Business description of Nordstrom-Inc from last 10-k form
Nordstrom, Inc. and subsidiaries 3
PART I
Item 1. Business.
DESCRIPTION OF BUSINESS
Founded in 1901 as a retail shoe business in Seattle, Nordstrom later incorporated in the state of Washington in 1946. We are one of the nation’s leading fashion specialty retailers, with 187 U.S. stores located in 28 states as of March 19, 2010. The west and east coasts are the areas in which we have the largest presence. We have four reportable segments: Retail Stores, Direct, Credit, and Other.
Founded in 1901 as a retail shoe business in Seattle, Nordstrom later incorporated in the state of Washington in 1946. We are one of the nation’s leading fashion specialty retailers, with 187 U.S. stores located in 28 states as of March 19, 2010. The west and east coasts are the areas in which we have the largest presence. We have four reportable segments: Retail Stores, Direct, Credit, and Other.
The
Retail Stores segment derives its revenues from sales of high-quality apparel, shoes, cosmetics
and accessories. It includes our 112 ‘Nordstrom’ full-line stores, 72 off-price ‘Nordstrom Rack’
stores, two ‘Jeffrey’ boutiques, and one clearance store that operates under the name ‘Last
Chance.’
The Nordstrom Rack stores purchase merchandise directly from manufacturers and also serve as
outlets for clearance merchandise from our
full-line stores.
Direct generates revenues from sales of high-quality apparel, shoes, cosmetics and accessories by
serving our customers on the Internet at www.nordstrom.com. The Direct segment’s merchandise is
primarily shipped from our fulfillment center in Cedar Rapids, Iowa. However, beginning in the
third quarter of 2009, we linked our Direct segment’s inventory with that of our full-line stores
and now have the ability to fulfill online orders from any of our full-line stores. This has given
our customers access to more of our merchandise. Additionally we offer our customers the option to
purchase items on our Web site and pick them up in our full-line stores. These enhancements have
enabled us to better serve customers across various channels and improve sales.
Our
Credit segment includes our wholly owned federal savings bank, Nordstrom fsb, through which we
offer a private label card, two Nordstrom VISA credit cards and a debit card for Nordstrom
purchases. The credit and debit cards feature a shopping-based program designed to increase
customer visits and spending. Although the primary purpose of our Credit business is to foster
greater customer loyalty and drive more sales, we also generate revenues through finance charges
and other fees on these cards.
Our
Other segment includes our product development team, called Nordstrom Product Group, which
designs and contracts to manufacture private label merchandise sold in our Retail Stores and Direct
segments. In addition, this segment includes our corporate center operations.
For more information about our business and our reportable segments, see Item 7, “Management’s
Discussion and Analysis of Financial Condition
and Results of Operations” on page 16 and Note 14 of the Notes to Consolidated Financial Statements
in Item 8.
FISCAL YEAR
We operate on a 52/53-week fiscal year ending on the Saturday closest to January 31st. References to 2009, 2008 and 2007 relate to the 52-week fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008, respectively. References to 2010 relate to the 52-week fiscal year ending January 29, 2011.
We operate on a 52/53-week fiscal year ending on the Saturday closest to January 31st. References to 2009, 2008 and 2007 relate to the 52-week fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008, respectively. References to 2010 relate to the 52-week fiscal year ending January 29, 2011.
TRADEMARKS
We have 136 trademarks, each of which is the subject of one or more trademark registrations and/or trademark applications. Our most notable trademarks include Nordstrom, Nordstrom Rack, John W. Nordstrom, Caslon, and Classiques Entier. Each of our trademarks is renewable indefinitely provided that it is still used in commerce at the time of the renewal.
We have 136 trademarks, each of which is the subject of one or more trademark registrations and/or trademark applications. Our most notable trademarks include Nordstrom, Nordstrom Rack, John W. Nordstrom, Caslon, and Classiques Entier. Each of our trademarks is renewable indefinitely provided that it is still used in commerce at the time of the renewal.
RETURN POLICY
We offer our customers a fair and liberal return policy at our full-line stores and online at Nordstrom Direct. Our Nordstrom Rack stores accept returns up to 30 days from the date of purchase with the original price tag and sales receipt. In general, our return policy is considered to be more generous and liberal than industry standards.
We offer our customers a fair and liberal return policy at our full-line stores and online at Nordstrom Direct. Our Nordstrom Rack stores accept returns up to 30 days from the date of purchase with the original price tag and sales receipt. In general, our return policy is considered to be more generous and liberal than industry standards.
SEASONALITY
Due to our Anniversary Sale in July, the holidays in December and the half-yearly sales that occur in the second and fourth quarters, our sales are historically higher in the second and fourth quarters of the fiscal year than in the first and third quarters.
Due to our Anniversary Sale in July, the holidays in December and the half-yearly sales that occur in the second and fourth quarters, our sales are historically higher in the second and fourth quarters of the fiscal year than in the first and third quarters.
INVENTORY
We plan our merchandise purchases and receipts to coincide with expected sales trends. For instance, our merchandise purchases and receipts increase prior to our Anniversary Sale, which extends over the last two weeks of July. Also, we purchase and receive a larger amount of merchandise in the fall as we prepare for the holiday shopping season (from late November through early January). We pay for our merchandise purchases under the terms established with our vendors.
We plan our merchandise purchases and receipts to coincide with expected sales trends. For instance, our merchandise purchases and receipts increase prior to our Anniversary Sale, which extends over the last two weeks of July. Also, we purchase and receive a larger amount of merchandise in the fall as we prepare for the holiday shopping season (from late November through early January). We pay for our merchandise purchases under the terms established with our vendors.
In order to offer merchandise that our customers want, we purchase merchandise from a wide variety
of high-quality suppliers. We also have arrangements with agents and contract manufacturers to
produce our private label merchandise. Our suppliers include domestic and foreign businesses. We
expect our suppliers to meet our “Nordstrom Partnership: Standards and Business Practice
Guidelines,” which address our standards for matters such as legal and regulatory compliance,
labor, health and safety, and the environment.
COMPETITIVE CONDITIONS
Our business is highly competitive. We compete with other national, regional and local retail establishments that may carry similar lines of merchandise, including department stores, specialty stores, boutiques and Internet businesses. Our specific competitors vary from market to market. We believe the keys to competing in our industry include customer service, fashion newness, quality of product, the shopping experience, depth of selection, store environment and location.
Our business is highly competitive. We compete with other national, regional and local retail establishments that may carry similar lines of merchandise, including department stores, specialty stores, boutiques and Internet businesses. Our specific competitors vary from market to market. We believe the keys to competing in our industry include customer service, fashion newness, quality of product, the shopping experience, depth of selection, store environment and location.
EMPLOYEES
During 2009, we employed approximately 48,000 employees on a full- or part-time basis. Due to the seasonal nature of our business, employment increased to approximately 51,000 employees in July 2009 and 53,000 in December 2009. We do not have a significant number of employees who are members of a union. We believe our relationship with our employees is good.
During 2009, we employed approximately 48,000 employees on a full- or part-time basis. Due to the seasonal nature of our business, employment increased to approximately 51,000 employees in July 2009 and 53,000 in December 2009. We do not have a significant number of employees who are members of a union. We believe our relationship with our employees is good.
CAUTIONARY STATEMENT
Certain statements in this Annual Report on Form 10-K contain “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties, including, but not limited to, anticipated financial results, anticipated store openings, capital expenditures and dividend yield, and trends in company operations. Such statements are based upon current beliefs and expectations of the company’s management and are subject to significant risks and uncertainties. Actual future results may differ materially from historical results or current expectations depending upon factors including but not limited to the impact of deteriorating economic and market conditions and the resultant impact on consumer spending patterns, the company’s ability to respond to the business environment and fashion trends, the company’s ability to safeguard its brand and reputation, effective inventory management, efficient and proper allocation of the company’s capital resources, successful execution of the company’s store growth strategy including the timely completion of construction associated with newly planned stores, relocations and remodels, all of which may be impacted by the financial health of third parties, the company’s compliance with applicable banking and related laws and regulations impacting the company’s ability to extend credit to its customers, trends in personal bankruptcies and bad debt write-offs, availability and cost of credit, impact of the current regulatory environment and financial system reforms, changes in interest rates, disruptions in the company’s supply chain, the company’s ability to maintain its relationship with vendors and developers who may be experiencing economic difficulties, the geographic locations of the company’s stores, the company’s ability to maintain its relationships with its employees and to effectively train and develop its future leaders, the company’s compliance with information security and privacy laws and regulations, employment laws and regulations and other laws and regulations applicable to the company, successful execution of the company’s information technology strategy, successful execution of the company’s multi-channel strategy, risks related to fluctuations in world currencies, public health concerns and the resulting impact on consumer spending patterns, supply chain, and employee health, weather conditions and hazards of nature that affect consumer traffic and consumers’ purchasing patterns, the effectiveness of planned advertising, marketing and promotional campaigns, and the company’s ability to control costs. These and other factors could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. The company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances.
Certain statements in this Annual Report on Form 10-K contain “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties, including, but not limited to, anticipated financial results, anticipated store openings, capital expenditures and dividend yield, and trends in company operations. Such statements are based upon current beliefs and expectations of the company’s management and are subject to significant risks and uncertainties. Actual future results may differ materially from historical results or current expectations depending upon factors including but not limited to the impact of deteriorating economic and market conditions and the resultant impact on consumer spending patterns, the company’s ability to respond to the business environment and fashion trends, the company’s ability to safeguard its brand and reputation, effective inventory management, efficient and proper allocation of the company’s capital resources, successful execution of the company’s store growth strategy including the timely completion of construction associated with newly planned stores, relocations and remodels, all of which may be impacted by the financial health of third parties, the company’s compliance with applicable banking and related laws and regulations impacting the company’s ability to extend credit to its customers, trends in personal bankruptcies and bad debt write-offs, availability and cost of credit, impact of the current regulatory environment and financial system reforms, changes in interest rates, disruptions in the company’s supply chain, the company’s ability to maintain its relationship with vendors and developers who may be experiencing economic difficulties, the geographic locations of the company’s stores, the company’s ability to maintain its relationships with its employees and to effectively train and develop its future leaders, the company’s compliance with information security and privacy laws and regulations, employment laws and regulations and other laws and regulations applicable to the company, successful execution of the company’s information technology strategy, successful execution of the company’s multi-channel strategy, risks related to fluctuations in world currencies, public health concerns and the resulting impact on consumer spending patterns, supply chain, and employee health, weather conditions and hazards of nature that affect consumer traffic and consumers’ purchasing patterns, the effectiveness of planned advertising, marketing and promotional campaigns, and the company’s ability to control costs. These and other factors could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. The company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances.
SEC FILINGS
We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”). All material we file with the SEC is publicly available at the SEC’s Public Reference Room at 100 F Street NE, Room 1580, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a Web site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”). All material we file with the SEC is publicly available at the SEC’s Public Reference Room at 100 F Street NE, Room 1580, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a Web site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
WEB SITE ACCESS
Our Web site address is www.nordstrom.com. We make available free of charge on or through our Web site our annual and quarterly reports on Form 10-K and 10-Q (including related filings in XBRL format), current reports on Form 8-K, statements of changes in beneficial ownership of securities on Form 4 and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file the report with or furnish it to the SEC. Interested parties may also access a webcast of quarterly earnings conference calls and other financial events over our Web site.
Our Web site address is www.nordstrom.com. We make available free of charge on or through our Web site our annual and quarterly reports on Form 10-K and 10-Q (including related filings in XBRL format), current reports on Form 8-K, statements of changes in beneficial ownership of securities on Form 4 and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file the report with or furnish it to the SEC. Interested parties may also access a webcast of quarterly earnings conference calls and other financial events over our Web site.
CORPORATE GOVERNANCE
We have a long-standing commitment to upholding a high level of ethical standards. In addition, as required by the listing standards of the New York Stock Exchange (“NYSE”) and the rules of the SEC, we have adopted Codes of Business Conduct and Ethics for our employees, officers and directors (“Codes of Ethics”) and Corporate Governance Guidelines. We have posted on our Web site our Codes of Ethics, our Corporate Governance Guidelines, and our Committee Charters for the Audit, Compensation, Corporate Governance and Nominating, and Finance committees.
We have a long-standing commitment to upholding a high level of ethical standards. In addition, as required by the listing standards of the New York Stock Exchange (“NYSE”) and the rules of the SEC, we have adopted Codes of Business Conduct and Ethics for our employees, officers and directors (“Codes of Ethics”) and Corporate Governance Guidelines. We have posted on our Web site our Codes of Ethics, our Corporate Governance Guidelines, and our Committee Charters for the Audit, Compensation, Corporate Governance and Nominating, and Finance committees.
These items are also available in print to any person, without charge, upon request to:
Nordstrom, Inc. Investor Relations
P.O. Box 2737
Seattle, Washington 98111-2737
(206) 303-3200
invrelations@nordstrom.com
P.O. Box 2737
Seattle, Washington 98111-2737
(206) 303-3200
invrelations@nordstrom.com
Nordstrom, Inc. and subsidiaries 5
Item 1A. Risk Factors.
(Dollars in millions)
Our business faces many risks. We believe the risks described below outline the items of most
concern to us. However, these are not the only risks we face. Additional risks and uncertainties,
not presently known to us or that we currently consider immaterial, may also impair our business
operations.
DETERIORATION OF ECONOMIC CONDITIONS
The deterioration in economic conditions over the past two years has hurt our business in several ways. Rising unemployment, tightening of consumer credit and the decline in the housing market in the United States have all contributed to a reduction in consumer spending. This has had a significant negative impact on our revenues. We sell high-quality apparel, shoes, cosmetics and accessories, which many consumers consider to be discretionary items. During economic downturns, fewer customers may shop in our stores and on our Web site, and those who do shop may limit the amount of their purchases, all of which may lead to lower sales, higher markdowns and increased marketing and promotional spending in response to lower demand. The deterioration of economic conditions has also adversely affected our credit customers’ payment patterns and delinquency rates, increasing our bad debt expense. While some macroeconomic indicators suggest that a modest economic recovery has begun, key factors such as employment levels, consumer credit and housing market conditions remain weak. A sluggish economic recovery or a renewed downturn could have a significant adverse effect on our business.
The deterioration in economic conditions over the past two years has hurt our business in several ways. Rising unemployment, tightening of consumer credit and the decline in the housing market in the United States have all contributed to a reduction in consumer spending. This has had a significant negative impact on our revenues. We sell high-quality apparel, shoes, cosmetics and accessories, which many consumers consider to be discretionary items. During economic downturns, fewer customers may shop in our stores and on our Web site, and those who do shop may limit the amount of their purchases, all of which may lead to lower sales, higher markdowns and increased marketing and promotional spending in response to lower demand. The deterioration of economic conditions has also adversely affected our credit customers’ payment patterns and delinquency rates, increasing our bad debt expense. While some macroeconomic indicators suggest that a modest economic recovery has begun, key factors such as employment levels, consumer credit and housing market conditions remain weak. A sluggish economic recovery or a renewed downturn could have a significant adverse effect on our business.
ABILITY TO RESPOND TO THE BUSINESS ENVIRONMENT AND FASHION TRENDS
We strive to ensure the merchandise we offer remains current and compelling to our customers. We make decisions regarding inventory purchases well in advance of the season in which it will be sold. Therefore, our ability to predict or respond to changes in fashion trends, consumer preferences and spending patterns, and to match our merchandise levels and mix to sales trends and consumer tastes, significantly impacts our sales and operating results. If we do not identify and respond to emerging trends in consumer spending and preferences quickly enough, we may be forced to sell our merchandise at higher average markdown levels and lower average margins, which could harm our business. Conversely, if we fail to purchase enough merchandise, we may lose opportunities for additional sales and damage our relationships with our customers.
We strive to ensure the merchandise we offer remains current and compelling to our customers. We make decisions regarding inventory purchases well in advance of the season in which it will be sold. Therefore, our ability to predict or respond to changes in fashion trends, consumer preferences and spending patterns, and to match our merchandise levels and mix to sales trends and consumer tastes, significantly impacts our sales and operating results. If we do not identify and respond to emerging trends in consumer spending and preferences quickly enough, we may be forced to sell our merchandise at higher average markdown levels and lower average margins, which could harm our business. Conversely, if we fail to purchase enough merchandise, we may lose opportunities for additional sales and damage our relationships with our customers.
CONSUMER CREDIT
Our credit card operations help drive sales in our stores, allow our stores to avoid third-party transaction fees and generate additional revenues by extending credit. Our credit card revenues and profitability are subject in large part to economic and market conditions that are beyond our control, including, but not limited to, interest rates, consumer credit availability, consumer debt levels, unemployment trends and other matters. Increases in unemployment have corresponded with rising credit card delinquencies and write-offs, which may continue in the future. Further, these economic conditions could impair our ability to assess the creditworthiness of our customers if the criteria and/or models we use to underwrite and manage our customers become less predictive of future losses, which could cause our losses to rise and have a negative impact on our results of operations.
Our credit card operations help drive sales in our stores, allow our stores to avoid third-party transaction fees and generate additional revenues by extending credit. Our credit card revenues and profitability are subject in large part to economic and market conditions that are beyond our control, including, but not limited to, interest rates, consumer credit availability, consumer debt levels, unemployment trends and other matters. Increases in unemployment have corresponded with rising credit card delinquencies and write-offs, which may continue in the future. Further, these economic conditions could impair our ability to assess the creditworthiness of our customers if the criteria and/or models we use to underwrite and manage our customers become less predictive of future losses, which could cause our losses to rise and have a negative impact on our results of operations.
REGULATORY ENVIRONMENT AND FINANCIAL SYSTEM REFORMS
Current economic conditions, particularly in the financial markets, have resulted in increased legislative and regulatory actions. The Credit Card Accountability, Responsibility and Disclosure Act of 2009 (the “Credit CARD Act”) included new rules and restrictions on credit card pricing, finance charges and fees, customer billing practices and payment application. These provisions are likely to affect our credit business practices and could have a negative impact on our revenues and profitability.
Current economic conditions, particularly in the financial markets, have resulted in increased legislative and regulatory actions. The Credit Card Accountability, Responsibility and Disclosure Act of 2009 (the “Credit CARD Act”) included new rules and restrictions on credit card pricing, finance charges and fees, customer billing practices and payment application. These provisions are likely to affect our credit business practices and could have a negative impact on our revenues and profitability.
In addition, Congress and the Obama Administration are currently considering various proposals for
reform of the financial system. Proposed reforms include the elimination of the thrift charter and
all retailer-owned bank charters, creation of a new federal agency to supervise and enforce
consumer lending laws and regulations, and expanded state authority over consumer lending. The
final details of financial system reform legislation, if any, are highly uncertain at this time.
Depending on the nature and extent of any reforms, our credit business could be significantly
adversely affected.
LEADERSHIP DEVELOPMENT AND SUCCESSION PLANNING
The training and development of our future leaders is important to our long-term growth. If we do not effectively implement our strategic and business planning processes to attract, retain, train and develop future leaders, our long-term growth may suffer. We rely on the experience of our senior management, who have specific knowledge relating to us and our industry that is difficult to replace. If unexpected leadership turnover occurs without adequate succession plans, the loss of the services of any of these individuals, or any negative perceptions of our business as a result of those losses, could damage our brand image and our business.
The training and development of our future leaders is important to our long-term growth. If we do not effectively implement our strategic and business planning processes to attract, retain, train and develop future leaders, our long-term growth may suffer. We rely on the experience of our senior management, who have specific knowledge relating to us and our industry that is difficult to replace. If unexpected leadership turnover occurs without adequate succession plans, the loss of the services of any of these individuals, or any negative perceptions of our business as a result of those losses, could damage our brand image and our business.
INFORMATION SECURITY AND PRIVACY
The protection of our customer, employee and company data is important to us. The regulatory environment surrounding information security and privacy is increasingly demanding, with new and constantly changing requirements across our business units. In addition, our customers have a high expectation that we will adequately protect their personal information. A significant breach of customer, employee or company data could damage our reputation and result in lost sales, fines and lawsuits. In addition, a security breach could require that we expend significant additional resources related to our information security systems and could result in disruption of our operations, particularly our online sales operations.
The protection of our customer, employee and company data is important to us. The regulatory environment surrounding information security and privacy is increasingly demanding, with new and constantly changing requirements across our business units. In addition, our customers have a high expectation that we will adequately protect their personal information. A significant breach of customer, employee or company data could damage our reputation and result in lost sales, fines and lawsuits. In addition, a security breach could require that we expend significant additional resources related to our information security systems and could result in disruption of our operations, particularly our online sales operations.
BRAND AND REPUTATION
We have a well-recognized brand that many consumers believe offers a high level of customer service and quality merchandise. Any significant damage to our brand or reputation could negatively impact sales, reduce employee morale and productivity, and diminish customer trust, any of which would harm our business.
We have a well-recognized brand that many consumers believe offers a high level of customer service and quality merchandise. Any significant damage to our brand or reputation could negatively impact sales, reduce employee morale and productivity, and diminish customer trust, any of which would harm our business.
STORE GROWTH PLANS
Our five-year strategic growth plan includes opening several new full-line and Rack stores, with 30 announced store openings. The majority of these openings will occur by 2012. We compete with other retailers and businesses for suitable locations for our stores. Local land use and other regulations may impact our ability to find suitable locations. We also depend on the work of our developer partners to sustain our store growth plans. Developer delays of shopping center construction, expansion or renovation projects, or developer financial difficulties, could cause the delay or cancellation of our expected store openings or remodels, or could adversely affect maintenance and leasing at some shopping centers in which we have stores.
