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 July 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
_____ _____
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
_____ _____
Common stock outstanding as of August 19, 2005: 273,352 shares of common
stock.
1 of 22
NORDSTROM, INC. AND SUBSIDIARIES
--------------------------------
INDEX
-----
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Earnings
Quarter and Year to Date ended July 30, 2005
and July 31, 2004 3
Condensed Consolidated Balance Sheets
July 30, 2005, January 29, 2005 and July 31, 2004 4
Condensed Consolidated Statements of Shareholders' Equity
Year to Date ended July 30, 2005 and July 31, 2004 5
Condensed Consolidated Statements of Cash Flows
Year to Date ended July 30, 2005 and July 31, 2004 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits 20
SIGNATURES 21
INDEX TO EXHIBITS 22
2 of 22
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(amounts in thousands except per share amounts and percentages)
(unaudited)
Quarter Ended Year to Date Ended
---------------------- ----------------------
July 30, July 31, July 30, July 31,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net sales $2,106,438 $1,953,480 $3,760,912 $3,488,970
Cost of sales and related
buying and occupancy costs (1,347,515) (1,270,892) (2,393,680) (2,243,824)
---------- ---------- ---------- ----------
Gross profit 758,923 682,588 1,367,232 1,245,146
Selling, general and
administrative expenses (551,196) (536,233) (1,016,618) (988,967)
---------- ---------- ---------- ----------
Operating income 207,727 146,355 350,614 256,179
Interest expense, net (10,904) (14,091) (23,543) (50,775)
Other income including finance
charges, net 44,970 43,002 87,702 82,489
---------- ---------- --------- --------
Earnings before income taxes 241,793 175,266 414,773 287,893
Income tax expense (92,875) (68,351) (161,317) (112,251)
---------- ---------- --------- --------
Net earnings $ 148,918 $ 106,915 $ 253,456 $ 175,642
========== ========== ========= ==========
Basic earnings per share $ 0.54 $ 0.38 $ 0.93 $ 0.63
Diluted earnings per share $ 0.53 $ 0.37 $ 0.91 $ 0.62
Basic shares 273,379 281,469 273,225 279,844
Diluted shares 279,169 286,994 278,832 285,481
Quarter Ended Year to Date Ended
---------------------- ----------------------
July 30, July 31, July 30, July 31,
(% of Net sales)(1) 2005 2004 2005 2004
---------- ---------- ---------- ----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales and related
buying and occupancy costs (64.0%) (65.1%) (63.6%) (64.3%)
---------- ---------- ---------- ----------
Gross profit 36.0% 34.9% 36.4% 35.7%
Selling, general and
administrative expenses (26.2%) (27.5%) (27.0%) (28.3%)
---------- ---------- ---------- ----------
Operating income 9.9% 7.5% 9.3% 7.3%
Interest expense, net (0.5%) (0.7%) (0.6%) (1.5%)
Other income including finance
charges, net 2.1% 2.2% 2.3% 2.4%
---------- ---------- ---------- ----------
Earnings before income taxes 11.5% 9.0% 11.0% 8.3%
Income tax expense(2) (38.4%) (39.0%) (38.9%) (39.0%)
---------- ---------- ---------- ----------
Net earnings 7.1% 5.5% 6.7% 5.0%
========== ========== ========== ==========
(1) Subtotals and totals may not foot due to rounding
(2) Percent of earnings before income taxes
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these financial statements.
