10-Q 1 ni110103.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 November 1, 2003 [ ] 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 _____ _____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO _____ _____ Common stock outstanding as of November 29, 2003: 137,435,231 shares of common stock. 1 of 18 NORDSTROM, INC. AND SUBSIDIARIES -------------------------------- INDEX -----
Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Statements of Earnings Quarter and Year to Date ended November 1, 2003 and October 31, 2002 3 Condensed Consolidated Balance Sheets November 1, 2003, January 31, 2003 and October 31, 2002 4 Condensed Consolidated Statements of Cash Flows Year to Date ended November 1, 2003 and October 31, 2002 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 4. Controls and Procedures 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18
2 of 18 NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands except per share amounts) (unaudited)
Quarter Ended Year to Date Ended ---------------------- ---------------------- November 1, October 31, November 1, October 31, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Net sales $1,420,610 $1,323,201 $4,559,124 $4,224,490 Cost of sales and related buying and occupancy (911,314) (872,154) (2,991,967) (2,799,277) ---------- ---------- ---------- ---------- Gross profit 509,296 451,047 1,567,157 1,425,213 Selling, general and administrative expenses (450,622) (434,921) (1,381,308) (1,317,920) ---------- ---------- ---------- ---------- Operating income 58,674 16,126 185,849 107,293 Interest expense, net (26,681) (20,832) (73,043) (60,486) Minority interest purchase and reintegration costs - - - (53,168) Service charge income and other, net 42,576 35,006 114,289 103,651 ---------- ---------- ---------- ---------- Earnings before income taxes and cumulative effect of accounting change 74,569 30,300 227,095 97,290 Income tax expense (29,100) (11,873) (88,600) (53,741) ---------- ---------- ---------- ---------- Earnings before cumulative effect of accounting change 45,469 18,427 138,495 43,549 Cumulative effect of accounting change (net of tax of $8,541) - - - (13,359) ---------- ---------- ---------- ---------- Net earnings $ 45,469 $ 18,427 $ 138,495 $ 30,190 ========== ========== ========== ========== Basic earnings per share $ .33 $ .14 $ 1.02 $ .22 ========== ========== ========== ========== Diluted earnings per share $ .33 $ .14 $ 1.01 $ .22 ========== ========== ========== ========== Cash dividends paid per share of common stock outstanding $ .10 $ .10 $ .30 $ .28 ========== ========== ========== ========== The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.
3 of 18 NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands)
November 1, January 31, October 31, 2003 2003 2002 ---------- ---------- ---------- (Unaudited) (Audited) (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 154,490 $ 219,344 $ 53,658 Accounts receivable, net 606,172 639,630 623,421 Retained interest in accounts receivable 227,340 124,543 97,936 Merchandise inventories 1,189,996 953,112 1,278,932 Prepaid expenses 50,083 40,261 46,860 Other current assets 111,965 111,138 102,829 ---------- ---------- ---------- Total current assets 2,340,046 2,088,028 2,203,636 Land, buildings and equipment (net of accumulated depreciation of $2,051,968, $1,882,976, and $1,825,759) 1,736,617 1,761,544 1,754,288 Goodwill, net 56,609 56,609 56,609 Tradename, net 84,000 84,000 84,000 Other assets 155,767 121,726 123,239 ---------- ---------- ---------- TOTAL ASSETS $4,373,039 $4,111,907 $4,221,772 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable $ 486 $ 244 $ 571 Accounts payable 647,708 429,808 702,181 Accrued salaries, wages and related benefits 261,200 260,562 226,840 Income taxes and other accruals 200,133 188,986 158,095 Current portion of long-term debt 6,198 5,545 4,386 ---------- ---------- ---------- Total current liabilities 1,115,725 885,145 1,092,073 Long-term debt 1,236,287 1,341,826 1,343,423 Deferred lease credits 376,007 383,100 360,116 Other liabilities 143,726 128,972 101,093 Shareholders' Equity: Common stock, no par: 500,000,000 shares authorized; 136,970,748, 135,444,041 and 135,427,913 shares issued and outstanding 384,193 358,069 357,567 Unearned stock compensation (671) (2,010) (2,177) Retained earnings 1,111,864 1,014,105 967,614 Accumulated other comprehensive earnings 5,908 2,700 2,063 ---------- ---------- ---------- Total shareholders' equity 1,501,294 1,372,864 1,325,067 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,373,039 $4,111,907 $4,221,772 ========== ========== ========== The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.