Our five-year strategic growth plan includes opening several new full-line and Rack stores, with 30 announced store openings. The majority of these openings will occur by 2012. We compete with other retailers and businesses for suitable locations for our stores. Local land use and other regulations may impact our ability to find suitable locations. We also depend on the work of our developer partners to sustain our store growth plans. Developer delays of shopping center construction, expansion or renovation projects, or developer financial difficulties, could cause the delay or cancellation of our expected store openings or remodels, or could adversely affect maintenance and leasing at some shopping centers in which we have stores.
New store openings also involve certain risks, including constructing, furnishing and supplying a
store in a timely and cost effective manner and accurately assessing the demographic or retail
environment for a particular location. Our future sales at new, relocated or remodeled stores may
not meet our projections, which could affect our return on investment. Performance in our new
stores could also be negatively impacted if we are unable to hire employees who are able to deliver
the level of service our customers have come to expect when shopping in our stores. Our inability
to execute our store growth strategy in a way that generates appropriate returns on investment
could affect our future growth and profitability.
INFORMATION TECHNOLOGY STRATEGY
We make investments in information technology to sustain our competitive position. In 2010, we expect to spend approximately $160 on information technology operations and systems development, which is key to our growth. We must monitor and choose the right investments and implement them at the right pace. Excessive technological change could impact the effectiveness of adoption, and could make it more difficult for us to realize benefits from the technology. Targeting the wrong opportunities, failing to make the best investments, or making an investment commitment significantly above or below our needs may result in the loss of our competitive position. In addition, if we do not maintain our current systems we may see interruptions to our business and increase our costs in order to bring our systems up to date.
We make investments in information technology to sustain our competitive position. In 2010, we expect to spend approximately $160 on information technology operations and systems development, which is key to our growth. We must monitor and choose the right investments and implement them at the right pace. Excessive technological change could impact the effectiveness of adoption, and could make it more difficult for us to realize benefits from the technology. Targeting the wrong opportunities, failing to make the best investments, or making an investment commitment significantly above or below our needs may result in the loss of our competitive position. In addition, if we do not maintain our current systems we may see interruptions to our business and increase our costs in order to bring our systems up to date.
MULTI-CHANNEL STRATEGY EXECUTION
Over the past several years, we have made changes in our business to improve the shopping experience across all channels. These changes included aligning our online merchandise offering with our full-line stores to create a seamless experience for our customers between our stores and Web site, combining the full-line stores’ and Direct merchandise organizations; providing a more focused catalog offering; and creating a shared inventory platform between Direct and our full-line stores. We plan to make additional changes in our multi-channel merchandise planning process over the next few years. If we encounter challenges associated with change management, the ability to hire and retain key personnel involved in these efforts, implementation of associated information technology, or adoption of new processes, our ability to continue to successfully execute this strategy could be adversely affected. As a result, we may not derive the expected benefits to our sales and profitability, or we may incur increased costs relative to our current projections.
Over the past several years, we have made changes in our business to improve the shopping experience across all channels. These changes included aligning our online merchandise offering with our full-line stores to create a seamless experience for our customers between our stores and Web site, combining the full-line stores’ and Direct merchandise organizations; providing a more focused catalog offering; and creating a shared inventory platform between Direct and our full-line stores. We plan to make additional changes in our multi-channel merchandise planning process over the next few years. If we encounter challenges associated with change management, the ability to hire and retain key personnel involved in these efforts, implementation of associated information technology, or adoption of new processes, our ability to continue to successfully execute this strategy could be adversely affected. As a result, we may not derive the expected benefits to our sales and profitability, or we may incur increased costs relative to our current projections.
IMPACT OF COMPETITIVE MARKET FORCES
The retail industry environment continues to change for many of our vendors and customers. In the future, our competition may partner more effectively with vendors to serve consumers’ needs. If we do not effectively respond to changes in our environment, we may see a loss of market share to competitors, declining sales and declining profitability due to higher markdowns.
The retail industry environment continues to change for many of our vendors and customers. In the future, our competition may partner more effectively with vendors to serve consumers’ needs. If we do not effectively respond to changes in our environment, we may see a loss of market share to competitors, declining sales and declining profitability due to higher markdowns.
Our credit segment faces competition from large banks, and other credit card companies, some of
which have substantial financial resources. Many of our competitors offer general-purpose credit
card products with a variety of loyalty programs. In addition, there is intense competition for
cardholders with “prime” credit ratings who make up a significant portion of our credit portfolio.
If we do not effectively respond to the competitive banking and credit card environment, we could
lose market share to our competitors, which would have an adverse effect on our credit business.
CAPITAL MANAGEMENT AND LIQUIDITY
Our access to debt and equity capital, and our ability to invest capital to maximize the total returns to our shareholders, is critical to our long-term success. We utilize capital to finance our operations and working capital, make capital expenditures, manage our debt levels and return value to our shareholders through dividends and share repurchases. As a result of the financial crisis, global credit and equity markets have undergone significant disruption, making it difficult for many businesses to obtain financing on acceptable terms or at all. Our ability to obtain capital and the cost of the capital depend on financial market conditions and independent rating agencies’ short and long-term debt ratings, which are based largely on our performance as measured by credit metrics including interest coverage and leverage ratios. If our access to capital is restricted or if our cost of capital increases, our operations and financial condition could be adversely affected. Further, if we do not properly allocate our capital to maximize returns, our operations and cash flows could be adversely affected and our long-term cost of capital could increase.
Our access to debt and equity capital, and our ability to invest capital to maximize the total returns to our shareholders, is critical to our long-term success. We utilize capital to finance our operations and working capital, make capital expenditures, manage our debt levels and return value to our shareholders through dividends and share repurchases. As a result of the financial crisis, global credit and equity markets have undergone significant disruption, making it difficult for many businesses to obtain financing on acceptable terms or at all. Our ability to obtain capital and the cost of the capital depend on financial market conditions and independent rating agencies’ short and long-term debt ratings, which are based largely on our performance as measured by credit metrics including interest coverage and leverage ratios. If our access to capital is restricted or if our cost of capital increases, our operations and financial condition could be adversely affected. Further, if we do not properly allocate our capital to maximize returns, our operations and cash flows could be adversely affected and our long-term cost of capital could increase.
SUPPLY CHAIN DISRUPTION
The effective and efficient operation of our supply chain, including merchandise sourcing and procurement, receiving and distribution, is critical to the success of our business. Our supply chain operations may be adversely impacted by difficulties with our suppliers, such as production capacity constraints, errors in meeting merchandise specifications, including specifications dictated by consumer product safety laws, insufficient quality control, failures to meet production deadlines, or increases in manufacturing costs. Additionally, unforeseen disruptions in our supply chain due to severe weather, natural or man-made disasters, labor disputes, shipping problems, or information systems malfunction, may adversely affect our ability to deliver merchandise to our stores or our customers and could increase our costs.
The effective and efficient operation of our supply chain, including merchandise sourcing and procurement, receiving and distribution, is critical to the success of our business. Our supply chain operations may be adversely impacted by difficulties with our suppliers, such as production capacity constraints, errors in meeting merchandise specifications, including specifications dictated by consumer product safety laws, insufficient quality control, failures to meet production deadlines, or increases in manufacturing costs. Additionally, unforeseen disruptions in our supply chain due to severe weather, natural or man-made disasters, labor disputes, shipping problems, or information systems malfunction, may adversely affect our ability to deliver merchandise to our stores or our customers and could increase our costs.
Nordstrom, Inc. and subsidiaries 7
RELATIONSHIPS WITH VENDORS
Our relationships with our merchandise vendors have been a significant contributor to our past success and our position as a retailer of high-quality fashion merchandise. Some of our vendors have experienced serious cash flow problems due to the credit market crisis and economic deterioration. To address these problems, our vendors could attempt to increase their prices, alter payment terms or seek other relief, all of which could increase our costs. In some cases, they may be forced to reduce their operations or file for bankruptcy protection, which could have an adverse effect on our business if we are unable to procure the desired merchandise on acceptable terms.
Our relationships with our merchandise vendors have been a significant contributor to our past success and our position as a retailer of high-quality fashion merchandise. Some of our vendors have experienced serious cash flow problems due to the credit market crisis and economic deterioration. To address these problems, our vendors could attempt to increase their prices, alter payment terms or seek other relief, all of which could increase our costs. In some cases, they may be forced to reduce their operations or file for bankruptcy protection, which could have an adverse effect on our business if we are unable to procure the desired merchandise on acceptable terms.
We also have no guaranteed supply arrangements with our key vendors, many of whom limit the number
of retail channels they use to sell their merchandise. Competition to obtain and sell this
merchandise is intense. Nearly all of the brands of our top vendors are sold by competing
retailers, and many of our top vendors also have their own dedicated retail stores. If one or more
of our top vendors were to increase sales of merchandise through their own stores or to the stores
of our competitors, or to limit or reduce our access to their merchandise, our business could be
adversely affected.
GEOGRAPHIC LOCATION OF STORES
A significant amount of our total sales is derived from stores located on the west and east coasts, particularly California, which increases our exposure to local economic conditions, severe weather, natural disasters and other natural or man-made disruptions within these regions. Deterioration in economic conditions and consumer confidence within these regions has negatively impacted our business, including a reduction in overall sales, reduced gross margins and increased expenses, including bad debt expense. Any continued economic deterioration, severe weather patterns, natural disasters or other disruptions in these regions, could have a significant adverse effect on our business. In addition, many states in these regions are facing significant budget shortfalls, and may seek to address those shortfalls through unfavorable changes in tax laws and interpretation of existing laws which could adversely affect our results of operations.
A significant amount of our total sales is derived from stores located on the west and east coasts, particularly California, which increases our exposure to local economic conditions, severe weather, natural disasters and other natural or man-made disruptions within these regions. Deterioration in economic conditions and consumer confidence within these regions has negatively impacted our business, including a reduction in overall sales, reduced gross margins and increased expenses, including bad debt expense. Any continued economic deterioration, severe weather patterns, natural disasters or other disruptions in these regions, could have a significant adverse effect on our business. In addition, many states in these regions are facing significant budget shortfalls, and may seek to address those shortfalls through unfavorable changes in tax laws and interpretation of existing laws which could adversely affect our results of operations.
EMPLOYMENT LAWS AND REGULATIONS
Our policies and procedures are designed to comply with employment laws and regulations set forth by the federal government and in each of the states and municipalities where we do business. These include laws and regulations related to wages and hours, meals and rest periods, and commissions. These laws and regulations are complex and continuously evolving, and the related enforcement is increasingly aggressive, particularly in the state of California. Significant legislative changes that impact our relationship with our workforce could increase our expenses and adversely affect our operations. Possible legislative changes include changes to an employer’s obligation to recognize collective bargaining units, the process by which collective bargaining agreements are negotiated or imposed and health care mandates. In addition, if we fail to comply with applicable laws and regulations we could be subject to damage to our reputation, class action lawsuits, legal and settlement costs, disruption of our business, changes to our employment practices, and loss of customers and employees, which could result in a loss of sales, increased employment costs, low employee morale, and harm to our business and results of operations.
Our policies and procedures are designed to comply with employment laws and regulations set forth by the federal government and in each of the states and municipalities where we do business. These include laws and regulations related to wages and hours, meals and rest periods, and commissions. These laws and regulations are complex and continuously evolving, and the related enforcement is increasingly aggressive, particularly in the state of California. Significant legislative changes that impact our relationship with our workforce could increase our expenses and adversely affect our operations. Possible legislative changes include changes to an employer’s obligation to recognize collective bargaining units, the process by which collective bargaining agreements are negotiated or imposed and health care mandates. In addition, if we fail to comply with applicable laws and regulations we could be subject to damage to our reputation, class action lawsuits, legal and settlement costs, disruption of our business, changes to our employment practices, and loss of customers and employees, which could result in a loss of sales, increased employment costs, low employee morale, and harm to our business and results of operations.
REGULATORY COMPLIANCE
Our policies and procedures are designed to comply with all applicable laws and regulations, including those imposed by the SEC, NYSE, the banking industry and foreign countries. Additional legal and regulatory requirements, and the fact that foreign laws occasionally conflict with domestic laws, have increased the complexity of the regulatory environment and the cost of compliance. Failure to comply with the various regulations may result in damage to our reputation, civil and criminal liability, fines and penalties, increased cost of regulatory compliance and restatements of our financial statements.
Our policies and procedures are designed to comply with all applicable laws and regulations, including those imposed by the SEC, NYSE, the banking industry and foreign countries. Additional legal and regulatory requirements, and the fact that foreign laws occasionally conflict with domestic laws, have increased the complexity of the regulatory environment and the cost of compliance. Failure to comply with the various regulations may result in damage to our reputation, civil and criminal liability, fines and penalties, increased cost of regulatory compliance and restatements of our financial statements.
IMPACT OF PUBLIC HEALTH CONCERNS
Our business and operations could be materially and adversely affected by a regional or widespread pandemic, which could cause, among other things, a decrease in consumer spending that would negatively impact our sales; staffing shortages in our stores, distribution centers, or corporate offices; supply chain disruptions; or disruptions in the operations of our merchandise vendors or property developers. Any of these effects could have a significant adverse impact on our sales, costs, reputation and long-term growth plans.
Our business and operations could be materially and adversely affected by a regional or widespread pandemic, which could cause, among other things, a decrease in consumer spending that would negatively impact our sales; staffing shortages in our stores, distribution centers, or corporate offices; supply chain disruptions; or disruptions in the operations of our merchandise vendors or property developers. Any of these effects could have a significant adverse impact on our sales, costs, reputation and long-term growth plans.
FOREIGN CURRENCY
We purchase a portion of our inventory from foreign suppliers whose cost to us is affected by fluctuations of their local currency against the U.S. dollar or who price their merchandise in currencies other than the U.S. dollar. Changes in the value of the U.S. dollar relative to foreign currencies may increase our cost of goods sold, and if we are unable to pass these cost increases on to our customers, our gross margins, and ultimately our earnings, would decrease.
We purchase a portion of our inventory from foreign suppliers whose cost to us is affected by fluctuations of their local currency against the U.S. dollar or who price their merchandise in currencies other than the U.S. dollar. Changes in the value of the U.S. dollar relative to foreign currencies may increase our cost of goods sold, and if we are unable to pass these cost increases on to our customers, our gross margins, and ultimately our earnings, would decrease.
ANTI-TAKEOVER PROVISIONS
We are incorporated in the state of Washington and subject to Washington state law. Some provisions of Washington state law could interfere with or restrict takeover bids or other change-in-control events affecting us. For example, one provision prohibits us, except under specified circumstances, from engaging in any significant business transaction with any shareholder who owns 10% or more of our common stock (an “acquiring person”) for a period of five years following the time that the shareholder became an acquiring person.
We are incorporated in the state of Washington and subject to Washington state law. Some provisions of Washington state law could interfere with or restrict takeover bids or other change-in-control events affecting us. For example, one provision prohibits us, except under specified circumstances, from engaging in any significant business transaction with any shareholder who owns 10% or more of our common stock (an “acquiring person”) for a period of five years following the time that the shareholder became an acquiring person.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The following table summarizes the number of retail stores owned or leased by us, and the
percentage of total store square footage represented
by each listed category at January 30, 2010:
Owned on leased land
Leased stores
Owned stores on owned land
Partly owned and partly leased
Total
The following table summarizes our store opening activity during the last three years:
Number of stores, beginning of year
Stores opened
Stores acquired
Sale of Façonnable boutiques
Stores closed
Number of stores, end of year
1During the third quarter of 2007, we completed the sale of our Façonnable
business. Fiscal year 2007 includes international Façonnable boutiques through August 31, 2007 and
domestic
Façonnable boutiques through October 31, 2007 as follows: 36 international and 4 domestic
boutiques at the beginning of 2007; one international boutique opened during 2007; and all 41
boutiques sold as part of the sale of the Façonnable
business.
In 2009, we opened three full-line stores (Cherry Hill, New Jersey; Peabody, Massachusetts;
and Cincinnati, Ohio), relocated one full-line store (Murray, Utah) and opened thirteen Rack stores
(Paramus, New Jersey; Dallas, Texas; Sandy, Utah; Orland Park, Illinois; East Palo Alto,
California; Southlake, Texas; Maple Grove, Minnesota; Los Angeles, California; Pasadena,
California; San Jose, California; Austin, Texas; Orlando, Florida; and Cincinnati, Ohio). To date
in 2010, we have opened three new Rack stores (Houston, Texas; Kendall, Florida; and Coral Gables,
Florida). During the remainder of 2010, we are scheduled to open three full-line stores (Braintree,
Massachusetts; Newport Beach, California; and Santa Monica, California), relocate one full-line
store (Cerritos, California) and open fourteen additional Rack stores (Denver, Colorado;
Framingham, Massachusetts; Atlanta, Georgia; New York,
New York; Arlington, Virginia; Fairfax, Virginia; Durham, North Carolina; St. Louis, Missouri; Boca
Raton, Florida; Chicago, Illinois; Tampa, Florida; Lakewood, California; Burbank, California; and
Peoria, Arizona).
We also own six merchandise distribution centers, located in Portland, Oregon; Dubuque, Iowa;
Ontario, California; Newark, California; Upper Marlboro, Maryland; and Gainesville, Florida, which
are utilized by the Retail Stores segment. The Direct segment utilizes one fulfillment center in
Cedar Rapids, Iowa, which is owned on leased land. Our administrative offices in Seattle,
Washington are a combination of leased and owned space. We also lease an office building in the
Denver, Colorado metropolitan area for our Credit segment.
Nordstrom, Inc. and subsidiaries 9
The following table lists our retail store facilities as of January 30, 2010:
Full-Line Stores
ALASKA
Anchorage
ARIZONA
Chandler
Scottsdale
CALIFORNIA
Arcadia
Brea
Canoga Park
Cerritos
Corte Madera
Costa Mesa
Escondido
Glendale
Irvine
Los Angeles
Mission Viejo
Montclair
Palo Alto
Pleasanton
Redondo Beach
Riverside
Roseville
Sacramento
San Diego
San Francisco
San Jose
San Mateo
Santa Ana
Santa Barbara
Thousand Oaks
Walnut Creek
COLORADO
Broomfield
Denver
Lone Tree
CONNECTICUT
Farmington
FLORIDA
Aventura
Boca Raton
Coral Gables
Miami
Naples
Orlando
Palm Beach Gardens
Tampa
Wellington
GEORGIA
Atlanta
Buford
1This store has been subsequently relocated.
OREGON (continued)
Portland
Salem
Tigard
PENNSYLVANIA
King of Prussia
Pittsburgh
RHODE ISLAND
Providence
TEXAS
Austin
Dallas
Frisco
Houston
Hurst
San Antonio
UTAH
Murray
Orem
VIRGINIA
Arlington
Dulles
McLean
Norfolk
Richmond
WASHINGTON
Bellevue
Lynnwood
Seattle
Spokane
Tacoma
Tukwila
Vancouver
Other
Atlanta, GA
New York, NY
Nordstrom Rack Group
Chandler, AZ
Phoenix, AZ
Scottsdale, AZ
Brea, CA
Chino, CA
Colma, CA
Costa Mesa, CA
East Palo Alto, CA
Fresno, CA
Glendale, CA
Laguna Hills, CA
Long Beach, CA
1This store has been subsequently relocated.
Nordstrom, Inc. and subsidiaries 11
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Item 3. Legal Proceedings.
We are subject from time to time to various claims and lawsuits arising in the ordinary course
of business including lawsuits alleging violations by us of state and/or federal wage and hour
laws. Some of these suits purport or have been determined to be class actions and/or seek
substantial damages. While we cannot predict the outcome of these matters with certainty, we do not
believe any such claim, proceeding or litigation, either alone or in aggregate, will have a
material impact on our financial condition, results of operations or cash flows.
Item 4. Reserved.
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities.
MARKET, SHAREHOLDER AND DIVIDEND INFORMATION
Our common stock, without par value, is traded on the New York Stock Exchange under the symbol “JWN.” The approximate number of holders of common stock as of March 12, 2010 was 134,493 based upon the number of registered and beneficial shareholders, as well as the number of employee shareholders in the Nordstrom 401(k) Plan and Profit Sharing Plan. On this date we had 218,020,643 shares of common stock outstanding.
Our common stock, without par value, is traded on the New York Stock Exchange under the symbol “JWN.” The approximate number of holders of common stock as of March 12, 2010 was 134,493 based upon the number of registered and beneficial shareholders, as well as the number of employee shareholders in the Nordstrom 401(k) Plan and Profit Sharing Plan. On this date we had 218,020,643 shares of common stock outstanding.
The high and low sales prices of our common stock and dividends declared for each quarter of 2009
and 2008 are presented in the table below:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Full Year
STOCK PRICE PERFORMANCE
The following graph compares, for each of the last five fiscal years ending January 30, 2010, the cumulative total return of Nordstrom, Inc. common stock, Standard & Poor’s Retail Index and Standard & Poor’s 500 Index. The Retail Index is comprised of 30 retail companies, including Nordstrom, Inc., representing an industry group of the Standard & Poor’s 500 Index. The cumulative total return of Nordstrom, Inc. common stock assumes $100 invested on January 29, 2005 in Nordstrom, Inc. common stock and assumes reinvestment of dividends.
The following graph compares, for each of the last five fiscal years ending January 30, 2010, the cumulative total return of Nordstrom, Inc. common stock, Standard & Poor’s Retail Index and Standard & Poor’s 500 Index. The Retail Index is comprised of 30 retail companies, including Nordstrom, Inc., representing an industry group of the Standard & Poor’s 500 Index. The cumulative total return of Nordstrom, Inc. common stock assumes $100 invested on January 29, 2005 in Nordstrom, Inc. common stock and assumes reinvestment of dividends.
PERFORMANCE GRAPH
Nordstrom, Inc. common stock
Standard & Poor’s Retail Index
Standard & Poor’s 500 Index
Item 6. Selected Financial Data.