3 of 22
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(unaudited)
July 30, January 29, July 31,
2005 2005 2004
---------- ---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 462,875 $ 360,623 $ 319,332
Short-term investments 34,000 41,825 165,575
Accounts receivable, net 701,882 645,663 721,510
Investment in asset backed securities 515,596 422,416 381,940
Merchandise inventories 989,365 917,182 1,024,853
Current deferred tax assets 140,745 131,547 132,158
Prepaid expenses and other 50,101 53,188 48,105
---------- ---------- ----------
Total current assets 2,894,564 2,572,444 2,793,473
Land, buildings and equipment (net of
accumulated depreciation of $2,444,359,
$2,310,607 and $2,221,299) 1,771,492 1,780,366 1,772,752
Goodwill, net 51,714 51,714 51,714
Tradename, net 84,000 84,000 84,000
Other assets 114,643 116,866 110,942
---------- ---------- ----------
TOTAL ASSETS $4,916,413 $4,605,390 $4,812,881
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 714,429 $ 482,394 $ 699,432
Accrued salaries, wages
and related benefits 226,307 287,904 241,823
Other current liabilities 365,569 354,201 305,992
Income taxes payable 107,713 115,556 86,309
Current portion of long-term debt 4,840 101,097 103,129
---------- ---------- ----------
Total current liabilities 1,418,858 1,341,152 1,436,685
Long-term debt 923,952 929,010 927,227
Deferred property incentives, net 355,197 367,087 391,837
Other liabilities 199,724 179,147 185,692
Shareholders' Equity:
Common stock, no par:
1,000,000 shares authorized;
273,683, 271,331 and 282,871 shares
issued and outstanding 646,684 552,655 517,718
Unearned stock compensation (550) (299) (448)
Retained earnings 1,365,888 1,227,303 1,346,035
Accumulated other comprehensive
earnings 6,660 9,335 8,135
---------- ---------- ----------
Total shareholders' equity 2,018,682 1,788,994 1,871,440
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,916,413 $4,605,390 $4,812,881
========== ========== ==========
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these financial statements.
4 of 22
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(amounts in thousands except per share amounts)
(unaudited)
Accumulated Other
Common Stock Unearned Retained Comprehensive
Shares Amount Compensation Earnings Earnings Total
-----------------------------------------------------------------------
Balance at
January 29, 2005 271,331 $552,655 $(299) $1,227,303 $9,335 $1,788,994
Net earnings - - - 253,456 - 253,456
Other comprehensive earnings:
Foreign currency
translation adjustment - - - - (1,743) (1,743)
Fair value adjustment to
investment in asset backed
securities, net of tax
of $596 - - - - (932) (932)
--------
Comprehensive net earnings - - - - - 250,781
Cash dividends paid
($0.15 per share) - - - (40,994) - (40,994)
Issuance of common stock for:
Stock option plans 4,389 81,439 - - - 81,439
Employee stock purchase
plan 532 9,484 - - - 9,484
Stock-based compensation 124 3,106 (251) - - 2,855
Repurchase of common
stock (2,693) - - (73,877) - (73,877)
---------------------------------------------------------------------
Balance at July 30, 2005 273,683 $646,684 $(550) $1,365,888 $6,660 $2,018,682
=====================================================================
Accumulated Other
Common Stock Unearned Retained Comprehensive
Shares Amount Compensation Earnings Earnings Total
-----------------------------------------------------------------------
Balance at
January 31, 2004 276,753 $424,645 $(597) $1,201,093 $8,868 $1,634,009
Net earnings - - - 175,642 - 175,642
Other comprehensive earnings:
Foreign currency
translation adjustment - - - - 160 160
Fair value adjustment to
investment in asset backed
securities, net of tax
of $571 - - - - (893) (893)
--------
Comprehensive net earnings - - - - - 174,909
Cash dividends paid
($0.11 per share) - - - (30,700) - (30,700)
Issuance of common stock for:
Stock option plans 5,393 82,040 - - - 82,040
Employee stock purchase
plan 570 6,683 - - - 6,683
Stock-based compensation 155 4,350 149 - - 4,499
---------------------------------------------------------------------
Balance at July 31, 2004 282,871 $517,718 $(448) $1,346,035 $8,135 $1,871,440
=====================================================================
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these financial statements.
