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Nordstrom, Inc. (NYSE:JWN)
Q2 2018 Earnings Conference Call
August 16, 2018, 4:45 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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. If you would like to ask a question, please press *1 on your telephone keypad. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. 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.

Trina Schurman -- Director of Investor Relations 

Good afternoon and thank you for joining us. Today's earnings call will last 45 minutes and will include around 30 minutes for your questions. Before we begin, I want to mention that we'll be referring to slides, which can be viewed on going to nordstrom.com and the investor relations section. Our discussion may include forward-looking statements, so please refer to the slides showing our safe harbor language.

Participating in today's call are Blake Nordstrom, Co-President, and Anne Bramman, Chief Financial Officer, who will discuss the company's second quarter performance and the outlook for 2018. Joining during the Q&A session will be Pete Nordstrom, Co-President, and Jamie Nordstrom, President of stores.

With that, I'll turn the call over to Blake.

Blake Nordstrom -- Co-President

Good afternoon, everyone. Many of you joined us for our investor day last month. We appreciate the opportunity to share our customer strategy, our aspiration to be the best fashion retailer in a digital world, and our long-term financial commitments. For those who missed it, we have made the webcast available on our investor relations website. We've laid out our strategy and will continue to build on this foundation as we execute and measure our outcomes.

Our second quarter results reflect our progress in achieving our long-term financial commitments. In the second quarter, we reported a total sales increase of approximately 7% and earnings per share of $0.95. We remain on track for 2018 to be an inflection point for profitable growth.

As a reminder, over the course of this year, there are timing impacts related to the shift in the calendar and the new revenue recognition standard. In the second quarter, this represented a favorable impact of roughly 100 basis points on total sales and $30 million on EBIT. This is expected to fully reverse in the third quarter, resulting in an unfavorable impact. To help provide further clarity, we posted our slides ahead of this call and Anne will share additional insights in her remarks.

Because of these nuances on total sales this year, we're also providing color on our comp sales, which are reported on a like for like basis with no impacts on the calendar shift or revenue recognition. For the second quarter, comp sales increased 4%, driven by growth across both full price and off-price. We had robust digital sales growth for the quarter, reflecting our market-leading presence and significant progress toward our long-term goals. Digital sales grew 23% for the quarter, up 300 basis points from a year ago and accounted for 34% of our sales.

In full price, we had a comp increase of 4.1% for the quarter. We recently completed our one of a kind Anniversary Sale, an event that distinguishes us in the industry by featuring new arrivals and reduced prices for a limited time. Anniversary generates significant volume that rivals even our holiday period. We continue to see a heightened shift of customers shopping online during the Anniversary.

Digital sales accounted for more than 40% of our event. On the first day of early access for our Nordstrom cardholders, we our biggest day ever online, exceeding our previous record by 80% at ten times our average daily demand. We worked hard to manage our systems for peak demand.

Despite our efforts, we experienced some website issues as we encountered unprecedented levels of demand on the first day of the event. While our team resolved this, we know we disappointed many of our customers. In response, we offered cardholders 10 points per dollar on purchases made on the first day of Anniversary.

While we had a solid Anniversary overall, we're well aware that we have opportunities to better meet our customers' expectations. We've learned a lot and are highly committed to improving our execution. From a merchandising perspective, our partnerships with strategic brands enable us to provide customers with compelling offers and strengthen our product margin.

In the second quarter, sales from strategic brands grew 13%, making up around 45% of our full-price business. We are positioned to achieve our long-term plans for strategic brand growth that we shared during investor day. Our off-price business delivered a comp increase of 4% for the second quarter.

The strength of our inventory position allowed us to be fluid and respond quickly. We took swift action to accelerate inventory turns, strengthen our core assortment, and improve our execution in stores. Our second quarter comp sales exceeded our plans by a couple hundred basis points and we expect to carry and build upon this momentum during the second half of the year.

We also continue to deliver 25%+ sales gains in our digital business, nordstromrack.com and HauteLook. One of the primary topics we discussed during our investor day was our local markets strategy, a cornerstone of how we will win with customers and increase shareholder value.

When customers engage with us across stores and online, on average, they spend five times more and profitability per customer doubles. Through our focus on our top markets, we're combining the scale of our national infrastructure with our local assets of people, product, and place to drive increased customer engagement and gain market share.

We're starting in our largest market, Los Angeles, where we're bringing all of our digital and physical assets together in a seamless ecosystem. We're continuing to invest in supply chain, a critical enabler of the customer experience. We have identified sites for our West Coast fulfillment center and local omnichannel hub, which are scheduled to open in late 2019.

