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

Kimberly Conroy Greenberger - Morgan Stanley & Co. LLC Matthew Robert Boss - JPMorgan Securities LLC Oliver Chen - Cowen & Co. LLC Dorothy Senghas Lakner - Topeka Capital Markets Stephen Grambling - Goldman Sachs & Co. Paul E. Trussell - Deutsche Bank Securities, Inc. Lorraine Maikis Hutchinson - Bank of America - Merrill Lynch Neely J. N.

Tamminga - Piper Jaffray & Co (Broker) Mark R. Altschwager - Robert W. Baird & Co., Inc. (Broker) Jeffrey Stein - Northcoast Research Partners LLC Edward J. Yruma - KeyBanc Capital Markets Michael Binetti - UBS Securities LLC Brian Jay Tunick - RBC Capital Markets LLC.

Greetings, and welcome to the Nordstrom First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will begin with prepared remarks followed by a question-and-answer session. As a reminder, this conference is being recorded.

At this time, I will turn the call over to Trina Schurman, Director of Investor Relations for Nordstrom's. 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 to 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 and the outlook for fiscal year 2016.

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

Thank you, and good afternoon. For the first quarter, we had a sales increase of 2.5% and a comp decrease of 1.7%, which fell short of our plan for a low-single-digit increase. Despite our focused efforts to manage through this current environment, we are not satisfied with our results.

Given these sales trends, our inventories were too high, which puts pressure on our margins and necessitates additional markdowns. Our team has aggressively addressed our inventory position, and as a result, we ended the quarter with inventory up 5% versus sales growth of 2%.

For the balance of the year, our lowered inventory plans puts us in a much stronger position to manage the business more proactively. In addition to our inventory management efforts, we're continuing to evolve our operating model to support our growth strategy.

On April 18, we announced expense reduction efforts, predominantly here in our Seattle headquarters, of $60 million. This includes elimination of approximately 400 roles, which is about 7% of our corporate positions. This will improve our focus and execution and make us more nimble to respond to the business environment.

Later, Mike will share more on our expense reduction efforts. As we look at the balance of the year, we are actively implementing a number of initiatives to drive top-line growth and improve the customer experience.

On May 18, we're rolling out an expanded Nordstrom Rewards loyalty program that will allow all of our customers to earn rewards with or without a Nordstrom card. Our Rewards customers are many of our most loyal and best customers, spending four times more annually.

Today, only about one out of five customers are part of our program, yet their spend contributes roughly 40% of our sales. This opportunity to reward all of our customers is big. Over the next 12 months, our goal is to add 5 million customers to our program.

This will drive more sales and trips, and more importantly, it will enable us to better engage with our customers. On the technology and e-commerce side, we are investing to create a more seamless experience across stores and online.

This reflects continued modernization of our technology platform, including a scalable merchandising solution as well as service and experience features. These are significant projects. They account for two-thirds of our overall technology investments this year.

We're building on the continued success of our Canada expansion with two full-line store openings in Toronto this fall. With Toronto representing the most productive market in Canada and one of the top markets in all of North America, we see this as a significant opportunity.

We believe these stores have the potential, along with our international flagship in Vancouver, B.C., to be among our highest volume stores. In the U.S., we plan to open our second full-line store in Austin, Texas, which is a dynamic and growing market. Our strategy remains squarely focused on serving customers on their terms.

Knowing customers' desire and experience is both personalized and convenient, we are making improvements to enable our customers to shop seamlessly any way they choose. In our stores, our overall focus is to improve convenience.

As a recent example, we enhanced the buy online, pickup in store experience by providing curbside pickup in all of our full-line stores. Additionally, we are upgrading our scheduling tool to support our team's efforts to ensure we have the right people in the right place at the right time. This will help improve customer service and productivity.

On the merchandising side, we are dedicated to having the brands customers want, with a keen eye towards product differentiation. We know customers desire newness in fashion but are being more deliberate with their purchases.

We are seeing great results from our recent collaborations, such as IVY PARK, Topshop, Madewell, Brandy Melville, and Charlotte Tilbury. We will continue to introduce and grow relevant brands that are compelling to our customers while having limited distribution.

Moving to off-price, Nordstrom Rack represents an important channel for us to serve more customers and increase cross-shopping. Last year, 5 million new customers shopped at the Rack. This is meaningful because over one-third of our Rack customers will over time also shop in our full-price business.

