EX-13.1 10 v89013exv13w1.txt EXHIBIT 13.1 . . . Exhibit 13.1 financial highlights Dollars in thousands except per share amounts
FISCAL YEAR 2002 2001 % CHANGE ----------- ---- ---- -------- Net sales $5,975,076 $5,634,130 6.1 Earnings before income taxes and cumulative effect of accounting change 195,624 204,488 (4.3) Earnings before cumulative effect of accounting change 103,583 124,688 (16.9) Net earnings 90,224 124,688 (27.6) Basic earnings per share .67 .93 (28.0) Diluted earnings per share .66 .93 (29.0) Cash dividends paid per share .38 .36 5.6
COMP-STORE SALES % CHANGE [LINE CHART] 92 1.4% 93 2.7% 94 4.4% 95 -0.7% 96 0.6% 97 4.0% 98 -2.7% 99 -1.1% 00 0.3% 01 -2.9% 02 1.4%
SALES PER SQUARE FOOT [LINE CHART] 92 $381 93 $383 94 $395 95 $382 96 $377 97 $384 98 $362 99 $350 00 $342 01 $321 02 $319
GROSS PROFIT % OF SALES [LINE CHART] 92 31.6% 93 31.2% 94 33.3% 95 31.9% 96 30.9% 97 32.2% 98 33.8% 99 34.8% 00 34.0% 01 33.2% 02 33.5%
SG&A AS A % OF SALES [LINE CHART] 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% 02 30.3%
TABLE OF CONTENTS 12 MANAGEMENT'S DISCUSSION AND ANALYSIS 21 INDEPENDENT AUDITORS' AND MANAGEMENT REPORTS 22 CONSOLIDATED STATEMENTS OF EARNINGS 23 CONSOLIDATED BALANCE SHEETS 24 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 25 CONSOLIDATED STATEMENTS OF CASH FLOWS 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 44 ELEVEN-YEAR STATISTICAL SUMMARY 46 RETAIL STORE FACILITIES 48 OFFICERS OF THE CORPORATION AND EXECUTIVE TEAM 49 BOARD OF DIRECTORS 49 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 Nordstrom is a fashion specialty retailer offering a wide selection of high-quality apparel, shoes and accessories for men, women and children. We believe that we offer our customers an exceptional shopping experience by providing superior service and distinctive merchandise with an emphasis on quality and value. We also offer our products through multiple retail channels including our full-line stores, Nordstrom Rack stores, our catalogs and on the Internet. Our financial performance is driven largely by our ability to generate positive comparable store sales, successfully execute store openings, manage inventory and control expenses. To that end, our goals for 2002 were to drive top-line growth, implement our new perpetual inventory system and continue lowering expense levels as a percent of sales. During 2002, we were able to generate comparable store sales gains of 1.4%. We are encouraged by these gains in this challenging retail and economic environment. In recent years, our sales per square foot have declined as we have ventured into new markets and opened new stores. This year our sales per square foot decline slowed. In 2002, sales per square foot declined from $321 to $319, in spite of an 8% expansion in our retail square footage. We substantially completed the implementation of our perpetual inventory system, which allows us to more effectively manage inventory. Additionally, we are implementing a new replenishment system, which is scheduled for completion in the first quarter of 2003. Progress was made on controlling expenses in the current year. In 2002, selling, general and administrative expenses as a percent of sales were down 0.3% to 30.3%. This decrease is in addition to the 1.0% decrease we achieved in 2001. While we have made progress in this area, we are still focused on reaching our goal of 28.5% to 29.0% of sales in the next few years. Our focus for 2003 is to increase top line growth through positive comparable store sales and store openings, improve gross margin performance through better inventory control, and further reduce our expenses as a percent of sales. PERCENTAGE OF 2002 SALES BY MERCHANDISE CATEGORY [PIE CHART] Women's Apparel 35% Women's Accessories 22% Shoes 19% Men's Apparel and Furnishings 17% Children's Apparel and Accessories 4% Other 3%
RESULTS OF OPERATIONS: Segment results are discussed in each of the following sections as applicable. NET SALES (IN MILLIONS) [LINE CHART] 98 $5,049 99 $5,149 00 $5,529 01 $5,634 02 $5,975
Sales increases and comparable store sales are shown in the table below. Comparable stores are stores open at least one full fiscal year at the beginning of the fiscal year.
FISCAL YEAR 2000 2001 2002 ------ ------ ------ Net sales increase 7.4% 1.9% 6.1% Comparable store sales: Full-line stores 0.2% (2.6%) 0.7% Nordstrom Rack & other 1.2% (5.9%) 7.4% Total 0.3% (2.9%) 1.4%
12 NORDSTROM INC. AND SUBSIDIARIES management's discussion and analysis In 2002, net sales increased 6.1% over the prior year. This growth was primarily due to store openings. During 2002, we opened eight full-line stores, four Nordstrom Rack stores and one Faconnable boutique. We also closed one Nordstrom Rack location. The net impact was an increase to our retail square footage of 8%. Comparable store sales increased 1.4% due to increases at both full-line stores and Nordstrom Rack stores. Sales at Nordstrom Direct (formerly known as Nordstrom.com) declined slightly with a planned reduction in catalog sales partially offset by an increase in Internet sales. Merchandise division sales were led by Women's Designer, Cosmetics and Accessories. Men's Apparel and Shoes experienced small sales declines. The Women's Designer division benefited from the addition of new vendors, close scrutiny of developing trends and a targeted marketing plan. The increase in Cosmetics was primarily due to the addition of product lines. Accessories improved by differentiating its product and offering attractive values. In 2001, net sales increased 1.9% due to store openings. During 2001, we opened four full-line stores, eight Nordstrom Rack stores and three Faconnable boutiques. We also closed one Nordstrom Rack store and one full-line store. The net impact was an increase to our retail square footage of 6%. New store sales were partially offset by negative comparable store sales and a decline in sales at Nordstrom Direct. The most significant sales declines were in Men's Apparel and Shoes while Women's Apparel was essentially flat. In 2003, we plan to open four full-line stores and two Nordstrom Rack stores, increasing retail square footage by approximately 4%. Because of the continued challenging retail environment, comparable store sales are expected to be flat to slightly positive. GROSS PROFIT
FISCAL YEAR 2000 2001 2002 ---- ---- ---- Gross profit as a percent of net sales 34.0% 33.2% 33.5%
Gross profit as a percentage of net sales improved in 2002 due to better inventory management. In our merchandising divisions, improvement in gross profit rate offset lower sales in certain categories. Merchandise division gross profit was led by both Women's and Men's Apparel. Additionally, costs related to our private label operations improved. Total inventory increased as we added new stores, however, inventory per square foot declined due to improved performance at full-line stores partially offset by inventory increases at our Nordstrom Rack division. Total shrinkage as a percentage of sales was even with the previous year. Gross profit as a percentage of net sales declined in 2001 due to increased markdowns and new store occupancy expenses. The markdowns were taken to drive sales and to liquidate excess inventory caused by the decrease in comparable store sales. Inventory declines at comparable stores were partially offset by the addition of new stores. The comparable stores inventory decrease was due to a concerted effort to reduce inventory levels during the year resulting in lower inventory per square foot. Total shrinkage as a percentage of sales was even with the previous year. In 2003, we anticipate continuing progress in our ability to improve gross profit performance through better inventory management. SELLING, GENERAL AND ADMINISTRATIVE
FISCAL YEAR 2000 2001 2002 ---- ---- ---- Selling, general and administrative expense as a percent of net sales 31.6% 30.6% 30.3%
In 2002, we recognized a charge of $15.6 million to write-down an investment in a supply chain tool intended to support our private label division. Due to changes in business strategy, we determined that this asset was impaired. This charge reduced this asset to its estimated market value. Excluding the effect of the write-down, selling, general and administrative expenses as a percentage of net sales decreased in 2002 to 30.1% from 30.6% in the prior year. This decrease is the result of improvements in bad debt and selling expense and reductions in sales promotion. These costs were partially offset by higher distribution costs and higher information systems expense. Bad debt expense decreased as both delinquency and write-off trends stabilized. Selling expense decreased primarily due to continued efficiencies in shipping costs at Nordstrom Direct. Sales promotion decreased as Nordstrom Direct executed planned reductions in catalog size and number of mailings consistent with sales trends. Distribution costs increased primarily due to higher merchandise volumes and temporary inefficiencies caused by the implementation of our perpetual inventory system. The information NORDSTROM INC. AND SUBSIDIARIES 13 management's discussion and analysis systems expense increase resulted from depreciation and rollout costs of our new perpetual inventory system. In 2000, we recognized a charge of $13.0 million for certain severance and other costs related to a change in management. Also in 2000, we recorded an impairment charge of $10.2 million. Due to changes in business strategy, we determined that several software projects under development were either impaired or obsolete. Excluding the effect of the severance and impairment charge, selling, general and administrative expenses as a percentage of net sales decreased in 2001 to 30.6% versus 31.2% in the prior year. This improvement in selling, general and administrative expenses as a percentage of net sales is due to reductions in sales promotion and improvements in selling expenses. Sales promotion expenses decreased due to the discontinuation of a company-wide brand advertising program. Selling expenses decreased as Nordstrom Direct improved the efficiency of their shipping and call center activities. These improvements were partially offset by an increase in bad debt on our credit cards due to increased delinquencies and write-offs. In 2003, selling, general and administrative expenses as a percent of net sales are expected to improve slightly as we continue our focus on expense management. INTEREST EXPENSE, NET Interest expense, net increased 9.2% in 2002 primarily due to lower capitalized interest. Capitalized interest decreased due to lower average balances during the year for construction and software in progress. Interest expense, net increased 19.7% in 2001 due to higher average borrowings, partially offset by a decrease in interest rates. Interest expense, net for 2003 is expected to be flat with 2002. WRITE-DOWN OF STREAMLINE.COM, INC. We held an investment in Streamline.com, Inc., an Internet grocery and consumer goods delivery company. Streamline ceased its operations effective November 2000. During 2000 we wrote off our entire investment in Streamline, for a total expense of $32.9 million. MINORITY INTEREST PURCHASE AND REINTEGRATION COSTS During 2002, we purchased the outstanding shares of Nordstrom.com, Inc. series C preferred stock for $70.0 million. The excess of the purchase price over the fair market value of the preferred stock and professional fees resulted in a one-time charge of $42.7 million. No tax benefit was recognized on the share purchase, as we do not believe it is probable that this benefit will be realized. The impact of not recognizing this income tax benefit increased our effective tax rate to 47% before the cumulative effect of accounting change. Also in 2002, $10.4 million of expense was recognized related to the purchase of the outstanding Nordstrom.com options and warrants. SERVICE CHARGE INCOME AND OTHER, NET (IN MILLIONS) [LINE CHART] 98 $110 99 $117 00 $131 01 $134 02 $141
Service charge income and other, net increased in 2002 primarily due to gains recorded from our VISA securitization. Securitization gains increased this year as credit spreads improved, the cost of funds decreased and bad debt write-offs stabilized. This increase was partially offset by a decline in service charge and late fee income resulting from a decline in our private label accounts receivable. Service charge income declined slightly in 2001 due to lower interest rates, flat credit sales and a steady number of credit accounts. In 2003, service charge income is expected to be higher due to a small increase in credit sales and credit accounts, and adjustments to interest rates charged. 14 NORDSTROM INC. AND SUBSIDIARIES management's discussion and analysis DILUTED EARNINGS PER SHARE [LINE CHART] 98 $1.41 99 $1.46 00 $0.78 01 $0.93 02 $0.66
Earnings per share decreased in 2002 due to the write down of the supply chain tool, the minority interest purchase and reintegration costs and the cumulative effect of accounting change. Excluding the impact of these charges, earnings per share would have been $1.19, an increase from the prior year of 28.0%. This increase was primarily driven by an increase in comparable store sales, an improvement in gross profit percent and a decrease in selling, general and administrative expenses as a percent of sales. Earnings per share for 2001 were 19.2% higher than 2000 due to charges recognized in 2000, which include the write-down of Streamline, the management severance and the asset impairments. Excluding the impact of these charges, 2000 earnings per share would have been $1.04 resulting in a 2001 earnings per share decrease of 10.6%. This decrease is primarily due to 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. FOURTH QUARTER RESULTS Fourth quarter 2002 earnings per share were $0.44 compared with $0.38 in 2001. Total sales for the quarter increased by 7.3% versus the same quarter in the prior year and comparable store sales increased by 1.9%. The increase in sales was primarily due to the opening of eight full-line stores and four Nordstrom Rack stores during the year. Gross profit as a percentage of sales was flat with the same quarter in the prior year. Selling, general and administrative expenses as a percent of sales decreased in the quarter compared to the prior year primarily due to improved selling costs and reduced sales promotion offset by higher distribution costs and information systems expense. LIQUIDITY AND CAPITAL RESOURCES We finance our working capital needs, capital expenditures, acquisitions and share repurchase activity with a combination of cash flows from operations and borrowings. We believe that our operating cash flows, existing cash and available credit facilities are sufficient to finance our operations and planned growth for the foreseeable future. OPERATING ACTIVITIES Our operations are seasonal in nature. The second quarter, which includes our Anniversary Sale, accounts for approximately 28% of net sales, while the fourth quarter, which includes the holiday season, accounts for about 29% of net sales. Cash requirements are highest in the third quarter as we build our inventory for the holiday season. The decrease in net cash provided by operating activities between 2002 and 2001 was primarily due to