Trina Schurman - Nordstrom, Inc. Blake W. Nordstrom - Nordstrom, Inc. Michael G. Koppel - Nordstrom, Inc. Peter E. Nordstrom - Nordstrom, Inc. James F. Nordstrom - Nordstrom, Inc. Erik B. Nordstrom - Nordstrom, Inc..

Matthew Robert Boss - JPMorgan Securities LLC Lorraine Maikis Hutchinson - Bank of America Merrill Lynch Research Jeffrey Stein - Northcoast Research Partners LLC Neely J. N. Tamminga - Piper Jaffray & Co. Gregory W. Baglione - Morgan Stanley & Co. LLC Cody T. Ross - Wolfe Research LLC Paul Trussell - Deutsche Bank Securities, Inc. Mark R.

Altschwager - Robert W. Baird & Co., Inc. (Broker) Bilun Boyner - RBC Capital Markets LLC Robert Drbul - Guggenheim Securities LLC Edward J. Yruma - KeyBanc Capital Markets Inc./Pacific Crest Securities Richard Jaffe - Stifel, Nicolaus & Co., Inc. Tracy Kogan - Citigroup Global Markets, Inc. (Broker) Oliver Chen - Cowen & Co.

LLC Michael Binetti - UBS Securities LLC Edward McLaughlin - Goldman Sachs & Co..

Greetings, and welcome to the Nordstrom Third 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'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. 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 third 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..

Good afternoon, everyone. Our third quarter results reflected our team's substantial progress in making both adjustments to align to current business trends and longer-term changes to our business model. Before we get started, I'd like to first address the write down related to Trunk Club.

In August 2014, we acquired this startup as a new channel to serve customers in a personalized and relevant way. Unfortunately, the business has not performed to the expectations we had when we acquired it, and as a result, we have reduced the value of that asset.

Trunk Club continues to be well in line with our customer service commitment and value proposition. We remain committed to this business and view it as a part of our customer strategy. Mike will later discuss the adjustments we are making to assure its future success. Now, I'd like to move on to our third quarter performance.

From a top line perspective, our third quarter benefited from one week of our Anniversary Sale shifting into the quarter. This shift contributed to a comp increase of 2.4% over last year. To get a better sense of underlying trends, the combined second and third quarter comps were up 0.4%.

This is consistent with the trends we've been seeing over the past year. As the pace of customer expectations continues to accelerate, it's even more important for us to remain focused on the customer. We are in the midst of evolving our business model to better support shifts and how our customers are shopping with us.

While this is a continuous journey, we've made considerable changes in the way we operate to improve the customer experience and increase our productivity. We are extremely proud of our team's efforts over the past year to align inventories and gain greater efficiencies.

These outcomes have positively impacted our third quarter results and adds to our confidence as we continue to make improvements to our operating model. Our strategy is squarely focused on serving customers on their terms with the high level of product and service they expect from us.

This quarter, we have executed on a number of initiatives to better serve customers and drive top line growth. In our Nordstrom brand, we achieved another milestone related to our Canada expansion with two successful store openings in Toronto at Eaton Centre and Yorkdale Centre.

With Toronto being the fourth largest market in North America, we believe these stores will be among our top volume stores. They are in outstanding locations and we're excited about their potential. We now have five stores open in Canada and look forward to opening our sixth, also in Greater Toronto area at Sherway Gardens, next fall.

In the U.S., we had a successful opening of our second store in Austin, Texas at The Domain. Our Rack business serves as a great way of attracting new customers to Nordstrom. We expanded our reach with 15 new stores this fall for a total of 215 Racks.

These stores are complemented by our NordstromRack.com and HauteLook businesses, which are expected to reach over $700 million in sales this year. Offering a curated product assortment is an integral element of our customer strategy. In the third quarter, we launched new collaborations with J.Crew and denim brand, Good American.

Also in collaboration with Nike, we rolled out a women's lifestyle concept shop in our Downtown Seattle and Eaton Centre stores, followed by our Michigan Avenue store later this month. Through these partnerships, we were able to give our customers compelling product that has limited distribution. We have an unwavering focus on serving customers.