These investments in our supply chain network will help us address our opportunities to better serve customers, improve our efficiencies, and leverage inventories in our local markets. Last month, we announced that two additional Nordstrom local concepts will open in the LA market this fall. These neighborhood hubs are one component of our local market strategy to engage with customers through more convenient access to products and services, such as buy online, pick up in store, alterations, store reserve, and personal styling.

Technology is a critical component of our ambition to be the best fashion retailer in a digital world. On that front, we're pleased that Edmond Mesrobian has joined our executive team as Chief Technology Officer. Edmond brings nearly three decades of experience from large and complex international companies including Tesco and Expedia. He will support all aspects of technology across the company and focus on advancing our capabilities to deliver the best experience to our customers, however they choose to shop with us.

In closing, we believe we are leading the future of retail through our customer strategy centered on three strategic pillars -- providing a compelling product offering, delivering outstanding services and experiences, and leveraging the strength of the Nordstrom brand. We are confident in our path forward and are well-positioned to achieve our financial plans for the year and over the long run.

Now, I'd like to turn the call over to Anne to provide more color on our second quarter and expectations for the year.

Anne Bramman -- Chief Financial Officer

Thanks, Blake, and good afternoon, everyone. Before I review our second quarter results, I'd like to reiterate our key takeaways from our recent investor day regarding our long-term financial plan. To begin with, we're targeting higher shareholder returns through three deliverables -- growing market share, improving profitability and returns, and continuing our disciplined capital allocation approach.

Second, we're on track for 2018 to be an inflection point for profitable growth as we scale our generational investments and digital capabilities. And third, as our model evolves and we near completion of our heavy investment cycle over the next couple of years, we plan to return to mid-teens ROIC and accelerate free cashflow.

Our second quarter demonstrated our progress in achieving these financial goals. Q2 EPS of $0.95 reflected topline strength across our businesses and throughout the quarter. Based on our first half results, we have raised our full-year outlook from a top and bottom line perspective.

Now, I'll provide further details around the timing shifts. As Blake mentioned, quarterly comparisons to the prior year are impacted because of last year's 53-week calendar and revenue recognition changes. For the second and third quarters, the primary driver of timing shift is revenue recognition. This shift of events, triple points, Anniversary, and half-yearly largely offset within the second and third quarters. For example, in the second quarter, the unfavorable impact of triple points was largely offset by the favorable impact of Anniversary.

For the second quarter, we had a total sales increase of approximately 7%, including a favorable impact of roughly 100 basis points, which will fully reverse in the third quarter. This primarily represented the impact of revenue recognition as it relates to the timing of Anniversary.

As Blake mentioned, comp sales are reported on a like for like basis, which means there are no impacts from events shifts or revenue recognition. While we are providing color on our comp performance given this year's unique nuances, we're focusing on total market and sales performance as comps become less relevant over time.

As a reminder, at the beginning of 2018, we made changes to our sales reporting to align with how we view our results internally. We now allocate certain corporate adjustments, such as estimated sales returns, to our full-price and off-price businesses. These allocation changes do not impact sales at a totally company level, but they do impact prior comparisons for full-price and off-price.

It's also important to keep in mind that we don't believe our sales trends on a quarter over quarter basis are necessarily predictive due to the futile nature of business. For example, Anniversary has become less of an indicator for second half performance, as our merchandise offering continues to shift from fall to wear now. We view our underlying trend over a longer-term horizon, which has generally been consistent over the past several years.

Now, I'd like to walk through some timing impacts on the other areas of P&L and provide some color on Anniversary execution. First, the gross profit increase of approximately 90 basis points included a favorable shift of $30 million due to revenue recognition as it relates to the timing of Anniversary. This is expected to fully reverse in the third quarter. More specifically, it represents in transit sales that are now recognized as shipment under the new standard rather than deferred. There is an elevated impact relative to last year due to the high volume of online sales for Anniversary at the end of the quarter.

The second call out is related to an unplanned 10-point loyalty offering made in response to the site outage on the first day of Anniversary. This reduced gross profit by approximately $12 million in Q2 and is expected to be roughly EBIT-neutral by the end of the year as customers redeem their notes.

In Q2 last year, we had a similar loyalty accommodation, so the impact is minimal on a year over year basis. Our gross profit performance reflected higher product margins from continued regular price selling trends and leverage on occupancy expenses. From an inventory perspective, we ended the quarter with a positive spread between inventory and sales growth, in line with our expectations.

Moving to SG&A, our rate increased around 70 basis points over last year. This reflected higher fulfillment and delivery expenses related to digital growth and peak online demand during Anniversary. Coming off the event, we expect supply chain costs to return to recent levels. We're focused on continuing to bend the curve in expense growth and remain on track for a mid-single-digit increase for the year.