increases in inventories and accounts receivable partially offset by an increase in net earnings before noncash items and an increase in our accrual for income taxes. Inventory grew as we added stores during the year. Accounts receivable increased as Nordstrom VISA credit sales improved. The increased income tax accrual resulted from the timing of payments. Net cash provided by operating activities increased approximately $235 million in 2001 compared to 2000 primarily due to decreases in inventories and accounts receivable. The inventories decreased as a result of improved inventory management, while accounts receivable declined due to lower credit sales. In 2003, cash flows provided by operating activities are expected to remain fairly consistent with 2002. Inventory increases from store openings are expected to slow, offset by slower increases in accounts payable. Accounts receivable should increase modestly as credit sales grow. INVESTING ACTIVITIES For the last three years, investing activities have primarily consisted of capital expenditures, the minority interest purchase of Nordstrom.com and the acquisition of Faconnable. NORDSTROM INC. AND SUBSIDIARIES 15 management's discussion and analysis CAPITAL EXPENDITURES Our capital expenditures over the last three years totaled approximately $738 million, net of developer reimbursements, principally to add stores, improve existing facilities and purchase or develop new information systems. More than 3.9 million square feet of retail store space has been added during this period, representing an increase of 27% since January 31, 2000. We plan to spend approximately $700-$750 million, net of developer reimbursements, on capital projects during the next three years. Compared to the previous three years, we plan to open fewer stores, slow spending on information systems and increase our spending on the improvement of existing facilities. In the information systems area, we are in the process of replacing our point of sale system, which we expect to be substantially completed by 2004. At January 31, 2003, approximately $227 million has been contractually committed primarily for the construction of new stores or remodeling of existing stores. Although we have made commitments for stores opening in 2003 and beyond, it is possible that some stores may not be opened as scheduled because of delays in the development process, or because of the termination of store site negotiations. TOTAL SQUARE FOOTAGE (IN THOUSANDS) [LINE CHART] 98 13,593 99 14,487 00 16,056 01 17,048 02 18,428
ACQUISITION In 2000, we acquired Faconnable, S.A.S. in exchange for $88 million of cash and 5,074,000 shares of our common stock, for a total consideration of $169 million. The purchase provides for a contingent payment to a former owner that may be paid after five years from the acquisition date. If the former owner continues to have involvement in the business and performance targets are met, the contingent payment could approximate $12 million. The contingent payment will be expensed when it becomes probable that the targets will be met. FINANCING ACTIVITIES Financing activities primarily consist of share repurchases, dividend payments, as well as proceeds and payments on debt. SHARE REPURCHASE In May 1995, the Board of Directors authorized $1.1 billion of share repurchases. As of January 31, 2003, we have purchased 39 million shares of our 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. DIVIDENDS In 2002, we paid $.38 per share in common stock dividends, the sixth consecutive annual dividend increase. We paid $.36 and $.35 per share of common stock in fiscal 2001 and 2000. DEBT TO CAPITAL RATIO By the end of 2001, our debt to capital ratio had increased to 52.1% as a result of retail expansion, share repurchases and an acquisition. By the end of 2002, this ratio had decreased to 49.6%. Our near-term goal is to reduce this ratio to be in the range of 40% to 45%. DEBT In May 2002, we replaced the $200 million variable funding note backed by Nordstrom VISA credit card receivables with 5-year term notes also backed by the VISA credit card receivables. Class A and B notes with a combined face value of $200 million were issued to third party investors. We used the proceeds to retire the $200 million outstanding on the variable funding note. Based on SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" this debt and the related assets are not reflected in our consolidated balance sheets. 16 NORDSTROM INC. AND SUBSIDIARIES management's discussion and analysis In November 2001, we issued $300 million of Class A notes backed by Nordstrom private label receivables. These notes bear a fixed interest rate of 4.82% and have a maturity of five years. Both the debt and related assets are included in our consolidated balance sheets. A portion of the proceeds was used to pay-down approximately $77 million in medium-term notes and the purchase of Nordstrom.com, Inc.'s preferred stock for $70 million. The remaining proceeds will be used for general corporate purposes and capital expansion. In October 2000, we 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. INTEREST RATE SWAPS We entered into a variable interest rate swap agreement in the fourth quarter of 2002. The swap had a $250 million notional amount and a six-year term. Under the agreement, we received a fixed rate of 5.63% and paid a variable rate based on LIBOR plus a margin of 1.31% set at six-month intervals (3.25% at January 31, 2003). The swap agreement qualified as a fair value hedge and was recorded at fair value in other assets at January 31, 2003. Subsequent to January 31, 2003, we sold the interest rate swap and received cash of $2.3 million, which will be recognized as interest income evenly over the remaining life of the related debt. In the third quarter of 2002, we sold the interest rate swap that converted our $300 million, 8.95% fixed-rate debt to variable rate. We received cash of $4.9 million, which will be recognized as interest income evenly over the remaining life of the related debt. NONCASH FINANCING We own 49% of a limited partnership which constructed a new corporate office building in which we are the primary occupant. During the first quarter of 2002, the limited partnership refinanced its construction loan obligation with an $85 million mortgage secured by the property, of which $79 million was included in our balance sheet at January 31, 2003. The obligation has a fixed interest rate of 7.68% and a term of 18 years. AVAILABLE CREDIT In November 2001, we entered into a $300 million unsecured revolving credit facility that expires in November 2004. As of January 31, 2003, no borrowings have been made against this revolving credit facility. Also in November 2001, we issued a variable funding note backed by Nordstrom private label receivables with a $200 million capacity. As of January 31, 2003, no borrowings were outstanding against this note. Additionally, we have universal shelf registrations on file with the Securities and Exchange Commission that permit us to offer an additional $450 million of securities to the public. These registration statements allow us to issue various types of securities, including debt, common stock, warrants to purchase common stock, warrants to purchase debt securities and warrants to purchase or sell foreign currency. CONTRACTUAL OBLIGATIONS The following table summarizes our contractual obligations and the expected effect on liquidity and cash flows.
LESS THAN 1-3 4-5 OVER 5 FISCAL YEAR TOTAL 1 YEAR YEARS YEARS YEARS ----- ------ ----- ----- ----- Long-term Debt $1,338.4 $ 5.2 $ 407.9 $ 307.1 $ 618.2 Capital Leases 16.0 1.1 2.2 2.2 10.5 Operating Leases 780.4 73.2 141.3 123.9 442.0 Construction Commitments 227.3 165.2 62.1 -- -- -------- -------- -------- -------- -------- TOTAL $2,362.1 $ 244.7 $ 613.5 $ 433.2 $1,070.7 -------- -------- -------- -------- --------
NORDSTROM INC. AND SUBSIDIARIES 17 management's discussion and analysis DEBT RATINGS The following table shows our credit ratings at 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 could change depending on our performance and other factors. A significant ratings drop could result in the termination of the $200 million Nordstrom private label receivables variable funding note and a change in interest rates on the $300 million 8.95% senior notes and the $300 million revolving credit facility. The remainder of our outstanding debt is not subject to termination or interest rate adjustments based on changes in credit ratings. CRITICAL ACCOUNTING POLICIES The preparation of our financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We regularly evaluate our estimates including those related to doubtful accounts, inventory valuation, intangible assets, income taxes, self-insurance liabilities, post-retirement benefits, contingent liabilities and litigation. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The following discussion highlights the policies we feel are critical. REVENUE RECOGNITION We recognize revenues net of estimated returns and exclude sales tax. Retail stores record revenue at the point of sale. Catalog and Internet sales include shipping revenue and are recorded upon delivery to the customer. Our sales return liability is estimated based on historical return levels. INVENTORY Our inventory is stated at the lower of cost or market using the retail inventory method (first-in, first-out basis). Under the retail method, inventory is valued by applying a cost-to-retail ratio to the ending retail value of inventory. As our inventory retail value is adjusted regularly to reflect market conditions, our inventory method approximates the lower of cost or market. Factors considered in determining markdowns include current and anticipated demand, customer preferences, age of the merchandise and fashion trends. We also reserve for obsolescence based on historical trends and specific identification. Shrinkage is estimated as a percentage of sales for the period from the last inventory date, based on historical shrinkage losses. VENDOR ALLOWANCES We receive allowances from merchandise vendors for purchase price adjustments, cooperative advertising programs and cosmetic selling expenses. Purchase price adjustments are recorded as a reduction of cost of sales at the point they have been earned and the related merchandise has been sold. Allowances for cooperative advertising programs and cosmetic selling expenses are recorded as a reduction of selling, general and administrative expense when the advertising or selling expense is incurred. SELF INSURANCE We are self insured for certain losses related to health and welfare, workers' compensation and general liability. We record estimates of the total cost of claims incurred as of the balance sheet date. These estimates are based on analysis of historical data and actuarial estimates. ALLOWANCE FOR DOUBTFUL ACCOUNTS We evaluate the collectibility of our customer accounts receivable based on several factors, including historical trends, aging of accounts, write-off experience and expectations of future performance. Delinquent accounts are usually written off after the passage of 151 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy or other circumstances that make further collection unlikely. OFF-BALANCE SHEET FINANCING We have $200 million in outstanding term notes backed by our Nordstrom VISA credit card receivables. On an ongoing basis, our Nordstrom VISA receivables are transferred to a master note trust which has issued Class A and B notes to third party investors. We hold securities that represent our retained interests in the trust. 18 NORDSTROM INC. AND SUBSIDIARIES management's discussion and analysis We recognize gains or losses on the sale of Nordstrom 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 during the securitization process. The fair value of the assets is calculated as the present value of their expected cash flows. The discount rates used to calculate present value represent the volatility and risk of the assets. Significant assumptions and judgments are made to estimate the present value of expected cash flows and to determine the fair value of our retained interest. We have no other off-balance sheet transactions. REALIZATION OF DEFERRED TAX ASSETS In January 2003, we sold our Denver Credit facility generating a capital gain for tax purposes of $15.4 million, which was used to offset a portion of our existing capital loss carryforwards. Capital loss carryforwards of $19.0 million remain available to offset capital gain income in the next three years. No valuation allowance reserve has been provided because we believe it is probable that the full benefit of these carryforwards will be realized. Our purchase of the outstanding shares of Nordstrom.com, Inc. series C preferred stock resulted in an expense of $40.4 million which we believe will not be deductible for tax purposes. As a result, we have established a valuation allowance reserve of $16.5 million to offset the deferred tax asset related to this purchase. RECENT ACCOUNTING PRONOUNCEMENTS 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 SFAS No. 141 did not have a material impact on our financial statements. 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. Adoption of SFAS No. 142 resulted in an impairment charge and a reduction in amortization expense, which is detailed in Note 2 of the Notes to Consolidated Financial Statements. 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 our financial statements. We adopted SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" in the second quarter of 2002. SFAS No. 145 updates, clarifies and simplifies existing accounting pronouncements related to extinguishments of debt, provisions of the Motor Carrier Act of 1980 and lease transactions. The adoption of this statement did not have a material impact on our financial statements. SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" was also adopted by us in the second quarter of 2002. SFAS No. 146 nullifies EITF 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" by requiring that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred versus when an entity is committed to an exit plan. The adoption of this statement did not have a material impact on our financial statements. We adopted SFAS No. 148 "Accounting for Stock-Based Compensation" in the fourth quarter of 2002. SFAS No. 148 amends SFAS No. 123 of the same name and provides alternative transition methods for a voluntary change to fair value based accounting for stock-based employee compensation. SFAS No. 148 also requires more prominent and frequent disclosures about the effects of stock-based compensation. Adoption of SFAS No. 148 did not have a material impact on our financial statements. In November 2002, the Emerging Issues Task Force reached a consensus on certain issues discussed in EITF 02-16, "Accounting by a Reseller for Cash Consideration Received from a Vendor." This pronouncement addresses the timing and classification of cash payments received by a reseller from a vendor. Adoption of EITF 02-16 did not have a material impact on our financial statements. In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including NORDSTROM INC. AND SUBSIDIARIES 19 management's discussion and analysis Indirect Guarantees of the Indebtedness of Others." FIN 45 elaborates on the disclosures made by a guarantor and also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Adoption of FIN 45 in the fourth quarter of 2002 did not have a material impact on our financial statements. CAUTIONARY STATEMENT The preceding disclosures included forward-looking statements regarding our performance, liquidity and adequacy of capital resources. These statements are based on our current assumptions and expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Forward-looking statements are qualified by the risks and challenges posed by increased competition, shifting consumer demand, changing consumer credit markets, changing capital markets, changing interest rates and general economic conditions, hiring and retaining effective team members, sourcing merchandise from domestic and international vendors, investing in new business strategies, achieving our growth objectives and the impact of economic and competitive market forces, including the impact of terrorist activity or the impact of war. As a result, while we believe there is a reasonable basis for the forward-looking statements, you should not place undue reliance on those statements. This discussion and analysis should be read in conjunction with the consolidated financial statements and the Eleven-Year Statistical Summary. 