Greetings, and welcome to the Nordstrom Second Quarter 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. [Operator Instructions] 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 we'll be referring to slides, which can be viewed by going to the Investor Relations section of nordstrom.com in. Our discussion may include forward-looking statements, so please refer to the slides showing our Safe Harbor language. Participating in today's call are Erik Nordstrom, Co-President; and Anne Bramman, Chief Financial Officer, who will discuss the company's second quarter performance and outlook for 2019. Joining during the Q&A session will be Pete Nordstrom, Co-President. With that, I'll turn the call over to Erik.

Thank you for joining us today. In the second quarter, we delivered strong bottom-line results, demonstrating our inventory and expense execution. We exited the quarter with inventory levels in a favorable position and made significant strides in productivity. We are implementing key learnings from the quarter to drive our top-line and deliver bottom line results. In the second quarter, sales were down 5.1% which was around the low end of our expectations. Full-Price decreased 6.5% and Off-Price decreased 1.9%. We anticipated first quarter trends to continue. However, we have a slow start to the second quarter and softer results on both Full-Price and Off-Price. Last quarter, we emphasized our top line focus related to loyalty, digital marketing and merchandizing. We've seen good outcomes from our efforts including improvement in Nordstrom note redemption. From a merchandize perspective, we are improving our in-stock levels and addressing a gap between our opening and higher price points. We ended the quarter in a strong inventory position giving us the ability to better align our assortment in the second half of the year. Now I'd like to provide insight into two drivers of our business performance. Our Full-Price anniversary sale and our Off-Price business. Starting with anniversary, this is a unique event featuring new arrivals at reduced prices for a limited time. Our anniversary strategy focused on three objectives. Increasing customer satisfaction, driving sales and improving the economics of the event. We're seeing early indications that our event resonated well with customers. That said we plan anniversary consistent with current trends, the sales were softer than expected. Based on customer feedback, we curated our anniversary assortment to highlight their favorite brands which drove higher sell-through of anniversary product relative to last year. We expect this to benefit merchandized margins in the third quarter and we'll have a complete assessment of our overall anniversary results at that time. While we increase depth in top brands, it has become even more concentrated around key items. We did not have enough depth in key items and we are actively addressing this in the second half, particularly with our top gift ideas for the holidays. During anniversary, we improved our operational metrics around satisfaction scores, delivery times in key markets and site performance. This includes initial survey feedback from our top loyalty customers, who valued the enhanced benefits such as earlier access to merchandize. We also leverage our digital and physical assets through buy-online pick-up in store, which increases customer engagement and is one of our most profitable transactions. During anniversary, sales from order pickup more than doubled over last year with nearly half coming from customers using this service for the first time. Customers who engage through order pickup tend to double their overall spend. Turning to Off-Price. We are pleased with our profitability results. However, sales fell short of our expectations. Earlier this year, we made changes to improve our bottom line which included reducing less profitable flash events because these events helped drive meaningful traffic to our Nordstrom Rack and Hautelook sites, we are increasing the number of high-quality flash events in the second half. We are also accelerating our marketing efforts to drive traffic such as the upcoming launch of our Nordstrom Rack television brand campaign. The Off-Price business ended the quarter in a strong inventory position improving churns across all merchandise divisions. As we head into the second half, we are being opportunistic in the marketplace with plans to accelerate forward receipts. In this dynamic retail environment, we are evolving our business to create a seamless shopping journey. Historically, we know that more than a third of customers who place an online order or visited a store to help inform that purchase. And half of our customers who make a purchase in our store or first spent time on one of our digital properties. Our local market strategy leverages our physical and digital assets to provide greater access to merchandise selection. With faster delivery and at a lower cost to us. This strategy focuses on gaining market share in our most important markets by leveraging inventory and increasing customer engagement through the services we offer. Our business is highly concentrated in our top markets with the Top 10 accounting for 60% of our sales. This year we scale our local market strategy in Los Angeles, our largest market. We're seeing compelling results and predictive metrics for customer engagement and inventory efficiencies. We're seeing higher customer engagement and spend at our Nordstrom local neighborhood service hub. Customers spent 2.5 times more on average, this service hub account for 30% of order pickup and alterations increased by more than 10%. In addition, product returns are coming in eight days faster driving greater inventory efficiencies. To leverage inventory across the broader LA market, we began offering customers up to 7x more selection that's able next day. This contributed to sales from order pickup nearly tripling in July. We are pleased with our results in LA and are accelerating key elements of our local market strategy in more of our top markets. Our next milestone is expanding our presence in New York City, currently our largest market for online sales. This fall, we will significantly expand our presence with the opening of our flagship store and two Nordstrom locals. We anticipate that the combination of our physical and digital assets will drive a meaningful sales lift in this important market. We will also leverage our seven locations in New York City including Nordstrom Rack, and Trunk Club locations to take care of our customers through services such as returns, order pickup and alterations. In closing, we're focused on driving our top and bottom line results. And we are well-positioned for the second half. Nordstrom has managed through many cycles and we will continue to evolve our business to better serve customers on their terms, no matter how they choose to shop. I'll now turn it over Anne to provide additional color on our financial performance and outlook.

