e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended July 29, 2006
OR
|
|
|
o |
|
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
(State or other jurisdiction of
incorporation or organization)
|
|
91-0515058
(IRS employer
Identification No.) |
|
|
|
1617 Sixth Avenue, Seattle, Washington
(Address of principal executive offices)
|
|
98101
(Zip code) |
206-628-2111
(Registrants telephone number, including area code)
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 þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES o NO þ
Common stock outstanding as of August 17, 2006: 256,621 shares of common stock (in thousands).
NORDSTROM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page 2 of 28
PART
I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands except per share amounts and percentages)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Six Months Ended |
|
|
|
July 29, |
|
|
July 30, |
|
|
July 29, |
|
|
July 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
2,270,468 |
|
|
$ |
2,106,438 |
|
|
$ |
4,057,691 |
|
|
$ |
3,760,912 |
|
Cost of sales and related buying and
occupancy costs |
|
|
(1,446,633 |
) |
|
|
(1,347,515 |
) |
|
|
(2,569,636 |
) |
|
|
(2,393,680 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
823,835 |
|
|
|
758,923 |
|
|
|
1,488,055 |
|
|
|
1,367,232 |
|
Selling, general and administrative
expenses |
|
|
(579,552 |
) |
|
|
(551,196 |
) |
|
|
(1,073,772 |
) |
|
|
(1,016,618 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
244,283 |
|
|
|
207,727 |
|
|
|
414,283 |
|
|
|
350,614 |
|
Interest expense, net |
|
|
(12,783 |
) |
|
|
(10,904 |
) |
|
|
(23,534 |
) |
|
|
(23,543 |
) |
Other income including finance charges,
net |
|
|
60,851 |
|
|
|
44,970 |
|
|
|
114,689 |
|
|
|
87,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income tax expense |
|
|
292,351 |
|
|
|
241,793 |
|
|
|
505,438 |
|
|
|
414,773 |
|
Income tax expense |
|
|
(113,597 |
) |
|
|
(92,875 |
) |
|
|
(195,453 |
) |
|
|
(161,317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
178,754 |
|
|
$ |
148,918 |
|
|
$ |
309,985 |
|
|
$ |
253,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.68 |
|
|
$ |
0.54 |
|
|
$ |
1.17 |
|
|
$ |
0.93 |
|
Diluted earnings per share |
|
$ |
0.67 |
|
|
$ |
0.53 |
|
|
$ |
1.15 |
|
|
$ |
0.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares |
|
|
261,512 |
|
|
|
273,379 |
|
|
|
264,501 |
|
|
|
273,225 |
|
Diluted shares |
|
|
266,226 |
|
|
|
279,169 |
|
|
|
269,556 |
|
|
|
278,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(% of Net Sales) |
|
Quarter Ended |
|
Six Months Ended |
|
|
July 29, |
|
July 30, |
|
July 29, |
|
July 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales and related buying and
occupancy costs |
|
|
(63.7 |
%) |
|
|
(64.0 |
%) |
|
|
(63.3 |
%) |
|
|
(63.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
36.3 |
% |
|
|
36.0 |
% |
|
|
36.7 |
% |
|
|
36.4 |
% |
Selling, general and administrative
expenses |
|
|
(25.5 |
%) |
|
|
(26.2 |
%) |
|
|
(26.5 |
%) |
|
|
(27.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
10.8 |
% |
|
|
9.9 |
% |
|
|
10.2 |
% |
|
|
9.3 |
% |
Interest expense, net |
|
|
(0.6 |
%) |
|
|
(0.5 |
%) |
|
|
(0.6 |
%) |
|
|
(0.6 |
%) |
Other income including finance
charges,
net |
|
|
2.7 |
% |
|
|
2.1 |
% |
|
|
2.8 |
% |
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income tax expense |
|
|
12.9 |
% |
|
|
11.5 |
% |
|
|
12.5 |
% |
|
|
11.0 |
% |
Income tax expense (as a % of earnings
before income tax expense) |
|
|
(38.9 |
%) |
|
|
(38.4 |
%) |
|
|
(38.7 |
%) |
|
|
(38.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
7.9 |
% |
|
|
7.1 |
% |
|
|
7.6 |
% |
|
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.
Page 3 of 28
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2006 |
|
|
January 28, 2006 |
|
|
July 30, 2005 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
280,197 |
|
|
$ |
462,656 |
|
|
$ |
462,875 |
|
Short-term investments |
|
|
|
|
|
|
54,000 |
|
|
|
34,000 |
|
Accounts receivable, net |
|
|
712,166 |
|
|
|
639,558 |
|
|
|
701,882 |
|
Investment in asset backed securities |
|
|
354,348 |
|
|
|
561,136 |
|
|
|
515,596 |
|
Merchandise inventories |
|
|
1,026,287 |
|
|
|
955,978 |
|
|
|
989,365 |
|
Current deferred tax assets |
|
|
165,298 |
|
|
|
145,470 |
|
|
|
140,745 |
|
Prepaid expenses and other |
|
|
67,452 |
|
|
|
55,359 |
|
|
|
50,101 |
|
Restricted cash |
|
|
150,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,755,748 |
|
|
|
2,874,157 |
|
|
|
2,894,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land, buildings and equipment (net of
accumulated depreciation of $2,669,980,
$2,549,559 and $2,444,359) |
|
|
1,750,304 |
|
|
|
1,773,871 |
|
|
|
1,771,492 |
|
Goodwill |
|
|
51,714 |
|
|
|
51,714 |
|
|
|
51,714 |
|
Acquired tradename |
|
|
84,000 |
|
|
|
84,000 |
|
|
|
84,000 |
|
Other assets |
|
|
150,911 |
|
|
|
137,607 |
|
|
|
114,643 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,792,677 |
|
|
$ |
4,921,349 |
|
|
$ |
4,916,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
725,675 |
|
|
$ |
540,019 |
|
|
$ |
714,429 |
|
Accrued salaries, wages and related benefits |
|
|
220,026 |
|
|
|
285,982 |
|
|
|
226,307 |
|
Other current liabilities |
|
|
378,682 |
|
|
|
409,076 |
|
|
|
365,569 |
|
Income taxes payable |
|
|
120,074 |
|
|
|
81,617 |
|
|
|
107,713 |
|
Current portion of long-term debt |
|
|
307,463 |
|
|
|
306,618 |
|
|
|
4,840 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,751,920 |
|
|
|
1,623,312 |
|
|
|
1,418,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net |
|
|
624,861 |
|
|
|
627,776 |
|
|
|
923,952 |
|
Deferred property incentives, net |
|
|
356,111 |
|
|
|
364,382 |
|
|
|
355,197 |
|
Other liabilities |
|
|
215,425 |
|
|
|
213,198 |
|
|
|
199,724 |
|
Shareholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, no par value: 1,000,000 shares
authorized; 256,500, 269,549 and 273,683
shares issued and outstanding |
|
|
751,281 |
|
|
|
685,934 |
|
|
|
646,684 |
|
Unearned stock compensation |
|
|
|
|
|
|
(327 |
) |
|
|
(550 |
) |
Retained earnings |
|
|
1,095,181 |
|
|
|
1,404,366 |
|
|
|
1,365,888 |
|
Accumulated other comprehensive (loss)
earnings |
|
|
(2,102 |
) |
|
|
2,708 |
|
|
|
6,660 |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
1,844,360 |
|
|
|
2,092,681 |
|
|
|
2,018,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
4,792,677 |
|
|
$ |
4,921,349 |
|
|
$ |
4,916,413 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.