This approach guides us on how we set our priorities, allocate resources and accelerate the speed of our execution. As we head into the holiday season, we are planning the business consistent with the sales trends we've been seeing over the past year.

On the inventory and expense side, we have strong momentum in place and remain committed to continuing our progress to ensure we're best positioned to manage our business. Now, I'd like to turn it over to Mike..

Thanks, Blake. Our third-quarter results demonstrated the progress we are making to improve our operating model. Over the last year, we have been addressing not only the challenges of top line trends, but the longer-term impacts of operating a fast growing ecommerce business.

In this quarter's performance, we realized operating leverage generated by these adjustments, in particular from inventory and expense. We will continue to identify opportunities to improve our longer-term performance as our business continues to evolve.

Before providing more color on the quarter, I'd like to also address our plans related to Trunk Club. As Blake mentioned, because of our revised performance expectations, we recognized a non-cash impairment in the Trunk Club goodwill of $197 million.

While we have reset our performance goals, we continue to believe that Trunk Club provides us with unique customer experience that we can build upon. To that end, we are making a number of improvements to better serve customers. The initial results have been favorable for our customers and improved our economics.

To help give Trunk Club customers a broader selection of brands, we are also integrating supply chain and fulfillment capabilities over the next year. We anticipate that these, and other changes we're making, will drive continued growth and improve Trunk Club's results going forward.

Moving to our third quarter performance, our top line trends were generally consistent with what we've experienced over the past year. We've continued our progress in growing relevant brands that have limited distribution.

In our full-price business, our top 20 fastest-growing vendors, which includes many of the brands with limited distribution and our private label business, collectively grew 20% in the third quarter.

In response to the changes in consumer demand, we aggressively aligned our inventory plans and made significant progress in stabilizing our operating margins over the past two quarters combined. We ended the third quarter with a positive spread between sales and inventory growth.

Inventories are well positioned and current as we head into the important holiday season. Stepping back, we've made strategic investments over the past five years to meet changing customer expectations. This enabled us to grow our top line by 50%.

As we move forward, we will continue to adapt our operating model to provide an exemplary customer experience and deliver long-term profitable growth. This year, we've made tremendous progress in right-sizing our expense trajectory through increased efficiencies across our enterprise capabilities.

This includes our efforts to expand our digital experience, which is enabled through technology. For example, we've upgraded a vast majority of our website platform, which allows us to accelerate the continuous delivery of new customer-facing features.

From a productivity standpoint, we've prioritized our investments toward modernizing our infrastructure and implementing the highest value customer experiences. In supply chain, we have implemented a number of initiatives focused on improving the customer experience and reducing per unit cost.

Based on these efforts, we are on track to achieve savings of roughly $50 million in shipping and fulfillment costs this year. In marketing, our expanded Nordstrom Rewards loyalty program represents a meaningful opportunity to directly engage with customers, drive customer lifetime value and increase the efficiency of our marketing spend.

Since the launch of our non-tender offer in mid-May, we now have more than 7 million customers in our overall program, up over 40% from a year ago. In the third quarter, the spend from our loyalty customers made up 45% of our sales, which increased around 600 basis points from last year.

Finally, I'd like to provide additional color on our financial outlook for the year. Excluding the impairment charge, we've raised our full year earnings per share outlook to $2.85 to $2.95 from our prior outlook of $2.60 to $2.75 to incorporate third quarter results.

From a top line perspective, we anticipate a continuation of trends yielding flat comps for the year. In closing, we will continue to aggressively prioritize our resources to ensure that we provide a relevant, best-in-class experience for our customers while achieving profitable growth.

Through our ongoing efforts, we are confident that Nordstrom will remain relevant to customers now and in the future. I'll now turn it over to Trina for Q&A..

Thanks, 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 Q&A session..

Thank you. Thank you. Our first question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question..

Thanks, guys. So gross margin performance this quarter, the best in over five years.

Mike, if you broke down the 100 basis points here in the third quarter, what was the underlying merchandise margin trend? Any impact from the Trunk Club change? And just the best way to think about ongoing opportunity into the fourth quarter and beyond?.