(Dollars in millions except sales per square foot and per share amounts)
The following selected financial data are derived from the audited Consolidated Financial
Statements and should be read in conjunction with Item 1A “Risk Factors,” Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and the Consolidated
Financial Statements and related notes included in Item 8 of this Annual Report on Form 10-K.
Earnings Results
Net sales
Credit card revenues
Gross profit1
Selling, general and administrative (“SG&A”)
expenses:2
Retail stores, direct and other segments
(“Retail”)2
Credit segment2
Earnings on investment in asset-backed securities,
net2,3
Earnings before interest and income taxes (“EBIT”)
Interest expense, net
Earnings before income taxes (“EBT”)
Net earnings
Balance Sheet and Cash Flow Data
Accounts receivable, net
Investment
in asset-backed securities
Merchandise inventories
Current assets
Land, buildings and equipment, net
Total assets
Current liabilities
Long-term debt, including current portion
Shareholders’ equity
Cash flow from operations
Performance Metrics
Same-store sales percentage (decrease) increase4
Gross profit % of net sales
SG&A % of net sales:
Retail
Total
EBIT as a percentage of total revenues
EBT as a percentage of total revenues
Net earnings as a percentage of total revenues
Return on average shareholders’ equity
Sales per square foot5
Retail SG&A expense per square foot5
Per Share Information
Earnings per diluted share
Dividends per share
Book value per share
Store Information (at year end)
Full-line stores
Rack and other stores6
International Façonnable boutiques6
Total square footage
1Gross profit is calculated as net sales less cost of sales and related buying and
occupancy costs (for all segments).
2In 2009, we reclassified other income and expense, net in our consolidated statement of
earnings, which was previously presented separately. A portion of
other income and expense, net has been reclassified to earnings on
investment in asset-backed securities, net, and the
remaining portion has been reclassified to selling, general and administrative expenses.
3On May 1, 2007, we combined our Nordstrom private label credit card and Nordstrom VISA
credit card programs into one securitization program. At that time the Nordstrom VISA credit card
receivables were brought on-balance sheet.
4Same-stores include stores that have been open at least one full year at the beginning
of the year and sales from our Direct segment.
5Sales per square foot and Retail SG&A expense per square foot are calculated as net
sales and Retail SG&A expense, respectively, divided by weighted
average square footage.
6During the third quarter of 2007, we completed the sale of our Façonnable business and
realized a gain on sale of $34 ($21, net of tax). Results of operations for fiscal year 2007
include the
international Façonnable boutiques through August 31, 2007 and the domestic Façonnable
boutiques through October 31, 2007. Prior to the sale, the domestic Façonnable boutiques were
included in “Rack and other stores.”
7Fiscal year 2006 includes an extra week (the 53rd week) as a result of our
4-5-4 retail reporting calendar. The 53rd week is not included in our calculation of
same-store sales.
Nordstrom, Inc. and subsidiaries 15
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
(Dollar, share and square footage amounts in millions except percentages, per share and per
square foot amounts)
OVERVIEW
Nordstrom is a fashion specialty retailer offering high-quality apparel, shoes, cosmetics and accessories for women, men and children. We offer a wide selection of brand name and private label merchandise. We offer our products through various channels: our ‘Nordstrom’ branded full-line stores and Web site (which we refer to as “multi-channel”), our off-price ‘Nordstrom Rack’ stores, and our ‘Jeffrey’ boutiques. Our stores are located throughout the United States. In addition, we offer our customers a loyalty program associated with a variety of payment products and services, including credit and debit cards.
Nordstrom is a fashion specialty retailer offering high-quality apparel, shoes, cosmetics and accessories for women, men and children. We offer a wide selection of brand name and private label merchandise. We offer our products through various channels: our ‘Nordstrom’ branded full-line stores and Web site (which we refer to as “multi-channel”), our off-price ‘Nordstrom Rack’ stores, and our ‘Jeffrey’ boutiques. Our stores are located throughout the United States. In addition, we offer our customers a loyalty program associated with a variety of payment products and services, including credit and debit cards.
We believe our multi-channel offering is important to our success and is consistent with our
commitment to customer service. Our goal is to provide a seamless integrated shopping experience to
our customers whenever and however they choose to shop. With that in mind, we are continuing to
make improvements to our multi-channel capabilities. In 2008, we launched the “Buy Online, Pick Up
in Store” service, which allows customers to purchase merchandise online and then pick up their
item(s) at a Nordstrom store on the same day. In 2009, we updated our inventory platform to create
shared inventory across all of our full-line stores and our online store, allowing us to fulfill
online orders from any full-line store. These enhancements have led to greater merchandise
selections online, improved convenience, as well as significant improvements in our sell-through
rates (the proportion of available merchandise that we are able to sell) and inventory turnover.
Our merchandising efforts have also been a significant contributor to our recent success. By
managing our inventory levels effectively during the economic downturn that began approximately two
years ago, we were well positioned to increase purchases as sales improved and maintain fresh
merchandise in our stores without taking excessive markdowns. Our customers have continued to
respond favorably to our merchandise assortment, thereby contributing to additional sales growth
and higher rates of regular-priced sales.
Throughout 2009, we demonstrated discipline in the management of our expenses. Our model is focused
on controlling our fixed expenses, while flexing our variable and performance-related expenses with
our sales and earnings results. Our sales per square foot in 2009 declined to $368, consistent with
our sales per square foot of $369 in 2004. However, as a result of our expense management efforts,
we decreased our selling, general and administrative expenses per square foot for our Retail
Stores, Direct and Other segments over the same time period, from $100 in 2004 to $94 in 2009. This
flexibility in managing our business and the ability to adjust quickly to changes in trends have
put us in a healthy position heading into 2010.
The economic environment continues to have a significant impact on our customers. Consumers are
cautious about spending, unemployment levels continue to be high and economic uncertainty remains.
As a result of these conditions, we experienced elevated delinquency and write-off rates on our
credit card portfolio. We expect unemployment levels will remain elevated during 2010.
We recognize the importance of increasing our presence in top retail markets across the country.
During 2009 we opened three Nordstrom full-line stores, relocated another, and opened 13 Nordstrom
Racks. In 2010 we will continue to open full-line and Rack stores while returning to a more regular
remodeling schedule of five-to-six in 2010, compared to one remodel in 2009, as we continue to
pursue our long-term growth strategy.
We entered 2009 with considerable uncertainty, including an economic downturn and a volatile retail
environment. Our continued focus on improving service through our multi-channel offering, improved
merchandising and disciplined inventory, expense and capital management, enabled us to adapt as our
trends improved, and as a result we are well positioned going into 2010. Following a year of
improving performance and with a more efficient business model, we are focused on improving
execution and growing our market share. We believe that our response to the adversity of the past
two years has left us better positioned financially, competitively, and most important, with our
customers.
RESULTS OF OPERATIONS
Retail Stores, Direct and Other Segments
Summary
Our Retail Stores segment includes our full-line, Rack and Jeffrey stores; our Direct segment includes our online store; and our Other segment includes our product development group and corporate center operations (collectively the “Retail Business”). The following table summarizes the combined sales and expenses of our Retail Business for the fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008:
Our Retail Stores segment includes our full-line, Rack and Jeffrey stores; our Direct segment includes our online store; and our Other segment includes our product development group and corporate center operations (collectively the “Retail Business”). The following table summarizes the combined sales and expenses of our Retail Business for the fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008:
Net sales
Cost of sales and related buying and occupancy costs
Gross profit1
Selling, general and administrative expenses
% of net sales:
Gross profit
1Gross profit is calculated as net sales less cost of sales and related buying
and occupancy costs for our Retail Business.
Retail Business Net Sales
Net sales (decrease) increase
Same-store (decrease) increase by channel:
Direct
Multi-channel
Rack
Total company
Percentage of net sales by merchandise category:
Women’s apparel
Shoes
Men’s apparel
Women’s accessories
Cosmetics
Children’s apparel
Other
Total
NET SALES
- - 2009 VS 2008
Net sales for 2009 were approximately flat compared to 2008. The decline in multi-channel same-store sales was mostly offset by new store openings during 2009 and an increase in same-store sales for Rack.
Net sales for 2009 were approximately flat compared to 2008. The decline in multi-channel same-store sales was mostly offset by new store openings during 2009 and an increase in same-store sales for Rack.
Our multi-channel same-store sales declined 5.0% compared to 2008 as the decrease at our full-line
stores was partially offset by the strong performance of Direct. During 2009, we made continued
progress on our multi-channel strategy, providing our customers with access to more of our
merchandise. In the fall of 2009, we updated our inventory platform to allow for shared inventory
across all of our full-line stores and our Web site, allowing us to fulfill online orders from any
full-line store or from our fulfillment center. These enhancements increased sales and led to
significant improvements in our sell-through rates and inventory turnover, following their
implementation in the second half of the year. Our merchandising efforts also contributed to our
improving multi-channel sales trends during the second half of the year. By managing our inventory
levels effectively during the downturn in sales over the past two years, we had the flexibility to
increase purchases as sales improved and maintain current merchandise in our stores without taking
excessive markdowns. As a result, our percentage of regular price sales improved measurably over
the course of the year.
Same-store sales for our full-line stores decreased 7.2% compared to the same period last year.
Highlights for the year included both women’s shoes and accessories. Women’s shoes benefited from
sales of high-end shoes and boots, while fashion jewelry led accessories. Men’s clothing,
particularly young contemporary wear and men’s furnishings, remained challenging throughout the
year. This continues the trend we experienced last year as sales of men’s clothing declined in
conjunction with economic deterioration. The South and Mid-Atlantic regions were the top performing
geographic areas for full-line stores. California and the Northwest had same-store sales below the
full-line store average in 2009, although we saw improvements in both regions during the latter
part of the year.
Direct’s net sales increased 14.5% for the year, with results driven by the accessories, women’s
apparel and women’s shoes categories. Accessories benefited from the sales of handbags and fashion
jewelry while women’s apparel was led by special occasion dresses. Junior footwear and high-end
shoes drove the improvement in women’s shoes. The growth in our Direct business was helped by our
investments in technology and systems to better align our merchandise offering and improve the
online shopping experience.
Rack had its eighth consecutive year of positive sales growth with a same-store sales increase of
2.5% for the year. The shoes and women’s apparel categories led the positive performance for the
year. Junior and active footwear drove shoes while women’s apparel benefited from knitwear
and blouses.
During 2009 we opened three full-line and thirteen Rack stores. These stores represent 2.6% of our
total net sales for 2009, and increased our gross square footage by 4.1% during 2009.
NET SALES
- - 2008 VS 2007
Net sales declined 6.3% in 2008 compared to 2007. The decrease was due to same-store sales declines in our full-line stores, partially offset by increases in same-store sales for Rack and Direct, as well as new store openings.
Net sales declined 6.3% in 2008 compared to 2007. The decrease was due to same-store sales declines in our full-line stores, partially offset by increases in same-store sales for Rack and Direct, as well as new store openings.
Same-store sales for our full-line stores decreased 12.4% compared to the same period in 2007
primarily as a result of the economic downturn. The largest same-store sales decreases came in
women’s apparel and men’s apparel. Women’s apparel continued to experience a market-wide
deterioration and we saw a decline in men’s apparel correspond to the economic downturn,
particularly during the fourth quarter. Regionally, business trends were most challenging in
markets undergoing the largest housing price corrections. California was the most challenging
region throughout 2008,
with same-store sales below the full-line store average. All other regions were above the
same-store sales average for full-line stores.
Nordstrom, Inc. and subsidiaries 17
Direct net sales increased 8.4% in 2008, driven by our efforts to better align our merchandise
offering and experience with our full-line stores. Our new “Buy Online, Pick Up in Store” service
was launched in 2008 and proved to be a convenient and valued service for our customers. The
accessories, women’s apparel and kids’ merchandise categories led the growth in our Direct sales in
2008.
Rack same-store sales increased 3.1% for the year in 2008. The accessories category, led by
designer handbags, and men’s apparel category, led by premium denim, drove this growth. All regions
contributed to the positive same-store sales results.
During 2008 we opened eight full-line and six Rack stores. These stores represented 3.3% of our
total net sales for fiscal 2008, and increased our gross square footage by 6.7% during 2008.
SAME-STORE
SALES OUTLOOK - 2010
We expect 2010 same-store sales to increase approximately 2% to 4%. The same-store sales increase in the first half of 2010 is expected to be approximately 300 basis points higher than in the second half of 2010.
We expect 2010 same-store sales to increase approximately 2% to 4%. The same-store sales increase in the first half of 2010 is expected to be approximately 300 basis points higher than in the second half of 2010.
As of March 19, 2010, we have opened three Rack stores. In total, we plan to open three full-line
stores, relocate one full-line store and open fourteen additional Rack stores during the remainder
of 2010. This will increase retail square footage by approximately 4.5%.
Retail Business Gross Profit
Fiscal
year
Gross profit1
Gross profit rate2
Average inventory per square foot
Inventory turnover rate3
1Gross profit is calculated as net sales less Retail Business cost of sales and
related buying and occupancy costs.
2Gross profit rate is calculated as gross profit divided by net sales.
3Inventory turnover rate is calculated as annual cost of sales and related buying and occupancy costs (for all segments) divided by 4-quarter average inventory.
2Gross profit rate is calculated as gross profit divided by net sales.
3Inventory turnover rate is calculated as annual cost of sales and related buying and occupancy costs (for all segments) divided by 4-quarter average inventory.
GROSS
PROFIT - 2009 VS 2008
Retail gross profit increased $80 from last year while our gross profit rate improved 101 basis points compared with the same period in 2008. Retail gross profit consists of merchandise margin offset by buying and occupancy costs. The improvement for the year was driven by overall improvement in our merchandise margin, particularly in the second half of the year. The latter half of 2008 was highly promotional among retailers, meaning many competitors took steep markdowns and/or offered special events or incentives to attract customers, as sales declined. We were able to be less promotional and reduce markdowns during 2009, particularly during the second half of the year, by aligning inventory with sales trends. All major merchandise categories at our full-line stores contributed to this improvement over 2008. The improvement in our merchandise margin was offset by an increase in our buying and occupancy costs. Buying and occupancy costs as a percentage of sales increased 51 basis points. This increase was primarily driven by incentives that were a result of strong company performance relative to our plans for 2009.
Retail gross profit increased $80 from last year while our gross profit rate improved 101 basis points compared with the same period in 2008. Retail gross profit consists of merchandise margin offset by buying and occupancy costs. The improvement for the year was driven by overall improvement in our merchandise margin, particularly in the second half of the year. The latter half of 2008 was highly promotional among retailers, meaning many competitors took steep markdowns and/or offered special events or incentives to attract customers, as sales declined. We were able to be less promotional and reduce markdowns during 2009, particularly during the second half of the year, by aligning inventory with sales trends. All major merchandise categories at our full-line stores contributed to this improvement over 2008. The improvement in our merchandise margin was offset by an increase in our buying and occupancy costs. Buying and occupancy costs as a percentage of sales increased 51 basis points. This increase was primarily driven by incentives that were a result of strong company performance relative to our plans for 2009.
Our inventory turnover rate increased 4.0% over last year while our average inventory per square
foot decreased 10.3%. Our merchandising efforts have enabled us to manage inventory levels
consistent with sales trends and maintain fresh merchandise in our stores. Combined with the
increased sell-through resulting from our improved multi-channel inventory capabilities, these
efforts led to a significant increase in our inventory turnover rate.
GROSS
PROFIT - 2008 VS 2007
Retail gross profit in 2008 decreased $444 from 2007 while our gross profit rate declined 280 basis points. The deterioration in 2008 was driven primarily by a decrease in our merchandise margin rate as we utilized markdowns to respond to slower sales and a more promotional environment. All major merchandise categories at our full-line stores contributed to this decrease. Our buying and occupancy costs as a percentage of sales increased 76 basis points as many of these costs were fixed relative to the sales decline.
Retail gross profit in 2008 decreased $444 from 2007 while our gross profit rate declined 280 basis points. The deterioration in 2008 was driven primarily by a decrease in our merchandise margin rate as we utilized markdowns to respond to slower sales and a more promotional environment. All major merchandise categories at our full-line stores contributed to this decrease. Our buying and occupancy costs as a percentage of sales increased 76 basis points as many of these costs were fixed relative to the sales decline.
Our inventory turnover rate improved slightly in 2008 while our average inventory per square foot
decreased 7.0%. Our merchants’ efforts to align inventory levels to lower demand resulted in the
improvement in our inventory turnover rate and our lower inventory per square foot. Our objective
was to match the change in inventory per square foot, which declined 7.0% on average, with our
same-store sales rate, which declined 9.0% for
the year.
GROSS
PROFIT OUTLOOK - 2010
In 2010, we expect a 20 to 60 basis point improvement in our total company gross profit rate, which includes both our Retail gross profit and our cost of loyalty points within our Credit segment. We expect greater improvement in the first half of the year when compared to 2009, when weaker sales trends in the first and second quarters increased markdown pressure. The improvement will be partially offset by additional occupancy expense for the three new full-line and seventeen new Rack stores in 2010.
In 2010, we expect a 20 to 60 basis point improvement in our total company gross profit rate, which includes both our Retail gross profit and our cost of loyalty points within our Credit segment. We expect greater improvement in the first half of the year when compared to 2009, when weaker sales trends in the first and second quarters increased markdown pressure. The improvement will be partially offset by additional occupancy expense for the three new full-line and seventeen new Rack stores in 2010.
Retailers do not uniformly record the costs of buying and occupancy and supply chain operations
(freight, purchasing, receiving, distribution, etc.) between gross profit and selling, general and
administrative expense. As such, our gross profit and selling, general and administrative expenses
and rates may not be comparable to other retailers’ expenses and rates.
Retail Business Selling, General and Administrative Expenses
Selling, general and administrative expenses
Selling, general and administrative rate1
1Selling, general and administrative rate is calculated as selling, general and
administrative expenses for our Retail Business as a percentage of net sales.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES - 2009 VS 2008
Our Retail Business selling, general and administrative expenses (“Retail SG&A”) increased $6 due to increased performance-related incentives, partially offset by lower variable expenses and cost savings resulting from controlling our fixed costs. We increased our provision for performance-related expense as the year progressed to reflect the improved performance of our overall business relative to our plan. This reflects our ‘pay for performance’ approach to compensation. Our variable expenses decreased in conjunction with lower sales volume, and we worked diligently to maintain our discipline in managing fixed costs. During 2009, we opened three full-line stores and thirteen Rack stores, which contributed $41 of additional expenses. Although we opened more stores compared to 2008, the majority were Rack stores, which incur lower expenses than a full-line store. These drivers led our Retail SG&A expenses as a percentage of net sales to be approximately flat versus last year.
Our Retail Business selling, general and administrative expenses (“Retail SG&A”) increased $6 due to increased performance-related incentives, partially offset by lower variable expenses and cost savings resulting from controlling our fixed costs. We increased our provision for performance-related expense as the year progressed to reflect the improved performance of our overall business relative to our plan. This reflects our ‘pay for performance’ approach to compensation. Our variable expenses decreased in conjunction with lower sales volume, and we worked diligently to maintain our discipline in managing fixed costs. During 2009, we opened three full-line stores and thirteen Rack stores, which contributed $41 of additional expenses. Although we opened more stores compared to 2008, the majority were Rack stores, which incur lower expenses than a full-line store. These drivers led our Retail SG&A expenses as a percentage of net sales to be approximately flat versus last year.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES - 2008 VS 2007
Our SG&A expenses for our Retail Business decreased $58 due to lower variable expenses as well as cost savings resulting from our focus on controlling fixed expenses, partially offset by the additional expenses related to our new stores. During 2008, we opened eight full-line stores and six Rack stores, which contributed $72 of additional expenses. Our Retail SG&A expenses as a percentage of net sales increased 94 basis points. The increase as a percentage of net sales was due to the fixed nature of many of our selling, general and administrative expenses and the impact of declining sales.
Our SG&A expenses for our Retail Business decreased $58 due to lower variable expenses as well as cost savings resulting from our focus on controlling fixed expenses, partially offset by the additional expenses related to our new stores. During 2008, we opened eight full-line stores and six Rack stores, which contributed $72 of additional expenses. Our Retail SG&A expenses as a percentage of net sales increased 94 basis points. The increase as a percentage of net sales was due to the fixed nature of many of our selling, general and administrative expenses and the impact of declining sales.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES OUTLOOK - 2010
In 2010, our Retail SG&A dollars are expected to increase $125 to $175, while our Retail SG&A expenses as a percentage of net sales will decrease 10 to 20 basis points. The majority of this increase relates to our expectations for increased variable expenses consistent with the planned increase in sales, as well as approximately $50 to $60 of additional selling, general and administrative expenses from new stores to be opened during 2010.
In 2010, our Retail SG&A dollars are expected to increase $125 to $175, while our Retail SG&A expenses as a percentage of net sales will decrease 10 to 20 basis points. The majority of this increase relates to our expectations for increased variable expenses consistent with the planned increase in sales, as well as approximately $50 to $60 of additional selling, general and administrative expenses from new stores to be opened during 2010.
Gain on Sale of Façonnable
During the third quarter of 2007, we completed the sale of the Façonnable business in exchange for cash of $216, net of transaction costs, and realized a gain on sale of $34. The impact to reported earnings per diluted share for 2007 was $0.09, net of tax of $13.
During the third quarter of 2007, we completed the sale of the Façonnable business in exchange for cash of $216, net of transaction costs, and realized a gain on sale of $34. The impact to reported earnings per diluted share for 2007 was $0.09, net of tax of $13.