Page 4 of 28
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Amounts in thousands except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
|
|
|
|
Comprehensive |
|
|
|
|
|
|
Common Stock |
|
|
Stock |
|
|
Retained |
|
|
(Loss) |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Compensation |
|
|
Earnings |
|
|
Earnings |
|
|
Total |
|
|
Balance at January 28, 2006 |
|
|
269,549 |
|
|
$ |
685,934 |
|
|
$ |
(327 |
) |
|
$ |
1,404,366 |
|
|
$ |
2,708 |
|
|
$ |
2,092,681 |
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
309,985 |
|
|
|
|
|
|
|
309,985 |
|
Other comprehensive earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,175 |
|
|
|
1,175 |
|
Fair value adjustment to
investment in asset backed
securities, net of tax
of $3,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,985 |
) |
|
|
(5,985 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
305,175 |
|
Cash dividends paid ($0.21 per
share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,249 |
) |
|
|
|
|
|
|
(56,249 |
) |
Issuance of common stock for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option plans |
|
|
1,820 |
|
|
|
42,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,595 |
|
Employee stock purchase plan |
|
|
237 |
|
|
|
8,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,568 |
|
Other |
|
|
14 |
|
|
|
161 |
|
|
|
327 |
|
|
|
|
|
|
|
|
|
|
|
488 |
|
Stock-based compensation |
|
|
|
|
|
|
14,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,023 |
|
Repurchase of common stock |
|
|
(15,120 |
) |
|
|
|
|
|
|
|
|
|
|
(562,921 |
) |
|
|
|
|
|
|
(562,921 |
) |
|
Balance at July 29, 2006 |
|
|
256,500 |
|
|
$ |
751,281 |
|
|
|
|
|
|
$ |
1,095,181 |
|
|
$ |
(2,102 |
) |
|
$ |
1,844,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Common Stock |
|
|
Stock |
|
|
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 |
|
Other |
|
|
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 |
|
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.
Page 5 of 28
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
July 29, 2006 |
|
|
July 30, 2005 |
|
Operating Activities |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
309,985 |
|
|
$ |
253,456 |
|
Adjustments to reconcile net earnings to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization of buildings and equipment |
|
|
138,632 |
|
|
|
137,436 |
|
Amortization of deferred property incentives and other, net |
|
|
(16,280 |
) |
|
|
(15,664 |
) |
Stock-based compensation expense |
|
|
14,083 |
|
|
|
7,474 |
|
Deferred income taxes, net |
|
|
(31,632 |
) |
|
|
2,420 |
|
Tax benefit from stock-based payments |
|
|
18,092 |
|
|
|
26,872 |
|
Excess tax benefit from stock-based payments |
|
|
(15,109 |
) |
|
|
|
|
Provision for bad debt expense |
|
|
6,448 |
|
|
|
10,064 |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(78,971 |
) |
|
|
(67,230 |
) |
Investment in asset backed securities |
|
|
200,803 |
|
|
|
(94,112 |
) |
Merchandise inventories |
|
|
(79,747 |
) |
|
|
(71,717 |
) |
Prepaid expenses |
|
|
(11,809 |
) |
|
|
(71 |
) |
Other assets |
|
|
(1,262 |
) |
|
|
(1,936 |
) |
Accounts payable |
|
|
192,158 |
|
|
|
191,087 |
|
Accrued salaries, wages and related benefits |
|
|
(64,777 |
) |
|
|
(67,260 |
) |
Other current liabilities |
|
|
(29,356 |
) |
|
|
(938 |
) |
Income taxes payable |
|
|
38,457 |
|
|
|
(7,842 |
) |
Property incentives |
|
|
8,866 |
|
|
|
21,613 |
|
Other liabilities |
|
|
974 |
|
|
|
15,959 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
599,555 |
|
|
|
339,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(115,720 |
) |
|
|
(131,384 |
) |
Proceeds from sale of assets |
|
|
128 |
|
|
|
|
|
Purchases of short-term investments |
|
|
(109,550 |
) |
|
|
(289,500 |
) |
Sales of short-term investments |
|
|
163,550 |
|
|
|
297,325 |
|
Increase in restricted cash |
|
|
(150,000 |
) |
|
|
|
|
Other, net |
|
|
(2,820 |
) |
|
|
(139 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(214,412 |
) |
|
|
(123,698 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Principal payments on long-term debt |
|
|
(2,312 |
) |
|
|
(98,650 |
) |
Increase in cash book overdrafts |
|
|
5,604 |
|
|
|
35,633 |
|
Proceeds from exercise of stock options |
|
|
24,700 |
|
|
|
55,413 |
|
Proceeds from employee stock purchase plan |
|
|
8,370 |
|
|
|
8,640 |
|
Excess tax benefit from stock-based payments |
|
|
15,109 |
|
|
|
|
|
Cash dividends paid |
|
|
(56,249 |
) |
|
|
(40,994 |
) |
Repurchase of common stock |
|
|
(562,921 |
) |
|
|
(73,913 |
) |
Other, net |
|
|
97 |
|
|
|
210 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(567,602 |
) |
|
|
(113,661 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(182,459 |
) |
|
|
102,252 |
|
Cash and cash equivalents at beginning of period |
|
|
462,656 |
|
|
|
360,623 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
280,197 |
|
|
$ |
462,875 |
|
|
|
|
|
|
|
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.
Page 6 of 28
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in thousands except per share and per option 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 Annual Report on Form 10-K for the
fiscal year ended January 28, 2006. The same accounting policies are followed for preparing
quarterly and annual financial information. 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.
Similar to
many retailers, this year we will have an extra week a 53rd week. This
week will be reported in the fourth quarter, which will have 14 weeks instead of the normal 13
weeks.
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 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. With the exception of our adoption of Statement of Financial Accounting
Standards (SFAS) No. 123(R), Share-Based Payment in the beginning of the first quarter of 2006,
our accounting policies and methodologies in 2006 are consistent with those discussed in our Annual
Report on Form 10-K for the fiscal year ended January 28, 2006.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN)
48, Accounting for Uncertainty in Income Taxes. FIN 48 requires that we recognize the impact of
a tax position in our financial statements if that position is more likely than not to be sustained
on audit, based on the technical merits of the position. FIN 48 also provides guidance on
derecognition of income tax assets and liabilities, classification of current and deferred income
tax assets and liabilities, accounting for interest and penalties associated with tax positions,
accounting for income taxes in interim periods, and income tax disclosures. The provisions of FIN
48 are effective for us as of the beginning of our 2007 fiscal year. We are currently evaluating
the impact of adopting FIN 48 on our financial statements.
Stock-Based Compensation
Prior to the adoption of SFAS No. 123(R), we applied Accounting Principles Board Opinion (APB) No.
25, Accounting for Stock Issued to Employees, to measure compensation costs for our stock-based
compensation programs. Under APB No. 25, we recorded no compensation expense for stock options
granted to employees and directors because the options strike price was equal to the closing
market price of our common stock on the grant date. Also, through 2005 we recorded no compensation
expense in connection with our Employee Stock Purchase Plan (ESPP). Through 2005, we presented the
effect on net earnings and earnings per share of the fair value provisions of SFAS No. 123,
Accounting for Stock-Based Compensation in the Notes to Condensed Consolidated Financial
Statements.
Effective January 29, 2006, we adopted SFAS No. 123(R), which requires us to measure the cost of
employee and director services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. The costs are recognized over the period during which an
employee is required to provide services in exchange for the award.
Page 7 of 28
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in thousands except per share and per option amounts)
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
We recognize stock-based compensation expense on a straight-line basis over the requisite service
period. The following table summarizes our stock-based compensation expense (earnings):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Six Months Ended |
|
|
|
July 29, 2006 |
|
|
July 30, 2005 |
|
|
July 29, 2006 |
|
|
July 30, 2005 |
|
Stock options |
|
$ |
6,352 |
|
|
|
|
|
|
$ |
12,992 |
|
|
|
|
|
Employee Stock Purchase Plan |
|
|
471 |
|
|
|
|
|
|
|
959 |
|
|
|
|
|
Performance share units |
|
|
(829 |
) |
|
$ |
5,527 |
|
|
|
(715 |
) |
|
$ |
6,570 |
|
Other |
|
|
753 |
|
|
|
519 |
|
|
|
847 |
|
|
|
904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
before income tax benefit |
|
|
6,747 |
|
|
|
6,046 |
|
|
|
14,083 |
|
|
|
7,474 |
|
Income tax benefit |
|
|
(2,429 |
) |
|
|
(2,352 |
) |
|
|
(5,068 |
) |
|
|
(2,907 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense,
net of income tax benefit |
|
$ |
4,318 |
|
|
$ |
3,694 |
|
|
$ |
9,015 |
|
|
$ |
4,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The stock-based compensation expense before income tax benefit was recorded in our condensed
consolidated statements of earnings as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Six Months Ended |
|
|
|
July 29, 2006 |
|
|
July 30, 2005 |
|
|
July 29, 2006 |
|
|
July 30, 2005 |
|
Cost of sales and related buying
and occupancy costs |
|
$ |
2,628 |
|
|
|
|
|
|
$ |
5,351 |
|
|
|
|
|
Selling, general and administrative expenses |
|
|
4,119 |
|
|
$ |
6,046 |
|
|
|
8,732 |
|
|
$ |
7,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
before income tax benefit |
|
$ |
6,747 |
|
|
$ |
6,046 |
|
|
$ |
14,083 |
|
|
$ |
7,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We adopted SFAS No. 123(R) using the modified prospective method. Under this transition
method, the stock-based compensation expense recognized in the current period includes the expense
for stock options granted after January 29, 2006. The stock-based compensation expense also
includes the expense for options granted prior to, but not vested as of January 29, 2006 based on
the grant-date fair value determined in accordance with the original provisions of SFAS No. 123.