5 of 22
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
Year to Date Ended
-------------------------
July 30, July 31,
2005 2004
---------- ----------
OPERATING ACTIVITIES:
Net earnings $253,456 $175,642
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization of
buildings and equipment 137,436 130,235
Amortization of deferred property incentives
and other, net (15,664) (15,690)
Stock-based compensation expense 7,474 5,482
Deferred income taxes, net 2,420 (3,595)
Tax benefit on stock option exercises
and employee stock purchases 26,872 17,823
Provision for bad debt expense 10,064 12,731
Change in operating assets and liabilities:
Accounts receivable (67,230) (68,087)
Investment in asset backed securities (94,112) (111,110)
Merchandise inventories (71,717) (111,810)
Prepaid expenses (71) (463)
Other assets (1,936) (10,462)
Accounts payable 191,087 193,469
Accrued salaries, wages and related benefits (67,260) (34,864)
Other current liabilities (938) (8,710)
Income taxes payable (7,842) 1,505
Property incentives 21,613 689
Other liabilities 15,959 19,529
---------- ----------
Net cash provided by operating activities 339,611 192,314
---------- ----------
INVESTING ACTIVITIES:
Capital expenditures (131,384) (102,201)
Proceeds from sale of assets - 5,473
Sales of short-term investments 297,325 1,979,050
Purchases of short-term investments (289,500) (1,968,625)
Other, net (139) 205
---------- ----------
Net cash used in investing activities (123,698) (86,098)
---------- ----------
FINANCING ACTIVITIES:
Principal payments on long-term debt (98,650) (201,325)
Increase in cash book overdrafts 35,633 33,959
Proceeds from exercise of stock options 55,413 64,624
Proceeds from employee stock purchase plan 8,640 6,277
Cash dividends paid (40,994) (30,700)
Repurchase of common stock (73,913) -
Other, net 210 -
---------- ----------
Net cash used in financing activities (113,661) (127,165)
---------- ----------
Net increase (decrease) in cash and cash equivalents 102,252 (20,949)
Cash and cash equivalents at beginning of period 360,623 340,281
---------- ----------
Cash and cash equivalents at end of period $462,875 $319,332
========== ==========
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these financial statements.
6 of 22
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts and percentages)
(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 2005 are consistent
with those discussed in our 2004 Annual Report.
Two-for-one Stock Split
-----------------------
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 were distributed on June 30, 2005 to
shareholders of record as of June 13, 2005. The shares and per share
information included herein have been adjusted to reflect this stock split.
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 half 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 22
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts and percentages)
(unaudited)
Note 1 - Summary of Significant Accounting Policies (Cont.)
Quarter Ended Year to Date Ended
---------------------- ---------------------
July 30, July 31, July 30, July 31,
2005 2004 2005 2004
---------- ---------- ---------- ---------
Net earnings, as reported $148,918 $106,915 $253,456 $175,642
Add: stock-based compensation
expense included in reported
net earnings, net of tax 3,696 2,573 4,567 3,344
Deduct: stock-based
compensation expense determined
under fair value, net of tax (7,911) (7,848) (13,628) (13,673)
---------- ---------- ---------- ---------
Pro forma net earnings $144,703 $101,640 $244,395 $165,313
========== ========== ========== =========
Earnings per share:
Basic - as reported $0.54 $0.38 $0.93 $0.63
Diluted - as reported $0.53 $0.37 $0.91 $0.62
Basic - pro forma $0.53 $0.36 $0.89 $0.59
Diluted - pro forma $0.52 $0.35 $0.88 $0.58
Note 2 - Post-retirement 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 Year to Date Ended
------------------------ ------------------------
July 30, July 31, July 30, July 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Service cost $496 $372 $909 $744
Interest cost 1,027 991 2,045 1,982
Amortization of net loss 413 386 827 772
Amortization of prior
service cost 255 240 495 480
----------- ----------- ----------- -----------
Total expense $2,191 $1,989 $4,276 $3,978
=========== =========== =========== ===========
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NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts and percentages)
(unaudited)
Note 3 - Earnings Per Share
Quarter Ended Year to Date Ended
------------------------ ------------------------
July 30, July 31, July 30, July 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net earnings $148,918 $106,915 $253,456 $175,642
=========== =========== =========== ===========
Basic shares 273,379 281,469 273,225 279,844
Dilutive effect of
stock options and
performance share units 5,790 5,525 5,607 5,637
----------- ----------- ----------- -----------
Diluted shares 279,169 286,994 278,832 285,481
=========== =========== =========== ===========
Basic earnings per share $0.54 $0.38 $0.93 $0.63
Diluted earnings per share $0.53 $0.37 $0.91 $0.62
Antidilutive stock options
and other 150 - 150 20
Note 4 - Accounts Receivable
The components of accounts receivable are as follows:
-------------------------------------
