UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 001-15059
Nordstrom, Inc.
______________________________________________________
(Exact name of Registrant as specified in its charter)
Washington 91-0515058
_______________________________ ___________________
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1617 Sixth Avenue, Seattle, Washington 98101
____________________________________________________
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (206) 628-2111
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
_____ _____
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES X NO
_____ _____
Common stock outstanding as of May 20, 2005: 136,559 shares of common
stock.
1 of 20
NORDSTROM, INC. AND SUBSIDIARIES
--------------------------------
INDEX
-----
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Earnings
Quarter ended April 30, 2005 and May 1, 2004 3
Condensed Consolidated Balance Sheets
April 30, 2005, January 29, 2005 and May 1, 2004 4
Condensed Consolidated Statements of Shareholders' Equity
Quarter ended April 30, 2005 and May 1, 2004 5
Condensed Consolidated Statements of Cash Flows
Quarter ended April 30, 2005 and May 1, 2004 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 18
Item 6. Exhibits 18
SIGNATURES 19
INDEX TO EXHIBITS 20
2 of 20
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(amounts in thousands except per share amounts and percentages)
(unaudited)
Quarter Ended
----------------------
April 30, May 1,
2005 2004
---------- ----------
Net sales $1,654,474 $1,535,490
Cost of sales and related
buying and occupancy costs (1,046,165) (972,932)
---------- ----------
Gross profit 608,309 562,558
Selling, general and
administrative expenses (465,422) (452,734)
---------- ----------
Operating income 142,887 109,824
Interest expense, net (12,639) (36,684)
Other income including finance
charges, net 42,732 39,487
---------- ----------
Earnings before income taxes 172,980 112,627
Income tax expense (68,442) (43,900)
---------- ----------
Net earnings $ 104,538 $ 68,727
========== ==========
Basic earnings per share $ 0.77 $ 0.49
Diluted earnings per share $ 0.75 $ 0.48
Basic shares 136,535 139,110
Diluted shares 139,197 141,975
Quarter Ended
----------------------
April 30, May 1,
(% of Sales) 2005 2004
---------- ----------
Net sales 100.0% 100.0%
Cost of sales and related
buying and occupancy costs (63.2%) (63.4%)
---------- ----------
Gross profit 36.8% 36.6%
Selling, general and
administrative expenses (28.1%) (29.4%)
---------- ----------
Operating income 8.6% 7.2%
Interest expense, net (0.8%) (2.4%)
Other income including finance
charges, net 2.6% 2.5%
---------- ----------
Earnings before income taxes 10.5% 7.3%
Income tax expense(1) (39.6%) (39.0%)
---------- ----------
Net earnings 6.3% 4.5%
========== ==========
(1) Percent of earnings before income taxes
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
3 of 20
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(unaudited)
April 30, January 29, May 1,
2005 2005 2004
---------- ---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 315,695 $ 360,623 $ 172,372
Short-term investments 53,750 41,825 85,000
Accounts receivable, net 629,788 645,663 640,581
Investment in asset backed securities 427,302 422,416 307,663
Merchandise inventories 1,016,640 917,182 1,020,812
Current deferred tax assets 114,127 131,547 127,063
Prepaid expenses and other 53,934 53,188 49,088
---------- ---------- ----------
Total current assets 2,611,236 2,572,444 2,402,579
Land, buildings and equipment (net of
accumulated depreciation of $2,383,289,
$2,310,607 and $2,159,707) 1,763,766 1,780,366 1,787,436
Goodwill, net 51,714 51,714 51,714
Tradename, net 84,000 84,000 84,000
Other assets 108,891 116,866 99,045
---------- ---------- ----------
TOTAL ASSETS $4,619,607 $4,605,390 $4,424,774
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 582,381 $ 482,394 $ 563,733
Accrued salaries, wages
and related benefits 172,167 287,904 175,773
Other current liabilities 336,246 354,201 294,613
Income taxes payable 45,181 115,556 53,844
Current portion of long-term debt 100,458 101,097 6,502
---------- ---------- ----------
Total current liabilities 1,236,433 1,341,152 1,094,465
Long-term debt 928,175 929,010 1,024,283
Deferred property incentives, net 357,694 367,087 399,927
Other liabilities 204,353 179,147 174,469
Shareholders' Equity:
Common stock, no par:
500,000 shares authorized;
136,632, 135,665 and 139,816 shares
issued and outstanding 619,640 552,655 466,573
Unearned stock compensation (593) (299) (522)
Retained earnings 1,266,337 1,227,303 1,254,566
Accumulated other comprehensive
earnings 7,568 9,335 11,013
---------- ---------- ----------
Total shareholders' equity 1,892,952 1,788,994 1,731,630
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,619,607 $4,605,390 $4,424,774
========== ========== ==========