In addition, we recognized stock-based compensation expense related to our ESPP, as our 10%
purchase discount exceeds the amount allowed under SFAS No. 123(R) for non-compensatory treatment.
As provided for under the modified prospective method, we have not restated our results for prior
periods. The incremental stock-based compensation expense upon adoption of SFAS No. 123(R) for the
quarter ended July 29, 2006 was $6,823 ($4,365 net of tax), or $0.02 per basic share and $0.01 per
diluted share. For the six months ended July 29, 2006, the incremental stock-based compensation
expense was $13,951 ($8,933 net of tax), or $0.03 per basic and diluted share. We expect to record
$26,960 in incremental stock-based compensation expense for the year ended February 3, 2007,
representing approximately $0.06 per diluted share.
Prior to the adoption of SFAS No. 123(R), we presented all tax benefits resulting from the exercise
of stock options and ESPP as operating cash inflows. SFAS No. 123(R) requires the benefits of tax
deductions in excess of the compensation cost recognized for those awards to be classified as
financing cash inflows rather than operating cash inflows, on a prospective basis. This amount is
shown as Excess tax benefit from stock-based payments in the condensed consolidated statement of
cash flows and was $15,109 for the six months ended July 29, 2006.
Page 8 of 28
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in thousands except per share and per option amounts)
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The following table 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 in
2005:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Six Months Ended |
|
|
|
July 30, 2005 |
|
|
July 30, 2005 |
|
Net earnings, as reported |
|
$ |
148,918 |
|
|
$ |
253,456 |
|
Add: stock-based compensation expense included in reported net earnings,
net of tax |
|
|
3,696 |
|
|
|
4,567 |
|
Deduct: stock-based compensation expense determined under fair value,
net of tax |
|
|
(7,911 |
) |
|
|
(13,628 |
) |
|
|
|
|
|
|
|
Pro forma net earnings |
|
$ |
144,703 |
|
|
$ |
244,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.54 |
|
|
$ |
0.93 |
|
Diluted as reported |
|
$ |
0.53 |
|
|
$ |
0.91 |
|
|
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
0.53 |
|
|
$ |
0.89 |
|
Diluted pro forma |
|
$ |
0.52 |
|
|
$ |
0.88 |
|
|
In 2005, we used the Black-Scholes option valuation model to estimate the fair value of the
stock options under SFAS No. 123. When we adopted SFAS No. 123(R), we elected to use the Binomial
Lattice option valuation model. We believe that this model provides a better estimate of fair
value than the Black-Scholes option valuation model, as it can accommodate variability in
assumptions for expected volatility, dividends and risk-free interest rates. We used the following
assumptions to estimate the fair value for stock options at grant date: |
|
|
|
2006 |
|
|
2005 |
|
Risk-free interest rate |
|
|
4.9% 5.1 |
% |
|
|
3.9 |
% |
Weighted average expected volatility |
|
|
37.0 |
% |
|
|
44.3 |
% |
Weighted average expected dividend yield |
|
|
1.0 |
% |
|
|
1.7 |
% |
Weighted average expected life in years |
|
|
5.4 |
|
|
|
5.0 |
|
The weighted average fair value per option at the grant date was $16 and $10 in 2006 and 2005.
The following describes the significant assumptions used to estimate the fair value of options
granted:
|
|
|
Risk-free interest rate: For 2006, the rate represents the yield on U.S. Treasury
zero-coupon securities that mature over the 10-year life of the stock options. For 2005, the
rate was the yield on the U.S. Treasury zero-coupon securities which matured near the end of
the expected life of the stock options. |
|
|
|
|
Expected volatility: For 2006, the expected volatility was based on a combination of the
historical volatility of our common stock and the implied volatility of exchange traded
options for our common stock. In 2005, the expected volatility was estimated using the
historical volatility of our common stock. |
|
|
|
|
Expected dividend yield: For 2006, the yield was our forecasted dividend yield for the
next ten years. In 2005, the expected dividend yield was based on our historical dividend
yield. |
|
|
|
|
Expected life in years: The expected life represents the estimated period of time until
option exercise. In 2006, based on our historical exercise behavior and taking into
consideration the contractual term of the option and our employees expected exercise and
post-vesting employment termination behavior, the expected term of options granted was
derived from the output of the Binomial Lattice option valuation model. In 2005, the
expected life was determined based on our historical exercise behavior. |
Page 9 of 28
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in thousands except per share and per option amounts)
(Unaudited)
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 |
|
|
Six Months Ended |
|
|
|
July 29, 2006 |
|
|
July 30, 2005 |
|
|
July 29, 2006 |
|
|
July 30, 2005 |
|
Participant service cost |
|
$ |
557 |
|
|
$ |
496 |
|
|
$ |
1,114 |
|
|
$ |
909 |
|
Interest cost |
|
|
1,308 |
|
|
|
1,027 |
|
|
|
2,616 |
|
|
|
2,045 |
|
Amortization of net loss |
|
|
724 |
|
|
|
413 |
|
|
|
1,448 |
|
|
|
827 |
|
Amortization of prior service cost |
|
|
257 |
|
|
|
255 |
|
|
|
514 |
|
|
|
495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense |
|
$ |
2,846 |
|
|
$ |
2,191 |
|
|
$ |
5,692 |
|
|
$ |
4,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3: EARNINGS PER SHARE
The computation of earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Six Months Ended |
|
|
|
July 29, 2006 |
|
|
July 30, 2005 |
|
|
July 29, 2006 |
|
|
July 30, 2005 |
|
Net earnings |
|
$ |
178,754 |
|
|
$ |
148,918 |
|
|
$ |
309,985 |
|
|
$ |
253,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares |
|
|
261,512 |
|
|
|
273,379 |
|
|
|
264,501 |
|
|
|
273,225 |
|
Dilutive effect of stock options and
performance share units |
|
|
4,714 |
|
|
|
5,790 |
|
|
|
5,055 |
|
|
|
5,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares |
|
|
266,226 |
|
|
|
279,169 |
|
|
|
269,556 |
|
|
|
278,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.68 |
|
|
$ |
0.54 |
|
|
$ |
1.17 |
|
|
$ |
0.93 |
|
Diluted earnings per share |
|
$ |
0.67 |
|
|
$ |
0.53 |
|
|
$ |
1.15 |
|
|
$ |
0.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive stock options and other |
|
|
1,835 |
|
|
|
150 |
|
|
|
1,835 |
|
|
|
150 |
|
NOTE 4: ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2006 |
|
|
January 28, 2006 |
|
|
July 30, 2005 |
|
Trade receivables |
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted |
|
$ |
29,607 |
|
|
$ |
32,070 |
|
|
$ |
29,182 |
|
Restricted |
|
|
606,198 |
|
|
|
552,671 |
|
|
|
601,972 |
|
Allowance for doubtful accounts |
|
|
(15,934 |
) |
|
|
(17,926 |
) |
|
|
(18,259 |
) |
|
|
|
|
|
|
|
|
|
|
Trade receivables, net |
|
|
619,871 |
|
|
|
566,815 |
|
|
|
612,895 |
|
Other |
|
|
92,295 |
|
|
|
72,743 |
|
|
|
88,987 |
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
712,166 |
|
|
$ |
639,558 |
|
|
$ |
701,882 |
|
|
|
|
|
|
|
|
|
|
|
Our restricted trade receivables relate to our Nordstrom private label card, which back the
$300,000 Class A notes due in October 2006. The unrestricted trade receivables consist primarily
of our Façonnable trade receivables and accrued finance charges not yet allocated to customer
accounts.
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.
