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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 October 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 November 30, 2002: 135,436,615 shares of
common stock.
1 of 19
NORDSTROM, INC. AND SUBSIDIARIES
--------------------------------
INDEX
-----
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Earnings
Three and Nine months ended
October 31, 2002 and 2001 3
Condensed Consolidated Balance Sheets
October 31, 2002 and 2001 and
January 31, 2002 4
Condensed Consolidated Statements of Cash Flows
Nine months ended October 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 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
CERTIFICATIONS 18
2 of 19
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands except per share amounts)
(unaudited)
Three Months Nine Months
Ended October 31, Ended October 31,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales $1,323,201 $1,239,241 $4,224,490 $4,003,040
Cost of sales and related
buying and occupancy (873,847) (836,961) (2,802,409) (2,676,299)
---------- ---------- ---------- ----------
Gross profit 449,354 402,280 1,422,081 1,326,741
Selling, general and
administrative expenses (433,228) (399,568) (1,314,788) (1,253,715)
---------- ---------- ---------- ----------
Operating income 16,126 2,712 107,293 73,026
Interest expense, net (20,832) (17,934) (60,486) (56,717)
Minority interest purchase
and reintegration costs - - (53,168) -
Service charge income
and other, net 35,006 32,317 103,651 104,840
---------- ---------- ---------- ----------
Earnings before income taxes
and cumulative effect of
accounting change 30,300 17,095 97,290 121,149
Income tax expense (11,873) (6,600) (53,741) (47,200)
---------- ---------- ---------- ----------
Earnings before cumulative
effect of accounting change 18,427 10,495 43,549 73,949
Cumulative effect of accounting
change (net of tax) - - (13,359) -
---------- ---------- ---------- ----------
Net earnings $ 18,427 $ 10,495 $ 30,190 $ 73,949
========== ========== ========== ==========
Basic earnings per share $ .14 $ .08 $ .22 $ .55
========== ========== ========== ==========
Diluted earnings per share $ .14 $ .08 $ .22 $ .55
========== ========== ========== ==========
Cash dividends paid per share
of common stock outstanding $ .10 $ .09 $ .28 $ .27
========== ========== ========== ==========
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
3 of 19
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
October 31, January 31, October 31,
2002 2002 2001
---------- ---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 40,798 $ 331,327 $ 20,365
Accounts receivable, net 712,223 698,475 699,450
Merchandise inventories 1,278,932 888,172 1,161,178
Prepaid expenses 41,276 34,375 38,302
Other current assets 105,083 102,249 102,408
---------- ---------- ----------
Total current assets 2,178,312 2,054,598 2,021,703
Land, buildings and equipment (net of
accumulated depreciation of $1,825,759,
$1,663,409, and $1,648,745) 1,754,288 1,761,082 1,732,659
Intangible assets, net 140,488 138,331 139,466
Other assets 123,550 94,768 81,323
---------- ---------- ----------
TOTAL ASSETS $4,196,638 $4,048,779 $3,975,151
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 571 $ 148 $ 167,663
Accounts payable 685,515 490,988 637,694
Accrued salaries, wages
and related benefits 226,840 236,373 223,549
Income taxes and other accruals 152,822 142,002 155,632
Current portion of long-term debt 4,386 78,227 78,966
---------- ---------- ----------
Total current liabilities 1,070,134 947,738 1,263,504
Long-term debt 1,343,423 1,351,044 1,045,441
Deferred lease credits 360,116 342,046 330,747
Other liabilities 101,423 93,463 61,669
Shareholders' Equity:
Common stock, no par:
500,000,000 shares authorized;
135,427,913, 134,468,608 and
134,338,694 shares issued
and outstanding 357,567 341,316 338,589
Unearned stock compensation (2,177) (2,680) (3,148)
Retained earnings 967,614 975,203 936,560
Accumulated other comprehensive
earnings (loss) (1,462) 649 1,789
---------- ---------- ----------
Total shareholders' equity 1,321,542 1,314,488 1,273,790
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,196,638 $4,048,779 $3,975,151
========== ========== ==========
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
4 of 19
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine Months
Ended October 31,
----------------------
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net earnings $30,190 $73,949
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 169,851 155,679
Amortization of intangible assets - 3,495
Amortization of deferred lease credits and other, net (14,438) (4,974)
Stock-based compensation expense 3,442 2,237
Deferred income taxes, net 8,097 (3,368)
Cumulative effect of accounting change (net of tax) 13,359 -
Write-off of IT investment 15,570 -
Minority interest purchase expense 40,389 -
Change in:
Accounts receivable, net (11,812) 21,951
Merchandise inventories (372,605) (179,463)
Prepaid expenses (2,824) (5,780)
Other assets 4,693 (5,818)
Accounts payable 180,311 110,991
Accrued salaries, wages and related benefits (12,268) (12,520)
Income taxes and other accruals 10,312 2,133
Other liabilities 4,006 1,808
-------- --------
Net cash provided by operating activities 66,273 160,320
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (263,855) (296,382)
Additions to deferred lease credits 83,021 95,749
Minority interest purchase (70,000) -
Other, net (5,044) (1,688)
-------- --------
Net cash used for investing activities (255,878) (202,321)
-------- --------
FINANCING ACTIVITIES:
Proceeds from notes payable 423 84,603
Proceeds from long-term borrowings 432 -
Principal payments on long-term debt (84,593) (17,902)
Proceeds from sale of interest rate swap 4,931 -
Proceeds from issuance of common stock 15,662 7,885
Cash dividends paid (37,779) (36,168)
Purchase and retirement of common stock - (1,311)
-------- --------
Net cash (used)/provided by financing activities (100,924) 37,107
-------- --------
Net decrease in cash and cash equivalents (290,529) (4,894)
Cash and cash equivalents at beginning of period 331,327 25,259
-------- --------
Cash and cash equivalents at end of period $40,798 $20,365
======== ========
The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of these statements.