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
4 of 20
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(amounts in thousands)
(unaudited)
Accumulated Other
Common Stock Unearned Retained Comprehensive
Shares Amount Compensation Earnings Earnings Total
-------------------------------------------------------------------------------
Balance at
January 29, 2005 135,665 $552,655 $(299) $1,227,303 $9,335 $1,788,994
Net earnings - - - 104,538 - 104,538
Other comprehensive earnings:
Foreign currency
translation adjustment - - - - 147 147
Securitization fair value
adjustment, net of tax
of $1,224 - - - - (1,914) (1,914)
--------
Comprehensive net earnings - - - - - 102,771
Cash dividends paid
($0.13 per share) - - - (17,758) - (17,758)
Issuance of common stock for:
Stock option plans 1,532 55,556 - - - 55,556
Employee stock purchase
plan 266 8,768 - - - 8,768
Stock-based compensation 56 2,661 (294) - - 2,367
Repurchase of common
stock (887) - - (47,746) - (47,746)
----------------------------------------------------------------------------
Balance at
April 30, 2005 136,632 $619,640 $(593) $1,266,337 $7,568 $1,892,952
============================================================================
Accumulated Other
Common Stock Unearned Retained Comprehensive
Shares Amount Compensation Earnings Earnings Total
----------------------------------------------------------------------------
Balance at
January 31, 2004 138,377 $424,645 $(597) $1,201,093 $8,868 $1,634,009
Net earnings - - - 68,727 - 68,727
Other comprehensive earnings:
Foreign currency
translation adjustment - - - - 921 921
Securitization fair value
adjustment, net of tax
of $(783) - - - - 1,224 1,224
--------
Comprehensive net earnings - - - - - 70,872
Cash dividends paid
($0.11 per share) - - - (15,254) - (15,254)
Issuance of common stock for:
Stock option plans 1,081 32,396 - - - 32,396
Employee stock purchase
plan 285 6,336 - - - 6,336
Stock-based compensation 73 3,196 75 - - 3,271
--------------------------------------------------------------------------
Balance at
May 1, 2004 139,816 $466,573 $(522) $1,254,566 $11,013 $1,731,630
====================== ===================================================
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
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NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
Quarter Ended
------------------------
April 30, May 1,
2005 2004
---------- ----------
OPERATING ACTIVITIES:
Net earnings $104,538 $ 68,727
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization of
buildings and equipment 69,204 64,917
Amortization of deferred property incentives
and other, net (6,903) (8,666)
Stock-based compensation expense 1,428 1,264
Deferred income taxes, net 19,610 (3,597)
Tax benefit on stock option exercises
and employee stock purchases 16,546 6,536
Provision for bad debt expense 5,118 6,390
Change in operating assets and liabilities:
Accounts receivable 10,578 18,930
Investment in asset backed securities (9,210) (33,335)
Merchandise inventories (99,065) (113,386)
Prepaid expenses 666 (933)
Other assets 409 691
Accounts payable 97,507 121,052
Accrued salaries, wages and related benefits (118,548) (98,019)
Other current liabilities (20,781) (20,077)
Income taxes payable (46,971) (27,218)
Property incentives 9,839 833
Other liabilities 7,237 7,428
---------- ----------
Net cash provided by (used in) operating activities 41,202 (8,463)
---------- ----------
INVESTING ACTIVITIES:
Capital expenditures (53,021) (48,257)
Sales of short-term investments 153,575 1,122,150
Purchases of short-term investments (165,500) (1,031,150)
Other, net (691) 1,194
---------- ----------
Net cash (used in) provided by investing activities (65,637) 43,937
---------- ----------
FINANCING ACTIVITIES:
Principal payments on long-term debt (1,021) (198,739)
Decrease in cash book overdrafts (3,756) (21,586)
Proceeds from exercise of stock options 39,139 25,920
Proceeds from employee stock purchase plan 8,640 6,276
Cash dividends paid (17,758) (15,254)
Repurchase of common stock (47,746) -
Other, net 2,009 -
---------- ----------
Net cash used in financing activities (20,493) (203,383)
---------- ----------
Net decrease in cash and cash equivalents (44,928) (167,909)
Cash and cash equivalents at beginning of period 360,623 340,281
---------- ----------
Cash and cash equivalents at end of period $315,695 $172,372
========== ==========
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
6 of 20
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts)
(unaudited)
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements contained in
our 2004 Annual Report. The same accounting policies are followed for
preparing quarterly and annual financial data. All adjustments necessary for
the fair presentation of the results of operations, financial position and
cash flows have been included and are of a normal, recurring nature.