20 NORDSTROM INC. AND SUBSIDIARIES independent auditors' and management reports INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated balance sheets of Nordstrom, Inc. and subsidiaries (the "Company") as of January 31, 2003 and 2002, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended January 31, 2003. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2003, in conformity with accounting principles generally accepted in the United States of America. The Company changed its method of accounting for goodwill and other intangible assets upon adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, for the year ended January 31, 2003, as discussed in Note 2 to the consolidated financial statements. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Seattle, Washington March 28, 2003 MANAGEMENT REPORT We are responsible for preparing our 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 our best judgment. We maintain 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 our financial statements in accordance with auditing standards generally accepted in the United States of America and provides an objective, independent review of our internal controls and the fairness of our reported financial condition and results of operations. The Audit Committee, which is comprised of six independent directors, meets periodically with our management and the independent auditors to ensure that each is properly fulfilling its responsibilities. The Committee oversees our 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 NORDSTROM INC. AND SUBSIDIARIES 21 consolidated statements of earnings Dollars in thousands except per share amounts
% OF % OF % OF YEAR ENDED JANUARY 31, 2003 SALES 2002 SALES 2001 SALES ----------- ------- ----------- ------- ----------- ------- Net sales $ 5,975,076 100.0 $ 5,634,130 100.0 $ 5,528,537 100.0 Cost of sales and related buying and occupancy (3,971,372) (66.5) (3,765,859) (66.8) (3,649,516) (66.0) ----------- ------- ----------- ------- ----------- ------- Gross profit 2,003,704 33.5 1,868,271 33.2 1,879,021 34.0 Selling, general and administrative (1,813,968) (30.3) (1,722,635) (30.6) (1,747,048) (31.6) ----------- ------- ----------- ------- ----------- ------- Operating income 189,736 3.2 145,636 2.6 131,973 2.4 Interest expense, net (81,921) (1.4) (75,038) (1.4) (62,698) (1.1) Write-down of investment -- -- -- -- (32,857) (0.6) Minority interest purchase and reintegration costs (53,168) (0.9) -- -- -- -- Service charge income and other, net 140,977 2.4 133,890 2.4 130,600 2.3 ----------- ------- ----------- ------- ----------- ------- Earnings before income taxes and cumulative effect of accounting change 195,624 3.3 204,488 3.6 167,018 3.0 Income taxes (92,041) (1.6) (79,800) (1.4) (65,100) (1.2) ----------- ------- ----------- ------- ----------- ------- Earnings before cumulative effect of accounting change 103,583 1.7 124,688 2.2 101,918 1.8 Cumulative effect of accounting change (net of tax) (13,359) (0.2) -- -- -- -- ------------ -------- ----------- ------- ----------- ------- NET EARNINGS $ 90,224 1.5 $ 124,688 2.2 $ 101,918 1.8 ----------- ------- ----------- ------- ----------- ------- Basic earnings per share $ 0.67 $ 0.93 $ 0.78 ----------- ----------- ----------- Diluted earnings per share $ 0.66 $ 0.93 $ 0.78 ----------- ----------- ----------- Cash dividends paid per share $ 0.38 $ 0.36 $ 0.35 ----------- ----------- -----------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 22 NORDSTROM INC. AND SUBSIDIARIES consolidated balance sheets Dollars in thousands
JANUARY 31, 2003 2002 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 208,329 $ 331,327 Accounts receivable, net 759,262 698,475 Merchandise inventories 953,112 888,172 Prepaid expenses 40,261 36,888 Other current assets 111,654 102,249 ----------- ----------- Total current assets 2,072,618 2,057,111 Land, buildings and equipment, net 1,761,544 1,761,082 Goodwill, net 40,355 38,198 Tradename, net 100,133 100,133 Other assets 121,726 94,655 ----------- ----------- TOTAL ASSETS $ 4,096,376 $ 4,051,179 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 244 $ 148 Accounts payable 414,754 490,988 Accrued salaries, wages and related benefits 260,562 236,373 Income taxes and other accruals 188,986 144,402 Current portion of long-term debt 5,545 78,227 ----------- ----------- Total current liabilities 870,091 950,138 Long-term debt 1,341,826 1,351,044 Deferred lease credits 383,100 342,046 Other liabilities 129,302 93,463 Shareholders' equity: Common stock, no par: 500,000,000 shares authorized; 135,444,041 and 134,468,608 shares issued and outstanding 358,069 341,316 Unearned stock compensation (2,010) (2,680) Retained earnings 1,014,105 975,203 Accumulated other comprehensive earnings 1,893 649 ----------- ----------- Total shareholders' equity 1,372,057 1,314,488 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,096,376 $ 4,051,179 ----------- -----------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. NORDSTROM INC. AND SUBSIDIARIES 23 consolidated statements of shareholders' equity Dollars in thousands except per share amounts
Accum. Other Common Stock Unearned Stock Retained Comprehensive Shares Amount Compensation Earnings Earnings Total ------------ ------------ ------------ ------------ ------------ ------------ BALANCE AT FEBRUARY 1, 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 ($.35 per share) -- -- -- (45,935) -- (45,935) Issuance of common stock for: Stock option plans 181,910 4,039 -- -- -- 4,039 Employee stock purchase plan 165,842 2,211 -- -- -- 2,211 Business acquisition 5,074,000 77,696 -- -- -- 77,696 Stock compensation (14,075) (1,111) 4,853 -- -- 3,742 Purchase and retirement of common stock (3,889,908) -- -- (85,509) -- (85,509) ------------ ------------ ------------ ------------ ------------ ------------ BALANCE AT JANUARY 31, 2001 133,797,757 330,394 (3,740) 900,090 2,824 1,229,568 Net earnings -- -- -- 124,688 -- 124,688 Other comprehensive earnings: Foreign currency translation adjustment -- -- -- -- (2,175) (2,175) ------------- Comprehensive net earnings: -- -- -- -- -- 122,513 Cash dividends paid ($.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 Net earnings -- -- -- 90,224 -- 90,224 Other comprehensive earnings: Foreign currency translation adjustment -- -- -- -- 7,755 7,755(1) SERP adjustment, net of tax -- -- -- -- (6,511) (6,511)(1) ------------- Comprehensive net earnings: -- -- -- -- -- 91,468 Cash dividends paid ($.38 per share) -- -- -- (51,322) -- (51,322) Issuance of common stock for: Stock option plans 350,004 7,959 -- -- -- 7,959 Employee stock purchase plan 596,351 8,062 -- -- -- 8,062 Stock compensation 29,078 732 670 -- -- 1,402 ------------ ------------ ------------ ------------ ------------ ------------ BALANCE AT JANUARY 31, 2003 135,444,041 $ 358,069 $ (2,010) $ 1,014,105 $ 1,893 $ 1,372,057 ------------ ------------ ------------ ------------ ------------ ------------
(1) The ending balance of the foreign currency translation adjustment and SERP adjustment, net of tax was $8,404 and $(6,511) as of January 31, 2003. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 24 NORDSTROM INC. AND SUBSIDIARIES consolidated statements of cash flows Dollars in thousands
YEAR ENDED JANUARY 31, 2003 2002 2001 --------- --------- --------- OPERATING ACTIVITIES Net earnings $ 90,224 $ 124,688 $ 101,918 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of buildings and equipment 233,931 213,089 203,048 Amortization of intangible assets -- 4,630 1,251 Amortization of deferred lease credits and other, net (22,179) (8,886) (12,761) Stock-based compensation expense 1,130 3,414 6,480 Deferred income taxes, net 6,190 16,114 (3,234) Cumulative effect of accounting change, net of tax 13,359 -- -- Write-down of investment -- -- 32,857 Impairment of IT investment 15,570 -- 10,227 Minority interest purchase expense 40,389 -- -- Change in operating assets and liabilities, net of effects from acquisition of business: Accounts receivable, net (58,397) 22,556 (102,945) Merchandise inventories (117,379) 80,246 (120,729) Prepaid expenses 521 (2,438) (1,191) Other assets 3,378 (16,770) (3,821) Accounts payable (9,826) (18,241) 58,212 Accrued salaries, wages and related benefits 23,763 (203) 17,850 Income tax liabilities and other accruals 43,771 (10,413) 5,309 Other liabilities 14,227 12,088 (7,184) --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 278,672 419,874 185,287 --------- --------- --------- INVESTING ACTIVITIES Capital expenditures (328,166) (396,048) (330,347) Additions to deferred lease credits 97,673 126,383 92,361 Proceeds from sale-leaseback of Denver Credit facility 20,000 -- -- Minority interest purchase (70,000) -- -- Payment for acquisition, net of cash acquired -- -- (83,828) Other, net (3,513) (3,104) (1,781) --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES (284,006) (272,769) (323,595) --------- --------- --------- FINANCING ACTIVITIES Proceeds (payments) from notes payable 96 (82,912) 12,126 Proceeds from issuance of long-term debt 1,665 300,000 308,266 Principal payments on long-term debt (87,697) (18,640) (58,191) Proceeds from sale of interest rate swap 4,931 -- -- Proceeds from issuance of common stock 14,663 10,090 5,768 Cash dividends paid (51,322) (48,265) (45,935) Purchase and retirement of common stock -- (1,310) (85,509) --------- --------- --------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (117,664) 158,963 136,525 --------- --------- --------- Net (decrease) increase in cash and cash equivalents (122,998) 306,068 (1,783) Cash and cash equivalents at beginning of year 331,327 25,259 27,042 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 208,329 $ 331,327 $ 25,259 --------- --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. NORDSTROM INC. AND SUBSIDIARIES 25 notes to consolidated financial statements Dollars in thousands except per share amounts NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY: We are a fashion specialty retailer offering high-quality apparel, shoes and accessories for women, men and children with 142 U.S. stores located in 27 states. We also operate 23 Faconnable boutiques located primarily in Europe. Additionally, we generate catalog and Internet sales through Nordstrom Direct (formerly known as Nordstrom.com) and service charge income through Nordstrom Credit, Inc. CHANGE IN FISCAL YEAR: Beginning February 1, 2003, our fiscal year end will change from January 31 to the Saturday closest to January 31. Each fiscal year will consist of four 13 week quarters, with an extra week added onto the fourth quarter every five to six years. This fiscal calendar is widely used in the retail industry. 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: We make 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: We record revenues net of estimated returns and exclude sales tax. Retail stores record revenue at the point of sale. Catalog and Internet sales include shipping revenue and are recorded upon delivery to the customer. BUYING AND OCCUPANCY COSTS: Buying costs consist primarily of salaries and expenses incurred by our merchandise managers, buyers and private label product development group. Occupancy costs include rent, depreciation, property taxes and operating costs of our retail and distribution facilities. SHIPPING AND HANDLING COSTS: Our shipping and handling costs include payments to third-party shippers and costs to store, move and prepare merchandise for shipment. Shipping and handling costs of $42,506, $30,868 and $38,062 in 2002, 2001 and 2000 were included in selling, general and administrative expenses. ADVERTISING: Costs for newspaper, television, radio and other media are generally expensed as they occur. Direct response advertising costs, such as catalog book production and printing costs, are expensed over the life of the catalog, not to exceed six months. Total advertising expenses were $144,482, $145,341 and $190,991 in 2002, 2001 and 2000. STORE PREOPENING COSTS: Store opening and preopening costs are expensed as they occur. STOCK COMPENSATION: We apply APB No. 25, "Accounting for Stock Issued to Employees," in measuring compensation costs under our stock-based compensation programs, which are described more fully in Note 17. If we had elected to recognize compensation cost based on the fair value of the options and shares at grant date, net earnings and earnings per share would have been as follows:
YEAR ENDED JANUARY 31, 2003 2002 2001 ----------- ----------- ----------- Net earnings, as reported $ 90,224 $ 124,688 $ 101,918 Incremental stock-based compensation expense under fair value, net of tax (19,674) (17,252) (13,458) ----------- ----------- ----------- Pro forma net earnings $ 70,550 $ 107,436 $ 88,460 ----------- ----------- ----------- Earnings per share: Basic--as reported $ 0.67 $ 0.93 $ 0.78 Basic--pro forma $ 0.52 $ 0.80 $ 0.68 Diluted--as reported $ 0.66 $ 0.93 $ 0.78 Diluted--pro forma $ 0.52 $ 0.80 $ 0.67 ----------- ----------- -----------
