EX-13.1 7 v80728ex13-1.txt EXHIBIT 13.1 EXHIBIT 13.1 2001 ANNUAL REPORT Financial Highlights Dollars in thousands except per share amounts
FISCAL YEAR 2001 2000 % Change ----------- ---------- ---------- -------- Net sales $5,634,130 $5,528,537 1.9 Earnings before income taxes 204,488 167,018 22.4 Net earnings 124,688 101,918 22.3 Basic earnings per share .93 .78 19.2 Diluted earnings per share .93 .78 19.2 Cash dividends paid per share .36 .35 2.9
Stock Prices
2001 2000 -------------------- -------------------- FISCAL YEAR HIGH LOW high low -------------- ----- ----- ----- ----- First Quarter 21.17 15.60 34.50 18.25 Second Quarter 22.75 17.00 30.00 16.56 Third Quarter 22.97 13.80 19.50 14.19 Fourth Quarter 25.50 14.25 21.00 14.88
Nordstrom, Inc. common stock is traded on the New York Stock Exchange NYSE Symbol JWN [COMPARABLE STORE BAR GRAPH]
Comparable Store Sales % Change Total Sales % Change ------------------------------- -------------------- 91 1.4% 9.8% 92 1.4% 7.6% 93 2.7% 5.1% 94 4.4% 8.5% 95 -0.7% 5.6% 96 0.6% 8.4% 97 4.0% 9.1% 98 -2.7% 3.8% 99 -1.1% 2.0% 00 0.3% 7.4% 01 -2.9% 1.9%
[SALES PER SQUARE FOOT BAR GRAPH] Sales per Square Foot 91 $388 92 $381 93 $383 94 $395 95 $382 96 $377 97 $384 98 $362 99 $350 00 $342 01 $321
[SG&A BAR GRAPH] SG&A as a % of Sales 91 26.2% 92 26.4% 93 26.2% 94 26.4% 95 27.6% 96 27.7% 97 27.5% 98 28.3% 99 29.6% 00 31.6% 01 30.6%
[DILUTED EARNINGS PER SHARE BAR GRAPH] Diluted Earnings per Share 91 $0.82 92 $0.82 93 $0.86 94 $1.23 95 $1.00 96 $0.90 97 $1.20 98 $1.41 99 $1.46 00 $0.78 01 $0.93
NORDSTROM INC. AND SUBSIDIARIES Index 9 Management's Discussion and Analysis 16 Consolidated Statements of Earnings 17 Consolidated Balance Sheets 18 Consolidated Statements of Shareholders' Equity 19 Consolidated Statements of Cash Flows 20 Notes to Consolidated Financial Statements 37 Independent Auditors' and Management Report 38 Eleven-Year Statistical Summary 40 Officers of the Corporation and Executive Team 41 Board of Directors and Committees 42 Retail Store Facilities 44 Shareholder Information
View this entire report online. Please visit www.nordstrom.com to see this report and obtain the latest available information. Management's Discussion and Analysis OVERVIEW Earnings for 2001 (the fiscal year ended January 31, 2002) for Nordstrom, Inc. and its subsidiaries (collectively, the "Company") increased by 22% as compared to 2000. This increase was primarily attributable to nonrecurring charges experienced in the prior year. Excluding nonrecurring charges, earnings for 2001 declined by 8.4% due in large part to the slowing economy. The Company experienced a modest increase in net sales due to the opening of new stores but comparable store sales (sales from stores open at least one full fiscal year) declined. Gross profit as a percent of sales also declined primarily due to higher markdowns taken to increase sales and liquidate excess inventories. Selling, general and administrative expenses as a percent of sales declined as a result of focused efforts in 2001 to reduce costs. In 2002 (the fiscal year ending January 31, 2003), the Company plans to focus on sales growth, managing merchandise inventory levels, controlling expenses, and making disciplined capital investment decisions. The Company will also strive to build on its core values of customer service and delivering the right mix of quality merchandise at the right price. RESULTS OF OPERATIONS Percentage of 2001 Sales by Merchandise Category [PIE CHART] CHILDREN'S APPAREL AND ACCESSORIES 4% OTHER 3% MEN'S APPAREL AND FURNISHINGS 18% WOMEN'S APPAREL 35% SHOES 19% WOMEN'S ACCESSORIES 21%
[BAR GRAPH] NET SALES (IN MILLIONS) 1997 $4,865 1998 $5,049 1999 $5,149 2000 $5,529 2001 $5,634
Year over year net sales percentage increases and comparable store sales percentages are as follows:
FISCAL YEAR 2001 2000 1999 ----------- ---- ---- ---- Net sales increase 1.9% 7.4% 2.0% Comparable store sales (2.9%) 0.3% (1.1%)
The net sales increase of 1.9% in 2001 was due to new store openings. During 2001, the Company opened four Nordstrom full-line stores, eight Nordstrom Rack stores and three Faconnable boutiques. The increases in net sales were offset by negative comparable store sales and a decline in sales at Nordstrom.com. Comparable store sales in the first half of the year were lower by 1.3% and in the second half of the year were lower by 4.4%. The decline in the second half of 2001 was largely due to the overall slowdown in the economy. The most significant sales declines were in men's apparel and shoes while women's apparel was essentially flat. Net sales increased 7.4% in 2000 due to new store openings. During 2000, the Company opened six Nordstrom full-line stores and ten Nordstrom Rack stores. Comparable store sales were essentially flat in 2000, with increases in shoes, cosmetics and accessories offset by decreases in women's apparel. The decrease in women's apparel was primarily attributable to a change in product mix. 9 Management's Discussion and Analysis In 2002, the Company plans to open eight full-line stores, four Nordstrom Rack stores and two Faconnable boutiques, increasing retail square footage 8%. Given the continued weakness in the economy, comparable store sales are planned to be flat. Based on the sales trend seen in the prior year, comparable store sales are planned to be negative in the first half of the year and positive in the second half of the year. GROSS PROFIT Gross profit as a percentage of net sales is as follows:
FISCAL YEAR 2001 2000 1999 ----------- ---- ---- ---- Gross profit as a percent of net sales 33.2% 34.0% 34.8%
Gross profit as a percentage of net sales declined in 2001 due to higher markdowns and new store occupancy expenses. The higher markdowns were taken to drive sales and to liquidate excess inventory caused by the decrease in comparable store sales. In 2000, the decline in gross profit as a percentage of sales was due to increased markdowns taken to liquidate excess inventory and increased occupancy expenses as a result of additional stores. In 2002, gross profit as a percentage of sales is expected to improve moderately through careful management of inventory levels in relation to sales trends. However, any improvement may be limited if sales trends are weaker than expected. The Company expects to complete the rollout of its perpetual inventory system in 2002. The benefits of having better inventory tracking tools through perpetual inventory should, over time, also improve gross profit performance. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses as a percent of net sales are as follows:
FISCAL YEAR 2001 2000 1999 ----------- ---- ---- ---- Selling, general and administrative 30.6% 31.6% 29.6% Nonrecurring charges -- 0.4% 0.2% Selling, general and administrative before nonrecurring charges 30.6% 31.2% 29.4%
Excluding nonrecurring charges, selling, general and administrative expenses as a percentage of net sales decreased in 2001 primarily due to a focused effort to control expenses in the areas of sales promotion, direct selling and information technology. These decreases were partially offset by an increase in bad debt on the Company's credit cards. In 2000, before nonrecurring charges, the increase in selling, general and administrative expenses as a percent of sales was due to increased costs in the areas of direct selling, credit and sales promotion, related in part to store openings, and increased costs for information services resulting from the Company's investment in new technology. Fiscal 2000 included nonrecurring charges of $23 million, of which approximately $10 million (pre-tax) related to the write-off of abandoned and impaired information technology projects, and approximately $13 million (pre-tax) related to employee severance and other costs associated with a change in management. In 2002, selling, general and administrative expenses as a percent of net sales are expected to improve slightly as the Company continues its focus on expense management while incurring higher costs related to new stores, higher depreciation related to new information systems and continued high levels of bad debt. INTEREST EXPENSE, NET Interest expense, net increased 19.7% in 2001 due to higher average borrowings, partially offset by a decrease in interest rates. In 2000, interest expense, net increased 24.4% primarily due to higher average borrowings. 10 Management's Discussion and Analysis [BAR GRAPH] SERVICE CHARGE INCOME AND OTHER, NET (IN MILLIONS) 1997 $111 1998 $110 1999 $117 2000 $131 2001 $134
Service charge income and other, net primarily represents income from the Company's credit card operations. Service charge income declined slightly in 2001 due to lower interest rates, flat credit sales and a steady number of credit accounts. This decline was offset by lower miscellaneous charges compared to the prior year. In 2000, service charge income increased due to higher credit sales and increases in the number of credit accounts. Credit sales and the number of credit accounts increased as a result of a targeted marketing effort toward inactive accounts and the introduction of a rewards program. In 2002, service charge income is planned to be higher due to a small increase in credit sales and credit accounts, and adjustments to interest rates charged. WRITE-OFF OF INVESTMENT The Company held common shares in Streamline, Inc., an Internet grocery and consumer goods delivery company, at a cost of approximately $33 million. Streamline ceased its operations effective November 2000. During 2000, the Company wrote off its entire investment in Streamline. EARNINGS PER SHARE (DILUTED) [BAR GRAPH] 1997 $1.20 1998 $1.41 1999 $1.46 2000 $0.78 2001 $0.93
Diluted earnings per share are as follows:
FISCAL YEAR 2001 2000 1999 ----------- ---- ---- ---- Diluted earnings per share $.93 $ .78 $1.46 Nonrecurring charges -- .26 .04 Diluted earnings per share before nonrecurring charges $.93 $1.04 $1.50
Excluding nonrecurring charges, earnings per share for 2001 were 10.6% worse than 2000 primarily driven by a decline in comparable store sales and a decline in gross profit percent offset by decreases in selling, general and administrative expenses as a percent of sales. Excluding nonrecurring charges, earnings per share for 2000 were 30.7% lower than 1999 primarily due to the decline in gross profit percent and higher selling, general and administrative expenses, partially offset by higher service charge income. FOURTH QUARTER RESULTS Fourth quarter 2001 earnings per share were $.38 compared with $.20 in 2000. The prior year included a $.01 nonrecurring charge related to the write-off of the remaining Streamline investment. Total sales for the quarter declined by 1.5% versus the same quarter in the prior year and comparable store sales declined by 3.4%. The decline in sales was primarily due to the overall slowdown in the economy. Gross profit increased compared to the same quarter in the prior year due to lower markdowns. Selling, general and administrative expenses improved in the quarter compared to the 11 Management's Discussion and Analysis prior year due to lower costs in selling and sales promotion, partially offset by higher bad debt. The lower selling, general and administrative costs were the result of a focused effort to control costs. LIQUIDITY AND CAPITAL RESOURCES The Company finances its working capital needs, capital expenditures, acquisitions, and share repurchase activity with a combination of cash flows from operations and borrowings. Management believes that the Company's operating cash flows, existing cash and available credit facilities are sufficient to finance the Company's operations and planned growth for the foreseeable future. CASH FLOWS FROM OPERATIONS Net cash provided by operating activities increased approximately $238 million in 2001 compared to 2000 primarily due to decreases in merchandise inventories and accounts receivable. Net cash provided by operating activities decreased approximately $193 million in 2000 compared to 1999 largely due to lower net earnings and increases in credit card accounts receivable and merchandise inventories. In 2002, cash flows provided by operating activities are expected to decrease due to increases in accounts receivable related to increases in credit sales and inventory increases related to the opening of new stores. CAPITAL EXPENDITURES The Company's capital expenditures aggregated approximately $683 million over the last three years, net of developer reimbursements, principally to add stores, improve existing facilities and purchase or develop new information systems. Over 3.5 million square feet of retail store space was added during this period, representing an increase of 25% since January 31, 1999. The Company plans to spend approximately $875 million, net of developer reimbursements, on capital projects during the next three years, including new stores, the remodeling of existing stores, new systems and technology, and other items. At January 31, 2002, approximately $456 million has been contractually committed for the construction of new stores or remodel of existing stores. Although the Company has made commitments for stores opening in 2002 and beyond, it is possible that some stores may not be opened as scheduled because of delays inherent in the development process, or because of the termination of store site negotiations. TOTAL SQUARE FOOTAGE (THOUSANDS) 1997 12,614 1998 13,593 1999 14,487 2000 16,056 2001 17,048