Nordstrom, Inc. and subsidiaries 19
Credit Segment
The Nordstrom credit card products are designed to strengthen customer relationships and grow
retail sales by providing valuable services, loyalty benefits and payment products. We believe that
owning our credit card business allows us to fully integrate our rewards program with our retail
stores and provide better service to our customers, thus deepening our relationship with them and
driving greater customer loyalty. Cardholders can participate in the Nordstrom Fashion
Rewards® program, through which customers accumulate points based on their level of
spending (generally two points per dollar spent at Nordstrom and one point per dollar spent outside
of Nordstrom). Upon reaching two thousand points, customers receive twenty dollars in Nordstrom
Notes®, which can be redeemed for goods or services in our stores. As customers increase
their level of spending they receive additional benefits, including rewards such as complimentary
shipping and alterations in our retail stores. Our cardholders tend to visit our stores more
frequently and spend more with us than non-cardholders. We believe the Fashion Rewards program,
including these additional rewards, helps drive sales in our Retail Stores and Direct segments.
The table below illustrates a detailed view of the operational results of our Credit segment,
consistent with the segment disclosure provided in the notes to the consolidated financial
statements. In order to view the economic contribution of our credit card program, the following
items are also included in the table below:
| • | Intercompany merchant fees represent the estimated intercompany income of our credit business from the usage of our cards in the Retail Stores and Direct segments. To encourage the use of Nordstrom cards in our stores, the Credit segment does not charge the Retail Stores and Direct segments an intercompany interchange merchant fee. On a consolidated basis, we avoid costs that would be incurred if our customers used third-party cards. |
| • | During 2007, we combined our Nordstrom private label credit card and Nordstrom VISA credit card programs into one securitization program. At that time the Nordstrom VISA credit card receivables were brought on-balance sheet. While the underlying economics of the business did not change (Nordstrom has always owned 100% of its Credit segment), the accounting for this business segment did change. For comparability between years, off-balance sheet income (expense), net (credit card revenues, net of bad debt and interest expense) is shown for 2007. |
Interest expense is assigned to the Credit segment in proportion to the amount of estimated capital
needed to fund our credit card receivables, which assumes a mix of 80% debt and 20% equity. The
average accounts receivable investment metric included in the following table represents our best
estimate of the amount of capital for our credit card program that is financed by equity. As a
means of assigning a comparable cost of capital for our credit card business, we believe it is
important to maintain a capital structure similar to other financial institutions. Based on our
research, debt as a percentage of credit card receivables for other credit card companies ranges
from 70% to 90%. We believe that debt equal to 80% of our credit card receivables is appropriate
given our overall capital structure goals.
Finance charge revenue
Interchange - third party
Late fees and other revenue
Total credit card revenues
Interest expense
Net credit card income
Cost of sales and related buying and occupancy costs - loyalty program
Total expense
Earnings on
investment in asset-backed securities, net
Credit segment loss before income taxes, as presented in segment disclosure
Inter-company merchant fees
Off-balance sheet income, net1
Credit segment (loss) contribution, before income taxes
Average accounts receivable investment (assuming 80% of accounts
receivable is funded with debt)
Credit segment (loss) contribution, net of tax, as a percentage of average
accounts receivable investment
1In 2007, this includes off-balance sheet finance charges and other income of $22,
off-balance sheet interest expense of $6, and off-balance sheet bad debt expense of $7.
Net Credit Card Income
Credit card revenues include finance charges, interchange fees, late fees and other fees. Interchange fees are earned from the use of Nordstrom VISA credit cards at merchants outside of Nordstrom.
Credit card revenues include finance charges, interchange fees, late fees and other fees. Interchange fees are earned from the use of Nordstrom VISA credit cards at merchants outside of Nordstrom.
Credit card revenues increased to $370 in 2009 compared with $302 in 2008 due to an increase in our
annual percentage rate terms implemented in the fourth quarter of 2008, growth in our accounts
receivable balance and increased finance charges and late fees associated with increased
delinquencies during the economic downturn. The increase in credit card revenues from $253 in 2007
to $302 in 2008 was in part due to the Nordstrom VISA portfolio being on-balance sheet for a full
year in fiscal 2008 compared to only three quarters in fiscal 2007. The increase was also
due to portfolio growth and the change in our credit card pricing terms implemented in the fourth
quarter of 2008, partially offset by a significant reduction in the average prime rate.
In 2010, credit card revenues are expected to increase $35 to $45, due to moderate growth in our
accounts receivable.
In May 2009, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “Credit
CARD Act”) was passed. In January 2010, final rules implementing portions of the Credit CARD Act
were issued, including new restrictions on credit card pricing, finance charges and fees, customer
billing practices and payment application. These rules are requiring us to make changes to our
credit card business practices and systems. We have completed and implemented the necessary changes
and new procedures to enable compliance with those rules that had a mandatory effective date of
February 22, 2010. However, the Credit CARD Act’s full impact on our business is unknown at this
time. Additional proposed rules implementing other portions of the Credit CARD Act, effective in
August 2010, were published in early March, and interpretations of the new and proposed rules
continue to emerge. Depending on the nature and extent of the full impact from these rules, any
interpretations or additional rules, the practices, revenues and profitability of our credit
business could be adversely affected.
Interest expense decreased to $41 in 2009 from $50 in 2008 and $64 in 2007. These year-over-year
decreases were due to declining variable interest rates, partially offset by higher average
borrowings.
Credit Segment Cost of Sales and Related Buying and Occupancy Costs
Cost of sales and related buying and occupancy costs, which includes the estimated cost of Nordstrom Notes that will be issued and redeemed under our Fashion Rewards program, increased to $55 in 2009 compared with $50 in 2008. The increase was primarily due to increased use of Nordstrom credit cards, resulting in additional expense related to the Fashion Rewards program. Cost of sales and related buying and occupancy costs of $50 in 2008 increased slightly from $47 in 2007 due to growth in volume.
Cost of sales and related buying and occupancy costs, which includes the estimated cost of Nordstrom Notes that will be issued and redeemed under our Fashion Rewards program, increased to $55 in 2009 compared with $50 in 2008. The increase was primarily due to increased use of Nordstrom credit cards, resulting in additional expense related to the Fashion Rewards program. Cost of sales and related buying and occupancy costs of $50 in 2008 increased slightly from $47 in 2007 due to growth in volume.
Credit Segment Selling, General and Administrative Expenses
Selling, general and administrative expenses for our Credit segment are made up of operational and marketing expenses and bad debt. These expenses are summarized in the following table:
Selling, general and administrative expenses for our Credit segment are made up of operational and marketing expenses and bad debt. These expenses are summarized in the following table:
Operational and marketing expense
Bad debt expense
Total credit selling, general and administrative expense
Operational and marketing expenses are incurred to support and service our credit card
products and the related rewards programs, and are included in selling, general and administrative
expenses in the consolidated statement of earnings. Operational and marketing expense remained
relatively constant at $105 in 2009 compared with $101 in 2008. This reflects expenses that are
relatively fixed when compared to portfolio growth and our continued focus on controlling expenses.
The increase to $101 in 2008 compared with $91 in 2007 was due to additional marketing expenses as
a result of an increase in promotions related to our loyalty program in 2008.
Bad debt expense increased to $251 in 2009 from $173 in 2008 due to increased write-offs reflecting
consumer credit trends.
The following table illustrates the allowance for doubtful accounts activity for the past three
fiscal years:
Allowance at beginning of period
Bad debt provision1
Net
write-offs (on-balance sheet)
Allowance at end of period
Allowance as a percentage of ending accounts receivable
Delinquent balances over thirty days as a percentage of
accounts receivable
Bad debt provision as a percentage of average on-balance sheet
accounts receivable
Net write-offs as a percentage of average receivables2
1 In 2007, the one-time transitional charge-offs on the Nordstrom VISA receivables
of $21 are included in bad debt expense in selling, general and administrative expenses. These
charge-offs
represent actual write-offs on the Nordstrom VISA credit card portfolio during the eight-month
transitional period and are not included in the allowance for
doubtful accounts activity in the table above for 2007.
2 Calculated as net write-offs for the combined Nordstrom private label and Nordstrom
VISA portfolio as a percentage of average receivables, including average off-balance sheet
receivables in 2007 of $182.
Delinquency rates and write-offs ran at elevated levels throughout 2009. As of January 30,
2010, our delinquency rate was 5.3%, an increase from 3.7% in 2008 and 2.5% in 2007. Write-offs
increased $91 to $199, or 9.5% of average receivables in 2009 compared with $108, or 5.6% of
average
receivables in 2008. Our write-offs have a strong long-term correlation with national unemployment
rates, and this trend continued during 2009 as U.S. unemployment increased from 7.6% to 9.7%. In
California, unemployment rates in 2009 trended above the national unemployment rate. California
continues to experience particular weakness relative to our other geographic regions and accounts
for approximately 50% of our total write-offs. We are currently planning our business assuming an
average unemployment rate of approximately 10.5% in 2010. In light of this economic
Nordstrom, Inc. and subsidiaries 21
environment and based on our delinquency and write-off trends, we increased our allowance for doubtful accounts by
$52 to $190 in 2009 compared with an increase of $65 to $138 in 2008.
We anticipate that 2010 selling, general and administrative expenses for our Credit segment will
decrease by $10 to $25, primarily due to lower bad debt expense relative to 2009 as growth in the
unemployment rate and growth in our associated write-offs slows down.
Total Company Results
Interest Expense, Net
Interest expense, net
Interest expense, net increased $7 in 2009 compared with 2008 due to higher average debt
levels resulting from the $400 debt offering in the second quarter of 2009, partially offset by the
$250 senior notes which matured in January 2009 and the impact of declining variable interest
rates.
Interest expense, net increased $57 in 2008 compared with 2007 due to higher average debt levels
resulting from the $1,000 debt offering in the fourth quarter of 2007, as well as the $850
securitization transaction in May 2007.
We anticipate interest expense, net to decrease by $15 to $25 in 2010 due to lower debt levels,
reductions in interest rates and lower borrowing
facility fees.
Income Tax Expense
Income tax expense
Effective tax rate
The increase in our income tax expense in 2009 compared with 2008 was driven by the increase
in our earnings before income taxes, while the decline in income tax expense in 2008 compared with
2007 correlated with the decline in earnings before income taxes.
The following table illustrates the components of our effective tax rate for 2009, 2008 and 2007:
Statutory rate
State and local income taxes, net of federal
income taxes
Deferred tax adjustment
Permanent differences
Other, net
Effective tax rate
In 2009 and 2008, our effective tax rate was impacted by adjustments related to our deferred
tax assets primarily driven by the closure of several tax years under audit, as well as permanent
items related to investment valuation. These adjustments reduced our effective tax rate by 2.4% and
1.2% in 2009 and 2008, respectively.
We anticipate our effective tax rate to be approximately 39.0% in 2010.
Net Earnings and Earnings per Diluted Share
Net earnings
Net earnings as a
percentage of total
revenues
Earnings per diluted share
In 2009, net earnings increased 9.9% and earnings per diluted share increased $0.18 primarily
as a result of improved gross profit and continued expense performance, partially offset by
increased performance-related expenses related to our strong operating results relative to our plan
and increased bad debt expense.
In 2008, net earnings decreased 43.9% and earnings per diluted share decreased 36.5% as a result of
lower sales volume, increased markdowns and higher bad debt expense, partially offset by decreased
variable costs and reductions in fixed expenses. The decline in earnings per share was also
partially offset by the impact of share repurchases, which caused our weighted average shares
outstanding to decrease in 2008 compared with 2007.
We expect our earnings per diluted share to be in the range of $2.35 to $2.55 in 2010.
Fourth Quarter Results
Cost of sales and related buying and
occupancy costs
Net earnings
Earnings per diluted share
Our fourth quarter performance reflected continued improvement in our sales and gross margin
trends that we experienced throughout the year, particularly in the second half. Earnings per
diluted share were $0.77 for the quarter ended January 30, 2010 compared to $0.31 for the quarter
ended January 31, 2009. Net earnings for the fourth quarter of 2009 were $172 compared with $68 in
2008.
NET SALES
Total sales for the quarter increased 10.3% to $2,539 while same-store sales improved 6.9%. Multi-channel same-store sales increased 7.1%, with full-line same-store sales increasing 3.9% and Direct sales increasing 32.1%. Our multi-channel results benefited this year from both the comparison to a difficult period last year, as well as our shared inventory platform which enables online orders to be fulfilled from our full-line stores.
Total sales for the quarter increased 10.3% to $2,539 while same-store sales improved 6.9%. Multi-channel same-store sales increased 7.1%, with full-line same-store sales increasing 3.9% and Direct sales increasing 32.1%. Our multi-channel results benefited this year from both the comparison to a difficult period last year, as well as our shared inventory platform which enables online orders to be fulfilled from our full-line stores.
Results in full-line stores improved, as same-store sales increased 3.9% for the quarter. Our top
performing categories were women’s better apparel, women’s shoes, and accessories. Women’s better
apparel benefited primarily from sweaters. Women’s shoes were led by high-end shoes and junior
shoes, while jewelry drove the increase in accessories. The Midwest, South and Northwest regions
were the top performing geographic regions for
full-line stores relative to the fourth quarter of 2008.
Net sales for the Direct segment increased 32.1%, led by the performance of women’s shoes and
apparel. Shoes was driven by junior shoes and
high-end footwear, while coats and dresses performed well in women’s apparel.
Rack same-store sales increased 4.6% for the fourth quarter. Shoes, driven by juniors and active
footwear, and women’s clothing, driven by denim and knit tops, were the leading categories for
Rack.
GROSS PROFIT
Our gross profit rate increased 527 basis points to 37.3% from 32.0% last year. The improvement was mainly driven by merchandise margin as a percentage of net sales, partially offset by the impact of higher performance-related expenses included in buying and occupancy. Markdowns improved in the fourth quarter of 2009 when compared with the highly promotional fourth quarter experienced in 2008. We were effective in our management of inventory and ended the year with an inventory turn of 5.4, the highest in recent company history. We also ended the quarter with inventory per square foot down 4.1% from the fourth quarter of 2008.
Our gross profit rate increased 527 basis points to 37.3% from 32.0% last year. The improvement was mainly driven by merchandise margin as a percentage of net sales, partially offset by the impact of higher performance-related expenses included in buying and occupancy. Markdowns improved in the fourth quarter of 2009 when compared with the highly promotional fourth quarter experienced in 2008. We were effective in our management of inventory and ended the year with an inventory turn of 5.4, the highest in recent company history. We also ended the quarter with inventory per square foot down 4.1% from the fourth quarter of 2008.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative dollars for our Retail Business increased $56 compared to last year’s fourth quarter. The increase was largely driven by increased performance-related expenses due to our strong performance relative to our plan and higher variable expenses as a result of the improvement in sales. Our new store expenses in the fourth quarter of 2009 were $13, which partially offset fixed expense savings during the quarter. These drivers contributed to the 11 basis point increase in Retail Business selling, general and administrative expenses.
Selling, general and administrative dollars for our Retail Business increased $56 compared to last year’s fourth quarter. The increase was largely driven by increased performance-related expenses due to our strong performance relative to our plan and higher variable expenses as a result of the improvement in sales. Our new store expenses in the fourth quarter of 2009 were $13, which partially offset fixed expense savings during the quarter. These drivers contributed to the 11 basis point increase in Retail Business selling, general and administrative expenses.
In the fourth quarter, selling, general and administrative expenses for our credit segment were
$106, up from $90 in 2008. A majority of the increase was driven by higher bad debt expense from
increased write-offs associated with higher unemployment.
For further information on our quarterly results in 2009 and 2008, refer to Note 15 in the Notes to
Consolidated Financial Statements in Item 8.
Nordstrom, Inc. and subsidiaries 23
Return on Invested Capital (ROIC) (Non-GAAP financial measure)
We define Return on Invested Capital (ROIC) as follows:
We believe that ROIC is a useful financial measure for investors in evaluating our operating
performance for the periods presented. When read in conjunction with our net earnings and total
assets and compared to return on assets, it provides investors with a useful tool to evaluate our
ongoing operations and our management of assets from period to period. ROIC is one of our key
financial metrics, and we also incorporate it into our executive incentive measures. Our research
has shown that, historically, overall performance as measured by ROIC correlates directly to
shareholders’ return over the long term. For the 12 fiscal months ended January 30, 2010, our ROIC
increased to 12.1% compared to 11.6% for the 12 fiscal months ended January 31, 2009. ROIC is not a
measure of financial performance under GAAP, should not be considered a substitute for return on
assets, net earnings or total assets as determined in accordance with GAAP, and may not be
comparable to similarly titled measures reported by other companies. The closest GAAP measure is
return on assets, which increased slightly to 7.1% from 7.0% for the 12 fiscal months ended January
30, 2010 compared to the 12 fiscal months ended January 31, 2009. The following is a reconciliation
of return on assets to ROIC:
Add: income tax expense
Add: interest expense, net
Earnings before interest and income taxes
Add: rent expense
Less: estimated depreciation on capitalized
operating leases1
Net operating profit
Estimated income tax expense2
Net operating profit after tax (NOPAT)
Average total assets3
Less: average non-interest-bearing current liabilities4
Less: average deferred property incentives3
Add: average estimated asset base of capitalized
operating leases5
Average invested capital
Return on assets
ROIC
1Depreciation based upon estimated asset base of capitalized operating leases as
described in footnote 5 below.
2Based upon our effective tax rate multiplied by the net operating profit for the fiscal years ended January 30, 2010 and January 31, 2009.
3Based upon the trailing 12-month average.
4Based upon the trailing 12-month average for accounts payable, accrued salaries, wages and related benefits, and other current liabilities.
5Based upon the trailing 12-month average of the monthly asset base, which is calculated as the trailing 12 months rent expense multiplied by 8.
2Based upon our effective tax rate multiplied by the net operating profit for the fiscal years ended January 30, 2010 and January 31, 2009.
3Based upon the trailing 12-month average.
4Based upon the trailing 12-month average for accounts payable, accrued salaries, wages and related benefits, and other current liabilities.
5Based upon the trailing 12-month average of the monthly asset base, which is calculated as the trailing 12 months rent expense multiplied by 8.
Our ROIC increased primarily due to an increase in our earnings before interest and income
taxes compared to the prior year, offset by an increase in our average invested capital
attributable primarily to growth in cash and cash equivalents.
LIQUIDITY AND CAPITAL RESOURCES
We maintain a level of liquidity sufficient to allow us to cover our seasonal cash needs and to
maintain appropriate levels of short-term borrowings. We believe that our operating cash flows and
available credit facilities are sufficient to finance our cash requirements for the next 12 months
and beyond.
Over the long term, we manage our cash and capital structure to maximize shareholder return,
strengthen our financial position and maintain flexibility for future strategic initiatives. We
continuously assess our debt and leverage levels, capital expenditure requirements, debt service
payments, dividend payouts, potential share repurchases and future investments or acquisitions. We
believe our existing cash on-hand, operating cash flows, available credit facilities and potential
future borrowings will be sufficient to fund these scheduled future payments and potential
long-term initiatives.
For the fiscal year ended January 30, 2010, cash and cash equivalents increased by $723 to $795,
primarily due to cash provided by operations of $1,251, partially offset by $360 of capital
expenditures; and $182 of purchases, net of payments, made by our customers for third-party
merchandise and services using Nordstrom VISA credit cards. Additionally, we received proceeds from
long-term borrowings of $399, repaid commercial paper
and long-term borrowings totaling $300, and paid cash dividends of $139.
Operating Activities
Net cash provided by operating activities was $1,251 in 2009 and $848 in 2008. The majority of our operating cash inflows are related to sales to our customers, including the collection of accounts receivable. We also receive cash payments for property incentives from developers. Our operating cash outflows generally consist of payments to our inventory vendors (net of vendor allowances), payments to our employees for wages, salaries and other employee benefits, and payments to our landlords for rent. Operating cash outflows also include payments for income taxes and interest payments on our short and long-term borrowings.
Net cash provided by operating activities was $1,251 in 2009 and $848 in 2008. The majority of our operating cash inflows are related to sales to our customers, including the collection of accounts receivable. We also receive cash payments for property incentives from developers. Our operating cash outflows generally consist of payments to our inventory vendors (net of vendor allowances), payments to our employees for wages, salaries and other employee benefits, and payments to our landlords for rent. Operating cash outflows also include payments for income taxes and interest payments on our short and long-term borrowings.
The increase in cash provided by operating activities in 2009 compared with 2008 was due to working
capital initiatives and improved earnings. The positive impact from the change in accrued salaries,
wages and related benefits primarily reflects the increase in performance-related expenses as our
overall results improved relative to our plans in 2009 that will be paid in the first quarter of
fiscal year 2010.
In 2010, although we expect net earnings to increase, we expect our operating cash flows to
decline. This is a result of increases in working capital to support sales growth and payment of
performance-related expenses that were included in accrued salaries, wages and related benefits at
the
end of 2009.
Investing Activities
Net cash used in investing activities was $541 in 2009 and $792 in 2008. Our investing cash flows primarily consist of capital expenditures and, beginning in the second quarter of 2007 (when we brought our Nordstrom VISA credit card receivables on-balance sheet), customer purchases (net of payments) for goods and services outside of Nordstrom using the Nordstrom VISA credit cards.
Net cash used in investing activities was $541 in 2009 and $792 in 2008. Our investing cash flows primarily consist of capital expenditures and, beginning in the second quarter of 2007 (when we brought our Nordstrom VISA credit card receivables on-balance sheet), customer purchases (net of payments) for goods and services outside of Nordstrom using the Nordstrom VISA credit cards.
CAPITAL EXPENDITURES
Our capital expenditures over the last three years totaled $1,424, with $360 in 2009, $563 in 2008 and $501 in 2007. Compared with 2008, capital expenditures declined as we opened fewer full-line stores in 2009. While we opened more Rack stores in 2009 compared with 2008, the investment to open a Rack store is significantly less than a full-line store. Additionally, we reduced the number of full-line store remodels in 2009 compared with 2008.
