Stephanie Allen - Director IR Mike Koppel - EVP and CFO Blake Nordstrom - President Pete Nordstrom - President of Merchandising

Bob Buchanan - A. G. Edwards & Sons, Inc. Dana Cohen - Banc of America Securities Jennifer Black - Jennifer Black and Associates Barbara Wyckoff - Buckingham Research Group Christine Augustine - Bear Stearns Stacy Turnof - Merrill Lynch Dorothy Lakner - CIBC World Markets Richard Jaffe - Stifel Nicholas Maureen Depp - Loomis Sales. Neely Tamminga - Piper Jaffray. Adrianne Shapira - Goldman Sachs

Hello. Welcome to the Nordstrom fourth quarter 2005 earnings release conference call. (Operator instructions) It is now my pleasure to turn the meeting over to your host, Ms. Stephanie Allen, Director of Investor Relations for Nordstrom. Ma'am, you may begin.

Thanks, Wendy. Good afternoon, everyone and thank you for joining us on the call today. On the line with me this afternoon are Blake Nordstrom, President of Nordstrom Inc.; Pete Nordstrom, President of Merchandising; and Mike Koppel, Executive Vice President and Chief Financial Officer. This afternoon, Mike will lead off with a review of our fourth quarter results; Blake will make a few concluding remarks; and then, we will open it up for questions. Please note that any forward-looking statements we make in our remarks this afternoon should be considered in conjunction with the cautionary statements contained in our SEC filings. Now I will turn the call over to Mike.

Thanks, Stephanie and good afternoon. Before I get started I would just like to acknowledge that this is Stephanie's last call with us as Director of Investor Relations and we appreciate everything you have done and the great job. Going forward, RJ Jones will be taking over Stephanie's position.

Thanks, Mike.