Yeah, sure, Matt. Well, thanks for your question. Of the improvement in the gross profit line, roughly a third of it was direct from merchandise margin performance. The balance was leverage we're getting on sales and the buy-in and occupancy cost.

The story is pretty consistent with what we started to see as we've aligned inventories, not only our inventories but inventories around the industry. There's less promotion out there. We have less excess inventory, so we're seeing more stability in margins.

I think in terms of how we feel going forward, we've reflected that in our outlook, and certainly, any variance from the outlook would be determined by how we perform on the top line..

Great. Best of luck..

Okay, Matt. Thanks..

Thank you. Our next question comes from Lorraine Hutchinson with Bank of America. Please proceed with your question..

Thank you. I wanted to follow up on SG&A. I was wondering which initiatives drove the 70-basis-point positive variance in the quarter.

And also would you expect similar leverage in the fourth quarter?.

Yeah, Lorraine, this is Mike. We didn't really break out the elements of that 70 basis points. I will tell you collectively, we've seen some great progress amongst those three main areas that we called out as well as just generally operating our business in the core every day element of it.

In terms of what we see going forward, again, I will give a similar answer as I did with gross profit. We've reflected our expectations in the outlook, and any ability for us to gain additional leverage will purely be driven by sales..

Thank you..

Thank you. Our next question comes from Jeff Stein with Northcoast Research. Please proceed with your question..

Hey, Mike. So if we look at the fourth quarter outlook, basically at the high end, you're looking for relatively flat and at the low end, down about $0.10.

And with the improvement that you saw in gross margin and SG&A in the third quarter, what's changing between Q3 and Q4 that would cause you to be at best flat based on your revised guidance?.

Well, Jeff, that's a great question. I think there's a couple of elements to consider.

One is the fact that part of the leverage, while we did get 70 points of leverage from normal activity, we're still looking at a sales environment that while some folks may feel a little bit better about, the trends have been pretty consistent for the last couple quarters. And we're managing our business accordingly.

So, it's purely driven by the expectations of the top line. We expect to continue to achieve some good expense performance. But again, in terms of the margin impact of it, it's going to be sales driven..

Okay. But it would seem to me if you're looking for flat comps for the year, that would imply a similar comp trend in Q4 that you saw in Q3.

Correct?.

That's correct..

Okay, all right. Thank you..

Thank you, Jeff..

Thank you. Our next question comes from Neely Tamminga with Piper Jaffray. Please proceed with your question..

Great. Good afternoon, and congrats, Mike, on your pending retirement in 2017..

Oh, thanks, Neely..

Much, much deserved. Big shoes to fill, guys. Big shoes. Okay, so....

Agreed..

So put me on the committee, okay..

Okay..

So here's what we really want to know on the Rack side of the business.

Rack has kind of suddenly just been performing pretty well here in this environment, and what we want to get a sense of is just what does the content looks like as you kind of head into Q4? How are you feeling about things? How are you feeling about the Rack trends? And I guess more specifically, how have the categories within Rack been performing? I think you had some commentary in the release around the full line, but what are the category performances going on at Rack? Thanks..

Hi, Neely. This is Blake. Yeah, we're really pleased with our team's efforts that have been focused on a number of initiatives for a couple of years now, and it's a pretty simple playbook in terms of what resonates with the customer. But the opportunity is to make sure that we're executing well on behalf of the customer.

There's a whole range of things we're focused on from improving the experience of point-of-sale to the dressing room and ensuring that the stores are filled in and sized. And so I think the numbers are just reflective of the team's efforts and the customers' great response to that.

And inherent in all that is, do we have the right merchandise and a good value? Is there integrity in our pricing? So you mentioned in the last part of your question as kind of what's selling and what's the content of our inventory? Well just like the full-line stores, the inventory levels in off-price Nordstrom Rack are as current as we've seen in a long time.

And we're fluid. We have open to buy and the flow's improving and the customer's responding to that. So, we've gone from maybe a year ago or six months ago where we didn't have that open to buy and we had margin pressure. And there's just a good ripple effect or halo from that.

So we're encouraged by that and think we're heading in the right direction there..

Thank you..

Thank you. Our next question comes from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question..