Our capital expenditures over the last three years totaled $1,424, with $360 in 2009, $563 in 2008 and $501 in 2007. Compared with 2008, capital expenditures declined as we opened fewer full-line stores in 2009. While we opened more Rack stores in 2009 compared with 2008, the investment to open a Rack store is significantly less than a full-line store. Additionally, we reduced the number of full-line store remodels in 2009 compared with 2008.
Our capital expenditures included investments in new store openings and relocations, major and
minor remodels, and information technology improvements. We also received property incentives from
our developers of $96 in 2009, $119 in 2008 and $58 in 2007. These incentives are included in our
cash provided by operations in our consolidated statements of cash flows, however operationally we
view these as an offset to our capital expenditures. Our capital expenditure percentage, net of
property incentives, for the last three years by category are summarized in the
following table:
Category and expenditure percentage:
New store openings and relocations
Remodels (major and minor)
Information technology
The following table summarizes our store count and square footage activity during 2009:
Balance at January 31, 2009
New store openings
Store closings
Balance at January 30, 2010
In 2009 we opened three full-line stores and opened thirteen Rack stores. Together these
openings increased our gross square footage by 4.1%.
To date in 2010, we have opened three Rack stores. During the remainder of 2010, we anticipate
opening three full-line stores, relocating one full-line store and opening fourteen additional Rack
stores.
We expect that our capital expenditures (net of property incentives) will be approximately $2,100
over the next five years, with approximately $325 to $375 in 2010. Over these five years, we plan
to use 37% of this investment to build new and relocated stores, 41% on remodels (major and minor),
11% on information technology and 11% for other projects. Our current five-year plans include 28
new stores announced through 2012, and two announced with dates to be determined, which represents
a 9% increase in square footage. Almost one third of these stores will be in the South. We believe
that we have the capacity for additional capital investments should opportunities arise.
CHANGE IN CREDIT CARD RECEIVABLES ORIGINATED AT THIRD PARTIES
The Nordstrom VISA credit cards allow our customers to make purchases at merchants outside of
Nordstrom and accumulate points for our Nordstrom Fashion Rewards®. In 2009, we
experienced a decrease in third party purchases made by our customers using their Nordstrom VISA
credit cards. This decrease was driven by reductions in general consumer spending in response to
economic conditions during 2009. This caused a decrease in cash used for accounts receivable
originating at third parties, which was $182 in 2009 compared with $232 in 2008.
Financing Activities
Our net cash provided by financing activities was $13 in 2009 compared with $342 used in financing
activities in 2008. Our financing activities include our short-term and long-term borrowing
activity, dividends paid, and repurchases of common stock.
SHORT-TERM AND LONG-TERM BORROWING ACTIVITY
During 2009, we issued $400 of senior unsecured notes at 6.75% due June 2014. After deducting the original issue discount, underwriting fees and other expenses of $4, net proceeds from the offering were $396. These net borrowings were partially offset by the repayment of $275 in commercial paper borrowings and regularly scheduled principal payments of $25 on other long term borrowings.
During 2009, we issued $400 of senior unsecured notes at 6.75% due June 2014. After deducting the original issue discount, underwriting fees and other expenses of $4, net proceeds from the offering were $396. These net borrowings were partially offset by the repayment of $275 in commercial paper borrowings and regularly scheduled principal payments of $25 on other long term borrowings.
During the year, we entered into interest rate swap agreements (collectively, the “swap”) to manage
the interest rate risk associated with our fixed-rate borrowings. Our swap transaction has a $650
notional amount and matures in 2018. Under the swap, we receive a fixed rate of 6.25% and pay a variable rate based on one
month LIBOR plus a margin of 2.9% (3.1% at January 30, 2010).
DIVIDENDS
Cash dividends paid per share
In 2009, we paid dividends of $0.64 per share, which was consistent with our dividend payments
for 2008. This followed twelve consecutive years of annual dividend increases. In determining the
amount of dividends to pay, we analyze our dividend payout ratio and dividend yield, and balance
the dividend payment with our operating performance and capital resources. For the dividend yield,
which is calculated as our dividends per share divided by our stock price, we plan to target a 1.0%
to 1.5% long-term yield. We will balance any potential future dividend changes with our operating
performance and available capital resources.
In February 2010, we declared a first quarter dividend of $0.16 per share, which is consistent with
2009.
SHARE REPURCHASES
Our reported results for 2008 include $264 in share repurchases. During 2008, we repurchased 6.9 shares of our common stock for an aggregate purchase price of $238, at an average price per share of $34.29. In addition, our results for the period include the settlement of $26 in repurchases initiated in the fourth quarter of 2007. In August 2007 our Board of Directors authorized a $1,500 share repurchase program and in November 2007 authorized an additional $1,000 for share repurchases, bringing the total program to $2,500. We suspended our share repurchase program in September 2008, with $1,126 of remaining capacity. During 2009 we did not repurchase shares. The share repurchase program expired in August 2009. The actual amount and timing of any future share repurchases will be subject to market conditions, approval by our Board of Directors, and applicable Securities and Exchange Commission rules.
Our reported results for 2008 include $264 in share repurchases. During 2008, we repurchased 6.9 shares of our common stock for an aggregate purchase price of $238, at an average price per share of $34.29. In addition, our results for the period include the settlement of $26 in repurchases initiated in the fourth quarter of 2007. In August 2007 our Board of Directors authorized a $1,500 share repurchase program and in November 2007 authorized an additional $1,000 for share repurchases, bringing the total program to $2,500. We suspended our share repurchase program in September 2008, with $1,126 of remaining capacity. During 2009 we did not repurchase shares. The share repurchase program expired in August 2009. The actual amount and timing of any future share repurchases will be subject to market conditions, approval by our Board of Directors, and applicable Securities and Exchange Commission rules.
Free Cash Flow (Non-GAAP financial measure)
We define Free Cash Flow as:
Free Cash Flow = Net Cash Provided By Operating Activities – Capital Expenditures – Change in Credit Card Receivables Originated at Third Parties – Cash Dividends Paid + Increase in Cash Book Overdrafts
Free cash flow is one of our key liquidity measures, and we believe that our cash levels are more
appropriately analyzed using this measure. Free cash flow is not a measure of liquidity under GAAP
and should not be considered a substitute for operating cash flows as determined in accordance with
GAAP. In addition, free cash flow does have limitations:
| • | Free cash flow does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs; and | ||
| • | Other companies in our industry may calculate free cash flow differently than we do, limiting its usefulness as a comparative measure. |
To compensate for these limitations, we analyze free cash flow in conjunction with other GAAP
financial and performance measures impacting liquidity, including operating cash flows. The closest
GAAP measure is net cash provided by operating activities, which was $1,251 and $848 for the 12
months ended January 30, 2010 and January 31, 2009. The following is a reconciliation of our net
cash provided by operating activities and free cash flow:
Net cash provided by operating activities
Less: Capital expenditures
Change in credit card receivables originated at
third parties
Cash dividends paid
Add: Increase in cash book overdrafts
Free Cash Flow
Net cash used in investing activities
Net cash provided by (used in) financing activities
Credit Capacity and Commitments
As of January 30, 2010, we had total short-term borrowing capacity available for general corporate purposes of $950. Of the total capacity, we had $650 under our commercial paper program, which is backed by our unsecured revolving credit facility and $300 under our Variable Funding Note facility (“2007-A VFN”).
As of January 30, 2010, we had total short-term borrowing capacity available for general corporate purposes of $950. Of the total capacity, we had $650 under our commercial paper program, which is backed by our unsecured revolving credit facility and $300 under our Variable Funding Note facility (“2007-A VFN”).
During 2009, we entered into a new unsecured revolving credit facility (the “revolver”) with a
capacity of $650. This revolver replaced our previously existing $650 unsecured line of credit,
which was scheduled to expire in November 2010. The revolver, which expires in August 2012, is
available for working capital, capital expenditures and general corporate purposes. Under the terms
of the agreement, we pay a variable rate of interest and a facility fee based on our debt rating.
Under the revolver we have the option to increase the revolving commitment by up to $100, to a
total of $750, provided that we obtain written consent from the lenders who choose to increase
their commitment.
Our $650 commercial paper program allows us to use the proceeds to fund share repurchases as well
as operating cash requirements. Under the terms of the commercial paper agreement, we pay a rate of
interest based on, among other factors, the maturity of the issuance
and market conditions.
The issuance of commercial paper has the effect, while it is outstanding, of reducing borrowing
capacity under our revolver by an amount equal to the principal amount of commercial paper. As of
January 30, 2010 we had no outstanding issuances under our $650 commercial paper program and no
outstanding borrowings under our revolver.
During 2009, we renewed our 2007-A VFN. The 2007-A VFN has a capacity of $300 and matures in
January 2011. The 2007-A VFN is backed by substantially all of the Nordstrom private label card
receivables and a 90% interest in the co-branded Nordstrom VISA credit card receivables. Borrowings
under the 2007-A VFN incur interest based upon the cost of commercial paper issued by a third-party
bank conduit plus specified fees.
We pay a commitment fee for the notes based on the size of the commitment. Under the renewed 2007-A
VFN, we have the option to reduce the total capacity or, provided that written consent is obtained
from each of the parties to the Note Purchase Agreement, the facility contains the option to
increase the total capacity. As of January 30, 2010, we had no outstanding issuances against this
facility.
Our wholly owned federal savings bank, Nordstrom fsb, also maintains a variable funding facility
with a short-term credit capacity of $100. This facility is backed by the remaining 10% interest in
the Nordstrom VISA credit card receivables and is available, if needed, to provide liquidity
support to Nordstrom fsb. At the end of 2009 and 2008, Nordstrom fsb had no outstanding borrowings
under this facility. Borrowings under the facility incur interest based upon the cost of commercial
paper issued by the third-party bank conduit plus specified fees.
We maintain import and standby letters of credit to facilitate international payments. As of
January 30, 2010, we have $10 available under an import letter of credit, with $5 outstanding. We
additionally hold a $15 standby letter of credit, with $12 outstanding under this facility at the
end of the year.
We currently have an automatic shelf registration statement on file with the Securities and
Exchange Commission. Under the terms of the registration statement, and subject to the filing of
certain post-effective amendments, we are authorized to issue an unlimited principal amount of debt
securities.
Our next debt maturity is a $350 securitized note due in April 2010. Beginning in the first quarter
of 2010, we will make monthly cash deposits into a restricted account until the note is due in
accordance with the debt agreement. We will continue to monitor the credit markets and our
potential financing needs in order to ensure we have adequate cash on hand to pay this debt when it
becomes due. We expect to retire the $350 securitized note with available cash when it matures.
Debt Covenants
Our $650 unsecured line of credit requires that we maintain a leverage ratio of not greater than four times Adjusted Debt to EBITDAR, and a fixed charge coverage ratio of at least two times.
Our $650 unsecured line of credit requires that we maintain a leverage ratio of not greater than four times Adjusted Debt to EBITDAR, and a fixed charge coverage ratio of at least two times.
The fixed charge coverage ratio is defined as:
EBITDAR less gross capital expenditures
Interest expense, net + rent expense
Interest expense, net + rent expense
As of January 30, 2010 and January 31, 2009 we were in compliance with these covenants. We will
continue to monitor these covenants to ensure that we make any necessary adjustments to our plans
and believe that we will remain in compliance with these covenants during 2010. See additional
disclosure of Adjusted Debt to EBITDAR on the following page.
The following table shows our credit ratings at the date of this report:
Credit Ratings
Senior unsecured debt
Commercial paper
Senior unsecured outlook
These ratings could change depending on our performance and other factors. Our $100 variable
funding facility can be cancelled or not renewed if our debt ratings fall below Standard and Poor’s
BB+ rating or Moody’s Ba1 rating. Our other outstanding debt is not subject to termination or
interest rate adjustments based on changes in our credit ratings. We are currently three ratings
above the minimum for our Standard and Poor’s covenant requirements, and two ratings above the
minimum for our Moody’s covenant requirements.
Adjusted Debt to EBITDAR (Non-GAAP financial measure)
We define Adjusted Debt to Earnings before Interest, Income Taxes, Depreciation, Amortization and
Rent (“EBITDAR”) as follows:
Adjusted Debt to EBITDAR =
Adjusted Debt to EBITDAR is one of our key financial metrics, and we believe that our debt
levels are best analyzed using this measure. Our current goal is to manage debt levels to maintain
an investment grade credit rating as well as operate with an efficient capital structure for our
size, growth plans and industry. Investment grade credit ratings are important to maintaining
access to a variety of short-term and long-term sources of funding, and we rely on these funding
sources to continue to grow our business. We believe a higher ratio, among other factors, could
result in rating agency downgrades. In contrast, we believe a lower ratio would result in a higher
cost of capital and could negatively impact shareholder returns. As of both January 30, 2010 and
January 31, 2009, our Adjusted Debt to EBITDAR was 2.5.
Adjusted Debt to EBITDAR is not a measure of financial performance under GAAP and should not be
considered a substitute for debt to net earnings,
net earnings or debt as determined in accordance with GAAP. In addition, Adjusted Debt to EBITDAR
does have limitations:
| • | Adjusted Debt is not exact, but rather our best estimate of the total company debt we would hold if we had purchased the property and issued debt associated with our operating leases; | ||
| • | EBITDAR does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, including leases, or the cash requirements necessary to service interest or principal payments on our debt; and | ||
| • | Other companies in our industry may calculate Adjusted Debt to EBITDAR differently than we do, limiting its usefulness as a comparative measure. |
To compensate for these limitations, we analyze Adjusted Debt to EBITDAR in conjunction with other
GAAP financial and performance measures impacting liquidity, including operating cash flows,
capital spending and net earnings. The closest GAAP measure is debt to net earnings, which was 5.9
and 6.3 for 2009 and 2008, respectively. The following is a reconciliation of debt to net earnings
and Adjusted Debt to EBITDAR:
Debt2
Add: rent expense x 83
Adjusted Debt
Add: depreciation and amortization of
buildings and equipment
EBITDAR
Debt to Net Earnings
Adjusted Debt to EBITDAR
1The components of adjusted debt are as of the end of 2009 and 2008, while the
components of EBITDAR are for the 12 months ended January 30, 2010 and January 31, 2009.
2Debt included $275 of commercial paper borrowings outstanding as of January 31, 2009.
There were no outstanding commercial paper borrowings as of
January 30, 2010.
3The multiple of eight times rent expense used to calculate adjusted debt is our best
estimate of the debt we would record for our leases that are classified as operating if they had
met the criteria for a capital lease, or if we had purchased the
property.
Contractual Obligations
The following table summarizes our contractual obligations and the expected effect on our liquidity and cash flows as of January 30, 2010. We expect to fund these commitments primarily with operating cash flows generated in the normal course of business and credit available to us under existing and potential future facilities.
The following table summarizes our contractual obligations and the expected effect on our liquidity and cash flows as of January 30, 2010. We expect to fund these commitments primarily with operating cash flows generated in the normal course of business and credit available to us under existing and potential future facilities.
Long-term debt
Capital lease obligations
Other long-term liabilities
Operating leases
Purchase obligations
Total
Included in the required debt repayments disclosed above are estimated total interest payments
of $1,539 as of January 30, 2010, payable over the remaining life of the debts.
Other long-term liabilities consist of workers’ compensation and general liability insurance
reserves and postretirement benefits. The repayment amounts presented above were estimated based on
historical payment trends. Other long-term liabilities not requiring cash payments, such as
deferred property incentives and deferred revenue, were excluded from the table above. Also
excluded from the table above are unrecognized tax benefits of $48, as we are unable to reasonably
estimate the timing of future cash payments for these liabilities.
Purchase obligations primarily consist of purchase orders for unreceived goods or services and
capital expenditure commitments.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The following discussion highlights the estimates we believe are critical and should be read in conjunction with the Notes to the Consolidated Financial Statements. Our management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosures that follow.
The preparation of our financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The following discussion highlights the estimates we believe are critical and should be read in conjunction with the Notes to the Consolidated Financial Statements. Our management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosures that follow.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts represents our best estimate of the losses inherent in our Nordstrom private label card and Nordstrom VISA credit card receivables as of the balance sheet date. We evaluate the collectability of our accounts receivable based on several factors, including historical trends of aging of accounts, write-off experience and expectations of future performance, including trends in unemployment rates. We recognize finance charges on delinquent accounts until the account is written off. We write off credit card loans when accounts are, at a minimum, 151 days contractually delinquent. Accounts relating to cardholder bankruptcies, cardholder deaths and fraudulent transactions are written off earlier.
Our allowance for doubtful accounts represents our best estimate of the losses inherent in our Nordstrom private label card and Nordstrom VISA credit card receivables as of the balance sheet date. We evaluate the collectability of our accounts receivable based on several factors, including historical trends of aging of accounts, write-off experience and expectations of future performance, including trends in unemployment rates. We recognize finance charges on delinquent accounts until the account is written off. We write off credit card loans when accounts are, at a minimum, 151 days contractually delinquent. Accounts relating to cardholder bankruptcies, cardholder deaths and fraudulent transactions are written off earlier.
Management believes the allowance for doubtful accounts is adequate to cover anticipated losses in
our credit card accounts receivable under current conditions; however, significant deterioration in
any of the factors mentioned above or in general economic conditions could materially change these
expectations. Recent increases in unemployment and associated delinquency and write-off trends have
prompted us to record significant increases to our allowance for doubtful accounts, which increased
from $138 at January 31, 2009 to $190 at January 30, 2010. A 10% change in our allowance for
doubtful accounts would have affected net earnings by $12 for the fiscal year ended January 30,
2010.
Revenue Recognition
We record sales net of estimated returns and we exclude sales taxes. We recognize revenue from sales at our retail stores at the point of sale. Revenue from our online and catalog sales includes shipping revenue and is recognized upon estimated receipt by the customer. We estimate customer merchandise returns based on historical return patterns and reduce sales and cost of sales accordingly.
We record sales net of estimated returns and we exclude sales taxes. We recognize revenue from sales at our retail stores at the point of sale. Revenue from our online and catalog sales includes shipping revenue and is recognized upon estimated receipt by the customer. We estimate customer merchandise returns based on historical return patterns and reduce sales and cost of sales accordingly.
Although we believe we have sufficient current and historical knowledge to record reasonable
estimates of sales returns, there is a possibility that actual returns could differ from recorded
amounts. In the past three years, we have made no material changes to our estimates included in the
calculations of our sales return reserve. A 10% change in the sales return reserve would have had a
$5 impact on our net earnings for the year ended January 30, 2010.
Inventory
Our merchandise inventories are stated at the lower of cost or market value using the retail inventory method. Under the retail method, the valuation of inventories and the resulting gross margins are determined by applying a calculated cost-to-retail ratio to the retail value of ending inventory. To determine if the retail value of our inventory should be marked down, we consider current and anticipated demand, customer preferences, age of the merchandise and fashion trends. Inherent in the retail inventory method are certain management judgments that may affect the ending inventory valuation as well as gross margin. Among others, the significant estimates used in inventory valuation are obsolescence and shrinkage.
Our merchandise inventories are stated at the lower of cost or market value using the retail inventory method. Under the retail method, the valuation of inventories and the resulting gross margins are determined by applying a calculated cost-to-retail ratio to the retail value of ending inventory. To determine if the retail value of our inventory should be marked down, we consider current and anticipated demand, customer preferences, age of the merchandise and fashion trends. Inherent in the retail inventory method are certain management judgments that may affect the ending inventory valuation as well as gross margin. Among others, the significant estimates used in inventory valuation are obsolescence and shrinkage.
We reserve for obsolescence based on historical trends and specific identification. Shrinkage is
estimated as a percentage of net sales for the period from the most recent semi-annual inventory
count based on historical shrinkage results. Therefore, our obsolescence reserve and shrinkage
percentage contain uncertainties as the calculations require management to make assumptions and to
apply judgment regarding a number of factors, including market conditions, the selling environment,
historical results and current inventory trends.
We do not believe that the assumptions used in these estimates will change significantly based on
prior experience. In the past three years, we have made no material changes to our estimates
included in the calculations of the obsolescence and shrinkage reserves. A 10% change in the
obsolescence reserve or our shrink percentage would not have a material effect on our net earnings.
Income Taxes
We calculate income taxes using the asset and liability approach. We recognize deferred tax assets and liabilities based on the difference between the financial statement carrying amounts and respective tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which we expect those temporary differences to reverse.
We calculate income taxes using the asset and liability approach. We recognize deferred tax assets and liabilities based on the difference between the financial statement carrying amounts and respective tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which we expect those temporary differences to reverse.
We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may
record a valuation allowance if, based on all available evidence, we determine that some portion of
the tax benefit will not be realized. In the past three years we have not recorded any valuation
allowance related to our deferred tax assets.
In addition, we regularly evaluate the likelihood of realizing the benefit for income tax positions
we have taken in various federal, state and foreign filings by considering all relevant facts,
circumstances and information available to us. If we believe it is more likely than not that our
position will be sustained, we recognize a benefit at the largest amount which we believe is
cumulatively greater than 50% likely to be realized. Our unrecognized tax benefit was $43 as of
January 30, 2010 and $28 as of January 31, 2009.
Deferred tax asset valuation allowances and unrecognized tax benefits require significant
management judgment regarding applicable statutes and their related interpretation, the status of
various income tax audits, and our particular facts and circumstances. Also, as audits are
completed or statutes of limitations lapse, it may be necessary to record adjustments to our taxes
payable, deferred tax assets, tax reserves or income tax expense. Such adjustments reduced our
effective income tax rate by 1.8 percentage points in 2009 and 3.2 percentage points in 2008.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 to our consolidated financial statements for a discussion of recent accounting
pronouncements. We do not expect any of these pronouncements to have a material effect on our
results of operations, liquidity or capital resources as they primarily address financial
statement disclosures.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
(Dollars in millions)
INTEREST RATE RISK
Our primary exposure to market risk is through changes in interest rates. As of January 30, 2010, we have gross trade receivables of $2,162, which generate finance charge income at a combination of fixed and variable rates, and long-term debt of $2,613, including $1,150 that bears interest at LIBOR-based rates. Changing interest rates can therefore affect our credit card revenues and interest expense. The annualized effect of a one-percentage-point change in interest rates would not materially affect our net earnings, cash flows, or the fair value of our fixed-rate debt.