4 of 18 NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited)
Year to Date Ended ------------------------ November 1, October 31, 2003 2002 ---------- ---------- OPERATING ACTIVITIES: Net earnings $138,495 $30,190 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 185,163 169,851 Amortization of deferred lease credits and other, net (20,316) (14,623) Stock-based compensation expense 9,548 3,442 Deferred income taxes, net 3,325 8,097 Cumulative effect of accounting change, net of tax - 13,359 Impairment of IT investment - 15,570 Minority interest purchase expense - 40,389 Change in operating assets and liabilities: Accounts receivable, net 42,221 22,117 Retained interest in accounts receivable (100,814) (36,498) Merchandise inventories (234,246) (372,605) Prepaid expenses (4,003) (5,895) Other assets (6,437) 4,693 Accounts payable 206,355 189,212 Accrued salaries, wages and related benefits (9,015) (12,268) Income taxes and other accruals 6,478 13,185 Other liabilities 8,913 4,006 ---------- ---------- Net cash provided by operating activities 225,667 72,222 ---------- ---------- INVESTING ACTIVITIES: Capital expenditures (204,536) (263,855) Additions to deferred lease credits 37,157 83,021 Minority interest purchase - (70,000) Other, net (1,037) (4,661) ---------- ---------- Net cash used for investing activities (168,416) (255,495) ---------- ---------- FINANCING ACTIVITIES: Proceeds from notes payable 226 423 Proceeds from long-term borrowings - 432 Principal payments on long-term debt (109,374) (84,593) Proceeds from sale of interest rate swap 2,341 4,931 Proceeds from issuance of common stock 25,438 15,662 Cash dividends paid (40,736) (37,779) ---------- ---------- Net cash used for financing activities (122,105) (100,924) ---------- ---------- Net decrease in cash and cash equivalents (64,854) (284,197) Cash and cash equivalents at beginning of period 219,344 337,855 ---------- ---------- Cash and cash equivalents at end of period $154,490 $53,658 ========== ========== The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.
5 of 18 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 our 2002 Annual Report. The same accounting policies are followed for preparing quarterly and annual financial data. All adjustments necessary for the fair presentation of the results of operations, financial position and cash flows have been included and are of a normal, recurring nature. Due to the seasonal nature of the retail industry, quarterly results are not necessarily indicative of the results for the full fiscal year. Reclassification ---------------- We reclassified certain prior year amounts to conform to the current year presentation. Change in Fiscal Year --------------------- On February 1, 2003, our fiscal year-end changed from January 31 to the Saturday closest to January 31. Each fiscal year consists of four 13 week quarters, with an extra week added onto the fourth quarter every five to six years. A one-day transition period is included in our first quarter 2003 results. Stock Compensation ------------------ We apply APB No. 25, "Accounting for Stock Issued to Employees," in measuring compensation costs under our stock-based compensation programs, which are described more fully in our 2002 Annual Report. If we had elected to recognize compensation cost based on the fair value of the options and shares at grant date, net earnings and earnings per share would have been as follows:
Quarter Ended Year to Date Ended ---------------------- ---------------------- November 1, October 31, November 1, October 31, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Net earnings, as reported $45,469 $18,427 $138,495 $30,190 Add: stock-based compensation expense included in reported net income, net of tax 4,615 580 5,483 1,740 Deduct: stock-based compensation expense determined under fair value, net of tax (7,390) (5,499) (17,878) (17,870) ---------- ---------- ---------- ---------- Pro forma net earnings $42,694 $13,508 $126,100 $14,060 ========== ========== ========== ========== Earnings per share: Basic - as reported $0.33 $0.14 $1.02 $0.22 Diluted - as reported $0.33 $0.14 $1.01 $0.22 Basic - pro forma $0.31 $0.10 $0.93 $0.10 Diluted - pro forma $0.31 $0.10 $0.92 $0.10
6 of 18 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 1 - Summary of Significant Accounting Policies (Cont.) Recent Accounting Pronouncements -------------------------------- In January 2003, the FASB issued Interpretation No. 46 (FIN 46) "Consolidation of Variable Interest Entities", which requires the consolidation of variable interest entities (VIEs). An entity is considered to be a VIE when its equity investors lack controlling financial interest or the entity has insufficient capital to finance its activities without additional subordinated financial support. Consolidation of a VIE by an investor is required when it is determined that the majority of the entity's expected losses or residual returns will be absorbed by that investor. FIN 46 is effective for variable interest entities created or acquired after January 31, 2003. For variable interest entities created before February 1, 2003, FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. We do not believe the adoption of FIN 46 will have an impact on our financial statements. Note 2 - Goodwill and Other Intangible Assets The carrying amounts of our intangible assets are as follows:
Catalog/ Retail Stores Internet segment segment Total --------------------- -------- --------- Goodwill Tradename Goodwill -------- --------- -------- Balance as of February 1, 2003 and November 1, 2003 $ 40,893 $ 84,000 $ 15,716 $ 140,609
The purchase of the minority interest of Nordstrom.com in the first quarter of 2002 resulted in additional goodwill of $24,178, of which $8,462 was allocated to the Retail Stores reporting unit and $15,716 to the Catalog/Internet reporting unit. Goodwill of $32,431 and Tradename of $84,000 are assigned to the Faconnable reporting unit. Note 3 - Earnings Per Share
Quarter Ended Year to Date Ended ------------------------ ------------------------ November 1, October 31, November 1, October 31, 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net earnings $45,469 $18,427 $138,495 $30,190 Basic shares 136,303,837 135,207,627 135,907,488 134,995,245 Basic earnings per share $0.33 $0.14 $1.02 $0.22 Dilutive effect of stock options and performance share units 1,799,263 558,141 751,286 724,165 Diluted shares 138,103,100 135,765,768 136,658,774 135,719,410 Diluted earnings per share $0.33 $0.14 $1.01 $0.22 Antidilutive stock options 2,974,349 8,692,657 7,578,056 6,546,645
7 of 18 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 4 - Accounts Receivable The components of accounts receivable are as follows:
November 1, January 31, October 31, 2003 2003 2002 ----------- ----------- ----------- Trade receivables: Unrestricted $29,728 $15,599 $19,895 Restricted 567,396 613,647 601,535 Allowance for doubtful accounts (20,746) (22,385) (22,381) ----------- ----------- ----------- Trade receivables, net 576,378 606,861 599,049 Other 29,794 32,769 24,372 ----------- ----------- ----------- Accounts receivable, net $606,172 $639,630 $623,421 =========== =========== ===========
The restricted private label receivables back the $300 million Class A notes and the $200 million variable funding note issued by us in November 2001. Other accounts receivable consist primarily of vendor receivables and cosmetic rebates receivable. As all vendor receivables are fully earned at period end, no allowance for doubtful vendor receivables has been recorded. Note 5 - Debt In the third quarter, we purchased $62,405 of our 8.95% senior notes for a total cash payment of $72,925. Approximately $7,880 of expense was recognized in the third quarter of 2003 related to this purchase. Year to date we have purchased $103,230 of our 8.95% senior notes and $2,500 of our 6.7% medium-term notes for a total cash payment of $122,979. Approximately $14,303 of expense has been recognized during the year related to these purchases. We entered into a variable interest rate swap agreement in the second quarter of 2003. The swap qualifies as a fair value hedge and is recorded at its market value of ($10,884) in other liabilities. 8 of 18 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 6 - Segment Reporting The following tables set forth the information for our reportable segments and a reconciliation to the consolidated totals:
Quarter ended Retail Credit Catalog/ Corporate November 1, 2003 Stores Operations Internet and Other Eliminations Total --------------------------------------------------------------------------------------------------- Revenues from external customers $1,352,542 - $68,068 - - $1,420,610 Service charge income - $35,837 - - - 35,837 Intersegment revenues 6,245 6,942 - - $(13,187) - Interest expense, net 390 5,549 (62) $20,804 - 26,681 Earnings before taxes 121,136 3,853 (482) (49,938) - 74,569 Net earnings (loss) 73,864 2,350 (295) (30,450) - 45,469 Quarter ended Retail Credit Catalog/ Corporate October 31, 2002 Stores Operations Internet and Other Eliminations Total --------------------------------------------------------------------------------------------------- Revenues from external customers $1,261,124 - $62,077 - - $1,323,201 Service charge income - $33,311 - - - 33,311 Intersegment revenues 9,492 7,157 - - $(16,649) - Interest expense, net 119 6,054 382 $14,277 - 20,832 Earnings before taxes and cumulative effect of accounting change 86,274 4,963 (4,051) (56,886) - 30,300 Net earnings (loss) 52,506 3,020 (2,463) (34,636) - 18,427 Year to date ended Retail Credit Catalog/ Corporate November 1, 2003 Stores Operations Internet and Other Eliminations Total --------------------------------------------------------------------------------------------------- Revenues from external customers $4,353,627 - $205,497 - - $4,559,124 Service charge income - $104,506 - - - 104,506 Intersegment revenues 20,766 24,180 - - $(44,946) - Interest expense, net 508 16,364 (74) $56,245 - 73,043 Earnings before taxes 379,128 15,559 (1,967) (165,625) - 227,095 Net earnings (loss) 231,213 9,489 (1,200) (101,007) - 138,495 Assets 2,940,898 810,184 103,433 518,524 - 4,373,039 Year to date ended Retail Credit Catalog/ Corporate October 31, 2002 Stores Operations Internet and Other Eliminations Total --------------------------------------------------------------------------------------------------- Revenues from external customers $4,040,382 - $184,108 - - $4,224,490 Service charge income - $97,773 - - - 97,773 Intersegment revenues 22,731 23,265 - - $(45,996) - Interest expense, net 120 17,967 719 $41,680 - 60,486 Earnings before taxes and cumulative effect of accounting change 300,673 18,431 (20,074) (201,740) - 97,290 Net earnings (loss) 169,950 11,237 (12,238) (138,759) - 30,190 Assets 2,981,671 710,215 97,497 432,389 - 4,221,772
Note 7 - Nordstrom.com During 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 $42,736. No tax benefit was recognized on the share purchase, as we do not believe it is probable that this benefit will be realized. The impact of not recognizing this income tax benefit increased our prior year to date effective tax rate to 55.2% before the cumulative effect of accounting change. 9 of 18 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 7 - Nordstrom.com (Cont.) Also in 2002, $10,432 of expense was recognized related to the purchase of the outstanding Nordstrom.com options and warrants. The following table presents the charges resulting from the minority interest purchase and reintegration of Nordstrom.com.
Nine Months Ended October 31, 2002 ---------------- Excess of the purchase price over the fair market value of the preferred stock $40,389 Nordstrom.com option/warrant buyback expense 10,432 Professional fees incurred 2,347 ---------------- Total minority interest purchase and reintegration costs $53,168 ================
Note 8 - 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 Superior 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" or "Department Store" 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 in 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 four years prior to the filing of the amended complaint. Defendants, including us, have answered the amended complaint denying the allegations. The defendants have produced documents and responded to plaintiffs' other discovery requests, including providing witnesses for depositions. We entered into a settlement agreement with the plaintiffs and the other defendants on July 16, 2003. In furtherance of the settlement agreement, the case was refiled in the United States District Court for the Northern District of California on behalf of a class of all persons who currently reside in the United States and who purchased "Department Store" cosmetics from the defendants during the period May 29, 1994 through July 16, 2003. The Court has given preliminary approval to the settlement. A summary notice of class certification and the terms of the settlement will be disseminated to class members. A hearing on whether the Court will grant final approval of the settlement is scheduled for June 8, 2004. If approved by the Court, the settlement will result in the plaintiffs' claims and the claims of all class members being dismissed, with prejudice, in their entirety. In connection with the settlement agreement, the defendants will provide class members with certain free products and pay the plaintiffs' attorneys' fees. Our share of the cost of the settlement will not have a material adverse effect on our financial condition. 10 of 18 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 8 - Litigation (Cont.) We have entered into the settlement agreement solely to avoid protracted and costly litigation. There has been no finding or admission of any wrongdoing by us in this lawsuit. Other ----- We are subject to routine litigation incidental to our business. No material liability is expected. 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 2002 Annual Report. RESULTS OF OPERATIONS: ---------------------- Overview -------- Earnings for the third quarter of 2003 increased to $45,469 or $0.33 per diluted share from $18,427 or $0.14 per diluted share for the same period in 2002. This increase was driven by a 5.0% increase in same store sales, improved margin due to lower markdowns, leveraging on buying and occupancy expenses as well as selling, general and administrative expenses and overall expense control. Earnings for the year to date period ended November 1, 2003 increased to $138,495 or $1.01 per diluted share from $30,190 or $0.22 per diluted share for the same period in 2002. The increase for the year to date period was partially attributable to charges taken in 2002 to write-off an IT investment, acquire and reintegrate the minority interest of Nordstrom.com and to adopt a new accounting pronouncement. Excluding the nonrecurring and impairment charges taken in 2002, year to date earnings increased $37,264 or 36.8% when compared to the same period last year. This increase was the result of a 2.6% increase in same store sales, leveraging on buying and occupancy expenses as well as selling, general and administrative expenses and overall expense control. 11 of 18 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Year-over-year net income before and after nonrecurring and impairment charges are as follows:
Year to Date Ended ------------------------------------------- November 1, 2003 October 31, 2002 -------------------- -------------------- Diluted Diluted Dollars EPS Dollars EPS --------- --------- --------- --------- Reported net income $138,495 $1.01 $30,190 $0.22 Nonrecurring and impairment charges, net of tax: Minority interest purchase and reintegration costs - - 48,184 0.36 Cumulative effect of accounting change - - 13,359 0.10 Write-off of IT investment - - 9,498 0.07 --------- --------- --------- --------- Net income before nonrecurring and impairment charges $138,495 $1.01 $101,231 $0.75 ========= ========= ========= =========
Sales ----- Total sales for the quarter and year to date on a 4-5-4 comparable basis increased 9.8% and 7.2% due to same store sales increases and store openings. Same store sales on a 4-5-4 comparable basis increased 5.0% for the quarter and 2.6% year to date due to several factors, including a strong merchandise offering and an improved retail climate. Year to date sales also benefited from strong sales events. For the twelve months ended November 1, 2003, we have opened four full-line stores and two Nordstrom Rack stores. See our GAAP sales reconciliation on page 14. Our strongest performing merchandise divisions for the quarter were women's designer apparel, accessories, shoes, cosmetics, women's active wear and men's wear. Our weakest divisions were women's special sizes and children's apparel. Gross Profit ------------
QTD 2003 QTD 2002 YTD 2003 YTD 2002 -------- -------- -------- -------- Gross profit as a percent of sales 35.9% 34.1% 34.4% 33.7%
Gross profit as a percentage of sales improved 176 basis points for the quarter and 64 basis points for the year to date period ended November 1, 2003, compared to the same periods last year. The quarter perfomance was due to lower markdowns, which resulted from better inventory management, and leveraging of buying and occupancy expenses. Year to date perfomance was driven by the leveraging of buying and occupancy expenses. Inventory levels continued to show favorable trends as overall inventory control resulted in a 10.8% decrease in our inventory per square foot. 12 of 18 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Selling, General and Administrative -----------------------------------
QTD 2003 QTD 2002 YTD 2003 YTD 2002 -------- -------- -------- -------- Selling, general and administrative expense as a percent of sales 31.8% 32.9% 30.3% 31.1%
The year to date 2002 selling, general and administrative expense includes an impairment charge of $15,570 related to the write-down of an information technology investment in a supply chain tool at our manufacturing division. Without this charge, 2002 selling, general and administrative expenses as a percentage of sales on a year to date basis would have been 30.8%. Excluding the effects of the impairment charge, the quarter and year to date decreases resulted from leverage on better than expected same store sales and overall expense control. We saw the most significant improvements in information technology expenses, selling expenses and distribution costs. Interest Expense ---------------- Interest expense, net increased $5,849 for the quarter ended November 1, 2003 when compared to the same period in 2002 due to $7,880 in additional expense resulting from the repurchase of $62,405 in debt during the quarter. The additional expense was partially offset by lower interest expense resulting from the reduced debt balance outstanding. Year to date we have repurchased $105,730 in debt resulting in additional expense of $14,303. Service Charge Income and Other ------------------------------- Service charge income and other, net increased for the quarter and year to date periods ended November 1, 2003 primarily due to gains recorded from our VISA securitization. Securitization gains continued as increased sales on our VISA cards have resulted in higher receivable balances and related revenues, while the cost of funds declined and bad debt write-offs remained stable. Additionally, during the quarter we recorded approximately $4,048 in gains resulting from the relocation of two of our stores. Minority Interest Purchase and Reintegration Costs -------------------------------------------------- During 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 $42,736. No tax benefit was recognized on the share purchase, as we do not believe it is probable that this benefit will be realized. The impact of not recognizing this income tax benefit increased our prior year to date effective tax rate to 55.2% before the cumulative effect of accounting change. Also in 2002, $10,432 of expense was recognized related to the purchase of the outstanding Nordstrom.com options and warrants. 13 of 18 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) The following table presents the charges resulting from the minority interest purchase and reintegration of Nordstrom.com:
Nine Months Ended October 31, 2002 ---------------- Excess of the purchase price over the fair market value of the preferred stock $40,389 Nordstrom.com option/warrant buyback expense 10,432 Professional fees incurred 2,347 ---------------- Total minority interest purchase and reintegration costs $53,168 ================
Cumulative Effect of Accounting Change -------------------------------------- During the first quarter of 2002, we completed the initial 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 $0.10 per share on a diluted basis. Seasonality ------------ Our business, like that of other retailers, is subject to seasonal fluctuations. Our anniversary sale in July and the holidays in December result in higher sales in the second and fourth quarters of the fiscal year. Accordingly, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. GAAP Sales Reconciliation (Dollars in millions) ----------------------------------------------- We converted to a 4-5-4 Retail Calendar at the beginning of 2003. This change in our fiscal calendar has resulted in one less day of sales being included in our second quarter versus the same period in the prior year and one additional day of sales for the current year to date versus the same period last year. Sales performance numbers included in this document have been calculated on a comparative 4-5-4 basis. We believe that adjusting for the difference in days provides a more comparable basis (4-5-4 vs 4-5-4) from which to evaluate sales performance. The following reconciliation bridges the reported GAAP sales to the 4-5-4 comparable sales.
% Change % Change Dollar Total Comp Sales Reconciliation ($M) QTD 2003 QTD 2002 Increase Sales Sales ---------------------------- --------- --------- -------- --------- -------- Number of Days Reported GAAP 91 92 Reported GAAP Sales $1,420.6 $1,323.2 $97.4 7.4% 2.5% Less Aug. 1-3, 2002 sales - ($72.9) Plus Nov 1-2, 2002 sales - $43.2 --------- --------- Reported 4-5-4 sales $1,420.6 $1,293.5 $127.1 9.8% 5.0% --------- --------- 4-5-4 Adjusted Days 91 91
14 of 18 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
% Change % Change Dollar Total Comp Sales Reconciliation ($M) YTD 2003 YTD 2002 Increase Sales Sales ---------------------------- --------- --------- -------- --------- -------- Number of Days Reported GAAP 274 273 Reported GAAP Sales $4,559.1 $4,224.5 $334.6 7.9% 2.9% Less Feb. 1, 2003 ($18.2) - Less Feb. 1-2, 2002 sales - ($30.4) Plus Nov. 1-2, 2002 sales - $43.2 --------- --------- Reported 4-5-4 sales $4,540.9 $4,237.3 $303.6 7.2% 2.6% --------- --------- 4-5-4 Adjusted Days 273 273
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 year to date period ended November 1, 2003 increased compared to the same period last year. This increase was primarily a result of a decrease in inventory due to overall inventory control, partially offset by an increase in the retained interest of our VISA securitization. The increase in the retained interest was a result of increased sales on our VISA card. Capital Expenditures -------------------- For the year to date period ended November 1, 2003, net cash used in investing activities decreased primarily due to the $70,000 payment for the acquisition of the outstanding shares of Nordstrom.com, Inc. series C preferred stock in 2002. In addition, net capital expenditures decreased from a planned reduction in store openings. We opened two full-line stores in Austin, TX and Richmond, VA during the third quarter of 2003 as well as two Nordstrom Rack stores in Chicago, IL and Sunrise, FL. Year to date, we have opened a total of three full-line stores and two Nordstrom Rack stores. Additionally, in November 2003, we opened a full-line store in Wellington Green, FL. No other stores are scheduled to open in 2003. Gross square footage for the year increased approximately 4% from 18,428,000 to 19,131,000. Financing --------- For the year to date period ended November 1, 2003, cash used by financing activities increased primarily due to our current year debt repurchase partially offset by the scheduled retirement of $76,750 in medium-term notes in the prior year. 15 of 18 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Debt Buyback ------------ In the third quarter, we purchased $62,405 of our 8.95% senior notes for a total cash payment of $72,925. Approximately $7,880 of expense was recognized in the third quarter of 2003 related to this purchase. Year to date we have purchased $103,230 of our 8.95% senior notes and $2,500 of our 6.7% medium-term notes for a total cash payment of $122,979. Approximately $14,303 of expense has been recognized during the year related to these purchases. CRITICAL ACCOUNTING POLICIES: ----------------------------- 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 regularly evaluate our estimates including those related to doubtful accounts, inventory valuation, intangible assets, sales return, income taxes, self-insurance liabilities, post-retirement benefits, contingent liabilities and litigation. 