Hey. Good evening, everyone. This is Greg Baglione for Kimberly. I have two quick questions. One, just on the slide deck, it looks like here you have total SG&A dollars expected to grow about 5% for 2016.

Is that like a run rate that we should model going forward? Do you think it's sustainable? And then I think earlier you mentioned that your top-20 fastest-growing vendors increased 20% during the quarter. Can you just let us know what percentage of the business they comprise and maybe what you are seeing the other vendors outside of those? Thanks..

Sure. Greg, this is Mike. I'll take the first part of the SG&A. In terms of the progress we're making, we feel really good about how we've been able to bend the curve in the growth of a number of areas. Whether or not that 5% is going to maintain past 2016, we'll let you know about that in February when we talk about our 2017 plans.

But suffice it to say we feel like there's opportunity for us to continue to improve upon that. And certainly, the one challenge we do have there is the fastest-growing piece of our business is the ecommerce piece and that has the most variable element.

So, we have to keep all those things in mind that there's many dynamics happening here that prevent us from just fixing in on a locked number. But that being said, we think in terms of stabilizing operating margins, we've been able to make some good progress..

Yeah, and this is Pete. Related to the fastest-growing vendors, yeah, we have some bright spots, but I think you could just ascertain from the fact that our business is fairly flat in comps, that means we have some bigger brands that are probably decelerating too. So it all works itself out.

I think for us, though, it's nice to have some positive parts of the business to point to and these brands cut across a lot of different categories.

So I think it gives us a lot of purpose about going forward, how we plan our business, the people that we're working with, where we feel like we've got a momentum and future with, and making sure -conversely on the brands that are maybe going the other way that we're planning them accordingly too, so we don't get ourselves into inventory pinch.

A big part of what you've seen in terms of our improved results have to do purely with the fact that our sales are growing faster than inventory and the benefit of all that is what we're seeing here in our results..

Thank you. Our next question comes from Adrienne Yih with Wolfe Research. Please proceed with your question..

Hi. This is actually Cody on for Adrienne today.

How are you?.

Good, Cody..

Quick question. So the Beauty category has been growing for a while across the industry. One of your competitors recently cited a slowdown in this category. What are you seeing? And if you are seeing a slowdown, do you think this is more of a product of the industry slowing down? Or is someone else taking market share? Thank you..

Yeah, our Beauty business has been strong relative to the other categories for – it seems like a couple of years now, and it continues to be that way. So Beauty as a classification performed above the average of all of our product categories. So we continue to see good progress there.

We've got a good team that works really hard to bring newness and some limited distribution vendors to our assortments and that's been a good formula..

Great. Thank you, and best of luck..

Thank you..

Thank you..

Thank you. Next is Paul Trussell with Deutsche Bank. Please proceed with your question..

Yeah, good afternoon, and congrats as well, Mike..

Thanks, Paul..

When it comes to the multi-channel comp, fairly in line with maybe expectations we had, but the mix was quite different. I was very surprised just given the anniversary shift to still see the full-line comp down 4.5%.

Were there specific initiatives that you all had in the third quarter to drive maybe more traffic towards the dotcom? Or if you can just speak on the brick-and-mortar full-line versus the dotcom..

Paul, this is Jamie. I'll take that one. Yeah, I think what you're seeing is the continuing trend that we've been seeing for a while around mall traffic.

I don't think it's any secret out there that there's been some declines and depending on a lot of reports that you look at, mall traffic is down anywhere 4% to 5% based on a bunch of different reports that we see. And that's pretty consistent with how our trends have been.

And so what are we doing about that? Well, we are investing a lot in our ecommerce experience and you see the results there. We're pretty happy with the growth we're starting to see there and it's the paying off of some investments we've been making over the last couple years.

Within the stores, there's also some encouraging signs and results around some new experiences the we're trying to drive using technology, using mobile to not only make the customers' experience in the store more convenient, more compelling, but also drive more trips.

So some things that we've been piloting over the last six months we feel good about, and we're looking forward to continue to drive some reasons for customers to come visit our stores and maybe buck some of these trends going forward..

Thank you. Next is Mark Altschwager with Robert W. Baird. Please proceed with your question..

