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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 31, 2002
[ ] 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
_____ _____
Common stock outstanding as of August 31, 2002: 135,112,360 shares of
common stock.
1 of 21
NORDSTROM, INC. AND SUBSIDIARIES
--------------------------------
INDEX
-----
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Earnings
Three and Six months ended
July 31, 2002 and 2001 3
Condensed Consolidated Balance Sheets
July 31, 2002 and 2001 and
January 31, 2002 4
Condensed Consolidated Statements of Cash Flows
Six months ended July 31, 2002
and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
CERTIFICATIONS 20
2 of 21
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands except per share amounts)
(unaudited)
Three Months Six Months
Ended July 31, Ended July 31,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales $1,655,528 $1,545,759 $2,901,289 $2,763,799
Cost of sales and related
buying and occupancy (1,104,265) (1,040,908) (1,928,562) (1,839,338)
---------- ---------- ---------- ----------
Gross profit 551,263 504,851 972,727 924,461
Selling, general and
administrative expenses (496,685) (457,441) (881,560) (854,147)
---------- ---------- ---------- ----------
Operating income 54,578 47,410 91,167 70,314
Interest expense, net (19,605) (19,279) (39,654) (38,783)
Minority interest purchase
and reintegration costs (11,121) - (53,168) -
Service charge income
and other, net 35,341 35,368 68,645 72,523
---------- ---------- ---------- ----------
Earnings before income taxes
and cumulative effect of
accounting change 59,193 63,499 66,990 104,054
Income tax expense (22,858) (24,800) (41,868) (40,600)
---------- ---------- ---------- ----------
Earnings before cumulative
effect of accounting change 36,335 38,699 25,122 63,454
Cumulative effect of accounting
change (net of tax) - - (13,359) -
---------- ---------- ---------- ----------
Net earnings $ 36,335 $ 38,699 $ 11,763 $ 63,454
========== ========== ========== ==========
Basic earnings per share $ .27 $ .29 $ .09 $ .47
========== ========== ========== ==========
Diluted earnings per share $ .27 $ .29 $ .09 $ .47
========== ========== ========== ==========
Cash dividends paid per share
of common stock outstanding $ .09 $ .09 $ .18 $ .18
========== ========== ========== ==========
These statements should be read in conjunction with the Notes to
Condensed Consolidated Financial Statements contained herein.
3 of 21
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
July 31, January 31, July 31,
2002 2002 2001
---------- ---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 247,838 $ 331,327 $ 36,829
Accounts receivable, net 764,013 698,475 749,957
Merchandise inventories 1,039,365 888,172 1,002,633
Prepaid expenses 31,880 34,375 29,146
Other current assets 105,272 102,249 93,083
---------- ---------- ----------
Total current assets 2,188,368 2,054,598 1,911,648
Land, buildings and equipment (net of
accumulated depreciation of $1,770,885,
$1,663,409, and $1,619,418) 1,805,861 1,761,082 1,654,852
Intangible assets, net 140,106 138,331 141,510
Other assets 97,178 94,768 84,141
---------- ---------- ----------
TOTAL ASSETS $4,231,513 $4,048,779 $3,792,151
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 209 $ 148 $ 38,202
Accounts payable 684,814 490,988 601,407
Accrued salaries, wages
and related benefits 233,279 236,373 228,034
Income taxes and other accruals 169,084 142,002 168,322
Current portion of long-term debt 4,769 78,227 90,061
---------- ---------- ----------
Total current liabilities 1,092,155 947,738 1,126,026
Long-term debt 1,343,797 1,351,044 1,041,459
Deferred lease credits 389,526 342,046 299,014
Other liabilities 94,808 93,463 55,236
Shareholders' Equity:
Common stock, no par:
500,000,000 shares authorized;
135,089,518, 134,468,608 and
134,031,133 shares issued
and outstanding 351,587 341,316 334,513
Unearned stock compensation (2,345) (2,680) (3,345)
Retained earnings 962,699 975,203 938,130
Accumulated other comprehensive
earnings (loss) (714) 649 1,118
---------- ---------- ----------
Total shareholders' equity 1,311,227 1,314,488 1,270,416
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,231,513 $4,048,779 $3,792,151
========== ========== ==========
These statements should be read in conjunction with the Notes to
Condensed Consolidated Financial Statements contained herein.