You are welcome. We are pleased to report another year of strong operating performance. We ended 2005 with an 11.5% pre-tax margin, 240 basis points higher than last year and on the high end of the goal we set out to achieve by 2007. Our operating model continues to perform with efficiency, as gains in comparable store sales provide consistent flow through to the bottom line. We remain focused on improving our capital efficiency, which is yielding an increasingly favorable spread between the Company's cost to capital and return on capital. Overall, these results indicate that we continue to embrace the disciplines needed to achieve higher levels of performance. For the full year, we reported earnings of $551 million, or $1.98 per share; a 40% increase from the prior year. The full year results were driven by a 6% same-store sales increase, 64 basis points of gross margin expansion and 113 basis points of SG&A improvement. For the fourth quarter, earnings increased 36% to $190 million, or $0.69 per share. Strong top line momentum, along with gross margin and SG&A improvement, generated 150 basis points of pre-tax margin expansion in the quarter. Sales trends were positive throughout the quarter, with all of our geographic regions and most major merchandise categories posting same-store sales increases. Total sales grew 9.3% to $2.3 billion and same-store sales increased 5.8%, ahead of our low single-digit comp plan. Our strongest regional performance was in the Southern States, and our best-performing merchandise divisions were: cosmetics, accessories, women's and kids' shoes and men's apparel. The quarterly improvement in both gross profit and SG&A was primarily the result of strong sales volume. Gross profit increased 81 basis points, or $90 million compared to last year, due to sales leverage on buying and occupancy costs. Merchandise margin was slightly lower than last year, as we experienced markdown pressure in some segments of women's apparel. As for SG&A, we gained 70 basis points of rate improvement versus the prior year, primarily due to sales leverage on non-selling labor and advertising costs, and a reduction in workers' compensation expenses. These improvements were partially offset by stock-based incentive expenses that were higher year-over-year due to share price depreciation. The other income and finance charge line of the P&L increased $15.8 million for the quarter. About $6 million of this resulted from higher year-over-year credit card revenue. In addition, we recorded $8 million of income from gift card breakage. Following recent changes in unclaimed property legislation, we now recognize income from outstanding balances on aged gift cards. Going forward, we intend to recognize gift card breakage on outstanding balances over five years old. As a follow-up to our previous disclosure, during the fourth quarter we did not record any income related to the Visa/MasterCard settlement. We had previously expected to receive a $5 million to $6 million benefit in other income but now the timing of the settlement will be during our 2006 fiscal year. Net interest expense of $11.5 million was inline with expectations and lower than prior year, due to increased interest income on higher cash balances. During the quarter, we repurchased 1.1 million shares of stock for a total of $41 million, which did not reduce shares outstanding enough to materially impact quarterly EPS. The remaining balance on our current authorization is approximately $213 million. In this quarter's earnings press release, please note that we are now including a balance sheet and a statement of cash flows. From these we would like to highlight a few key measures. Average inventory per square foot for the year was approximately 2.3% lower than last year and annual inventory turnover improved 7%. Total debt at quarter end was $935 million, and total capital was $3 billion, resulting in a debt-to-total cap ratio of 30.9%, down from 36.5% this time last year. Over the course of the year we retired $96 million of debt, repurchased $287 million worth of stock, and ended the year with $517 million in cash in short-term investments. Our strong cash flow and low debt levels place us in a position of flexibility as we consider our strategic options for deploying capital. We are pleased to share that our board of directors recently approved a 24% increase in our quarterly dividend from $0.085 to $0.105 per share. Our current dividend policy aims to maintain a payout ratio in the range of 18% to 20% and a yield of approximately 1%. This is the second time within 12 months that we've increased our dividend in support of these stated targets. As far as our outlook for 2006, we are currently forecasting earnings per share in the range $2.15 to $2.23 for the full year, a 12% to 16% increase over last year, after normalizing the $0.06 impact for stock option expense. This range assumes low single-digit same-store sales growth throughout the year. In addition, we expect sales leverage on buying and occupancy costs to drive 25 to 35 basis points of annual gross margin expansion. We also anticipate an SG&A expense rate decline of 30 to 40 basis points, primarily from sales leverage on fixed expenses. This rate improvement is on a comparable basis to last year, excluding stock option expense. Interest expense should decline $8 million to $10 million and credit card revenue is assumed to increase $25 million to $30 million. As a reminder, our capital plan for the coming year is approximately $300 million net of developer reimbursement; 40% of which will be spent on new stores; 30% is earmarked for store remodels; and 15% for technology. The remainder is for maintenance and general corporate purposes. Depreciation will likely be around $290 million for the full year. We currently expect inventory levels to remain fairly consistent with last year on a per square foot basis. For the first quarter specifically, earnings are expected to be in the range of $0.39 to $0.44 per share, including a $0.01 to $0.02 from stock options expense. During the first quarter, our SG&A plan contains additional expenses related to new store operations and IT projects. This results in approximately a 6% increase in SG&A in the first quarter, versus our planned increase of 3.5% to 4% for the year. Lastly, I wanted to take this opportunity to update our immediate term goals for SG&A and pre-tax margin. Our current three-year plan is targeting an expense rate of between 26% and 26.5%, and pre-tax margin range from 12.5% to 13% at the end of 2008. These targets are based on low single-digit comp sales. Now I'll turn the call over to Blake for some additional remarks.