SHARE REPURCHASE In May 1995, the Board of Directors authorized $1.1 billion of share repurchases. As of January 31, 2002, the Company has purchased 39 million shares of its common stock for $1 billion, with remaining share repurchase authority of $82 million. The share repurchase represents 24% of the shares outstanding as of May 1995 after adjusting for the 1998 stock split, at an average price per share of $25.93. Share repurchases have been partially financed through additional borrowings, resulting in an increase in the Company's debt to capital ratio. DIVIDEND POLICY In 2001, the Company paid $.36 per share of common stock in cash dividends, the fifth consecutive annual dividend increase. The Company paid $.35 and $.32 per share of common stock in fiscal 2000 and 1999. 12 Management's Discussion and Analysis ACQUISITION In 2000, the Company acquired Faconnable, S.A. ("Faconnable"), of Nice, France, a designer, wholesaler and retailer of high quality men's and women's apparel and accessories. The Company paid $88 million in cash and issued 5,074,000 shares of common stock of the Company for a total consideration of $169 million. The purchase also provides for a contingent payment to one of the previous owners that may be paid after five years from the acquisition date. If the previous owner continues to have active involvement in the business and performance targets are met, the contingent payment would approximate $10 million. Since the contingent payment is performance based, the actual amount paid will likely vary from this amount and will be expensed when it becomes probable that the targets will be met. DEBT, AVAILABLE CREDIT AND DEBT RATINGS In October 2000, the Company issued $300 million of 8.95% Senior Notes due in 2005. These proceeds were used to reduce short-term indebtedness, to fund the acquisition of Faconnable, and for general corporate purposes. The Company entered into a variable interest rate swap agreement in the third quarter of 2001. The swap has a $300 million notional amount and a four-year term. Under the agreement, the Company receives a fixed rate of 8.95% and pays a variable rate based on LIBOR plus a margin of 4.44% set at six-month intervals (6.85% at January 31, 2002). Any differences between the amounts paid and received on interest rate swap agreements are recognized as adjustments to interest expense over the life of the swap. In November 2001, the Company issued $300 million of Class A notes backed by Nordstrom Private Label Receivables ("PL Term"). The PL Term bears a fixed interest rate of 4.82% and has a maturity of five years. Both the debt and related assets of the PL Term are included in the Company's consolidated balance sheet. The Company will use the proceeds for general corporate purposes and capital expansion. The Company has an outstanding $200 million variable funding note backed by Nordstrom VISA credit card receivables ("Visa VFN"). 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 the Company's consolidated balance sheets. The Visa VFN is scheduled to expire in April 2002. The Company is in the process of renewing this credit facility. The Company owns a 49% interest in a limited partnership which constructed a new corporate office building in which the Company is the primary occupant. Land, building and equipment includes capitalized costs related to this building of $93 million and $57 million as of January 31, 2002 and 2001. The Company is a guarantor of a $93 million credit facility of the limited partnership of which $89 million and $53 million is outstanding as of January 31, 2002 and 2001 and is included in other long-term debt. The limited partnership is currently refinancing the $93 million credit facility and has signed a commitment agreement for an $85 million mortgage secured by the property. The obligation will have a fixed interest rate of 7.68% and a term of 18 years. The Company expects the agreement to close in April 2002 subject to various requirements. The difference between the amount outstanding under the original credit facility and the new mortgage will be funded by the Company. In November 2001, the Company entered into a $300 million unsecured revolving credit facility that expires in November 2004. This credit facility replaced an existing $500 million line of credit, that was scheduled to expire in July 2002. As of January 31, 2002, no borrowings have been made against this revolving credit facility. In November 2001, the Company issued a variable funding note backed by Nordstrom Private Label Receivables ("PL VFN") with a $200 million capacity. As of January 31, 2002, no borrowings have been made against this note. The Company has the following credit ratings as of the date of this report.
STANDARD CREDIT RATINGS MOODY'S* AND POOR'S* -------------- -------- ------------- Senior unsecured debt Baa1 A- Commercial paper P-2 A-2
---------- * negative outlook These ratings are subject to change depending on the Company's performance. A significant ratings drop could result in the termination of the $200 million PL VFN and the $200 million Visa VFN, and a change in interest rates on the $300 million 8.95% Senior Notes and the $300 million revolving credit facility. 13 The remainder of the Company's outstanding debt is not subject to termination or interest rate adjustments based on changes in credit ratings. The following table summarizes the Company's contractual obligations and the expected effect on liquidity and cash flows excluding the $93 million construction loan and any potential liability related to the Nordstrom.com Put Agreement.
LESS THAN 1 - 3 4 - 5 OVER FISCAL YEAR TOTAL 1 YEAR YEARS YEARS 5 YEARS ----------- -------- -------- -------- -------- -------- Long-term Debt $1,330.6 $ 77.7 $ 3.0 $ 700.6 $ 549.3 Capital Leases 17.2 1.3 2.2 2.2 11.5 Operating Leases 674.1 66.9 125.2 108.5 373.5 Construction Commitments 456.1 195.9 151.2 -- 109.0 -------- -------- -------- -------- -------- Total $2,478.0 $ 341.8 $ 281.6 $ 811.3 $1,043.3 ======== ======== ======== ======== ========
Construction commitments include $109 million shown in the Over 5 Years category for new stores construction. These contracts do not have specific due dates and may become due sooner than five years. CRITICAL ACCOUNTING POLICIES The preparation of the Company's 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, the Company evaluates its estimates including those related to doubtful accounts, inventory valuation, intangible assets, income taxes, self-insurance liabilities, pensions, contingent liabilities and litigation. The Company bases its 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. PUT AGREEMENT The holders of the minority interest of Nordstrom.com LLC, through their ownership interests in its managing member, Nordstrom.com, Inc., have the right to sell their shares of Nordstrom.com, Inc. to the Company for effectively $80 million in the event that certain events do not occur. This right would terminate if the Company provides at least $100 million in additional funding to Nordstrom.com, Inc. prior to July 1, 2002 or if Nordstrom.com, Inc. completes an initial public offering of its common stock prior to September 1, 2002. It is possible that the Company will choose not to provide the $100 million in additional funding and that Nordstrom.com, Inc. will not complete an initial public offering on or before September 1, 2002. If and when the Company determines that neither of those events is likely to occur and that the purchase of the minority interest shares is probable, the Company will begin to accrete, over the period remaining prior to the purchase, the difference between that $80 million and the fair value of the shares. Based on current values for similar businesses, management of the Company believes that the amount of that difference could range from $55 million to $65 million. VALUATION OF INTANGIBLE ASSETS The Company is in the process of performing a valuation to determine if there has been an impairment of the $138 million intangible asset resulting from the purchase of Faconnable. This is the Company's only intangible asset. The valuation is dependent on many factors including future performance and market conditions. Should this asset be impaired, a charge will be recorded in the first quarter of 2002. REALIZATION OF DEFERRED TAX ASSETS As of January 31, 2002, the Company has $34 million of capital loss carryforwards. 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 carryforwards will be realized. 14 RECENT ACCOUNTING PRONOUNCEMENTS In February 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and No. 138. It requires the fair value of all derivatives to be recognized as assets or liabilities, and specifies accounting for changes in their fair value. Adoption of this standard did not have a material impact on the Company's financial statements. In March 2001, the Company adopted SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," a replacement of SFAS No. 125 with the same title. It revises the standards for securitizations and other transfers of financial assets and collateral and requires certain additional disclosures, but otherwise retains most of SFAS No. 125's provisions. Adoption of this standard did not have a material impact on the Company's financial statements. The Emerging Issues Task Force reached a consensus on Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," which provides guidance on how a transferor that retains an interest in securitized financial assets, or an enterprise that purchases a beneficial interest in securitized financial assets, should account for related interest income and impairment. Adoption of this accounting issue for the quarter ended July 31, 2001, did not have a material impact on the Company's financial statements. In February 2002, the Company adopted SFAS No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and establishes specific criteria for the recognition of goodwill separate from other intangible assets. Adoption of the accounting provisions of SFAS No. 141 did not have a material impact on the Company's financial statements. 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. The Company is currently evaluating the impact of SFAS No. 142 on its earnings and financial position. In February 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 retains the fundamental provisions of SFAS No. 121, but establishes new criteria for asset classification and broadens the scope of qualifying discontinued operations. The adoption of this statement did not have a material impact on the Company's financial statements. FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT Certain statements made in this annual report include forward-looking statements regarding the Company's performance, liquidity and adequacy of capital resources. These statements are based on the Company's 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 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 the Company believes there is a reasonable basis for the forward-looking statements, one should not place undue reliance on those statements. 15 Consolidated Statements of Earnings Dollars in thousands except per share amounts