CASH EQUIVALENTS: Cash equivalents are short-term investments with a maturity of three months or less from the date of purchase. CASH MANAGEMENT: Our 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. 26 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements CUSTOMER ACCOUNTS RECEIVABLE: Based on industry practices, installments maturing in more than one year or deferred payment accounts receivable are included in current assets. MERCHANDISE INVENTORIES: Merchandise inventories are valued at the lower of cost or market, using the retail method (first-in, first-out basis). 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: We review our intangibles and other long-lived assets annually for impairment or when circumstances indicate the carrying value of these assets may not be recoverable. DEFERRED LEASE CREDITS: We receive developer reimbursements as incentives to construct stores in certain developments. We capitalize the 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. FOREIGN CURRENCY TRANSLATION: The assets and liabilities of our foreign subsidiary have been translated to U.S. dollars using the exchange rates effective on the balance sheet date, while income and expense accounts are translated at the average rates in effect during the year. Resulting translation adjustments are recorded as other comprehensive earnings. INCOME TAXES: We use the asset and liability method of accounting for income taxes. Using this method, deferred tax assets and liabilities are recorded based on differences between financial reporting and tax basis of assets and liabilities. The deferred tax assets and liabilities are calculated using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. LOYALTY PROGRAMS: We have customer loyalty programs in which customers receive points for qualifying purchases. Upon the accumulation of a certain number of points, customers receive a merchandise certificate. We accrue the cost of anticipated merchandise certificate redemptions upon issuance of the certificate to the customer. The related expense is recorded in selling, general and administrative expense. VENDOR ALLOWANCES: We receive allowances from merchandise vendors for purchase price adjustments, cooperative advertising programs and cosmetic selling expenses. Purchase price adjustments are recorded as a reduction of cost of sales at the point they have been earned and the related merchandise has been sold. Allowances for cooperative advertising programs and cosmetic selling expenses are recorded as a reduction of selling, general and administrative expense when the advertising or selling expense is incurred. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash equivalents and notes payable approximate fair value. The fair value of long-term debt, including current maturities, using quoted market prices of the same or similar issues, was approximately $1,443,000 and $1,378,000 at January 31, 2003 and 2002. DERIVATIVES POLICY: We limit our use of derivative financial instruments to the management of foreign currency and interest rate risks. The effect of these activities is not material to our financial condition or results of operations. We have no material off-balance sheet credit risk, and the fair value of derivative financial instruments at January 31, 2003 and 2002 was not material. RECENT ACCOUNTING PRONOUNCEMENTS: In February 2002, we adopted the following three pronouncements: 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 SFAS No. 141 did not have a material impact on our financial statements. NORDSTROM INC. AND SUBSIDIARIES 27 notes to consolidated financial statements 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. Adoption of SFAS No. 142 resulted in an impairment charge and a reduction in amortization expense, which is detailed in Note 2. 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 our financial statements. We adopted SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" in the second quarter of 2002. SFAS No. 145 updates, clarifies and simplifies existing accounting pronouncements related to extinguishments of debt, provisions of the Motor Carrier Act of 1980 and lease transactions. The adoption of this statement did not have a material impact on our financial statements. SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" was also adopted by us in the second quarter of 2002. SFAS No. 146 nullifies EITF 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" by requiring that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred versus when an entity is committed to an exit plan. The adoption of this statement did not have a material impact on our financial statements. We adopted SFAS No. 148 "Accounting for Stock-Based Compensation" in the fourth quarter of 2002. SFAS No. 148 amends SFAS No. 123 of the same name and provides alternative transition methods for a voluntary change to fair value based accounting for employee stock compensation. SFAS No. 148 also requires more prominent and frequent disclosures about the effects of stock-based compensation. Adoption of SFAS No. 148 did not have a material impact on our financial statements. In November 2002, the Emerging Issues Task Force reached a consensus on certain issues discussed in EITF 02-16, "Accounting by a Reseller for Cash Consideration Received from a Vendor." This pronouncement addresses the timing and classification of cash payments received by a reseller from a vendor. Adoption of EITF 02-16 did not have a material impact on our financial statements. In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others." FIN 45 elaborates on the disclosures made by a guarantor and also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Adoption of FIN 45 in the fourth quarter of 2002 did not have a material impact on our financial statements. NOTE 2: CUMULATIVE EFFECT OF ACCOUNTING CHANGE Effective February 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets having indefinite lives will no longer be amortized but will be subject to annual impairment tests. In connection with the adoption of SFAS No. 142, we reviewed the classification and useful lives of our intangible assets. Our intangible assets were determined to be either goodwill or indefinite lived tradename. As required by SFAS No. 142, we defined our reporting unit as the Faconnable Business Unit, one level below our reportable Retail Stores segment. We then tested our intangible assets for impairment by comparing the fair value of the reporting unit with its carrying value. Fair value was determined using a discounted cash flow methodology. SFAS No. 142 requires us to perform these impairment tests at adoption and at least annually thereafter. We expect to perform our impairment test annually during our first quarter or when circumstances indicate we should do so. Our initial impairment test resulted in an impairment charge to goodwill of $21,900 in the first quarter of 2002, while the tradename was determined not to be impaired. The goodwill impairment resulted from a reduction in management's estimate of future growth for this reporting unit. The impairment charge is reflected as a cumulative effect of accounting change. 28 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements The changes in the carrying amount of our intangible assets for the year ended January 31, 2003, are as follows:
Catalog/ Retail Stores Internet Segment Segment Goodwill Tradename Goodwill Total --------- --------- --------- --------- FEBRUARY 1, 2002 $ 38,198 $ 100,133 $ -- $ 138,331 Goodwill impairment (21,900) -- -- (21,900) Goodwill acquired through purchase of minority interest (see Note 21) -- -- 24,057 24,057 --------- --------- --------- --------- JANUARY 31, 2003 $ 16,298 $ 100,133 $ 24,057 $ 140,488 --------- --------- --------- ---------
The following table shows the actual results of operations as well as pro-forma results adjusted to exclude intangible amortization and the cumulative effect of accounting change.
YEAR ENDED JANUARY 31, 2003 2002 2001 -------- -------- -------- Reported net earnings $ 90,224 $124,688 $101,918 Intangible amortization, net of tax -- 2,824 763 Cumulative effect of accounting change, net of tax 13,359 -- -- -------- -------- -------- ADJUSTED NET EARNINGS $103,583 $127,512 $102,681 -------- -------- --------
Basic and diluted earnings per share:
YEAR ENDED JANUARY 31, 2003 2002 2001 ---------------- ------ ------ Earnings per share: BASIC DILUTED BASIC AND DILUTED ----- ------- ----------------- Reported net earnings $0.67 $0.66 $0.93 $0.78 Intangible amortization, net of tax -- -- 0.02 -- Cumulative effect of accounting change, net of tax 0.10 0.10 -- -- ----- ----- ----- ----- ADJUSTED NET EARNINGS $0.77 $0.76 $0.95 $0.78 ----- ----- ----- -----
Before adoption of SFAS No. 142, we amortized our intangible assets over their estimated useful lives on a straight-line basis ranging from 10 to 35 years. Accumulated amortization of intangible assets was $5,881 as of January 31, 2003 and 2002. NOTE 3: ACQUISITION In 2000, we acquired Faconnable, S.A.S., of Nice, France, a designer, wholesaler and retailer of high quality men's and women's apparel and accessories. We paid $87,685 in cash and issued 5,074,000 shares of our common stock for a total consideration of $168,868. The purchase provides for a contingent payment to a former owner that may be paid after five years from the acquisition date. If the former owner continues to have involvement in the business and performance targets are met, the contingent payment could approximate $12,000. The contingent payment will be expensed when it becomes probable that the targets will be met. NOTE 4: EMPLOYEE BENEFITS We provide a profit sharing plan and 401(k) plan for our employees. The profit sharing plan is non-contributory and is fully funded by us. The Board of Directors establishes our contribution to the profit sharing plan each year. The 401(k) plan is funded by voluntary employee contributions. In addition, we provide matching contributions up to a stipulated percentage of employee contributions. Our contributions to the profit sharing plan and matching contributions to the 401(k) plan totaled $35,162, $28,525 and $29,113 in 2002, 2001 and 2000. NORDSTROM INC. AND SUBSIDIARIES 29 notes to consolidated financial statements NOTE 5: POSTRETIREMENT BENEFITS We have an unfunded Supplemental Executive Retirement Plan ("SERP"), which provides retirement benefits to certain officers and select employees. Effective February 2003, the SERP was amended to change the target benefit, eliminate the offset of our contributions to the 401k and profit sharing plans and make additional participants eligible. Certain grandfathered participants will remain under the previous plan provisions. The following provides a reconciliation of benefit obligations and funded status of the SERP:
JANUARY 31, 2003 2002 -------- -------- Change in benefit obligation: Benefit obligation at beginning of year $ 34,411 $ 23,543 Service cost 1,447 1,092 Interest cost 3,537 2,668 Amortization of adjustments 2,941 1,821 Change in additional minimum liability 7,760 7,308 Distributions (2,523) (2,021) -------- -------- Benefit obligations at end of year $ 47,573 $ 34,411 -------- -------- Funded status of plan: Under funded status $(50,125) $(39,547) Unrecognized transitional obligation -- 324 Unrecognized prior service cost 3,805 6,396 Unrecognized loss 15,074 6,983 -------- -------- Accrued pension cost $(31,246) $(25,844) -------- -------- Balance sheet amounts: Additional minimum liability $(16,327) $ (8,567) Intangible asset 3,805 6,720 -------- --------
The components of SERP expense and a summary of significant assumptions are as follows:
YEAR ENDED JANUARY 31, 2003 2002 2001 ------ ------ ------ Service cost $1,447 $1,092 $ 630 Interest cost 3,537 2,668 2,044 Amortization of adjustments 2,941 1,821 688 ------ ------ ------ Total SERP expense $7,925 $5,581 $3,362 ------ ------ ------ Assumption percentages: Discount rate 7.00% 7.25% 7.50% Rate of compensation increase 4.00% 5.00% 5.00% ------ ------ ------
NOTE 6: INTEREST EXPENSE, NET The components of interest expense, net are as follows:
YEAR ENDED JANUARY 31, 2003 2002 2001 -------- -------- -------- Short-term debt $ 677 $ 3,741 $ 12,682 Long-term debt 89,850 83,225 58,988 -------- -------- -------- Total interest expense 90,527 86,966 71,670 -------- -------- -------- Less: Interest income (4,254) (1,545) (1,330) Capitalized interest (4,352) (10,383) (7,642) -------- -------- -------- INTEREST EXPENSE, NET $ 81,921 $ 75,038 $ 62,698 -------- -------- --------
NOTE 7: INVESTMENT In September 1998, we made an investment in Streamline.com, Inc., an Internet grocery and consumer goods delivery company. Streamline ceased its operations effective November 2000, after failing to obtain additional capital to fund its operations. During 2000, we wrote-off our entire investment in Streamline, for a total pre-tax loss on the investment of $32,857. 30 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements NOTE 8: INCOME TAXES Income tax expense consists of the following:
YEAR ENDED JANUARY 31, 2003 2002 2001 -------- -------- -------- Current income taxes: Federal $ 76,901 $ 58,122 $ 79,778 State and local 10,633 6,142 11,591 -------- -------- -------- Total current income taxes 87,534 64,264 91,369 Deferred income taxes: Current (4,225) (7,217) (11,215) Non-current 8,732 22,753 (15,054) -------- -------- -------- Total deferred income taxes 4,507 15,536 (26,269) -------- -------- -------- Total before cumulative effect of accounting change 92,041 79,800 65,100 -------- -------- -------- Deferred income taxes on cumulative effect of accounting change (8,541) -- -- -------- -------- -------- TOTAL TAX EXPENSE $ 83,500 $ 79,800 $ 65,100 -------- -------- --------
A reconciliation of the statutory Federal income tax rate to the effective tax rate on earnings before the cumulative effect of accounting change is as follows:
YEAR ENDED JANUARY 31, 2003 2002 2001 ----- ----- ----- Statutory rate 35.00% 35.00% 35.00% State and local income taxes, net of Federal income taxes 3.78 3.93 3.93 Change in valuation allowance 8.45 -- -- Other, net (0.18) .09 .05 ----- ----- ----- EFFECTIVE TAX RATE 47.05% 39.02% 38.98% ----- ----- -----
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, 2003 2002 --------- --------- Accrued expenses $ 35,480 $ 33,896 Compensation and benefits accruals 52,969 48,584 Merchandise inventories 25,831 24,643 Capital loss carryforwards 7,406 13,399 Loss on minority interest purchase 16,532 -- Other 28,835 21,123 --------- --------- Total deferred tax assets 167,053 141,645 Land, buildings and equipment basis and depreciation differences (50,401) (49,978) Employee benefits (9,657) (9,771) Other (3,891) (3,195) --------- --------- Total deferred tax liabilities (63,949) (62,944) --------- --------- Valuation allowance (16,532) -- --------- --------- NET DEFERRED TAX ASSETS $ 86,572 $ 78,701 --------- --------- In January 2003 we sold our Denver Credit facility, generating a capital gain for tax purposes of $15,367 which was used to offset a portion of our existing capital loss carryforwards. Capital loss carryforwards of $18,990 remain available to offset capital gain income in the next three years. No valuation allowance has been provided because we believe it is probable that the full benefit of these carryforwards will be realized. Our purchase of the outstanding shares of Nordstrom.com, Inc. series C preferred stock resulted in an expense of $40,389 which we believe will not be deductible for tax purposes. As a result, we have established a valuation allowance of $16,532 to offset the deferred tax asset related to this purchase. NORDSTROM INC. AND SUBSIDIARIES 31 notes to consolidated financial statements NOTE 9: EARNINGS PER SHARE Basic earnings per share is computed using the weighted average number of common shares outstanding during the year. Diluted earnings per share uses the weighted average number of common shares outstanding during the year plus dilutive common stock equivalents, primarily stock options and performance share units. Options with an exercise price greater than the average market price were not included in diluted earnings per share. These options totaled 7,259,273, 8,563,996 and 7,409,387 shares in 2002, 2001 and 2000.