We've been pleased with our six stores that have opened so far this year. Their sales exceeded our expectations by more than 10%. We plan to open 15 more new stores this fall. In closing, we recognize that the pace of change is increasing, so we're working diligently to evolve our business to best serve our customers.

This means continuing to make the tough but necessary decisions that will ensure we are set up for continued success. We are confident that through our initiatives, we are competitively positioned to deliver the products and experiences our customers want.

I'll now turn it over to Mike who will provide more color on our performance along with details on the changes we are making to our business..

Thanks, Blake. As we head into the balance of the year, we expect that uncertainty in sales trends will continue and have built that into our outlook. We are implementing comprehensive plans to ensure that we can execute levers around inventory, expense, and capital, all while maintaining our strong financial position.

These plans also incorporate our commitment to liquidity and working capital needs by optimizing our inventory turns. We are aggressively prioritizing our resources to assure that every dollar spent is meaningful to the customer experience, and we'll continue to challenge activities that are not.

Now I'll provide additional color on our first quarter performance. Our earnings per diluted share of $0.26 were below our expectations, primarily due to lower sales volume and higher markdowns as we align inventory to current sales trends. Our results also included credit charge-backs and severance charges of $0.10.

These charge-backs, which were significantly higher than planned, related to an industry change in liability rules that took effect last October. In early February, we completed the rollout of our chip-enabled point-of-sale system.

As a result, we have begun to see these charge-backs decrease and anticipate a smaller residual impact in the second quarter. Moving to the top-line, we had a comp decrease of 1.7% and total sales increase of 2.5%. Our full-price businesses, which include our full-line stores, Nordstrom.com, Trunk Club, and Canada, had a comp decrease of 4.3%.

This softness was broad-based across stores and online as well as across merchandise categories, although we had notably tougher trends in jewelry and handbags as well as some of our larger volume brands.

On a positive note, we continue to see customers desiring fashion and newness, reflected in consistent regular price selling as well as strength in our new and emerging brands. Our off-price business, including stores and online, had a comp increase of 4.6%. In addition to inventory management, expense rigor is a key component of our plan.

We are making strategic decisions to invest in our future growth while focusing on areas where we can further streamline. We continue to move forward with our emphasis on technology as a top priority, committing one-third of our capital investments.

In March, after considerable planning, we implemented a new technology operating model which included adding technical expertise at the senior management level. We are confident that these improvements will lead Nordstrom's next phase of growth and innovation while continuing to optimize productivity and reduce complexity.

We are also executing on a number of initiatives to increase efficiencies across our supply chain and marketing functions. In our supply chain, we have an ongoing opportunity to improve the unit economics of product delivered to customers.

We are refining our online assortment through greater focus on key brands and categories while editing less profitable items.

We're also improving our merchandise allocation process between stores and fulfillment centers, leading to a reduction in split shipments, lower cancellation rates, and better in-stock positions, all of which ultimately improve our customer experience.

Similar to our efforts with technology, we are taking steps to increase marketing effectiveness across our enterprise. All of these changes are part of the broader ongoing efforts in improving our operating model.

Through our actions, we expect to generate this year over $150 million in expense savings inclusive of $60 million from our corporate realignment efforts. We continue to explore further opportunities to maintain flexibility in responding to changes in business conditions and customer expectations.

Our third lever in addition to inventory and expense discipline relates to capital deployment and allocation. Given the changes we are seeing in our industry, we are in the final stages of a thorough review of our five-year capital plan. This includes prioritizing our investments to achieve our stated goal of mid-teens return on invested capital.

We will provide updates on these plans once they are finalized. Now, I'd like to address our financial outlook. In updating our plans for the remainder of the year, we feel it is appropriate to realign our outlook given the uncertainty in trends and expectations for a continued promotional environment.

Comp sales are expected to be between a 1% decrease to a 1% increase compared with our prior outlook of flat to a 2% increase. Our earnings per diluted share expectation for this year is $2.50 to $2.70 compared with our prior outlook of $3.10 to $3.35.

In closing, while the pace of change continues to accelerate, our commitment to serving our customers remains unchanged. With our experienced leadership team, we are confident in our ability to manage through this current cycle.

We maintain a healthy balance sheet and cash flow that will support the best interest of our customers, employees, and shareholders over the long-term. Now, I'll turn it over to Trina for Q&A..