Thanks Erik. Our second quarter earnings demonstrated our continued inventory and expense discipline. We are in a strong position to rebalance our merchandise assortment with customer demand across price points and key items. We also make significant progress in bending the expense curve, mitigating our sales shortfall. Second quarter sales reflect a consistent traffic trends, while conversion was softer relative to the first quarter. Heading into the second half, we continued to take aggressive action related to loyalty, digital marketing and merchandise. Our progress in the second quarter and plans for the second half give us confidence in our ability to turn around our current trend. Beginning with loyalty, we continue to grow the program with 12 million active customers, increasing 12% over last year and making up 64% of second quarter sales. We've addressed the execution related to Nordstrom notes and redemptions are in line with expectations. Enrollments are up over last year and importantly we saw a significant improvement in customer satisfaction scores during the quarter. With respect to digital marketing, we increased our level of investment in Full-Price and have further plans to accelerate Off-Price. For example in the first half, we had a 25% year-over-year reduction of flash event and plan to get back to prior levels with high quality events. And third in merchandising, you need initial investments in women's apparel to address the gap in our assortment from a price points perspective. We are encouraged by the sell-through performance and we're accelerating plans for the second half. In addition, we're applying our anniversary learnings to increase depth to key items specifically for the holidays or amplifying our gift assortment across categories and increasing the mix at more accessible price points. For the second quarter, our gross profit rate decreased 50 basis points from last year due to occupancy deleverage. Q2 merchandise margin rate relative to last year improved sequentially from Q1 and markdown levels were consistent with our expectations. We ended the quarter in a solid inventory position reflecting two consecutive quarters of positive spread sales. Expense performance well exceeded our expectations. Our SG&A rate in Q2 increased modestly by 26 basis points, reflecting fixed costs deleverage on lower sales volume. SG&A expense was down 4% compared to the previous year. This was primarily due to our expense savings in addition to performance related adjustment. Today, we have delivered expense savings of $100 million tracking ahead of our annual plans of $150 million to $200 million. Our efficiency initiatives include realignment of our support structure and stores, end-to-end process improvement in supply chain and technology and lower discretionary spend. These initiatives represent permanent reductions to our cost structure that position as well for strong EBIT flows through. During the second quarter we also managed variable expense as well in a tough sales environment and maintained flat overhead expenses. Expenses related to digital capabilities, marketing, technology and supply chain were relatively flat to last year. Our Q2 EBIT margin of 5.7% deleverage by 47 basis points over last year. A meaningful improvement from Q1. EBIT for our generational investments met our expectations. Moving to the full year, we lowered the top end of our prior outlook for revised EPS range of $3.25 to $3.50. We expect a sales decline of approximately 2% for the year versus the prior outlook range between a 2% decrease to flat growth. The impact of tariffs has not been incorporated into our outlook, but we believe it will be relatively immaterial for the year. Now I'd like to provide color on our assumptions for the second half. Sales are expected to be flat at the midpoint reflecting roughly a 400 basis point improvement from the first half. This incorporates four sales drivers all which are weighted equally. First, our merchandise plans include rebalancing our assortment, increasing depth of key items and accelerating opportunistic buys for off-price. Second, we are accelerating our marketing efforts including our Nordstrom Rack Television brand campaign in additional flash events in off-price, while continuing digital marketing investments in full-price. Third, we will lap last year's Nordy Club launch with respect to Nordstrom notes with most of the impact in the fourth quarter. And fourth, sales in the New York flagship, opening on October 24th will primarily benefit the fourth quarter. For the third quarter, we expect sales to improve modestly from the first half. We expect gross profit rate expansion from improved sell-through at the anniversary product. We also expect our SG&A rate to be leveraged from fixed cost, which includes pre open expenses for New York flagship. Third quarter EBIT margin is expected to be relatively flat including last year's estimated credit related charge. For the fourth quarter, we expect the New York City flagship opening to tribute sales in the fourth quarter, as well as occupancy deleverage. Taking a step back, our framework to drive shareholder value remains consistent. Gain market share, improve profitability and returns and maintain a discipline capital allocation approach. We're focused on driving the top-line, leveraging inventory and bending the expense curve. Over time, we expect our generational investments to further scale and contribute to improve profitability and return on invested capital. We have a strong balance sheet and maintain a consistent approach to capital allocations. As we exit this year's heavy investment cycle, we expect moderating CapEx and accelerating free cash flow beyond 2019. CapEx levels are expected to moderate from 6% this year to 3% to 4% of sales and appropriate level to fund our strategic objectives. In terms of the long -term financial targets we shared a year ago, we will focus on delivering on our current year expectations and intend to revisit those targets after we finish the year. In closing, our priorities are to drive our top-line, improve profitability and execute key strategies to enhance the customer experience. I'll now turn over to Trina for Q&A.