% OF % of % of YEAR ENDED JANUARY 31, 2002 SALES 2001 sales 2000 sales ---------------------- ----------- ----- ----------- ----- ----------- ----- Net sales $ 5,634,130 100.0 $ 5,528,537 100.0 $ 5,149,266 100.0 Cost of sales and related buying and occupancy (3,765,859) (66.8) (3,649,516) (66.0) (3,359,760) (65.2) ----------- ----- ----------- ----- ----------- ----- Gross profit 1,868,271 33.2 1,879,021 34.0 1,789,506 34.8 Selling, general and administrative (1,722,635) (30.6) (1,747,048) (31.6) (1,523,836) (29.6) ----------- ----- ----------- ----- ----------- ----- Operating income 145,636 2.6 131,973 2.4 265,670 5.2 Interest expense, net (75,038) (1.4) (62,698) (1.1) (50,396) (1.0) Write-down of investment -- -- (32,857) (0.6) -- -- Service charge income and other, net 133,890 2.4 130,600 2.3 116,783 2.2 ----------- ----- ----------- ----- ----------- ----- Earnings before income taxes 204,488 3.6 167,018 3.0 332,057 6.4 Income taxes (79,800) (1.4) (65,100) (1.2) (129,500) (2.5) ----------- ----- ----------- ----- ----------- ----- NET EARNINGS $ 124,688 2.2 $ 101,918 1.8 $ 202,557 3.9 =========== ===== =========== ===== =========== ===== Basic earnings per share $ 0.93 $ 0.78 $ 1.47 =========== =========== =========== Diluted earnings per share $ 0.93 $ 0.78 $ 1.46 =========== =========== =========== Cash dividends paid per share $ 0.36 $ 0.35 $ 0.32 =========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 16 Consolidated Balance Sheets Dollars in thousands
JANUARY 31, 2002 2001 ----------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 331,327 $ 25,259 Accounts receivable, net 698,475 721,953 Merchandise inventories 888,172 945,687 Prepaid expenses 34,375 28,760 Other current assets 102,249 91,323 ----------- ----------- Total current assets 2,054,598 1,812,982 Land, buildings and equipment, net 1,761,082 1,599,938 Intangible assets, net 138,331 143,473 Other assets 94,768 52,110 ----------- ----------- TOTAL ASSETS $ 4,048,779 $ 3,608,503 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 148 $ 83,060 Accounts payable 490,988 466,476 Accrued salaries, wages and related benefits 236,373 234,833 Income taxes and other accruals 142,002 153,613 Current portion of long-term debt 78,227 12,586 ----------- ----------- Total current liabilities 947,738 950,568 Long-term debt 1,351,044 1,099,710 Deferred lease credits 342,046 275,252 Other liabilities 93,463 53,405 Shareholders' equity: Common stock, no par: 250,000,000 shares authorized; 134,468,608 and 133,797,757 shares issued and outstanding 341,316 330,394 Unearned stock compensation (2,680) (3,740) Retained earnings 975,203 900,090 Accumulated other comprehensive earnings 649 2,824 ----------- ----------- Total shareholders' equity 1,314,488 1,229,568 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,048,779 $ 3,608,503 ----------- -----------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 17 Consolidated Statements of Shareholders' Equity Dollars in thousands except per share amounts
Common Stock Accum. Other ------------------------- Unearned Stock Retained Comprehensive Shares Amount Compensation Earnings Earnings Total ----------- ---------- -------------- ------------ ------------- ------------ BALANCE AT FEBRUARY 1, 1999 142,114,167 $ 230,761 $ (4,703) $ 1,074,487 -- $ 1,300,545 Net earnings -- -- -- 202,557 -- 202,557 Unrealized gain on investment, net of tax -- -- -- -- $ 17,032 17,032 ------------ Comprehensive net earnings: -- -- -- -- -- 219,589 Cash dividends paid ($.32 per share) -- -- -- (44,463) -- (44,463) Issuance of common stock 341,947 9,577 -- -- -- 9,577 Stock compensation 40,274 7,221 (3,890) -- -- 3,331 Purchase and retirement of common stock (10,216,400) -- -- (302,965) -- (302,965) ----------- ---------- --------- ------------ ---------- ------------ BALANCE AT JANUARY 31, 2000 132,279,988 247,559 (8,593) 929,616 17,032 1,185,614 Net earnings -- -- -- 101,918 -- 101,918 Other comprehensive earnings: Unrealized loss on investment during period, net of tax -- -- -- -- (23,461) (23,461) Reclassification of realized loss, net of tax -- -- -- -- 6,429 6,429 Foreign currency translation adjustment -- -- -- -- 2,824 2,824 ------------ Comprehensive net earnings: -- -- -- -- -- 87,710 Cash dividends paid ($.35 per share) -- -- -- (45,935) -- (45,935) Issuance of common stock for: Stock option plans 181,910 4,039 -- -- -- 4,039 Employee stock purchase plan 165,842 2,211 -- -- -- 2,211 Business acquisition 5,074,000 77,696 -- -- -- 77,696 Stock compensation, net (14,075) (1,111) 4,853 -- -- 3,742 Purchase and retirement of common stock (3,889,908) -- -- (85,509) -- (85,509) ----------- ---------- --------- ------------ ---------- ------------ BALANCE AT JANUARY 31, 2001 133,797,757 330,394 (3,740) 900,090 2,824 1,229,568 Net earnings -- -- -- 124,688 -- 124,688 Other comprehensive earnings: Foreign currency translation adjustment -- -- -- -- (2,175) (2,175) ------------ Comprehensive net earnings: -- -- -- -- -- 122,513 Cash dividends paid ($.36 per share) -- -- -- (48,265) -- (48,265) Issuance of common stock for: Stock option plans 186,165 3,788 -- -- -- 3,788 Employee stock purchase plan 541,677 6,754 -- -- -- 6,754 Stock compensation 19,009 380 1,060 -- -- 1,440 Purchase and retirement of common stock (76,000) -- -- (1,310) -- (1,310) ----------- ---------- --------- ------------ ---------- ------------ BALANCE AT JANUARY 31, 2002 134,468,608 $ 341,316 $ (2,680) $ 975,203 $ 649 $ 1,314,488 ----------- ---------- --------- ------------ ---------- ------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 18 Consolidated Statements of Cash Flows Dollars in thousands
YEAR ENDED JANUARY 31, 2002 2001 2000 ---------------------- --------- --------- --------- OPERATING ACTIVITIES Net earnings $ 124,688 $ 101,918 $ 202,557 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of buildings and equipment 213,089 203,048 193,718 Amortization of intangible assets 4,630 1,251 -- Amortization of deferred lease credits and other, net (8,538) (12,349) (6,387) Stock-based compensation expense 3,414 6,480 3,331 Deferred income taxes, net 15,662 (3,716) (22,859) Write-down of investment -- 32,857 -- Change in operating assets and liabilities, net of effects from acquisition of business: Accounts receivable, net 22,556 (102,945) (29,854) Merchandise inventories 215,731 6,741 79,894 Prepaid expenses (1,684) (173) (6,976) Other assets (16,770) (3,821) (8,880) Accounts payable (159,636) (67,924) (76,417) Accrued salaries, wages and related benefits (203) 17,850 14,942 Income tax liabilities and other accruals (11,310) 3,879 965 Other liabilities 12,088 (7,184) 25,212 --------- --------- --------- Net cash provided by operating activities 413,717 175,912 369,246 --------- --------- --------- INVESTING ACTIVITIES Capital expenditures (390,138) (321,454) (305,052) Additions to deferred lease credits 126,383 92,361 114,910 Payment for acquisition, net of cash acquired -- (83,828) -- Other, net (3,309) (1,781) (452) --------- --------- --------- Net cash used in investing activities (267,064) (314,702) (190,594) --------- --------- --------- FINANCING ACTIVITIES Proceeds (payments) from notes payable (82,912) 12,126 (7,849) Proceeds from issuance of long-term debt 300,000 308,266 -- Principal payments on long-term debt (18,640) (58,191) (63,341) Capital contribution to subsidiary from minority shareholders -- -- 16,000 Proceeds from issuance of common stock 10,542 6,250 9,577 Cash dividends paid (48,265) (45,935) (44,463) Purchase and retirement of common stock (1,310) (85,509) (302,965) --------- --------- --------- Net cash provided by (used in) financing activities 159,415 137,007 (393,041) --------- --------- --------- Net increase (decrease) in cash and cash equivalents 306,068 (1,783) (214,389) Cash and cash equivalents at beginning of year 25,259 27,042 241,431 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 331,327 $ 25,259 $ 27,042 --------- --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 19 Notes to Consolidated Financial Statements Dollars in thousands except per share amounts NOTE 1: Summary of Significant Accounting Policies The Company: Nordstrom, Inc. is a fashion specialty retailer offering a wide selection of high-quality apparel, shoes and accessories for women, men and children, in the United States through 80 Nordstrom full-line stores, 46 Nordstrom Rack and clearance stores, 4 Faconnable boutiques and 2 free-standing shoe stores. The Company also operates 24 Faconnable boutiques located primarily in Europe. Additionally, the Company generates catalog and Internet sales through Nordstrom.com LLC and service charge income through Nordstrom Credit, Inc. Basis of Presentation: The consolidated financial statements include the balances of Nordstrom, Inc. and its subsidiaries for the entire fiscal year. All significant intercompany transactions and balances are eliminated in consolidation. Use of Estimates: Management makes estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications: Certain reclassifications of prior year balances have been made for consistent presentation with the current year. Revenue Recognition: Revenues are recorded net of estimated returns and exclude sales tax. Revenue is recorded at the point of sale for retail stores. Catalog and e-commerce sales include shipping revenue and are recorded upon shipment to the customer. Buying and Occupancy Costs: Buying costs consist primarily of salaries and expenses incurred by the Company's merchandise managers, buyers and private label product development group. Occupancy costs include rent, depreciation, property taxes and operating costs related to the Company's retail and distribution facilities. Shipping and Handling Costs: The Company's costs for shipping and handling to customers include payments to third-party shippers and costs incurred to store, move and prepare merchandise for shipment. Shipping and handling costs of $30,868, $38,062 and $29,085 in 2001, 2000 and 1999 were included in selling, general and administrative expenses. Advertising: Costs for newspaper, television, radio and other media are generally expensed as incurred. Direct response advertising costs, consisting primarily of catalog book production and printing costs, are deferred and recognized over the expected life of the catalog, not to exceed six months. Total advertising expenses were $145,341, $190,991 and $160,957 in 2001, 2000 and 1999. Store Preopening Costs: Store opening and preopening costs are charged to expense when incurred. Cash Equivalents: Cash equivalents represent short-term investments with a maturity of three months or less from the time of purchase. Cash Management: The Company's cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Accounts payable at January 31, 2002 includes $31,817 of checks not yet presented for payment drawn in excess of cash balances. Customer Accounts Receivable: In accordance with industry practices, installments maturing in more than one year and deferred payment accounts receivable are included in current assets. Merchandise Inventories: Merchandise inventories are stated at the lower of cost (first-in, first-out basis) or market, using the retail method. Land, Buildings and Equipment: Depreciation is computed using a combination of accelerated and straight-line methods. Estimated useful lives by major asset category are as follows:
ASSET LIFE (IN YEARS) ----- --------------- Buildings 5 - 40 Store fixtures and equipment 3 - 15 Leasehold improvements Shorter of life of lease or asset life Software 3 - 7