Our primary exposure to market risk is through changes in interest rates. As of January 30, 2010, we have gross trade receivables of $2,162, which generate finance charge income at a combination of fixed and variable rates, and long-term debt of $2,613, including $1,150 that bears interest at LIBOR-based rates. Changing interest rates can therefore affect our credit card revenues and interest expense. The annualized effect of a one-percentage-point change in interest rates would not materially affect our net earnings, cash flows, or the fair value of our fixed-rate debt.
We manage our net interest rate exposure through our mix of fixed and variable rate borrowings and
associated current and long-term assets. From time to time, we may also enter into interest rate
swap transactions for purposes of hedging the exposure of changes in fair value of our long-term
debt from interest rate risk. We do not use financial instruments for trading or other speculative
purposes and are not party to any leveraged financial instruments.
The table below presents information about our long-term debt obligations and interest rate swaps
that are sensitive to changes in interest rates as of January 30, 2010. For debt obligations,
including our capital leases, the table presents principal amounts, at book value, by maturity
date, and related weighted average interest rates. For interest rate swaps, the table presents
notional amounts and weighted average interest rates by expected (contractual) maturity dates.
Notional amounts are the predetermined dollar principal on which the exchanged interest payments
are based.
Dollars
in millions
Fixed
Avg. int. rate
Variable
Avg. int. rate1
Interest rate swaps
Fixed to variable
Avg. pay rate1
Avg. receive rate
1Interest rates as of January 30, 2010.
FOREIGN CURRENCY EXCHANGE RISK
The majority of our revenues, expenses and capital expenditures are transacted in U.S. dollars. However, we periodically enter into foreign currency purchase orders denominated in Euros for apparel, accessories and shoes. We use forward contracts to hedge against fluctuations in foreign currency prices. The fair value of our outstanding forward contracts at January 30, 2010 is not material.
The majority of our revenues, expenses and capital expenditures are transacted in U.S. dollars. However, we periodically enter into foreign currency purchase orders denominated in Euros for apparel, accessories and shoes. We use forward contracts to hedge against fluctuations in foreign currency prices. The fair value of our outstanding forward contracts at January 30, 2010 is not material.
Item 8. Financial Statements and Supplementary Data.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as is defined in the Securities Exchange Act of 1934. These internal controls
are designed to provide reasonable assurance that the reported financial information is presented
fairly, that disclosures are adequate and that the judgments inherent in the preparation of
financial statements are reasonable. There are inherent limitations in the effectiveness of any
system of internal control, including the possibility of human error and overriding of controls.
Consequently, an effective internal control system can only provide reasonable, not absolute,
assurance, with respect to reporting financial information.
Management conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework and criteria established in Internal Control — Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation, management concluded that the Company’s internal control over financial reporting
was effective as of January 30, 2010.
Deloitte & Touche LLP, an independent registered public accounting firm, is retained to audit
Nordstrom’s consolidated financial statements and the effectiveness of the Company’s internal
control over financial reporting. Its accompanying reports are based on audits conducted in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
/s/ Michael G. Koppel
Michael G. Koppel
Executive Vice President and Chief Financial Officer
Michael G. Koppel
Executive Vice President and Chief Financial Officer
/s/ Blake W. Nordstrom
Blake W. Nordstrom
President
Blake W. Nordstrom
President
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Nordstrom, Inc.
Seattle, Washington
Seattle, Washington
We have audited the internal control over financial reporting of Nordstrom, Inc. and subsidiaries
(the “Company”) as of January 30, 2010, based on
criteria established in Internal Control –
Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.
A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of January 30, 2010, based on the
criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial statement schedule as of
and for the year ended January 30, 2010 of the Company and our report dated March 19, 2010,
expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Seattle, Washington
March 19, 2010
Seattle, Washington
March 19, 2010
We have audited the accompanying consolidated balance sheets of Nordstrom, Inc. and subsidiaries
(the “Company”) as of January 30, 2010 and January 31, 2009, and the related consolidated
statements of earnings, shareholders’ equity, and cash flows for each of the three years in the
period ended January 30, 2010. Our audits also included the financial statement schedule listed in
the Index at Item 15(a)2. These financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Nordstrom, Inc. and subsidiaries as of January 30, 2010 and January 31,
2009, and the results of their operations and their cash flows for each of the three years in the
period ended January 30, 2010, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company’s internal control over financial reporting as of January 30,
2010, based on the criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 19,
2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.
Nordstrom, Inc.
In millions except per share amounts
Net sales
Credit card revenues
Total revenues
Cost of sales and related buying and occupancy costs
Selling, general and administrative expenses:
Retail stores, direct and other segments
Credit segment
Gain on sale of Façonnable
Earnings on
investment in asset-backed securities, net
Earnings before interest and income taxes
Earnings before income taxes
Net earnings
Earnings per basic share
Basic shares
Diluted shares
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
Nordstrom, Inc.
In millions
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Merchandise inventories
Current deferred tax assets, net
Prepaid expenses and other
Total current assets
Land, buildings and equipment, net
Goodwill
Other assets
Total assets
Liabilities and Shareholders’ Equity
Current liabilities:
Commercial paper
Accounts payable
Accrued salaries, wages and related benefits
Other current liabilities
Current portion of long-term debt
Total current liabilities
Long-term debt, net
Deferred property incentives, net
Other liabilities
Commitments and contingencies
Shareholders’ equity:
Common stock, no par value: 1,000 shares authorized;
217.7 and 215.4 shares issued and outstanding
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
Nordstrom, Inc.
Balance at February 3, 2007
Cumulative effect of accounting change
Adjusted Beginning Balance at February 3, 2007
Other comprehensive (loss) earnings:
Foreign currency translation adjustment
Postretirement plan adjustments, net of tax of ($5)
Fair value
adjustment to investment in asset-backed
securities, net of tax of $3
Comprehensive net earnings
Cash dividends paid ($0.54 per share)
Issuance of common stock for:
Stock option plans
Employee stock purchase plan
Other
Stock-based compensation
Repurchase of common stock
Balance at February 2, 2008
Other comprehensive earnings:
Postretirement plan adjustments, net of tax of ($8)
Cash dividends paid ($0.64 per share)
Effect of postretirement plan measurement date change
Balance at January 31, 2009
Other comprehensive loss:
Postretirement plan adjustments, net of tax of $6
Balance at January 30, 2010
Nordstrom, Inc.
Operating Activities
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization of buildings and equipment, net
Amortization of deferred property incentives and other, net
Stock-based compensation expense
Deferred income taxes, net
Tax benefit from stock-based payments
Excess tax benefit from stock-based payments
Provision for bad debt expense
Gain on sale of Façonnable
Change in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other assets
Accounts payable
Accrued salaries, wages and related benefits
Other current liabilities
Income taxes
Deferred property incentives
Other liabilities
Net cash provided by operating activities
Investing Activities
Capital expenditures
Change in credit card receivables originated at third parties
Proceeds from sale of Façonnable
Net cash used in investing activities
Financing Activities
(Repayments) proceeds from commercial paper borrowings, net
Proceeds from long-term borrowings, net of discounts
Principal payments on long-term borrowings
Increase in cash book overdrafts
Cash dividends paid
Proceeds from exercise of stock options
Proceeds from employee stock purchase plan
Excess tax benefit from stock-based payments
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental Cash Flow Information
Cash paid during the year for:
Interest (net of capitalized interest)
Income taxes
Nordstrom, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Dollar and share amounts in millions except per share, per option and unit amounts
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Founded in 1901 as a shoe store in Seattle, today Nordstrom is a fashion specialty retailer that offers customers a well-edited selection of high-quality fashion brands focused on apparel, shoes, cosmetics and accessories for men, women and children. This breadth of merchandise allows us to serve a wide range of customers who appreciate quality fashion and a superior shopping experience. We offer a wide selection of brand name and private label merchandise through multiple retail channels: our ‘Nordstrom’ branded 112 full-line stores and online store at www.nordstrom.com (collectively, “multi-channel”), 69 off-price ‘Nordstrom Rack’ stores, two ‘Jeffrey’ boutiques, and one clearance store. Our stores are located throughout the United States.
Founded in 1901 as a shoe store in Seattle, today Nordstrom is a fashion specialty retailer that offers customers a well-edited selection of high-quality fashion brands focused on apparel, shoes, cosmetics and accessories for men, women and children. This breadth of merchandise allows us to serve a wide range of customers who appreciate quality fashion and a superior shopping experience. We offer a wide selection of brand name and private label merchandise through multiple retail channels: our ‘Nordstrom’ branded 112 full-line stores and online store at www.nordstrom.com (collectively, “multi-channel”), 69 off-price ‘Nordstrom Rack’ stores, two ‘Jeffrey’ boutiques, and one clearance store. Our stores are located throughout the United States.
Through our Credit segment, we offer our customers a variety of payment products and services,
including a Nordstrom private label card,
two Nordstrom VISA credit cards and a debit card for Nordstrom purchases. These products also allow
our customers to participate in our loyalty program.
Fiscal Year
Our fiscal year ends on the Saturday closest to January 31st. References to 2009, 2008 and 2007 relate to the 52-week fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008, respectively. References to 2010 relate to the 52-week fiscal year ending January 29, 2011.
Our fiscal year ends on the Saturday closest to January 31st. References to 2009, 2008 and 2007 relate to the 52-week fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008, respectively. References to 2010 relate to the 52-week fiscal year ending January 29, 2011.
Principles of Consolidation
The consolidated financial statements include the balances of Nordstrom, Inc. and its subsidiaries. All intercompany transactions and balances are eliminated in consolidation.
The consolidated financial statements include the balances of Nordstrom, Inc. and its subsidiaries. All intercompany transactions and balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Uncertainties regarding such estimates and assumptions are inherent in the preparation of financial statements and actual results may differ from those estimates and assumptions. Our significant accounting judgments and estimates include allowance for doubtful accounts, sales return reserve, inventory obsolescence and shrinkage reserves, deferred tax asset valuation and unrecognized tax benefits.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Uncertainties regarding such estimates and assumptions are inherent in the preparation of financial statements and actual results may differ from those estimates and assumptions. Our significant accounting judgments and estimates include allowance for doubtful accounts, sales return reserve, inventory obsolescence and shrinkage reserves, deferred tax asset valuation and unrecognized tax benefits.
Reclassification
In 2009, we reclassified other income and expense, net in our consolidated statement of earnings to selling, general and administrative expenses and earnings on investment in asset-backed securities, net. Results for 2008 and 2007 have been reclassified for consistency with the 2009 presentation. These reclassifications do not impact our reported net earnings, earnings per share or cash flows for these periods.
In 2009, we reclassified other income and expense, net in our consolidated statement of earnings to selling, general and administrative expenses and earnings on investment in asset-backed securities, net. Results for 2008 and 2007 have been reclassified for consistency with the 2009 presentation. These reclassifications do not impact our reported net earnings, earnings per share or cash flows for these periods.
Net Sales
We recognize revenue from sales at our retail stores at the point of sale, net of estimated returns and excluding sales taxes. Revenue from our sales to customers shipped directly from our stores and our online and catalog sales includes shipping revenue, when applicable, and is recognized upon estimated receipt by the customer. We estimate customer merchandise returns based on historical return patterns and reduce sales and cost of sales accordingly. Our sales return reserves were $76 and $70 at the end of 2009 and 2008.
We recognize revenue from sales at our retail stores at the point of sale, net of estimated returns and excluding sales taxes. Revenue from our sales to customers shipped directly from our stores and our online and catalog sales includes shipping revenue, when applicable, and is recognized upon estimated receipt by the customer. We estimate customer merchandise returns based on historical return patterns and reduce sales and cost of sales accordingly. Our sales return reserves were $76 and $70 at the end of 2009 and 2008.
Credit Card Revenues
Credit card revenues include finance charges, late fees and other fees generated by our combined Nordstrom private label card and Nordstrom VISA credit card programs, and interchange fees generated by the use of Nordstrom VISA cards at third-party merchants. These fees are assessed according to the terms of the related cardholder agreements and recognized as revenue when earned.
Credit card revenues include finance charges, late fees and other fees generated by our combined Nordstrom private label card and Nordstrom VISA credit card programs, and interchange fees generated by the use of Nordstrom VISA cards at third-party merchants. These fees are assessed according to the terms of the related cardholder agreements and recognized as revenue when earned.
Cost of Sales
Cost of sales includes the purchase cost of inventory sold (net of vendor allowances), in-bound freight, and certain costs of loyalty program benefits related to our credit and debit cards.
Cost of sales includes the purchase cost of inventory sold (net of vendor allowances), in-bound freight, and certain costs of loyalty program benefits related to our credit and debit cards.
Buying and Occupancy Costs
Buying costs consist primarily of compensation and other costs incurred by our merchandising and product development groups. Occupancy costs include rent, depreciation, property taxes and facility operating costs of our retail, corporate center and distribution operations.
Buying costs consist primarily of compensation and other costs incurred by our merchandising and product development groups. Occupancy costs include rent, depreciation, property taxes and facility operating costs of our retail, corporate center and distribution operations.
Rent
We recognize minimum rent expense, net of landlord reimbursements, on a straight-line basis over the minimum lease term from the time that we control the leased property. For leases that contain predetermined, fixed escalations of the minimum rent, we recognize the rent expense on a straight-line basis and record the difference between the rent expense and the rent payable as a liability. Contingent rental payments, typically based on a percentage of sales, are recognized in rent expense when payment of the contingent rent is probable.
We recognize minimum rent expense, net of landlord reimbursements, on a straight-line basis over the minimum lease term from the time that we control the leased property. For leases that contain predetermined, fixed escalations of the minimum rent, we recognize the rent expense on a straight-line basis and record the difference between the rent expense and the rent payable as a liability. Contingent rental payments, typically based on a percentage of sales, are recognized in rent expense when payment of the contingent rent is probable.
We receive incentives from landlords to construct stores in certain developments. These incentives
are recorded as a deferred credit and recognized as a reduction of rent expense on a straight-line
basis over the lease term. At the end of 2009 and 2008, the deferred credit balance was $518 and
$478.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of compensation and benefits costs (other than those included in buying and occupancy costs), advertising, shipping and handling costs, bad debt expense related to our credit card operations, and other miscellaneous expenses.
Selling, general and administrative expenses consist primarily of compensation and benefits costs (other than those included in buying and occupancy costs), advertising, shipping and handling costs, bad debt expense related to our credit card operations, and other miscellaneous expenses.
Advertising
Production costs for newspaper, radio and other media are expensed the first time the advertisement is run. Total advertising expenses, net of vendor allowances, of $85, $98 and $101 in 2009, 2008 and 2007, respectively, were included in selling, general and administrative expenses.
Production costs for newspaper, radio and other media are expensed the first time the advertisement is run. Total advertising expenses, net of vendor allowances, of $85, $98 and $101 in 2009, 2008 and 2007, respectively, were included in selling, general and administrative expenses.
Vendor Allowances
We receive allowances from merchandise vendors for cosmetic selling expenses, purchase price adjustments, cooperative advertising programs and various other expenses. Allowances for cosmetic selling expenses are recorded in selling, general and administrative expenses as a reduction of the related costs when incurred. Purchase price adjustments are recorded as a reduction of cost of sales at the point they have been earned and the related merchandise has been sold. Allowances for cooperative advertising and promotion programs and other expenses are recorded in cost of sales and related buying and occupancy costs and selling, general and administrative expenses as a reduction of the related costs when incurred. Any allowances in excess of actual costs incurred that are included in selling, general and administrative expenses are recorded as a reduction of cost of sales. The following table shows vendor allowances earned during the year:
We receive allowances from merchandise vendors for cosmetic selling expenses, purchase price adjustments, cooperative advertising programs and various other expenses. Allowances for cosmetic selling expenses are recorded in selling, general and administrative expenses as a reduction of the related costs when incurred. Purchase price adjustments are recorded as a reduction of cost of sales at the point they have been earned and the related merchandise has been sold. Allowances for cooperative advertising and promotion programs and other expenses are recorded in cost of sales and related buying and occupancy costs and selling, general and administrative expenses as a reduction of the related costs when incurred. Any allowances in excess of actual costs incurred that are included in selling, general and administrative expenses are recorded as a reduction of cost of sales. The following table shows vendor allowances earned during the year:
Cosmetic selling expenses
Purchase price adjustments
Cooperative advertising and promotion
Other
Total vendor allowances
Shipping and Handling Costs
Our shipping and handling costs include payments to third-party shippers and costs to hold, move and prepare merchandise for shipment. These costs do not include inbound freight to our distribution centers, which we include in the cost of our inventory. Shipping and handling costs of $103, $106 and $87 in 2009, 2008 and 2007, respectively, were included in selling, general and administrative expenses.
Our shipping and handling costs include payments to third-party shippers and costs to hold, move and prepare merchandise for shipment. These costs do not include inbound freight to our distribution centers, which we include in the cost of our inventory. Shipping and handling costs of $103, $106 and $87 in 2009, 2008 and 2007, respectively, were included in selling, general and administrative expenses.
Loyalty Program
Customers who spend a certain amount with us using our Nordstrom private label cards or our Nordstrom VISA credit cards receive Nordstrom Notes®, which can be redeemed for goods or services in our stores. We estimate the net cost of the Nordstrom Notes that will be issued and redeemed and record this cost as rewards points are accumulated. In addition to this long-standing benefit, in 2007 we launched an enhanced loyalty program, Fashion Rewards®. Under this program, Nordstrom customers receive benefits such as free alterations based on their annual levels of spending. We record the cost of the loyalty program benefits for Nordstrom Notes and alterations in cost of sales given that we provide customers with products or services for these rewards. Other costs of the loyalty program, which primarily include shipping and fashion events, are recorded in selling, general and administrative expenses. These expenses are recorded based on estimates of benefits expected to be accumulated and redeemed in relation to sales.
Customers who spend a certain amount with us using our Nordstrom private label cards or our Nordstrom VISA credit cards receive Nordstrom Notes®, which can be redeemed for goods or services in our stores. We estimate the net cost of the Nordstrom Notes that will be issued and redeemed and record this cost as rewards points are accumulated. In addition to this long-standing benefit, in 2007 we launched an enhanced loyalty program, Fashion Rewards®. Under this program, Nordstrom customers receive benefits such as free alterations based on their annual levels of spending. We record the cost of the loyalty program benefits for Nordstrom Notes and alterations in cost of sales given that we provide customers with products or services for these rewards. Other costs of the loyalty program, which primarily include shipping and fashion events, are recorded in selling, general and administrative expenses. These expenses are recorded based on estimates of benefits expected to be accumulated and redeemed in relation to sales.
Stock-Based Compensation
We recognize stock-based compensation expense related to stock options at their estimated grant-date fair value, recorded on a straight-line basis over the requisite service period. The total compensation expense is reduced by estimated forfeitures expected to occur over the vesting period of the award. We estimate the fair value of stock options granted using the Binomial Lattice option valuation model. Stock-based compensation expense also includes amounts related to performance share units and our Employee Stock Purchase Plan, based on their fair values as of the end of each reporting period.
We recognize stock-based compensation expense related to stock options at their estimated grant-date fair value, recorded on a straight-line basis over the requisite service period. The total compensation expense is reduced by estimated forfeitures expected to occur over the vesting period of the award. We estimate the fair value of stock options granted using the Binomial Lattice option valuation model. Stock-based compensation expense also includes amounts related to performance share units and our Employee Stock Purchase Plan, based on their fair values as of the end of each reporting period.
New Store Opening Costs
Non-capital expenditures associated with opening new stores, including marketing expenses, relocation expenses and temporary occupancy costs, are charged to expense as incurred. These costs are included in both buying and occupancy costs and selling, general and administrative expenses according to their nature as disclosed above.
Non-capital expenditures associated with opening new stores, including marketing expenses, relocation expenses and temporary occupancy costs, are charged to expense as incurred. These costs are included in both buying and occupancy costs and selling, general and administrative expenses according to their nature as disclosed above.
Gift Cards
We recognize revenue from the sale of gift cards when the gift card is redeemed by the customer, or we recognize breakage income when the likelihood of redemption, based on historical experience, is deemed to be remote. Based on an analysis of our program since its inception in 1999, we determined that balances remaining on cards issued beyond five years are unlikely to be redeemed and therefore may be recognized as income. Breakage income was $8, $7 and $6 in 2009, 2008 and 2007. To date, our breakage rate is approximately 3.2% of the amount initially issued as gift cards. Gift card breakage income is included in selling, general and administrative expenses in our consolidated statement of earnings. We had outstanding gift card liabilities of $174 and $175 at the end of 2009 and 2008, which are included in other current liabilities.
We recognize revenue from the sale of gift cards when the gift card is redeemed by the customer, or we recognize breakage income when the likelihood of redemption, based on historical experience, is deemed to be remote. Based on an analysis of our program since its inception in 1999, we determined that balances remaining on cards issued beyond five years are unlikely to be redeemed and therefore may be recognized as income. Breakage income was $8, $7 and $6 in 2009, 2008 and 2007. To date, our breakage rate is approximately 3.2% of the amount initially issued as gift cards. Gift card breakage income is included in selling, general and administrative expenses in our consolidated statement of earnings. We had outstanding gift card liabilities of $174 and $175 at the end of 2009 and 2008, which are included in other current liabilities.