4 of 21
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Six Months
Ended July 31,
----------------------
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net earnings $11,763 $63,454
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 111,917 102,178
Amortization of intangible assets - 2,337
Amortization of deferred lease credits and other, net (9,054) (3,511)
Stock-based compensation expense 2,087 3,126
Deferred income taxes, net (3,357) (3,485)
Impairment of intangibles 21,900 -
Write-off of IT investment 15,570 -
Minority interest purchase expense 40,389 -
Change in:
Accounts receivable, net (63,939) (28,744)
Merchandise inventories (183,976) (87,211)
Prepaid expenses 4,362 2,304
Other assets 2,787 (3,318)
Accounts payable 237,380 150,654
Accrued salaries, wages and related benefits (5,064) (9,054)
Income taxes and other accruals 26,411 14,842
Other liabilities 4,098 2,698
-------- --------
Net cash provided by operating activities 213,274 206,270
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (184,507) (178,886)
Additions to deferred lease credits 58,449 59,057
Minority interest purchase (70,000) -
Other, net (3,347) (2,673)
-------- --------
Net cash used for investing activities (199,405) (122,502)
-------- --------
FINANCING ACTIVITIES:
Proceeds (payments) from notes payable 61 (44,858)
Proceeds from long-term borrowings 815 -
Principal payments on long-term debt (84,053) (5,736)
Proceeds from issuance of common stock 10,086 3,810
Cash dividends paid (24,267) (24,102)
Purchase and retirement of common stock - (1,312)
-------- --------
Net cash used in financing activities (97,358) (72,198)
-------- --------
Net (decrease) increase in cash and cash equivalents (83,489) 11,570
Cash and cash equivalents at beginning of period 331,327 25,259
-------- --------
Cash and cash equivalents at end of period $247,838 $36,829
======== ========
These statements should be read in conjunction with the Notes to
Condensed Consolidated Financial Statements contained herein.
5 of 21
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(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
the 2001 Nordstrom, Inc. Annual Report. The same accounting policies are
followed in preparing quarterly financial data as are followed in preparing
annual data. In management's opinion, all adjustments necessary for a fair
presentation of the results of operations, financial position and cash flows
have been included and are of a normal, recurring nature.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Due to the seasonal nature of the retail industry, quarterly results are not
necessarily indicative of the results for the fiscal year.
Recent Accounting Pronouncements
- --------------------------------
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 updates, clarifies and simplifies existing accounting
pronouncements related to extinguishments of debt, provisions of the Motor
Carrier Act of 1980 and lease transactions. Generally, SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. We elected to adopt
SFAS No. 145 during the second quarter of 2002. The adoption of this
statement did not have a material impact on our financial statements.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 nullifies EITF 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)" by
requiring that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred versus when an entity is
committed to an exit plan. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. We elected to adopt
SFAS No. 146 during the second quarter of 2002. The adoption of this
statement did not have a material impact on our financial statements.
Note 2 - Cumulative Effect of Accounting Change
Effective February 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting
requirements for goodwill and other intangible assets. Under SFAS No. 142,
goodwill and intangible assets having indefinite lives will no longer be
amortized but will be subject to annual impairment tests. Other intangible
assets will continue to be amortized over their estimated useful lives.
In connection with the adoption of SFAS No. 142, we reviewed the
classification and useful lives of our intangible assets. Our intangible
assets were determined to be either goodwill or indefinite lived tradename.
6 of 21
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
Note 2 - Cumulative Effect of Accounting Change (Cont.)
As required by SFAS No. 142, we defined our reporting unit as the Faconnable
Business Unit, one level below our reportable Retail Stores segment. We then
tested our intangible assets for impairment in the first quarter by comparing
the fair value of the reporting unit with its carrying value. Fair value was
determined using a discounted cash flow methodology. These impairment tests
are required to be performed at adoption of SFAS No. 142 and at least annually
thereafter. On an ongoing basis we expect to perform our impairment test
during our first quarter or when other circumstances indicate we need to do
so.
Based on our initial impairment test, we recognized an adjustment to goodwill
of $21,900 in the first quarter of 2002, while the tradename was determined
not to be impaired. The goodwill adjustment resulted from a reduction in
management's estimate of future growth for this reporting unit. The
impairment charge recognized in the first quarter is reflected as a cumulative
effect of accounting change.