Page 10 of 28
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in thousands except per share and per option amounts)
(Unaudited)
NOTE 5: INVESTMENT IN ASSET BACKED SECURITIES
Our investment in asset backed securities and the off-balance sheet financing are described in
Notes 1 and 8 of our Annual Report on Form 10-K for the fiscal year ended January 28, 2006. 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 29, 2006 |
|
|
January 28, 2006 |
|
|
July 30, 2005 |
|
Total face value of co-branded Nordstrom VISA
credit card principal receivables |
|
$ |
840,087 |
|
|
$ |
738,947 |
|
|
$ |
703,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities issued by the VISA Trust: |
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet (sold to third parties): |
|
|
|
|
|
|
|
|
|
|
|
|
2002 Class A & B Notes |
|
$ |
200,000 |
|
|
$ |
200,000 |
|
|
$ |
200,000 |
|
2004-2 VFN |
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
500,000 |
|
|
$ |
200,000 |
|
|
$ |
200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transferor Interest amount recorded on Nordstrom,
Inc.s balance sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in asset backed securities at fair value |
|
$ |
354,348 |
|
|
$ |
561,136 |
|
|
$ |
515,596 |
|
|
|
|
|
|
|
|
|
|
|
In July 2006, the VISA Trust issued for cash $300,000 of variable funding notes at par; these
notes are referred to as the 2004-2 VFN. The proceeds received by the VISA Trust were then sent to
us in exchange for a reduction in the Transferor Interest in the VISA Trust held by Nordstrom, Inc.
The reduction in the Transferor Interest was equal to a $300,000 reduction in our share of the
principal balance of the underlying VISA credit card receivables.
The following table presents the key assumptions we use to value the investment in asset backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2006 |
|
|
January 28, 2006 |
|
|
July 30, 2005 |
|
Weighted average remaining life (in months) |
|
|
7.2 |
|
|
|
7.6 |
|
|
|
7.2 |
|
Average annual credit losses |
|
|
5.7 |
% |
|
|
4.7 |
% |
|
|
6.9 |
% |
Average gross yield |
|
|
17.5 |
% |
|
|
17.1 |
% |
|
|
17.5 |
% |
Weighted average coupon on issued securities |
|
|
5.7 |
% |
|
|
5.2 |
% |
|
|
4.6 |
% |
Average monthly payment rates |
|
|
8.1 |
% |
|
|
8.2 |
% |
|
|
8.2 |
% |
Discount rate on investment in asset backed
securities |
|
8.4% to 11.8% |
|
5.9% to 11.1% |
|
5.6% to 9.7% |
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 |
|
|
Six Months Ended |
|
|
|
July 29, 2006 |
|
|
July 30, 2005 |
|
|
July 29, 2006 |
|
|
July 30, 2005 |
|
Interest income |
|
$ |
25,773 |
|
|
$ |
18,403 |
|
|
$ |
44,700 |
|
|
$ |
32,567 |
|
Gain on sales of
receivables and
other income |
|
|
7,636 |
|
|
|
7,458 |
|
|
|
16,031 |
|
|
|
13,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,409 |
|
|
$ |
25,861 |
|
|
$ |
60,731 |
|
|
$ |
45,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 11 of 28
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in thousands except per share and per option amounts)
(Unaudited)
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 January 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 (7.85% at July 29,
2006). The fair value of our interest rate swap is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2006 |
|
|
January 28, 2006 |
|
|
July 30, 2005 |
|
Interest rate swap fair value |
|
$ |
(11,899 |
) |
|
$ |
(11,050 |
) |
|
$ |
(10,507 |
) |
In the second quarter of 2006, we deposited $150,000 into a restricted pre-funding account.
We will continue to deposit $50,000 of cash per month into the account to repay the $300,000
Private Label Securitization debt due in October 2006.
In June 2006, we amended our existing variable funding facility backed by Nordstrom private label
card and VISA credit card receivables to increase the capacity of this facility from $150,000 to
$450,000. Borrowings under the facility will incur interest based upon the actual cost of
commercial paper plus specified fees ranging from 0.075% to 0.15% (5.43% as of July 29, 2006). We
pay a commitment fee ranging from 0.125% to 0.15% for the note based on the amount of the
commitment. Fee rates decrease if more than $50,000 is outstanding on the facility. The facility
can be cancelled or not renewed if our debt ratings fall below Standard and Poors BB+ rating or
Moodys Ba1 rating. Our current rating by Standard and Poors is A, five grades above BB+, and by
Moodys is Baa1, three grades above Ba1.
In July 2006, the VISA Trust used this facility to issue $300,000 of Notes. As the VISA Trust is a
statutory business trust and the VISA credit card receivables transferred to it are accounted for
as a sale under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, the obligations of the VISA Trust are not recorded in our
financial statements. The VISA Trust sent the proceeds from this note issuance to us in return for
a reduction in our interest in the VISA Trust equal to a $300,000 decrease in our share of the
principal balance of VISA credit card receivables.
Page 12 of 28
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in thousands except per share and per option amounts)
(Unaudited)
NOTE 7: STOCK-BASED COMPENSATION
In 2004, our shareholders approved the 2004 Equity Incentive Plan. We currently grant stock
options, performance share units and common shares under this plan.
Stock Options
As of July 29, 2006, we have options outstanding under three stock option plans (collectively, the
Nordstrom, Inc. Plans). Options vest over periods ranging from four to eight years, and expire
ten years after the date of grant. A summary of stock option activity under the Nordstrom, Inc.
Plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
July 29, 2006 |
|
|
July 30, 2005 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Shares |
|
|
Exercise Price |
|
|
|
|
|
|
Outstanding, beginning of year |
|
|
14,344 |
|
|
$ |
15 |
|
|
|
18,320 |
|
|
$ |
13 |
|
Granted |
|
|
1,939 |
|
|
|
40 |
|
|
|
2,564 |
|
|
|
26 |
|
Exercised |
|
|
(1,820 |
) |
|
|
14 |
|
|
|
(4,390 |
) |
|
|
13 |
|
Cancelled |
|
|
(367 |
) |
|
|
25 |
|
|
|
(501 |
) |
|
|
16 |
|
|
|
|
|
|
Outstanding, end of period |
|
|
14,096 |
|
|
$ |
19 |
|
|
|
15,993 |
|
|
$ |
15 |
|
|
|
|
|
|
In 2005 and 2006, stock option awards to employees were approved by the Compensation Committee
of the Companys Board of Directors and their exercise price was set at the closing price of our
common stock on the Committee meeting date. The stock option awards provide our leaders with the
opportunity for financial rewards when our stock price increases. The awards are determined based
upon a percentage of the leaders base salary and the fair value of the stock options, which was
estimated using an option pricing model. The fair value per stock option was $16 in 2006 (using a
Binomial Lattice option valuation model) and $10 in 2005 (using the Black-Scholes option valuation
model). For the six months ended July 29, 2006, we awarded stock options to 1,235 employees
compared to 1,207 employees in the same period in 2005.
The total intrinsic value of options exercised during the six months ended July 29, 2006 and July
30, 2005 was $46,016 and $66,890. The total fair value of stock options vested during the six
months ended July 29, 2006 and July 30, 2005 was $30,068 and $26,403. As of July 29, 2006, the
total unrecognized stock-based compensation expense related to nonvested stock options was $51,066,
which is expected to be recognized over a weighted average period of 32 months. The aggregate
intrinsic value of options outstanding as of July 29, 2006 was $226,268.
The following table summarizes information about stock options outstanding for the Nordstrom, Inc.
Plans as of July 29, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Contractual |
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
Range of Exercise Prices |
|
Shares |
|
|
Life (Years) |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
|
|
$8.03 $9.00 |
|
|
3,351 |
|
|
|
6 |
|
|
$ |
9 |
|
|
|
2,311 |
|
|
$ |
9 |
|
$9.01 $13.00 |
|
|
3,203 |
|
|
|
5 |
|
|
|
12 |
|
|
|
3,166 |
|
|
|
12 |
|
$13.01 $20.00 |
|
|
3,536 |
|
|
|
5 |
|
|
|
18 |
|
|
|
2,056 |
|
|
|
18 |
|
$20.01 $40.27 |
|
|
4,006 |
|
|
|
9 |
|
|
|
33 |
|
|
|
480 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
14,096 |
|
|
|
6 |
|
|
$ |
19 |
|
|
|
8,013 |
|
|
$ |
13 |
|
|
|
|
|
|
Page 13 of 28
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in thousands except per share and per option amounts)
(Unaudited)
NOTE 7: STOCK-BASED COMPENSATION (CONT.)
Performance Share Units
We grant performance share units to align the performance of our senior management with our
shareholder returns. Performance share units vest after a three-year performance period only when
our total shareholder return (growth in stock price and reinvestment of dividends) is positive and
outperforms companies in a defined peer group of direct competitors determined by the Compensation
Committee of our Board of Directors. The percentage of units that vest depends on our relative
position at the end of the performance period and can range from 0% to 125% of the number of units
granted. As participants may elect to exchange each unit earned for one share of stock or the
cash equivalent, these units are classified as a liability award.