Income Taxes
We use the asset and liability method of accounting for income taxes. Using this method, deferred tax assets and liabilities are recorded based on differences between the financial reporting and tax basis of assets and liabilities. The deferred tax assets and liabilities are calculated using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, it is determined that some portion of the tax benefit will not be realized.
We use the asset and liability method of accounting for income taxes. Using this method, deferred tax assets and liabilities are recorded based on differences between the financial reporting and tax basis of assets and liabilities. The deferred tax assets and liabilities are calculated using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, it is determined that some portion of the tax benefit will not be realized.
We regularly evaluate the likelihood of realizing the benefit for income tax positions we have
taken in various federal, state and foreign filings by considering all relevant facts,
circumstances and information available. If we believe it is more likely than not that our position
will be sustained,
we recognize a benefit at the largest amount which we believe is cumulatively greater than 50%
likely to be realized.
Interest and penalties related to income tax matters are classified as a component of income tax
expense.
Comprehensive Net Earnings
Comprehensive net earnings include net earnings and other comprehensive earnings and losses. Other comprehensive loss of $9 in 2009 and other comprehensive earnings of $12 in 2008 consisted of adjustments, net of tax, related to our postretirement benefit obligations. In 2007, other comprehensive loss of $13 consisted primarily of a foreign currency translation adjustment and a fair value adjustment to our investment in asset-backed securities, partially offset by postretirement plan adjustments.
Comprehensive net earnings include net earnings and other comprehensive earnings and losses. Other comprehensive loss of $9 in 2009 and other comprehensive earnings of $12 in 2008 consisted of adjustments, net of tax, related to our postretirement benefit obligations. In 2007, other comprehensive loss of $13 consisted primarily of a foreign currency translation adjustment and a fair value adjustment to our investment in asset-backed securities, partially offset by postretirement plan adjustments.
The accumulated other comprehensive losses of $19 and $10 at the end of 2009 and 2008 consist
entirely of unrecognized losses on postretirement benefit obligations. During 2009 and 2008, we did
not own any material foreign subsidiaries, and therefore, we did not recognize any foreign currency
translation in accumulated other comprehensive loss.
Cash Equivalents
Cash equivalents are short-term investments with a maturity of three months or less from the date of purchase and are carried at amortized cost, which approximates fair value. Our cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Accounts payable at the end of 2009 and 2008 included $74 and $66 of checks not yet presented for payment drawn in excess of our bank deposit balances.
Cash equivalents are short-term investments with a maturity of three months or less from the date of purchase and are carried at amortized cost, which approximates fair value. Our cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Accounts payable at the end of 2009 and 2008 included $74 and $66 of checks not yet presented for payment drawn in excess of our bank deposit balances.
Accounts Receivable
We record credit card accounts receivable on our consolidated balance sheets at the outstanding balance, net of an allowance for doubtful accounts. We estimate the allowance for doubtful accounts based on our best estimate of the losses inherent in our receivables as of the balance sheet date. We evaluate the collectability of our accounts receivable based on several factors, including historical trends of aging of accounts, write-off experience and expectations of future performance, including trends in unemployment rates. We recognize finance charges on delinquent accounts until the account is written off. Delinquent accounts, including fees, are written off when they are determined to be uncollectible, usually after the passage of 151 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy or other circumstances that make further collection unlikely.
We record credit card accounts receivable on our consolidated balance sheets at the outstanding balance, net of an allowance for doubtful accounts. We estimate the allowance for doubtful accounts based on our best estimate of the losses inherent in our receivables as of the balance sheet date. We evaluate the collectability of our accounts receivable based on several factors, including historical trends of aging of accounts, write-off experience and expectations of future performance, including trends in unemployment rates. We recognize finance charges on delinquent accounts until the account is written off. Delinquent accounts, including fees, are written off when they are determined to be uncollectible, usually after the passage of 151 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy or other circumstances that make further collection unlikely.
Our Nordstrom private label cards can be used only in Nordstrom stores, while the Nordstrom VISA
cards allow our customers the option of using the cards for purchases of Nordstrom merchandise and
services, as well as for purchases outside of Nordstrom. Cash flows from the use of both the
private label cards and Nordstrom VISA credit cards for sales originating at our stores are treated
as an operating activity in the consolidated statements of cash flows as they relate to sales at
Nordstrom. Cash flows arising from the use of Nordstrom VISA cards outside of our stores are
treated as an investing activity within the consolidated statements of cash flows, as they
represent loans made to our customers for purchases at third parties.
Securitization of Accounts Receivable
Prior to May 2007, our private label card receivables were held in a trust, which could issue third-party debt that was secured by the private label receivables. The private label program was treated as ‘on-balance sheet,’ with the receivables, net of bad debt allowance, and debt recorded on our consolidated balance sheet; the finance charge income recorded in credit card revenues; and the bad debt expense recorded in credit segment selling, general and administrative expenses.
Prior to May 2007, our private label card receivables were held in a trust, which could issue third-party debt that was secured by the private label receivables. The private label program was treated as ‘on-balance sheet,’ with the receivables, net of bad debt allowance, and debt recorded on our consolidated balance sheet; the finance charge income recorded in credit card revenues; and the bad debt expense recorded in credit segment selling, general and administrative expenses.
The Nordstrom VISA credit card receivables were held in a separate trust (the VISA Trust), which
could issue third-party debt that was secured by the Nordstrom VISA credit card receivables. The
Nordstrom VISA credit card program was treated as ‘off-balance sheet’ prior to May 2007. We
recorded the fair value of our interest in the VISA Trust on our consolidated balance sheet, gains
on the sale of receivables to the VISA Trust and our share of the VISA Trust’s finance income in
earnings on investment in asset-backed securities, net.
On May 1, 2007, we converted the Nordstrom private label cards and Nordstrom VISA credit card
programs into one securitization program, which is accounted for as a secured borrowing (on-balance
sheet). When we combined the securitization programs, our investment
in asset-backed securities,
which was accounted for as available-for-sale securities, was eliminated and we reacquired all of
the Nordstrom VISA credit card receivables previously held off-balance sheet. Nordstrom VISA credit
card receivables are now recorded at the outstanding balance, net of an allowance for doubtful
accounts, on our consolidated balance sheet.
The following table summarizes certain income, expenses and cash flows received from and paid to
the VISA Trust prior to the May 2007 transaction:
Period
Principal collections reinvested in new receivables
Gains on sales of receivables
Income earned on beneficial interests
Cash flows (used in) provided by beneficial interests:
Investment
in asset-backed securities
Servicing fees
Net credit losses were $9 in 2007.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market, using the retail method (weighted average cost).
Merchandise inventories are valued at the lower of cost or market, using the retail method (weighted average cost).
Land, Buildings and Equipment
Land is recorded at historical cost, while buildings and equipment are recorded at cost less accumulated depreciation. Capitalized software includes the costs of developing or obtaining internal-use software, including external direct costs of materials and services and internal payroll costs related to the software project.
Land is recorded at historical cost, while buildings and equipment are recorded at cost less accumulated depreciation. Capitalized software includes the costs of developing or obtaining internal-use software, including external direct costs of materials and services and internal payroll costs related to the software project.
We capitalize interest on construction in progress and software projects during the period in which
expenditures have been made, activities are in progress to prepare the asset for its intended use,
and actual interest costs are being incurred.
Depreciation is computed using the straight-line method over the asset’s estimated useful life,
which is determined by asset category as follows:
Asset
Buildings and improvements
Store fixtures and equipment
Leasehold improvements
Capitalized software
Leasehold improvements made at the inception of the lease are amortized over the shorter of
the asset life or the initial lease term. Leasehold improvements made during the lease term are
amortized over the shorter of the asset life or the remaining lease term. Lease terms include the
fixed, non-cancelable term of a lease, plus any renewal periods determined to be reasonably
assured.
Goodwill
Goodwill represents the excess of acquisition cost over the fair value of the related net assets acquired, and is not subject to amortization.
Goodwill represents the excess of acquisition cost over the fair value of the related net assets acquired, and is not subject to amortization.
Impairment
When facts and circumstances indicate that the carrying values of long-lived tangible assets may be impaired, we perform an evaluation of recoverability by comparing the carrying values of the net assets to their related projected undiscounted future cash flows in addition to other quantitative and qualitative analyses. Upon indication that the carrying values of long-lived assets may not be recoverable, we recognize an impairment loss. We estimate the fair value of the assets using the expected present value of future cash flows of the assets. Property, plant and equipment assets are grouped at the lowest level at which there are identifiable cash flows when assessing impairment. Cash flows for our retail store assets are identified at the individual store level.
When facts and circumstances indicate that the carrying values of long-lived tangible assets may be impaired, we perform an evaluation of recoverability by comparing the carrying values of the net assets to their related projected undiscounted future cash flows in addition to other quantitative and qualitative analyses. Upon indication that the carrying values of long-lived assets may not be recoverable, we recognize an impairment loss. We estimate the fair value of the assets using the expected present value of future cash flows of the assets. Property, plant and equipment assets are grouped at the lowest level at which there are identifiable cash flows when assessing impairment. Cash flows for our retail store assets are identified at the individual store level.
We review our goodwill annually for impairment as of the first day of the first quarter or when
circumstances indicate its carrying value may not be recoverable. We perform this evaluation at the
reporting unit level, comprised of the principal business units within our Retail and Direct
segments, through the application of a two-step fair value test. The first step of the test
compares the carrying value of the reporting unit to its estimated fair value, which is based on
the expected present value of future cash flows. If fair value does not exceed carrying value then
a second step is performed to quantify the amount of the impairment. Based on the results of our
tests, fair value substantially exceeds carrying value, therefore we had no goodwill impairment in
2009, 2008 or 2007.
Self Insurance
We retain a portion of the risk for certain losses related to employee health and welfare, workers’ compensation and general liability claims. Liabilities associated with these losses include undiscounted estimates of both losses reported and losses incurred but not yet reported. We estimate our ultimate cost based on an actuarially based analysis of claims experience, regulatory changes and other relevant factors.
We retain a portion of the risk for certain losses related to employee health and welfare, workers’ compensation and general liability claims. Liabilities associated with these losses include undiscounted estimates of both losses reported and losses incurred but not yet reported. We estimate our ultimate cost based on an actuarially based analysis of claims experience, regulatory changes and other relevant factors.
Derivatives
Our interest rate swap agreements (collectively, the “swap”) are designated as fully effective fair value hedges. As such, we recognize our swap as either an asset or liability at fair value in our consolidated balance sheet, with an offsetting adjustment to the carrying value of our long-term debt. See Note 7: Debt and Credit Facilities for additional information related to our swap.
Our interest rate swap agreements (collectively, the “swap”) are designated as fully effective fair value hedges. As such, we recognize our swap as either an asset or liability at fair value in our consolidated balance sheet, with an offsetting adjustment to the carrying value of our long-term debt. See Note 7: Debt and Credit Facilities for additional information related to our swap.
We periodically enter into foreign currency purchase orders denominated in Euros for apparel,
accessories and shoes. We use forward contracts to hedge against fluctuations in foreign currency
prices. These forward contracts do not qualify for derivative hedge accounting; therefore any
changes in the fair value of financial contracts are reflected in the statement of earnings. The
notional amounts of our foreign currency forward contracts at the contract rates were $1 and $3 at
the end of 2009 and 2008.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature. The estimated fair value of long-term debt, including current maturities, based on quoted market prices of the same or similar issues, was $2,809 and $1,743 at the end of 2009 and 2008, compared to carrying values of $2,613 and $2,238, respectively.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature. The estimated fair value of long-term debt, including current maturities, based on quoted market prices of the same or similar issues, was $2,809 and $1,743 at the end of 2009 and 2008, compared to carrying values of $2,613 and $2,238, respectively.
The fair value of our swap was a $1 liability as of January 30, 2010. This fair value is estimated
based upon open-market quotes for identical or comparable assets from reputable third-party brokers
using market-based inputs, adjusted for credit risk, and as such is considered a Level 2 fair value
measurement.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-01, Generally Accepted Accounting Principles (ASC 105, Generally Accepted Accounting Principles), which established the FASB Accounting Standards Codification (“the Codification” or “ASC”) as the official single source of authoritative U.S. generally accepted accounting principles (“GAAP”). All existing accounting standards were superseded and all other accounting guidance not included in the Codification is now considered non-authoritative. The Codification is not intended to change GAAP, but is meant to organize and simplify authoritative GAAP literature. The Codification became effective for interim and annual periods ending after September 15, 2009.
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-01, Generally Accepted Accounting Principles (ASC 105, Generally Accepted Accounting Principles), which established the FASB Accounting Standards Codification (“the Codification” or “ASC”) as the official single source of authoritative U.S. generally accepted accounting principles (“GAAP”). All existing accounting standards were superseded and all other accounting guidance not included in the Codification is now considered non-authoritative. The Codification is not intended to change GAAP, but is meant to organize and simplify authoritative GAAP literature. The Codification became effective for interim and annual periods ending after September 15, 2009.
Following the Codification, the FASB no longer issues new standards in the form of Statements, FASB
Staff Positions or Emerging Issues Task Force Abstracts. Instead, it issues Accounting Standards
Updates (“ASU”) which serve to update the Codification, provide background information about the
guidance and the basis for conclusions on the changes to the Codification.
The impact on our consolidated financial statements is disclosure-only in nature as all references
to authoritative accounting literature will be made in accordance with the Codification. In order
to ease the transition to the Codification, we are providing the Codification cross-reference
alongside the references to the standards issued and adopted prior to the effective date of the
Codification.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures
about Derivative Instruments and Hedging
Activities — an amendment of FASB Statement No. 133 (“SFAS 161”) (contained within ASC 815,
Derivatives and Hedging). SFAS 161 expanded the disclosure requirements in SFAS 133 about an
entity’s derivative instruments and hedging activities. This statement became effective for us as
of the beginning of fiscal year 2009 and did not impact our consolidated financial position or
results of operations, as its requirements are disclosure-only in nature.
NOTE 2: ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows:
Trade receivables:
Restricted
Unrestricted
Allowance for doubtful accounts
Trade receivables, net
Accounts receivable, net
The following table summarizes the restricted trade receivables:
Nordstrom VISA credit card receivables
Private label card receivables
Restricted trade receivables
The restricted trade receivables relate to substantially all of our Nordstrom private label
card receivables and our Nordstrom VISA credit card receivables. Under our securitization program,
the restricted trade receivables are transferred to a third-party trust on a daily basis. The
restricted trade receivables secure our Series 2007-1 Notes, the Series 2007-2 Notes and our two
variable funding notes. Our credit card securitization agreements set a maximum percentage of
receivables that can be associated with various receivable categories, such as employee or foreign
receivables. As of January 30, 2010 and January 31, 2009, these maximums were not exceeded.
The unrestricted trade receivables consist primarily of the remaining portion of our Nordstrom
private label card receivables and our Nordstrom VISA credit card receivables and accrued finance
charges not yet allocated to customer accounts. Other accounts receivable consist primarily of
credit card receivables due from third-party financial institutions and vendor claims.
NOTE 3: LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment consist of the following:
Land and land improvements
Buildings and building improvements
Construction in progress
Less: accumulated depreciation and amortization
Land, buildings and equipment, net
The total cost of buildings and equipment held under capital lease obligations was $28 at the
end of both 2009 and 2008, with related accumulated amortization of $22 in 2009 and $21 in 2008.
The amortization of capitalized leased buildings and equipment of $1 in both 2009 and 2008 was
recorded in depreciation expense.
Nordstrom, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
NOTE 4: SELF INSURANCE
Our self insurance reserves are summarized as follows:
Employee health and welfare
Workers’ compensation
General liability
Total
We are self-insured for the majority of our employee health and welfare coverage, and we do
not use stop-loss coverage. Participants contribute
to the cost of their coverage through both premiums and out-of-pocket expenses and are subject to
certain plan limits and deductibles.
Our workers’ compensation policies have a retention per claim of $1 or less and no policy limits.
Our general liability policies, encompassing employment practices liability and commercial general
liability, have a retention per claim of $1 or less and a policy limit up to $25 and
$150, respectively.
NOTE 5: 401(k) AND PROFIT SHARING
We provide a 401(k) and profit sharing plan for our employees. Our Board of Directors establishes
our profit sharing contribution each year. The 401(k) component is funded by voluntary employee contributions. In February 2009, the plan was
amended to replace our fixed company matching contribution with a discretionary contribution in an
amount determined by our Board of Directors. Our expense related to the profit sharing component
and matching contributions to the 401(k) component totaled $74, $39 and $50 in 2009, 2008 and 2007.
NOTE 6: POSTRETIREMENT BENEFITS
We have an unfunded defined benefit Supplemental Executive Retirement Plan (“SERP”), which provides
retirement benefits to certain officers and select employees. The SERP has different benefit levels
depending on the participant’s role in the company. At the end of 2009 and 2008 there were 35 and
33 officers and select employees eligible for SERP benefits. This plan is non-qualified and does
not have a minimum funding requirement.
Benefit Obligations and Funded Status
Change in benefit obligation:
Benefit obligation at beginning of year
Participant service cost
Interest cost
Benefits paid
Actuarial loss (gain)
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Employer contribution
Fair value of plan assets at end of year
Underfunded status at end of year
The accumulated benefit obligation, which is the present value of benefits earned to date,
assuming no salary growth, was $96 and $81 at the end of 2009 and 2008.
Amounts recognized as liabilities in the consolidated balance sheets consist of the following:
Current liabilities
Noncurrent liabilities
Net amount recognized
Components of SERP Expense
The components of SERP expense recognized in the consolidated statements of earnings are as
follows:
Participant service cost
Interest cost
Amortization of net loss
Amortization of prior service cost
Total SERP expense
Amounts not yet reflected in SERP expense and included in accumulated other comprehensive
earnings (pre-tax) consist of the following:
Accumulated loss
Prior service cost
Total accumulated comprehensive loss
In 2010, we expect $2 of costs currently in accumulated other comprehensive earnings to be
recognized as components of SERP expense.
Assumptions
Weighted-average assumptions used to determine benefit obligation and SERP expense are as follows:
Assumptions used to determine benefit
obligation:
Discount rate
Rate of compensation increase
Assumptions used to determine SERP expense:
In accordance with ASC 715, Compensation-Retirement Benefits (formerly SFAS 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans), during 2008, we
recognized a one-time adjustment of ($3) to retained earnings in shareholders’ equity as a result
of changing our benefit obligation measurement date from October 31 to our fiscal year-end.
Future Benefit Payments and Contributions
As of January 30, 2010, the expected future benefit payments based upon the assumptions described
above and including benefits attributable
to estimated future employee service are as follows:
2010
2011
2012
2013
2014
2015-2019
In 2010, we expect to make contributions to the plan of $5.
NOTE 7: DEBT AND CREDIT FACILITIES
Debt
A summary of our long-term debt is as follows:
Secured
Series 2007-1 Class A Notes, 4.92%, due April 2010
Series 2007-1 Class B Notes, 5.02%, due April 2010
Series 2007-2 Class A Notes, one-month LIBOR plus 0.06%
per year, due April 2012
Series 2007-2 Class B Notes, one-month LIBOR plus 0.18%
per year, due April 2012
Mortgage payable, 7.68%, due April 2020
Unsecured
Senior notes, 6.75%, due June 2014, net of unamortized
discount
Senior notes, 6.25%, due January 2018, net of
unamortized discount
Senior debentures, 6.95%, due March 2028
Senior notes, 7.00%, due January 2038, net of
unamortized discount
Total long-term debt
Less: current portion
Total due beyond one year
Both the Series 2007-1 Class A & B Notes and the Series 2007-2 Class A & B Notes are secured
by substantially all of the Nordstrom private label card receivables and a 90% interest in the
Nordstrom VISA credit card receivables. Our mortgage payable is secured by an office building which
had a net book value of $78 at the end of 2009.
During 2009, we issued $400 of senior unsecured notes at 6.75%, due June 2014. After deducting the
original issue discount of $1 and other fees and expenses of $3, net proceeds from the offering
were $396. We used a portion of the proceeds from the issuance to repay the $140 in outstanding
issuances of commercial paper as of May 26, 2009, the date the senior notes were issued. During
2009, we also repaid $19 in unsecured debt related to the acquisition of Jeffrey.
Other secured debt as of January 30, 2010 consists primarily of capital lease obligations. Other
unsecured debt as of January 30, 2010 consists primarily of an adjustment to the carrying value of
our long-term debt associated with the fair value of our interest rate swap.
During 2009, we entered into interest rate swap agreements (collectively, the “swap”) with a $650
notional amount maturing in 2018. Under the swap we receive a fixed rate of 6.25% and pay a
variable rate based on one month LIBOR plus a margin of 2.9% (3.1% at January 30, 2010).
Required principal payments on long-term debt, excluding capital lease obligations, are as follows:
Thereafter
Interest Expense
The components of interest expense, net are as follows:
Interest expense on long-term debt and
short-term
borrowings
borrowings
Less:
Interest income
Capitalized interest
Interest expense, net
Credit Facilities
As of January 30, 2010, we had total short-term borrowing capacity available for general corporate
purposes of $950. Of the total capacity, we had $650 under our commercial paper program, which is
backed by our unsecured revolving credit facility and $300 under our Variable Funding Note facility
(“2007-A VFN”).
During 2009, we entered into a new unsecured revolving credit facility (the “revolver”) with a
capacity of $650. This revolver replaced our previously existing $650 unsecured line of credit,
which was scheduled to expire in November 2010. The revolver, which expires in August 2012, is
available for working capital, capital expenditures and general corporate purposes. Under the terms
of the agreement, we pay a variable rate of interest and a facility fee based on our debt rating.