The changes in the carrying amount of our intangible assets for the period
ended July 31, 2002, are as follows:
Catalog/
Retail Stores Internet
segment segment Total
--------------------- -------- ---------
Goodwill Tradename Goodwill
-------- --------- --------
Balance as of
February 1, 2002 $ 38,198 $ 100,133 $ - $ 138,331
Impairment losses (21,900) - - (21,900)
Goodwill acquired through
exercise of Nordstrom.com
Put Agreement (see Note 9) - - 23,675 23,675
-------- --------- -------- ---------
Balance as of July 31, 2002 $ 16,298 $ 100,133 $ 23,675 $ 140,106
======== ========= ======== =========
The following table shows the actual results of operations for the three and
six months ended July 31, 2002 and 2001 as well as pro-forma results adjusted
for the exclusion of intangible amortization and the cumulative effect of the
accounting change.
Three Months Six Months
Ended Ended
July 31, July 31,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Reported net income $ 36,335 $ 38,699 $ 11,763 $ 63,454
Intangible amortization,
net of tax - 712 - 1,426
Cumulative effect of the
accounting change, net of tax - - 13,359 -
--------- --------- --------- ---------
Adjusted net income $ 36,335 $ 39,411 $ 25,122 $ 64,880
========= ========= ========= =========
7 of 21
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
Note 2 - Cumulative Effect of Accounting Change (Cont.)
Three Months Six Months
Ended Ended
July 31, July 31,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Basic and diluted earnings per share
Reported net income $ .27 $ .29 $ .09 $ .47
Intangible amortization,
net of tax - - - .01
Cumulative effect of the
accounting change, net of tax - - .10 -
--------- -------- --------- ---------
Adjusted net income $ .27 $ .29 $ .19 $ .48
========= ======== ========= =========
Note 3 - Earnings Per Share
Three Months Six Months
Ended July 31, Ended July 31,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net earnings $36,335 $38,699 $11,763 $63,454
Basic shares 135,066,212 134,008,385 134,887,294 133,933,442
Basic earnings per share $0.27 $0.29 $0.09 $0.47
Dilutive effect of
stock options and
restricted stock 753,673 413,825 878,448 233,664
Diluted shares 135,819,885 134,422,210 135,765,742 134,167,106
Diluted earnings per share $0.27 $0.29 $0.09 $0.47
Antidilutive stock
options 6,764,220 9,289,833 6,542,883 9,299,833
Note 4 - Accounts Receivable
The components of accounts receivable are as follows:
July 31, January 31, July 31,
2002 2002 2001
----------- ----------- -----------
Unrestricted trade receivables $103,812 $73,157 $749,530
Restricted trade receivables 658,775 628,271 -
Other 23,557 21,325 21,285
Allowance for doubtful accounts (22,131) (24,278) (20,858)
----------- ----------- -----------
Accounts receivable, net $764,013 $698,475 $749,957
=========== =========== ===========
The restricted trade receivables consist of Nordstrom Private Label
Receivables. These receivables back the $300 million of Class A notes and the
$200 million variable funding note issued by us in November 2001.
8 of 21
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
Note 5 - Debt
On May 1, 2002, we replaced the $200 million variable funding note backed by
VISA credit card receivables ("Visa VFN") with 5-year term notes also backed
by the VISA credit card receivables. Class A and B notes with a combined face
value of $200 million were issued to third party investors. We used the
proceeds to retire the $200 million outstanding on the Visa VFN. We retained
a Transferor's Interest, subordinated Class C note, and an Interest Only
Strip. In accordance with SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," this debt
and the related assets are not reflected in our consolidated balance sheets.
Note 6 - Limited Partnership
We own a 49% interest in a limited partnership which constructed a new
corporate office building in which we are the primary occupant. During the
first quarter of 2002, the limited partnership refinanced its construction
loan obligation with an $85,000 mortgage secured by the property, of which
$79,808 was included on our balance sheet at July 31, 2002. The obligation
has a fixed interest rate of 7.68% and a term of 18 years. The $5,000
difference between the $90,000 outstanding under the original credit facility
and the new mortgage was funded by Nordstrom, Inc.
Our financial statements include capitalized costs related to this
building of $87,667 and $82,187, which includes noncash amounts of $68,631
and $67,225 as of July 31, 2002 and 2001. The corresponding finance
obligation of $84,742 and $78,401 as of July 31, 2002 and 2001 is included
in other long-term debt.