Turning to capital allocation, our philosophy is to maintain a consistent and balanced approach between reinvesting in the business and returning cash to shareholders. We're also focused on maintaining a strong balance sheet and an investment grade credit rating. Our debt leverage remain consistent, with our expectations at 2.5 times on an adjusted debt to EBITDA basis. We had approximately $90 million in share repurchases year to date.

Turning to our full-year guidance, we've raised our EPS outlook from a range of $3.35 to $3.50 to a range of $3.50 to $3.65. This incorporates our first half results while maintaining our assumptions for the second half of the year. From a comp perspective, we've raised our full-year expectations from a 0.5% to 1.5% increase to a 1.5% to 2% increase. This assumes a continuation of underlying sales trends in the second half of the year.

From a gross profit perspective, we continue to expect modest improvement in product margins and a consistent occupancy rate relative to last year. For the second half of the year, we expect Q3 to contribute roughly 30% of EBIT and Q4 to contribute 70%.

We have the following quarterly callouts. Q3 EBIT margin is planned to deleverage on fixed expense and includes a $30 million unfavorable shift in Q2 associated with the impact of revenue recognition. Q4 EBIT margin is planned to leverage on higher sales volume and reflect a favorable comparison of $16 million from a one-time employee investment associated with last year's tax room. When normalizing for this one-time impact, Q4's planned EBIT contribution in the second half is generally consistent with historical trends.

We remain confident that 2018 is an inflection point for long-term profitable growth. Our drivers of EBIT margin improve include continued strength in our product margins, scaling of generational investments, and leveraging our digital capabilities. We're encouraged by our progress today and we're tracking well against our financial plans.

I'll now turn it over to Trina for Q&A.

Trina Schurman -- Director of Investor Relations 

Thanks, Anne. To give everyone a chance to ask a question, please limit to one question. We'll now move to the Q&A session.

Questions and Answers:

Operator

Thank you. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * key.

Thank you. Our first question is from Jay Sol with UBS.

Jay Sole -- UBS -- Analyst

Can you talk about what improved in the off-price business this quarter? Can you just take us through the improvement that led to a 4% comp?

Blake Nordstrom -- Co-President

Jay, this is Blake. I tried to make those comments through my remarks, that as I indicated in the previous call, we had some opportunities in women's and there were some opportunities with the balance, whether that was seasonal items or some bets that we made on fashion. The fact that our inventories were in pretty good shape, the team was able to react in a short amount of time and make some adjustments to that balance. We had quite an improvement there. We're heading in the right direction and we're encouraged by that.

As we've indicated previously, we've had good foot traffic in our stores and online and the opportunities for the sales results resulted in our end and we're pleased that we're making some progress.

Jay Sole -- UBS -- Analyst

So, maybe to follow-up on your point about inventory. Can you just talk about how you were able to drive 7% total sales growth for the company in 2Q, even though inventory was down 2% at the end of Q1?

Blake Nordstrom -- Co-President

Okay. This is Blake. I think the biggest inventory change happened in the racks. We've had good inventory management for some time. It's critical in this environment. We in 2017 were not as consistent in our inventory management and Geevy Thomas and our merchandising team made that a real priority at the beginning of the year and have made great strides.

We alluded at the investor day that we felt that we were heavy with our inventories. He's been able to, with the team, take some inventory back of the house. So, it's about $85 million less on a comp store basis than our stores. We don't think it's changed what's happening in front of the house. So, the ability to turn it faster, have fewer touches, have more regular price or first price selling is really benefiting in many ways.

Jay Sole -- UBS -- Analyst

Got it. Thanks so much.

Operator

Next of Mark Altschwager with Robert W. Baird and Company. Please proceed with your question.

Mark Altschwager -- Robert W. Baird -- Analyst

Great. Good afternoon. Thanks for taking the question. I guess first, I'm curious about the Anniversary Sale performance in the LA market. I know it's early, but you've got that beta group of customers that's on the market intensification strategy. So, I'm curious if there are any earnings you can speak of as you look at how those customers interacted with the brand during the sale. Thanks.

Jamie Nordstrom -- President of Stores

Yeah, Mark. This is Jamie. We spent most of the front part of this year building out a lot of those new experiences that we talked about at the investor day for LA customers. It's still a relatively small number of customers in Los Angeles that are exposed to those experiences. They're helping us build those. We call it the beta group. We're involving those customers quite a bit along the way.

So, I don't think there's a story yet there or results on how those experiences drove our total business in Los Angeles for the Anniversary Sale. I think we're going to start to get those results over the back half of the year. We'll have more to share there. I think the results so far are encouraging. We know we've got a big opportunity there to increase market share and do a better job for customers. So far, the results are really encouraging. We'll have more in the coming quarters to be able to share on our results there.