Thanks, Mike. Good afternoon, everyone. Before opening it up for questions, I would like to make a few comments about this past year and the year ahead of us. Several years ago, we set a goal to sustain positive same-store sales momentum and to improve overall operating efficiency each year. We are pleased to report that we have made continued progress toward this goal. In 2005, our pre-tax margin ended the year at 11.5%, which is the highest level since the Company went public in 1971. 2005 was also our fourth consecutive year of positive comp store sales growth. In addition, our gross margin reached an all-time high and our SG&A rate declined to an 11-year low. One of our core beliefs is that top line performance starts and ends with the experience each customer has in our stores. For us, the essence of this experience is desirable product, coupled with personalized service. Our ongoing focus revolves around these two tenants of our business, as we believe they will contribute to the long-term success of our Company. As we look ahead to 2006 and beyond, our top priority is to gain market share through existing stores and channels, as well as new stores. We have a solid foundation in place to support growth. Our people continue to gain proficiency and experience with our technology platform and they are hungry to become even more sophisticated and to reach higher performance levels. We continue to progress in operating efficiencies, disciplined execution and strengthening our financial position. Building our capacity to push ourselves further than we have gone before is vital to our future success. In support of our top line priority, we have identified three areas of focus that each hold unique opportunities. First, is re-energizing women's apparel. Second, is multi-channel integration. And third is enhancing our designer business. Women's apparel represents about one-third of our total sales and serves a range of individual tastes and styles. Over the past six months, we have been working to develop more targeted merchandising strategies for our various women's departments. A thorough analysis of objective customer information has help us better understand our customers' needs and shopping priorities in terms of style, price, fit, and occasion. We're now in the process of determining how our lifestyle departments should evolve to better serve our women customers. Initial findings indicate that we have several opportunities to enhance our women's apparel offering. We are excited to start taking action on a few of them. One is expanding our contemporary and modern segments. Building on the success of our TVD, Savvy and BP departments over the last few years. We also have an opportunity to improve our wear-to-work offer, an effort that will most directly affect our Point of View, Studio 121 and Individual departments. This kind of assessment is part of an ongoing process for us as we strive to stay relevant to our customers. We will keep you informed on our progress through the year. Multi-channel integration is another key area of focus for us. Out of all of our customers, the most productive are multi-channel shoppers. Our website is proving to be a valuable tool for attracting new customers who ultimately become full-line shoppers. We have learned that our customers want more and easier access to us, in ways that work best for them. In 2005, we started to make changes in our direct business that better align our online shopping environment and catalogue with the customer experience in our full-line stores. In 2006, we will begin migrating the direct inventory system onto our full-line stores platform. These ongoing changes will take several years to combine supporting systems and create a more seamless merchandise offer and experience for our customer. Our next key focus area, Designer, is a critical part of our business because it contributes significantly to the aspirational nature of our brand. Our goal is to have a complete designer offering and at least one store for every major market we serve. We have identified select stores where in 2006, we are working to expand our designer assortment. Our Director of Designer Merchandising, Jeffrey Kalinsky is helping us create a full designer offer across footwear, apparel and accessories categories in these stores. Further contributing to top line growth, expansion opportunities into new and existing markets continue to emerge for us. In addition to our previously announced Natick store, last week we shared plans to open three more new stores in Boston. We have wanted to be part of the Boston community for almost 25 years and we are very pleased to be able to enter this market starting in 2007 and ending with four stores in place by mid-2010. We will continue to pursue selective real estate opportunities that support our strategy. Today the foundation is in place for us to bring more innovation and creativity into offering a differentiated shopping experience for our customers. By focusing on our people, the merchandise, new stores, remodel and technology, we have laid the groundwork for future long-term growth. Our people deserve all of the credit for how far we have come and where we will go. Our Company is made up of many talented, competitive individuals whose unwavering commitment to servicing our customers is our most valuable asset. Now I'd like to open it up for any questions you may have.

Thank you. (Operator instructions) Our first question comes from Bob Buchanan - A. G. Edwards. Bob Buchanan - A. G. Edwards & Sons: Yes, congratulations on a great quarter and a great year.

Thank you, Bob. Bob Buchanan - A. G. Edwards & Sons: Just a few data points for starters. CapEx, I missed that number, Mike. Have you guys given a dollar number for inventory at year end?

Bob, the CapEx number for next year is $300 million, and on the release that we shared we did have a balance sheet, and the inventory number is $956 million. Bob Buchanan - A. G. Edwards & Sons: Okay, fine. And just the one question I had is with regard to multi-channel. Are there any business process improvements that you anticipate making or any key software that you will use in the integration process?

Blake, do you want to take that?

Sure. Hi, Bob. This is Blake. Bob Buchanan - A. G. Edwards & Sons: Hi, Blake.

We have, as you know, in the full-line stores the Retek platform and to date we've been utilizing Ecometry, which is what we started with the catalogue business. So we are migrating now, as in my remarks, to a Retek platform. There probably might be some adjustments for some differences like the planning aspect of a direct business, but this is probably going to be about a two-year or a three-year process of really getting these systems right within our direct channels so that they can speak efficiency to the full-line stores and back and forth. So ultimately, a more seamless experience for the customers. Unfortunately, this doesn't happen overnight and we need to limp along with our existing system while we are on a parallel track to bringing this on board. Bob Buchanan - A. G. Edwards & Sons: Lastly, on the Federated Store situation, what is going on there? Are there books out on those various stores that are available? Where do you stand on that process?

Bob, this is Mike again. Well, the original process which we participated in on the 26 stores that the Attorney Generals had targeted, the Boston stores are part of that group. We continue to evaluate opportunities that makes sense for us, based on what hits our hurdles and what makes sense for our geographic strategy. We're continuing to look at that and our sense is that it is probably going to carry out over the next year before we have total clarity on the final situation. Bob Buchanan - A. G. Edwards & Sons: Okay. Thank you very much.