Good afternoon. Thanks for taking the question..

Sure..

Maybe elaborating on that last comment. I guess could you just talk a little bit more about some of the initiatives around your digital shopping experience? I think you've talked about efforts to edit the assortment and maybe leverage salesperson product knowledge.

Just curious how all that's evolving and what other opportunities you see to further differentiate your online experience versus both pure-play online and omni-channel competitors?.

Sure. I'll take that and, Erik, if you want to jump in. A lot of what we're trying to do in the stores is give customers control. And mobile is such a great medium for that.

So recently we launched in our Seattle area stores as a pilot a feature called Reserve Online & Try Out (23:27) in Store, and it allows customers to pick merchandise out on their phone through our mobile app, and they can have that merchandise placed in a dressing room. We know when the customer shows up. We have it ready for them.

They can walk in, try it on, what they want to buy, we can check them out real fast. And the results from that over the last month or so have been really, really encouraging. And we're looking forward to rolling that out nationally in 2017.

So a lot of deployment of technology that we've been investing in and building over the last couple years into the customers' hands to make shopping our stores way more convenient and compelling, and we think that's going to drive some trips.

E (24:10), if you want to take the second part of that?.

Sure. I would reemphasize this, we brought up over the last several quarters just a context of we really run the business agnostic to those channels, and that's because it's how our customers shop. So while we do accounting-wise break things out, full-line stores and ecommerce, there's so much overlap between those businesses, and that is increasing.

And Jamie gave one example there, the store reserve, which is we're excited about because it's a very explicit, seamless experience that connects a shopping journey that starts online and ends up in a store.

We know that's how lots of our customers have been shopping, but they start online and when they go in the store and want to actually see it, touch it, feel it, try it on, they have to start over. This allows them not to start over.

So a lot of our initiatives are around continuing to take out friction between the channels and really deliver experience that is consistent with how customers want to shop. That being said, online, in the last quarter, some of our initiatives that got put into place. We have a redesigned homepage experience that is performing well.

We have a store mode in search and browse that is both on our full website and in our app, and that again would be an example of really connecting the online and offline shopping experience. We've improved our navigation, had some personalization, small steps that we're excited about, and a redesign of our order confirmation, order history.

A lot of these are some subtle changes that don't pop off (26:10) the page but have had positive results as we've done AB testing on them. On the app, in addition to the store mode, we launched visual search. We had a separate catalog app we've integrated into our main Nordstrom app. We also launched search and messaging within iMessage.

And all these are looking to make the shopping experience more friction-free and on the customer returns..

Thank you..

Thank you. Our next question comes from Brian Tunick with RBC Capital Markets. Please proceed with your question..

Hi. Good afternoon. This is Bilun Boyner on for Brian. I guess we wanted to ask about gross margins longer term.

Beyond the opportunity to recover maybe some of the gross margin declines in Q4, what are some of the buckets within your cost of goods sold, or the investments that have been hurting your gross margins over the last few years that you maybe see most opportunities to improve to help you get gross margins maybe closer to 36%, 37% range over the next few years?.

Sure. This is Mike. There's several components that have been affecting that line, and the ones that have had the most significant impact are really related to the evolving mix of our business and the way our business is changing.

So a couple of examples there are, as the Rack business, the off-price business continues to grow faster than the other businesses, that has a lower gross margin element. It also has a lower expense element, so the operating margin tends to be pretty comparable, but it does affect that gross profit line.

In addition, the growth of our loyalty business has put some pressure on that over time.

I think in terms of what have been the more shorter-term impacts and some of the good news we've seen recently, that's been a function of the sales trends we've seen, the excess inventory last year, and as we start to come out of that and have better controls over our inventories based on the current environment we're in, we're seeing positive in the margin.

But I think it's fair to say it's tough to see getting that line back to historical highs, because there's structural elements to it both at the business level as well as the assortment level where we're seeing some changes in mix..

Thank you. Our next question comes from Bob Drbul with Guggenheim. Please proceed with your question..

Hi. Good afternoon. Mike. Congratulations again on your retirement..

Thanks, Bob..

Just a couple of quick questions.