Mark Altschwager -- Robert W. Baird -- Analyst

Okay. Thank you. If I can just follow-up with Anne real quick -- a lot of moving pieces with the revenue recognition changes and some other items. Could you simplify it for us and walk through how we should be thinking about the gross margin rate progression in Q3 and Q4.

Anne Bramman -- Chief Financial Officer

Yeah. So, we really tried to be transparent as we possibly could to roadmap it out for you guys. I think the key thing you need to keep in mind is you look at the Q3 pieces to it is the revenue recognition piece and gross margin is a good guy in Q2 and a bad guy in Q3. So, that's going to have a negative impact on margin, as well as Q3 is a lower volume quarter for us.

So, as you would expect, consistent with what we see with historical trends, the way we planned it out is that our expenses, both in buying and occupancy and SG&A would de-leverage consistent with what we've seen historically just based on the topline volume components to it. That's really kind of the headlines around that.

Mark Altschwager -- Robert W. Baird -- Analyst

That's helpful. Thanks so much and best of luck.

Operator

Next is Brian Tunick with Royal Bank of Canada. Please proceed with your question.

Brian Tunick -- RBC Capital Markets -- Analyst

Thanks. Good afternoon. I'm curious about any comments you'd share about the learnings from the men's store in New York City so far and anything you wanted to comment on Canada as some of them entered the comp base. Then my second question would be as you talk about the components of getting EBIT margin expansion, just on leveraging the digital capabilities, can you maybe talk about what are some things over time that you think in that part of the business will start showing leverage against ongoing investments? Thank you very much.

Jamie Nordstrom -- President of Stores

Sure, Brian. This is Jamie. I'll take the first part of that. In regard to Manhattan, we opened our men's store this past spring. It's the first time we've ever had a men's-only store. As you recall, it was opportunistic that we could get that space and open it over a year before our main store will be mostly focused on women. We're learning a lot about operating a men's only store. We're learning a lot about traffic trends in New York, particularly as summer comes along.

But mostly, I think what we're really encouraged by, a lot of the qualitative response we've had from customers, from people in our industry who have visited that store, the team we've put together there and were encouraged by our long-term prospects. So, a lot more to come there, particularly next fall when we get the tower open and we'll really be able to have our full offer there and start serving Manhattan in a more robust way.

In regard to Canada, this past spring, we opened our first three Rack stores in Canada. Those were delayed. We'd hoped to have rack stores opened earlier than this. As we shared before, our rack stores play a really critical role in allowing us to have great flow of newness in our full-price stores.

So, it's nice to get those stores open. I can tell you that we are exceeding expectations in those three rack stores. The team has done a terrific job of getting them open. We've got three more opening this fall. We think that by bringing our rack business there along with our full price business, we'll start to be able to be offering more of the full Nordstrom experience.

In addition, we continue to see opportunities to improve our flow of merchandise into Canada across the border. It's different than shipping within the US. We continue to see opportunities to improve our effectiveness there. We're encouraged about getting after those opportunities in the back-half of this year.

Anne Bramman -- Chief Financial Officer

Then your question on leveraging digital capabilities, I think it's important to step back and look at the historical context. So, if you look at the investments that we started making back in 2010, 2012, our investments in those three key capabilities, which is marketing, technology, and supply chain, were growing at 20%. So, there was a high-growth and high-investment period.

From 2015 to 2017, we bent the curve and it went down to about 10%. As we gave guidance for this year and also during the investor day, we spent quite a bit of time talking about this as well. Our guidance on these capabilities is growing at about a mid-single-digit. So, we're continuing to bend the curve on this.

We talked about this in the investor day, but the two areas that we've already seen leverage in those areas are marketing and technology. As we talked about on the investor day, supply chain is kind of the last frontier that we're focusing on. The investments we're making on the West Coast, primarily the LA, as Blake talked about in his script, will help further the curve and that bending the curve in that cost model.

Brian Tunick -- RBC Capital Markets -- Analyst

Alright. That's very helpful. Good luck for the fall.

Anne Bramman -- Chief Financial Officer

Thank you.

Operator

Next is Oliver Chen with Cowen & Company. Please proceed with your question.

Oliver Chen -- Cowen & Company -- Managing Director

Hi. We are were curious about, as you look forward to the holiday season, what are some characteristics that might different from this year versus last year? Retail has definitely gotten fast in terms of just in time and buying close to need. We'd love your thoughts with respect to that as well as digital.

Just a quick follow-up on the merchandise margin -- the forecast for the merchandise margins, what are some of the aspects that we should think about in terms of mark-downs versus AUC? Thank you.

Pete Nordstrom -- Co-President

Yeah, Oliver, this is Pete. For holiday time, it was mentioned that what we saw at Anniversary wasn't necessarily predictive of that. In year's past, the Anniversary Sale was largely predictive of what was going to happen fall season. We transitioned to much more of a wear now offer, which has been really good for our results. So, I would need to be clairvoyant to tell you exactly what's going to happen for holiday time. I think we're on a good trajectory in terms of what we're focusing on and that it's bearing fruit.

