important thing is we focus on getting that done first and getting our larger businesses supported by that. And then subsequent to that, we will put the functionality into some of our newer businesses..

This is Pete. With regards to the NPG question, thanks for noticing, yes, we've had good NPG business and our sales are growing faster in NPG than it is across our branded business. And it's good. It's just been part of our intentions and plans and it's been working out well.

I'd say in particular some of the strong places where we've been performing is we've introduced Rack NPG in a much more purposeful way and that's gone very well.

The accessible price points, particularly in some of those more trend and young customer departments that we talked about earlier and women's, particularly like in BP and Savvy, that's gone extremely well and also in t.b.d. So across the board, NPG is performing well.

It's an important part of our strategy and we will continue to let it find its level..

Thank you..

Thank you. Our next question comes from Paul Swinand, Morningstar. Your line is now open..

Good afternoon and thanks for taking all the questions.

Just wanted to ask with the Rack online doing so well, but it's really a small base, now if you've got several different online brands, can you give us a little color on what you're finding or learning and the differences are between the brands and what your strategies are from the different brands going forward?.

Hi, Paul. This is Erik. I'd say overall it's, what Blake said earlier, that our plan is to provide customers choices to shop, how they want to shop. One of the interesting things about launching Nordstromrack.com is seeing the difference in customers between that business and our HauteLook business.

The flash sale business is still a very viable business, a big business. It's one that we think is really additive to what we do and there is a synergy there, that foundation that HauteLook had allowed us to launch Rack.com much sooner than we would have been on our own. So, we're seeing synergies of those businesses in things like product.

I think our product in Nordstromrack.com has improved significantly since launch. There's – we're continuing to explore some synergies with marketing. But again there's a point – while there's some customers that go back and forth, there's – they are separate customers. Customers, some customers prefer flash.

Some categories are stronger in flash and some prefer persistence. So we really like the combination..

Interesting.

And do you think though all – do they add to your inventory turn? Do you think your inventory turn can still continue to improve?.

Yes..

Great. Thank you very much. Best of luck..

Thanks..

Thank you. And the next question comes from Paul Trussell, Deutsche Bank. Your line is now open, sir..

Good afternoon. A big chunk of your $4.3 billion CapEx plan for the next five years or is it this year.

So should we expect a kind of relatively equal balance over the next four years of say $750 million to $800 million, or is 2016 perhaps a little bit elevated as well? And also I believe that you mentioned, Mike, that these CapEx projects would be funded out of free cash flow.

So if you do successfully reach terms on the credit card, and it sounds like you're close, what's the priorities with that cash influx? Is buybacks the focus?.

Sure. Paul, first on the CapEx, as we said we expect in the forward years after this year that the CapEx as a percent of sales will start to – will be below the average of 5%. Next year should be measurably lower than it is this year, and we should see it gradually even off after that.

In terms of capital, I would just reiterate at this point in time that we've had a very balanced approach in terms of how we not only invest our capital, but also how we return it to our shareholders.

And so should we be successful with the sale of the credit receivables, then we'll apply those lenses and we'll study what the most appropriate way is to deal with that excess capital, and we'll certainly let you know what we decide..

I appreciate that.

And then I know you don't give very specific quantification or margins per segment, but just given the kind of scale and productivity levels you've reached now with the Rack, can you just kind of remind us or update us on how the margin profile of the Rack business compares to the other areas, particularly the full line, and how we should think about maybe the impact to total EBIT as the rack becomes a bigger piece of the total?.

Sure. Well, you know the Rack as we've stated in the past behaves a little differently than our regular price business, but when it comes to the contribution, the four wall contribution, it's very similar to the full line business. So as that business continues to grow, it's contributing positively to the overall earnings growth of the company.

Now that being said, as you go through the investment cycle we're going through right now, it looks a little different, but long term that has a very positive contribution. Thank you..

And our next question comes from Michael Binetti, UBS. Your line is now open..

Hey, guys. Good evening and congrats on a great sales quarter.

If, interestingly, if the – you talked about your confidence in the Rack business accelerating, maybe just a little bit more on some of the components of what you saw in the quarter relative to that slowing down? I don't know even know if anybody's asked if the West Coast port issues had any impact on you there.

And then also, you articulated some confidence in that reaccelerating through the year.

Maybe you could talk about what gives you confidence there or any of the details behind that?.

Hello, Mike. This is Blake. Regarding the port, we're no different than any other business that had some minor impact to that, but we just didn't think it was material, in particular at this later date to call out. So for us, it didn't have an impact on the figures that warranted further explanation.

In terms of the business, we talked about it a little bit. We've debated a little bit prior to the call should we go through some of the very minor nuances that maybe could have contributed to the Rack having a slight decrease. Again, we've just seen some improvement there.

We're going against from last year the best performance we had in a two-year time period in terms of the Q1.

But there were a number of little contributions that created that decrease, but we're very confident about our plans for the year and our ability to continue with the trends we've had in the past and the budget we have of low single-digits and again, we think the results of late are demonstrating that and so we feel good about it..

And then if I could just follow that up for a second, it's I would say you're one of the few soft lines companies we've seen whose sales in the first quarter came in above the plan for the year, so maybe taking a little bit of pressure off the rest of the year and hitting your targets.

