Basis Of Presentation

3 Months Ended

May 02, 2020

NOTE 1: BASIS OF PRESENTATION

The accompanying Condensed Consolidated Financial Statements include the balances of Nordstrom, Inc. and its subsidiaries. All intercompany transactions and balances are eliminated in consolidation. The interim Condensed Consolidated Financial Statements have been prepared on a basis consistent in all material respects with the accounting policies described and applied in our 2019 Annual Report and reflect all adjustments of a normal recurring nature that are, in management’s opinion, necessary for the fair presentation of the results of operations, financial position and cash flows for the periods presented.

The Condensed Consolidated Financial Statements as of and for the periods ended May 2, 2020 and May 4, 2019 are unaudited. The Condensed Consolidated Balance Sheet as of February 1, 2020 has been derived from the audited Consolidated Financial Statements included in our 2019 Annual Report. The interim Condensed Consolidated Financial Statements should be read together with the Consolidated Financial Statements and related footnote disclosures contained in our 2019 Annual Report.

Our business, like that of other retailers, is subject to seasonal fluctuations. Our sales are typically higher during our Anniversary Sale in July and the holidays in the fourth quarter. As a result of COVID-19, the Anniversary Sale has moved to August in 2020. Results for any one quarter may not be indicative of the results that may be achieved for a full fiscal year.

Use of Estimates

The preparation of financial statements in conformity with GAAP in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities during the reporting period. Uncertainties regarding such estimates and assumptions are inherent in the preparation of financial statements and actual results may differ from these estimates and assumptions. Our most significant accounting judgments and estimates include leases, revenue recognition, inventory valuation, long-lived asset recoverability, goodwill impairment and income taxes, all of which involve assumptions about future events. As a result of COVID-19, we may be unable to accurately predict the impact of the pandemic going forward and as a result our estimates may change in the near term. See below for areas that required more judgments and estimates as a result of COVID-19.

Revenue Recognition

We reduce sales and cost of sales by an estimate of our future customer merchandise returns, which is calculated based on historical return patterns, and record a sales return allowance and an estimated return asset. We record the impact of the sales return allowance in our separate Full-Price, Off-Price and digital sales metrics. The majority of our returns from both digital and physical sales come through our stores. With the temporary closure of our stores beginning March 17, 2020, customers are generally not able to return goods in our stores, impacting the expected timing of returns. As a result, our estimates of future returns require more judgment and estimates and actual returns may differ from our historical return rates.

Merchandise Inventory

Under our retail method of inventory accounting, we adjust our inventory and costs of sales for retail inventory markdowns taken on the selling price. Our estimated markdown reserves increased approximately $75 as of May 2, 2020, compared to the prior year, as a result of the temporary closure of our stores beginning on March 17, 2020, and the impact on demand from COVID-19. Markdown estimates may be more volatile as we consider current and anticipated demand, customer preferences, age of merchandise, fashion trends and the current promotional environment.

Long-Lived Assets

As we optimize our mix of physical and digital assets to align with longer-term customer trends, we permanently closed 16 FLS. As part of the closures, and when facts and circumstances indicate that the carrying values of buildings, equipment and ROU assets may be impaired, we compare the carrying value to the related projected future cash flows, among other quantitative and qualitative analysis. These projections are inherently subject to uncertainties and while we believe the inputs and assumptions utilized in our future cash flows are reasonable, our estimates may change in the near term based on our future performance.

We incurred non-cash impairment charges on long-lived tangible and ROU assets, primarily associated with the FLS closures, to adjust the carrying value to its estimated fair value. The following table provides details related to asset impairment charges as a result of COVID-19:



	May 2, 2020
Long-lived asset impairment¹		$94
Operating lease ROU asset impairment¹	23
Total asset impairment		$117

¹As of May 2, 2020, the carrying value of the applicable long-lived and operating lease ROU assets after impairment was $15 and $6.

These charges are included in our Retail segment SG&A expense on the Condensed Consolidated Statement of Earnings.

Goodwill Impairment

We review our goodwill annually in the fourth quarter or when circumstances indicate that the carrying value may exceed fair value. Our most recently completed goodwill impairment analyses in the fourth quarter of 2019 indicated significant excess fair values over carrying values. After performing both qualitative and quantitative analyses, including review of future long-term revenue and cash flow assumptions, we concluded a triggering event requiring us to accelerate our annual goodwill impairment analysis did not occur, as we still expect any potential change in fair value to exceed carrying value. As a result, we did not record a goodwill impairment charge in the first quarter of 2020.

CARES Act

On March 27, 2020 the CARES Act was signed into law, providing payroll tax credits for employee retention, deferral of payroll taxes, and several income tax provisions including modifications to the net interest deduction limitation, changes to certain property depreciation and allows for carryback of certain operating losses.

We have estimated the impacts of the CARES Act in accordance with our overall approach for determining our income tax provision that uses an estimated annual effective tax rate based on our best estimates and adjusts for discrete taxable events that occur during the quarter. As a result, we will carryback our 2020 US Federal operating loss and recover taxes previously paid at the applicable 35% tax rate rather than the current rate of 21%. Our estimated annual effective tax rate reflects this benefit and is the primary driver for the rate increase when compared to the same period in 2019. As a result, we recorded $275 in taxes receivable, which is classified in prepaid expenses and other on the Condensed Consolidated Balance Sheet.

In addition, for the quarter ended May 2, 2020, we recognized $34 in employee retention payroll tax credits and elected to defer payment of the employer portion of social security taxes.

Severance

In the first quarter of 2020, we recorded $88 of restructuring costs in connection with our regional and corporate reorganization, including $25 in cost of sales and related buying and occupancy costs and $63 in SG&A on the Condensed Consolidated Statement of Earnings. We expect payments to occur by the end of the second quarter of 2020.

Leases

We incurred operating lease liabilities arising from the commencement of lease agreements of $37 for the quarter ended May 2, 2020 and $24 for the quarter ended May 4, 2019.

Subsequent Events

In May 2020, we began reopening stores by applying a phased market-by-market approach, where allowed by state and local governments, when we are prepared with the right safety measures and protocols, and when we believe we can provide for the safety and wellbeing of our employees and customers.

Also in May 2020, significant civil unrest, looting and rioting in several urban centers impacted 27 stores with varying degrees of damage, including recently reopened stores as well as those only supporting web fulfill. As a result, we temporarily closed these stores in order to assess the damage and make repairs, as well as surrounding stores in affected areas to ensure the safety of our customers and employees. We maintain business interruption and property insurance coverage, which covers inventory at the selling price and property and equipment at replacement costs, less a deductible. We are currently assessing the degree of the damage and the extent to which insurance may be available to cover the costs associated with these events. However, we do not expect losses after insurance recoveries to be material to our Condensed Consolidated Financial Statements. We currently have more than 60% of our stores open, including stores that were damaged from the civil unrest, and we offer contactless curbside pickup service in most full-line stores.

In June 2020, we amended our Program Agreement with TD to eliminate the prior requirement to post collateral under the Agreement and to extend the term of the agreement until April 2024.