Thank you, Anne. Before we get started with Q&A, we would appreciate if you can limit to one question to allow everyone a chance to ask a question. Also as a reminder, the company does not plan to comment on market rumors or speculation. We will now move to the Q&A

[Operator Instructions] Our first question comes from Edward Yruma with KeyBanc Capital Markets. Please proceed.

Hey, good afternoon. Thanks for taking the question and thanks for all the insight on anniversary. I know you indicated that your strategy of kind of deeper in brands that the customer loves seem to have worked. But just try to help us understand a little bit some of the conversion issues you experienced. And you obviously indicated that the pre-sale did well or at least the customers responded to it. So I guess just kind of what did the consumer not like about anniversary that contributed to the soft top line. Thank you.

Ed, this is Erik. We did go into the event go narrow and deeper on brands. We headed it out some of the long tail of our brand and went deeper in our customer's favorite brands. That being said we didn't go far enough. We simply ran out of our top items. And also we have a long history with anniversary sale. There was a change this year in customer behavior. Certainly, we always see a highly disproportionate amount of demand on our top items. What was different this year was how deep that disproportion amount was. We saw more demand on our top items than we seen previously. And we simply ran out faster of our top items than we had planned. So we're encouraged that I think our buyers did a great job of picking the right items and putting the dollars in the best items. We just should have could have done a better job of going deeper on those top items. And that would apply you brought up the early access portion as we mentioned we had a lot of good customer feedback on the changes we've made this year. But again I think what we could have done better. We could have had deeper positions on our top item.

Our next question comes from Omar Saad with Evercore. Please proceed.

Thanks for taking my question. I wanted to follow up and a lot of the detail and commentary you made on the Los Angeles market local. Maybe you can elaborate what it is about this experience where you're seeing your loyal customer who gets free shipping and returns. Going to the store, order online, pick it up in the store and how do we make sense of that in an e-commerce shipping world? And then what is it --what are the inventory implications on the other side at least within the Los Angeles market and maybe at least theoretically thinking about it longer term as you expand these kind of strategies to other markets. Thank.

Thanks Omar. Yes, there's clearly being able to have a broad --the broad selection that customers are coming, customers to online but being able to pick it up in stores resonates with lots and lots of customers. Just looking at a lot of retailers results this last couple weeks, seems to me there's a pretty common thread there of some successes in various categories of company doing this. We've had BOPUS capabilities for quite some time. We did make some changes and mostly impactfully in Los Angeles, we greatly increased to the selection that customers have in doing a buy-online-pickup-in store for next day. Specifically, we're able to leverage the entire markets inventory that we're having stores. And what the customer choose where they want to pick it up. We're able to move around that inventory very efficiently between our stores in the market, get it there quickly and customers love it. Our customer satisfaction scores on that service are amongst the highest. We have of anything we do and mention the inventory implications of that part of our local market strategy is getting to a different level of inventory efficiency in particular having the capabilities of holding back inventory, and allocating it as needed to its stores or be it to customers home. We haven't done that yet. We're still working on that. We've done some testing. We're getting in position to do that. But we certainly think that that's the next step of Nordstrom local is getting even bigger selection to customers having fewer out of stocks. And for us reaching another level of inventory efficiency.