So, you heard about the strategic brands. We increasingly have been working a very collaborative way strategically with that subset of brands to do things like plan holiday. For us, that means being the store of choice for gift giving. We've got a lot of things that we think we can do to improve our gift giving position. So, we're encouraged about that.

One of the things that we've seen that's been a trend for a while that we think will play itself out also through the fourth quarter is the ongoing casualization of America. We saw that a lot through the Anniversary time, really across all classifications. I think more than anything else, we've kind of learned that the plans that we've had in motion have been validated largely by everything we've seen year to date.

Then I think lastly, given the fact that our inventories are in relatively good shape and we're in a position where we can react, I think we feel like we're in a good position for the fourth quarter.

Anne Bramman -- Chief Financial Officer

And Oliver, on your question on merchandise margins, what we talked about today is we reaffirmed that the guidance we gave at the beginning of the year is that we expect modest merchandise margin improvement throughout the year or how we finish the year, so, as we continue first half, second half, it was flat to slightly up and I would expect to see the same thing in the second half as well.

Oliver Chen -- Cowen & Company -- Managing Director

Okay. That's helpful. Just a last follow-up on the Rack -- it's really great you made some really nice improvements there. It sounded like there are still parts of it that are a work in progress. What are your thoughts on the state of your talent at Rack and things that you might need to do. I would love context around where you think you are versus where there's incremental opportunity to get better.

Blake Nordstrom -- Co-President

Well, this is Blake, article. We're very proud of our team leading the rack. We think these results our reflective of their efforts and their talents. That said, there are always lots of opportunities with our business and so we're really encouraged by those and believe some of the fundamental principles they are particularly focused on represent tremendous opportunities as well as looking at it as an off-price.

We are this year crossing the billion-dollar mark with our NordstromRack.com and HauteLook business. In the off-price world, there's really no one that has kind of our model and approach in both that multiple channel omnichannel experience in off-price that we have. So, we're excited about that and think that you'll see going forward continued improvement with those results.

Oliver Chen -- Cowen & Company -- Managing Director

Thank you. Best regards.

Operator

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

Paul Trussell -- Deutsche Bank -- Managing Director

Thank you. Good afternoon. Congrats on a good quarter. I wanted to ask about the penetration this quarter in growth rate of your private label and limited distribution brands. Second, while I know you don't break it out numerically anymore, if you could at least maybe provide some details on what you're seeing from a traffic productivity and profitability standpoint of your business in store. Thank you.

Pete Nordstrom -- Co-President

This is Pete. With regard to the private label, we planned right at the very beginning of the year to have this be a growth year in private label. We're still on that trajectory. That continues to expand compared to last year. With the strategic growth, I think you heard about how much of the business that makes up for us. That's growing too.

When we say we're growing to 13% last quarter. So, that obviously is outpacing the rest of our business. So, it definitely has helped us in terms of our editing agenda and prioritizing, so, making sure we're really investing the dollars where it's paying off most. We definitely, again, feel like our strategy is the right one and will continue to bear fruit for a while.

Jamie Nordstrom -- President of Stores

Paul, this is Jamie. I'll take the second part. In terms of store traffic, we've not seen a material change in our store traffic trends for quite a while now, frankly, certain the last few quarters. It's been pretty consistent. I think what's changed and has for everybody is that when a third of your business is done online in any given market, the nature of that traffic is different.

A lot of those customers are coming in having already decided what they want to buy because they've been shopping on our website or they're coming in to get alterations on something they bought on Nordstrom.com or any number of different versions of a digital to in-store experience.

Part of our opportunity is looking at our stores and figuring out how do we need to evolve the staffing model, the layout, the services and experiences that we offer in those stores to continue to be relevant to that customer who spent some time shopping on our website. When they come into the store, is their experience matching what their expectations are? That's a big focus of ours in Los Angeles. But for all of our major markets, we know that's what the customer expects and that's where our focus is.

Paul Trussell -- Deutsche Bank -- Managing Director

Thanks for the color. Best of luck.

Operator

Next is Ed Yruma with KeyBanc Capital Markets. Please proceed with your question.

Ed Yruma -- KeyBanc Capital Markets -- Managing Director

Hey, good afternoon. Thanks for taking my question. I guess real quickly on Anniversary, did you see any change, particularly as you head to more online in-return behavior? I guess how do you deal with returns given that more of the inventory is wear now. Then as a follow-up, were there any classifications of products that were particularly noteworthy? Thank you.