Asset Impairment: The Company reviews its intangibles and other long-lived assets for impairment when events or changes in circumstances indicate the carrying value of these assets may not be recoverable. 20 Notes to Consolidated Financial Statements Deferred Lease Credits: The Company receives developer reimbursements as incentives to construct stores in certain developments. The Company capitalizes certain property, plant and equipment for these stores during the construction period. At the end of the construction period, developer reimbursements in excess of construction costs are recorded as deferred lease credits and amortized as a reduction to rent expense, on a straight-line basis over the life of the applicable lease or operating covenant. Construction costs in excess of developer reimbursements are recorded as prepaid rent and amortized as rent expense on a straight-line basis over the life of the applicable lease or operating covenant. Fair Value of Financial Instruments: The carrying amount of cash equivalents and notes payable approximates fair value. The fair value of long-term debt (including current maturities), using quoted market prices of the same or similar issues with the same remaining term to maturity, is approximately $1,378,000 and $1,041,000 at January 31, 2002 and 2001. Derivatives Policy: The Company limits its use of derivative financial instruments to the management of foreign currency and interest rate risks. The effect of these activities is not material to the Company's financial condition or results of operations. The Company has no material off-balance sheet credit risk, and the fair value of derivative financial instruments at January 31, 2002 and 2001 is not material. Recent Accounting Pronouncements: In February 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and No. 138. It requires the fair value of all derivatives to be recognized as either assets or liabilities and specifies accounting for changes in their fair value. Adoption of this standard did not have a material impact on the Company's financial statements. In March 2001, the Company adopted SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," a replacement of SFAS No. 125 with the same title. It revises the standards for securitizations and other transfers of financial assets and collateral and requires certain additional disclosures, but otherwise retains most of SFAS No. 125's provisions. Adoption of this standard did not have a material impact on the Company's financial statements. The Emerging Issues Task Force ("EITF") has reached a consensus on Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," which provides guidance on how a transferor that retains an interest in securitized financial assets, or an enterprise that purchases a beneficial interest in securitized financial assets, should account for related interest income and impairment. Adoption of this accounting issue in the quarter ended July 31, 2001, did not have a material impact on the Company's financial statements. In July 2001, the FASB issued SFAS No. 141 "Business Combinations." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and establishes specific criteria for the recognition of goodwill separate from other intangible assets. Adoption of the accounting provisions of SFAS No. 141 in February 2002 did not have a material impact on the Company's financial statements. At February 1, 2002, the Company implemented SFAS No. 142 "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. Prior to the adoption of SFAS No. 142, the Company's intangible assets were amortized over their estimated useful lives on a straight-line basis ranging from 10 to 35 years. Accumulated amortization of intangible assets was $5,881 and $1,251 at January 31, 2002 and 2001. The Company is currently evaluating the impact of SFAS No. 142 on its earnings and financial position. In February 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 retains the fundamental provisions of SFAS No. 121, but establishes new criteria for asset classification and broadens the scope of qualifying discontinued operations. The adoption of this statement did not have a material impact on the Company's financial statements. 21 Notes to Consolidated Financial Statements NOTE 2: Acquisition In 2000, the Company acquired Faconnable, S.A. ("Faconnable"), of Nice, France, a designer, wholesaler and retailer of high quality men's and women's apparel and accessories. The Company paid $87,685 in cash and issued 5,074,000 shares of common stock of the Company for a total consideration of $168,868. The purchase also provides for a contingent payment to one of the previous owners that may be paid after five years from the acquisition date. If the previous owner continues to have active involvement in the business and performance targets are met, the contingent payment would approximate $10,000. Since the contingent payment is performance based, the actual amount paid will likely vary from this amount and will be expensed when it becomes probable that the targets will be met. NOTE 3: Employee Benefits The Company provides a profit sharing plan and 401(k) plan for employees. The profit sharing plan is non-contributory and is fully funded by the Company. The Board of Directors establishes the Company's contribution to the profit sharing plan each year. The 401(k) plan is funded by voluntary employee contributions. In addition, the Company provides matching contributions up to a stipulated percentage of employee contributions. The Company's matching contributions to the 401(k) plan and contributions to the profit sharing plan totaled $28,525, $29,113 and $47,500 in 2001, 2000 and 1999. NOTE 4: Interest Expense, Net The components of interest expense, net are as follows:
YEAR ENDED JANUARY 31, 2002 2001 2000 ---------------------- -------- -------- -------- Short-term debt $ 3,741 $ 12,682 $ 2,584 Long-term debt 83,225 58,988 56,831 -------- -------- -------- Total interest expense 86,966 71,670 59,415 Less: Interest income (1,545) (1,330) (3,521) Capitalized interest (10,383) (7,642) (5,498) -------- -------- -------- Interest expense, net $ 75,038 $ 62,698 $ 50,396 -------- -------- --------
NOTE 5: Income Taxes Income tax expense consists of the following:
YEAR ENDED JANUARY 31, 2002 2001 2000 ---------------------- --------- --------- --------- Current income taxes: Federal $ 58,122 $ 79,778 $ 130,524 State and local 6,142 11,591 21,835 --------- --------- --------- Total current income taxes 64,264 91,369 152,359 Deferred income taxes: Current (7,217) (11,215) (18,367) Non-current 22,753 (15,054) (4,492) --------- --------- --------- Total deferred income taxes 15,536 (26,269) (22,859) --------- --------- --------- Total income taxes $ 79,800 $ 65,100 $ 129,500 --------- --------- ---------
A reconciliation of the statutory Federal income tax rate to the Company's effective tax rate is as follows:
YEAR ENDED JANUARY 31, 2002 2001 2000 ---------------------- ----- ----- ----- Statutory rate 35.00% 35.00% 35.00% State and local income taxes, net of Federal income taxes 3.93 3.93 4.06 Other, net .09 .05 (.06) ----- ----- ----- Effective tax rate 39.02% 38.98% 39.00% ----- ----- -----
22 Notes to Consolidated Financial Statements Deferred income taxes reflect the net tax effect of temporary differences between amounts recorded for financial reporting purposes and amounts used for tax purposes. The major components of deferred tax assets and liabilities are as follows:
JANUARY 31, 2002 2001 ----------- --------- --------- Accrued expenses $ 33,896 $ 33,458 Compensation and benefits accruals 48,584 43,803 Merchandise inventories 24,643 26,290 Capital loss on investment 13,399 12,751 Other 21,123 18,298 --------- --------- Total deferred tax assets 141,645 134,600 --------- --------- Land, buildings and equipment basis and depreciation differences (49,978) (25,678) Employee benefits (9,771) (10,937) Other (3,195) (3,748) --------- --------- Total deferred tax liabilities (62,944) (40,363) --------- --------- Net deferred tax assets $ 78,701 $ 94,237 --------- ---------
As of January 31, 2002, the Company has $34,357 of capital loss carryforwards available to be utilized within four years to reduce future capital gain income. No valuation allowance has been provided because management believes it is more likely than not that the full benefit of the carryforwards will be realized. NOTE 6: Earnings Per Share Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding during the year plus dilutive common stock equivalents (primarily stock options, performance share units and restricted stock). Options with an exercise price greater than the average market price were not included in the computation of diluted earnings per share. These options totaled 8,563,996, 7,409,387 and 2,798,966 shares in 2001, 2000 and 1999.
YEAR ENDED JANUARY 31, 2002 2001 2000 ---------------------- ------------ ------------ ------------ Net earnings $ 124,688 $ 101,918 $ 202,557 ------------ ------------ ------------ Basic shares 134,104,582 131,012,412 137,814,589 ------------ ------------ ------------ Basic earnings per share $ 0.93 $ 0.78 $ 1.47 ------------ ------------ ------------ Dilutive effect of stock options and restricted stock 234,587 100,673 610,255 ------------ ------------ ------------ Diluted shares 134,339,169 131,113,085 138,424,844 ------------ ------------ ------------ Diluted earnings per share $ 0.93 $ 0.78 $ 1.46 ------------ ------------ ------------
NOTE 7: Investment In September 1998, the Company made an investment in Streamline.com, Inc. ("Streamline"), an Internet grocery and consumer goods delivery company. Streamline ceased its operations effective November 22, 2000, due to failure to obtain additional capital to fund its operations. During 2000, the Company wrote off its entire investment in Streamline, for a total pre-tax loss on the investment of $32,857. 23 Notes to Consolidated Financial Statements NOTE 8: Accounts Receivable The components of accounts receivable are as follows:
JANUARY 31, 2002 2001 ----------- --------- --------- Unrestricted trade receivables $ 73,157 $ 716,218 Restricted trade receivables 628,271 -- Other 21,325 22,266 Allowance for doubtful accounts (24,278) (16,531) --------- --------- Accounts receivable, net $ 698,475 $ 721,953 --------- ---------
Bad debt expense totaled $34,750, $20,368 and $11,707 in 2001, 2000 and 1999. Restricted trade receivables back the $300 million of Class A notes and the $200 million variable funding note issued by the Company in November 2001. Other accounts receivable consists primarily of vendor receivables and cosmetic rebates receivable. NOTE 9: Receivable-backed Securities Nordstrom has $200 million in outstanding debt securities (Class A) and holds securities that represent undivided interests (Class B and Seller Retained Interest) or residual interests (Interest Only Strip) in a master trust. These securities are collateralized by Nordstrom VISA credit card receivables that are sold to the trust on an ongoing basis. The carrying amounts of the retained interests approximate fair value and are included in customer accounts receivable. Gains or losses are recognized on the sale of VISA receivables to the trust based on the difference between the face value of the receivables sold and the fair value of the assets created in the securitization process. The receivables sold to the trust are then allocated between the various interests in the trust based on those interests' relative fair market value. The fair values of the assets are calculated as the present value of their expected future cash flows, which assumes the weighted average remaining life of 2.4 months, average credit losses of 7.41%, average gross yield of 17.48%, average interest expense on issued securities of 2.38%, average payment rate of 22.04%, and discount rates of 7.75% for the Seller Retained Interest, 13.62% for the Class B and 25.35% for the Interest Only Strip. These discount rates represent the volatility and risk of the assets and are calculated using an established formula that considers both the current interest rate environment and credit spreads. The following table summarizes the estimated fair value of the securities held by the Company and certain cash flows received from and paid to the master trust.
YEAR ENDED JANUARY 31, 2002 2001 ---------------------- -------- -------- Class B Certificate $ 10,849 $ 11,000 Seller Retained Interest 47,102 42,052 Interest Only Strip 1,335 3,464 Principal collections reinvested in new receivables 669,582 485,422 Gains on sales of receivables 3,147 5,356 Income earned on retained assets 6,711 9,035 Cash flows from retained assets: Class B Certificate 715 684 Seller Retained Interest 6,217 4,411 Interest Only Strip 4,984 4,955 Servicing Fees 8,440 8,121 -------- --------
Interest income earned on the Class B certificate, Interest Only Strip and the Seller Retained Interest are included in service charge income and other on the consolidated statements of earnings. 24 Notes to Consolidated Financial Statements The following table illustrates the change in fair market value estimates given independent changes in assumptions.