Our next question comes from Oliver Chen with Cowen and Company. Please proceed.

Hi. Thank you. Regarding the product opportunity ahead and thinking about rebalancing in key items and the investments you need to make. Is it very different on the full-price side versus rack? And how as you do approach holiday, the key topic is value as well as e-commerce and sustainability? Would love your thoughts.

Yes. This is Pete. I think for us just being more thoughtful and purposeful about how price impacts really our offering. And this is particularly clear when holiday, when we've been able to get some objective information about how customers purchased gifts, the prices that they're really looking for from us. And we just --we are going to be much more purposeful at having the proper amount of inventory, first of all, in the gift classifications that make sense but also with prices that working for us, no really looking more to $50 to $150 or $200 cut price points. And so we have a pretty broad range of prices that we have to offer. And it doesn't serve as well just have kind of democratic approach across every category that we're in. We need to step back and figure out where to invest the money to be a better gift destination for customers. And I can just tell you in our experience of being around this it feels like the most purposeful attempt for us to improve into be a gift destination. So we think we've learned a lot and as Erik mentioned, anniversary I think was helpful kind of understanding depth of stuff. So we feel good about our chance to have a good holiday's result of that. As you talked about price and what happens in off-price and full-price, it's a version of it that's applicable in both places and we are trying to be thoughtful and surgical about how we're doing it. So I just think it puts extra focus on our ability to be good editors and curators, something we've been able to approach with some more objective information. We have better days than we've ever had before. So again I think from our point of view it feels like the less opinion based thing and if it's much more purposeful around objective information.

Okay, great. And would love your thoughts on re-commerce Nordstrom's been really ahead of the curve with what customers want. And I know you have an innovative partnership with Rent The Runway.

Yes. Well, thematically it's abundantly clear that the whole sustainability subject is really important to lots of customers and so it's important to us. And I think the re-commerce thing plays right into that. And there's a bunch of things that we're working on that we're really not in position to fill you in on right now because a lot of things are flying. But I think it's fair to assume that at the major theme for our merchandising strategy that is right at the heart of the lot of it and it gives us a great opportunity to work collaboratively with our brand partners to figure out how to satisfy customers better on that score.

Our next question comes from Jay Sole with UBS. Proceed great.

Great. Thanks so much. Erik, I appreciate your comments on the anniversary sale. If you take a step back and maybe just help us understand sales for the company are down 4.3% the first half. If you could pick out maybe two or three real big picture things that explain why the sales have -- the sales growth rate has slowed down so much from where it was historically going back five or ten years it'd be really helpful. Thank you.

Sure. Well, first I'd starts with what we talked about in first quarter. We identified three areas. Loyalty program, digital marketing and the balance of our merchandise assortment. We made good progress on the first two. The loyalty program and digital marketing, we saw a general good traffic across our properties. As we talked about in the first quarter, the merchandise assortment takes longer. We have also had buys in place and around that we have opportunities and the balance of our price points and we have opportunities in being in stock in these top items that we've been talking about. We've seen some encouraging signs there. Those that rebalancing is underway but we expected that to have more attraction in the third quarter and the fourth quarter. And we did in the second quarter.

Do you feel like that the company organizationally is the right structure? And what do you feel like is the key to sort of driving traffic back into the stores? And driving that store sales growth right back to a higher level.

Well, as you know, we've been working our local market strategy for a couple years now. And that is progressing and we started last year in LA really to do a lot of testing with customers, lot of listening of how we can connect our digital and physical assets to better serve customers. This year it's really been about scaling it in LA. We started with our four stores in LA. We've now expanded in particular that buy-online pick-up in store greater selection for next day delivery across 16 stores in Los Angeles, Orange County as well as our three local stores. And we're seeing really tremendous traction on that service in particular. But stepping back, it is --it's looking at our physical assets as points of engagement as much as they are points of sale. We really don't care where the sale gets rung up. And we continue to learn that there are physical assets that that's when leverage really how customers want make a tremendous difference. So we talked about buy online pickup in store. We know customers who use that service then double those that don't use it. I think others talked about alterations before operation is obviously something that can't be done digitally. And it's something we're really good at. We're the largest employer of tailors in North America. I think we have the best tailors they are out there. And the customers are engaged all our alterations area. There's been triples when a customer engages with a stylist, their spend goes up 5x. So that engagement is really what we're looking for be with services, be it across channels, we know the more engagement we get with customers the better it is. And through our local market strategy in particular, we feel really good that we've found some ways to leverage these physical assets that really resonate with customers.