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. No changes to our methodologies have occurred since our disclosures in the 2002 Annual Report. Recent Accounting Pronouncements -------------------------------- In January 2003, the FASB issued Interpretation No. 46 (FIN 46) "Consolidation of Variable Interest Entities", which requires the consolidation of variable interest entities (VIEs). An entity is considered to be a VIE when its equity investors lack controlling financial interest or the entity has insufficient capital to finance its activities without additional subordinated financial support. Consolidation of a VIE by an investor is required when it is determined that the majority of the entity's expected losses or residual returns will be absorbed by that investor. FIN 46 is effective for variable interest entities created or acquired after January 31, 2003. For variable interest entities created before February 1, 2003, FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. We do not believe the adoption of FIN 46 will have an impact on our financial statements. FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT: ------------------------------------------------- The preceding disclosures included 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, changing interest rates 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 the impact of economic and competitive market forces, including the impact of terrorist activity or the impact of war. 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. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements. 16 of 18 Item 4. CONTROLS AND PROCEDURES As of the end of the period covered by this Quarterly Report on Form 10-Q, we performed an evaluation under the supervision and with the participation of management, including our President and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities and Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, our President and our Chief Financial Officer concluded that our disclosure controls and procedures are effective in the timely recording, processing, summarizing and reporting of material financial and non-financial information. 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 has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 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 8 in Notes to Condensed Consolidated Financial Statements Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- (a) Exhibits -------- 3.2 Bylaws, as amended and restated on November 18, 2003. 10.1 Nordstrom Supplemental Executive Retirement Plan (2003 Restatement). 31.1 Certification of President required by Section 302(a) of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer required by Section 302(a) of the Sarbanes-Oxley Act of 2002. 32.1 Certification of President regarding periodic report containing financial statements as required by Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer regarding periodic report containing financial statements as required by Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K ------------------- We filed a Form 8-K on August 7, 2003 attaching a press release to announce our preliminary July 2003 sales results. We filed a Form 8-K on August 21, 2003 attaching a press release to announce our results of operations for the quarter ended August 2, 2003. We filed a Form 8-K on September 4, 2003 attaching a press release to announce our preliminary August 2003 sales results. We filed a Form 8-K on October 9, 2003 attaching a press release to announce our preliminary September 2003 sales results. 17 of 18 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: December 8, 2003 ------------------ 18 of 18 NORDSTROM INC. AND SUBSIDIARIES Exhibit Index Exhibit Method of Filing ------- ---------------- 3.1 Bylaws, as amended and restated on Filed herewith electronically November 18, 2003 10.1 Nordstrom Supplemental Executive Filed herewith electronically Retirement Plan (2003 Restatement) 31.1 Certification of President Filed herewith electronically required by Section 302(a) of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Filed herewith electronically Officer required by Section 302(a) of the Sarbanes-Oxley Act of 2002 32.1 Certification of President Filed herewith electronically regarding periodic report containing financial statements as required by Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Filed herewith electronically Officer regarding periodic report containing financial statements as required by Section 906 of the Sarbanes-Oxley Act of 2002