Note 7 - Supplementary Cash Flow Information
We capitalize certain property, plant and equipment during the construction
period of commercial buildings, which are subsequently derecognized and leased
back. During the six months ended July 31, 2001, the noncash activities
related to the reclassification of new stores that qualified as sale and
leaseback were $60,645.
9 of 21
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
Note 8 - Segment Reporting
The following tables set forth information for our reportable segments and a
reconciliation to the consolidated totals:
Three months ended Retail Credit Catalog/ Corporate
July 31, 2002 Stores Operations Internet and Other Eliminations Total
- ---------------------------------------------------------------------------------------------------
Revenues from external
customers $1,588,539 - $66,989 - - $1,655,528
Service charge income - $30,707 - - - 30,707
Intersegment revenues 9,421 14,560 - - $ (23,981) -
Interest expense, net (183) 5,474 152 $14,162 - 19,605
Net earnings (loss) 66,278 3,242 (11,710) (21,475) - 36,335
Three months ended Retail Credit Catalog/ Corporate
July 31, 2001 Stores Operations Internet and Other Eliminations Total
- ---------------------------------------------------------------------------------------------------
Revenues from external
customers $1,483,443 - $62,316 - - $1,545,759
Service charge income - $33,931 - - - 33,931
Intersegment revenues 4,186 8,297 - - $(12,483) -
Interest expense, net 353 6,002 (50) $ 12,974 - 19,279
Net earnings (loss) 69,960 1,519 (2,939) (29,841) - 38,699
Six months ended Retail Credit Catalog/ Corporate
July 31, 2002 Stores Operations Internet and Other Eliminations Total
- ---------------------------------------------------------------------------------------------------
Revenues from external
customers $2,771,248 - $130,041 - - $2,901,289
Service charge income - $62,162 - - - 62,162
Intersegment revenues 13,239 24,466 - - $ (37,705) -
Interest expense, net 1 11,913 337 $27,403 - 39,654
Earnings before cumulative
effect of accounting change 123,212 4,820 (12,018) (90,892) - 25,122
Net earnings (loss) 109,853 4,820 (12,018) (90,892) - 11,763
Assets 2,756,239 758,682 76,183 640,409 - 4,231,513
Six months ended Retail Credit Catalog/ Corporate
July 31, 2001 Stores Operations Internet and Other Eliminations Total
- ---------------------------------------------------------------------------------------------------
Revenues from external
customers $2,631,780 - $132,019 - - $2,763,799
Service charge income - $70,555 - - - 70,555
Intersegment revenues 7,682 13,853 - - $(21,535) -
Interest expense, net 708 12,625 (98) $ 25,548 - 38,783
Net earnings (loss) 123,623 6,795 (7,186) (59,778) - 63,454
Assets 2,613,649 744,308 66,052 368,142 - 3,792,151
Note 9 - Nordstrom.com
On May 31, 2002, we purchased the outstanding shares of Nordstrom.com, Inc.
series C preferred stock for $70,000. The excess of the purchase price over
the fair market value of the preferred stock and professional fees resulted in
a one-time charge of $42,047, which was recognized in the first quarter of
2002. A valuation allowance has been provided for the full amount of the tax
benefit related to this charge, as management believes it is not likely that
these benefits will be realized. After allocating the fair market value to
the identifiable assets of Nordstrom.com, Inc., we recognized the excess
purchase price as additional goodwill of $23,675.
In July 2002, $10,432 of expense was recognized related to the purchase of the
outstanding Nordstrom.com options and warrants. The purchase of these
outstanding options and warrants was completed in August 2002.
10 of 21
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
Note 9 - Nordstrom.com (Cont.)
In the second quarter of 2002, the accounting for the share repurchase was
finalized resulting in a $659 reduction to the expense recognized in first
quarter 2002 and additional professional fees of $1,348. We do not anticipate
additional charges related to the Nordstrom.com minority interest purchase and
reintegration.
The following table presents the charges associated with the minority interest
purchase and reintegration costs.