Thanks, Bob.

Dana Cohen - Banc of America Securities. Dana Cohen - Banc of America Securities: Hi, guys. Congrats. A couple of questions. Just starting on the stores, what does it now look like the number of stores will be for '07 in total?

Total '07, Dana, will be five new stores. Dana Cohen - Banc of America Securities: Five new stores. It is my understanding that those three in Boston are -- Simon's is taking them back and then you'll get them via them?

That's correct. Dana Cohen - Banc of America Securities: Okay. Any preliminary sense of CapEx then, for '07?

Well, the CapEx plan for the three-year period that we talked about last quarter was roughly $1.1 billion. With some of the additional stores that we just layered on, that we announced most recently, it brings it up closer to about $1.3 billion and that is spread out over that three-year period. Dana Cohen - Banc of America Securities: Doing the math on the pre-tax target, clearly you're assuming some improvement in gross margin. How much of that is at the merchandising margin level? How much of that is leveraged on buying and occupancy?

It is primarily leveraged on buying and occupancy. Dana Cohen - Banc of America Securities: Can you just clarify in the other income item -- I know it is a small thing, but -- the $8 million from the gift cards, is that in the $16 million or separate?

That's in there. Dana Cohen - Banc of America Securities: It is $8 million out of $16 million?

Yes. Dana Cohen - Banc of America Securities: That $8 million -- because another company made a similar announcement this morning, and it sounded as if -- this was The Limited -- they said that it was a cumulative effect from the time that the gift cards had started. Is it different for you? They classified it as a one-time thing.

No. Ours actually, because of a number of changes, -- one is in some legislative changes in the state that we used to be required to [beseech] in -- and two, because the SEC got more active this year in terms of giving guidance as to how to account for this. We established a five-year policy. Basically that $8 million reflects a smaller amount that's anything older than five years. Then what we would normally take into income at five years. So on an ongoing basis, we've included in our results next year roughly $5 million to $6 million assumed in there. It is pretty close to an annual rate. Dana Cohen - Banc of America Securities: Okay. Great. Thanks so much.

Thanks, Dana.

Jennifer Black, Jennifer Black and Associates. Jennifer Black - Jennifer Black and Associates: Good afternoon and let me add my congratulations.

Thanks, Jennifer. Jennifer Black - Jennifer Black and Associates: I wondered if you could first talk a little bit about -- it seems like you have done a great job balancing your private label brands with the brands that you carry. Could you talk about how you feel about Classiques versus Facconable and where you stand and what you are thinking about with what you just talked about as far as your new strategies? That is my first question.

Hi Jennifer, this is Pete. Jennifer Black - Jennifer Black and Associates: Hi, Pete.

Hi. I think we have had some success with NPG, with our own products and we continue to let it seek its own level in terms of how the total make-up of our entire merchandise offering. The most success that we've had this last year really is more by category. In departments like men's and accessories and lingerie and BP, and not so much with the specific brands like the Classiques, Halogen and the Caslon. They are still a very big part of the business and if we're going to have success in women's like Blake talked about here, we have to improve those brands. We're definitely working in tandem with NBG to make sure that we have a synergistic approach to how those brands will fit into the lifestyle departments that we have. We've done okay there, but we could certainly do better. That's part of our plan. Jennifer Black - Jennifer Black and Associates: Is Facconable in your long-term plan?

Yes. It is a big part of our business. We had good success in men's, not as good in women's this year. It wasn't always that way, it kind of depends year by year. It is a big brand that our customers really like and we're going to continue to make it as good as it can possibly be. Jennifer Black - Jennifer Black and Associates: Lastly, can you give us an update on where you are? I know petites was starting to get better and plus sizes. Can you talk a little bit about that?

Plus sizes is stronger than petites and it has been for a few years. Petites is probably one of the more challenging segments for us. You have heard us have these calls for the last couple of years, talking about that. It has to complement the entire women's strategy, so it is part of the work that we're going through, too to, make sure that it is complementary. We have opportunity to improve in petites, still. Jennifer Black - Jennifer Black and Associates: Great. Lastly, are you finding places in your organization where you can continue to streamline or move people around where it makes more sense? Is that also part of your plan?