Our business, like that of other retailers, is subject to seasonal
fluctuations. Our Anniversary sale in July and the holidays in December
typically result in higher sales in the second and fourth quarters of our
fiscal years. Accordingly, results for any quarter are not necessarily
indicative of the results that may be achieved for a full fiscal year.
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 off-balance
sheet financing, inventory valuation, sales return accruals, self-insurance
liabilities, doubtful accounts, intangible assets, income taxes, post-
retirement benefits, contingent liabilities and litigation. We base our
estimates on historical experience and other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from these
estimates. Our accounting policies and methodologies in the first quarter of
2005 are consistent with those discussed in our 2004 Annual Report.
Stock Compensation
------------------
We apply APB No. 25, "Accounting for Stock Issued to Employees," in measuring
compensation costs under our stock-based compensation programs, which is
described more fully in our 2004 Annual Report.
We expect to adopt SFAS No. 123(R), "Share-Based Payment" in the first quarter
of 2006. In connection with the implementation of SFAS No. 123(R), the SEC
Staff issued additional guidance recently for stock options granted to
employees who will be eligible to retire before the normal vesting of their
stock options. If we had followed the SEC Staff's recently issued guidance,
the impact would be immaterial in the first quarters of 2005 and 2004.
The table below illustrates the effect on net earnings and earnings per share
if we had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."
7 of 20
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts)
(unaudited)
Note 1 - Summary of Significant Accounting Policies (Cont.)
Quarter Ended
----------------------
April 30, May 1,
2005 2004
---------- ----------
Net earnings, as reported $104,538 $68,727
Add: stock-based compensation
expense included in reported
net earnings, net of tax 871 771
Deduct: stock-based
compensation expense determined
under fair value, net of tax (5,717) (5,651)
---------- ----------
Pro forma net earnings $99,692 $63,847
========== ==========
Earnings per share:
Basic - as reported $0.77 $0.49
Diluted - as reported $0.75 $0.48
Basic - pro forma $0.73 $0.46
Diluted - pro forma $0.72 $0.45
Note 2 - Postretirement Benefits
The expense components of our Supplemental Executive Retirement Plan, which
provides retirement benefits to certain officers and select employees, are as
follows:
Quarter Ended
------------------------
April 30, May 1,
2005 2004
----------- -----------
Service cost $413 $372
Interest cost 1,018 991
Amortization of net loss 414 386
Amortization of prior service cost 240 240
----------- -----------
Total expense $2,085 $1,989
=========== ===========
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NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts)
(unaudited)
Note 3 - Earnings Per Share
Quarter Ended
------------------------
April 30, May 1,
2005 2004
----------- -----------
Net earnings $104,538 $68,727
=========== ===========
Basic shares 136,535 139,110
Dilutive effect of
stock options and
performance share units 2,662 2,865
----------- -----------
Diluted shares 139,197 141,975
=========== ===========
Basic earnings per share $0.77 $0.49
Diluted earnings per share $0.75 $0.48
Antidilutive stock options - 1,980
Note 4 - Accounts Receivable
The components of accounts receivable are as follows:
-------------------------------------
April 30, January 29, May 1,
2005 2005 2004
----------- ----------- -----------
Trade receivables:
Unrestricted $ 36,936 $ 31,400 $ 30,800
Restricted 533,977 568,062 556,647
Allowance for doubtful accounts (18,495) (19,065) (19,934)
----------- ----------- -----------
Trade receivables, net 552,418 580,397 567,513
Other 77,370 65,266 73,068
----------- ----------- -----------
Accounts receivable, net $629,788 $645,663 $640,581
=========== =========== ===========
Our restricted trade receivables relate to our Nordstrom private label card,
which back the $300,000 Class A notes and the $150,000 variable funding note.