YEAR ENDED JANUARY 31, 2003 2002 2001 ------------ ------------ ------------ Net earnings $ 90,224 $ 124,688 $ 101,918 ------------ ------------ ------------ Basic shares 135,106,772 134,104,582 131,012,412 ------------ ------------ ------------ Basic earnings per share $ 0.67 $ 0.93 $ 0.78 ------------ ------------ ------------ Dilutive effect of stock options and performance share units 617,468 234,587 100,673 ------------ ------------ ------------ Diluted shares 135,724,240 134,339,169 131,113,085 ------------ ------------ ------------ Diluted earnings per share $ 0.66 $ 0.93 $ 0.78 ------------ ------------ ------------
NOTE 10: ACCOUNTS RECEIVABLE The components of accounts receivable are as follows:
JANUARY 31, 2003 2002 --------- --------- Private label trade receivables: Unrestricted $ 15,599 $ 16,242 Restricted 613,647 628,271 Allowance for doubtful accounts (22,385) (23,022) --------- --------- Private label trade receivables, net 606,861 621,491 VISA securitization master trust certificates 123,220 55,659 Other 29,181 21,325 --------- --------- ACCOUNTS RECEIVABLE, NET $ 759,262 $ 698,475 --------- ---------
The restricted private label receivables back the $300 million of Class A notes and the $200 million variable funding note issued by us in November 2001. Other accounts receivable consist primarily of vendor receivables and cosmetic rebates receivable. Bad debt expense totaled $29,080, $34,750 and $20,368 in 2002, 2001 and 2000. NOTE 11: OFF-BALANCE SHEET FINANCING In May 2002, we replaced our $200 million variable funding note backed by VISA credit card receivables ("VISA VFN") with 5-year term notes also backed by the VISA credit card receivables. Class A and B notes with a combined face value of $200 million were issued to third party investors. These proceeds were used to retire the $200 million outstanding on the VISA VFN. We hold securities that represent our retained interests in a master note trust. The carrying amounts of the retained interests approximate fair value and are included in accounts receivable. In accordance with SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," our consolidated balance sheets do not include this debt and the related receivables. These related VISA credit card receivables are sold to the trust on an ongoing basis. We recognize gains or losses 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 values. The fair values of the assets are calculated as the present value of their expected future cash flows. The following table summarizes the estimated fair values of our retained interests as well as the assumptions used:
JANUARY 31, 2003 ----------- Fair value of retained interests: $ 124,791 Assumptions: Weighted average remaining life (in months) 2.8 Average credit losses 6.38% Average gross yield 17.81% Average interest expense on issued securities 1.70% Average payment rate 20.94% Discount rates of retained interests: Class C Certificate 16.79% Seller Retained Interest 10.51% Interest Only Strip 19.92% -----------
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. 32 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements The following table illustrates the sensitivity in the fair market value estimates of the retained interests given independent changes in assumptions as of January 31, 2003:
+10% +20% -10% -20% ------- ------- ------- ------- Gross Yield $ 1,207 $ 2,414 $(1,207) $(2,414) Interest Expense on Issued Classes (76) (152) 76 152 Card Holders Payment Rate (99) (296) 207 384 Charge Offs (531) (1,059) 533 1,069 Discount Rate (337) (673) 339 680 ------- ------- ------- -------
The following table summarizes certain income, expenses and cash flows received from and paid to the master note trust.
YEAR ENDED JANUARY 31, 2003 2002 2001 -------- -------- -------- Principal collections reinvested in new receivables $824,715 $669,582 $485,422 Gains on sales of receivables 8,290 3,147 5,356 Income earned on retained interests 10,786 6,711 9,035 Cash flows from retained assets: Retained interests 28,100 11,916 10,050 Servicing fees 5,407 8,440 8,121 -------- -------- --------
Interest income earned on the retained interests is included in service charge income and other on the consolidated statements of earnings. The total principal balance of the VISA receivables was $323,101 and $258,075 as of January 31, 2003 and 2002. Gross credit losses were $18,580 and $17,050 for the years ended January 31, 2003 and 2002, and receivables past due for more than 30 days were $8,519 and $8,170 at January 31, 2003 and 2002. The following table illustrates default projections using net credit losses as a percentage of average outstanding receivables in comparison to actual performance:
YEAR ENDED JANUARY 31, 2004 2003 2002 ---- ---- ---- Original projection 6.16% 7.66% 5.99% Actual N/A 6.59% 6.62% ---- ---- ----
Under the terms of the trust agreement, we may be required to fund certain amounts upon the occurrence of specific events. The securitization agreements set a maximum percentage of receivables that can be associated with employee accounts. As of January 31, 2003, this maximum was exceeded by $1,500. It is possible that we may be required to repurchase these receivables. Aside from this instance, we do not believe any additional funding will be required. Our continued 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 "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," holding subordinated, non-subordinated and residual interests in the trust, and servicing the portfolio. NOTE 12: RECEIVABLE-BACKED SECURITIES In 2001, we issued $300 million of receivable-backed securities supported by substantially all of our private label credit card receivables. This transaction is accounted for as a secured financing. Total principal receivables of the securitized portfolio at January 31, 2003 and 2002 were approximately $609,784 and $625,516, and receivables more than 30 days past due were approximately $16,973 and $19,301. Net charged off receivables for the years ending January 31, 2003 and 2002 were $29,555 and $28,134. The private label receivables also serve as collateral for a variable funding facility with a limit of $200,000. Interest on the facility varies based on the actual cost of commercial paper plus specified fees. Nothing was outstanding on this facility at January 31, 2003 or 2002. NORDSTROM INC. AND SUBSIDIARIES 33 notes to consolidated financial statements Our 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. NOTE 13: LAND, BUILDINGS AND EQUIPMENT Land, buildings and equipment consist of the following:
JANUARY 31, 2003 2002 ----------- ----------- Land and land improvements $ 60,692 $ 59,141 Buildings 829,885 683,926 Leasehold improvements 943,555 910,291 Capitalized software 150,655 46,603 Store fixtures and equipment 1,222,842 1,142,169 Construction in progress 436,891 582,361 ----------- ----------- 3,644,520 3,424,491 Less accumulated depreciation and amortization (1,882,976) (1,663,409) ----------- ----------- LAND, BUILDINGS AND EQUIPMENT, NET $ 1,761,544 $ 1,761,082 ----------- -----------
Capitalized software includes external direct costs, internal direct labor and employee benefits, as well as interest associated with the development of the computer software. Depreciation begins in the period in which the software is ready for its intended use. Construction in progress includes $61,384 and $127,847 of software in progress at January 31, 2003 and 2002. The total cost of capitalized leased buildings was $13,884 at January 31, 2003 and 2002, with related accumulated amortization of $9,261 and $8,854. The amortization of capitalized leased buildings was recorded in depreciation expense. In January 2003, we sold our Denver Credit facility for $20,000 and subsequently leased it back. A gain of $103 was recorded at the time of the sale, while the remaining gain of $15,919 will be recognized as a reduction to rent expense evenly over the 15 year life of the lease. At January 31, 2003, we have contractual commitments of approximately $227,340 primarily for the construction of new stores or remodeling of existing stores. NOTE 14: NOTES PAYABLE A summary of notes payable is as follows:
YEAR ENDED JANUARY 31, 2003 2002 2001 -------- -------- ---------- Average daily short- term borrowings $ 370 $ 81,647 $ 192,392 Maximum amount outstanding 15,000 177,100 360,480 Weighted average interest rate: During the year 2.0% 4.6% 6.6% At year-end -- -- 6.4% -------- -------- ----------
Short-term borrowings during the year represent amounts drawn on our variable funding note, which is described in Note 12. We have an unsecured line of credit totaling $300,000, which is available as liquidity support for our commercial paper program, and expires in November 2004. The line of credit agreement contains restrictive covenants, which include maintaining certain financial ratios. We pay a commitment fee for the line based on our debt rating. At January 31, 2003 and 2002, there were no borrowings on the line of credit. Additionally, in connection with the purchase of foreign merchandise, we have outstanding import letters of credit totaling $58,059 and standby letters of credit totaling $20,649 at January 31, 2003. 34 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements NOTE 15: LONG-TERM DEBT A summary of long-term debt is as follows:
JANUARY 31, 2003 2002 ----------- ----------- Receivable-backed PL Term, 4.82%, due 2006 $ 300,000 $ 300,000 Senior debentures, 6.95%, due 2028 300,000 300,000 Senior notes, 5.625%, due 2009 250,000 250,000 Senior notes, 8.95%, due 2005 300,000 300,000 Medium-term notes, 7.25%, due 2002 -- 76,750 Notes payable, 6.7%, due 2005 100,000 100,000 Other 97,371 102,521 ----------- ----------- Total long-term debt 1,347,371 1,429,271 Less current portion (5,545) (78,227) ----------- ----------- TOTAL DUE BEYOND ONE YEAR $ 1,341,826 $ 1,351,044 ----------- -----------
In the third quarter of 2002, we sold the interest rate swap that converted our $300,000, 8.95% fixed-rate debt to variable rate. We received cash of $4,931, which will be recognized as interest income evenly over the remaining life of the related debt. We entered into a variable interest rate swap agreement effective in the fourth quarter of 2002. The swap had a $250 million notional amount and a six-year term. Under the agreement, we received a fixed rate of 5.63% and paid a variable rate based on LIBOR plus a margin of 1.31% set at six-month intervals (3.25% at January 31, 2003). The swap agreement qualified as a fair value hedge and was recorded at fair value in other assets at January 31, 2003. Subsequent to January 31, 2003, we sold the interest rate swap and received cash of $2,341, which will be recognized as interest income evenly over the remaining life of the related debt. We own a 49% interest in a limited partnership which constructed a new corporate office building in which we are the primary occupant. During the first quarter of 2002, the limited partnership refinanced its construction loan obligation with an $85,000 mortgage secured by the property, of which $79,319 was included on our balance sheet at January 31, 2003. This financial obligation will be amortized as we make rental payments to the limited partnership over the 18 year life of the permanent financing. The obligation has a fixed interest rate of 7.68% and a term of 18 years. Required principal payments on long-term debt, excluding capital lease obligations, are as follows:
YEAR ENDED JANUARY 31, 2004 $ 5,226 2005 4,683 2006 403,171 2007 303,538 2008 3,584 THEREAFTER 618,232 --------
NORDSTROM INC. AND SUBSIDIARIES 35 notes to consolidated financial statements NOTE 16: LEASES We lease land, buildings and equipment under noncancelable lease agreements with expiration dates ranging from 2003 to 2080. Certain leases include renewal provisions at our option. Most of the leases provide for additional rent payments based upon specific percentages of sales and require us to pay for certain common area maintenance and other costs.