July 30, January 29, July 31,
2005 2005 2004
----------- ----------- -----------
Trade receivables:
Unrestricted $ 29,182 $ 31,400 $ 24,228
Restricted 601,972 568,062 618,109
Allowance for doubtful accounts (18,259) (19,065) (19,934)
----------- ----------- -----------
Trade receivables, net 612,895 580,397 622,403
Other 88,987 65,266 99,107
----------- ----------- -----------
Accounts receivable, net $701,882 $645,663 $721,510
=========== =========== ===========
Our restricted trade receivables relate to our Nordstrom private label retail
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 business 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 22
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts and percentages)
(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:
--------------------------------
July 30, January 29, July 31,
2005 2005 2004
---------- ---------- ----------
Total face value of co-branded Nordstrom
VISA credit card principal receivables $703,237 $612,549 $567,975
========== ========== ==========
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 $515,596 $422,416 $381,940
========== ========== ==========
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 investment in asset backed securities:
------------------------------------------
July 30, January 29, July 31,
2005 2005 2004
------------ ------------ ------------
Weighted average remaining life
(in months) 7.2 8.1 2.3
Average credit losses 6.9% 6.9% 5.0%
Average gross yield 17.5% 15.8% 17.7%
Weighted average coupon on issued
securities 4.6% 3.8% 1.8%
Average payment rates 8.2% 7.5% 24.1%
Discount rate on investment in
asset backed securities 5.6% to 9.7% 4.5% to 9.0% 7.5% to 13.3%
10 of 22
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts and percentages)
(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 Year to Date Ended
------------------------ ------------------------
July 30, July 31, July 30, July 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Interest income $18,403 $13,426 $32,567 $25,668
Gains on sales of
receivables and
other income 7,458 3,953 13,344 7,755
----------- ----------- ----------- -----------
$25,861 $17,379 $45,911 $33,423
=========== =========== =========== ===========
Note 6 - Debt
We retired the remaining $96,027 of our 6.7% medium-term notes when they
matured in July 2005.
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 (6.238% at
July 30, 2005.) The fair value of our interest rate swap is as follows:
-------------------------------------
July 30, January 29, July 31,
2005 2005 2004
----------- ----------- -----------
Interest rate swap fair value $(10,507) $(7,821) $(11,901)
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NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts and percentages)
(unaudited)
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
July 30, 2005 Stores(1) Operations Internet and Other Eliminations Total
---------------------------------------------------------------------------------------------------
Net sales $2,020,234 $- $86,204 $- $- $2,106,438
Intersegment revenues 4,920 11,826 - - (16,746) -
Interest expense, net (144) (6,311) - (4,449) - (10,904)
Other income including
finance charges, net (3,364) 58,706 (17) (10,355) - 44,970
Earnings before taxes 273,585 13,408 10,253 (55,453) - 241,793
Quarter ended Retail Credit Catalog/ Corporate
July 31, 2004 Stores Operations Internet and Other Eliminations Total
---------------------------------------------------------------------------------------------------
Net sales $1,868,808 $- $84,672 $- $- $1,953,480
Intersegment revenues 9,723 11,051 - - (20,774) -
Interest expense, net (138) (5,862) 18 (8,109) - (14,091)
Other income including
finance charges, net (1,176) 51,613 (212) (7,223) - 43,002
Earnings before taxes 211,593 9,837 4,246 (50,410) - 175,266
Year to date ended Retail Credit Catalog/ Corporate
July 30, 2005 Stores(1) Operations Internet and Other Eliminations Total
---------------------------------------------------------------------------------------------------
Net sales $3,590,757 $- $170,155 $- $- $3,760,912
Intersegment revenues 8,703 19,720 - - (28,423) -
Interest expense, net (325) (12,548) - (10,670) - (23,543)
Other income including
finance charges, net (4,795) 108,735 (36) (16,202) - 87,702
Earnings before taxes 479,808 25,001 17,819 (107,855) - 414,773
Assets 2,721,448 1,169,190 111,066 914,709 - 4,916,413
Year to date ended Retail Credit Catalog/ Corporate
July 31, 2004 Stores Operations Internet and Other Eliminations Total
---------------------------------------------------------------------------------------------------
Net sales $3,323,415 $- $165,555 $- $- $3,488,970
Intersegment revenues 13,760 18,651 - - (32,411) -
Interest expense, net (2) (263) (11,225) 87 (39,374) - (50,775)
Other income including
finance charges, net (3,850) 99,144 (446) (12,359) - 82,489
Earnings before taxes 388,716 19,960 10,237 (131,020) - 287,893
Assets 2,736,279 1,042,091 120,729 913,782 - 4,812,881
As of July 30, 2005, January 29, 2005, and July 31, 2004, Retail Stores assets
included $35,998 of goodwill and $84,000 of tradename, and Catalog/Internet
assets 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. In 2005, 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 in Corporate and Other.