At the end of each period, we record the performance share unit liability based on the vesting
factors described above. At the end of July 29, 2006 and July 30, 2005, our liabilities included
$4,903 and $11,825 for the units. For the six months ended July 29, 2006 and July 30, 2005,
stock-based compensation (earnings) expense was $(715) and $6,570. As of July 29, 2006, the
remaining unrecognized stock-based compensation expense related to nonvested performance share
units was $2,329, which is expected to be recognized over a weighted average period of 15 months.
At January 28, 2006, 412,648 units were unvested. During the six months ended July 29, 2006,
63,673 units were granted, 216,865 units vested and 991 units cancelled, resulting in an ending
balance of 258,465 unvested units as of July 29, 2006.
The following table summarizes the information for performance share units that vested during the
period:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
July 29, 2006 |
|
|
July 30, 2005 |
|
Number of performance share units vested |
|
|
216,865 |
|
|
|
336,892 |
|
Total fair value of performance share units vested |
|
$ |
11,310 |
|
|
$ |
10,159 |
|
Total amount of performance share units settled for cash |
|
$ |
5,982 |
|
|
$ |
1,836 |
|
Nonemployee Director Stock Incentive Plan
The Nonemployee Director Stock Incentive Plan authorizes the grant of stock awards to our
nonemployee directors. These awards may be deferred or issued in the form of restricted or
unrestricted stock, nonqualified stock options or stock appreciation rights. We issued 5 shares of
common stock for a total expense of $169 in 2006. An additional 15 shares were deferred for a
total expense of $509. As of July 29, 2006, we had 755 remaining shares available for issuance.
Employee Stock Purchase Plan
We offer an Employee Stock Purchase Plan as a benefit to our employees. Employees may make payroll
deductions of up to ten percent of their base and bonus compensation. At the end of each six-month
offering period, participants may purchase shares of our common stock at 90% of the fair market
value on the last day of each offer period. Beginning in 2006, we recognize stock-based
compensation expense related to the ESPP, as our purchase discount exceeds the amount allowed under
SFAS No. 123(R) for non-compensatory treatment. We record compensation expense over the purchase
period at the fair value of the ESPP at the end of each reporting period.
We issued 237 shares under this plan in the first quarter of 2006. As of July 29, 2006 and July
30, 2005, we had current liabilities of $5,760 and $4,961 for the purchase of shares in the future.
Page 14 of 28
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in thousands except per share and per option amounts)
(Unaudited)
NOTE 8: SEGMENT REPORTING
The following tables set forth the information for our reportable segments and a reconciliation to
the consolidated totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2006 |
|
Stores |
|
|
Credit |
|
|
Direct |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
|
Net sales |
|
$ |
2,128,192 |
|
|
|
|
|
|
$ |
126,898 |
|
|
$ |
15,378 |
|
|
|
|
|
|
$ |
2,270,468 |
|
Net sales increase (decrease) |
|
|
7.5 |
% |
|
|
N/A |
|
|
|
16.9 |
% |
|
|
(14.4 |
%) |
|
|
N/A |
|
|
|
7.8 |
% |
Intersegment revenues |
|
|
|
|
|
$ |
12,717 |
|
|
|
|
|
|
|
|
|
|
$ |
(12,717 |
) |
|
|
|
|
Interest expense, net |
|
|
|
|
|
|
(7,602 |
) |
|
|
|
|
|
|
(5,181 |
) |
|
|
|
|
|
|
(12,783 |
) |
Other income including finance
charges, net |
|
|
(3,816 |
) |
|
|
67,168 |
|
|
|
(200 |
) |
|
|
(2,301 |
) |
|
|
|
|
|
|
60,851 |
|
Earnings before income tax
expense |
|
|
300,746 |
|
|
|
15,582 |
|
|
|
30,845 |
|
|
|
(54,822 |
) |
|
|
|
|
|
|
292,351 |
|
Earnings before income tax
expense
as a percentage of net sales |
|
|
14.1 |
% |
|
|
N/A |
|
|
|
24.3 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
12.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2005 |
|
Stores |
|
|
Credit |
|
|
Direct |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
|
Net sales |
|
$ |
1,979,962 |
|
|
|
|
|
|
$ |
108,508 |
|
|
$ |
17,968 |
|
|
|
|
|
|
$ |
2,106,438 |
|
Net sales increase |
|
|
7.3 |
% |
|
|
N/A |
|
|
|
9.2 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
7.8 |
% |
Intersegment revenues |
|
|
|
|
|
$ |
11,826 |
|
|
|
|
|
|
|
|
|
|
$ |
(11,826 |
) |
|
|
|
|
Interest expense, net |
|
|
|
|
|
|
(6,311 |
) |
|
|
|
|
|
|
(4,593 |
) |
|
|
|
|
|
|
(10,904 |
) |
Other income including finance
charges, net |
|
|
(2,765 |
) |
|
|
58,706 |
|
|
|
(17 |
) |
|
|
(10,954 |
) |
|
|
|
|
|
|
44,970 |
|
Earnings before income tax
expense |
|
|
268,996 |
|
|
|
13,408 |
|
|
|
21,405 |
|
|
|
(62,016 |
) |
|
|
|
|
|
|
241,793 |
|
Earnings before income tax
expense
as a percentage of net sales |
|
|
13.6 |
% |
|
|
N/A |
|
|
|
19.7 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
11.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2006 |
|
Stores |
|
|
Credit |
|
|
Direct |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
|
Net sales |
|
$ |
3,782,616 |
|
|
|
|
|
|
$ |
236,500 |
|
|
$ |
38,575 |
|
|
|
|
|
|
$ |
4,057,691 |
|
Net sales increase (decrease) |
|
|
7.9 |
% |
|
|
N/A |
|
|
|
11.1 |
% |
|
|
(6.9 |
%) |
|
|
N/A |
|
|
|
7.9 |
% |
Intersegment revenues |
|
|
|
|
|
$ |
21,050 |
|
|
|
|
|
|
|
|
|
|
$ |
(21,050 |
) |
|
|
|
|
Interest expense, net |
|
|
|
|
|
|
(14,184 |
) |
|
|
|
|
|
|
(9,350 |
) |
|
|
|
|
|
|
(23,534 |
) |
Other income including finance
charges, net |
|
|
(5,609 |
) |
|
|
124,725 |
|
|
|
(349 |
) |
|
|
(4,078 |
) |
|
|
|
|
|
|
114,689 |
|
Earnings before income tax
expense |
|
|
537,803 |
|
|
|
33,269 |
|
|
|
56,066 |
|
|
|
(121,700 |
) |
|
|
|
|
|
|
505,438 |
|
Earnings before income tax
expense
as a percentage of net sales |
|
|
14.2 |
% |
|
|
N/A |
|
|
|
23.7 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
12.5 |
% |
Total assets |
|
|
2,334,691 |
|
|
|
1,173,188 |
|
|
|
104,515 |
|
|
|
1,180,283 |
|
|
|
|
|
|
|
4,792,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2005 |
|
Stores |
|
|
Credit |
|
|
Direct |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
|
Net sales |
|
$ |
3,506,548 |
|
|
|
|
|
|
$ |
212,920 |
|
|
$ |
41,444 |
|
|
|
|
|
|
$ |
3,760,912 |
|
Net sales increase |
|
|
7.3 |
% |
|
|
N/A |
|
|
|
9.3 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
7.8 |
% |
Intersegment revenues |
|
|
|
|
|
$ |
19,720 |
|
|
|
|
|
|
|
|
|
|
$ |
(19,720 |
) |
|
|
|
|
Interest expense, net |
|
|
|
|
|
|
(12,548 |
) |
|
|
|
|
|
|
(10,995 |
) |
|
|
|
|
|
|
(23,543 |
) |
Other income including finance
charges, net |
|
|
(4,606 |
) |
|
|
108,735 |
|
|
|
(36 |
) |
|
|
(16,391 |
) |
|
|
|
|
|
|
87,702 |
|
Earnings before income tax
expense |
|
|
476,763 |
|
|
|
25,001 |
|
|
|
39,202 |
|
|
|
(126,193 |
) |
|
|
|
|
|
|
414,773 |
|
Earnings before income tax
expense
as a percentage of net sales |
|
|
13.6 |
% |
|
|
N/A |
|
|
|
18.4 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
11.0 |
% |
Total assets |
|
|
2,326,472 |
|
|
|
1,169,190 |
|
|
|
111,066 |
|
|
|
1,309,685 |
|
|
|
|
|
|
|
4,916,413 |
|
Page 15 of 28
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in thousands except per share and per option amounts)
(Unaudited)
NOTE 8: SEGMENT REPORTING (CONT.)