Our next question comes from Alexandra Walvis with Goldman Sachs. Please proceed.

Good evening. Thanks so much for taking the question. I had a question clarifying the guidance. You helpfully break down what the four drivers of the four point improvement in comps into the back half likely to be. I was wondering if you could clarify whether the sales from the New York flagship would all be coming in the fourth quarter given the opening date. And then a follow-up question now I think that implies some pretty strong sales per square foot in that new store. And can you talk about the level of confidence there and your perhaps expectations on the P&L implications of that specifically. Thank you.

Hi, Alexandra. I'm going to start with the clarification on the guidance piece to it. So as you mentioned the store does open on October 24th. So there will be very I mean tiny amount in Q3 and I would say the significant majority of what you would see would be in Q4 which is how we framed the guidance on this. And as far as again how we're looking at New York and I think Erik and Pete can weigh in on this but provides more color on this, but we've really seen this is -- we're opening this for positionally entering a market. And I think when Erik went through his slides and we had the slide talking about the seven points in Manhattan that we are servicing customers. We're really approaching this as not only opening the tower but our locals leveraging other touch points between Trunk Club and Racks as well as an enhancements in our online with our customers as well.

Yes. I would just add on to that. So we think it's really important that with opening of the tower that we have these other assets and services coming online around the same time. So I know we've announced that will be opening two Nordstrom local service hubs; one of the Upper East Side, one in the village. And we're also able to execute and deliver the most popular services our customers haven't-- we've seen in Los Angeles our local which is do returns, online returns in particular. Order pickup and alterations at our two rack locations in Manhattan as well as the Trunk Club clubhouse. So we left seven locations on Manhattan to be able to take care of customers. And there's really a synergy between those assets. The inventory we have there. The people we have there. Services were able to provide. And we had a lot of proof points in Los Angeles. We're set up well to leverage that from New York, but I would reiterate enhance point and we had that one slide in my section that shows the map and the seven locations really emphasize that that's where that if we are opening a market we have assets, physical and services that we are excited to bring to New York City customer.

Our next question comes from Paul Trussell with Deutsche Bank. Please proceed.

Good afternoon. On margins, on SG&A dollars were nicely managed. Could you highlight some of the areas of savings? And do you now expect to deliver above the original $150 million to $200 million of savings you originally outlined? And also on gross margins can you just talk about the puts and takes please? Both in regards to what you experienced in the second quarter but also your level of confidence in terms of expecting expansion in the third quarter. Thank you.

Hi, Paul. So let me take the SG&A piece as well, as we've talked about we had three particular drivers driving our SG&A, one is realigning our support structure and costs for the store, the second one is really driving end-to-end productivity initiatives to supply chain and technology. And I would say to a lesser degree, it's more discretionary spending across the board. And I would say that's a small piece of all the things that we've been doing. So those are the three levers, we've been pulling and working through. And as you mentioned, we are ahead of our plan. So when you look at our overall guidance for the year, we basically -- typically we had in Q2, attempt our plan for the second half and bend the beat we had. So we are exceeding what we originally had thought in Q1. So that's how you get to the reconciliation of the guidance. On gross margin, as we mentioned, our merch margins were actually in line with our expectations as far as markdowns. The only thing we had was the leverage on our occupancy expenses within our sales volume. As we go through the rest of the year, we really didn't change any of our guidance assumptions on margin. As Erik have talked about how we thought about Anniversary sale as far as having better margins in the third quarter from the Anniversary product. That was the plan that we made and we're continuing to progress on that. So again one thing that's changed on overall guidance was basically the top line.

Our next question comes from line of Mark Altschwager with Baird. Please proceed.

Thanks and good afternoon. Nice job on the expense savings. I was hoping you could dig a bit more into how the operating model is really changing at the store level and just really what you're doing differently. I think that's a big component of the cost savings that you've outlined. And I also think this is the first Anniversary sale period, since you've put some of these operational changes into place. So just curious how that all played out during the higher-volume period and any key learnings as you move forward to the holiday? Thanks.