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 will now move to the question-and-answer session..

Thank you. Thank you. Our first question comes from Kimberly Greenberger from Morgan Stanley. Please proceed with your question..

Great. Thank you. Mike, I'm wondering if – as you're reevaluating your financial targets here for 2016, if you have taken another look at your five-year capital plan to see if there might be an opportunity perhaps to cut back or redeploy some capital that you had previously targeted for that five-year plan. Thanks..

Sure, Kim. Yeah, thank you for your question. I did mention in our comments that we are going through a thorough review of the capital plan which will result in a reduction of that plan. We haven't articulated that specifically yet. We're reviewing it with our board next week. And after we complete that discussion, we're happy to share it..

Totally understood.

Are there any sort of overarching strategies or any new insights that you're bringing to bear as you go through those discussions that might just sort of help us understand how you are evaluating your capital opportunities?.

Well, I think, clearly, as we've been talking for the last couple of years, we're seeing a transformation in our business model. The e-commerce element continues to grow at a good pace and the impact of technology in digital on the customer experience continues to accelerate.

So that would imply our commitment to technology and fulfillment and the things that continue to support that business is going to be something we're going to stay very strong on. On the other side, we continue to see traffic falling off in malls. And how we think about our store-based asset will probably require some level of adjustment.

So I think fundamentally that's how we're thinking..

Thank you. Our next question comes from Matthew Boss from JPMorgan..

Thanks, guys. So I just wanted to hear your thoughts on the roughly 10-point spread this quarter between Rack and full-line comps.

What do you think off-price is delivering that full-price department stores just seem to be missing? And as we think about the lower run-rate at Nordstrom.com this quarter, how do you accelerate traffic online, and anything to account for the moderation that we saw over the last three months?.

Matt, this is Blake. I'll take the first part of that. I think, first of all, we would emphasize the online off-price part of that business, which comprises of HauteLook and Nordstromrack.com. And that's a newer business for us. It's been on a pretty steep curve.

We have a much more mature business on the full-price side of it, and so that's been contributing greatly. And then the Rack has had a pretty consistent performance for some time. It, along with our other businesses, saw a little bit of softening in Q3 and Q4. And we were pleased in the Rack stores to see it get closer to trend in Q1.

So the off-price business is more about a consistency with our trends and our plans. And there are some challenges and some headwinds in the full-price business that, I think, Erik can add a little bit to..

Yeah, I can give you some context on the drop-off in our Nordstrom.com business. Two categories I'd want to share with you. Number one, if you're looking at customer behavior, our conversion is up, our customer acquisition, retention, AUR are all pretty much in line with our budget. Where we saw drop-off was on trips.

We had fewer trips come into our website last quarter. The second category that sheds some light in looking at regular versus off-price business on our Nordstrom.com site. Our regular price demand is up in the mid-double-digits and has remained healthy for quite some time.

Where we're seeing a big miss is in our clearance and promo – promotional business. So what we take away from that is, number one, the clearance and promotional environment is really noisy. There's a lot of excess product out in the marketplace. It's certainly easy to shop online. There's some heavy, heavy discounting going on.

And we're seeing that effect in our business. Secondly, the customers are coming to us for newness and a great experience. And that portion of our business remains pretty darn healthy.

So that – looking forward, what gives us confidence and what we're determined to stay focused on is giving customers great merchandise, a reason to come and buy something new, and give them a great experience. And I think it was in Blake's comments earlier, mentioned some of the brands that we're doing well with.

That's more of what we see in our future, something like IVY PARK that we launched, a very limited distribution brand. We had great performance on that online and in our stores. The experience online was something we're pretty proud of and was a differentiated experience.

And where we saw a lot of weakness, it was in some very highly promotional brands that we had tough results with this quarter. So that's what we're seeing..

Thank you. Our next question comes from Oliver Chen from Cowen & Co..

could you just elaborate a little bit on the direction strategically, what that implies and if it's related to what you mentioned about larger volume brands being a little tougher? Just curious about what that means for strategy, those pieces. Thank you..

Okay. This is Erik. On price matching, it's – the cause and effect is a little clearer online in our stores, the price transparency that the Internet provides.

And we have been more purposeful for, I'd say, the last couple years of matching price on products online, really for big online retailers, wherever they may be because there is no regionality to e-commerce. And that has served us well in gaining trust with the customers.