In the Trunk Club, can you detail little more on the operational changes you are making to make it more profitable? And can you comment a little bit around the footwear category, how you're positioned, the selling season, winter boots and fashion boots?.

Sure, Bob.

E (29:18), can you comment on Trunk Club, please?.

Sure. I'm actually in Chicago. We spent the day with our Trunk Club team here. I would want to emphasize while we're taking the write-down as needed, we're actually very encouraged with what we've learned, the team's learned, and how to make the model better. And the model we're focused on is really making it better for customers.

When we make the model better for our customers, the economic model improves as well. And two areas I guess I would call out without getting too specific. One we think we have an opportunity.

We've seen some early results in just better connecting with our customers on a more consistent basis that gets them sticky with the brand, and the other is that we could be more accurate in what we put in the Trunks (30:16) and what we're sending out to customers that makes for a much better customer experience and it helps the model significantly..

Thank you..

This is Pete. Related to the question about shoes and boots, in particular seasonal, we get an early view of that with Anniversary Sale and so the fashion-oriented part of the boot classification of short booties to over-the-knee boots was all strong and really good.

So I think as the weather starts kicking in across the country, we expect that that'll be a good classification for us. It's still kind of early days on that, but it seems like we have a pretty good handle on what's happening with that trend.

I'd also say that the sneaker business continued to be strong across all of the different genders of shoes and what we're selling..

Great. Thank you..

Okay, Bob..

Thank you. Our next question comes from the line of Ed Yruma with KeyBanc Capital Markets. Please proceed with your question..

Hey. Thanks for taking my question, and congrats, Mike..

Thanks, Ed..

On the credit card business and loyalty, I know that you intended to fund some of the non-tender rewards through efficiencies in advertising.

So I guess have you begun to implement that? And I guess second, have there been any implications or changes in sign-up patterns with the traditional credit card now that you can get the rewards with the non-tender system? Thank you..

Sure, Ed. Well, this is Mike. In terms of efficiencies in marketing, I think it's a little early for that. As you know, we just introduced it in May. We've had a very nice response. We built a good book of business around that with people signing up.

But I think that's going to take a little bit of time in order for us to see, I would say, tangible impact of our ability to be more efficient with our marketing. But that being said, we're up to 45% of our business connecting with those customers, so that's very, very positive as we look forward.

Could you please remind me the second part of the question?.

Yeah, just asking if there have been any changes in credit card sign-ups or how the pace in non-tender may impact that business..

Yeah, you know, Ed, we have seen a slowdown in the sign-ups of the tender-related side of the business. In the aggregate for both sides, we've seen very, very promising results but certainly on the tender side, it has slowed down a little bit..

Thank you. Our next question comes from the line of Richard Jaffe with Stifel. Please proceed with your question..

Thanks very much, guys, and, Mike, my congratulations to you and wish you the best in the next part of your career..

Thanks, Richard..

Sure, Mike. We're going to miss you. The main floor business, if you could just comment and that would be fragrances, beauty, handbags, accessories. I know you called out women's apparels as strong, and I assume that's not the main floor.

Could you go into some of these other categories and how they're doing vis-à-vis the women's apparel business?.

Yeah, this is Pete. The women's apparel business has been pretty good for us.

And where we've had the best success is what we would classify as the young customer stuff that largely has to do with our Topshop business, but really anything that's about acquiring a new customer and speaking directly to a millennial customer, that's been particularly good in women's apparel.

In terms of the main floor part of it, beauty's been strong; shoes has been relatively strong. The challenge has been really in the accessory categories, particularly like jewelry, accessories, and a chunk of a handbag business, that more for us would be the entry or middle type prices.

Our designer business across shoes, handbags, apparel has been good. That continues to outperform. So it's a large portfolio of categories to look at there, but we definitely have some parts of the business that have gone well.

I mean you heard us call out the J.Crew and the Good American brand, and there's a lot of initiatives and things that we're trying, particularly in women's apparel that maybe speaks to a bit of a younger customer that's helping us with sales and helping us acquire new customers, and again, giving us something really to focus on going forward that's going to hopefully bear some good results for us..