5 of 19
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
our 2001 Annual Report. The same accounting policies are followed for
preparing quarterly and annual financial data. 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.
We reclassified certain prior year amounts 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 full fiscal year.
Beginning February 1, 2003, our fiscal year-end will change from January 31 to
the Saturday closest to January 31. In the future, each fiscal year will
consist of four 13 week quarters, with an extra week added onto the fourth
quarter every 5-6 years.
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, we
will no longer amortize goodwill and intangible assets having indefinite lives
but will instead perform annual impairment tests.
In connection with the adoption of SFAS No. 142, we reviewed the
classification and useful lives of our intangible assets. Our intangible
assets were determined to be either goodwill or indefinite lived tradename.
As required by SFAS No. 142, we defined our reporting unit as the Faconnable
Business Unit, one level below our reportable Retail Stores segment. We then
tested our intangible assets for impairment 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. SFAS No. 142 required us
to perform these impairment tests at adoption and at least annually
thereafter. On an ongoing basis we expect to perform our impairment test
during the first quarter or when other circumstances indicate we need to do
so.
Based on our initial test, we recognized a goodwill impairment charge of
$21,900 in the first quarter of 2002. The goodwill impairment 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. We determined the Faconnable
tradename not to be impaired.
6 of 19
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
Note 2 - Cumulative Effect of Accounting Change (Cont.)
The changes in the carrying amount of our intangible assets for the period
ended October 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
Goodwill impairment (21,900) - - (21,900)
Goodwill acquired through
exercise of Nordstrom.com
Put Agreement (see Note 8) - - 24,057 24,057
-------- --------- -------- ---------
Balance as of October 31, 2002 $ 16,298 $ 100,133 $ 24,057 $ 140,488
======== ========= ======== =========
The following table shows the actual results of operations for the three and
nine months ended October 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 Nine Months
Ended Ended
October 31, October 31,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Reported net income $ 18,427 $ 10,495 $ 30,190 $ 73,949
Intangible amortization,
net of tax - 706 - 2,132
Cumulative effect of
accounting change, net of tax - - 13,359 -
--------- --------- --------- ---------
Adjusted net income $ 18,427 $ 11,201 $ 43,549 $ 76,081
========= ========= ========= =========
Basic and diluted earnings per share
Reported net income $ .14 $ .08 $ .22 $ .55
Intangible amortization,
net of tax - - - .02
Cumulative effect of
accounting change, net of tax - - .10 -
--------- -------- --------- ---------
Adjusted net income $ .14 $ .08 $ .32 $ .57
========= ======== ========= =========
7 of 19
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
Note 3 - Earnings Per Share
Three Months Nine Months
Ended October 31, Ended October 31,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net earnings $18,427 $10,495 $30,190 $73,949
Basic shares 135,207,627 134,149,137 134,995,245 134,006,130
Basic earnings per share $0.14 $0.08 $0.22 $0.55
Dilutive effect of
stock options and
restricted stock 558,141 59,827 724,165 163,781
Diluted shares 135,765,768 134,208,964 135,719,410 134,169,911
Diluted earnings per share $0.14 $0.08 $0.22 $0.55
Antidilutive stock
options 8,692,657 10,486,554 6,546,645 8,888,040
Note 4 - Accounts Receivable
The components of accounts receivable are as follows:
October 31, January 31, October 31,
2002 2002 2001
----------- ----------- -----------
Unrestricted trade receivables $19,673 $16,012 $646,278
Restricted trade receivables 693,914 684,160 53,399
Other 21,017 21,325 20,465
Allowance for doubtful accounts (22,381) (23,022) (20,692)
----------- ----------- -----------
Accounts receivable, net $712,223 $698,475 $699,450
=========== =========== ===========
The restricted trade receivables consist of Nordstrom Private Label
Receivables and Visa Securitization Master Trust Certificates. The Private
Label receivables back the $300 million of Class A notes and the $200 million
variable funding note issued by us in November 2001.