We do not look to price matching or price promotion in any way as being a big strategic lever and a way of driving our top line. We look at price matching as a customer respect and a customer trust issue; that when a customer comes to us, they know that they're being treated fairly.

And we think the clearest way of doing that and what customers expect is to not pay more for a specific item when they're shopping with us. So that's served us well in establishing that trust. We know from hearing our customers that they do have more confidence in our pricing than even just a couple of years ago.

But strategically, where we're looking to win long-term is – at full-price, is with newness which, as I mentioned, I think is increasingly with more limited distributed brands that really excite the fashion customer and gets them to look for something new..

Oliver, the second part of your question on the unit profitability. There's a couple of elements of that. One is just our – better understanding the breadth of our assortment.

One of the ways that we've been able to expand and grow our online business is through expanding the assortment and, at the same time, we also found that through expansion, some of our price points got to some lower levels; that it becomes more difficult to make money on. So we're evaluating that.

We've also done a lot of work to eliminate split shipments. Clearly, if you have to pay a delivery charge on a split shipment, it cost you more than if it goes in one shipment. So as we've grown and learned more about this business, we're finding ways to be more diligent and specific about understanding those levers and making some progress on that..

Our next question comes from Dorothy Lakner from Topeka Capital Markets..

Thanks, and good afternoon, everyone.

Just wondered if you could talk a little bit about some of the other strengths or maybe weaknesses in the assortment and some of the things that you're doing to continue to bring that newness to the customer, whether it be through expanding Madewell, bringing in IVY PARK or also, you've had so much success with Nordstrom Product Group product recently.

I just wondered if you could maybe speak to the changes that you're making to the assortment to continue to excite the customer. Thanks..

This is Pete. You answered that question well, actually. Those are all things that we're doing. So, yeah, I think the thing that should be kind of hopeful and promising to all is we still have good examples of product that comes in and performs exceedingly well. It's not like there's a malaise over everything no matter what.

It's just that's not the case. We've had good success, as we've talked about, with Topshop that continues on. Brandy Melville's been really good, Madewell, Charlotte Tilbury, IVY PARK.

Anywhere where we can work with the brands and to do something not necessarily entirely exclusive but somewhat limited to our stores around a brand that a customer has confidence in and interest in. That's a great formula for us. So the thing that we have going for us is we've had some success with these things.

There are people in the industry that are interested in working with us. And we're big enough where we can create some special programs that it can be really compelling to a vendor.

So we've found that most of our talks with the brands and the vendors have been positive about the things that we can work on together to help us stimulate interest with the customer. So we continue on with that journey.

We're going to be pragmatic and conservative with our plans, but we're going to be aggressive about trying to figure out new ways to get customers excited..

Does that mean that you pull back on some maybe bigger brands that are very heavily promoted in order to kind of get out of that whole frenzy?.

Yeah, well, it was alluded to in what Mike and Erik talked about. There's some businesses that we've been in, whether it's a specific item or brand, that might be pretty good to the top-line, but over time, it may not be particularly good for the bottom-line. So we've got to reconcile those issues.

And there – you heard us mention, there's some big brands that we have that have had some precipitous declines. A lot of that's related to promotion and how that's adversely impacted that brand with our customers. So, yeah, I mean, the good news is, is if you're a buyer here at Nordstrom, that creates some open-to-buy.

It creates an opportunity to try some new vendors, some new programs, some new things. And so, brands are an important part of what we do, but if they're offering, and the way things are going with certain brands, are damaging to our brand, then, obviously, we've got to figure out alternatives and different things to try. And so that's part of it.

You heard about these brands, and you mentioned our own label product, the Nordstrom Product Group, which has been really pretty strong for us relatively as well. So we will continue on that path..

Our next question comes from Stephen Grambling from Goldman Sachs..

Hey. Good afternoon.

I guess just as one quick follow-up to Oliver's question, are you seeing any change in the percentage of transactions that are actually price matched in-store?.

It's a good question.

Jamie, do you know that?.

I don't know if we know that exact number at the moment..

Yeah..

So maybe if I can sneak another one in there....

We'll have to (26:13) Yeah, Steve. Yeah, go ahead. I'm sorry, Steve. No, we didn't have the exact answer for you, but we can get back to you on that one..