The unrestricted trade receivables consist primarily of our Faconnable trade
receivables and Nordstrom private label receivables that are not eligible for
securitization, such as foreign and employee receivables exceeding a
contractual threshold.
Other accounts receivable consist primarily of credit card receivables due
from third party financial institutions and vendor rebates, which are believed
to be fully realizable as they are collected soon after they are earned.
9 of 20
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts)
(unaudited)
Note 5 - Investment in Asset Backed Securities
Our investment in asset backed securities and the off-balance sheet financing
are described in Note 9 of our 2004 Annual Report. The following table
presents the co-branded Nordstrom VISA credit card balances and the estimated
fair value of our investment in asset backed securities:
-----------------------------------
April 30, January 29, May 1,
2005 2005 2004
----------- ----------- -----------
Total face value of co-branded Nordstrom
VISA credit card principal receivables $619,556 $612,549 $492,946
=========== =========== ===========
Securities issued by the VISA Trust:
Off-balance sheet (sold to third parties):
2002 Class A & B Notes at par value $200,000 $200,000 $200,000
=========== =========== ===========
Amounts recorded on balance sheet:
Investment in asset backed
securities at fair value $427,302 $422,416 $307,663
=========== =========== ===========
In 2004, we revised the repayment period assumption in our valuation model
that we use to determine the fair value of the VISA Trust. The 2004 repayment
period assumption is based on historical payment, default and finance charge
yield experience on a specific account basis. The prior repayment period
assumption was based on our ongoing payment experience, which included
payments by card holders who pay their account balance in full each month.
While the assumptions used below are different in 2004, the impact of the
assumption change was not significant and does not reflect a change in the
underlying quality of the portfolio. The following table presents the key
assumptions we use to value the asset backed securities:
Assumptions used to estimate the
fair value of the investment in asset
backed securities:
Weighted average remaining life (in months) 7.7 8.1 2.3
Average credit losses 7.1% 6.9% 5.1%
Average gross yield 15.9% 15.8% 18.4%
Weighted average coupon on issued securities 4.3% 3.8% 1.5%
Average payment rates 7.7% 7.5% 23.6%
Internal rate of returns on investment
in asset backed securities 5.4-6.7% 5.2-6.4% 6.7-13.5%
10 of 20
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts)
(unaudited)
Note 5 - Investment in Asset Backed Securities (Cont.)
The following table summarizes the income earned by the investment in asset
backed securities that is included in other income including finance charges,
net on the condensed consolidated statements of earnings:
Quarter Ended
------------------------
April 30, May 1,
2005 2004
----------- -----------
Interest income $10,482 $12,242
Gains on sales of receivables and other income 9,589 3,802
----------- -----------
$20,071 $16,044
=========== ===========
Note 6 - Debt
To manage our interest rate risk, we have an interest rate swap outstanding
recorded in other liabilities. Our swap has a $250,000 notional amount,
expires in 2009 and is designated as a fully effective fair value hedge.