The segment information for 2005 has been adjusted from our previous disclosures as we now reflect
Façonnable, Nordstrom Product Group and the distribution network in Other. Also, beginning in
September 2005, we changed our internal method for recognizing returns of Direct sales at Retail
Stores. Previously, these returns were recognized in the Direct segment and now they are
recognized in the Retail Stores segment.
NOTE 9: SUPPLEMENTARY CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
July 29, 2006 |
|
|
July 30, 2005 |
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
Interest (net of capitalized interest) |
|
$ |
30,367 |
|
|
$ |
29,549 |
|
Income taxes |
|
$ |
166,741 |
|
|
$ |
139,265 |
|
NOTE 10: CONTINGENCIES
Gain Contingencies
In July 2006, we received $5,586 of proceeds from the VISA Check/Master Money Antitrust Litigation.
These proceeds were recorded as a gain in the second quarter of 2006 in other income including
finance charges, net.
Loss Contingencies
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.
Page 16 of 28
Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
(Dollar amounts in millions except per share amounts).
The following discussion should be read in conjunction with the Managements Discussion and
Analysis section of our Annual Report on Form 10-K for the fiscal year ended January 28, 2006.
RESULTS OF OPERATIONS
Overview
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Six Months |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Net earnings |
|
$ |
178.8 |
|
|
$ |
148.9 |
|
|
|
310.0 |
|
|
$ |
253.5 |
|
Net earnings as a percentage of net sales |
|
|
7.9 |
% |
|
|
7.1 |
% |
|
|
7.6 |
% |
|
|
6.7 |
% |
Diluted earnings per share |
|
$ |
0.67 |
|
|
$ |
0.53 |
|
|
$ |
1.15 |
|
|
$ |
0.91 |
|
Net earnings as a percentage of net sales improved 80 basis points for the quarter and 90
basis points for the six months ended July 29, 2006 compared to the same periods last year. These
results were driven by the combination of continued sales growth, moderate gross profit rate
expansion, stable selling cost rates, and leverage of fixed costs. Key highlights include:
|
|
|
Same-store sales increased 5.7% for the quarter and 5.6% for the six months ended July 29,
2006, above our low single-digit plan. For both periods, sales increases continued across
all of our retail sales channels and all of our geographic regions. |
|
|
|
|
Gross profit as a percentage of net sales (gross profit rate) increased 26 basis points
for the quarter and 32 basis points for the six months ended July 29, 2006, delivered by
merchandise margin improvement and leverage on our buying and occupancy costs. |
|
|
|
|
Sales leverage on expenses resulted in a 64 basis point reduction in selling, general and
administrative expenses as a percentage of net sales (SG&A rate) for the quarter and a 57
basis point reduction for the six months ended July 29, 2006. |
|
|
|
|
We repurchased 9.7 million shares of our common stock during the second quarter and 15.1
million shares during the first six months of 2006 for $350.0 and $562.9. The resulting
reduction in weighted-average shares outstanding had a $0.01 impact on diluted earnings per
share for the quarter and a $0.03 impact for the six months ended July 29, 2006. |
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Six Months |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Net sales |
|
$ |
2,270.5 |
|
|
$ |
2,106.4 |
|
|
$ |
4,057.7 |
|
|
$ |
3,760.9 |
|
Net sales increase |
|
|
7.8 |
% |
|
|
7.8 |
% |
|
|
7.9 |
% |
|
|
7.8 |
% |
Total company same-store sale increase |
|
|
5.7 |
% |
|
|
6.2 |
% |
|
|
5.6 |
% |
|
|
6.2 |
% |
Total net sales for the quarter and six month periods increased over the same periods in the
prior year due to new stores and same-store sales increases. Total net sales benefited from the
four Full-Line stores opened since the second quarter of 2005. These four stores increased our
retail square footage by 3% compared to last year.
Mens apparel, cosmetics, accessories and intimate apparel were the key merchandise categories that
experienced the largest same-store sales increases in the second quarter and for the six months
ended July 29, 2006. During both periods, our womens apparel merchandise category had slight
same-store sales decreases.
Page 17 of 28
Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
(Cont.) (Dollar amounts in millions except per share amounts).
Our second quarter sales are an important contributor to our annual results. We hold
clearance sales in June with our Womens & Kids and Mens Half Yearly Events. In July, we conduct
our Anniversary Sale, which is our biggest event of the year, offering new Fall-season merchandise
priced at promotional discount prices before the season begins. Our highest sales volume days of
the year occur during these three events. Each of these events delivered positive same-store sales
increases in 2006. In addition, sales of regular-price merchandise increased in the second
quarter.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Six Months |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Gross profit |
|
$ |
823.8 |
|
|
$ |
758.9 |
|
|
$ |
1,488.1 |
|
|
$ |
1,367.2 |
|
Gross profit rate |
|
|
36.3 |
% |
|
|
36.0 |
% |
|
|
36.7 |
% |
|
|
36.4 |
% |
|
|
|
|
|
Four Quarters Ended |
|
|
|
|
|
|
July 29, 2006 |
|
July 30, 2005 |
Average inventory per square foot |
|
|
|
|
|
|
|
|
|
|
$52.20 |
|
|
|
$52.94 |
|
Inventory turnover rate (for the most recent four quarters) |
|
|
|
|
|
|
|
|
|
|
4.85 |
|
|
|
4.58 |
|
|
Compared to the same periods last year, our gross profit rate improved 26 basis points for the
quarter and 32 basis points for the six months ended July 29, 2006. For the quarter, our
merchandise margin improved slightly compared to the same period in the prior year, driven
primarily by our mens and intimate apparel merchandise divisions. For the six months ended July
29, 2006, our merchandise margin was flat compared to last year. Additionally, for both periods,
we experienced leverage on buying and occupancy expenses from better than planned sales.
|
|
Our buying expense included $2.6 in the second quarter and $5.4 in the six months ended July 29,
2006 for costs related to stock options awarded primarily to our merchant and product development
groups. These costs impacted our gross profit rate by 12 basis points for the quarter and 13 basis
points for the six month period.
|
|
Our four-quarter average inventory turnover rate improved 5.9% in 2006, indicating that our
merchandise planning and execution have continued to improve.
|
|
Selling, General and Administrative Expenses (SG&A)
|
|
|
|
Second Quarter |
|
Six Months |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Selling, general and administrative expenses |
|
$ |
579.6 |
|
|
$ |
551.2 |
|
|
$ |
1,073.8 |
|
|
$ |
1,016.6 |
|
SG&A rate |
|
|
25.5 |
% |
|
|
26.2 |
% |
|
|
26.5 |
% |
|
|
27.0 |
% |
Compared to the same period last year, our SG&A rate improved 64 basis points for the quarter
and 57 basis points for the six months ended July 29, 2006. For both periods, the performance
resulted primarily from leverage on better than planned sales. Our variable expense rate, which
consists primarily of selling labor and credit expenses, was slightly lower than last year; and, we
leveraged our fixed selling costs, including non-selling labor and advertising. SG&A include
incentive and deferred compensation costs, which were impacted by fluctuations in our stock price
and, to a lesser degree, overall market trends. We experienced favorability in our SG&A resulting
from a decline in our stock price during both the quarter and six months ended July 29, 2006.
However, our employee medical costs and information technology professional services increased in
2006.
SG&A included $4.2 in the second quarter and $8.6 in the six months ended July 29, 2006 for costs
related to stock options awarded to employees in our store operations, business units and corporate
service center. These costs impacted our SG&A rate by 18 basis points for the quarter and 21 basis
points for the six month period.
Page 18 of 28
Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
(Cont.) (Dollar amounts in millions except per share amounts).
Interest Expense, net
Interest expense, net increased by $1.9 to $12.8 for the quarter ended July 29, 2006, compared to
the same period in 2005. The increase was due to a slight increase in our average interest rates
and lower interest income as we reduced our cash and short-term investment balances in 2006 as
compared to 2005.
For the six months ended July 29, 2006, interest expense, net was $23.5, which was flat compared to
the same period in 2005. During the first quarter of 2006, our interest income was higher than
last year due to larger cash balances. During the second quarter, this was offset by an increase
in interest expense as discussed above.