Sounds good. So I guess you also mentioned the more promotional environment. How much of that is being driven by kind of the traditional competitors, the traditional promotional cadence, versus either brands now trying to go direct or even e-commerce? And are there any kind of mitigating factors you have from brands going direct? Thanks..

Yeah, this is Pete. It's both. It's the traditional competitors, and it's the fact that all these brands are retailers as well. Everyone finds themselves in a tough environment, and they're doing what they can to stimulate sales. And I think it just depends on your customer.

For some, I guess that means price promotion is a lever that's going to really compel their customers. I think what you're hearing from us is that's not the most compelling lever for our customers.

So what can we do about that? Again, I think we're big enough where we matter to brands, and so we can have conversations about how to run a healthy business and the choices that we have. The other thing that we have going for us is brands like our customers.

We've got a lot of the kinds of customers that they want to appeal to, and we have good customer data, and we can be transparent about that with our brand partners, we can usually work towards solutions that are going to work well. So I – we've got a lot of things going for us that I think put us in a position where we can do something about this..

Thank you. Our next question comes from Paul Trussell from Deutsche Bank..

Hey, Mike.

Could you just dig into the margins a bit more for us? Just given the current inventory levels, what kind of assumptions are you – or we should be making regarding continued merchandise margin pressure into the second quarter? Also, how should we think about the Anniversary Sales shift impact to 2Q and 3Q? And then moving towards SG&A, what are the adjustments – given the adjustments that you're making, how should we think about the cadence of expenses? It certainly seems like it was still at an elevated level here this quarter..

Sure. Well, Paul, thanks for your questions there.

Starting with the margin pressure, I mean, clearly, we haven't specifically broken out those line items, but based on the fact that we are in what is a typical down-cycle where demand is soft, we're going to keep the pressure on ensuring that our inventories are turning, they're turning healthy, we maintain liquidity, and we continue to bring new goods in.

So that will pressure margins. And we have made assumptions within our outlook that include that. As far as the A Sale impact, the impact to the EPS is probably a couple cents shift between the second quarter and third quarter and about a 200 basis point shift out of Q2 into Q3 for comps.

And just so everybody understands that, every several years our Anniversary Sale, the last week of that falls into the third quarter. This is a year where that happens. So you're going to see the shift that relates to that. In terms of SG&A, again, we haven't broken that out by quarter or specifically by line item.

But I will say that we've already begun to see the impacts of the things that we are talking about. We expect the impacts of those elements to continue to improve as the year progresses..

Our next question comes from Lorraine Hutchinson from Bank of America Merrill Lynch..

Thank you. Good afternoon. How much of the....

Hi, Lorraine..

Hi.

How much of the product in the store would you say is limited or exclusive to you? And how big do you think that could get over time, if that'll be the key differentiating factor for the stores? How much of the store do you think you could get that to?.

Yeah, it's limited. It's a range. So I would say in terms of stuff that's relatively limited or completely exclusive, it's probably maybe a third of our offer. Maybe a little bit more, it's hard to say.

The thing is we're still a house of brands and one of the strongest elements that we have to compel ourselves to customers is the breadth of what we have to offer, and brands really lead the way for that. So I think it's important that we don't manage with a blunt instrument. It takes a lot of finesse.

And I think it's important that we're always out there in the market looking to buy the best of what the market has to offer. And then we can kind of work as time goes on on how to be meaningful enough to that brand where we can have a collaborative thing that works well for both of us.

So we're pretty open, but again, ultimately, we want to make sure we're doing business we think could be profitable over time. So we can work on that more and it's become more and more of an important issue as time's gone on..

Thank you. Our next question comes from Neely Tamminga from Piper Jaffray..

Great. Thanks, guys..

Sure, Neely..

Okay.

So if we looked at your 2016 Triple Points Event as kind of a proxy for your most loyal customers and their behavior, are you seeing more stability in the top-line performance on those kind of days, Triple Points versus what you just reported so far this spring? And maybe is it the lulls kind of in between the events that are causing more of the comps decline? We're just trying to get a sense of your truly most loyal customers and how they're feeling and how they're behaving.

Thank you..

Sure, Neely. This is Mike. Thanks your question. We still see the penetration from our Nordstrom Rewards customers at roughly the same level, a little better than it was last year. In terms of the events, I wouldn't say that there is a material change in how we're seeing event versus non-event periods.