YEAR ENDED JANUARY 31, 2003 2002 2001 ------- ------- ------- Minimum rent: Store locations $23,511 $26,951 $16,907 Offices, warehouses and equipment 25,851 20,144 21,070 Percentage rent: Store locations 7,776 8,047 9,241 ------- ------- ------- TOTAL RENT EXPENSE $57,138 $55,142 $47,218 ------- ------- -------
Future minimum lease payments as of January 31, 2003 are as follows:
CAPITAL OPERATING YEAR ENDED JANUARY 31, LEASES LEASES -------- --------- 2004 $ 1,120 $ 73,158 2005 1,120 73,053 2006 1,120 68,271 2007 1,120 63,796 2008 1,120 60,088 Thereafter 10,350 442,015 -------- --------- Total minimum lease payments 15,950 $ 780,381 -------- --------- Less amount representing interest 7,013 -------- Present value of net minimum lease payments $ 8,937 --------
NOTE 17: STOCK-BASED COMPENSATION STOCK OPTION PLAN: We have a stock option plan (the "Nordstrom, Inc. Plan") under which stock options, performance share units and restricted stock may be granted to key employees. Options vest over periods ranging from four to eight years, and expire ten years after the date of grant. PERFORMANCE SHARE UNITS: In 2002, 2001 and 2000 we granted 190,396, 273,864 and 355,072 performance share units which will vest over three years if certain financial goals are met. Employees may elect to receive common stock or cash upon vesting of these performance shares. At January 31, 2003 and 2002, $4,441 and $4,713 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, 2003 and 2002, 415,640 and 518,189 units were outstanding. RESTRICTED STOCK: We 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, we accelerated the vesting of 144,000 shares of restricted stock resulting in compensation expense of $3,039, and cancelled 14,175 shares of restricted stock. In January 2002, we accelerated 9,536 unvested shares of restricted stock, resulting in compensation expense of $193. The remaining shares vested normally. As of January 31, 2003 and 2002, there were no shares of unvested restricted stock. At January 31, 2003, approximately 6,391,703 shares are reserved for future stock option grants pursuant to the Plan. We apply APB No. 25, "Accounting for Stock Issued to Employees," in measuring compensation costs under our stock-based compensation programs. Stock options are issued at the fair market value of the stock at the date of grant. Accordingly, we recognized no compensation cost for stock options issued under the plan. For performance share units, we record compensation expense over the performance period at the fair value of the stock on the date when it is probable that the employees will earn the units. 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 2002, 2001 and 2000 was $1,130, $3,414 and $6,480. 36 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements Stock option activity for the Nordstrom, Inc. Plan was as follows:
YEAR ENDED JANUARY 31, 2003 2002 2001 ------------------------- ---------------------- ---------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- --------- ---------- -------- ---------- --------- Outstanding, beginning of year 10,763,893 $24 8,873,342 $27 8,135,301 $28 Granted 2,423,966 25 3,288,826 19 2,470,169 21 Exercised (350,004) 19 (186,165) 18 (181,910) 20 Cancelled (951,510) 26 (1,212,110) 25 (1,550,218) 28 ---------- ----- ---------- ----- ---------- ----- Outstanding, end of year 11,886,345 $25 10,763,893 $24 8,873,342 $27 ---------- ----- ---------- ----- ---------- ----- Options exercisable at end of year 5,724,629 $26 4,533,281 $27 3,833,379 $26 ---------- ----- ---------- ----- ---------- -----
The following table summarizes information about stock options outstanding for the Nordstrom, Inc. Plan as of January 31, 2003:
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 5,499,006 7 $ 19 2,557,503 $ 20 $23 - $32 4,503,716 7 $ 26 1,716,077 $ 27 $33 - $40 1,883,623 6 $ 36 1,451,049 $ 35 --------- ---------- --- ---- --------- ---- 11,886,345 7 $ 25 5,724,629 $ 26 ---------- --- ---- --------- ----
Stock option activity for the Nordstrom.com 1999 and 2000 Plans was as follows:
YEAR ENDED JANUARY 31, 2003 2002 2001 ------------------------- ---------------------- ---------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- --------- ---------- -------- ---------- --------- Outstanding, beginning of year 3,524,808 $1.73 4,174,950 $1.72 1,373,950 $1.67 Granted 112,500 1.92 41,500 1.92 3,794,931 1.73 Exercised -- -- -- -- (135,000) 1.67 Cancelled (3,637,308) 1.73 (691,642) 1.68 (858,931) 1.68 ---------- ----- ---------- ----- ---------- ----- Outstanding, end of year -- $-- 3,524,808 $1.73 4,174,950 $1.72 ---------- ----- ---------- ----- ---------- ----- Options exercisable at end of year -- $-- 1,241,104 $1.68 703,750 $1.67 ---------- ----- ---------- ----- ---------- -----
NORDSTROM INC. AND SUBSIDIARIES 37 notes to consolidated financial statements NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN In May 2002, our shareholders approved the 2002 Nonemployee Director Stock Incentive Plan under which we reserved 450,000 shares of our common stock for issuance to nonemployee directors. The plan authorizes the grant of awards in the form of restricted shares, stock units, nonqualified stock options or stock appreciation rights, or any combination of these forms. As of January 31, 2003, we issued 18,981 shares of common stock for a total expense of $405 and had 431,019 remaining shares available for issuance. NORDSTROM.COM Nordstrom.com had two stock option plans, the "1999 Plan" and the "2000 Plan," as well as warrants issued to vendors in exchange for services. In the third quarter of 2002, we purchased 3,608,322 options and 470,000 warrants in connection with the purchase of the minority interest in Nordstrom.com (see Note 21) for a total cash payment of $11,802. At January 31, 2003, there are no outstanding options or warrants for Nordstrom.com. EMPLOYEE STOCK PURCHASE PLAN We offer an Employee Stock Purchase Plan ("ESPP") as a benefit to our employees. Employees participate through payroll deductions in amounts related to their base compensation. At the end of each offering period, the participants purchase shares 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, we issued 596,351, 541,677 and 165,842 shares in 2002, 2001 and 2000. As of January 31, 2003 and 2002, we had payroll deductions totaling $3,000 and $2,641 for the purchase of shares. We have 2,196,130 shares available for issuance at January 31, 2003. PACESETTER STOCK PLAN We granted 10,653, 6,687 and 100 shares of common stock to key employees under the Pacesetters stock plan in 2002, 2001 and 2000. The Pacesetter stock plan was established in 1997 to provide additional incentive to employees, officers, consultants or advisors to promote the success of the business. The related expense of $240, $130 and $2 was recorded in 2002, 2001 and 2000. As of January 31, 2003, we have 11,055 shares available for issuance. GRANTS TO EXECUTIVE OFFICERS Options and performance share units granted to our president and four other most highly compensated individuals were 8.3%, 7.9% and 3.4% as a percent of total options and performance share units granted in 2002, 2001 and 2000. SFAS NO. 123 If we 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, 2003 2002 2001 -------- --------- --------- Net earnings, as reported $ 90,224 $ 124,688 $ 101,918 Incremental stock-based compensation expense under fair value, net of tax (19,674) (17,252) (13,458) -------- --------- --------- Pro forma net earnings $ 70,550 $ 107,436 $ 88,460 -------- --------- --------- Earnings per share: Basic--as reported $ 0.67 $ 0.93 $ 0.78 Basic--pro forma $ 0.52 $ 0.80 $ 0.68 Diluted--as reported $ 0.66 $ 0.93 $ 0.78 Diluted--pro forma $ 0.52 $ 0.80 $ 0.67 -------- --------- ---------
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, 2003 2002 2001 ------ ------ ------ Stock Options: Risk-free interest rate 4.3% 4.8% 6.4% Volatility 69.0% 68.0% 65.0% Dividend yield 1.5% 1.3% 1.0% Expected life in years 5.0 5.0 5.0 ------ ------ ------ Weighted-average fair value at grant date $ 14 $ 10 $ 12 ------ ------ ------ ESPP: Risk-free interest rate 1.9% 4.3% 6.0% Volatility 69.0% 68.0% 65.0% Dividend yield 1.5% 1.3% 1.0% Expected life in years 0.5 0.5 0.5 ------ ------ ------ Weighted-average fair value at grant date $ 7 $ 5 $ 6 ------ ------ ------
38 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements For Nordstrom.com, we used the following weighted-average assumptions:
YEAR ENDED JANUARY 31, 2003 2002 2001 ----- -------- --------- Risk-free interest rate -- 4.5% 6.2% Volatility -- 127.0% 121.0% Dividend yield -- 0.0% 0.0% Expected life in years -- 4.0 4.0 ----- -------- --------- Weighted-average fair value at grant date -- $ 1.56 $ 1.39 ----- -------- ---------
NOTE 18: SUPPLEMENTARY CASH FLOW INFORMATION We capitalize certain property, plant and equipment during the construction period of commercial buildings which is subsequently derecognized and reclassed to prepaid rent or deferred lease credits. We also had noncash activity related to the construction of our corporate office building. The noncash activity is as follows:
YEAR ENDED JANUARY 31, 2003 2002 2001 -------- -------- ---- Noncash activity: Reclassification of new stores $ 61,792 $ 75,555 -- Corporate office construction (3,951) 36,120 -- -------- -------- ----
Supplementary cash flow information includes the following:
YEAR ENDED JANUARY 31, 2003 2002 2001 ------- ------- ------- Cash paid during the year for: Interest (net of capitalized interest) $84,898 $77,025 $58,190 Income taxes 48,386 80,689 88,911 ------- ------- -------
NOTE 19: SEGMENT REPORTING We have four segments: Retail Stores, Credit Operations, Catalog/Internet, and Corporate and Other. The Retail Stores segment derives its revenues from sales of high-quality apparel, shoes and accessories. It includes our full-line, Nordstrom Rack and Faconnable stores as well as our product development group, which coordinates the design and production of private label merchandise sold in our retail stores. The Credit Operations segment revenues consist primarily of finance charges earned through issuance of the Nordstrom private label and VISA credit cards. The Catalog/Internet segment generates revenues from direct mail catalogs and the Nordstrom.com website. We use the same measurements to compute net earnings for reportable segments as we do for the consolidated company. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in Note 1. NORDSTROM INC. AND SUBSIDIARIES 39 notes to consolidated financial statements The following tables set forth the information for our reportable segments and a reconciliation to the consolidated totals:
Retail Credit Catalog/ Corporate YEAR ENDED JANUARY 31, 2003 Stores Operations Internet and Other Eliminations TOTAL ---------- ---------- ---------- ---------- ------------ ---------- Revenues from external customers (b) $5,704,795 -- $ 270,281 -- -- $5,975,076 Service charge income -- $ 133,587 -- -- -- 133,587 Intersegment revenues 29,737 32,783 -- -- $ (62,520) -- Interest expense, net 191 23,582 972 $ 57,176 -- 81,921 Depreciation and amortization 201,861 3,212 4,977 23,881 -- 233,931 Earnings before taxes and cumulative effect of accounting change 442,115 21,194 (13,565) (254,120) -- 195,624 Net earnings (loss) 256,339 12,929 (8,275) (170,769) -- 90,224 Assets (a)(b) 2,677,790 750,510 97,853 570,223 -- 4,096,376 Capital expenditures 230,864 2,058 4,507 90,737 -- 328,166 ---------- ---------- ---------- ---------- ---------- ---------- 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 -- $ 131,267 -- -- -- 131,267 Intersegment revenues 20,192 25,514 -- -- $ (45,706) -- Interest expense, net 994 25,013 77 $ 48,954 -- 75,038 Depreciation and amortization 182,960 2,253 5,498 22,378 -- 213,089 Amortization of intangible assets 4,630 -- -- -- -- 4,630 Earnings before taxes 402,299 10,652 (8,139) (200,324) -- 204,488 Net earnings (loss) 245,305 6,495 (4,963) (122,149) -- 124,688 Assets (a)(b) 2,570,375 699,454 69,457 711,893 -- 4,051,179 Capital expenditures 379,819 2,054 2,554 11,621 -- 396,048 ---------- ---------- ---------- ---------- ---------- ---------- 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 -- $ 135,337 -- -- -- 135,337 Intersegment revenues 30,294 12,440 -- -- $ (42,734) -- 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 Earnings before taxes 440,212 18,851 (29,367) (262,678) -- 167,018 Net earnings (loss) 268,627 11,503 (17,920) (160,292) -- 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 295,834 3,095 5,187 26,231 -- 330,347 ---------- ---------- ---------- ---------- ---------- ----------
(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 $75,645 and $68,487 for the years ended January 31, 2003 and 2002, and $12,318 for the period from October 24, 2000, the date of acquisition, to January 31, 2001, and assets of $219,861, $198,689 and $206,601 as of January 31, 2003, 2002 and 2001. 40 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements NOTE 20: RESTRUCTURINGS, IMPAIRMENTS AND OTHER ONE-TIME CHARGES The following table provides a summary of restructuring, impairments and other charges:
YEAR ENDED JANUARY 31, 2003 2002 2001 ------- ------- ------- Restructuring - employee severance $ -- $ 1,791 $ -- Management severance -- -- 13,000 Asset impairment 15,570 -- 10,227 ------- ------- ------- TOTAL CHARGES $15,570 $ 1,791 $23,227 ------- ------- -------
In July 2002, we recognized a charge of $15,570 to write-down an IT investment in a supply chain tool intended to support our manufacturing division. Due to changes in business strategy, we determined that this asset was impaired. This charge to the Retail Stores segment reduced this asset to its estimated market value. The charge was recorded in selling, general and administrative expense. During the year ended January 31, 2002, we streamlined our operations through a reduction in workforce of approximately 2,600 employees. As a result, we 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, we 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, we 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. We also accrued $13,000 for certain severance and other costs related to a change in management. During the year ended January 31, 2000, we recorded a $10,000 charge in selling, general and administrative expenses primarily associated with the restructuring of our 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, we recorded $2,056 related to settlement costs for two lawsuits. The restructuring included the termination of 50 employees in the information technology department. At January 31, 2000, $1,452 of the charge remained unpaid. The following table presents the activity and balances of the reserves established in connection with the restructuring charges:
YEAR ENDED JANUARY 31, 2003 2002 2001 ---- ------- ------- Beginning balance $-- $ 178 $ 1,452 Additions -- 1,791 -- Payments -- (1,890) (1,220) Adjustments -- (79) (54) ---- ------- ------- ENDING BALANCE $-- $ -- $ 178 ---- ------- -------
NOTE 21: NORDSTROM.COM In May 2002, we paid $70,000 for the outstanding shares of Nordstrom.com, Inc. series C preferred stock in fulfillment of our put agreement with the minority interest holders of Nordstrom.com LLC. The excess of the purchase price over the fair market value of the preferred stock and professional fees resulted in a one-time charge of $42,736. No tax benefit was recognized, as we do not believe it is probable that this benefit will be realized. Purchase of the minority interest of Nordstrom.com also resulted in additional goodwill of $24,057. In July 2002, we purchased 3,608,322 Nordstrom.com options and 470,000 warrants for $11,802. We recognized $10,432 of expense related to the purchase of these options and warrants. The following table presents the charges associated with the minority interest purchase and reintegration costs.