Thank you. Our next question comes from Paul Lejuez with Citigroup. Please proceed with your question..

Thanks. It's Tracy filling in for Paul. I had a follow-up on merchandise margin. I think you said it was up about 30 basis points overall. But how was the performance by division in full flat price in Rack? And did the shift in the Anniversary Sale have any impact on that line item? Thanks..

Yeah, Tracy, we don't usually break it out to that level of detail. Appreciate the question, though..

Can I sneak in another one?.

Yeah, sure. Go ahead..

You raised your outlook for credit income, and I was wondering, it sounds like it wasn't because of an increase in sign-up. What is really driving the underlying profitability there? Is it higher balances? I guess just tell us the reason for the increase..

That's a very good question. Yes. Part of it is related to higher balances and part of it is related to operating efficiencies that we continue to realize in that side of the business..

Yeah..

Thank you..

Thank you. Our next question comes from Oliver Chen with Cowen & Company. Please proceed with your question..

Congrats on solid results, and, Mike, we'll miss you. Best regards there..

Thanks, Oliver..

The trend for inventory ahead, inventories have been really sharp. So just for the next few quarters, should we expect a continued conservative stance on inventories versus sales? And another question we had is on shipping costs.

Shipping costs as a percentage of sales, what do you think will happen to that line item as the business and as consumers and kind of the DC and the non-linearization of supply chain kind of occurs? Just curious on your thoughts..

Well, I'm going let either Blake or Mike deal with that shipping one. But in terms of inventory levels, yeah. I mean it's fundamental to our bottom-line performance to manage inventories well.

And you go through those cycles and learn painful lessons along the way, and we did a pretty good job correcting – first of all, our sales plans to be more reflective of what the reality of the trends are and then getting the inventories down. And we did that at the beginning of the year, and we're benefiting from that now.

So our plans going forward reflect the last year or so trends, which Mike talked about earlier, have been pretty consistent. So I guess some might view that as kind of conservative, but I think that serves us well. If business does improve, it's been our position that's pretty easy to find inventory out there, things are improving.

So we feel like we're in pretty good shape and well served to keep a conservative viewpoint on our planning so that the inventory stays in line..

Oliver, this is Blake. I'll touch on the shipping subject. Supply chain has become a integral part of customer service. And as we've said over and over, our focus is on the customer. So the last couple of years, we've made some pretty big investments to ensure that our supply chain is in lockstep with our customers' demands.

I think the biggest thing, as you mentioned, some of the fees or costs; Mike pulled out in his remarks, I believe roughly $50 million in savings throughout this year that we're finding back of the house system efficiencies. But the bigger picture is the mix subject, and you touched on distribution centers versus fulfillment centers.

We continue to see year in, year out our core efficiencies in the distribution part of it, which is more of an apples-for-apples. The mix of timing and the type of goods, and how we're getting goods to customers, and then there's the return reverse logistics subject in aggregate means more cost.

And so we're working really hard on that to, number one, first of all, meet the customers' demand; and number two, meet our goals and results and our shareholders that we're doing it in an efficient manner..

Okay. And lastly, we took a walk of Toronto, which has a lot of principles which really don't seem easily replicated by Amazon and a unique innovative approach to service.

What are some of the learnings from your store to the future that you'll prioritize in terms of getting out to your other stores as soon as possible, just because that store in Toronto had a lot of unique excitement around service and experiences, which would seem quite lively and helpful for store traffic?.

Well, Oliver, this is Jamie. Thanks for that. I'm glad you got to see that store. We just opened two stores in Toronto over the last couple months. And we always say whenever we open a store that it's our best store ever. And those stores particularly we're very proud of and we're going for it. We've got a good team up there.

Our store managers of those two stores are two of our best. And in terms of service, we're really going for it. You mentioned some special things that we've been doing there.

Along with some of our other what we would call our bigger more kind of flagship stores in Michigan Avenue in Chicago, Vancouver, downtown Seattle, where it's not just about having a broader offering of designer goods, which we do, but having more specialized services to serve customers in lots of different ways.

And that could mean anything from delivering merchandise to their house, picking them up, bringing them to the store. We've got food and beverage offerings in those stores that are pretty unique and, so far, customers are giving us great feedback on.