Other Income Including Finance Charges, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Six Months |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Other income including finance charges, net |
|
$ |
60.9 |
|
|
$ |
45.0 |
|
|
$ |
114.7 |
|
|
$ |
87.7 |
|
Other income including finance charges, net
as a percentage of net sales |
|
|
2.7 |
% |
|
|
2.1 |
% |
|
|
2.8 |
% |
|
|
2.3 |
% |
Other income including finance charges, net increased by $15.9 for the quarter and $27.0 for
the six months ended July 29, 2006. For both periods, the increase was primarily due to growth in
our co-branded Nordstrom VISA credit card program.
In July 2006, we received $5.6 of proceeds from the VISA Check/Master Money Antitrust Litigation.
These proceeds were recorded as a gain in the second quarter of 2006 in other income including
finance charges, net.
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.
Page 19 of 28
Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
(Cont.) (Dollar amounts in millions except per share amounts).
Return on Invested Capital (ROIC) (Non-GAAP financial measure)
In the past two years, we have incorporated Return on Invested Capital (ROIC) into our key
financial metrics, and since 2005 have used it as an executive incentive measure. Overall
performance as measured by ROIC correlates directly to shareholders return over the long-term.
For the 12 months ended July 29, 2006, we improved our ROIC to 18.5% compared to 14.7% for the 12
months ended July 30, 2005. Our ROIC improved primarily from increased earnings before interest
and taxes. See our GAAP ROIC reconciliation below. The closest GAAP measure is return on assets,
which improved to 12.5% from 9.9% for the last 12 months ended July 29, 2006 compared to the 12
months ended July 30, 2005.
We define ROIC as follows:
|
|
|
|
|
|
|
|
|
|
|
ROIC
|
|
=
|
|
Net Operating Profit after Taxes (NOPAT) |
|
|
|
|
|
|
|
|
Average Invested Capital
|
|
|
|
|
|
|
|
|
|
Numerator = NOPAT
|
|
|
|
Denominator = Average Invested Capital |
|
|
|
Net Earnings
|
|
|
|
Average total assets |
|
|
+ Income tax expense
|
|
|
|
- Average non-interest-bearing current liabilities |
|
|
|
|
|
|
- Average deferred property incentives |
|
|
= EBIT
|
|
|
|
+ Average estimated asset base of capitalized
operating leases
|
|
|
+ Rent expense
|
|
|
|
= Average invested capital
|
|
|
- Estimated depreciation on
capitalized operating leases
|
|
|
|
|
|
|
= Net operating profit |
|
|
|
|
|
|
- Estimated income tax
expense
|
|
|
|
|
|
|
= NOPAT |
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of our return on assets to ROIC is as follows:
|
|
|
|
|
|
|
|
|
|
|
12 months ended |
|
|
|
July 29, 2006 |
|
|
July 30, 2005 |
|
Net earnings |
|
$ |
607.9 |
|
|
$ |
471.3 |
|
Add: income tax expense |
|
|
368.0 |
|
|
|
302.9 |
|
Add: interest expense, net |
|
|
45.3 |
|
|
|
50.2 |
|
|
|
|
|
|
|
|
Earnings before interest and income tax expense |
|
|
1,021.2 |
|
|
|
824.4 |
|
|
|
|
|
|
|
|
|
|
Add: rent expense |
|
|
44.9 |
|
|
|
50.0 |
|
Less: estimated depreciation on capitalized operating leases1 |
|
|
(24.0 |
) |
|
|
(26.7 |
) |
|
|
|
|
|
|
|
Net operating profit |
|
|
1,042.1 |
|
|
|
847.7 |
|
|
|
|
|
|
|
|
|
|
Estimated income tax expense |
|
|
(393.3 |
) |
|
|
(330.2 |
) |
|
|
|
|
|
|
|
Net operating profit after tax |
|
$ |
648.8 |
|
|
$ |
517.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total assets2 |
|
$ |
4,877.0 |
|
|
$ |
4,746.8 |
|
Less: average non-interest-bearing current liabilities3 |
|
|
(1,373.9 |
) |
|
|
(1,292.5 |
) |
Less: average deferred property incentives2 |
|
|
(361.8 |
) |
|
|
(377.4 |
) |
Add: average estimated asset base of capitalized operating leases4 |
|
|
366.5 |
|
|
|
431.9 |
|
|
|
|
|
|
|
|
Average invested capital |
|
$ |
3,507.8 |
|
|
$ |
3,508.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Assets |
|
|
12.5 |
% |
|
|
9.9 |
% |
ROIC |
|
|
18.5 |
% |
|
|
14.7 |
% |
1
Depreciation based upon estimated asset base of capitalized operating leases as
described in Note 4 below.
2
Based upon the trailing 12-month average.
3
Based upon the trailing 12-month average for accounts payable, accrued salaries, wages
and related benefits, other current liabilities and income taxes payable.
4
Based upon the trailing 12-month average of the monthly asset base which is calculated
as the trailing 12 months rent expense multiplied by 8.
Page 20 of 28
Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
(Cont.) (Dollar amounts in millions except per share amounts).
LIQUIDITY AND CAPITAL RESOURCES
Overall for the first six months of 2006, cash has decreased by $182.5 from the beginning of the
year. Cash outflows for common stock repurchases and payments to the Private Label Securitization
pre-funding account were only partially offset by cash inflows from operations, including the
reduction in our investment in asset backed securities.
Operating Activities
In comparison to last year, net cash flow from operating activities increased by $259.9 to $599.6
in 2006 primarily due to the reduction of our investment in asset backed securities. In July 2006,
the VISA Trust issued for cash $300.0 of variable funding notes at par. The proceeds received by
the VISA Trust were then sent to us in exchange for a reduction in the Transferor Interest in the
VISA Trust held by Nordstrom, Inc. (reflected as the investment in asset backed securities in our
condensed consolidated balance sheets). The reduction in the Transferor Interest was equal to a
$300.0 reduction in our share of the principal balance of the underlying VISA credit card
receivables.
Excluding the proceeds from the reduction of our investment in asset backed securities, our net
cash flow from operating activities decreased $40.1, due partially to the change in the
classification of the reduction in our tax benefit for stock-based payment arrangements from
operating activities to financing activities as a result of the adoption of SFAS No. 123(R),
Share-Based Payment, and partially as a result of the timing of various working capital items.
Investing Activities
Net cash used in investing activities increased by $90.7 to $214.4 primarily due to the investment
of $150.0 into a pre-funding account in preparation for the upcoming repayment of our Private Label
Securitization debt. We plan to continue to deposit $50.0 of cash per month into the pre-funding
account to fund the $300.0 Private Label Securitization due in October 2006. The restricted
pre-funding account was classified as restricted cash in the condensed consolidated balance sheet.
Our capital expenditures decreased slightly in 2006 as a result of the timing of our new store
openings and remodels. In the first half of 2006, we opened one Full-Line store in Palm Beach
Gardens, Florida. We are scheduled to open a new store to replace our existing store at the
Topanga Plaza in Canoga Park, California in October 2006. Also, we expect to open a Rack store in
San Marcos, California in November 2006.
In 2006, we sold our short-term investments and primarily used the proceeds for the common stock
repurchases described below.
Financing Activities
Net cash used in financing activities increased to $567.6 in 2006 from $113.7 in 2005, primarily
due to increased repurchases of our outstanding common stock.
In the first half of 2006, we repurchased 15.1 million shares of our common stock for an aggregate
purchase price of $562.9 (an average price per share of $37.23). In May 2006, our Board of
Directors authorized up to $1,000.0 of share repurchases. As of July 29, 2006, the unused
authorization was $650.0. The actual number and timing of future share repurchases will be subject
to market conditions and applicable SEC rules.
Page 21 of 28
Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
(Cont.) (Dollar amounts in millions except per share amounts).
In June 2006, we amended our existing variable funding note facility to increase the capacity
of this facility from $150.0 to $450.0. In July 2006, the VISA Trust used this facility to issue
$300.0 of Notes. As the VISA Trust is a statutory business trust and the VISA credit card
receivables transferred to it are accounted for as a sale under SFAS No. 140, the obligations of
the VISA Trust are not recorded in our financial statements. The VISA Trust sent the proceeds from
this note issuance to us in return for a reduction in our interest in the VISA Trust equal to a
$300.0 decrease in our share of the principal balance of VISA credit card receivables.
Liquidity
Over the long term, we 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 scheduled future payments and
potential long-term initiatives.