Consistent with our previous unsecured revolving credit facility, the new revolver requires that we
maintain a leverage ratio of not greater than four times Adjusted Debt to EBITDAR. The revolver
also requires that we maintain a fixed charge coverage ratio of at least two times, defined as:
As of January 30, 2010 and January 31, 2009 we were in compliance with these covenants.
Under the revolver we have the option to increase the revolving commitment by up to $100, to a
total of $750, provided that we obtain written consent from the lenders who choose to increase
their commitment.
Our $650 commercial paper program allows us to use the proceeds to fund share repurchases as well
as operating cash requirements. Under the terms of the commercial paper agreement, we pay a rate of
interest based on, among other factors, the maturity of the issuance and market conditions. The
issuance of commercial paper has the effect, while it is outstanding, of reducing borrowing
capacity under our revolver by an amount equal to the principal amount of commercial paper. As of
January 30, 2010 we had no outstanding issuances under our $650 commercial paper program and no
outstanding borrowings under our revolver. As of January 31, 2009, we had $275 in outstanding
issuances under our $650 commercial paper program and no outstanding borrowings under our revolver.
During 2009, we renewed our 2007-A VFN. The 2007-A VFN has a capacity of $300 and matures in
January 2011. The 2007-A VFN is backed by substantially all of the Nordstrom private label card
receivables and a 90% interest in the co-branded Nordstrom VISA credit card receivables. Borrowings
under the 2007-A VFN incur interest based upon the cost of commercial paper issued by a third-party
bank conduit plus specified fees. We pay a commitment fee for the notes based on the size of the
commitment. At the end of 2009 and 2008, we had no outstanding issuances against this facility.
NOTE 8: LEASES
We lease the land or the land and buildings at many of our full-line stores, and we lease the
buildings at many of our Rack stores. Additionally, we lease office facilities, warehouses and
equipment. Most of these leases are classified as operating leases and they expire at various dates
through 2080. Our fixed, non-cancelable lease terms are generally 20 to 30 years for full-line
stores and 10 to 15 years for Rack stores. Many of our leases include options that allow us to
extend the lease term beyond the initial commitment period, subject to terms agreed to at lease
inception. Most of our leases also provide for payment of operating expenses, such as common area
charges, real estate taxes and other executory costs, and some leases require additional payments
based on sales.
Future minimum lease payments as of January 30, 2010 are as follows:
Total minimum lease payments
Less amount representing interest
Present value of net minimum lease payments
Rent expense for 2009, 2008 and 2007 was as follows:
Minimum rent:
Store locations
Offices, warehouses and equipment
Percentage
rent - store locations
Property
incentives - store locations
Total rent expense
The rent expense above does not include common area maintenance costs which were $19 in each
of 2009, 2008 and 2007.
NOTE 9: COMMITMENTS AND CONTINGENT LIABILITIES
Our estimated total purchase obligations, capital expenditure contractual commitments and inventory
purchase orders were $1,221 as of January 30, 2010. In connection with the purchase of foreign
merchandise, we have outstanding import letters of credit totaling $5 as of January 30, 2010.
We are subject from time to time to various claims and lawsuits arising in the ordinary course of
business including lawsuits alleging violations by us of state and/or federal wage and hour laws.
Some of these suits purport or have been determined to be class actions and/or seek substantial
damages. While we cannot predict the outcome of these matters with certainty, we do not believe any
such claim, proceeding or litigation, either alone or in aggregate, will have a material impact on
our financial condition, results of operations or cash flows.
NOTE 10: SHAREHOLDERS’ EQUITY
Share Repurchase Program
The following is a summary of the activity related to our share repurchase programs in 2007, 2008
and 2009:
Capacity at February 4, 2007
August 2007 authorization
November 2007 authorization
Shares repurchased (2/4/07 to 2/2/08)
Capacity at February 2, 2008
Shares repurchased (2/3/08 to 1/31/09)
Capacity at January 31, 2009
Shares repurchased (2/1/09 to 1/30/10)
Unused capacity upon program
expiration in August 2009
Capacity at January 30, 2010
Fiscal 2007 share repurchases included $300 repurchased as part of an accelerated share
repurchase program. We repurchased 5.4 shares of our common stock on May 23, 2007 at $55.17 per
share and in June 2007, we received 0.4 shares at no additional cost, based on the volume weighted
average price of our common stock from June 1, 2007 to June 26, 2007. This resulted in an average
price per share of $51.69 for the accelerated share repurchase as a whole.
Dividends
We paid dividends of $0.64 per share in 2009 and 2008 and $0.54 per share in 2007.
NOTE 11: STOCK COMPENSATION PLANS
We currently have three stock-based compensation plans: the 2004 Equity Incentive Plan, the 2002
Nonemployee Director Stock Incentive Plan and our Employee Stock Purchase Plan. Under our 2004
Equity Incentive plan, we grant non-qualified stock options, performance share units and common
shares to employees. As of January 30, 2010, we have 48.4 shares authorized, 25.4 shares issued and
outstanding and 7.8 shares available for grant. The Nonemployee Director Stock Incentive Plan
authorizes the grant of stock awards to our nonemployee directors. These awards may be deferred or
issued in the form of restricted or unrestricted stock, non-qualified stock options or stock
appreciation rights. As of January 30, 2010, we had 0.9 shares authorized and 0.7 remaining shares
available for issuance. In 2009, we deferred shares with a total expense of $1.
Under the Employee Stock Purchase Plan (“ESPP”), employees may make payroll deductions of up to ten
percent of their base and bonus compensation. At the end of each six-month offering period,
participants may apply their accumulated payroll deductions toward the purchase of shares of our
common stock at 90% of the fair market value on the last day of the offer period. As of January 30,
2010, we had 9.4 shares authorized and 1.7 shares available for issuance under the ESPP. We issued
0.7 shares under the ESPP during 2009. At the end of 2009 and 2008, we had current liabilities of
$4 and $5, respectively, for future purchases of shares under the ESPP.
The following table summarizes our stock-based compensation expense:
Stock options
Performance share units
Employee stock purchase plan
Total stock-based compensation expense before income tax benefit
Income tax benefit
Total stock-based compensation expense, net of income tax
benefit
The stock-based compensation expense before income tax benefit was recorded in our
consolidated statements of earnings as follows:
Total stock-based compensation expense before
income tax benefit
The benefits of tax deductions in excess of the compensation cost recognized for stock-based
awards are classified as financing cash inflows and are reflected as “Excess tax benefit from
stock-based payments” in the consolidated statements of cash flows.
Stock Options
We used the following assumptions to estimate the fair value for stock options at grant date:
We used the following assumptions to estimate the fair value for stock options at grant date:
Risk-free interest
rate: Represents the yield
on U.S.
Treasury zero-coupon
securities that mature over
the 10-year life of the
stock options.
Weighted average
volatility: Based on
a combination of
the historical volatility of
our common stock and the
implied volatility of
exchange traded options for
our common stock.
Weighted average expected
dividend yield: Our
forecasted dividend yield
for the next ten years.
Expected life in
years: Represents the
estimated
period of time until option
exercise. The expected term
of options granted was
derived from the output of
the Binomial Lattice option
valuation model and was
based on our historical
exercise behavior, taking
into consideration the
contractual term of the
option and our employees’
expected exercise and
post-vesting employment
termination behavior.
The weighted average fair value per option at the grant date was $7, $15 and $20 in 2009, 2008 and
2007. In 2009, 2008 and 2007, stock option awards to employees were approved by the Compensation
Committee of our Board of Directors and their exercise price was set at $13.47, $38.02 and $53.63,
the closing price of our common stock on February 27, 2009, February 28, 2008 and March 1, 2007
(the dates of grant). The stock option awards provide recipients with the opportunity for financial
rewards when our stock price increases. The awards are determined based upon a percentage of the
recipients’ base salary and the fair value of the stock options. In 2009, we awarded stock options
to 1,213 employees compared to 1,230 and 1,195 employees in 2008 and 2007.
As of January 30, 2010, we have 14.5 options outstanding under the 2004 Equity Incentive Plan.
Options generally vest over four years, and expire ten years after the date of grant. A summary of
the stock option activity for 2009 is presented below:
Fiscal
Year
Outstanding, beginning of year
Granted
Exercised
Cancelled
Expired
Outstanding, end of year
Options exercisable at end of year
Options vested or expected to
vest at end of year
The total intrinsic value of options exercised during 2009, 2008 and 2007 was $23, $14 and
$79. The total fair value of stock options vested during 2009 was $25 and for both 2008 and 2007 it
was $24. As of January 30, 2010, the total unrecognized stock-based compensation expense related to
nonvested stock options was $38, which is expected to be recognized over a weighted average period
of 29 months.
Performance Share Units
We grant performance share units to executive officers as one of the ways to align compensation with shareholder interests. Performance share units vest after a three-year period only when our total shareholder return (reflecting daily stock price appreciation and compound reinvestment of dividends) is positive and outperforms companies in a defined group of competitors determined by the Compensation Committee of our Board of Directors. The percentage of units that are earned depends on our relative position at the end of the vesting period and can range from 0% to 125% of the number of units granted.
We grant performance share units to executive officers as one of the ways to align compensation with shareholder interests. Performance share units vest after a three-year period only when our total shareholder return (reflecting daily stock price appreciation and compound reinvestment of dividends) is positive and outperforms companies in a defined group of competitors determined by the Compensation Committee of our Board of Directors. The percentage of units that are earned depends on our relative position at the end of the vesting period and can range from 0% to 125% of the number of units granted.
Performance share units are payable in either cash or stock as elected by the employee;
therefore they are classified as a liability award. The liability is remeasured, with a
corresponding adjustment to earnings, at each fiscal quarter-end during the vesting period. The
performance share unit liability is remeasured using the estimated percentage of units earned
multiplied by the closing market price of our common stock on the current period-end date and is
pro-rated based on the amount of time passed in the vesting period. The price used to issue stock
or cash for the performance share units upon vesting is the closing market price of our common
stock on the vest date.
Following is a summary of performance share unit activity:
Vested but unearned
Vested and earned
Total fair value of performance share
units earned
Total amount of performance share
units settled or to be settled in cash
As of January 30, 2010, our other liabilities included $3 for performance share units. As of
January 31, 2009, we had no liabilities related to performance share units. As of January 30, 2010,
the remaining unrecognized stock-based compensation expense for unvested performance share units
was $4, which is expected to be recognized over a weighted average period of 22 months.
Nordstrom, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
NOTE 12: INCOME TAXES
Income tax expense consists of the following:
Current income taxes:
Federal
State and local
Total current income tax expense
Deferred income taxes:
Current
Non-current
Total deferred income tax benefit
Total income tax expense
A reconciliation of the statutory Federal income tax rate to the effective tax rate on
earnings before income taxes is as follows:
In 2009 and 2008, the IRS completed its routine examination of our federal filings for the
2007 and 2002 through 2006 years, respectively.
As a result of adjustments identified in the IRS examinations and revisions of estimates, we
increased our deferred tax assets, which resulted in a reduction in our effective tax rate in 2009
and 2008.
The major components of deferred tax assets and liabilities are as follows:
Compensation and benefits accruals
Accrued expenses
Merchandise inventories
Land, buildings and equipment basis and
depreciation differences
Gift cards and gift certificates
Loyalty reward certificates
Federal benefit of state taxes
Total deferred tax assets
Total deferred tax liabilities
Net deferred tax assets
A reconciliation of the beginning and ending amount of unrecognized tax benefits for 2009, 2008 and
2007 is as follows:
Unrecognized tax benefit at beginning of year
Gross increase to tax positions in prior
periods
Gross decrease to tax positions in prior
periods
Gross increase to tax positions in current
period
Lapse of statute
Settlements
Unrecognized tax benefit at end of year
At the end of 2009, 2008 and 2007, $25, $10 and $9 of the ending gross unrecognized tax
benefit balance relates to deferred items which,
if recognized, would not impact the effective tax rate.
During both 2009 and 2008, our income tax expense included $2 of tax-related interest and
penalties. During 2007, our income tax expense included $3 of tax-related interest and penalties.
At the end of 2009, 2008 and 2007, our liability for interest and penalties was $7, $6 and $4.
We file income tax returns in federal and various state and local jurisdictions. Prior to 2008, we
filed returns in France and other foreign jurisdictions. With few exceptions, we are no longer
subject to federal, state and local, or non-U.S. income tax examinations for years before 2001. The
federal tax returns for 2008 and 2009 are under concurrent year processing (accelerated audits),
which are expected to be completed in 2010 and 2011. We also currently have an open audit in France
for the years 2001 through 2004, related to our Façonnable business which we sold in 2007.
Unrecognized tax benefits related to federal, state and foreign tax positions may decrease by $3 by
January 29, 2011, subject to the completion of examinations and the expiration of various statutes
of limitations.
NOTE 13: EARNINGS PER SHARE
Earnings per basic share is computed using the weighted average number of common shares outstanding
during the year. Earnings per diluted share uses the weighted average number of common shares
outstanding during the year plus dilutive common stock equivalents, primarily stock options and
performance share units.
The computation of earnings per share is as follows:
Dilutive effect of stock options and
performance
share units
Options and other equity instruments totaling 7.2 shares in 2009, 4.9 shares in 2008 and 2.7
shares in 2007 were excluded from earnings per diluted share because their impact was
anti-dilutive.
NOTE 14: SEGMENT REPORTING
As of January 30,
2010, we have identified four reportable segments: Retail Stores, Direct, Credit
and Other. Our Retail Stores segment includes our Nordstrom full-line stores and our Nordstrom Rack
off-price stores, which meet the aggregation criteria set forth in ASC 280, Segment Reporting.
Through our Direct segment, we operate our Nordstrom branded online store. With our multi-channel
initiative, we are increasingly integrating our Nordstrom full-line stores and online store. Our
goal is to create a seamless, consistent merchandise offering and service experience for our
customers regardless of how they choose to shop.
Through
our Credit segment, we offer our customers a variety of payment products and services,
including a Nordstrom private label card, two Nordstrom VISA credit cards and a debit card for
Nordstrom purchases. Our card products also include a loyalty program that provides benefits to
our cardholders based on their level of spending.
The
Other segment includes our product development group, which coordinates the design and
production of private label merchandise sold in our retail stores, and our distribution network.
This segment also includes our corporate center operations. During the time that we owned it, this
segment also included the operations of our Façonnable business.
The following table summarizes net sales by merchandise category:
Women’s apparel
Shoes
Men’s apparel
Women’s accessories
Cosmetics
Children’s apparel
The following table presents our sales by merchandise category as a percentage of net sales:
In general, we use the same measurements to compute earnings before income taxes for
reportable segments as we do for the consolidated company. However, redemptions of our Nordstrom
Notes® are included in net sales for our Retail Stores segment. The sales amount in our
Other segment includes an entry to eliminate these transactions from our consolidated net sales.
There is no impact to consolidated earnings before income taxes for this adjustment. In addition,
our sales return reserve and other corporate adjustments are recorded in the Other segment. Other
than described above, the accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in Note 1.
Dollar and share amounts in millions except per share, per option and unit amounts
The following tables set forth information for our reportable segments:
Fiscal
year 2009
Net sales1
Net sales (decrease) increase
Credit card revenue
Earnings (loss) before interest and
income taxes
Interest expense, net2
Earnings (loss) before income taxes
Earnings (loss) before income taxes
as a % of net sales
Depreciation and amortization
Assets3
Fiscal
year 2008
Fiscal
year 2007
Net sales increase
1Net sales in Other include foreign sales of $62 in 2007.
2Interest income of $1, $2 and $14 for 2009, 2008 and 2007 is recorded in our Other segment as an offset to interest expense, net.
3Assets in Other include unallocated assets in corporate headquarters, consisting primarily of cash, land, buildings and equipment, and deferred tax assets.
2Interest income of $1, $2 and $14 for 2009, 2008 and 2007 is recorded in our Other segment as an offset to interest expense, net.
3Assets in Other include unallocated assets in corporate headquarters, consisting primarily of cash, land, buildings and equipment, and deferred tax assets.
NOTE 15: SELECTED QUARTERLY DATA (UNAUDITED)
Same-store sales
percentage change
Selling, general and
administrative expenses:
Retail stores, direct and
other segments
Net earnings as a percentage
of total revenues
1Gross profit is calculated as net sales less cost of sales and related buying and
occupancy costs.
NOTE 16: SALE OF FAÇONNABLE
During the third quarter of 2007, we completed the sale of our Façonnable business in exchange for
cash of $216, net of transaction costs. As part of this transaction, goodwill of $28, acquired
tradename of $84, and foreign currency translation of $16 were removed from our consolidated
balance sheet and we recorded a gain of $34. Upon the closing of this transaction, we entered into
a Transition Services Agreement, whereby we provided back office functions related to the
Façonnable U.S. wholesale business. This agreement ended during 2009.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
As of the end of the period covered by this Annual Report on Form 10-K, the Company performed
an evaluation under the supervision and with the participation of management, including our
President and Chief Financial Officer, of the design and effectiveness of our disclosure controls
and procedures (as defined in rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of
1934 (the “Exchange Act”)). Based upon that evaluation, our President and our Chief Financial
Officer concluded that, as of the end of the period covered by this Annual Report, our disclosure
controls and procedures were effective in the timely and accurate recording, processing,
summarizing and reporting of material financial and non-financial information within the time
periods specified within the Commission’s rules and forms. Our President and Chief Financial
Officer also concluded that our disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports that we file or submit under the Exchange Act
is accumulated and communicated to our management, including our President and Chief Financial
Officer, to allow timely discussions regarding required disclosure.
There have been no changes in our internal control over financial reporting (as defined in Rules
13a-15(f) or 15d-15(f) of the Exchange Act) during
our most recently completed fiscal quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
The following information required under this item is filed as part of this report:
Item 9B. Other Information.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required under this item is included in the following sections of our Proxy
Statement for our 2010 Annual Meeting of Shareholders, which sections are incorporated by reference
herein and will be filed within 120 days after the end of our fiscal year:
Executive Officers
Election of Directors
Board Committees
Director Nominating Process
Web site Access to Corporate Governance Documents
Section 16(a) Beneficial Ownership Reporting Compliance
Corporate Governance
Election of Directors
Board Committees
Director Nominating Process
Web site Access to Corporate Governance Documents
Section 16(a) Beneficial Ownership Reporting Compliance
Corporate Governance
The certifications of our President and Chief Financial Officer required pursuant to Sections 302
and 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits to this Annual Report on Form
10-K and were included as exhibits to each of our quarterly reports on Form 10-Q. Our President
certified to the New York Stock Exchange (NYSE) on June 8, 2009 pursuant to Section 303A.12(a) of
the NYSE’s listing standards, that he was not aware of any violation by the Company of the NYSE’s
corporate governance listing standards as of that date.
Item 11. Executive Compensation.
Compensation of Executive Officers
Compensation Discussion and Analysis
Director Compensation
Compensation Committee Interlocks and Insider Participation
Compensation Discussion and Analysis
Director Compensation
Compensation Committee Interlocks and Insider Participation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters.
The information required under this item is included in the following section of our Proxy
Statement for our 2010 Annual Meeting of Shareholders, which sections are incorporated by reference
herein and will be filed within 120 days after the end of our fiscal year:
Security Ownership of Certain Beneficial Owners and Management
Equity Compensation Plans
Equity Compensation Plans
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Election of Directors
Certain Relationships and Related Transactions
Certain Relationships and Related Transactions
Item 14. Principal Accounting Fees and Services.
The information required under this item is included in the following section of our Proxy
Statement for our 2010 Annual Meeting of Shareholders, which section is incorporated by reference
herein and will be filed within 120 days after the end of our fiscal year:
Ratification of the Appointment of Independent Registered Public Accounting Firm
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)1. FINANCIAL STATEMENTS
(a)2. FINANCIAL STATEMENT SCHEDULE
(a)3. EXHIBITS
Exhibits are incorporated herein by reference or are filed with this report as set forth in the
Index to Exhibits on pages 65 through 70 hereof.
All other schedules and exhibits are omitted because they are not applicable, not required, or
because the information required has been given as part of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NORDSTROM, INC.
(Registrant)
(Registrant)
/s/ Michael G. Koppel
Michael G. Koppel
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Michael G. Koppel
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: March 19, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the date
indicated.
/s/
Principal
Accounting Officer:
Directors:
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 033-18321,
333-63403, 333-40064, 333-40066, 333-79791, 333-101110, 333-118756, and 333-146049 on Form S-8
and No. 333-147664 on Form S-3 of our reports dated March 19, 2010, relating to the
consolidated financial statements and financial statement schedule of Nordstrom, Inc. and
subsidiaries and the effectiveness of Nordstrom, Inc.’s internal control over financial reporting,
appearing in this Annual Report on Form 10-K of Nordstrom, Inc. for the year ended January 30,
2010.
/s/ Deloitte & Touche LLP
Seattle, Washington
March 19, 2010
Seattle, Washington
March 19, 2010
NORDSTROM, INC. AND SUBSIDIARIES
(Dollars in millions)
Deducted from related consolidated balance sheet account
Allowance for doubtful accounts:
Year ended:
January 30, 2010
January 31, 2009
February 2, 2008
Reserves
Allowance for sales return, net:
(A) These expenses do not include write-offs of $21 related to the one-time transition of our
VISA portfolio to on-balance sheet, which are included in credit selling, general and
administrative expenses.
(B) Deductions consist of write-offs of uncollectible accounts, net of recoveries.
(C) Deductions consist of actual returns offset by the value of the merchandise returned and the sales commission reversed.
(B) Deductions consist of write-offs of uncollectible accounts, net of recoveries.
(C) Deductions consist of actual returns offset by the value of the merchandise returned and the sales commission reversed.
Nordstrom, Inc. and Subsidiaries
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
* This exhibit is a management contract, compensatory plan or arrangement
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
10.64
10.65
10.66
10.67
10.68
10.69
21.1
23.1
31.1
31.2
32.1
101.