+10% +20% -10% -20% ---- ---- ---- ---- Gross Yield: IO Strip 668 1,339 (661) (1,312) Class B -- -- -- -- Seller Retained Interest 156 313 (156) (313) Interest Expense on Issued Classes: IO Strip (85) (170) 85 171 Class B -- -- -- -- Seller Retained Interest -- -- -- -- Card Holders Payment Rate: IO Strip (76) (137) 90 195 Class B 7 14 (9) (18) Seller Retained Interest 58 110 (71) (161) Charge Offs: IO Strip (325) (647) 330 661 Class B -- -- -- -- Seller Retained Interest (136) (271) 136 273 Discount Rate: IO Strip (10) (19) 10 19 Class B (28) (57) 29 57 Seller Retained Interest (71) (142) 71 142
The total principal balance of the VISA receivables is $258,075 as of January 31, 2002. Gross credit losses were $17,050 for the 12 months ending January 31, 2002 and receivables past due for more than 30 days were $8,170 on January 31, 2002. The following table illustrates default projections using net credit losses as a percentage of average outstanding receivables in comparison to actual performance:
2002 2001 2000 ----- ----- ----- Original projection 7.66% 5.99% 5.39% Actual N/A 6.62% 5.46%
Under the terms of the trust agreement, the Company may be required to fund certain amounts upon the occurrence of specific events. The Company does not believe additional funding will be required. The Company's continuing involvement in the securitization of Visa receivables will include recording gains/losses on sales in accordance with SFAS No. 140 and recognizing income on retained assets as prescribed by EITF 99-20, holding both subordinated, non-subordinated, and residual interests in the trust, and servicing the portfolio. The Company also issued $300 million of receivable-backed securities supported by substantially all of its private label credit cards. This transaction is accounted for as a secured financing. Total principal receivables of the securitized portfolio on January 31, 2002 were approximately $625,516, receivables more than 30 days past due were approximately $19,301, and charged off receivables for the 12 months ending January 31, 2002 were $28,134. The private label receivables also serve as collateral for a variable funding facility with a limit of $200 million. Nothing was outstanding on this facility on January 31, 2002. The Company's continuing involvement in the securitization of private label receivables will include pledging new receivables to the master note trust, accounting for the transaction as a secured financing and servicing the portfolio. 25 Notes to Consolidated Financial Statements NOTE 10: Land, Buildings and Equipment Land, buildings and equipment consist of the following:
JANUARY 31, 2002 2001 ---------- ---------- Land and land improvements $ 59,141 $ 60,871 Buildings 683,926 760,029 Leasehold improvements 910,291 903,925 Capitalized software 46,603 38,642 Store fixtures and equipment 1,142,169 1,172,914 ---------- ---------- 2,842,130 2,936,381 Less accumulated depreciation and amortization (1,663,409) (1,554,081) ---------- ---------- 1,178,721 1,382,300 Construction in progress 582,361 217,638 ---------- ---------- Land, buildings and equipment, net $1,761,082 $1,599,938 ---------- ----------
Capitalized software includes external direct costs, capitalized internal direct labor and other employee benefits, and capitalized interest associated with the development of internal-use computer software. Depreciation begins in the period in which the software is ready for its intended use. Construction in progress includes $127,847 and $46,696 of software in progress at January 31, 2002 and 2001. At January 31, 2002, the Company has contractual commitments of approximately $456,090 for the construction of new stores or remodeling of existing stores. NOTE 11: Notes Payable A summary of notes payable is as follows:
YEAR ENDED JANUARY 31, 2002 2001 2000 ---------- ---------- ---------- Average daily short- term borrowings $ 81,647 $ 192,392 $ 45,030 Maximum amount outstanding 177,100 360,480 178,533 Weighted average interest rate: During the year 4.6% 6.6% 5.8% At year-end -- 6.4% 6.0%
At January 31, 2002, the Company has an unsecured line of credit totaling $300,000, which is available as liquidity support for the Company's commercial paper program, and expires in November 2004. The line of credit agreement contains restrictive covenants, which include maintaining certain financial ratios. The Company pays a commitment fee for the line based on the Company's debt rating. In November 2001, the Company issued a variable funding note backed by Nordstrom Private Label Receivables ("PL VFN") with a $200 million capacity. Interest on the PL VFN varies based on 30-day commercial paper rated at A1/P1. As of January 31, 2002, there have been no borrowings on the PL VFN. Additionally, in connection with the purchase of foreign merchandise, the Company has outstanding letters of credit totaling $77,085 at January 31, 2002. 26 Notes to Consolidated Financial Statements NOTE 12: Long-Term Debt A summary of long-term debt is as follows:
JANUARY 31, 2002 2001 ----------- ----------- Receivable-backed PL Term, 4.82%, due 2006 $ 300,000 -- Senior debentures, 6.95%, due 2028 300,000 $ 300,000 Senior notes, 5.625%, due 2009 250,000 250,000 Senior notes, 8.950%, due 2005 300,000 300,000 Medium-term notes, 7.25%, due 2002 76,750 87,750 Notes payable, 6.7%, due 2005 100,000 100,000 Other 102,521 74,546 ----------- ----------- Total long-term debt 1,429,271 1,112,296 Less current portion (78,227) (12,586) ----------- ----------- Total due beyond one year $ 1,351,044 $ 1,099,710 ----------- -----------
The Company entered into a variable interest rate swap agreement in the third quarter of 2001. The swap has a $300 million notional amount and a four-year term. Under the agreement, the Company receives a fixed rate of 8.95% and pays a variable rate based on LIBOR plus a margin of 4.44% set at six-month intervals (6.85% at January 31, 2002). Any differences between the amounts paid and received on interest rate swap agreements are recognized as adjustments to interest expense over the life of the swap. The swap agreement qualifies as a fair value hedge and is recorded at fair value in other liabilities. In November 2001, the Company issued $300 million of Class A notes backed by Nordstrom Private Label Receivables ("PL Term"). The PL Term bears a fixed interest rate of 4.82% and has a maturity of five years. The Company will use the proceeds for general corporate purposes and capital expansion. The Company owns a 49% interest in a limited partnership that completed construction on a new corporate office building in which the Company is the primary occupant. Land, buildings and equipment includes capitalized costs related to this building of $92,952 and $57,270 as of January 31, 2002 and 2001 which includes noncash amounts of $78,003 and $41,883 as of January 31, 2002 and 2001. The corresponding finance obligation of $89,180 and $53,060 is included in other long-term debt. This finance obligation will be amortized as rental payments are made by the Company to the limited partnership over the life of the permanent financing. The Company is a guarantor of a $93,000 credit facility of the limited partnership. The credit facility provides for interest at either the LIBOR rate plus 0.75%, or the greater of the Federal Funds rate plus 0.5% and the prime rate, and matures in August 2002 (2.63% and 6.36% at January 31, 2002 and 2001). The limited partnership is currently refinancing the $93,000 credit facility and has signed a commitment agreement for an $85,000 mortgage secured by the property. The obligation will have a fixed interest rate of 7.68% and a term of 18 years. The Company expects the agreement to close in April 2002 subject to various requirements. The difference between the amount outstanding under the original credit facility and the new mortgage will be funded by the Company. Required principal payments on long-term debt, excluding capital lease obligations and construction loan obligations, are as follows:
YEAR ENDED JANUARY 31, 2003 $ 77,730 2004 1,535 2005 1,463 2006 400,410 2007 300,188 Thereafter 549,332 --------
27 Notes to Consolidated Financial Statements NOTE 13: Leases The Company leases land, buildings and equipment under noncancelable lease agreements with expiration dates ranging from 2002 to 2080. Certain leases include renewal provisions at the Company's option. Most of the leases provide for additional rent payments based upon specific percentages of sales and require the Company to pay for certain common area maintenance and other costs.
YEAR ENDED JANUARY 31, 2002 2001 2000 ------- ------- ------- Minimum rent: Store locations $26,951 $16,907 $18,794 Offices, warehouses and equipment 20,144 21,070 19,926 Percentage rent: Store locations 8,047 9,241 7,441 ------- ------- ------- Total rent expense $55,142 $47,218 $46,161 ------- ------- -------
Future minimum lease payments as of January 31, 2002 are as follows:
CAPITAL OPERATING YEAR ENDED JANUARY 31, LEASES LEASES ------- --------- 2003 $ 1,335 $ 66,940 2004 1,120 64,480 2005 1,120 60,680 2006 1,120 56,191 2007 1,120 52,285 Thereafter 11,470 373,517 -------- -------- Total minimum lease payments 17,285 $674,093 -------- -------- Less amount representing interest 7,851 -------- Present value of net minimum lease payments $9,434 --------
NOTE 14: Stock-Based Compensation STOCK OPTION PLAN The Company has a stock option plan ("the Plan") under which stock options, performance share units and restricted stock may be granted to key employees. Stock options are issued at the fair market value of the stock at the date of grant. Options vest over periods ranging from four to eight years, and expire ten years after the date of grant. In addition to option grants, the Company granted 273,864, 355,072 and 272,970 performance share units in 2001, 2000 and 1999, which will vest over three years if certain financial goals are attained. Employees may elect to receive common stock or cash upon vesting of these performance shares. At January 31, 2002 and 2001, $4,713 and $2,741 was recorded in accrued salaries, wages and related benefits for these performance shares. Employees who receive performance share units pay no monetary consideration. No amounts have been paid and no common stock has been issued in connection with this program. As of January 31, 2002, 518,189 units were outstanding. The Company also granted 30,069 and 180,000 shares of restricted stock in 1999 and 1998, with a weighted average fair value of $32.09 and $27.75. In September 2000, the Company accelerated the vesting of 144,000 shares of restricted stock resulting in compensation expense of $3,039, and also cancelled 14,175 shares of restricted stock as a result of management changes. In January 2002, the Company accelerated the vesting on the remaining 9,536 unvested shares of restricted stock, resulting in compensation expense of $193. At January 31, 2002, there are no shares of unvested restricted stock. At January 31, 2002, approximately 7,856,298 shares are reserved for future stock option grants pursuant to the Plan. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in measuring compensation costs under its stock-based compensation programs. Accordingly, no compensation cost has been recognized for stock options issued under the Plan. Performance share compensation expense is recorded over the performance period at the fair value of the stock at the date when probable that such shares have been earned. Restricted stock compensation expense is based on the market price on the date of grant and is recorded over the vesting period. Stock-based compensation expense for 2001, 2000 and 1999 was $3,414, $6,480 and $3,331. 28 Notes to Consolidated Financial Statements Stock option activity for the Nordstrom, Inc. Plan was as follows:
YEAR ENDED JANUARY 31, 2002 2001 2000 ------------------------- ------------------------- ------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- ----------- --------- ----------- --------- ----------- Outstanding, beginning of year 8,873,342 $ 27 8,135,301 $ 28 5,893,632 $ 27 Granted 3,288,826 19 2,470,169 21 2,926,368 31 Exercised (186,165) 18 (181,910) 20 (341,947) 23 Cancelled (1,212,110) 25 (1,550,218) 28 (342,752) 30 ---------- ----------- --------- ----------- --------- ----------- Outstanding, end of year 10,763,893 $ 24 8,873,342 $ 27 8,135,301 $ 28 ---------- ----------- --------- ----------- --------- ----------- Options exercisable at end of year 4,533,281 $ 27 3,833,379 $ 26 3,145,393 $ 25