In what regard, when you say move people around? Jennifer Black - Jennifer Black and Associates: I don't know. If you find that you have redundancies in one region, I'm sure you probably have everything under a microscope as far as how you can best utilize your dollars. Yes, I know that you will not go to the major system, that's totally out of the question. I just wondered if there was more low-hanging fruit as far as that goes.

You mean in terms of vendors that we're working with? Jennifer Black - Jennifer Black and Associates: No, not vendors, but your own people and better ways to utilize them, or do you think that you've maxed that out?

I don't think we maxed that out at all. We're still getting better and better and more capable with the information we have as a result of the systems that Mike has been talking about. That affords us opportunities to become more efficient and leverage our most talented buying people. So that is an ongoing process that will really never stop. The goal is to continue to do more with less, but it is a little different division by division.

Jennifer, this is Mike. In addition to that, one of the things that -- and we've talked about this for several years -- is that as our learning curve continues to move up, we continue to find ways to do things, not only more efficiently, but with greater value. We are going to continue to do that. I don't think our sense is that this is something that we reach a final end point on. Jennifer Black - Jennifer Black and Associates: Okay. Great.

I hope that helps. Jennifer Black - Jennifer Black and Associates: That helps. One last thing. Are you looking to bring in new designers into the MPG group?

Well Jim O'Neal heads up our MPG area. I know that his primarily focus over the last 12 months and probably going forward into '06 is really our design capabilities in MPG. He has worked, since he has had this job the last three years on the efficiencies around process, and what have you. I think for us to be able to be as successful as you want to be, the design element has to be really scrutinized and held to the highest possible standards. So we are working on that, too. Jennifer Black - Jennifer Black and Associates: All right. Good luck.

Thank you.

Thanks, Jennifer.

Barbara Wyckoff of Buckingham Research Group. Barbara Wyckoff - Buckingham Research Group: Hi, everyone. Great year, great quarter.

Thanks, Barbara. Barbara Wyckoff - Buckingham Research Group: I have two merchandising questions. You talked a little bit about this, Blake. The Missy business has been struggling for so long, what do you see happening here? Is the market weak? Is there just a lack of ideas and execution? Is it a competitive situation with some of the business moving over or migrating over to contemporary or specialty stores? Is there any hope in the near future for a turnaround here? Then I have a second follow-up question.

Pete, do you want to take that one?

Yes. Well, as you can appreciate it is probably all of those things you mentioned; it is complicated. It is a huge part of our business so it has a lot of our attention. I think that the challenges that we may have had in those areas are probably mostly within our control. We have to continue to evolve what we're doing in those areas in the products that we're offering. We are always encouraged every time we go to market, all of the things there are to buy. Sometimes we get burdened maybe by history or what have you, and the risk of having to move on to new things; but that's just the nature of fashion retailing. I think, now that we've got better information, we have a higher level of confidence in being able to continue to evolve this. So, I don't think what the market has is at all a barrier for us to be successful. As a matter of fact, I think that we ought to capitalize on continuing to bring newness in here and continuing to allow those departments to evolve. Where we've had most of our success is probably in the categories that would be most often defined as contemporary, or modern. It is not so much about an age as it is about styling and fit and how we can apply that across the different price points we serve. We really have worked on the women's initiative to figure out our strategy along four key points: fit, price, style, and occasion. That applies really to all of the different segments in women's that we're involved with. There's clearly good merchandise to buy out there, if we get our mind in the right place about it. Barbara Wyckoff - Buckingham Research Group: Thanks. A question about accessories. It has been such an explosive category in the past few years. What's going on this season, beginning of Spring. What do you see for Fall that looks good? Are handbags going to hold up or is it going to move to something else?

Well the whole accessory business has been such a great way for the customer to be able to update their look with regards to fashion. As you have heard us talk about the last couple of years, that anything around newness or fashion is what our customer has really been responding to. I think our team in accessories has just done an excellent job of giving the customer a compelling reason to buy something new. So whether it is fabrication story or a color story, anything that continues to allow that to evolve has been positive for us. We have had good results in jewelry; we've had good results in handbags. One of the things that has gone with our success in handbags is layering on more of this designer and luxury part of the business where we've had good success. Things like our sunglass business and our watch business. Both of those have grown disproportionately compared to the success we've already had in the accessory division. So we will continue to layer on those elements that give the customer the ability to update their look. Barbara Wyckoff - Buckingham Research Group: Thank you.

Thanks, Barbara.