Thanks Mark. Yes, the implications on operating model, especially on our store are pretty profound. Our stores -- we're going to leverage the inventory we have in our stores to better serve customers, meaning the stores are increasingly becoming fulfillment centers as well as selling directly to customers. So we have had changes in our models in our store there to do that. We need more people handling both online orders are being filled as well as returns coming back, and getting that inventory resalable as quickly as possible. That's gone really well, and in particular, over Anniversary was such an intense period of demand. We saw significant improvement in our fulfillment rates in our stores as well as the speed of delivery direct to customers in our key markets. So we feel really good about that.

Thanks. And if I could just quickly follow up on a previous question. The implied sales guidance is quite a bit stronger for Q4 versus Q3. Is there anything beyond the Manhattan store coming online that's driving that difference? If you could just talk about some of the drivers there, that would be helpful.

Yes. What we try to do is give you full-year and then give you the Q3 assumptions. And we talked about how we expect sales to moderate -- moderately getting better in Q3 and then some of the big drivers. -- the biggest outstanding driver was Q4. So I would assume is that out of the four levers that we laid out, you are going to continue to see some improvement, particularly as we go through the second half of the year.

Our next question comes from Dana Telsey with Telsey Advisory Group. Please proceed.

Good afternoon. Two quick things. As you think of the women's apparel market and what you've been seeing there, did anything from the Anniversary sale informed you for what should be in the store or other brands or what's happening with some of the existing innovative brands that you have to expand or to contract and bring in others? And lastly, what does success mean to you for the New York store? Are there any metrics around it that you can place? Thank you.

Hi Dana, it's Pete. We made some strides in women's apparel. That's not a lot that you can easily quantify at this point, but I think certainly creating a road map for the future for us to bend the curve there. As Erik mentioned, I think we did a good job of identifying the key items and brands and styles that customers are responding to. So we've always had a pretty aggressive program on trying to identify and amplify emerging brands. I guess what I can tell you is changes -- the cycle on all that stuff is shorter than it's ever been. So one of the things we need to do is identify new emerging brands and amplify them quickly. It isn't a matter of test and learns over a couple of years, a couple of stores in time. So I guess what I could say just more broadly is that I think we have more confidence in our ability that will put on the gaps, when things are working well. And the same holds true for perhaps some legacy brands that are declining. And we have some very big built up established businesses with some legacy brands, where it's going the wrong way. So our teams have to be really good editors. They've got to be curious and they can't really use last year, so much as a guide. So the other thing, I would say is thematically really understanding the way price impacts classifications and just getting sharper about that is helpful. So it's been kind of a tough go for a while in women's apparel, but I think it's fair to say that we have optimism about our ability to make some improvements there, particularly starting at the back half of the year. And then, the other question was about, I'm sorry, was it about New York specifically Dana?

Yes. How do you quantify success of the New York store, what would you be looking at in a year or how do you think of the New York store? What would make it in your mind as success? Did the volumes match Seattle or how do you think about it?

Yes. There's obviously a way of quantifying and we don't break out those numbers by the store. But I think what Anne mentioned really is the way that we look at by market. And I think as we mentioned all the way along, already is our largest online market. And we know when we have physical access to a market like that we grow our online business considerably as well, adding the stores and that sale in the physical stores as well. So we'll probably have more to say about as that begins. But I think ultimately the way you guys should be keeping scoring it; it's looking for us to look at it in terms of a market. I would say, though, if you're asking us, particularly in the near term, how we're going to view the success. I think it's really along the lines of can we deliver a great customer experience there and all the ways that I think customers would expect from Nordstrom entering the market. There are plenty of places to buy things in New York and if we're really successful that is because we do the little thing that is actually big thing. Just the way that we serve customers in a more relevant, a more convenient way, we've heard that theme a lot. And we've got a good team of leaders that were ready to take that challenge on. So, no, I think we'll be getting a lot of indications about our ultimate ability to be successful there based on the reaction that we get from customers that our ability to step up and did deliver something that's --.

Thank you. Our next question comes from line of Matthew Boss with JP Morgan. Please proceed.

Great. Thanks. So at Off-Price, this was the weakest quarter on the top line, I think in five plus years. I guess what's driving the magnitude of the slowdown? What's the timeline to stabilize the concept? And any change in your view regarding the long-term size of the brick-and-mortar fleet for Rack?