YEAR ENDED JANUARY 31, 2003 ------- Excess of the purchase price over the fair market value of the preferred stock $40,389 Nordstrom.com option/warrant buyback expense 10,432 Professional fees incurred 2,347 ------- TOTAL $53,168 -------
NORDSTROM INC. AND SUBSIDIARIES 41 notes to consolidated financial statements NOTE 22: VULNERABILITY DUE TO CERTAIN CONCENTRATIONS Approximately 30% of our retail square footage is located in the state of California. At January 31, 2003, the net book value of property located in California was approximately $263,000. We carry earthquake insurance in all states with a $50,000 deductible and a $50,000 payout limit per occurrence. At January 31, 2003 and 2002, approximately 38% and 40% of our receivables were obligations of customers residing in California. Concentration of the remaining receivables is considered to be limited due to their geographical dispersion. NOTE 23: CONTINGENT LIABILITIES We have been named in various lawsuits and intend to vigorously defend ourself. While we cannot predict the outcome of these lawsuits, we believe these matters will not have a material adverse effect on our financial position, results of operations or cash flows. COSMETICS. Nordstrom 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 us, have answered the amended complaint denying the allegations. The defendants have produced documents and responded to plaintiffs' other discovery requests, including providing witnesses for depositions. Plaintiffs have not yet moved for class certification. Pursuant to an order of the court, plaintiffs and defendants have participated in mediation sessions. The California state court has set a status conference for June 2003. WASHINGTON PUBLIC TRUST ADVOCATES. In early 2002, we were 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 us seeks to recover from us 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 us, to the people of the City of Spokane regarding lack of disclosures concerning the developer and the Project. By order dated August 9, 2002, the court granted our motion to dismiss us from that lawsuit. Plaintiff attempted to obtain direct review by the Washington Supreme Court which declined to hear the case and referred it to the Washington Court of Appeals. The Washington Court of Appeals has scheduled a hearing on the appeal for April 25, 2003. OTHER. We are subject to routine litigation incidental to our business. No material liability is expected. 42 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements NOTE 24: SELECTED QUARTERLY DATA (UNAUDITED)
YEAR ENDED JANUARY 31, 2003 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL ----------- ------------- ------------- ------------- ----------- Net sales $ 1,245,761 $ 1,655,528 $ 1,323,201 $ 1,750,586 $ 5,975,076 Gross profit 421,464 551,263 449,354 581,623 2,003,704 Minority interest purchase and reintegration costs (42,047) (11,121) -- -- (53,168) (Loss)/earnings before cumulative effect of accounting change (11,213) 36,335 18,427 60,034 103,583 Cumulative effect of accounting change (net of tax) (13,359) -- -- -- (13,359) Net (loss)/earnings (24,572) 36,335 18,427 60,034 90,224 Basic (loss)/earnings per share (.18) .27 .14 .44 .67 Diluted (loss)/earnings per share (.18) .27 .14 .44 .66 Dividends per share .09 .09 .10 .10 .38 Common stock price High 26.29 26.87 21.93 22.39 26.87 Low 22.15 16.58 15.06 17.87 15.06 ----------- ------------- ------------- ------------- -----------
The per share amounts for the (loss)/earnings before cumulative effect of accounting change were $(0.08) for basic and diluted in the first quarter, and $0.77 and $0.76 for basic and diluted for the total year.
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 ------------- ------------- ------------- ------------- -------------
Nordstrom, Inc. common stock is traded on the New York Stock Exchange, NYSE Symbol JWN. NORDSTROM INC. AND SUBSIDIARIES 43 eleven-year statistical summary Dollars in thousands except square footage and per share amounts
YEAR ENDED JANUARY 31, 2003 2002 2001 2000 ------------- ---------------- ------------- ------------- FINANCIAL POSITION Customer accounts receivable, net $ 730,081 $ 677,150 $ 699,687 $ 596,020 Merchandise inventories 953,112 888,172 945,687 797,845 Current assets 2,072,618 2,057,111 1,812,982 1,564,648 Current liabilities 870,091 950,138 950,568 866,509 Working capital 1,202,527 1,106,973 862,414 698,139 Working capital ratio 2.38 2.17 1.91 1.81 Land, buildings and equipment, net 1,761,544 1,761,082 1,599,938 1,429,492 Long-term debt, including current portion 1,347,371 1,429,271 1,112,296 804,982 Debt/capital ratio .4955 .5209 .4929 .4249 Shareholders' equity 1,372,057 1,314,488 1,229,568 1,185,614 Shares outstanding 135,444,041 134,468,608 133,797,757 132,279,988 Book value per share 10.13 9.78 9.19 8.96 Total assets 4,096,376 4,051,179 3,608,503 3,062,081 OPERATIONS Net sales 5,975,076 5,634,130 5,528,537 5,149,266 Gross profit 2,003,704 1,868,271 1,879,021 1,789,506 Selling, general and administrative (1,813,968) (1,722,635) (1,747,048) (1,523,836) Operating income 189,736 145,636 131,973 265,670 Interest expense, net (81,921) (75,038) (62,698) (50,396) Write-down of investment -- -- (32,857) -- Minority interest purchase and reintegration costs (53,168) -- -- -- Service charge income and other, net 140,977 133,890 130,600 116,783 Earnings before income taxes and cumulative effect of accounting change 195,624 204,488 167,018 332,057 Income taxes (92,041) (79,800) (65,100) (129,500) Earnings before cumulative effect of accounting change 103,583 124,688 101,918 202,557 Cumulative effect of accounting change (net of tax) (13,359) -- -- -- Net earnings 90,224 124,688 101,918 202,557 Basic earnings per share .67 .93 .78 1.47 Diluted earnings per share .66 .93 .78 1.46 Dividends per share .38 .36 .35 .32 Comparable store sales percentage increase (decrease) 1.4% (2.9%) .3% (1.1%) Net earnings as a percent of net sales 1.51% 2.21% 1.84% 3.93% Return on average shareholders' equity 6.72% 9.80% 8.44% 16.29% Sales per square foot for Company-operated stores 319 321 342 350 STORES 166 156 140 104 TOTAL SQUARE FOOTAGE 18,428,000 17,048,000 16,056,000 14,487,000
44 NORDSTROM INC. AND SUBSIDIARIES
1999 1998 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ ------------ ------------ $ 567,661 $ 641,862 $ 693,123 $ 874,103 $ 655,715 $ 565,151 $ 584,379 750,269 826,045 719,919 626,303 627,930 585,602 536,739 1,668,689 1,613,492 1,549,819 1,612,776 1,397,713 1,314,914 1,219,844 794,490 979,031 795,321 833,443 693,015 631,064 516,397 874,199 634,461 754,498 779,333 704,698 683,850 703,447 2.10 1.65 1.95 1.94 2.02 2.08 2.36 1,378,006 1,252,513 1,152,454 1,103,298 984,195 845,596 824,142 868,234 420,865 380,632 439,943 373,910 438,574 481,945 .4214 .3194 .2720 .3232 .2575 .2934 .3337 1,300,545 1,458,950 1,457,084 1,408,053 1,330,437 1,153,594 1,038,649 142,114,167 152,518,104 159,269,954 162,226,288 164,488,196 164,118,256 163,949,594 9.15 9.57 9.15 8.68 8.09 7.03 6.34 3,103,689 2,890,664 2,726,495 2,732,619 2,396,783 2,177,481 2,053,170 5,049,182 4,864,604 4,457,931 4,113,717 3,895,642 3,591,228 3,415,613 1,704,237 1,568,791 1,378,472 1,310,931 1,297,018 1,121,539 1,079,608 (1,429,837) (1,338,235) (1,232,860) (1,136,069) (1,029,856) (940,708) (901,446) 274,400 230,556 145,612 174,862 267,162 180,831 178,162 (47,091) (34,250) (39,400) (39,295) (30,664) (37,646) (44,810) -- -- -- -- -- -- -- -- -- -- -- -- -- -- 110,414 110,907 135,331 134,179 98,311 88,509 86,140 337,723 307,213 241,543 269,746 334,809 231,694 219,492 (131,000) (121,000) (95,227) (106,190) (132,304) (90,804) (84,489) 206,723 186,213 146,316 163,556 202,505 140,890 135,003 -- -- -- -- -- -- -- 206,723 186,213 146,316 163,556 202,505 140,890 135,003 1.41 1.20 .90 1.00 1.23 .86 .82 1.41 1.20 .90 1.00 1.23 .86 .82 .30 .265 .25 .25 .1925 .17 .16 (2.7%) 4.0% 0.6% (0.7%) 4.4% 2.7% 1.4% 4.09% 3.83% 3.28% 3.98% 5.20% 3.92% 3.95% 14.98% 12.77% 10.21% 11.94% 16.30% 12.85% 13.73% 362 384 377 382 395 383 381 97 92 83 78 76 74 72 13,593,000 12,614,000 11,754,000 10,713,000 9,998,000 9,282,000 9,224,000
NORDSTROM INC. AND SUBSIDIARIES 45 retail store facilities open at January 31, 2003
YEAR SQUARE STORE LOCATION STORE NAME FOOTAGE OPENED SOUTHWEST GROUP ARIZONA Chandler Chandler Fashion Center 149,000 2001 Scottsdale Scottsdale Fashion Square 235,000 1998 CALIFORNIA Arcadia Santa Anita 151,000 1994 Brea Brea Mall 195,000 1989 Canoga Park Topanga 154,000 1984 Cerritos Los Cerritos Center 122,000 1981 Corte Madera The Village at Corte Madera 116,000 1985 Costa Mesa South Coast Plaza 235,000 1986 Escondido North County 156,000 1986 Glendale Glendale Galleria 147,000 1983 Los Angeles The Grove 120,000 2002 Los Angeles Westside Pavilion 150,000 1985 Mission Viejo The Shops at Mission Viejo 172,000 1999 Montclair Montclair Plaza 134,000 1986 Palo Alto Stanford Shopping Center 187,000 1984 Pleasanton Stoneridge Mall in Pleasanton 173,000 1990 Redondo Beach The Galleria at South Bay 161,000 1985 Riverside The Galleria at Tyler in Riverside 164,000 1991 Roseville Galleria at Roseville 149,000 2000 Sacramento Arden Fair 190,000 1989 San Diego Fashion Valley 220,000 1981 San Diego Horton Plaza 151,000 1985 San Diego University Towne Centre 130,000 1984 San Francisco San Francisco Shopping Centre 350,000 1988 San Francisco Stonestown Galleria 174,000 1988 San Jose Valley Fair 232,000 2001 San Mateo Hillsdale Shopping Center 149,000 1982 Santa Ana MainPlace/Santa Ana 169,000 1987 Santa Barbara Paseo Nuevo in Santa Barbara 186,000 1990 Walnut Creek Broadway Plaza in Walnut Creek 193,000 1984 NEVADA Las Vegas Fashion Show 207,000 2002 EAST COAST GROUP CONNECTICUT Farmington Westfarms 189,000 1997 FLORIDA Boca Raton Town Center at Boca Raton 193,000 2000 Coral Gables Village of Merrick Park 212,000 2002 Orlando The Florida Mall 174,000 2002 Tampa International Plaza 172,000 2001 GEORGIA Atlanta Perimeter Mall 243,000 1998 Buford Mall of Georgia 172,000 2000