Under the agreement, we receive a fixed rate of 5.63% and pay a variable rate
based on LIBOR plus a margin of 2.3% set at six-month intervals (5.20% at
April 30, 2005.) The fair value of our interest rate swap is as follows:
-------------------------------------
April 30, January 29, May 1,
2005 2005 2004
----------- ----------- -----------
Interest rate swap fair value $(9,549) $(7,821) $(12,630)
Note 7 - Segment Reporting
The following tables set forth the information for our reportable segments and
a reconciliation to the consolidated totals:
Quarter ended Retail Credit Catalog/ Corporate
April 30, 2005 Stores(1) Operations Internet and Other Eliminations Total
---------------------------------------------------------------------------------------------------
Net sales $1,570,523 $- $83,951 $- $- $1,654,474
Other income including
finance charges, net (1,431) 50,029 (19) (5,847) - 42,732
Intersegment revenues 3,783 7,894 - - (11,677) -
Interest expense, net (181) (6,237) - (6,221) - (12,639)
Earnings before taxes 206,223 11,593 7,566 (52,402) - 172,980
Assets 2,743,957 1,021,194 110,761 743,695 - 4,619,607
Quarter ended Retail Credit Catalog/ Corporate
May 1, 2004 Stores(1) Operations Internet and Other Eliminations Total
---------------------------------------------------------------------------------------------------
Net sales $1,454,607 $- $80,883 $- $- $1,535,490
Other income including
finance charges, net (2,674) 47,531 (234) (5,136) - 39,487
Intersegment revenues 4,037 7,600 - - (11,637) -
Interest expense, net (2) (125) (5,363) 69 (31,265) - (36,684)
Earnings before taxes 177,123 10,123 5,991 (80,610) - 112,627
Assets 2,847,705 870,699 102,135 604,235 - 4,424,774
11 of 20
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts)
(unaudited)
Note 7 - Segment Reporting (Cont.)
As of April 30, 2005, January 29, 2005, and May 1, 2004, Retail Stores assets
included $35,998 of goodwill and $84,000 of tradename, and Catalog/Internet
included $15,716 of goodwill.
(1) Beginning in the first quarter of 2005, we started to integrate the
merchandise buying and marketing activities of our Retail Stores and
Catalog/Internet segments. The expenses for these activities are included in
the Retail Stores segment.
(2) During the first quarter of 2004, we retired $196,770 of our 8.95% senior
notes and $973 of our 6.7% medium-term notes for a total cash payment of
$219,587. We recorded a pre-tax charge of $20,842 in interest expense, net
related to this purchase.
Note 8 - Litigation
We are involved in routine claims, proceedings, and litigation arising from
the normal course of our business. We do not believe any such claim,
proceeding or litigation, either alone or in aggregate, will have a material
impact on our results of operations, financial position, or liquidity.
Note 9 - Subsequent Event
On May 24, 2005, our Board of Directors approved a two-for-one stock split of
our outstanding common stock and a proportional increase in the number of
common shares authorized from 500,000 to 1,000,000. Additional shares issued
as a result of the stock split will be distributed on or about June 30, 2005
to shareholders of record as of June 13, 2005. The shares and per share
information included herein have not been adjusted to reflect this stock
split. We will adjust for the stock split on a retroactive basis beginning in
the second quarter of 2005.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Management's
Discussion and Analysis section of our 2004 Annual Report. All dollar amounts
are in millions except per share amounts.
RESULTS OF OPERATIONS
---------------------
Overview
--------
Earnings for the first quarter of 2005 increased 52% to $104.5 or $0.75 per
diluted share from $68.7 or $0.48 per diluted share for the same period in
2004.
12 of 20
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
For the first quarter of 2005, we planned to achieve same-store sales
increases over last year in the 1% to 3% range. Our actual same-store sales
during this period were 6.2% greater than last year. Our fixed operating
costs were held in-line with our plan for the quarter and were consistent with
last year. As a result of the additional sales and the control of fixed
operating expenses, we increased our earnings and we improved two key
operating metrics in the first quarter of 2005 as compared to the same quarter
in 2004: gross profit as a percentage of net sales increased by 20 basis
points to 36.8%, and selling, general and administrative expenses as a
percentage of net sales decreased 130 basis points to 28.1%. We refer to
these types of rate improvements as "leverage" on additional sales.
In the first quarter of 2004, we incurred prepayment and deferred debt costs
of $20.8, or $0.08 per diluted share, upon prepayment of $197.7 of long-term
debt. We did not incur similar costs in 2005, which also improved our 2005
results in relation to the 2004 results.