July 31, 2002
---------------------------
Three Months Six Months
Ended Ended
------------ -----------
Excess of the purchase price over the
fair market value of the preferred stock $ (659) $40,389
Nordstrom.com option/warrant buyback expense 10,432 10,432
Professional fees incurred 1,348 2,347
------------ -----------
$11,121 $53,168
============ ===========
Note 10 - Write-off of IT Investment
In July 2002 we recognized a non-recurring charge of $15,570 to write-down an
IT investment in a supply chain tool intended to support our manufacturing
division. Due to changes in business strategy, we determined that this asset
was impaired. This non-cash charge in the Retail Stores segment will reduce
this asset to its estimated market value. The entire amount of the charge was
recorded in selling, general and administrative expenses.
Note 11 - Litigation
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 have now been consolidated in Marin County state
court. In May 2000, plaintiffs filed an amended complaint naming a number of
manufacturers of cosmetics and fragrances and two other retailers as
additional defendants. Plaintiffs' amended complaint alleges that the retail
price of the "prestige" cosmetics sold in department and specialty stores was
collusively controlled by the retailer and manufacturer defendants in
violation of the Cartwright Act and the California Unfair Competition Act.
Plaintiffs seek treble damages and restitution of an unspecified amount,
attorneys' fees and prejudgment interest, on behalf of a class of all
California residents who purchased cosmetics and fragrances for personal use
from any of the defendants during the period four years prior to the filing of
the amended complaint. Defendants, including us, have answered the amended
complaint denying the allegations. The retail defendants have produced
documents and responded to plaintiffs' other discovery requests, including
providing witnesses for depositions. Two retail defendants have filed motions
for summary judgment, and plaintiffs have not yet moved for class
certification. Pursuant to an order of the court, plaintiffs and defendants
participated in mediation sessions in May and September 2001.
11 of 21
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
Note 11 - Litigation (Cont.)
Washington Public Trust Advocates
- ---------------------------------
By order dated August 9, 2002, the court granted our motion to dismiss us from
Washington Public Trust Advocates, ex rel., et al. v. City of Spokane, et al.,
as previously described, and dismissed us from that lawsuit. That order is
subject to appeal until September 9, 2002.
Other
- -----
We are also subject to other ordinary routine litigation. We do not expect
any material liability related to that litigation.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Dollars in Thousands
The following discussion should be read in conjunction with the Management's
Discussion and Analysis section of the 2001 Annual Report.
RESULTS OF OPERATIONS:
- ----------------------
Overview
- --------
Earnings for the quarter ended July 31, 2002 decreased to $36,335 from $38,699
for the same period in 2001. Earnings for the six months ended July 31, 2002
decreased to $11,763 from $63,454 for the same period in 2001. The decrease
for the six months was attributable to three one-time charges related to the
write-off of an IT investment, minority interest purchase and reintegration
costs of Nordstrom.com, Inc., and the adoption of a new accounting
pronouncement. Excluding these one-time charges, earnings for the quarter
increased to $52,360 from $38,699 for the same period last year, and earnings
for the six-month period increased to $82,805 from $63,454 for the same period
last year. Diluted earnings per share before one-time charges were $.39 for
the quarter compared to $.29 in the second quarter of last year. For the six
months ended July 31, 2002, diluted earnings per share before one-time charges
were $.61 compared to $.47 for the same period last year.
Year-over-year changes in net income before non-recurring items were as
follows:
Three Months Six Months
Ended Ended
July 31, July 31,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Reported net income $ 36,335 $ 38,699 $ 11,763 $ 63,454
Non-recurring items, net of tax:
Minority interest purchase and
reintegration costs 6,527 - 48,185 -
Goodwill impairment - - 13,359 -
Write-off of IT investment 9,498 - 9,498 -
--------- --------- --------- ---------
Net income before non-recurring
items $ 52,360 $ 38,699 $ 82,805 $ 63,454
========= ========= ========= =========
Diluted earnings per share before
non-recurring items $ 0.39 $ 0.29 $ 0.61 $ 0.47
========= ========= ========= =========
12 of 21
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
Sales
- -----
Year-over-year changes in total company sales and comparable-store sales were
as follows:
QTD % Change YTD % Change
------------------ ------------------
Calendar 4-5-4* Calendar 4-5-4*
-------- -------- -------- --------
Total Company sales 7.1% 7.0% 5.0% 4.8%
Comparable-store sales 2.1% 2.2% 0.5% 0.3%
* the 13 and 26 week periods ended August 3, 2002 and August 4, 2001.