Christine Augustine, Bear Stearns. Christine Augustine - Bear Stearns: Thank you. I'm wondering if you could talk about traffic and transaction trends in the quarter? As you look out to '06, based on your plan for a low single-digit comp increase, do you anticipate it to be an even balance between traffic and ticket? Are there certain categories where you feel there's room to even have higher average unit retails? Thank you.

Hi, Christine, this is Mike. Christine Augustine - Bear Stearns: Hi, Mike.

On the first part of your question, in terms of traffic, we haven't historically measured traffic counts in the stores, but I think suffice it to say our traffic continues to be healthy. During the quarter, our average transactions were actually up and we saw that trend for really just about all of the year. In terms of going forward, we like to focus more around whether or not we're getting the right product on the floor and we're selling it at a regular price. That's what's going to drive those metrics, rather than the metrics driving the decisions that we make. We will continue to look at that and hopefully as a result of us continuing to do the things we are a doing in merchandising, that will drive those metrics up. Christine Augustine - Bear Stearns: Just on that topic -- since you brought it up -- about sell-through rates. What's the update on Profit Logic?

On markdown optimization? Christine Augustine - Bear Stearns: Yes.

I would say we are continuing in a pretty deep learning mode there. It is helping us make better decisions. It is highlighting opportunities for us to work through, slow merchandise and issues we have. We are still, I would say, a ways from really saying that we truly understand it and we are effectively using it. Christine Augustine - Bear Stearns: So have you anticipated, in your guidance, any benefit from it in '06? Or is that something that really we should think about for '07 and beyond?

You know, we haven't tried to put a number on that and included it in guidance. It is really tough to get your arms around that. We do expect benefit. We've said all along, Christine, that we don't expect this to be a dramatic benefit to our margin that it is much more of a nominal to moderate benefit. So hopefully as we continue to work forward on this, as we see results we will share them with you. But, no, we haven't included them in our expectations. Christine Augustine - Bear Stearns: Thank you and good luck. I hope you have a great year.

Thanks, Christine.

Stacy Turnof, Merrill Lynch. Stacy Turnof - Merrill Lynch: Good evening, everyone. Could you give us an update from markdown optimization, the system that you recently rolled out? What kind of benefit are you seeing to your gross margin line at this point, from that system?

Hi, Stacy. This is Mike again. We just spent a couple of minutes discussing that. In summary, at this point in time, we haven't seen any measurable benefit to the margins. Stacy Turnof - Merrill Lynch: Is there, in terms of forecast going forward, is it more, let's say two years out? Or a year out?

We haven't included that in any projections at this point. I think we stated before that the impact of it, while it is going to create some value for us, it is probably going to be nominal to moderate. Stacy Turnof - Merrill Lynch: I have one other question. In terms of your integration, mid-year you spent some time consolidating your catalogue. In terms of some of the performance between that and the catalogue and full-line stores, what kind of impact are you seeing on the business?

We did make changes with the content of the catalogue, and that was mostly around trying to make sure that we had the similar offer available online, in the catalogues, that we do in our stores. We tried to take a bit of a more aspirational tone with those books, to help drive as much business as possible into the full-line stores. We have had some success there, but like anything else, you learn more after you do it. We know more today than we did six, seven months ago when we embarked on this. Those catalogues will continue to evolve. I think in the perfect world what we're looking to be able to do is not only highlight trends and make it very compelling to look at, but we literally should be able to sell from it well, too. We are finding the places where we can do that well. Stacy Turnof - Merrill Lynch: And my final question is, are you basically complete with the pre-ticketing initiative?

I am sorry, I didn't hear -- what was the question? Stacy Turnof - Merrill Lynch: Pre-ticketing. I am sorry about my laryngitis. You were basically 80% there at the end of the third quarter. Would you say you're basically complete at this point?

I would say that we've achieved the majority of what we wanted to accomplish there. Stacy Turnof - Merrill Lynch: Great. Thank you.

Thank you.

Dorothy Lakner, CIBC. Dorothy Lakner, CIBC World Markets: Thanks. Good afternoon, everyone.

Hi. Dorothy Lakner, CIBC World Markets: We've been very impressed with the new designer merchandise that's really appeared recently in accessories and footwear. What's the biggest category for opportunity in that business, now that you are working with Jeffrey Kalinsky? Also, how far along are you in the process of identifying the stores that you want to designate in each region?