Yes. I would merely point to those issues we've had across our Full-Price business, in fact our Off-Price business as well, the loyalty, digital marketing and merchandise assortment. The loyalty is as you mentioned, we had good progress over the quarter. So we like the directions that were there. The digital marketing, we're a little further behind in Off-Price than we are in Full-Price. We do have still some traffic opportunities in Off-Price. We feel much better about that. In particular, what's unique about Off-Price, which we touched on our comments, is flash. We did a deep dive at the end of last year into all* our flash events. We had a number of flash events that were one category that we don't carry in our stores and with the majority of our online returns coming back to our stores that creates issues. But number two, they were unprofitable events. So we did a lot of editing at these flash events. The flip side is what's really a plus about the flash model is the traffic generation engagement mainly through email that we give our customers, who sign up these flash events is terrific and helps us not only on the flash site, but helps us on our Rack.com site as well. So we felt the reduction in traffic from cutting back on those events. We started the last -- about last three weeks back on more of our normal cadence there of flash events and the key to there is not just quantity of flash events, it's the quality of flash events. And we feel really good about that. So feel good about flash events going forward that it's going to be differentiated than the first half. We feel good about the marketing that's going to be differentiated than the first half. The other point [Indecipherable] noticed here is the inventory position. I mean we're sitting here midway through the year with lots of open to buy across our Company, but particularly in Off-Price. In Off-Price, the biggest driver Off-Price business is having great merchandise. Being opportunistic, especially in times like now that are tough for the industry, we're really excited about the position we're into to really pick up some compelling merchandise for our customers and get them into our Rack brand.

And quick-follow up. Any reason for the lack of share buyback this quarter and how best to think about capital allocation in the back half?

Yes, Matt. So we've always been really consistent about how we approach capital allocation and it's the first and foremost, we look at investing in the business. And we talked about this as a very heavy investment cycle year for us as we complete the payments and the investments we're making in New York. And as we exit out of the year, that CapEx investments are -- be coming are more moderated environment than we have seen in the past throughput [with that] And then the second piece to it is, of course, our dividend and also staying, we are very focused on investment grade. So the way we look to share buyback in the past is we need excess cash for that. And so that's kind of the priority of how we look at our capital allocations.

Okay. We'll now take one more question.

Thank you. Our last question comes from Chuck Grom with Gordon Hackett. Please proceed.

Thanks. Just a few housekeeping things. I guess first on the third quarter guide, can you quantify how much gross margin expansion you're anticipating? Second would be on the second quarter, could you perhaps walk us through categories that either outperformed or underperformed? And then third, on the note redemption issue, is there a way you can speak to how much it's improved and maybe quantify how much of the drag it was in the fourth quarter of last year, given that you're going to be cycling that. And I think that's part of your equation for acceleration in sales later this year. Thanks.

Pete, do you want to take the assortment question.

Yes, sure. In the second quarter, we had pretty significant improvement in the beauty area. I think we mentioned that before that we had some out of stock issues at the beginning of the year hurt us. And so we bent the curve there and beauty improved quite a bit. To me, it's been a consistent story for quite some time as our designer business across all categories positive. That continues to be a good growth opportunity for us. Our MPG area did very well, our own product that showed some improvement. That's good to see. And then lastly, I'd say that the lingerie and activewear in women's performed relatively better. The tougher areas for us are we had some slowdown in shoes. I think that represented a moment in time we shall see, but that was a bit of a dip from where it was that the shoes have been performing strongly. Men's had some challenges. I would say the biggest driver there that we've noticed, and this is not a surprise to anyone who follows our industry but the continued kind of casualization of American that impacts the men's business quite a bit. And so while we're still serving a lot of men and selling them things, the average price of what we're selling them oftentimes is less than it was when they were buying more suits and ties and things of that nature. So there are adjustments we need to continue to make, but I think that those kind of represent the stronger performing categories relative to the future performance from last quarter.

And as far as your question on margin, the guidance we gave is that we thought gross profit at the end of the year would have slight de-leverage really driven on -- de-leverage on occupancy, based on our sales volume. And so when we talked about Q3, what we said was that we thought -- we thought merch margin would actually be an improvement year-over-year because of the Anniversary sell-through that we're expecting from how we plan Anniversary. I mean and just to remind you, Q4 will actually have the occupancies in New York City baked into it. I think from that you can kind of bake into your model. As far as the Nordstrom note, we gave that split roughly evenly for the second half. You can probably imagine if you are anniversarying this note redemptions and the time it takes for people to accumulate and redeem, the cumulative effect. So it's not going to be completely even across the two quarters. But for the second half it's roughly 500 basis points. End of Q&A

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

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