And ultimately, we want those stores to be really compelling places that people want to go and see something new. And the better job we do in all of our stores but particularly our higher-traffic stores of showing the customer something new, giving them a reason to buy something new, the better our business is.

So we're really, really encouraged by some of the early results from those stores and things that we can replicate across our entire fleet, and I think you'll see us doing that over the next year or two..

Thank you. Our next question comes from Michael Binetti with UBS. Please proceed with your question..

Hey, guys. Good evening. Let me add my congrats, Mike, to you on the next leg of your adventure..

Thanks, Michael..

A lot of my questions have been answered. Let me throw two in here.

Can we just get an idea of the profile maybe of the new Rewards customer compared to the narrower credit card Reward customer from before, changes in frequency you've noticed? Or maybe more importantly, how does the gross margin on the sale of the non-tender loyalty compare to the previous generation Rewards customer?.

Michael, I would say just in general, the non-tender customer tends to be – it's a broader appeal product. The tender product qualifications for having that card, we had very, very high FICO standards. It tended to be somebody that had had a longer history of spending that could justify getting that card.

The non-tender, we don't have that and so we're attracting a much broader customer. It's allowing us to engage with a younger customer that is coming through their cycle with us and introduce them to some of our benefits and to the conveniences of shopping with Nordstrom.

In terms of the economics, I would say just by its very nature, you're going to have higher spend with a credit card oriented product versus a non-credit card oriented product. In terms of margin, I don't think I have any numbers in front of me that tells me the impact of that.

But I think the most important thing, it's like we talk about opening the Rack stores. We're attracting a lot of new customers to our brand and those customers will continue to grow with us..

If I could sneak one more in.

I know you're not going to talk about the plan for beyond this year, but can we talk about just some of the high-level items impacting the cost lines today in which you think we should be thinking about longer term as we go into next year and maybe some of those that will not be a factor? Looking out past this year, we see the cost savings you guys have rolling through in the report today.

But I think you'll lap some dead rent in Canada next year, you'll probably have less Trunk Club amortization now. Maybe on the gross margin line, some of the price matching can continue to next year.

Can you just help us think about some of the puts and takes on the bigger buckets as we look into next year for a model?.

Michael, it sounds like you figured it out..

I always like you blasting on this stuff, though..

Yeah, okay. It's what I kind of thought. I would just reinforce the fact that the three main areas that we continue to focus on, technology, supply chain and marketing, they continue to be critical because those are the areas of investment that are driving the new platform for growth and that's ecommerce and anything digital related.

So we're going to have to continue to figure out how to use those resources more effectively and find ways to deliver the experience more efficiently, because they're very, very, highly variable in nature. And the more that, that business grows, the more those costs are going to go up. So I think that's going to be a multi-year effort on our part.

I think the other things we've talked about, you're right, tend to be a little bit more shorter-term. The investments we've made, yes, we are starting to see the impact to the earnings line start to narrow. We saw some improvement in 2016. We should see additional improvement next year and years to come..

Great. We'll now take one more question..

Thank you. Our final question comes from the line of Lindsay Drucker Mann with Goldman Sachs. Please proceed with your question..

Hi. This is Edward McLaughlin on for Lindsay..

Okay..

I had a follow-up on the breakdown of your comp performance between Nordstrom.com and Rack.com. It seems like it converged here in the third quarter compared to the second quarter.

Is there any detail you can provide on the customer flow you're seeing between the two or anything else that might be driving that?.

This is Blake.

Hey, Erik, do you want to take that? Or would you like me to take it?.

Well, I think – jump in if (45:15). We had an initiative in our fulfillment center for our Nordstrom Rack and HauteLook ecommerce business that delayed some shipments getting out and it took some sales out of the third quarter and will shift them over to the fourth quarter..

That's absolutely correct, and so there's a timing difference there. And so we saw a slight improvement in Nordstrom.com and what you're looking at, Lindsay (sic) [Edward], is the NordstromRack.com and HauteLook was down from this trend. When we make that adjustment for what happened in our supply chain side, it's pretty consistent with our trends..

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..

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation..