10-Q 1 ni73102.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 001-15059 Nordstrom, Inc. ______________________________________________________ (Exact name of Registrant as specified in its charter) Washington 91-0515058 _______________________________ ___________________ (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1617 Sixth Avenue, Seattle, Washington 98101 ____________________________________________________ (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (206) 628-2111 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO _____ _____ Common stock outstanding as of August 31, 2002: 135,112,360 shares of common stock. 1 of 21 NORDSTROM, INC. AND SUBSIDIARIES -------------------------------- INDEX -----
Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Statements of Earnings Three and Six months ended July 31, 2002 and 2001 3 Condensed Consolidated Balance Sheets July 31, 2002 and 2001 and January 31, 2002 4 Condensed Consolidated Statements of Cash Flows Six months ended July 31, 2002 and 2001 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 CERTIFICATIONS 20
2 of 21 NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands except per share amounts) (unaudited)
Three Months Six Months Ended July 31, Ended July 31, ---------------------- ---------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Net sales $1,655,528 $1,545,759 $2,901,289 $2,763,799 Cost of sales and related buying and occupancy (1,104,265) (1,040,908) (1,928,562) (1,839,338) ---------- ---------- ---------- ---------- Gross profit 551,263 504,851 972,727 924,461 Selling, general and administrative expenses (496,685) (457,441) (881,560) (854,147) ---------- ---------- ---------- ---------- Operating income 54,578 47,410 91,167 70,314 Interest expense, net (19,605) (19,279) (39,654) (38,783) Minority interest purchase and reintegration costs (11,121) - (53,168) - Service charge income and other, net 35,341 35,368 68,645 72,523 ---------- ---------- ---------- ---------- Earnings before income taxes and cumulative effect of accounting change 59,193 63,499 66,990 104,054 Income tax expense (22,858) (24,800) (41,868) (40,600) ---------- ---------- ---------- ---------- Earnings before cumulative effect of accounting change 36,335 38,699 25,122 63,454 Cumulative effect of accounting change (net of tax) - - (13,359) - ---------- ---------- ---------- ---------- Net earnings $ 36,335 $ 38,699 $ 11,763 $ 63,454 ========== ========== ========== ========== Basic earnings per share $ .27 $ .29 $ .09 $ .47 ========== ========== ========== ========== Diluted earnings per share $ .27 $ .29 $ .09 $ .47 ========== ========== ========== ========== Cash dividends paid per share of common stock outstanding $ .09 $ .09 $ .18 $ .18 ========== ========== ========== ========== These statements should be read in conjunction with the Notes to Condensed Consolidated Financial Statements contained herein.
3 of 21 NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) (unaudited)
July 31, January 31, July 31, 2002 2002 2001 ---------- ---------- ---------- ASSETS Current Assets: Cash and cash equivalents $ 247,838 $ 331,327 $ 36,829 Accounts receivable, net 764,013 698,475 749,957 Merchandise inventories 1,039,365 888,172 1,002,633 Prepaid expenses 31,880 34,375 29,146 Other current assets 105,272 102,249 93,083 ---------- ---------- ---------- Total current assets 2,188,368 2,054,598 1,911,648 Land, buildings and equipment (net of accumulated depreciation of $1,770,885, $1,663,409, and $1,619,418) 1,805,861 1,761,082 1,654,852 Intangible assets, net 140,106 138,331 141,510 Other assets 97,178 94,768 84,141 ---------- ---------- ---------- TOTAL ASSETS $4,231,513 $4,048,779 $3,792,151 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable $ 209 $ 148 $ 38,202 Accounts payable 684,814 490,988 601,407 Accrued salaries, wages and related benefits 233,279 236,373 228,034 Income taxes and other accruals 169,084 142,002 168,322 Current portion of long-term debt 4,769 78,227 90,061 ---------- ---------- ---------- Total current liabilities 1,092,155 947,738 1,126,026 Long-term debt 1,343,797 1,351,044 1,041,459 Deferred lease credits 389,526 342,046 299,014 Other liabilities 94,808 93,463 55,236 Shareholders' Equity: Common stock, no par: 500,000,000 shares authorized; 135,089,518, 134,468,608 and 134,031,133 shares issued and outstanding 351,587 341,316 334,513 Unearned stock compensation (2,345) (2,680) (3,345) Retained earnings 962,699 975,203 938,130 Accumulated other comprehensive earnings (loss) (714) 649 1,118 ---------- ---------- ---------- Total shareholders' equity 1,311,227 1,314,488 1,270,416 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,231,513 $4,048,779 $3,792,151 ========== ========== ========== These statements should be read in conjunction with the Notes to Condensed Consolidated Financial Statements contained herein.
4 of 21 NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited)
Six Months Ended July 31, ---------------------- 2002 2001 -------- -------- OPERATING ACTIVITIES: Net earnings $11,763 $63,454 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 111,917 102,178 Amortization of intangible assets - 2,337 Amortization of deferred lease credits and other, net (9,054) (3,511) Stock-based compensation expense 2,087 3,126 Deferred income taxes, net (3,357) (3,485) Impairment of intangibles 21,900 - Write-off of IT investment 15,570 - Minority interest purchase expense 40,389 - Change in: Accounts receivable, net (63,939) (28,744) Merchandise inventories (183,976) (87,211) Prepaid expenses 4,362 2,304 Other assets 2,787 (3,318) Accounts payable 237,380 150,654 Accrued salaries, wages and related benefits (5,064) (9,054) Income taxes and other accruals 26,411 14,842 Other liabilities 4,098 2,698 -------- -------- Net cash provided by operating activities 213,274 206,270 -------- -------- INVESTING ACTIVITIES: Capital expenditures (184,507) (178,886) Additions to deferred lease credits 58,449 59,057 Minority interest purchase (70,000) - Other, net (3,347) (2,673) -------- -------- Net cash used for investing activities (199,405) (122,502) -------- -------- FINANCING ACTIVITIES: Proceeds (payments) from notes payable 61 (44,858) Proceeds from long-term borrowings 815 - Principal payments on long-term debt (84,053) (5,736) Proceeds from issuance of common stock 10,086 3,810 Cash dividends paid (24,267) (24,102) Purchase and retirement of common stock - (1,312) -------- -------- Net cash used in financing activities (97,358) (72,198) -------- -------- Net (decrease) increase in cash and cash equivalents (83,489) 11,570 Cash and cash equivalents at beginning of period 331,327 25,259 -------- -------- Cash and cash equivalents at end of period $247,838 $36,829 ======== ======== These statements should be read in conjunction with the Notes to Condensed Consolidated Financial Statements contained herein.
5 of 21 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 1 - Summary of Significant Accounting Policies Basis of Presentation --------------------- The accompanying condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in the 2001 Nordstrom, Inc. Annual Report. The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. In management's opinion, all adjustments necessary for a fair presentation of the results of operations, financial position and cash flows have been included and are of a normal, recurring nature. Certain prior year amounts have been reclassified to conform to the current year presentation. Due to the seasonal nature of the retail industry, quarterly results are not necessarily indicative of the results for the fiscal year. Recent Accounting Pronouncements -------------------------------- In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 updates, clarifies and simplifies existing accounting pronouncements related to extinguishments of debt, provisions of the Motor Carrier Act of 1980 and lease transactions. Generally, SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. We elected to adopt SFAS No. 145 during the second quarter of 2002. The adoption of this statement did not have a material impact on our financial statements. In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 nullifies EITF 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" by requiring that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred versus when an entity is committed to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We elected to adopt SFAS No. 146 during the second quarter of 2002. The adoption of this statement did not have a material impact on our financial statements. Note 2 - Cumulative Effect of Accounting Change Effective February 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets having indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their estimated useful lives. In connection with the adoption of SFAS No. 142, we reviewed the classification and useful lives of our intangible assets. Our intangible assets were determined to be either goodwill or indefinite lived tradename. 6 of 21 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 2 - Cumulative Effect of Accounting Change (Cont.) As required by SFAS No. 142, we defined our reporting unit as the Faconnable Business Unit, one level below our reportable Retail Stores segment. We then tested our intangible assets for impairment in the first quarter by comparing the fair value of the reporting unit with its carrying value. Fair value was determined using a discounted cash flow methodology. These impairment tests are required to be performed at adoption of SFAS No. 142 and at least annually thereafter. On an ongoing basis we expect to perform our impairment test during our first quarter or when other circumstances indicate we need to do so. Based on our initial impairment test, we recognized an adjustment to goodwill of $21,900 in the first quarter of 2002, while the tradename was determined not to be impaired. The goodwill adjustment resulted from a reduction in management's estimate of future growth for this reporting unit. The impairment charge recognized in the first quarter is reflected as a cumulative effect of accounting change. The changes in the carrying amount of our intangible assets for the period ended July 31, 2002, are as follows:
Catalog/ Retail Stores Internet segment segment Total --------------------- -------- --------- Goodwill Tradename Goodwill -------- --------- -------- Balance as of February 1, 2002 $ 38,198 $ 100,133 $ - $ 138,331 Impairment losses (21,900) - - (21,900) Goodwill acquired through exercise of Nordstrom.com Put Agreement (see Note 9) - - 23,675 23,675 -------- --------- -------- --------- Balance as of July 31, 2002 $ 16,298 $ 100,133 $ 23,675 $ 140,106 ======== ========= ======== =========
The following table shows the actual results of operations for the three and six months ended July 31, 2002 and 2001 as well as pro-forma results adjusted for the exclusion of intangible amortization and the cumulative effect of the accounting change.
Three Months Six Months Ended Ended July 31, July 31, -------------------- -------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Reported net income $ 36,335 $ 38,699 $ 11,763 $ 63,454 Intangible amortization, net of tax - 712 - 1,426 Cumulative effect of the accounting change, net of tax - - 13,359 - --------- --------- --------- --------- Adjusted net income $ 36,335 $ 39,411 $ 25,122 $ 64,880 ========= ========= ========= =========
7 of 21 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 2 - Cumulative Effect of Accounting Change (Cont.)
Three Months Six Months Ended Ended July 31, July 31, -------------------- -------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Basic and diluted earnings per share Reported net income $ .27 $ .29 $ .09 $ .47 Intangible amortization, net of tax - - - .01 Cumulative effect of the accounting change, net of tax - - .10 - --------- -------- --------- --------- Adjusted net income $ .27 $ .29 $ .19 $ .48 ========= ======== ========= =========
Note 3 - Earnings Per Share
Three Months Six Months Ended July 31, Ended July 31, ------------------------ ------------------------ 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net earnings $36,335 $38,699 $11,763 $63,454 Basic shares 135,066,212 134,008,385 134,887,294 133,933,442 Basic earnings per share $0.27 $0.29 $0.09 $0.47 Dilutive effect of stock options and restricted stock 753,673 413,825 878,448 233,664 Diluted shares 135,819,885 134,422,210 135,765,742 134,167,106 Diluted earnings per share $0.27 $0.29 $0.09 $0.47 Antidilutive stock options 6,764,220 9,289,833 6,542,883 9,299,833
Note 4 - Accounts Receivable The components of accounts receivable are as follows:
July 31, January 31, July 31, 2002 2002 2001 ----------- ----------- ----------- Unrestricted trade receivables $103,812 $73,157 $749,530 Restricted trade receivables 658,775 628,271 - Other 23,557 21,325 21,285 Allowance for doubtful accounts (22,131) (24,278) (20,858) ----------- ----------- ----------- Accounts receivable, net $764,013 $698,475 $749,957 =========== =========== ===========
The restricted trade receivables consist of Nordstrom Private Label Receivables. These receivables back the $300 million of Class A notes and the $200 million variable funding note issued by us in November 2001. 8 of 21 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 5 - Debt On May 1, 2002, we replaced the $200 million variable funding note backed by VISA credit card receivables ("Visa VFN") with 5-year term notes also backed by the VISA credit card receivables. Class A and B notes with a combined face value of $200 million were issued to third party investors. We used the proceeds to retire the $200 million outstanding on the Visa VFN. We retained a Transferor's Interest, subordinated Class C note, and an Interest Only Strip. In accordance with SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," this debt and the related assets are not reflected in our consolidated balance sheets. Note 6 - Limited Partnership We own a 49% interest in a limited partnership which constructed a new corporate office building in which we are the primary occupant. During the first quarter of 2002, the limited partnership refinanced its construction loan obligation with an $85,000 mortgage secured by the property, of which $79,808 was included on our balance sheet at July 31, 2002. The obligation has a fixed interest rate of 7.68% and a term of 18 years. The $5,000 difference between the $90,000 outstanding under the original credit facility and the new mortgage was funded by Nordstrom, Inc. Our financial statements include capitalized costs related to this building of $87,667 and $82,187, which includes noncash amounts of $68,631 and $67,225 as of July 31, 2002 and 2001. The corresponding finance obligation of $84,742 and $78,401 as of July 31, 2002 and 2001 is included in other long-term debt. Note 7 - Supplementary Cash Flow Information We capitalize certain property, plant and equipment during the construction period of commercial buildings, which are subsequently derecognized and leased back. During the six months ended July 31, 2001, the noncash activities related to the reclassification of new stores that qualified as sale and leaseback were $60,645. 9 of 21 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 8 - Segment Reporting The following tables set forth information for our reportable segments and a reconciliation to the consolidated totals:
Three months ended Retail Credit Catalog/ Corporate July 31, 2002 Stores Operations Internet and Other Eliminations Total --------------------------------------------------------------------------------------------------- Revenues from external customers $1,588,539 - $66,989 - - $1,655,528 Service charge income - $30,707 - - - 30,707 Intersegment revenues 9,421 14,560 - - $ (23,981) - Interest expense, net (183) 5,474 152 $14,162 - 19,605 Net earnings (loss) 66,278 3,242 (11,710) (21,475) - 36,335 Three months ended Retail Credit Catalog/ Corporate July 31, 2001 Stores Operations Internet and Other Eliminations Total --------------------------------------------------------------------------------------------------- Revenues from external customers $1,483,443 - $62,316 - - $1,545,759 Service charge income - $33,931 - - - 33,931 Intersegment revenues 4,186 8,297 - - $(12,483) - Interest expense, net 353 6,002 (50) $ 12,974 - 19,279 Net earnings (loss) 69,960 1,519 (2,939) (29,841) - 38,699 Six months ended Retail Credit Catalog/ Corporate July 31, 2002 Stores Operations Internet and Other Eliminations Total --------------------------------------------------------------------------------------------------- Revenues from external customers $2,771,248 - $130,041 - - $2,901,289 Service charge income - $62,162 - - - 62,162 Intersegment revenues 13,239 24,466 - - $ (37,705) - Interest expense, net 1 11,913 337 $27,403 - 39,654 Earnings before cumulative effect of accounting change 123,212 4,820 (12,018) (90,892) - 25,122 Net earnings (loss) 109,853 4,820 (12,018) (90,892) - 11,763 Assets 2,756,239 758,682 76,183 640,409 - 4,231,513 Six months ended Retail Credit Catalog/ Corporate July 31, 2001 Stores Operations Internet and Other Eliminations Total --------------------------------------------------------------------------------------------------- Revenues from external customers $2,631,780 - $132,019 - - $2,763,799 Service charge income - $70,555 - - - 70,555 Intersegment revenues 7,682 13,853 - - $(21,535) - Interest expense, net 708 12,625 (98) $ 25,548 - 38,783 Net earnings (loss) 123,623 6,795 (7,186) (59,778) - 63,454 Assets 2,613,649 744,308 66,052 368,142 - 3,792,151
Note 9 - Nordstrom.com On May 31, 2002, we purchased the outstanding shares of Nordstrom.com, Inc. series C preferred stock for $70,000. The excess of the purchase price over the fair market value of the preferred stock and professional fees resulted in a one-time charge of $42,047, which was recognized in the first quarter of 2002. A valuation allowance has been provided for the full amount of the tax benefit related to this charge, as management believes it is not likely that these benefits will be realized. After allocating the fair market value to the identifiable assets of Nordstrom.com, Inc., we recognized the excess purchase price as additional goodwill of $23,675. In July 2002, $10,432 of expense was recognized related to the purchase of the outstanding Nordstrom.com options and warrants. The purchase of these outstanding options and warrants was completed in August 2002. 10 of 21 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 9 - Nordstrom.com (Cont.) In the second quarter of 2002, the accounting for the share repurchase was finalized resulting in a $659 reduction to the expense recognized in first quarter 2002 and additional professional fees of $1,348. We do not anticipate additional charges related to the Nordstrom.com minority interest purchase and reintegration. The following table presents the charges associated with the minority interest purchase and reintegration costs.
July 31, 2002 --------------------------- Three Months Six Months Ended Ended ------------ ----------- Excess of the purchase price over the fair market value of the preferred stock $ (659) $40,389 Nordstrom.com option/warrant buyback expense 10,432 10,432 Professional fees incurred 1,348 2,347 ------------ ----------- $11,121 $53,168 ============ ===========
Note 10 - Write-off of IT Investment In July 2002 we recognized a non-recurring charge of $15,570 to write-down an IT investment in a supply chain tool intended to support our manufacturing division. Due to changes in business strategy, we determined that this asset was impaired. This non-cash charge in the Retail Stores segment will reduce this asset to its estimated market value. The entire amount of the charge was recorded in selling, general and administrative expenses. Note 11 - Litigation Cosmetics --------- We were originally named as a defendant along with other department store and specialty retailers in nine separate but virtually identical class action lawsuits filed in various Superior Courts of the State of California in May, June and July 1998 that have now been consolidated in Marin County state court. In May 2000, plaintiffs filed an amended complaint naming a number of manufacturers of cosmetics and fragrances and two other retailers as additional defendants. Plaintiffs' amended complaint alleges that the retail price of the "prestige" cosmetics sold in department and specialty stores was collusively controlled by the retailer and manufacturer defendants in violation of the Cartwright Act and the California Unfair Competition Act. Plaintiffs seek treble damages and restitution of an unspecified amount, attorneys' fees and prejudgment interest, on behalf of a class of all California residents who purchased cosmetics and fragrances for personal use from any of the defendants during the period four years prior to the filing of the amended complaint. Defendants, including us, have answered the amended complaint denying the allegations. The retail defendants have produced documents and responded to plaintiffs' other discovery requests, including providing witnesses for depositions. Two retail defendants have filed motions for summary judgment, and plaintiffs have not yet moved for class certification. Pursuant to an order of the court, plaintiffs and defendants participated in mediation sessions in May and September 2001. 11 of 21 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 11 - Litigation (Cont.) Washington Public Trust Advocates --------------------------------- By order dated August 9, 2002, the court granted our motion to dismiss us from Washington Public Trust Advocates, ex rel., et al. v. City of Spokane, et al., as previously described, and dismissed us from that lawsuit. That order is subject to appeal until September 9, 2002. Other ----- We are also subject to other ordinary routine litigation. We do not expect any material liability related to that litigation. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Dollars in Thousands The following discussion should be read in conjunction with the Management's Discussion and Analysis section of the 2001 Annual Report. RESULTS OF OPERATIONS: ---------------------- Overview -------- Earnings for the quarter ended July 31, 2002 decreased to $36,335 from $38,699 for the same period in 2001. Earnings for the six months ended July 31, 2002 decreased to $11,763 from $63,454 for the same period in 2001. The decrease for the six months was attributable to three one-time charges related to the write-off of an IT investment, minority interest purchase and reintegration costs of Nordstrom.com, Inc., and the adoption of a new accounting pronouncement. Excluding these one-time charges, earnings for the quarter increased to $52,360 from $38,699 for the same period last year, and earnings for the six-month period increased to $82,805 from $63,454 for the same period last year. Diluted earnings per share before one-time charges were $.39 for the quarter compared to $.29 in the second quarter of last year. For the six months ended July 31, 2002, diluted earnings per share before one-time charges were $.61 compared to $.47 for the same period last year. Year-over-year changes in net income before non-recurring items were as follows:
Three Months Six Months Ended Ended July 31, July 31, -------------------- -------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Reported net income $ 36,335 $ 38,699 $ 11,763 $ 63,454 Non-recurring items, net of tax: Minority interest purchase and reintegration costs 6,527 - 48,185 - Goodwill impairment - - 13,359 - Write-off of IT investment 9,498 - 9,498 - --------- --------- --------- --------- Net income before non-recurring items $ 52,360 $ 38,699 $ 82,805 $ 63,454 ========= ========= ========= ========= Diluted earnings per share before non-recurring items $ 0.39 $ 0.29 $ 0.61 $ 0.47 ========= ========= ========= =========
12 of 21 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Sales ----- Year-over-year changes in total company sales and comparable-store sales were as follows:
QTD % Change YTD % Change ------------------ ------------------ Calendar 4-5-4* Calendar 4-5-4* -------- -------- -------- -------- Total Company sales 7.1% 7.0% 5.0% 4.8% Comparable-store sales 2.1% 2.2% 0.5% 0.3%
* the 13 and 26 week periods ended August 3, 2002 and August 4, 2001. The increase in total sales for the quarter and the six-month periods was a result of new store openings. Since August 1, 2001, we have opened 6 full- line stores and 9 Nordstrom Rack stores. The increase in comparable store sales (sales in stores open at least one full fiscal year at the beginning of the fiscal year) for the quarter is a result of our Anniversary and Half- Yearly sale events, as well as strong sales at Nordstrom Rack. The flat comparable store sales for the six-month period is a result of the strong sale events in the second quarter offset by the negative comparable store sales in the first quarter. Gross Profit ------------ Gross profit as a percentage of net sales increased for the three-month period ended July 31, 2002, and remained flat for the six-month period ended July 31, 2002, as compared to the same periods in 2001. The increase for the quarter was primarily due to high markdowns taken in the prior year to reduce excess inventory. The six-month results remained flat due to increased occupancy costs from store openings that offset the improved markdown performance. Selling, General and Administrative ----------------------------------- Before one-time charges of $15,570, selling, general and administrative expenses as a percentage of net sales decreased for the three month and six month periods ended July 31, 2002. The improvement was due to decreased payroll and benefit expenses, lower bad debt expense and lower catalog and shipping expenses at Nordstrom Direct (formerly Nordstrom.com) partially offset by higher IT expenses related to the implementation of our perpetual inventory system. The one-time charge related to a write-off of an IT investment in a supply chain tool at our manufacturing division. Interest Expense ---------------- Interest expense, net increased in the three and six month periods ended July 31, 2002 compared to the same periods in 2001. The increase was due to higher average long-term borrowings, partially offset by a decrease in average short- term borrowings and long-term interest rates. Service Charge Income and Other ------------------------------- Service charge income and other, net remained flat for the three month period ended July 31, 2002, but decreased slightly for the six month period ended July 31, 2002 compared to the same periods in 2001. The decrease for the six month period resulted from declining interest rates, as well as lower receivable balances. For the quarter, declining interest rates were offset by increasing receivable balances which resulted in the flat results compared to the same period last year. 13 of 21 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Nordstrom.com -------------- On May 31, 2002, we purchased the outstanding shares of Nordstrom.com, Inc. series C preferred stock for $70,000. The excess of the purchase price over the fair market value of the preferred stock and professional fees resulted in a one-time charge of $42,047, which was recognized in the first quarter of 2002. A valuation allowance has been provided for the full amount of the tax benefit related to this charge, as management believes it is not likely that these benefits will be realized. After allocating the fair market value to the identifiable assets of Nordstrom.com, Inc., we recognized the excess purchase price as additional goodwill of $23,675. In July 2002, $10,432 of expense was recognized related to the purchase of the outstanding Nordstrom.com options and warrants. The purchase of these outstanding options and warrants was completed in August 2002. In the second quarter of 2002, the accounting for the share repurchase was finalized resulting in a $659 reduction to the expense recognized in first quarter 2002 and additional professional fees of $1,348. We do not anticipate additional charges related to the Nordstrom.com minority interest purchase and reintegration. The following table presents the charges associated with the minority interest purchase and reintegration costs:
July 31, 2002 --------------------------- Three Months Six Months Ended Ended ------------ ----------- Excess of the purchase price over the fair market value of the preferred stock $ (659) $40,389 Nordstrom.com option/warrant buyback expense 10,432 10,432 Professional fees incurred 1,348 2,347 ------------ ----------- $11,121 $53,168 ============ ===========
Cumulative Effect of Accounting Change -------------------------------------- During the first quarter, we completed the review required by SFAS No. 142 "Goodwill and Other Intangible Assets." As a result of our review, we recorded a cumulative effect of accounting change of $13,359 net of tax or $0.10 per share on a diluted basis. Seasonality ------------ Our business, like that of other retailers, is subject to seasonal fluctuations. Our anniversary sale in July and the holidays in December result in sales that are higher in the second and fourth quarters of the fiscal year. Accordingly, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. LIQUIDITY AND CAPITAL RESOURCES: -------------------------------- We finance our working capital needs and capital expenditures with cash provided by operations and borrowings. Cash Flow from Operations ------------------------- Net cash provided by operating activities for the six month period ended July 31, 2002 increased $7,004 compared to the same period last year. This increase was primarily due to the increase in net earnings before noncash items and an increase in accounts payable offset by an increase in merchandise inventories. 14 of 21 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Capital Expenditures -------------------- For the six month period ended July 31, 2002, net cash used in investing activities increased $76,903 compared to the same period in 2001, primarily due to the $70,000 payment for the acquisition of the outstanding shares of Nordstrom.com, Inc. series C preferred stock. In addition, capital expenditures for new stores increased $5,621 for the six months ended July 31, 2002 compared to the same period in 2001. During the second quarter of fiscal 2002, we opened one new Nordstrom Rack store in Ontario, CA. Year to date, we have opened a total of three new full-line stores and three new Nordstrom Rack stores. Additionally, in August 2002, we opened a Nordstrom Rack store in Long Beach, California. Throughout the remainder of the year ending January 31, 2003, we expect to open five full-line stores in Dulles, Virginia; St. Louis, Missouri; Coral Gables, Florida; Orlando, Florida and Las Vegas, Nevada; and one Faconnable boutique in Coral Gables, Florida. For the entire year, gross square footage is expected to increase approximately 8 percent. Total square footage of our stores was 17,455,000 as of July 31, 2002, compared to 16,307,000 as of July 31, 2001. Financing --------- For the six month period ended July 31, 2002, cash used by financing activities increased $25,160 primarily due to the scheduled retirement of $76,750 in medium-term notes compared to a $44,858 reduction in notes payable from the prior year. CRITICAL ACCOUNTING POLICIES: ----------------------------- The preparation of our financial statements require that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates including those related to doubtful accounts, inventory valuation, intangible assets, income taxes, self-insurance liabilities, pensions, contingent liabilities and litigation. We base our estimates on historical experience and on other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Realization of Streamline Deferred Tax Asset -------------------------------------------- As of July 31, 2002, we have $32,857 of capital loss carryforward related to the write off of our investment in Streamline.com, Inc. The utilization of this deferred tax asset is contingent upon the ability to generate capital gains within the next four years. No valuation allowance has been provided because management believes it is probable that the full benefit of the carryforward will be realized. RECENT ACCOUNTING PRONOUNCEMENTS: --------------------------------- In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 updates, clarifies and simplifies existing accounting pronouncements related to extinguishments of debt, provisions of the Motor Carrier Act of 1980 and lease transactions. Generally, SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. We elected to adopt SFAS No. 145 during the second quarter of 2002. The adoption of this statement did not have a material impact on our financial statements. 15 of 21 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 nullifies EITF 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" by requiring that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred versus when an entity is committed to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We elected to adopt SFAS No. 146 during the second quarter of 2002. The adoption of this statement did not have a material impact on our financial statements. FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT: ------------------------------------------------- This document may include forward-looking statements regarding our performance, liquidity and adequacy of capital resources. These statements are based on our current assumptions and expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Forward-looking statements are qualified by the risks and challenges posed by increased competition, shifting consumer demand, changing consumer credit markets, changing capital markets and general economic conditions, hiring and retaining effective team members, sourcing merchandise from domestic and international vendors, investing in new business strategies, achieving our growth objectives, and other risks and uncertainties, including the uncertain economic and political environment arising from the terrorist acts of September 11th and subsequent terrorist activities. As a result, while we believe there is a reasonable basis for the forward-looking statements, you should not place undue reliance on those statements. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in interest rates. In seeking to minimize risk, we manage exposure through our regular operating and financing activities. We do not use financial instruments for trading or other speculative purposes and are not party to any leveraged financial instruments. Interest rate exposure is managed through our mix of fixed and variable rate borrowings. Short-term borrowing and investing activities generally bear interest at variable rates, but because they have maturities of three months or less, we believe that the risk of material loss is low. At July 31, 2002, we have $300 million of 8.95% fixed-rate debt converted to variable rate through the use of an interest rate swap. The interest rate swap reduced interest payments on our highest fixed-rate debt by taking advantage of the current low interest rates. A shift in future interest rates could adversely affect the amount of interest paid through this swap agreement. The majority of our revenue, expense and capital expenditures are transacted in United States dollars. However, we periodically enter into foreign currency purchase orders for apparel and shoes denominated in Euros. We use forward contracts to hedge against fluctuations in foreign currency prices. The amounts of these contracts are immaterial. The use of derivatives is limited to only those financial instruments that have been authorized by our Chief Financial Officer and Treasurer. The functional currency of Faconnable, S.A. of Nice, France is the Euro. Assets and liabilities of Faconnable are translated into U.S. dollars at the exchange rate prevailing at the end of the period. Income and expenses are translated into U.S. dollars at the exchange rate prevailing on the respective dates of the transactions. The effects of changes in foreign currency exchange rates are included in other comprehensive earnings. 16 of 21 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONT.) Certain other information required under this item is included in Note 6 in the Notes to Condensed Consolidated Financial Statements. PART II - OTHER INFORMATION Item 1. Legal Proceedings ------------------------- The information required under this item is included in the following section of Part I, Item 1 of this report: Note 11 in Notes to Condensed Consolidated Financial Statements Item 4. Submission of Matters to a Vote of Security Holders ----------------------------------------------------------- We held our Annual Shareholders Meeting on May 21, 2002, at which time the shareholders voted on the following proposals: (1) Election of nine directors for a one-year term each.
Name of Candidate For Withheld ---------------------- ----------- ----------- D. Wayne Gittinger 123,044,226 2,006,980 Enrique Hernandez, Jr. 124,085,512 965,694 John A. McMillan 124,114,579 936,627 Bruce A. Nordstrom 124,122,615 928,591 John N. Nordstrom 124,125,080 926,126 Alfred E. Osborne, Jr. 108,653,169 16,398,037 William D. Ruckelshaus 108,638,142 16,413,064 Bruce G. Willison 108,854,893 16,196,313 Alison A. Winter 123,648,328 1,402,878
There were no abstentions and no broker non-votes. (2) Approval of Amendment to the Company's Articles of Incorporation The vote was 114,078,444 for, 10,396,970 against, and there were 575,792 abstentions. There were no broker non-votes. (3) Approval of the 2002 Nonemployee Director Stock Incentive Plan The vote was 95,623,346 for, 28,771,100 against, and there were 656,760 abstentions. There were no broker non-votes. (4) Ratification of the appointment of Deloitte and Touche LLP as auditors The vote was 119,232,521 for, 5,301,833 against, and there were 516,852 abstentions. There were no broker non-votes. (5) Shareholder proposal regarding global human rights standards The vote was 7,070,443 for, 98,764,672 against, and there were 5,835,841 abstentions and 13,380,250 broker non-votes. 17 of 21 Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- (a) Exhibits -------- 3.1 Articles of Incorporation of the Registrant, as amended and restated on May 21, 2002, are filed herein as an Exhibit. 10.1 The 2002 Nonemployee Director Stock Incentive Plan is filed herein as an Exhibit. 99.1 Certification of Chief Executive Officer regarding periodic report containing financial statements. 99.2 Certification of Chief Financial Officer regarding periodic report containing financial statements. (b) Reports on Form 8-K ------------------- We filed a Form 8-K on May 17, 2002 to announce the purchase of the outstanding shares of Nordstrom.com, Inc. series C preferred stock. 18 of 21 SIGNATURES Pursuant to the requirements 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) /s/ Michael G. Koppel ---------------------------------------------------- Michael G. Koppel Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) Date: September 12, 2002 ------------------ 19 of 21 Certification required by Section 302(a) of the Sarbanes-Oxley Act of 2002 I, Blake W. Nordstrom, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Nordstrom, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: September 12, 2002 /s/ Blake W. Nordstrom ------------------ ---------------------- Blake W. Nordstrom President 20 of 21 Certification required by Section 302(a) of the Sarbanes-Oxley Act of 2002 I, Michael G. Koppel, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Nordstrom, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: September 12, 2002 /s/ Michael G. Koppel ------------------ ---------------------- Michael G. Koppel Executive Vice President and Chief Financial Officer 21 of 21 NORDSTROM INC. AND SUBSIDIARIES Exhibit Index Exhibit Method of Filing ------- ---------------- 3.1 Articles of Incorporation of the Filed herewith electronically Registrant, as amended and restated on May 21, 2002 10.1 The 2002 Nonemployee Director Filed herewith electronically Stock Incentive Plan 99.1 Certification of Chief Executive Filed herewith electronically Officer regarding periodic report containing financial statements 99.2 Certification of Chief Financial Filed herewith electronically Officer regarding periodic report containing financial statements