Pete Nordstrom -- Co-President

Yeah, this is Pete. The biggest difference with doing more and more business online is how that return rate impacts us. Usually, it had to do with a period of time. It gets sent to them, they receive it, if they decide they want to return it -- we're trying to do a better job all the time of having predictive modeling around how this really impacts our results.

I think Anne spoke to some of how we think it's going to impact us in August. We had this incredible demand. We're going to probably have more returns too. So, that's part of it. I'm sorry, the second part of your question was what?

Ed Yruma -- KeyBanc Capital Markets -- Managing Director

Were there any standouts from a performance perspective, classifications or products during Anniversary?

Pete Nordstrom -- Co-President

Yeah. The beauty classification was the biggest standout for us, extremely strong. We had improvement in shoes, which was nice. As you know, that's a big classification for us. Kids has done well. The other thing -- it was remarkably similar how the different divisions performed, more so than normal. What I would say, some of the things that set the different divisions apart is our regular price business is really good.

So, we have so many people in the stores and where we have newness and flow coming in, this was strong. We noticed that for example, in divisions like in the designer part of our business, where our designer business continues to be very strong and that's almost entirely based on new deliveries.

Anne Bramman -- Chief Financial Officer

This is Anne. Pete's absolutely correct in how we're looking at the returns. The one thing I want to make sure you realize is that consistent with how we've done this in past year's as well is we take a look at that and we set up a reserve where we anticipate those returns to be. We've already contemplated based on predictive analysis and historical trends what that reserve has booked in the second quarter from a total sales perspective.

Ed Yruma -- KeyBanc Capital Markets -- Managing Director

Great. Thank you.

Operator

Next is Erinn Murphy with Piper Jaffray. Please proceed with your question.

Erinn Murphy -- Piper Jaffray -- Analyst

Great. Thanks. Good afternoon. I guess just going back to the Anniversary Sale in its totality, you guys specifically called out the success you had online of 80% on day one. Can you just quantify what the total sale performance was relative to last year. Within the Anniversary Sale, can you speak to what you're seeing in women's apparel?

Anne Bramman -- Chief Financial Officer

So, overall, we don't really differentiate or give what the specific numbers are for Anniversary. What I can tell you is that for the quarter, it was definitely in line with our expectations. For the comps that we delivered, not only was Anniversary strong, but also going into Anniversary. So, overall, we had a very solid quarter.

Pete Nordstrom -- Co-President

This is Pete. With regard to women's performance in Anniversary, it was a little bit of a mixed bag. As it all rolled up, it was pretty consistent with our other divisions. We had really strong performance in the really casual parts of the business that I mentioned. That really played itself out in women's. And in categories that we call the young customer categories, we had some success there too.

Erinn Murphy -- Piper Jaffray -- Analyst

Okay. Then just two more for me. Anne, you just referenced in the answer to the former question the sales return reserve. I think it was 900 basis points in the quarter. Did that impact full line comp at all in the second quarter. And then Trunk Club -- any update on how that performed broadly in the quarter? Thank you.

Anne Bramman -- Chief Financial Officer

Yeah. Let me just clarify -- I would actually refer you to the press release. There are specifics on the reserves. Trina can talk to you guys offline about how it works from an accounting perspective as far as how we look at that. From a comp perspective, it's pure comp. It's handled the same way year over year. It's really a pure number that you're looking at.

Trunk Club -- what I would say, it's part of our generational investments. We're very excited by where we're seeing that business model continue to play out. We certainly see it as part of our full-price business to see it's continuing to drive growth as part of our generational investments.

Erinn Murphy -- Piper Jaffray -- Analyst

Thank you.

Operator

Next is Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good afternoon, everyone, and congratulations on the nice quarter. As you think about your business and categories, I think you have Anthropologie Home now in your stores. How do you think of taking a look at other categories and square footage by classification? Are there opportunities to flex perhaps with home or other categories that we should be thinking about? Thank you.

Pete Nordstrom -- Co-President

Yeah, Dana, this is Pete. You've probably noticed from being in our stores over the years. What we've tried to do is have a more common floor surface with less defined barriers so that we can contract and expand with different classifications as they're growing.

The Anthropologie example you used is a pretty good one. We don't have particularly large at home departments. When we got into Anthropologie, that supplied some furniture and stuff that went with that. In many case, because we have one floor surface on a floor like that, we have some flexibility where we can expand our footprint in at home. So, we're able to do that in some cases.

We're just trying to have our whole physical setup be as absolutely nimble and fluid as it possibly can be. Obviously, there are some limitations to that, but yeah, that's a theme that we've been on for quite some time. We talk about a lot strategically as a group of merchants, making sure that we're really funding and chasing the things that are working and then working hand in hand with the stores to make sure that we've got the floor space to do that.

Dana Telsey -- Telsey Advisory Group -- Analyst

Is home a category that you find interesting?