I will say that our last Triple Event, the timing of it probably wasn't the best, and so we're making adjustments for that. We're super-excited about the non-tender. There's a couple elements about the non-tender program I think that give us a lot to look forward.

One is, as Blake mentioned, there's an opportunity to engage in a whole another pool of customers and to bring them into our loyalty program. And we have seen over time a multiple increase in spend, roughly four times spend and three times more trips of those that are engaged in our loyalty program.

And the other element of it was I think more on an operational side, and that is we really learned a lot about how to develop a good customer experience. As a matter of fact, an outstanding customer experience as we went through the development of this tool. And so, we're really excited about that. We're looking forward to our customers using it.

We believe it's very simple to sign up and simple to use and will further engage a lot more folks into our Rewards program..

Our next question comes from Mark Altschwager from Robert W. Baird..

Good afternoon. Thanks for taking the question. Nice sequential improvement in the Rack comp.

Can you talk more about the drivers there? Just curious to what extent did higher inventory transfers from full-price perhaps boost conversion or UPT in Rack? And to the extent that you're able to reduce full-price receipts given the softer sales environment, would that be a potential headwind on the Rack store comp as you progress through the year?.

Mark, this is Blake. It's hard to point to one thing that was material enough that moved those sales. As I mentioned earlier, we're working on a number of issues. We did see, overall, an improvement. Part of the Rack's mix is the full-line store transfer merchandise you talked about.

And that's up slightly because as we get this clearance rises, markdowns rise, and we're getting almost kind of clearance fatigue for some of the customers that are not as motivated on this merchandise, it's causing us to have to take markdowns sooner and steeper in some cases to clear it. That's moved up a little bit at the Rack.

The Rack has a balance of closeouts from our top vendors along with this full-line store merchandise. Again, we're just pleased overall that it improved.

We think we are taking the necessary steps with our inventory planning within the off-price division to be fluid for what's available in the market because there's more product out there in both to ensure that we're in a position to open-to-buy and flexibility for what comes our way from our full-price channels both in dot-com and full-line stores..

Thank you. Our next question comes from Jeff Stein from Northcoast Research..

Just a couple ones real quick. First of all, wondering if you can tell us what the comp store sales were for the brick-and-mortar stores only for full-price, off-price.

And secondly, since you entered Canada, we've seen some changes up there in terms of the economic outlook with lower oil prices, higher unemployment, and now there's some discussion about a housing bubble in Canada.

Any concerns about how that might affect your expansion plans and the performance of the stores you've opened so far up in Canada? Thank you..

This is Jamie. I'll start with the Canada question. Our entry into Canada has gone really well. We are now a year and a half into – since we opened in Calgary. We opened our first international flagship in Vancouver last fall. We're also in Ottawa. And, as Blake mentioned, we're excited about the two stores we're opening in Toronto this fall.

Yeah, there's been a lot of talk about different macroeconomic issues in Canada. I will tell you we've not seen a material impact from those, particularly in Calgary, which has a big concentration around the energy industry. We may have seen a couple of slight impacts, but overall, our business there remains strong.

And we're really encouraged by the overall customer reception we've had to our stores and on our merchandise mix and our service. And so despite what I think we've all read about Canada, we're really encouraged about both the medium- and long-term future there..

And, Jeff, you mentioned – this is Blake – about future, does it affect future growth plans in Canada, we've committed to six stores and we think we're in the best markets there. As we mentioned, we've got the two in Toronto this year and we have our final store, our third, which will be Toronto in 2017. We don't have any other plans.

We're excited about these six stores that are in the best spots and doing the best job we can in those communities. I think there was an additional question there as well..

Yeah, comp store sales in full-line..

Yeah, I'm not sure if we broke those out in the....

We did..

We did?.

Yeah..

Where are they? Oh, they're right there..

Yeah, we're down 7%..

Okay. So for full-line stores, it was down 7.7%, and Rack was down 0.8% on a comp basis..

Thank you. Our next question comes from Ed Yruma from KeyBanc Capital Markets..

Hey, guys. Thanks for taking my questions. I guess first....

Sure, Ed..

...on expanded loyalty program, how do we think about the gross margin impact and is this reward going to be materially different than those that have the credit card? And then I guess second, you guys mentioned you would look at store closures, would that be within the context of lease expirations or do you have a cohort of stores that are underperforming that you would consider terminating them ahead of lease renewal? Thank you..