12 of 22
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts and percentages)
(unaudited)
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.
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 second quarter of 2005 increased 39% to $148.9, or $0.53 per
diluted share, from $106.9, or $0.37 per diluted share, for the same period in
2004. For the year to date period ended July 30, 2005, earnings increased 44%
to $253.5, or $0.91 per diluted share, from $175.6, or $0.62 per diluted
share, for the same period in 2004.
For the second quarter of 2005, we planned to achieve same-store sales
increases over last year in the low single digits. Our actual same-store
sales were 6.2% greater than last year for both the quarter and year to date
periods ended July 30, 2005. We held our fixed operating costs in-line with
our plan for both the quarter and year to date periods. As a result of the
additional same-store sales and the control of fixed operating expenses, we
increased our earnings and we improved two key operating metrics for the
quarter and year to date periods ended July 30, 2005 as compared to the same
periods in 2004: gross profit as a percentage of net sales, which increased
110 basis points for the quarter and 70 basis points for the year to date
period, and selling, general and administrative expenses as a percentage of
net sales, which improved 130 basis points for the quarter and year to date
periods. 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 year to
date 2005 results in relation to the 2004 results.
13 of 22
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
Net Sales
---------
Total net sales increased 7.8% for both the quarter and year to date periods
over the same periods in the prior year, primarily due to same-store sales
increases. Same-store sales increased 6.2% for both the quarter and year to
date periods. Both our Full-Line and Rack stores had overall and same-store
sales increases, suggesting that our merchandise offering is continuing to
appeal to customers. In addition, same-store sales for our Anniversary Sale
event, which has a material impact to the second quarter, increased in the
mid-single digit range. For both the quarter and year to date periods:
- all of our geographic regions reported same-store sales increases,
- our strongest regional performances were in the Southern and Southwest
states, and
- our best performing merchandise divisions were accessories, men's
wear, cosmetics, and the designer and junior segments of women's
apparel.
In addition, total sales benefited from the six Full-Line stores and two Rack
stores opened since August 2003, increasing our retail square footage by 5%
during the last two years.
Gross Profit
------------
Second Quarter Year to Date
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Gross profit as a percentage
of net sales 36.0% 34.9% 36.4% 35.7%
Gross profit as a percentage of net sales improved 110 basis points for the
quarter and 70 basis points for the year to date period ended July 30, 2005.
The quarter and year to date performance was due to leverage on buying and
occupancy expenses from increased sales volume and lower markdowns. Our
inventory levels declined slightly compared to the prior year, consistent with
our goal of improving our inventory turnover rate (the inventory turnover rate
for the last four quarters was 4.58 at July 2005 and 4.25 at July 2004). This
resulted in a 2.1% reduction in our average inventory per square foot compared
to the prior year.
Selling, General and Administrative Expense
-------------------------------------------
Second Quarter Year to Date
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Selling, general and
administrative expenses
as a percentage of net sales 26.2% 27.5% 27.0% 28.3%
Selling, general and administrative expenses as a percentage of net sales
improved 130 basis points for the quarter and year to date periods. The
quarter and year to date performance 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.
14 of 22
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
Interest Expense, net
---------------------
Interest expense, net decreased by $3.2 to $10.9 for the quarter ended July
30, 2005 compared to the same period in 2004. The decrease is primarily due
to increased interest income from higher cash balances.
Interest expense, net decreased by $27.2 to $23.5 for the year to date period
ended July 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. We did not incur similar costs in 2005.