Pete Nordstrom -- Co-President

Yeah. It's interesting. We've had good growth just relative to last year's comps in at home for over a year now. Yeah. For us, again, it's relatively small. So, it means there's a whole bunch of opportunity. I think our biggest challenge continues to be the edit. That's a very broad category. We don't necessarily have a whole ton of space and you have the supply chain challenges of size of product you're shipping.

We're trying to be thoughtful about how to enter into that business and do it in a profitable way. I guess I would describe it that we are really open to ideas. We're open to collaborating with people. We considered a lot of different things and we will continue to do that as we go forward.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Operator

Next is Omar Saad with Evercore ISI.

Omar Saad -- Evercore ISI -- Managing Director

Thanks for taking my question. Great quarter. I wanted to follow-up a little bit on the conversation around wear now. It seems like a pretty interesting driver behind some of the trends at the consumer level. Can you talk to us, maybe put a little into a historical perspective how that has changed the share of what's in the floor space and where we are now in terms of the wear now percentage and how that's helping to drive the comps, maybe help frame it a little bit?

Pete Nordstrom -- Co-President

Yeah, this is Pete. We don't really measure the percentage of business done wear now versus not. That would be pretty difficult to do. I think part of it is the way the digital and online part of the business is affected because people can buy things and get the instant gratification that way. I think they don't have to come in and preparation for several months down the road. They can wait a little bit.

So, what we see when we were all in this business years ago as buyers and merchants on the floor is you would get people that would come in during the Anniversary Sale and stock up for things in the fall and winter that they had no intention of wearing for a few months. That just doesn't really happen very much anymore. That's been a slow evolution that we continue to be on top of.

I think it impacts, obviously, the designer business. You hear them talk about that too, that shipping things so early in the season sometimes is difficult. I think that's where some of the seasonless dressing comes in. It's been easier for everyone to deal with it that way. We also have the nuance of having businesses in Canada and Florida.

So, that has its own rhythm too. Our allocation process is pretty sophisticated and challenging given the diversity of our stores. We want to really maximize the productivity in each location. We've got to be really good at that. Again, that's a journey that we're on. It gets improved upon with technology and systems over time.

Omar Saad -- Evercore ISI -- Managing Director

That's really helpful. If I could, could I ask a follow-up on a little bit more articulation on your social media strategy, where you think you are, how you're using social media across the different platforms, and if you think there's more opportunity in some of those business?

Pete Nordstrom -- Co-President

It's been super positive for us. We really give our marketing team a lot of credit for being nimble in how we deploy those dollars. It's not dissimilar from many parts of our business. If you do a strict legacy approach, it's not super helpful. We are really trying to keep a lot of our money flexible in kind of dry powder so we can invest where it's working for us. Social media has been super impactful. I think a large part of what made Anniversary successful was our ability to leverage social media platforms and direct to customer social media kind of channels and what have you. That definitely played a big role in our marketing plan.

Omar Saad -- Evercore ISI -- Managing Director

Thanks. Good luck.

Operator

Next is Matthew Boss with JP Morgan. Please proceed with your question.

Matthew Boss -- JPMorgan -- Analyst

Great. Thanks. If you broke down full-line comps this quarter, with store traffic unchanged, as I think you said earlier, any particular categories that are really driving the AUR improvement or is it more the inventory mix of clearance versus a year ago? Then along those lines, do you believe the AUR increase you're seeing today, do you believe that's a sustainable driver of comps going forward?

Pete Nordstrom -- Co-President

This is Pete. This has been a theme for us for a long time. The regular price part of our business continues to drive it. Even coming to Anniversary, we've worked hard to try to clear as early as we could so we weren't carrying that stuff over. We weren't 100% successful there. That's an ongoing theme where we can get that stuff to the rack earlier on as we come through anniversary in the fall. We've been on that theme for a while. I'm sorry, I didn't get the second part of your question.

Matthew Boss -- JPMorgan -- Analyst

Basically, if the comp today is AUR-driven, is it the mix of clearance, that you have less clearance on the floor today?

Pete Nordstrom -- Co-President

It's not necessarily AUR-driven, although we do have some classifications with AUR is higher where the business has been good. Our transactions are up. That's mostly what you're seeing.

Matthew Boss -- JPMorgan -- Analyst

Okay. So, the traffic levels were basically the same, but your number of transactions was higher.

Pete Nordstrom -- Co-President

That's right. Conversions were probably somewhat better.

Jamie Nordstrom -- President of Stores

Yeah. This is Jamie. I'll just clarify something I said earlier. I was talking about store traffic. Store traffic has been consistent for the last several quarters. Online traffic relative to our results is up. That's where you're seeing a lot of the growth. Most of our comp increase is coming from more transactions. The biggest increase in those transactions is coming on Nordstrom.com.