Sales
-----
Total sales increased 7.7% for the quarter over the same period in the prior
year primarily due to same-store sales increases. Same-store sales increased
6.2% for the quarter. Both our Full-Line and Rack stores had overall and
same-store sales increases which suggest that our merchandise offering is
continuing to appeal to customers. All of our geographic regions and major
merchandise divisions reported same-store sales increases in the first quarter
of 2005. Our strongest regional performances were in the Southwest and
Southern States and our best performing merchandise divisions were cosmetics,
accessories, the designer and junior segment of women's apparel and men's
apparel.
In addition, total sales benefited from the six Full-Line stores and two Rack
stores opened since May 2003, increasing our retail square footage by 5%
during the last two years.
Gross Profit
------------
First Quarter
-------------------
2005 2004
-------- --------
Gross profit as a percentage of net sales 36.8% 36.6%
Gross profit as a percentage of net sales improved 20 basis points for the
quarter ended April 30, 2005. We experienced slightly higher markdown levels
compared to the prior period. The higher markdowns were more than offset by
leverage on buying and occupancy expenses resulting from the same-store sales
increase. We continued to benefit from our perpetual inventory system, which
gives us better visibility into sales trends and on-hand content, allowing us
to more effectively manage our merchandise and meet customer demand. We
maintained our inventory levels consistent with the prior year, even though
our sales and square footage grew in the first quarter of 2005. This resulted
in a 2.9% decline in our average inventory per square foot compared to the
prior year.
13 of 20
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
Selling, General and Administrative Expense
-------------------------------------------
First Quarter
-------------------
2005 2004
-------- --------
Selling, general and
administrative expenses
as a percentage of net sales 28.1% 29.4%
Selling, general and administrative expenses as a percentage of net sales
improved 130 basis points for the quarter ended April 30, 2005. This was
primarily from leverage on same-store sales increases as we used our existing
infrastructure to support increased sales. We continued to control and
leverage our fixed general and administrative expenses, especially non-selling
labor and employee benefits. In addition, our credit expenses, which includes
bad debt provisions on the Nordstrom private label charge card, improved over
the prior year due to reductions in delinquent receivables.
Interest Expense
----------------
Interest expense, net decreased by $24.0 to $12.6 for the quarter ended April
30, 2005 compared to the same period in 2004. The decrease is primarily due
to debt prepayment costs of $20.8 incurred in 2004 in connection with a $197.7
debt buyback.
Other Income Including Finance Charges, net
-------------------------------------------
Other income including finance charges, net increased by $3.2 for the quarter
ended April 30, 2005. The increase is primarily due to growth in our co-
branded Nordstrom VISA credit card transaction volume and related finance
charges.
Seasonality
------------
Our business, like that of other retailers, is subject to seasonal
fluctuations. Our Anniversary sale in July and the holidays in December
typically result in higher sales in the second and fourth quarters of our
fiscal years. Accordingly, results for any quarter are not necessarily
indicative of the results that may be achieved for a full fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Overall, cash and short-term investments decreased by $33.0 in the first
quarter of 2005 to $369.4 as of April 30, 2005, as we used our cash from
operations for capital expenditures and dividends.
Operating Activities
--------------------
Cash flow from operating activities increased by $49.7 to $41.2 in 2005 as
compared to the prior period, due to higher net earnings, slower growth in our
investment in asset backed securities and increased property incentives.
Payments received for property incentives increased in the first quarter of
2005 in connection with the planned increase in new stores opening in fiscal
2005 as compared to the prior period. This was partially offset by the
increase in performance-based compensation payments as a result of the
improvement in our 2004 financial results as compared to 2003.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
Investing Activities
--------------------
Net cash used in investing activities increased in 2005 as compared to 2004.
While capital expenditures remained consistent with the prior period, we used
cash to purchase a net $11.9 of our short-term investments in 2005, compared
to receiving cash of $91.0, net by selling short-term investments in the prior
period.
Year to date, we opened one Full-Line store in Atlanta, Georgia.
Additionally, we expect to open three Full-Line stores this year, in San
Antonio, Texas; Irvine, California; and Dallas, Texas. Gross square footage
for the year is expected to increase approximately 3 percent, from 19,397,000
at the beginning of 2005 to 20,019,000.