The following table summarizes information about stock options outstanding for the Nordstrom, Inc. Plan as of January 31, 2002:
Options Outstanding Options Exercisable ----------------------------------------------- ---------------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life (Years) Price Shares Price --------------- --------- ------------ ---------- --------- ---------- $13 - $22 6,183,330 8 $ 19 1,671,982 $ 20 $23 - $32 2,479,733 6 27 1,683,022 27 $33 - $40 2,100,830 7 36 1,178,277 35 ---------- ---- ---------- --------- ---------- 10,763,893 7 $ 24 4,533,281 $ 27 ---------- ---- ---------- --------- ----------
Stock option activity for the Nordstrom.com 1999 and 2000 Plans were as follows:
YEAR ENDED JANUARY 31, 2002 2001 2000 ------------------------- ------------------------- ------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- ----------- --------- ----------- --------- ----------- Outstanding, beginning of year 4,174,950 $ 1.72 1,373,950 $ 1.67 -- -- Granted 41,500 1.92 3,794,931 1.73 1,379,950 $ 1.67 Exercised -- -- (135,000) 1.67 -- -- Cancelled (691,642) 1.68 (858,931) 1.68 (6,000) 1.67 ---------- ----------- --------- ----------- --------- ----------- Outstanding, end of year 3,524,808 $ 1.73 4,174,950 $ 1.72 1,373,950 $ 1.67 ---------- ----------- --------- ----------- --------- ----------- Options exercisable at end of year 1,241,104 $ 1.68 703,750 $ 1.67 -- --
29 Notes to Consolidated Financial Statements NORDSTROM.COM Nordstrom.com has two stock option plans, the "1999 Plan" and the "2000 Plan." Vested options under the 1999 Plan are exercisable only in the event of an initial public offering of Nordstrom.com. As of January 31, 2002, the weighted average contractual life for options outstanding was 8.2 years with exercise prices ranging from $1.67 to $1.92 per share. No compensation cost has been recognized related to the options under the 2000 plan because the exercise price was equal to the fair value of Nordstrom.com stock on the date of grant. The options vest over a period of two and one-half to four years and must be exercised within ten years of the grant date. Nordstrom.com LLC has also issued warrants to purchase 2,176,250 common shares at an exercise price of $1.67 to its managing member, Nordstrom.com, Inc. The warrants expire on January 31, 2012. As of January 31, 2002, warrants to purchase 135,000 common shares are exercisable. EMPLOYEE STOCK PURCHASE PLAN In May 2000, the Company's shareholders approved the establishment of an Employee Stock Purchase Plan (the "ESPP") under which 3,500,000 shares of the Company's common stock are reserved for issuance to employees. The plan qualifies as a noncompensatory employee stock purchase plan under Section 423 of the Internal Revenue Code. Employees are eligible to participate through payroll deductions in amounts related to their base compensation. At the end of each offering period, shares are purchased by the participants at 85% of the lower of the fair market value at the beginning or the end of the offering period, usually six months. Under the ESPP, 541,677 and 165,842 shares were issued in 2001 and 2000. As of January 31, 2002, payroll deductions totaling $2,641 were accrued for purchase of shares on March 31, 2002. SFAS No. 123 If the Company had elected to recognize compensation cost based on the fair value of the options and shares at grant date as prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," net earnings and earnings per share would have been the pro forma amounts shown below:
YEAR ENDED JANUARY 31, 2002 2001 2000 ----------- ----------- ----------- Pro forma net earnings $ 107,436 $ 88,460 $ 192,916 Pro forma basic EPS $ 0.80 $ 0.68 $ 1.40 Pro forma diluted EPS $ 0.80 $ 0.67 $ 1.39
The Black-Scholes method was used to estimate the fair value of the options at grant date based on the following factors:
YEAR ENDED JANUARY 31, 2002 2001 2000 ------ ------ ------ Stock Options: Risk-free interest rate 4.8% 6.4% 5.7% Volatility 68.0% 65.0% 61.0% Dividend yield 1.3% 1.0% 1.0% Expected life in years 5.0 5.0 5.0 ---- ---- ---- Weighted-average fair value at grant date $ 10 $ 12 $ 17 ---- ---- ---- ESPP: Risk-free interest rate 4.3% 6.0% -- Volatility 68.0% 65.0% -- Dividend yield 1.3% 1.0% -- Expected life in years 0.5 0.5 -- ---- ---- ---- Weighted-average fair value at grant date $ 5 $ 6 -- ---- ---- ----
For Nordstrom.com, the Company used the following weighted-average assumptions:
YEAR ENDED JANUARY 31, 2002 2001 2000 ------ ------ ------ Risk-free interest rate 4.5% 6.2% 6.0% Volatility 127.0% 121.0% 81.0% Dividend yield 0.0% 0.0% 0.0% Expected life in years 4.0 4.0 4.0 ----- ----- ----- Weighted-average fair value at grant date $1.56 $1.39 $1.05 ----- ----- -----
NOTE 15: Postretirement Benefits The Company has a Supplemental Executive Retirement Plan ("SERP"), which provides retirement benefits to certain officers and other select employees of the Company. The benefits are unfunded and limited to a maximum of 60% of the monthly average compensation less the actuarial equivalent of any monthly benefits payable under the profit sharing plan. 30 Notes to Consolidated Financial Statements The following provides a reconciliation of benefit obligations, funded status of the SERP, as well as a summary of significant assumptions:
JANUARY 31, 2002 2001 -------- -------- Change in benefit obligation: Benefit obligation at beginning of year $ 23,543 $ 23,645 Service cost 1,092 630 Interest cost 2,668 2,044 Amortization of adjustments 1,821 688 Change in additional minimum liability 7,308 (1,519) Distributions (2,021) (1,945) -------- -------- Benefit obligations at end of year $ 34,411 $ 23,543 -------- -------- Funded status of plan: Under funded status $(39,547) $(28,964) Unrecognized transitional obligation 324 648 Unrecognized prior service cost 6,396 240 Unrecognized loss 6,983 5,792 -------- -------- Accrued pension cost $(25,844) $(22,284) -------- -------- Balance sheet amounts: Additional minimum liability $ (8,567) $ (1,259) Intangible asset 6,720 888 -------- --------
The components of SERP expense are as follows:
JANUARY 31, 2002 2001 2000 ------ ------ ------ Service cost $1,092 $ 630 $ 906 Interest cost 2,668 2,044 1,952 Amortization of adjustments 1,821 688 1,013 ------ ------ ------ Total SERP expense $5,581 $3,362 $3,871 ------ ------ ------ Assumption percentages: Discount rate 7.25% 7.50% 6.50% Rate of compensation increase 5.00% 5.00% 5.00% ------ ------ ------
NOTE 16: Supplementary Cash Flow Information The Company capitalizes certain property, plant and equipment during the construction period of commercial buildings which are subsequently derecognized and leased back. During the year ended January 31, 2002, the noncash activity related to the derecognition of new stores that qualified as sale and leaseback were $75,555. Supplementary cash flow information includes the following:
YEAR ENDED JANUARY 31, 2002 2001 2000 -------- -------- -------- Cash paid during the year for: Interest (net of capitalized interest) $ 77,025 $ 58,190 $ 54,195 Income taxes 80,689 88,911 129,566
NOTE 17: Segment Reporting The Company has three reportable segments that have been identified based on differences in products and services offered and regulatory conditions: the Retail Stores, Credit Operations, and Catalog/Internet segments. The Retail Stores segment derives its revenues from sales of high-quality apparel, shoes and accessories. It includes the Company's product development group, which coordinates the design and production of private label merchandise sold in the Company's retail stores. The Credit Operations segment revenues consist primarily of finance charges earned through issuance of the Nordstrom proprietary and VISA credit cards. The Catalog/Internet segment generates revenues from direct mail catalogs and the Nordstrom.com website. The measurements used to compute net earnings for reportable segments are consistent with those used to compute net earnings for the Company. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in Note 1. The following tables set forth the information for the Company's reportable segments and a reconciliation to the consolidated totals: 31 Notes to Consolidated Financial Statements
Retail Credit Catalog/ Corporate YEAR ENDED JANUARY 31, 2002 Stores Operations Internet and Other Eliminations Total ---------- ---------- ---------- ---------- ------------ ---------- Revenues from external customers (b) $5,356,875 -- $ 277,255 -- -- $5,634,130 Service charge income -- $ 129,697 -- -- -- 129,697 Intersegment revenues 20,204 33,767 -- -- $ (53,971) -- Interest expense, net 994 24,994 77 $ 48,973 -- 75,038 Depreciation and amortization 182,960 2,253 5,498 22,378 -- 213,089 Amortization of intangible assets 4,630 -- -- -- -- 4,630 Income tax expense (benefit) 150,921 9,104 -- (80,225) -- 79,800 Net earnings (loss) 235,815 14,226 (8,139) (117,214) -- 124,688 Assets (a)(b) 2,564,375 695,556 69,457 719,391 -- 4,048,779 Intangible assets 138,331 -- -- -- -- 138,331 Capital expenditures 373,909 2,054 2,554 11,621 -- 390,138
Retail Credit Catalog/ Corporate YEAR ENDED JANUARY 31, 2001 Stores Operations Internet and Other Eliminations Total ---------- ---------- ---------- ---------- ------------ ---------- Revenues from external customers (b) $5,217,889 -- $ 310,648 -- -- $5,528,537 Service charge income -- $ 135,121 -- -- -- 135,121 Intersegment revenues 30,294 26,889 -- -- $ (57,183) -- Interest expense, net 795 29,267 (604) $ 33,240 -- 62,698 Depreciation and amortization 176,758 1,786 7,552 16,952 -- 203,048 Amortization of intangible assets 1,251 -- -- -- -- 1,251 Income tax expense (benefit) 165,150 13,140 -- (113,190) -- 65,100 Net earnings (loss) 258,416 20,557 (29,367) (147,688) -- 101,918 Assets (a)(b) 2,557,616 703,077 68,010 279,800 -- 3,608,503 Intangible assets 143,473 -- -- -- -- 143,473 Capital expenditures 286,941 3,095 5,187 26,231 -- 321,454
Retail Credit Catalog/ Corporate YEAR ENDED JANUARY 31, 2000 Stores Operations Internet and Other Eliminations Total ---------- ---------- ---------- ---------- ------------ ---------- Revenues from external customers $4,914,293 -- $ 234,973 -- -- $5,149,266 Service charge income -- $ 125,727 -- -- -- 125,727 Intersegment revenues 20,285 25,963 -- -- $ (46,248) -- Interest expense, net 728 26,933 (167) $ 22,902 -- 50,396 Depreciation and amortization 170,826 1,424 6,313 15,155 -- 193,718 Income tax expense (benefit) 191,790 19,450 -- (81,740) -- 129,500 Net earnings (loss) 300,009 30,417 (35,685) (92,184) -- 202,557 Assets (a) 2,051,327 601,320 95,241 314,193 -- 3,062,081 Capital expenditures 263,352 2,792 5,206 33,702 -- 305,052
(a) Segment assets in Corporate and Other include unallocated assets in corporate headquarters, consisting primarily of land, buildings and equipment, and deferred tax assets. (b) Includes sales of foreign operations of $68,487 for the year ended January 31, 2002, and $12,318 for the period from October 24, 2000, the date of acquisition, to January 31, 2001, and assets of $198,689 and $206,601 as of January 31, 2002 and 2001. 32 Notes to Consolidated Financial Statements NOTE 18: Restructurings, Impairments, and Other One-Time Charges The following table provides a summary of restructuring, impairments and other charges:
YEAR ENDED JANUARY 31, 2002 2001 2000 ------- ------- ------- Employee severance $ 1,791 -- $ 2,685 Other expenses -- -- 1,206 ------- ------- ------- Restructuring subtotal 1,791 -- 3,891 Management severance -- $13,000 -- Asset impairment -- 10,227 4,053 Litigation settlement costs -- -- 2,056 ------- ------- ------- Total charges $ 1,791 $23,227 $10,000 ------- ------- -------