YEAR SQUARE STORE LOCATION STORE NAME FOOTAGE OPENED MARYLAND Annapolis Annapolis Mall 162,000 1994 Bethesda Montgomery Mall 225,000 1991 Columbia The Mall in Columbia 173,000 1999 Towson Towson Town Center 205,000 1992 NEW JERSEY Edison Menlo Park 204,000 1991 Freehold Freehold Raceway Mall 174,000 1992 Paramus Garden State Plaza 282,000 1990 Short Hills The Mall at Short Hills 188,000 1995 NEW YORK Garden City Roosevelt Field 241,000 1997 White Plains The Westchester 219,000 1995 NORTH CAROLINA Durham The Streets at Southpoint 149,000 2002 PENNSYLVANIA King of Prussia The Plaza at King of Prussia 238,000 1996 RHODE ISLAND Providence Providence Place 206,000 1999 VIRGINA Arlington The Fashion Centre 241,000 1989 at Pentagon City Dulles Dulles Town Center 148,000 2002 McLean Tysons Corner Center 253,000 1988 Norfolk MacArthur Center 166,000 1999 CENTRAL STATES ILLINOIS Chicago Michigan Avenue 271,000 2000 Oak Brook Oakbrook Center 249,000 1991 Schaumburg Woodfield Shopping Center 215,000 1995 Skokie Old Orchard Center 209,000 1994 INDIANA Indianapolis Circle Centre 216,000 1995 KANSAS Overland Park Oak Park Mall 219,000 1998 MICHIGAN Troy Somerset Collection 258,000 1996 MINNESOTA Bloomington Mall of America 240,000 1992 MISSOURI Des Peres West County 193,000 2002 OHIO Beachwood Beachwood Place 231,000 1997 Columbus Easton Town Center 174,000 2001 TEXAS Dallas Dallas Galleria 249,000 1996 Frisco Stonebriar Centre 149,000 2000 Hurst North East Mall 149,000 2001
46 NORDSTROM INC. AND SUBSIDIARIES
YEAR SQUARE STORE LOCATION STORE NAME FOOTAGE OPENED NORTHWEST GROUP ALASKA Anchorage Anchorage 97,000 1975 COLORADO Broomfield FlatIron Crossing 172,000 2000 Littleton Park Meadows 245,000 1996 OREGON Portland Clackamas Town Center 121,000 1981 Portland Downtown Portland 174,000 1977 Portland Lloyd Center 150,000 1990 Salem Salem Center 71,000 1980 Tigard Washington Square 189,000 1994 UTAH Murray Fashion Place 110,000 1981 Orem University Mall 122,000 2002 Salt Lake City Crossroads Plaza 140,000 1980 WASHINGTON Bellevue Bellevue Square 285,000 1982 Lynnwood Alderwood Mall 127,000 1979 Seattle Downtown Seattle 383,000 1998 Seattle Northgate 122,000 1965 Spokane Spokane 137,000 1999 Tacoma Tacoma Mall 134,000 1966 Tukwila Southcenter 170,000 1968 Vancouver Vancouver 71,000 1977 OTHER Honolulu, HI Ward Centre Shoes 16,000 2002 Faconnable U.S. (5 boutiques) 46,000 Faconnable International (23 boutiques) 77,000 NORDSTROM RACK GROUP Chandler, AZ Chandler Festival Rack 37,000 2000 Phoenix, AZ Last Chance 48,000 1995 Scottsdale, AZ Scottsdale Promenade Rack 38,000 2000 Brea, CA Brea Union Plaza Rack 45,000 1999 Chino, CA Chino Spectrum Towne 38,000 2002 Center Rack Colma, CA Colma Rack 31,000 1987 Costa Mesa, CA Metro Pointe at South 50,000 1997 Coast Rack Fresno, CA Villaggio Retail Center Rack 32,000 2002 Glendale, CA Glendale Fashion Center Rack 36,000 2000 Long Beach, CA Long Beach CityPlace Rack 33,000 2002 Los Angeles, CA The Promenade at Howard 41,000 2001 Hughes Center Rack Ontario, CA Ontario Mills Mall Rack 40,000 2002
YEAR SQUARE STORE LOCATION STORE NAME FOOTAGE OPENED Oxnard, CA Esplanade Shopping Center Rack 38,000 2001 Roseville, CA Creekside Town Center Rack 36,000 2001 Sacramento, CA Howe `Bout Arden Center Rack 54,000 1999 San Diego, CA Mission Valley Rack 57,000 1997 San Francisco, CA 555 Ninth Street Retail 43,000 2001 Center Rack San Jose, CA Westgate Mall Rack 48,000 1998 San Leandro, CA San Leandro Rack 44,000 1990 Woodland Hills, CA Topanga Rack 64,000 1984 Littleton, CO Meadows Marketplace Rack 34,000 1998 Broomfield, CO Flatiron Marketplace Rack 36,000 2001 Buford, GA Mall of Georgia Crossing Rack 44,000 2000 Honolulu, HI Victoria Ward Center Rack 34,000 2000 Northbrook, IL Northbrook Rack 40,000 1996 Oak Brook, IL The Shops at Oak Brook 42,000 2000 Place Rack Schaumburg, IL Woodfield Rack 45,000 1994 Gaithersburg, MD Gaithersburg Rack 49,000 1999 Towson, MD Towson Rack 31,000 1992 Grand Rapids, MI Centerpointe Mall Rack 40,000 2001 Troy, MI Troy Marketplace Rack 40,000 2000 Bloomington, MN Mall of America Rack 41,000 1998 Las Vegas, NV Silverado Ranch Plaza Rack 33,000 2001 Westbury, NY The Mall at the Source Rack 48,000 1997 Beaverton, OR Tanasbourne Town Center Rack 53,000 1998 Clackamas, OR Clackamas Promenade Rack 28,000 1988 Portland, OR Downtown Portland Rack 19,000 1986 King of Prussia, PA The Overlook at 45,000 2002 King of Prussia Rack Philadelphia, PA Franklin Mills Mall Rack (1) 43,000 1993 Hurst, TX The Shops at North 40,000 2000 East Mall Rack Plano, TX Preston Shepard Place Rack 39,000 2000 Salt Lake City, UT Sugarhouse Rack 31,000 1991 Dulles, VA Dulles Town Crossing Rack 41,000 2001 Woodbridge, VA Potomac Mills Rack 46,000 1990 Auburn, WA SuperMall of the Great 48,000 1995 Northwest Rack Bellevue, WA Factoria Mall Rack 46,000 1997 Lynnwood, WA Golde Creek Plaza Rack 38,000 1999 Seattle, WA Downtown Seattle Rack 42,000 1987 Spokane, WA NorthTown Mall Rack 28,000 2000
(1) Store closed January 26, 2003, however it has been treated as open for the full year. NORDSTROM INC. AND SUBSIDIARIES 47 OFFICERS OF THE CORPORATION AND EXECUTIVE TEAM Jammie Baugh, 50 Executive Vice President, Human Resources, Full-line Stores Laurie M. Black, 44 Executive Vice President and President, Nordstrom Rack MEMBER OF EXECUTIVE TEAM Mark S. Brashear, 41 Executive Vice President and President, Faconnable MEMBER OF EXECUTIVE TEAM James H. Bromley, 39 Executive Vice President and President, Nordstrom Direct, Inc. MEMBER OF EXECUTIVE TEAM Dale Cameron, 54 Executive Vice President, Corporate Merchandise Manager, Cosmetics, Full-line Stores Robert E. Campbell, 47 Vice President, Strategy and Planning, Treasurer Linda Toschi Finn, 55 Executive Vice President, Marketing MEMBER OF EXECUTIVE TEAM Bonnie M. Junell, 46 Vice President, Corporate Merchandise Manager, Point of View and Narrative, Full-line Stores Kevin T. Knight, 47 Executive Vice President, Chairman and Chief Executive Officer of Nordstrom fsb, President of Nordstrom Credit, Inc. MEMBER OF EXECUTIVE TEAM Michael G. Koppel, 46 Executive Vice President and Chief Financial Officer MEMBER OF EXECUTIVE TEAM Llynn (Len) A. Kuntz, 42 Executive Vice President, WA/AK Regional Manager, Full-line Stores David P. Lindsey, 53 Vice President, Store Planning David L. Mackie, 54 Vice President, Real Estate, and Corporate Secretary Robert J. Middlemas, 46 Executive Vice President, Central States Regional Manager, Full-line Stores Jack H. Minuk, 48 Vice President, Corporate Merchandise Manager, Women's Shoes, Full-line Stores Blake W. Nordstrom, 42 President MEMBER OF EXECUTIVE TEAM Bruce A. Nordstrom, 69 Chairman of the Board of Directors Erik B. Nordstrom, 39 Executive Vice President, Full-line Stores MEMBER OF EXECUTIVE TEAM Peter E. Nordstrom, 41 Executive Vice President and President, Full-line Stores MEMBER OF EXECUTIVE TEAM James R. O'Neal, 44 Executive Vice President and President, Nordstrom Product Group MEMBER OF EXECUTIVE TEAM Suzanne R. Patneaude, 56 Vice President, Corporate Merchandise Manager, Designer/Savvy, Full-line Stores R. Michael Richardson, 46 Vice President and Chief Information Officer Karen Bowman Roesler, 47 Vice President, Marketing Nordstrom Credit Group K. C. (Karen) Shaffer, 49 Executive Vice President, Nordstrom Rack NW Rack Regional Manager Joel T. Stinson, 53 Executive Vice President and Chief Administrative Officer MEMBER OF EXECUTIVE TEAM Delena M. Sunday, 42 Executive Vice President, Human Resources and Diversity Affairs MEMBER OF EXECUTIVE TEAM Geevy S. K. Thomas, 38 Executive Vice President, South Regional Manager, Full-line Stores 48 NORDSTROM INC. AND SUBSIDIARIES board of directors BOARD OF DIRECTORS D. Wayne Gittinger, 70 Partner, Lane Powell Spears Lubersky LLP Seattle, Washington Enrique Hernandez Jr., 47 President and CEO, Inter-Con Security Systems, Inc. Pasadena, California Jeanne P. Jackson, 51 Founder and General Partner, MSP Capital Newport, California John A. McMillan, 71 Retired Co-Chairman of the Board of Directors Seattle, Washington Bruce A. Nordstrom, 69 Chairman of the Board of Directors Seattle, Washington John N. Nordstrom, 66 Retired Co-Chairman of the Board of Directors Seattle, Washington Alfred E. Osborne Jr., 58 Director of the Harold Price Center for Entrepreneurial Studies and Associate Professor of Business Economics, The Anderson School at UCLA Los Angeles, California William D. Ruckelshaus, 70 A Strategic Director, Madrona Venture Group Seattle, Washington Stephanie M. Shern, 55 Former Vice Chairman and Partner, Ernst & Young LLP Little Falls, New Jersey Bruce G. Willison, 54 Dean, The Anderson School at UCLA Los Angeles, California Alison A. Winter, 56 President, Northeast Personal Financial Services, The Northern Trust Corporation Chicago, Illinois AUDIT COMMITTEE Enrique Hernandez Jr., Chair Jeanne P. Jackson Alfred E. Osborne Jr. William D. Ruckelshaus Stephanie M. Shern Alison A. Winter COMPENSATION AND STOCK OPTION COMMITTEE Enrique Hernandez Jr. Jeanne P. Jackson Alfred E. Osborne Jr. William D. Ruckelshaus, Chair Bruce G. Willison Alison A. Winter CORPORATE GOVERNANCE AND NOMINATING COMMITTEE D. Wayne Gittinger Enrique Hernandez Jr. Alfred E. Osborne Jr., Chair William D. Ruckelshaus EXECUTIVE COMMITTEE John A. McMillan Bruce A. Nordstrom John N. Nordstrom FINANCE COMMITTEE D. Wayne Gittinger John A. McMillan John N. Nordstrom Alfred E. Osborne Jr. Bruce G. Willison Alison A. Winter, Chair shareholder information INDEPENDENT AUDITORS Deloitte & Touche LLP Seattle, Washington COUNSEL Lane Powell Spears Lubersky LLP Seattle, Washington 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 20, 2003 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, 2003 will be provided to shareholders upon request to: Nordstrom, Inc. Investor Relations P. O. Box 2737 Seattle, Washington 98111 (206) 303-3200 invrelations@nordstrom.com 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.