Financing Activities
--------------------
Net cash used in financing activities decreased in 2005 as compared to 2004.
In the first quarter of 2004, we retired $196.8 of our 8.95% senior notes and
$1.0 of our 6.7% medium-term notes for a total cash payment of $219.6, which
included prepayment premiums of $21.8.
Our debt to capital ratio decreased from 37.3% at May 1, 2004 to 35.2% at
April 30, 2005. In the second quarter of 2005, we plan to repay the remaining
$96.0 of our 6.7% medium-term notes that are due in July 2005 with cash on
hand. This will reduce our debt to capital ratio even further to
approximately 33%.
In February 2005, our Board of Directors authorized $500.0 of share
repurchases. The prior $300.0 authorization was completed during the fourth
quarter of 2004. The actual number and timing of share repurchases will be
subject to market conditions and applicable SEC rules. Year to date, we have
purchased 887,200 shares for $47.7 at an average price of $53.82 per share.
There were no share repurchases for the same period in 2004.
In the first quarter of 2005, the repurchases of our common stock was offset
by proceeds from the exercise of stock options and the employee stock purchase
plan of $47.8 compared to $32.2 for the same period in the prior year.
Liquidity
---------
We maintain a level of liquidity to allow us to cover our seasonal cash needs
and to minimize our need for short-term borrowings. We believe that our
operating cash flows, existing cash and available credit facilities are
sufficient to finance our cash requirements for the next 12 months. We plan
to pay the remaining $96.0 of our 6.7% medium-term notes due in July 2005 with
existing cash.
Over the long term, we strive to manage our cash and capital structure to
maximize shareholder return, strengthen our financial position and maintain
flexibility for future strategic initiatives. We continuously assess our debt
and leverage levels, capital expenditure requirements, principal debt
payments, dividend payouts, potential share repurchases, and future
investments or acquisitions. We believe our operating cash flows, existing
cash, and available credit facilities, as well as any potential future
borrowing facilities will be sufficient to fund these scheduled future
payments and potential long-term initiatives.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
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 off-balance
sheet financing, inventory valuation, sales return accruals, self-insurance
liabilities, doubtful accounts, intangible assets, income taxes, post-
retirement benefits, contingent liabilities and litigation. We base our
estimates on historical experience and other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from these
estimates. Our accounting policies and methodologies in the first quarter of
2005 are consistent with those discussed in our 2004 Annual Report.
Effective February 2005, Nordstrom Direct sales, which include catalog and
Internet, are included in same-store sales. See Note 7 in our Notes to
Condensed Consolidated Financial Statements on page 11 for further details.
FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT
------------------------------------------------
The preceding disclosures included forward-looking statements regarding our
performance, liquidity, capital expenditures 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 our
ability to predict fashion trends, consumer apparel buying patterns, our
ability to control costs, weather conditions, hazards of nature, trends in
personal bankruptcies and bad debt write-offs, changes in interest rates,
employee relations, our ability to continue our expansion plans, potential
opportunities that may be related to the current changes in our industry,
changes in governmental or regulatory requirements, and the impact of economic
and competitive market forces, including the impact of terrorist activity or
the impact of a war on us, our customers and the retail industry. 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. We
undertake no obligation to update or revise any forward-looking statements to
reflect subsequent events, new information or future circumstances. This
discussion and analysis should be read in conjunction with the condensed
consolidated financial statements.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, we
performed an evaluation under the supervision and with the participation of
management, including our President and Chief Financial Officer, of our
disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)
under the Securities and Exchange Act of 1934 (the "Exchange Act")). Based
upon that evaluation, our President and Chief Financial Officer concluded
that, as of the end of the period covered by this Quarterly Report, our
disclosure controls and procedures are effective in the timely recording,
processing, summarizing and reporting of material financial and non-financial
information.
There has been no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most
recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-------------------------
Cosmetics
---------
We were originally named as a defendant along with other department store and
specialty retailers in nine separate but virtually identical class action
lawsuits filed in various Superior Courts of the State of California in May,
June and July 1998 that were consolidated in Marin County Superior Court. In
May 2000, plaintiffs filed an amended complaint naming a number of
manufacturers of cosmetics and fragrances and two other retailers as
additional defendants. Plaintiffs' amended complaint alleges that the retail
price of the "prestige" or "Department Store" cosmetics sold in department and
specialty stores was collusively controlled by the retailer and manufacturer
defendants in violation of the Cartwright Act and the California Unfair
Competition Act.