During the year ended January 31, 2002, the Company streamlined its operations through a reduction in workforce of approximately 2,600 employees. As a result, the Company recorded a restructuring charge of $1,791 in selling, general and administrative expenses relating to severance for approximately 195 employees. Personnel affected were primarily located in the corporate center and in full-line stores. During the year ended January 31, 2001, the Company recorded an impairment charge of $10,227, consisting of $9,627 recorded in selling, general and administrative expenses and $600 in interest expense. Due to changes in business strategy, the Company determined that several software projects under development were either impaired or obsolete. The charges consisted of $6,542 primarily related to the disposition of transportation management software. Additionally, merchandise software was written down $3,685 to its estimated fair value. During the same year, the Company accrued and paid $13,000 for certain severance and other costs related to a change in management. During the year ended January 31, 2000, the Company recorded a charge of $10,000 in selling, general and administrative expenses primarily associated with the restructuring of the Company's information technology services area. The charge consisted of $4,053 in the disposition of several software projects under development, $2,685 in employee severance and $1,206 in other miscellaneous costs. Additionally, the Company recorded $2,056 related to settlement costs for two lawsuits. The restructuring included the termination of 50 employees in the information technology department. The following table presents the activity and balances of the reserves established in connection with the restructuring charges:
YEAR ENDED JANUARY 31, 2002 2001 2000 ------- ------- ------- Beginning balance $ 178 $ 1,452 -- Additions 1,791 -- $ 3,891 Payments (1,890) (1,220) (2,122) Adjustments (79) (54) (317) ------- ------- ------- Ending balance $ -- $ 178 $ 1,452 ------- ------- -------
NOTE 19: Vulnerability Due to Certain Concentrations Approximately 31% of the Company's retail square footage is located in the state of California. At January 31, 2002, the net book value of property located in California was approximately $276,000. Accordingly, the Company carries earthquake insurance in California with a $50,000 deductible and a $50,000 coverage limit per occurrence. At January 31, 2002 and 2001, approximately 40% and 41% of the Company's receivables were obligations of customers residing in California. Concentration of the remaining receivables is considered to be limited due to their geographical dispersion. 33 Notes to Consolidated Financial Statements NOTE 20: Nordstrom.com Put Agreement The holders of the minority interest of Nordstrom.com LLC, through their ownership interests in its managing member, Nordstrom.com, Inc., have the right to sell their shares of Nordstrom.com, Inc. to the Company for effectively $80 million in the event that certain events do not occur. This right would terminate if the Company provides at least $100 million in additional funding to Nordstrom.com, Inc. prior to July 1, 2002 or if Nordstrom.com, Inc. completes an initial public offering of its common stock prior to September 1, 2002. It is possible that the Company will choose not to provide the $100 million in additional funding and that Nordstrom.com, Inc. will not complete an initial public offering on or before September 1, 2002. If and when the Company determines that neither of those events is likely to occur and that the purchase of the minority interest shares is probable, the Company will begin to accrete, over the period remaining prior to the purchase, the difference between that $80 million and the fair value of the shares. Based on current values for similar businesses, management of the Company believes that the amount of that difference could range from $55,000 to $65,000. NOTE 21: Contingent Liabilities The Company has been named in various lawsuits and intends to vigorously defend itself in those cases. The Company is not in a position at this time to quantify the amount or range of any possible losses related to those claims. While no assurance can be given as to the ultimate outcome of these lawsuits, based on preliminary investigations, management currently believes that resolving these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows. COSMETICS. The Company was 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 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 period four years prior to the filing of the amended complaint. Defendants, including the Company, have answered the amended complaint denying the allegations. The Company and the other retail defendants have produced documents and responded to plaintiffs' other discovery requests, including providing witnesses for depositions. 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. 34 Notes to Consolidated Financial Statements WASHINGTON PUBLIC TRUST ADVOCATES. In early 2002, the Company was named as one of 30 defendants in Washington Public Trust Advocates, ex rel., et al. v. City of Spokane, et al., filed in the Spokane County Superior Court, State of Washington. Plaintiff is a not-for-profit corporation bringing claims on behalf of the City of Spokane and the Spokane Parking Public Development Authority. The claims relate to the River Park Square Mall and Garage Project in Spokane, Washington (the "Project"), which includes a Nordstrom store. The portion of the complaint applicable to the Company seeks to recover from the Company the amount of a Department of Housing and Urban Development loan made to the developer of the Project. Damages are sought in the amount of $22.75 million, or a lesser amount to the extent that the HUD loan proceeds were used for the construction of the store and not as tenant improvements. Other portions of the complaint seek to invalidate bonds issued to finance the public parking garage serving the Project, terminate the lease of the parking garage by the City of Spokane, and rescind other agreements between the City of Spokane and the developer of the Project, as well as damages from the developer of the Project in unspecified amounts. The Complaint also alleges breach of fiduciary duties by various defendants, including the Company, to the people of the City of Spokane regarding lack of disclosures concerning the developer and the Project. Unspecified damages are sought for this cause of action. The lawsuit was recently filed, the Company has not answered, and no discovery has commenced. OTHER. The Company is also subject to other ordinary routine litigation incidental to its business and with respect to which no material liability is expected. 35 Notes to Consolidated Financial Statements NOTE 22: Selected Quarterly Data (unaudited)
YEAR ENDED JANUARY 31, 2002 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL ------------- ------------- ------------- ------------- ------------- Net sales $ 1,218,040 $ 1,545,759 $ 1,239,241 $ 1,631,090 $ 5,634,130 Gross profit 419,610 504,851 402,280 541,530 1,868,271 Earnings before income taxes 40,555 63,499 17,095 83,339 204,488 Net earnings 24,755 38,699 10,495 50,739 124,688 Basic earnings per share .18 .29 .08 .38 .93 Diluted earnings per share .18 .29 .08 .38 .93 Dividends per share .09 .09 .09 .09 .36 Common stock price High 21.17 22.75 22.97 25.50 25.50 Low 15.60 17.00 13.80 14.25 13.80
YEAR ENDED JANUARY 31, 2001 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL ------------- ------------- ------------- ------------- ------------- Net sales $ 1,153,377 $ 1,457,035 $ 1,262,390 $ 1,655,735 $ 5,528,537 Gross profit 407,722 502,722 438,522 530,055 1,879,021 Write-down of investment -- (10,540) (20,655) (1,662) (32,857) Earnings before income taxes 53,689 74,501 (5,520) 44,348 167,018 Net earnings 32,789 45,401 (3,320) 27,048 101,918 Basic earnings per share .25 .35 (.03) .20 .78 Diluted earnings per share .25 .35 (.03) .20 .78 Dividends per share .08 .09 .09 .09 .35 Common stock price High 34.50 30.00 19.50 21.00 34.50 Low 18.25 16.56 14.19 14.88 14.19
36 Independent Auditors' and Management Report Independent Auditors' Report We have audited the accompanying consolidated balance sheets of Nordstrom, Inc. and subsidiaries (the "Company") as of January 31, 2002 and 2001, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended January 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Nordstrom, Inc. and subsidiaries as of January 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP ----------------------------------- Deloitte & Touche LLP Seattle, Washington March 25, 2002 Management Report Management is responsible for preparing the Company's financial statements and the other information that appears in the annual report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include estimates based on management's best judgment. The Company maintains a comprehensive system of internal controls and procedures designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with established procedures. The concept of reasonable assurance is based on the recognition that the cost of maintaining the system of internal accounting controls should not exceed the benefit derived from the system. Deloitte and Touche LLP audits the Company's financial statements in accordance with auditing standards generally accepted in the United States of America and provides an objective, independent review of the Company's internal controls and the fairness of its reported financial condition and results of operations. The Audit Committee, which is comprised of five independent directors, meets periodically with management and the independent auditors to ensure that each is properly fulfilling its responsibilities. The Committee oversees the Company's systems of internal control, accounting practices, financial reporting and audits to ensure their quality, integrity and objectivity are sufficient to protect shareholders' investments. /s/ MICHAEL G. KOPPEL ----------------------------------- Michael G. Koppel Executive Vice President and Chief Financial Officer 37 Eleven-Year Statistical Summary Dollars in thousands except square footage and per share amounts
YEAR ENDED JANUARY 31, 2002 2001 2000 1999 ----------- ----------- ----------- ----------- FINANCIAL POSITION Customer accounts receivable, net $ 677,150 $ 699,687 $ 596,020 $ 567,661 Merchandise inventories 888,172 945,687 797,845 750,269 Current assets 2,054,598 1,812,982 1,564,648 1,668,689 Current liabilities 947,738 950,568 866,509 794,490 Working capital 1,106,860 862,414 698,139 874,199 Working capital ratio 2.17 1.91 1.81 2.10 Land, buildings and equipment, net 1,761,082 1,599,938 1,429,492 1,378,006 Long-term debt, including current portion 1,429,271 1,112,296 804,982 868,234 Debt/capital ratio .5209 .4929 .4249 .4214 Shareholders' equity 1,314,488 1,229,568 1,185,614 1,300,545 Shares outstanding 134,468,608 133,797,757 132,279,988 142,114,167 Book value per share 9.78 9.19 8.96 9.15 Total assets 4,048,779 3,608,503 3,062,081 3,103,689 OPERATIONS Net sales 5,634,130 5,528,537 5,149,266 5,049,182 Gross profit 1,868,271 1,879,021 1,789,506 1,704,237 Selling, general and administrative (1,722,635) (1,747,048) (1,523,836) (1,429,837) Operating income 145,636 131,973 265,670 274,400 Interest expense, net (75,038) (62,698) (50,396) (47,091) Write-down of investment -- (32,857) -- -- Service charge income and other, net 133,890 130,600 116,783 110,414 Earnings before income taxes 204,488 167,018 332,057 337,723 Income taxes (79,800) (65,100) (129,500) (131,000) Net earnings 124,688 101,918 202,557 206,723 Basic earnings per share .93 .78 1.47 1.41 Diluted earnings per share .93 .78 1.46 1.41 Dividends per share .36 .35 .32 .30 Comparable store sales percentage increase (decrease) (2.9%) .3% (1.1%) (2.7%) Net earnings as a percent of net sales 2.21% 1.84% 3.93% 4.09% Return on average shareholders' equity 9.80% 8.44% 16.29% 14.98% Sales per square foot for Company-operated stores 321 342 350 362 STORES 156 140 104 97 TOTAL SQUARE FOOTAGE 17,048,000 16,056,000 14,487,000 13,593,000
38