Sure, Ed. This is Mike. In terms of the loyalty program, we have factored in, we haven't broken out at this point specifically the impact of the gross profit, but we have factored that into our outlook.

The non-tender program has a lower value element to it than the tender one does, and so we don't expect it to have the same impact from a margin standpoint. And we're certainly hoping that it has a very favorable impact from a loyalty and long-term sales benefit..

And on store closures, we have closed a small handful of stores over the last several years, and those were really all tied to lease expirations and the expiration of covenants. All of our stores are profitable. They all make money. So it's really not tied to performance; it's tied to when a lease or a covenant expires.

We take a look at the long-term future of that store and that shopping center.

And in some cases, we've found that by moving to a better location in that same town, in that same market, like we experienced recently in Los Angeles, we moved from South Bay Galleria to Del Amo Shopping Center about three miles away and we're having really good results there.

And so, we're looking at those individual markets, nothing – no plans to announce now, but we are taking a look at them, and we think that there's going to be positive opportunities over time..

Thank you. Our next question comes from Michael Binetti from UBS..

Hey, guys. Good evening..

Hi, Michael..

Just a quick modeling question, Mike. The restructuring charges and the credit charge-back, how much of that account for in the change in the guidance for the year? Could you help us just directionally think about that as an incremental data point? And then if I could ask a quick follow-up.

We were surprised to see kind of a large shift lower in the retail EBIT guidance, given a relatively small one-point change in the midpoint of the comp guidance. You guys have historically had some advantages in fixed versus floating SG&A because the big sales commission line in your cost structure.

I mean has the leverage point on SG&A really changed that much this quickly, or can you walk us through some of the items that seem to be delevering pretty hard in the new guidance versus the old?.

Sure. Thanks, Michael. First, the first part of your question, the impact of the restructuring charges and the credit card charge-back activity was $0.10 or $30 million of pre-tax earnings for both the – primarily for the quarter and there's probably maybe a $0.01 or $0.02 impact in addition to that for the year.

In terms of the leverage point, I think what you're seeing is that we continue to invest in the long-term growth of the company, which is having an impact on the leverage of the company. And primarily, a lot of that is coming from the accelerated pace of the technology investment.

Those dollars for the development of the tools that we're putting into place in the foundations that we're building not only come to the P&L but they go to our balance sheet and then find their way through the P&L relatively quickly. So that's a big element of it.

The other element, if you may recall, we opened the East Coast fulfillment center last fall. And so, we're still absorbing the incremental impact of the cost of that asset. So I would categorize the ability to leverage going forward as being more about the overall investments that we have made from an SG&A standpoint.

And, of course, in addition to that, we're seeing some pressure on our gross margin..

We'll now take one more question..

Our last question comes from Brian Tunick from RBC..

Thanks very much, and good afternoon. My question really was on the full-line store comp decline, the down 7.7%. Was just hoping you could give some perspective. I guess a lot of us think your small store base, located primarily in any malls would certainly buck what we're hearing about other mall traffic trends.

So it's been obviously many years since you've put up that kind of comp decline. You've had a couple more months now since energy and tourism have slowed.

Do you have any more perspective on what's happening at your full-line stores right now?.

Yeah, Brian, this is Jamie. I think it's been pretty well documented out there that mall traffic overall has been soft over the last probably couple quarters – we've seen some data recently over the last month or two that it was down, approaching double-digits. And we notice that. We are in – we're primarily in malls.

And when we see mall traffic go down, it hurts us. And we can see that in certain areas of our business. Clearance sales is a good example of that. While our full-price, regular-price sales have been hanging in there, our clearance sales over the last quarter or two have really been down. And I think that jives with mall traffic being off.

So we're looking at how can we, regardless of the mall that we're in, give the customer a compelling reason to make a trip to the store? Obviously, that starts with the merchandise, but also has to do with the kind of services that we're offering.

And we mentioned we're making big improvements in things like the buy online, pick up in store experience, things that we're doing online that flow into the store and vice versa.

And so, we're encouraged by things that we have in our control to compel customers to want to go come to the store, and we're excited about starting to leverage some of the investments we've made over the next year or so in creating some of these new customers experiences..

Again, thank you for joining today's call. A replay, along with the slide presentation and prepared remarks, will be available for one year on our website. Thank you for your interest in Nordstrom..

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