The increase in total sales for the quarter and the six-month periods was a
result of new store openings. Since August 1, 2001, we have opened 6 full-
line stores and 9 Nordstrom Rack stores. The increase in comparable store
sales (sales in stores open at least one full fiscal year at the beginning of
the fiscal year) for the quarter is a result of our Anniversary and Half-
Yearly sale events, as well as strong sales at Nordstrom Rack. The flat
comparable store sales for the six-month period is a result of the strong sale
events in the second quarter offset by the negative comparable store sales in
the first quarter.
Gross Profit
- ------------
Gross profit as a percentage of net sales increased for the three-month period
ended July 31, 2002, and remained flat for the six-month period ended July 31,
2002, as compared to the same periods in 2001. The increase for the quarter
was primarily due to high markdowns taken in the prior year to reduce excess
inventory. The six-month results remained flat due to increased occupancy
costs from store openings that offset the improved markdown performance.
Selling, General and Administrative
- -----------------------------------
Before one-time charges of $15,570, selling, general and administrative
expenses as a percentage of net sales decreased for the three month and six
month periods ended July 31, 2002. The improvement was due to decreased
payroll and benefit expenses, lower bad debt expense and lower catalog and
shipping expenses at Nordstrom Direct (formerly Nordstrom.com) partially
offset by higher IT expenses related to the implementation of our perpetual
inventory system. The one-time charge related to a write-off of an IT
investment in a supply chain tool at our manufacturing division.
Interest Expense
- ----------------
Interest expense, net increased in the three and six month periods ended July
31, 2002 compared to the same periods in 2001. The increase was due to higher
average long-term borrowings, partially offset by a decrease in average short-
term borrowings and long-term interest rates.
Service Charge Income and Other
- -------------------------------
Service charge income and other, net remained flat for the three month period
ended July 31, 2002, but decreased slightly for the six month period ended
July 31, 2002 compared to the same periods in 2001. The decrease for the six
month period resulted from declining interest rates, as well as lower
receivable balances. For the quarter, declining interest rates were offset by
increasing receivable balances which resulted in the flat results compared to
the same period last year.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
Nordstrom.com
- --------------
On May 31, 2002, we purchased the outstanding shares of Nordstrom.com, Inc.
series C preferred stock for $70,000. The excess of the purchase price over
the fair market value of the preferred stock and professional fees resulted in
a one-time charge of $42,047, which was recognized in the first quarter of
2002. A valuation allowance has been provided for the full amount of the tax
benefit related to this charge, as management believes it is not likely that
these benefits will be realized. After allocating the fair market value to
the identifiable assets of Nordstrom.com, Inc., we recognized the excess
purchase price as additional goodwill of $23,675.
In July 2002, $10,432 of expense was recognized related to the purchase of the
outstanding Nordstrom.com options and warrants. The purchase of these
outstanding options and warrants was completed in August 2002.
In the second quarter of 2002, the accounting for the share repurchase was
finalized resulting in a $659 reduction to the expense recognized in first
quarter 2002 and additional professional fees of $1,348. We do not anticipate
additional charges related to the Nordstrom.com minority interest purchase and
reintegration.
The following table presents the charges associated with the minority interest
purchase and reintegration costs:
July 31, 2002
---------------------------
Three Months Six Months
Ended Ended
------------ -----------
Excess of the purchase price over the
fair market value of the preferred stock $ (659) $40,389
Nordstrom.com option/warrant buyback expense 10,432 10,432
Professional fees incurred 1,348 2,347
------------ -----------
$11,121 $53,168
============ ===========
Cumulative Effect of Accounting Change
- --------------------------------------
During the first quarter, we completed the review required by SFAS No. 142
"Goodwill and Other Intangible Assets." As a result of our review, we
recorded a cumulative effect of accounting change of $13,359 net of tax or
$0.10 per share on a diluted basis.
Seasonality
- ------------
Our business, like that of other retailers, is subject to seasonal
fluctuations. Our anniversary sale in July and the holidays in December
result in sales that are higher in the second and fourth quarters of the
fiscal year. 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:
- --------------------------------
We finance our working capital needs and capital expenditures with cash
provided by operations and borrowings.