This is Pete. I think in terms of the categories, they're all fairly equal. We've been in probably the women's apparel part the longest and have the most complete offer in terms of the amount of stores and the depth that we have there in established business. We've been in the shoe business forever, but, there's a lot of room to improve there, too. I think most of the -- well, it is pretty equal. I would say shoes and really the handbag business is where we've had the exponential type of growth and I think as long as we continue to concentrate on this there are still opportunities to continue to grow that for the foreseeable future. I am sorry, what's the second part of your question? Dorothy Lakner, CIBC World Markets: Just how far along are you in that process of identifying the stores in each region that you want to designate as designer stores, that might not be already carrying designer merchandise?

Well, we've identified them already. But, to the extent that we've been able to change their offer, it would be something that you would see -- that is a work in progress. I think over the next couple of years, we're really going to be in a place where we will have something to show for that. That list of stores, it is not super definite or finite. It can evolve and merge as we have opportunities. There's a combination of factors that come into play there. One is it a store with the opportunity with the customer that we have there to be able to do this business well? Secondly, can we get shipped all of the real desirable designer products that we want? Those two things have to fit together and things evolve and change over time. You have the obvious locations for us: the downtown Seattle, the Southcoast Plazas, the Michigan Avenue which have had this and will continue to have it. We will expand upon it. We also have places like Minneapolis for example, the Mall of America where we have a very strong store. We believe that market is under-served in terms of the ability to deliver the luxury product. We have actually had quite a bit of success working with our vendor partners to be able to expand our offer in true designer in that store. You will see that, probably within the next 12 months, things coming in there. We are pretty excited about that. Dorothy Lakner, CIBC World Markets: Great, thank you.

Thank you.

Richard Jaffe, Stifel Nicholas. Richard Jaffe, Stifel Nicholas: Thanks very much. On a smaller topic, the specialty store business, either Jeffrey's businesses or the Facconable freestanding stores, do you see that as -- either Jeffrey's or Facconable -- as a further growth opportunity? And are there other concepts, I guess percolating, that you can share with us?

This is Pete. Right now we don't have any plans to expand the stand-alone Facconable stores in America or the Jeffrey's stores. They are both doing fine. The concentration of our efforts in terms of where we can create the most value for the shareholder really has to do with what we can do in the stores, and using -- in the case of Jeffrey Kalinsky his knowledge and expertise to not only keep his store going but to contribute to our stores. That is where we have had a lot of real positive success so far. I think it is only going to be that way for the foreseeable future -- there's more to come. Richard Jaffe, Stifel Nicholas: Great, thank you.

Maureen Depp, Loomis Sales. Maureen Depp, Loomis Sales: Hi, thanks. I just wanted to ask about the comment made about the SG&A expenses being higher in the first quarter than the full year. Are there any special projects or initiatives going on that we should know about?

Hi, Maureen. This is Mike. Maureen Depp, Loomis Sales: Hi, Mike.

It is nothing more than what we have shared. Our big initiative right now is multi-channel integration. We are embarking on new planning systems for our merchandising group. It is really just a timing of how some of the investments are being made. The other component of that, too, is that we are just anniversaring a number of new stores that weren't in the first quarter last year, and so that's causing a rise in the expense rate as well. Maureen Depp, Loomis Sales: Okay. Thanks.

Thanks, Maureen.

Neely Tamminga of Piper Jaffray. Neely Tamminga - Piper Jaffray: Great, can you hear me?

Yes. Neely Tamminga - Piper Jaffray: Great. Good afternoon. I also have a cold here today. Two things. Mike, can you talk a little bit about -- I guess this is really for Pete -- in terms of the women's change that is occurring. I am trying to get my head around this. Are you actually, physically, changing the spaces? Obviously, you are going to be upgrading some of the assortment that is in there, changing some things around. Potentially, could you be repositioning some brands within some of the women's departments? Similar to what you've done with Free People? I am just trying to get a sense of -- coming off of Magic, it is very clear to me that there is a major overhaul coming down the pike here in Fall. I'm just trying to get a sense of what that is going to look like.