If you are able to accelerate the Rack, and I don't know that you're going to tell me that you expect one of the other banners to slow down, Mike, would your – given that you've already articulated a multi-year investment plan to us, would your preference be to let some of the EPS flow through the rest of the year? Or are there few investments that you look at you say we could speed those up if things came in better than we thought?.

Yeah, Michael, I don't think any change in the sales pattern, particularly on the upside, is going to change our current game plan for the year. We've got a lot on our plate. We're running real hard to get everything done. So if we're able to generate some incremental flow-through, that'd likely be the case..

Thanks a lot..

Thank you. And our next question comes from Joan Payson, Barclays. Your line is now open..

Hi. This is Bridgette Taylor on for Joan Payson. Just a quick question on Rack.com.

What do you expect the growth of Rack.com to be going forward given we will now be wrapping the launch of the site? And then secondly, given this is a higher CapEx year, what do you expect the effect on full-year free cash flow and the cash balance by the end of the year? Sorry, what do you expect those to be?.

Hi, Bridgette. This is Erik. We don't release expectations around Rack.com's growth rates. So I'll stay away from that one..

Okay, so I guess I'll answer the second part of that. So, Mike, well this year in terms of free cash flow, I think we've said this is going to be year where we're not going to generate excess free cash flow, mostly because of our CapEx plan. By the end of the year, cash levels will be approximately where they are now.

I think they're roughly about $800 million right now. They'll probably be between $800 million depending on how the business performs..

Great. Thanks so much..

Yes..

Thank you. Our next question comes from Kimberly Greenberger, Morgan Stanley. Your line is now open..

Great, thank you so much. Mike, obviously you've got some incremental SG&A expenses flowing through the P&L for the investments that you're making in the business, including the expansion that you're engaging in. I'm wondering if you can talk to us about how to think about SG&A dollars going forward and in future years.

Should we expect any decline in future years, for example in the actual dollars being spent or is it simply a matter of growing the top line over time so that you can leverage the investments that are currently being made..

Yeah, Kimberly. Well first with the kind of growth plans we have, it's frankly tough to imagine that SG&A would decline. Hopefully, we're in a position that we continue to grow and we're funding that growth. So I don't envision SG&A declining. If you're going to get leverage, it's going to come from the top line.

We continue to look for opportunities to re-calibrate elements of our business, to make it more efficient as customer preferences are changing and that's helping us. But in terms of expectations that SG&A would decline, I wouldn't factor that into your models..

Great, thank you..

Yes..

Thank you. Our next question comes from Matt McGinley, Evercore ISI. The line is now open..

My first question is on gross margin.

Last year you had a fairly substantial decline in gross margin as it related to the competitive markdowns you had in Rack and loyalty, and although there wasn't much movement this quarter, it was up a little bit; I suspect there were some bigger moving pieces that were underneath it given the volatility you typically had in this line.

And if you could give us some color on what was the drag or were you better in merch margins or was loyalty more favorable? And then Mike I have a quick follow-up on the share repurchase question.

I understand you use a grid, but would you expect to offset the options dilution and your share count would be lower over the course of the year? Or should we expect this kind of rate that you're at today in terms of share count would be – where you'd be around at the end of the year?.

Sure. Well first, with the gross margin. There's a few things going on there. I'll tell you from a merchandise margin standpoint we're relatively even with last year. We had some deleverage in some components of the expense and some leverage in other components of the expense that make up that line.

The other thing to understand is that the Rack becomes a larger percentage total of the business. Rack has a lower merchandise margin than the rest of the business, and so you're going to have just by very nature a mixed impact of that. But our margins overall were on plan. So we felt good about the performance there.

In terms of share repurchase, we every quarter, we recalibrate our buyback matrix. We still have a substantial amount of authorization left to buy back shares, and we're still committed to a balanced approach to reallocating – to allocating that capital.

So, I think what you should see in the future would be consistent with what we've done in the past..

Great. Thank you..

Yes..

And our next question comes from Bob Drbul, Nomura Securities. Your line is now open..

Hi. Good evening. Just had a couple of questions.

On the inventory levels in terms of the 19% increase, can you give us a breakdown in the different buckets with inventory for store growth, the online growth, Canada, Nordstromrack.com? And the other question is just with how much of the inventory that used to go from the full-line stores to Rack, is that number changing? Where's it been trending recently?.

Sure, Bob. This is Mike. In terms of the inventory levels, we included on our slides there was a chart that I think directionally indicated where those increases were coming from. We didn't share exact numbers, but I think you can certainly imply qualitatively where the growth was coming from, from those slides.

In terms of Rack product that's coming from full line, Blake's going to handle that..

Yeah, so it has a function of the sell through within the full-line stores, which Jamie talked about, we're always working on to be more efficient. But as we add more stores, percentage-wise it comes down a little bit. I do think it's important to note that you should look at it as well as the full-price business and off-price business.

So as we have a more robust e-commerce business in full price, there's a portion of goods there too that we clear through the Rack. So, it's not just a function of store count from full line to Rack..

Again, thank you for joining today's call. A replay along with a slide presentation and today's remarks will be available for one year on our website. Additionally, you'll find an overview of our performance at the end of the slide presentation. Thank you for your interest in Nordstrom..

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