1998 1997 1996 1995 1994 1993 1992 ----------- ------------ ---------- ------------ ------------ ------------ ------------ $ 641,862 $ 693,123 $ 874,103 $ 655,715 $ 565,151 $ 584,379 $ 585,490 826,045 719,919 626,303 627,930 585,602 536,739 506,632 1,613,492 1,549,819 1,612,776 1,397,713 1,314,914 1,219,844 1,177,638 979,031 795,321 833,443 693,015 631,064 516,397 558,768 634,461 754,498 779,333 704,698 683,850 703,447 618,870 1.65 1.95 1.94 2.02 2.08 2.36 2.11 1,252,513 1,152,454 1,103,298 984,195 845,596 824,142 856,404 420,865 380,632 439,943 373,910 438,574 481,945 491,076 .3194 .2720 .3232 .2575 .2934 .3337 .4029 1,458,950 1,457,084 1,408,053 1,330,437 1,153,594 1,038,649 927,465 152,518,104 159,269,954 162,226,288 164,488,196 164,118,256 163,949,594 163,688,454 9.57 9.15 8.68 8.09 7.03 6.34 5.67 2,890,664 2,726,495 2,732,619 2,396,783 2,177,481 2,053,170 2,041,875 4,864,604 4,457,931 4,113,717 3,895,642 3,591,228 3,415,613 3,174,822 1,568,791 1,378,472 1,310,931 1,297,018 1,121,539 1,079,608 1,007,554 (1,338,235) (1,232,860) (1,136,069) (1,029,856) (940,708) (901,446) (831,005) 230,556 145,612 174,862 267,162 180,831 178,162 176,549 (34,250) (39,400) (39,295) (30,664) (37,646) (44,810) (49,106) -- -- -- -- -- -- -- 110,907 135,331 134,179 98,311 88,509 86,140 87,443 307,213 241,543 269,746 334,809 231,694 219,492 214,886 (121,000) (95,227) (106,190) (132,304) (90,804) (84,489) (80,527) 186,213 146,316 163,556 202,505 140,890 135,003 134,359 1.20 .90 1.00 1.23 .86 .82 .82 1.20 .90 1.00 1.23 .86 .82 .82 .265 .25 .25 .1925 .17 .16 .155 4.0% 0.6% (0.7%) 4.4% 2.7% 1.4% 1.4% 3.83% 3.28% 3.98% 5.20% 3.92% 3.95% 4.23% 12.77% 10.21% 11.94% 16.30% 12.85% 13.73% 15.41% 384 377 382 395 383 381 388 92 83 78 76 74 72 68 12,614,000 11,754,000 10,713,000 9,998,000 9,282,000 9,224,000 8,590,000
39 Officers of the Corporation and Executive Team Officers of the Corporation Jammie Baugh, 49 Executive Vice President, Human Resources MEMBER OF EXECUTIVE TEAM Laurie M. Black, 43 Executive Vice President and President, Nordstrom Rack MEMBER OF EXECUTIVE TEAM Mark S. Brashear, 40 Executive Vice President and President, Faconnable, S.A.S. Dale Cameron, 53 Executive Vice President, Corporate Merchandise Manager, Cosmetics Full-line Stores Robert E. Campbell, 46 Vice President, Strategy and Planning, Treasurer N. Claire Chapman, 41 Corporate Secretary Linda Toschi Finn, 54 Executive Vice President, Marketing MEMBER OF EXECUTIVE TEAM Bonnie M. Junell, 45 Vice President, Corporate Merchandise Manager, Point of View, Narrative Full-line Stores Kevin T. Knight, 46 Executive Vice President, Chairman and Chief Executive Officer of Nordstrom fsb, President of Nordstrom Credit, Inc. MEMBER OF EXECUTIVE TEAM Michael G. Koppel, 45 Executive Vice President and Chief Financial Officer MEMBER OF EXECUTIVE TEAM Llynn (Len) A. Kuntz, 41 Executive Vice President, WA/AK Regional Manager Full-line Stores David P. Lindsey, 52 Vice President, Store Planning David L. Mackie, 53 Vice President, Real Estate and Legal Affairs Robert J. Middlemas, 45 Executive Vice President, Central States Regional Manager Full-line Stores Jack H. Minuk, 47 Vice President, Corporate Merchandise Manager, Women's Shoes Full-line Stores Blake W. Nordstrom, 41 President MEMBER OF EXECUTIVE TEAM Bruce A. Nordstrom, 68 Chairman of the Board of Directors Erik B. Nordstrom, 38 Executive Vice President, Full-line Stores Peter E. Nordstrom, 40 Executive Vice President and President, Full-line Stores MEMBER OF EXECUTIVE TEAM James R. O'Neal, 43 Executive Vice President and President, Nordstrom Product Group MEMBER OF EXECUTIVE TEAM Suzanne R. Patneaude, 55 Vice President, Corporate Merchandise Manager, Designer/Savvy Full-line Stores R. Michael Richardson, 45 Vice President and Chief Information Officer Karen Bowman Roesler, 46 Vice President, Marketing Nordstrom Credit Group K.C. (Karen) Shaffer, 48 Executive Vice President, Nordstrom Rack NW Regional Manager Joel T. Stinson, 52 Executive Vice President and Chief Administrative Officer MEMBER OF EXECUTIVE TEAM Delena M. Sunday, 41 Executive Vice President, Diversity Affairs MEMBER OF EXECUTIVE TEAM Geevy S.K. Thomas, 37 Executive Vice President, South Regional Manager Full-line Stores Additional Member of Nordstrom, Inc. Executive Team J. Daniel Nordstrom, 39 Chief Executive Officer, Nordstrom.com 40 Board of Directors and Committees Committees Executive John A. McMillan Bruce A. Nordstrom John N. Nordstrom Corporate Governance and Nominating D. Wayne Gittinger, Chair Enrique Hernandez, Jr. Alfred E. Osborne, Jr. William D. Ruckelshaus Audit Enrique Hernandez, Jr. Alfred E. Osborne, Jr. William D. Ruckelshaus Bruce G. Willison, Chair Alison A. Winter Compensation and Stock Options Enrique Hernandez, Jr. Alfred E. Osborne, Jr. William D. Ruckelshaus, Chair Alison A. Winter Finance D. Wayne Gittinger Enrique Hernandez, Jr. John A. McMillan John N. Nordstrom Alfred E. Osborne, Jr., Chair Bruce G. Willison FIRST ROW D. Wayne Gittinger, 69 Partner, Lane Powell Spears Lubersky LLP Seattle, Washington Enrique Hernandez, Jr., 46 [FIRST ROW - 3 PHOTOGRAPHS] President and CEO, Inter-Con Security Systems, Inc. Pasadena, California John A. McMillan, 70 Retired Co-Chairman of the Board of Directors Seattle, Washington SECOND ROW Bruce A. Nordstrom, 68 Chairman of the Board of Directors Seattle, Washington John N. Nordstrom, 65 [SECOND ROW - 3 PHOTOGRAPHS] Retired Co-Chairman of the Board of Directors Seattle, Washington Alfred E. Osborne, Jr., 57 Director of the Harold Price Center for Entrepreneurial Studies and Associate Professor of Business Economics, The Anderson School at UCLA Los Angeles, California THIRD ROW William D. Ruckelshaus, 69 [THIRD ROW - 3 PHOTOGRAPHS] A Strategic Director, Madrona Venture Group Seattle, Washington Bruce G. Willison, 53 Dean, The Anderson School at UCLA Los Angeles, California Alison A. Winter, 55 Executive Vice President for Midwest Personal Financial Services, The Northern Trust Corporation Chicago, Illinois 41 Retail Store Facilities open at January 31, 2002
STORE SQUARE LOCATION STORE NAME FOOTAGE --------- ---------------------------------- ------------ SOUTHWEST GROUP ARIZONA Chandler Chandler Fashion Center 149,000 Scottsdale Scottsdale Fashion Square 235,000 CALIFORNIA Arcadia Santa Anita 151,000 Brea Brea Mall 195,000 Canoga Park Topanga 154,000 Cerritos Los Cerritos Center 122,000 Corte Madera The Village at Corte Madera 116,000 Costa Mesa South Coast Plaza 235,000 Escondido North County 156,000 Glendale Glendale Galleria 147,000 Los Angeles Westside Pavilion 150,000 Mission Viejo The Shops at Mission Viejo 172,000 Montclair Montclair Plaza 134,000 Palo Alto Stanford Shopping Center 187,000 Pleasanton Stoneridge Mall 173,000 Redondo Beach The Galleria at South Bay 161,000 Riverside The Galleria at Tyler in Riverside 164,000 Roseville Galleria at Roseville 149,000 Sacramento Arden Fair 190,000 San Diego Fashion Valley Center 220,000 San Diego Horton Plaza 151,000 San Diego University Towne Centre 130,000 San Francisco Stonestown Galleria 174,000 San Francisco San Francisco Shopping Centre 350,000 San Jose Valley Fair 232,000 San Mateo Hillsdale Shopping Center 149,000 Santa Ana MainPlace/Santa Ana 169,000 Santa Barbara Paseo Nuevo 186,000 Walnut Creek Broadway Plaza 193,000 EAST COAST GROUP CONNECTICUT Farmington Westfarms 189,000 FLORIDA Boca Raton Town Center at Boca Raton 193,000 Tampa International Plaza 172,000 GEORGIA Atlanta Perimeter Mall 243,000 Buford Mall of Georgia 172,000 MARYLAND Annapolis Annapolis Mall 162,000 Bethesda Montgomery Mall 225,000 Columbia The Mall in Columbia 173,000 Towson Towson Town Center 205,000 NEW JERSEY Edison Menlo Park 266,000 Freehold Freehold Raceway Mall 174,000 Paramus Garden State Plaza 282,000 Short Hills The Mall at Short Hills 188,000 NEW YORK Garden City Roosevelt Field 241,000 White Plains The Westchester 219,000 PENNSYLVANIA King of Prussia The Plaza at King of Prussia 238,000 RHODE ISLAND Providence Providence Place 206,000 VIRGINIA Arlington The Fashion Centre at Pentagon City 241,000 McLean Tysons Corner Center 253,000 Norfolk MacArthur Center 166,000 CENTRAL STATES ILLINOIS Chicago Michigan Avenue 271,000 Oak Brook Oakbrook Center 249,000 Schaumburg Woodfield Shopping Center 215,000 Skokie Old Orchard Center 209,000 INDIANA Indianapolis Circle Centre 216,000 KANSAS Overland Park Oak Park Mall 219,000 MICHIGAN Troy Somerset Collection 258,000 MINNESOTA Bloomington Mall of America 240,000 OHIO Beachwood Beachwood Place 231,000 Columbus Easton Town Center 174,000
42
STORE SQUARE LOCATION STORE NAME FOOTAGE --------- ---------------------------------- ------------ TEXAS Dallas Dallas Galleria 249,000 Frisco Stonebriar Centre 149,000 Hurst North East Mall 149,000 NORTHWEST GROUP ALASKA Anchorage Anchorage 97,000 COLORADO Broomfield FlatIron Crossing 172,000 Littleton Park Meadows 245,000 OREGON Portland Clackamas Town Center 121,000 Portland Downtown Portland 174,000 Portland Lloyd Center 150,000 Salem Salem Center 71,000 Tigard Washington Square 189,000 UTAH Murray Fashion Place 110,000 Salt Lake City Crossroads Plaza 140,000 WASHINGTON Bellevue Bellevue Square 285,000 Lynnwood Alderwood Mall 127,000 Seattle Downtown Seattle 383,000 Seattle Northgate 122,000 Spokane Spokane 137,000 Tacoma Tacoma Mall 134,000 Tukwila Southcenter 170,000 Vancouver Vancouver Mall 71,000 OTHER Honolulu, HI Women's Ala Moana Shoes 14,000 Honolulu, HI Men's Ala Moana Shoes 8,000 Faconnable U.S. (4 boutiques) 40,000 Faconnable International (24 boutiques) 81,000 NORDSTROM RACK GROUP Chandler, AZ Chandler Festival Rack 37,000 Phoenix, AZ Last Chance 48,000 Scottsdale, AZ The Promenade Rack 38,000 Brea, CA Brea Union Plaza Rack 45,000 Chino, CA Chino Marketplace Rack 30,000 Colma, CA Colma Rack 31,000 Costa Mesa, CA Metro Pointe Rack 50,000 Glendale, CA Glendale Fashion Center Rack 36,000 Los Angeles, CA The Promenade at Howard Hughes Center Rack 41,000 Oxnard, CA Esplanade Shopping Center Rack 38,000 Roseville, CA Creekside Town Center Rack 36,000 Sacramento, CA Howe `Bout Arden Center Rack 54,000 San Diego, CA Mission Valley Rack 57,000 San Francisco, CA 555 Ninth Street Retail Center Rack 43,000 San Jose, CA Westgate Mall Rack 48,000 San Leandro, CA San Leandro Rack 44,000 Woodland Hills, CA Topanga Rack 64,000 Littleton, CO Meadows Marketplace Rack 34,000 Broomfield, CO Flatiron Marketplace Rack 36,000 Buford, GA Mall of Georgia Crossing Rack 44,000 Honolulu, HI Victoria Ward Center Rack 34,000 Northbrook, IL Northbrook Rack 40,000 Oak Brook, IL The Shops at Oak Brook Place Rack 42,000 Schaumburg, IL Woodfield Rack 45,000 Gaithersburg, MD Gaithersburg Rack 49,000 *Silver Spring, MD City Place Rack 37,000 Towson, MD Towson Rack 31,000 Grand Rapids, MI Centerpointe Mall Rack 40,000 Troy, MI Troy Marketplace Rack 40,000 Bloomington, MN Mall of America Rack 41,000 Las Vegas, NV Silverado Ranch Plaza Rack 33,000 Westbury, NY The Mall at the Source Rack 48,000 Beaverton, OR Tanasbourne Town Center Rack 53,000 Clackamas, OR Clackamas Promenade Rack 28,000 Portland, OR Downtown Portland Rack 19,000 Philadelphia, PA Franklin Mills Mall Rack 43,000 Hurst, TX The Shops at North East Mall Rack 40,000 Plano, TX Preston Shepard Place Rack 39,000 Salt Lake City, UT Sugarhouse Rack 31,000 Dulles, VA Dulles Town Crossing Rack 41,000 Woodbridge, VA Potomac Mills Rack 46,000 Auburn, WA SuperMall of the Great Northwest Rack 48,000 Bellevue, WA Factoria Mall Rack 46,000 Lynnwood, WA Golde Creek Plaza Rack 38,000 Seattle, WA Downtown Seattle Rack 42,000 Spokane, WA NorthTown Mall Rack 28,000
* Store closed January 21, 2002, however it has been treated as open for the full year. 43 Shareholder Information INDEPENDENT AUDITORS DELOITTE & TOUCHE LLP COUNSEL LANE POWELL SPEARS LUBERSKY LLP TRANSFER AGENT AND REGISTRAR Mellon Investor Services LLC P.O. Box 3315 South Hackensack, New Jersey 07606 Telephone (800) 318-7045 TDD for Hearing Impaired (800) 231-5469 Foreign Shareholders (201) 329-8660 TDD Foreign Shareholders (201) 329-8354 GENERAL OFFICES 1617 Sixth Avenue Seattle, Washington 98101-1742 Telephone (206) 628-2111 ANNUAL MEETING May 21, 2002 at 11:00 a.m. Pacific Daylight Time Nordstrom Downtown Seattle Store John W. Nordstrom Room, fifth floor 1617 Sixth Avenue Seattle, Washington 98101-1742 FORM 10-K The Company's annual report on Form 10-K for the year ended January 31, 2002 will be provided to shareholders upon written request to: Nordstrom, Inc. Investor Relations P.O. Box 2737 Seattle, Washington 98111 Or by calling (206) 303-3200 SHAREHOLDER INFORMATION Please visit WWW.NORDSTROM.COM to obtain shareholder information. In addition, the Company is always willing to discuss matters of concern to shareholders, including its vendor standards compliance mechanisms and progress in achieving compliance. 44