Plaintiffs seek treble damages and restitution in an unspecified amount,
attorneys' fees and prejudgment interest, on behalf of a class of all
California residents who purchased cosmetics and fragrances for personal use
from any of the defendants during the four years prior to the filing of the
amended complaint.
We entered into a settlement agreement with the plaintiffs and the other
defendants on July 13, 2003. In furtherance of the settlement agreement, the
case was re-filed in the United States District Court for the Northern
District of California on behalf of a class of all persons who currently
reside in the United States and who purchased "Department Store" cosmetics
from the defendants during the period May 29, 1994 through July 16, 2003. The
Court gave preliminary approval to the settlement, and a summary notice of
class certification and the terms of the settlement were disseminated to class
members. On March 30, 2005, the Court entered a final judgment approving the
settlement and dismissing the plaintiffs' claims and the claims of all class
members with prejudice, in their entirety. On April 29, 2005, two class
members who had objected to the settlement filed notices of appeal from the
Court's final judgment to the United States Court of Appeals for the Ninth
Circuit. It is uncertain when the appeals will be resolved, but the appeal
process could take as much as two years or more. If the Court's final judgment
approving the settlement is affirmed on appeal, or the appeals are dismissed,
the defendants will provide class members with certain free products and pay
the plaintiffs' attorneys' fees, awarded by the Court of $24 million. Our
share of the cost of the settlement will not have a material adverse effect on
our financial condition, results of operations or cash flows.
Other
-----
We are involved in various routine legal proceedings incidental to the
ordinary course of business. In management's opinion, the outcome of pending
legal proceedings, separately and in the aggregate, will not have a material
adverse effect on our business or consolidated financial condition.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
--------------------------------------------------------------------
(c) Repurchases
-----------
(dollars in millions except per share amounts)
Total Total Number Maximum Number (or
Number of Average of Shares (or Units) Approximate Dollar Value)
Shares Price Paid Purchased as Part of of Shares (or Units) that
(or Units) Per Share Publicly Announced May Yet Be Purchased Under
Purchased (or Units) Plans or Programs the Plans or Programs (2)
---------- ---------- -------------------- --------------------------
Feb. 2005 - - - -
(1/30/05 to
2/26/05)
---------- ---------- -------------------- --------------------------
Mar. 2005 467,200 $53.73 467,200 $475
(2/27/05 to
4/2/05)
---------- ---------- -------------------- --------------------------
April 2005 420,557 (1) $53.92 420,000 $452
(4/3/05 to
4/30/05)
---------- ---------- -------------------- --------------------------
Total 887,757 $53.82 887,200 $452
---------- ---------- -------------------- --------------------------
(1) Included in this balance are 557 shares that were not redeemed as part of
a publicly announced repurchase plan or program. These shares were owned and
tendered by an employee to Nordstrom as payment for an option exercise.
(2) In February 2005, the Board of Directors authorized $500.0 of share
repurchases. The prior $300.0 authorization was completed during the fourth
quarter of 2004. The actual number and timing of share repurchases will be
subject to market conditions and applicable SEC rules. Year to date, we have
purchased 887,200 shares for $47.7 at an average price of $53.82 per share.
Item 6. Exhibits
-----------------
Exhibits are incorporated herein by reference or are filed with this report as
set forth in the Index to Exhibits on page 20 hereof.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORDSTROM, INC.
(Registrant)
/s/ Michael G. Koppel
----------------------------------------------------
Michael G. Koppel
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: June 7, 2005
-----------------
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NORDSTROM INC. AND SUBSIDIARIES
Exhibit Index
Exhibit Method of Filing
------- ----------------
31.1 Certification of President Filed herewith electronically
required by Section 302(a) of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Filed herewith electronically
Officer required by Section 302(a)
of the Sarbanes-Oxley Act of 2002
32.1 Certification of President and Furnished herewith electronically
Chief Financial Officer pursuant
to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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