Other Income Including Finance Charges, net
-------------------------------------------
Other income including finance charges, net increased by $2.0 for the quarter
and $5.2 for the year to date period ended July 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 increased by $94.4 in the first two
quarters of 2005 to $496.9 as of July 30, 2005 due to cash from operations,
which were partially offset by capital expenditures and a scheduled debt
payment.
Operating Activities
--------------------
Net cash flow from operating activities increased by $147.3 to $339.6 in 2005
as compared to the prior period primarily due to the increase in our net
earnings. Other factors that increased the 2005 cash flow from operations
were our increased inventory turnover rate and property incentive receipts
associated with stores opening in 2005.
Investing Activities
--------------------
Net cash used in investing activities increased in 2005 as compared to 2004,
primarily due to capital expenditures for new stores and store remodels; this
increase is offset from an overall perspective by the property incentive
receipts, which are classified as operating activities.
Year to date, we opened one Full-Line store in Atlanta, Georgia. Throughout
the remainder of the year, we plan to open three Full-Line stores. Stores
will open in San Antonio, Texas at The Shops at La Cantera on September 16th
and in Irvine, Calif. at The Irvine Spectrum on September 30th. The final
opening of the year will be on November 11th in Dallas, Texas at NorthPark
Center. Gross square footage for the year is expected to increase
approximately 3.4%, from 19,397,000 to 20,048,000.
15 of 22
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
Financing Activities
--------------------
Net cash used in financing activities decreased $13.5 to $113.7 in 2005. In
2004 and 2005, we utilized cash on hand to retire debt. In both years,
employee stock option exercises have increased our cash balances. Our cash
dividends paid in 2005 increased as we returned a portion of our increased net
earnings to our shareholders.
In August 2004, our Board of Directors authorized $300.0 of share repurchases.
Following this authorization, we repurchased $300.0 of our common shares by
the end of 2004. In February 2005, our Board of Directors authorized an
additional $500.0 of share repurchases. The actual number and timing of share
repurchases will be subject to market conditions and applicable SEC rules.
Year to date in 2005, we have purchased 2,691,200 shares for $73.9 at an
average price of $27.45 per share.
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.
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
repayments, 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 scheduled future payments and
potential long-term initiatives.
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 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 12 for further details.
16 of 22
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
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.
18 of 22
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 (3)
---------- ---------- -------------------- --------------------------
May 2005 609,015 (1) $26.78 607,800 $436.0
(5/1/05 to
5/28/05)
---------- ---------- -------------------- --------------------------
Jun. 2005 309,264 (2) $31.89 309,000 $426.1
(5/29/05 to
7/2/05)
---------- ---------- -------------------- --------------------------
Jul. 2005 - $- - $426.1
(7/3/05 to
7/30/05)
---------- ---------- -------------------- --------------------------
Total 918,279 $28.50 916,800 $426.1
---------- ---------- -------------------- --------------------------
(1) Included in this balance are 1,215 shares that were not redeemed as part
of a publicly announced repurchase plan or program. These shares were
tendered by an employee to Nordstrom for tax withholding purposes.
(2) Included in this balance are 264 shares that were not redeemed as part of
a publicly announced repurchase plan or program. These shares were tendered
by an employee to Nordstrom for tax withholding purposes.
(3) 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 2,691,200 shares for $73.9 at an average price of $27.45 per share.
19 of 22
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
(amounts in thousands)
We held our Annual Shareholders Meeting on May 24, 2005, at which time the
shareholders voted on the following proposals:
(1) Election of Directors
Name of Candidate For Withheld
---------------------- ----------- -----------
Phyllis J. Campbell 126,495 1,391
Enrique Hernandez, Jr. 126,494 1,391
Jeanne P. Jackson 126,211 1,675
Robert G. Miller 126,478 1,408
Blake W. Nordstrom 126,014 1,871
Bruce A. Nordstrom 125,438 2,447
John N. Nordstrom 125,515 2,371
Alfred E. Osborne, Jr., Ph.D. 124,747 3,138
Alison A. Winter 127,078 807
There were no abstentions and no broker non-votes.
(2) Ratification of the Appointment of Independent Auditors
The vote was 125,013 for, 2,136 against, and there were 737 abstentions.
There were no broker non-votes.
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 22 hereof.
20 of 22
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: September 1, 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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