Cash Flow from Operations
- -------------------------
Net cash provided by operating activities for the six month period ended July
31, 2002 increased $7,004 compared to the same period last year. This
increase was primarily due to the increase in net earnings before noncash
items and an increase in accounts payable offset by an increase in merchandise
inventories.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
Capital Expenditures
- --------------------
For the six month period ended July 31, 2002, net cash used in investing
activities increased $76,903 compared to the same period in 2001, primarily
due to the $70,000 payment for the acquisition of the outstanding shares of
Nordstrom.com, Inc. series C preferred stock. In addition, capital
expenditures for new stores increased $5,621 for the six months ended July 31,
2002 compared to the same period in 2001. During the second quarter of fiscal
2002, we opened one new Nordstrom Rack store in Ontario, CA. Year to date, we
have opened a total of three new full-line stores and three new Nordstrom Rack
stores. Additionally, in August 2002, we opened a Nordstrom Rack store in
Long Beach, California. Throughout the remainder of the year ending January
31, 2003, we expect to open five full-line stores in Dulles, Virginia; St.
Louis, Missouri; Coral Gables, Florida; Orlando, Florida and Las Vegas,
Nevada; and one Faconnable boutique in Coral Gables, Florida. For the entire
year, gross square footage is expected to increase approximately 8 percent.
Total square footage of our stores was 17,455,000 as of July 31, 2002,
compared to 16,307,000 as of July 31, 2001.
Financing
- ---------
For the six month period ended July 31, 2002, cash used by financing
activities increased $25,160 primarily due to the scheduled retirement of
$76,750 in medium-term notes compared to a $44,858 reduction in notes payable
from the prior year.
CRITICAL ACCOUNTING POLICIES:
- -----------------------------
The preparation of our financial statements require that management make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates including those
related to doubtful accounts, inventory valuation, intangible assets, income
taxes, self-insurance liabilities, pensions, contingent liabilities and
litigation. We base our estimates on historical experience and on other
assumptions that management believes to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or
conditions.
Realization of Streamline Deferred Tax Asset
- --------------------------------------------
As of July 31, 2002, we have $32,857 of capital loss carryforward related to
the write off of our investment in Streamline.com, Inc. The utilization of
this deferred tax asset is contingent upon the ability to generate capital
gains within the next four years. No valuation allowance has been provided
because management believes it is probable that the full benefit of the
carryforward will be realized.
RECENT ACCOUNTING PRONOUNCEMENTS:
- ---------------------------------
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 updates, clarifies and simplifies existing accounting
pronouncements related to extinguishments of debt, provisions of the Motor
Carrier Act of 1980 and lease transactions. Generally, SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. We elected to adopt
SFAS No. 145 during the second quarter of 2002. The adoption of this
statement did not have a material impact on our financial statements.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 nullifies EITF 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)" by
requiring that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred versus when an entity is
committed to an exit plan. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. We elected to adopt
SFAS No. 146 during the second quarter of 2002. The adoption of this
statement did not have a material impact on our financial statements.
FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT:
- -------------------------------------------------
This document may include forward-looking statements regarding our
performance, liquidity and adequacy of capital resources. These statements
are based on our current assumptions and expectations and are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. Forward-looking statements are qualified by
the risks and challenges posed by increased competition, shifting consumer
demand, changing consumer credit markets, changing capital markets and general
economic conditions, hiring and retaining effective team members, sourcing
merchandise from domestic and international vendors, investing in new business
strategies, achieving our growth objectives, and other risks and
uncertainties, including the uncertain economic and political environment
arising from the terrorist acts of September 11th and subsequent terrorist
activities. As a result, while we believe there is a reasonable basis for the
forward-looking statements, you should not place undue reliance on those
statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates. In seeking to
minimize risk, we manage exposure through our regular operating and financing
activities. We do not use financial instruments for trading or other
speculative purposes and are not party to any leveraged financial instruments.
Interest rate exposure is managed through our mix of fixed and variable rate
borrowings. Short-term borrowing and investing activities generally bear
interest at variable rates, but because they have maturities of three months
or less, we believe that the risk of material loss is low.
At July 31, 2002, we have $300 million of 8.95% fixed-rate debt converted to
variable rate through the use of an interest rate swap. The interest rate
swap reduced interest payments on our highest fixed-rate debt by taking
advantage of the current low interest rates. A shift in future interest rates
could adversely affect the amount of interest paid through this swap
agreement.