In October 2006, we will repay our $300.0 of 4.82% Private Label Securitization debt; we have
already invested $150.0 in a pre-funding account in anticipation of this repayment. In April 2007,
the $200.0 2002 Class A & B Notes issued by the VISA Trust will mature. We are evaluating
alternatives to combine the Private Label and VISA credit card borrowing programs in the first half
of 2007.
In the
third quarter, we expect to borrow up to $250.0 to finance a portion
of our holiday season merchandise purchases. We are pursuing an
increase to the variable funding note facility borrowing capacity,
although we have other available financing sources.
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 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 critical accounting policies and methodologies in 2006 are consistent
with those discussed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2006.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes. FIN 48
requires that we recognize the impact of a tax position in our financial statements if that
position is more likely than not to be sustained on audit, based on the technical merits of the
position. FIN 48 also provides guidance on derecognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities, accounting for interest
and penalties associated with tax positions, accounting for income taxes in interim periods, and
income tax disclosures. The provisions of FIN 48 are effective for us as of the beginning of our
2007 fiscal year. We are currently evaluating the impact of adopting FIN 48 on our financial
statements.
Page 22 of 28
Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
(Cont.) (Dollar amounts in millions except per share amounts).
FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT
Certain statements in the preceding disclosures contain forward-looking statements (as defined in
the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties,
including anticipated financial results, use of cash and liquidity, store openings and trends in
our operations. Actual future results and trends may differ materially from historical results or
current expectations depending upon various factors including, but not limited to:
|
|
|
the impact of economic and competitive market forces, |
|
|
|
|
the impact of terrorist activity or war on our customers and the retail industry, |
|
|
|
|
our ability to predict fashion trends, |
|
|
|
|
consumer apparel buying patterns, |
|
|
|
|
trends in personal bankruptcies and bad debt write-offs, |
|
|
|
|
changes in interest rates, |
|
|
|
|
employee relations, |
|
|
|
|
our ability to continue and control our expansion, remodel and investment plans, |
|
|
|
|
changes in government or regulatory requirements, |
|
|
|
|
our ability to control costs, |
|
|
|
|
weather conditions, and |
|
|
|
|
hazards of nature. |
These and other factors could affect our financial results and trends and cause actual results and
trends to differ materially from those contained in any forward-looking statements we may provide.
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 3. Quantitative And Qualitative Disclosures About Market Risk.
We discussed our interest rate risk and our foreign currency exchange risk in Item 7A of our
Annual Report on Form 10-K for the fiscal year ended January 28, 2006. There has been no material
change to these risks since that time.
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.
Page 23 of 28
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 alleged that the retail price of the prestige or Department Store cosmetics and
fragrances 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 sought 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 original complaints.
While we believe that the plaintiffs claims are without merit, we entered into a settlement
agreement with the plaintiffs and the other defendants on July 13, 2003 in order to avoid the cost
and distraction of protracted litigation. 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 and fragrances 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 was 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 Courts final judgment to the
United States Court of Appeals for the Ninth Circuit. One of the objectors has since dropped her
appeal, but the other filed her appeal brief on March 20, 2006. Plaintiffs and defendants briefs
were filed on May 25, 2006. It is uncertain when the appeals will be resolved, but the appeal
process could take as much as another year or more. If the Courts final judgment approving the
settlement is affirmed on appeal, or the appeals are dismissed, the defendants will provide class
members with certain free products with an estimated retail value of $175 million and pay the
plaintiffs attorneys fees, awarded by the Court, of $24 million. We do not believe the outcome of
this matter will have a material adverse effect on our financial condition, results of operations
or cash flows.
Other
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.
Page 24 of 28
Item 1A. Risk Factors.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you
should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual
Report on Form 10-K for the fiscal year ended January 28, 2006. There have been no material
changes in our risk factors from those disclosed in our Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Repurchases
(dollars in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number (or |
|
|
|
Total Number |
|
|
Average |
|
|
Shares (or Units) |
|
|
Approximate Dollar Value) |
|
|
|
of Shares |
|
|
Price Paid |
|
|
Purchased as Part of |
|
|
Of Shares (or Units) that May |
|
|
|
(or Units |
|
|
Per Share |
|
|
Publicly Announced |
|
|
Yet Be Purchased Under |
|
|
|
Purchased) |
|
|
(or Unit) |
|
|
Plans or Programs |
|
|
the Plans or Programs2 |
|
|
|
|
May 2006
(April 30, 2006 to
May 27, 2006) |
|
|
697,682 |
1 |
|
$ |
35.78 |
|
|
|
696,800 |
|
|
$ |
975.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 2006
(May 28, 2006 to
July 1, 2006) |
|
|
7,679,700 |
|
|
$ |
36.07 |
|
|
|
7,679,700 |
|
|
$ |
698.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2006
(July 2, 2006 to
July 29, 2006) |
|
|
1,320,877 |
|
|
$ |
36.37 |
|
|
|
1,320,877 |
|
|
$ |
650.0 |
|
|
|
|
Total |
|
|
9,698,259 |
|
|
$ |
36.07 |
|
|
|
9,697,377 |
|
|
|
|
|
|
|
|
1
Included in this balance were 882 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
In the first half of 2006, we repurchased 15.1 million shares of our common stock for
an aggregate purchase price of $562.9 (an average price per share of $37.23). In May 2006,
our Board of Directors authorized up to $1,000.0 of share repurchases. As of July 29, 2006,
the unused authorization was $650.0. The actual number and timing of future share repurchases
will be subject to market conditions and applicable SEC rules.
Page 25 of 28
Item 4. Submission of Matters to a Vote of Security Holders (Amounts in thousands).
We held our Annual Shareholders Meeting on May 23, 2006 at which time the shareholders voted
on the following proposals:
(1) |
|
Election of Directors |
|
|
|
|
|
|
|
|
|
Name of Candidate |
|
For |
|
|
Withheld |
|
|
Phyllis J. Campbell |
|
|
246,041 |
|
|
|
1,681 |
|
Enrique Hernandez, Jr. |
|
|
244,674 |
|
|
|
3,048 |
|
Jeanne P. Jackson |
|
|
244,545 |
|
|
|
3,177 |
|
Robert G. Miller |
|
|
244,675 |
|
|
|
3,047 |
|
Blake W. Nordstrom |
|
|
245,860 |
|
|
|
1,862 |
|
Erik B. Nordstrom |
|
|
245,606 |
|
|
|
2,116 |
|
Peter E. Nordstrom |
|
|
245,604 |
|
|
|
2,118 |
|
Philip G. Satre |
|
|
244,931 |
|
|
|
2,791 |
|
Alison A. Winter |
|
|
246,317 |
|
|
|
1,404 |
|
|
|
There were no abstentions and no broker non-votes. |
(2) |
|
Approval of an Amendment to the Companys Employee Stock Purchase Plan |
|
|
The vote was 217,638 for, 1,133 against, and there were 1,346 abstentions. There were 27,605
broker non-votes. |
(3) |
|
Ratification of the Appointment of Independent Registered Public Accounting Firm |
|
|
The vote was 246,051 for, 439 against, and there were 1,232 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 28 hereof.
Page 26 of 28
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: August 31, 2006 |
|
|
Page 27 of 28
NORDSTROM, INC. AND SUBSIDIARIES
Exhibit Index
|
|
|
|
|
|
|
Exhibit |
|
Method of Filing |
|
|
10.1
|
|
Trust Agreement dated
October 16, 2001 between
Nordstrom Private Label
Receivables LLC and
Wilmington Trust Company, as
trustee
|
|
Filed herewith electronically |
|
|
|
|
|
10.2
|
|
Administration Agreement
dated October 1, 2001
between Nordstrom Private
Label Credit Card Master
Note Trust and Nordstrom fsb
|
|
Filed herewith electronically |
|
|
|
|
|
10.3
|
|
Trust Agreement dated March
25, 2002 between Nordstrom
Credit Card Receivables LLC
and Wilmington Trust
Company, as trustee
|
|
Filed herewith electronically |
|
|
|
|
|
31.1
|
|
Certification of President
required by Section 302(a)
of the Sarbanes-Oxley Act of
2002
|
|
Filed herewith electronically |
|
|
|
|
|
31.2
|
|
Certification of Chief
Financial Officer required
by Section 302(a) of the
Sarbanes-Oxley Act of 2002
|
|
Filed herewith electronically |
|
|
|
|
|
32.1
|
|
Certification of President
and Chief Financial Officer
pursuant to 18 U.S.C. 1350,
as adopted pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Furnished herewith electronically |
Page 28 of 28