Matthew Boss -- JPMorgan -- Analyst

That's helpful. Best of luck.

Operator

Next is Simeon Siegel with Nomura / Instinet.

Simeon Siegel -- Nomura / Instinet -- Analyst

Thanks. Good afternoon. Congrats on the strong quarter. First, I'm sorry if I missed it -- how many reward customers do you currently have and what was the growth there this quarter? Then did you parse out the digital strength between full-price and off-price? Thank you.

Pete Nordstrom -- Co-President

We have over 10 million loyalty customers. I'm sorry, what was the second part?

Simeon Siegel -- Nomura / Instinet -- Analyst

The growth year over year.

Pete Nordstrom -- Co-President

Yeah, we're up nearly 20% there. It's growing well.

Simeon Siegel -- Nomura / Instinet -- Analyst

Great. Then within the digital strength, obviously very impressive -- how was full-price versus off-price?

Blake Nordstrom -- Co-President

This is Blake. It was very similar. From a percentage point of view, off-price was slightly ahead but it's a smaller basis than full-price. Overall, very strong, both in total over 20%.

Simeon Siegel -- Nomura / Instinet -- Analyst

Great. Thanks a lot. Best of luck for the rest of the year.

Trina Schurman -- Director of Investor Relations 

We'll now take one last question.

Operator

Our last question is from Kimberly Greenberger with Morgan Stanley.

Kimberly Greenberger -- Morgan Stanley -- Managing Director

Great. Thank you so much for taking the question. I had a question about full-price net sales. You talked about in the press release being down 5%. I assume that relates to the Anniversary Sale shift, but I just wanted to make sure I understood that.

Then the commentary about the shift in the Anniversary Sale inventory to more wear now styles and as a result not being predictive, as you said, of back-half performance, when you say it's more wear now, are you talking about summer transition and early fall goods that you're selling, which may not be indicative, for example, of the winter product. I just want to make sure I understand that. Are you suggesting that there may be some shift, perhaps out of Q3 into the Anniversary Sale as a result of more compelling product each year in that sale? Thanks so much.

Pete Nordstrom -- Co-President

I'll let Anne take some of the math part. This is Pete. Related to wear now, you're right, it's more about here we are in July and August and the kind of stuff someone would wear today isn't necessarily what they would wear in November.

In years' past, we may have sold a disproportionate amount of coats, sweaters, and boots. We don't as much now. We probably sell more knits and sandals and tops. There's some nuance to this, obviously. It's not a complete one or the other. It's just a balance and a proportion and we've learned over the years the wear now part of it is disproportionately more important than it used to be.

Anne Bramman -- Chief Financial Officer

Yeah, Kimberly, this is Anne. I would refer you to the press release. There's a table in the back that has a footnote that describes the impact, the full-price total sales between Q2 and Q3 and the reversal. The only thing it has to do is in the past, we held reserves for potential returns at total company with our segment change, we have now started allocating that out to the segment. It's just the timing of when the segments would have seen that.

So, last year, they would have seen that in Q3. This year, we were pushing it in Q2. There are specific footnotes that describe that impact and I would encourage you to talk to Trina offline about that.

Kimberly Greenberger -- Morgan Stanley -- Managing Director

Okay. Great. Sorry, just one last quick question for you -- the inventory looks like it's in great shape here. I'm wondering with the one week later balance sheet close, was there a positive or negative impact on your inventory because of that calendar shift?

Anne Bramman -- Chief Financial Officer

Not meaningfully, no. Given the size of our inventory levels and the fact that we're in Anniversary Sale, it really didn't have any impact.

Kimberly Greenberger -- Morgan Stanley -- Managing Director

Okay. Thanks so much.

Trina Schurman -- Director of Investor Relations 

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.

Operator

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

Duration: 50 minutes

Call participants:

Trina Schurman -- Director of Investor Relations 

Blake Nordstrom -- Co-President

Anne Bramman -- Chief Financial Officer

Jamie Nordstrom -- President of Stores

Pete Nordstrom -- Co-President

Jay Sole -- UBS -- Analyst

Mark Altschwager -- Robert W. Baird -- Analyst

Brian Tunick -- RBC Capital Markets -- Analyst

Oliver Chen -- Cowen & Company -- Managing Director

Paul Trussell -- Deutsche Bank -- Managing Director

Ed Yruma -- KeyBanc Capital Markets -- Managing Director

Erinn Murphy -- Piper Jaffray -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

Omar Saad -- Evercore ISI -- Managing Director

Matthew Boss -- JPMorgan -- Analyst

Simeon Siegel -- Nomura / Instinet -- Analyst

Kimberly Greenberger -- Morgan Stanley -- Managing Director

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