That's a great question. We believe we have the appropriate amount of departments in the appropriate amount of space allocated to the women's segment and really across all of the different lifestyle issues we talked about, with fit, price, occasion and style. It really is much more a subject around the actual content and getting that right first. I think it will continue to evolve our space needs, as the customer demand dictates it. Obviously, it is different today than it was five years ago. I would anticipate it will continue to evolve five years from now. We are just trying to be as nimble as we can and really looking forward more than looking backwards in terms of how we create strategies around women's. But I think you're right. It is going to continue to evolve and there is opportunity out there to improve, for sure. Neely Tamminga - Piper Jaffray: If Blake or Mike could talk a little bit about some of the leadership changes that have been going on, with Dale's pending retirement here, I think next week. Maybe you could talk about what is going on with the rack leadership, and what the plans are for rack this year and for year? That would be great.

Hi, this is Blake. Let me touch on the rack and then Pete can take the merchandising and full-line stores area. The rack -- and Pete will touch on this -- Laurie Black has been leading that division for the past couple of years and has done an excellent job. She is now overseeing our cosmetic area, taking Dale Cameron's place. We took who we feel is one of our best divisional merchandise managers, Scott Meden from the women's shoe division to follow Laurie and continue with the strategy that she and her team have built. Obviously, we hope to continue to build upon the great platform that Laurie's done. Pete, do you want to talk about maybe, some of the regional or at least merchandising adjustments that have been made?

It is pretty much a natural evolution of what happens when people have been with us for a while. In Dale Cameron's case, she has been with us for over 35 years and put herself in the position where she can retire completely on her own terms. We're proud of her for that. She has been just sensational. What's gone along with that is her sense of responsibility to make sure that she left the division in great shape, and that we had people capable of carrying the torch and moving forward. We've had the benefit over this last month of Laurie Black literally working side by side with Dale in transition, as Dale is getting ready to retire and Laurie is moving into this new position. Frankly, Lori isn't new to full-line store merchandising issues. She has had full-line store merchandising jobs before and was very successful at it, even though cosmetics will be relatively new. She has a lot of main floor-type of experience for us, and actually cites Dale as a mentor of hers, and has worked with her directly over the years. We anticipate that is going to be a smooth transition. Laurie is a fantastic merchant. In the case of women's designer wear, Sue Patton on a very similar story to Dale Cameron. She has been with us over 35 years, has done very well and has decided she wants to retire. In her case, she had pretty much her right-hand person, who has been that same person for probably about 10 years and has grown up in the designer division; she has been with us for over 20 years. The time was right for her to accept some more responsibility. I know Sue has a lot of confidence in her and so do we. Her name is Jennifer Wheeler. I think that these will be seamless transitions. It will be exciting for the new people in there. It will breathe new ideas in. I think that's ultimately good for everybody. We are going to do our best to manage it well. Neely Tamminga - Piper Jaffray: Fantastic. Thank you guys and best luck in 2006.

Thank you.

Wendy, I think we have time for one more question.

Thank you. Adrianne Shapira, Goldman Sachs. Adrianne Shapira, Goldman Sachs: Thank you. Mike, just wondering on sales per square foot, your former peak was about $395. What do the new margin targets, what are they predicated on?

The new margin targets? Adrianne Shapira, Goldman Sachs: Yes, your pre-tax margins, what sort of sales per square foot do you think you need to get to, to achieve those?

Well based on low single-digit comps, which would put us -- I am going to say roughly in the mid-$370 to $380 range. Adrianne Shapira, Goldman Sachs: Okay, so it is not even getting back to your former peak levels.

Not for the next year or two.

Not yet. Adrianne Shapira, Goldman Sachs: Okay. A question about your men's half yearly sale event. It seems to be much more successful than the women's. Why is that? What sort of best practices can you take from that and apply it to the sale events going forward?

That's a really good question. Our clearance events are in transition, too. Since we have better information, markdown authorization and all of these things, we don't do nearly as much saving up for a clearance time as we did before. We are able to clear goods in a more timely fashion, so when we come to these traditional clearance events, we do tend to buy some more things in special purchase. With regard to men's -- that is a really good question. I think there probably are some things that could be learned there. But one thing that we know for sure is that the major amount of success that we've had in transitions and seasons at clearance time is our ability to be able to bring in new, regular-priced product. That was particularly true in January where it has been traditionally a clearance time, but with people having gift cards in their hands and anxious to buy new products, we were fortunate that we were able to have our inventories in line and be able to respond to that and not really burdened by a whole bunch of clearance activity in that month. I think that served us pretty well. Adrianne Shapira, Goldman Sachs: Great, thank you.

Thanks, Adrian.

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