The majority of our revenue, expense and capital expenditures are transacted
in United States dollars. However, we periodically enter into foreign currency
purchase orders for apparel and shoes denominated in Euros. We use forward
contracts to hedge against fluctuations in foreign currency prices. The
amounts of these contracts are immaterial. The use of derivatives is limited
to only those financial instruments that have been authorized by our Chief
Financial Officer and Treasurer.
The functional currency of Faconnable, S.A. of Nice, France is the Euro.
Assets and liabilities of Faconnable are translated into U.S. dollars at the
exchange rate prevailing at the end of the period. Income and expenses are
translated into U.S. dollars at the exchange rate prevailing on the respective
dates of the transactions. The effects of changes in foreign currency exchange
rates are included in other comprehensive earnings.
16 of 21
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONT.)
Certain other information required under this item is included in Note 6 in
the Notes to Condensed Consolidated Financial Statements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
The information required under this item is included in the following section
of Part I, Item 1 of this report:
Note 11 in Notes to Condensed Consolidated Financial Statements
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
We held our Annual Shareholders Meeting on May 21, 2002, at which time the
shareholders voted on the following proposals:
(1) Election of nine directors for a one-year term each.
Name of Candidate For Withheld
---------------------- ----------- -----------
D. Wayne Gittinger 123,044,226 2,006,980
Enrique Hernandez, Jr. 124,085,512 965,694
John A. McMillan 124,114,579 936,627
Bruce A. Nordstrom 124,122,615 928,591
John N. Nordstrom 124,125,080 926,126
Alfred E. Osborne, Jr. 108,653,169 16,398,037
William D. Ruckelshaus 108,638,142 16,413,064
Bruce G. Willison 108,854,893 16,196,313
Alison A. Winter 123,648,328 1,402,878
There were no abstentions and no broker non-votes.
(2) Approval of Amendment to the Company's Articles of Incorporation
The vote was 114,078,444 for, 10,396,970 against, and there were 575,792
abstentions. There were no broker non-votes.
(3) Approval of the 2002 Nonemployee Director Stock Incentive Plan
The vote was 95,623,346 for, 28,771,100 against, and there were 656,760
abstentions. There were no broker non-votes.
(4) Ratification of the appointment of Deloitte and Touche LLP as auditors
The vote was 119,232,521 for, 5,301,833 against, and there were 516,852
abstentions. There were no broker non-votes.
(5) Shareholder proposal regarding global human rights standards
The vote was 7,070,443 for, 98,764,672 against, and there were 5,835,841
abstentions and 13,380,250 broker non-votes.
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Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
--------
3.1 Articles of Incorporation of the Registrant, as amended and restated
on May 21, 2002, are filed herein as an Exhibit.
10.1 The 2002 Nonemployee Director Stock Incentive Plan is filed herein
as an Exhibit.
99.1 Certification of Chief Executive Officer regarding periodic report
containing financial statements.
99.2 Certification of Chief Financial Officer regarding periodic report
containing financial statements.
(b) Reports on Form 8-K
-------------------
We filed a Form 8-K on May 17, 2002 to announce the purchase of the
outstanding shares of Nordstrom.com, Inc. series C preferred stock.
18 of 21
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 Accounting and Financial Officer)
Date: September 12, 2002
------------------
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Certification required by Section 302(a) of the Sarbanes-Oxley Act of 2002
I, Blake W. Nordstrom, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nordstrom, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 12, 2002 /s/ Blake W. Nordstrom
------------------ ----------------------
Blake W. Nordstrom
President
20 of 21
Certification required by Section 302(a) of the Sarbanes-Oxley Act of 2002
I, Michael G. Koppel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nordstrom, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 12, 2002 /s/ Michael G. Koppel
------------------ ----------------------
Michael G. Koppel
Executive Vice President and
Chief Financial Officer
21 of 21
NORDSTROM INC. AND SUBSIDIARIES
Exhibit Index
Exhibit Method of Filing
- ------- ----------------
3.1 Articles of Incorporation of the Filed herewith electronically
Registrant, as amended and
restated on May 21, 2002
10.1 The 2002 Nonemployee Director Filed herewith electronically
Stock Incentive Plan
99.1 Certification of Chief Executive Filed herewith electronically
Officer regarding periodic report
containing financial statements
99.2 Certification of Chief Financial Filed herewith electronically
Officer regarding periodic report
containing financial statements