Note 5 - Supplementary Cash Flow Information
We capitalize certain property, plant and equipment during the construction
period of commercial buildings, which are subsequently derecognized and
reclassed to prepaid rent or deferred lease credits. During the nine months
ended October 31, 2002 and 2001, the noncash activities related to the
reclassification of new stores were $80,389 and $60,645.
Additionally during the nine months ended October 31, 2002 and 2001, we had
noncash activities related to the construction of our corporate office
building of ($4,539) and $30,176.
8 of 19
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
Note 6 - 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
October 31, 2002 Stores Operations Internet and Other Eliminations Total
- ---------------------------------------------------------------------------------------------------
Revenues from external
customers $1,256,860 - $66,341 - - $1,323,201
Service charge income - $28,672 - - - 28,672
Intersegment revenues 9,492 (4,774) - - $(4,718) -
Interest expense, net 119 6,054 382 $14,277 - 20,832
Net earnings (loss) 44,351 5,379 (1,919) (29,384) - 18,427
Three months ended Retail Credit Catalog/ Corporate
October 31, 2001 Stores Operations Internet and Other Eliminations Total
- ---------------------------------------------------------------------------------------------------
Revenues from external
customers $1,172,332 - $66,909 - - $1,239,241
Service charge income - $31,040 - - - 31,040
Intersegment revenues 7,462 5,728 - - $(13,190) -
Interest expense, net 86 5,485 68 $12,295 - 17,934
Net earnings (loss) 34,956 7,109 (1,132) (30,438) - 10,495
Nine months ended Retail Credit Catalog/ Corporate
October 31, 2002 Stores Operations Internet and Other Eliminations Total
- ---------------------------------------------------------------------------------------------------
Revenues from external
customers $4,028,108 - $196,382 - - $4,224,490
Service charge income - $90,834 - - - 90,834
Intersegment revenues 22,731 19,692 - - $ (42,423) -
Interest expense, net 120 17,967 719 $41,680 - 60,486
Earnings before cumulative
effect of accounting change 167,563 10,199 (13,937) (120,276) - 43,549
Net earnings (loss) 154,204 10,199 (13,937) (120,276) - 30,190
Assets 2,995,109 707,376 82,163 411,990 - 4,196,638
Nine months ended Retail Credit Catalog/ Corporate
October 31, 2001 Stores Operations Internet and Other Eliminations Total
- ---------------------------------------------------------------------------------------------------
Revenues from external
customers $3,804,112 - $198,928 - - $4,003,040
Service charge income - $101,595 - - - 101,595
Intersegment revenues 15,144 19,581 - - $(34,725) -
Interest expense, net 794 18,110 (30) $37,843 - 56,717
Net earnings (loss) 158,579 13,904 (8,318) (90,216) - 73,949
Assets 2,812,324 683,716 83,265 395,846 - 3,975,151
Note 7 - 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 $42,736. No tax benefit was recognized, as we do not
believe it is probable that this benefit will be realized.
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 September 2002.
The purchase of the minority interest of Nordstrom.com resulted in additional
goodwill of $24,057.
9 of 19
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
Note 7 - Nordstrom.com (Cont.)
The following table presents the charges associated with the minority interest
purchase and reintegration costs.
Nine Months
Ended
October 31, 2002
----------------
Excess of the purchase price over the
fair market value of the preferred stock $40,389
Nordstrom.com option/warrant buyback expense 10,432
Professional fees incurred 2,347
----------------
$53,168
================
Note 8 - 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 formal mediation sessions in May and September 2001.
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. Plaintiff has
filed an appeal with the Washington State Supreme Court.
Other
- -----
We are also subject to other ordinary routine litigation. We do not expect
any material liability related to that litigation.
10 of 19
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 October 31, 2002 increased to $18,427 from
$10,495 for the same period in 2001. Earnings for the nine months ended
October 31, 2002 decreased to $30,190 from $73,949 for the same period in
2001. The decrease for the nine 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 nine-month period increased to $101,231 from $73,949 for the same period
last year. Diluted earnings per share were $0.14 for the quarter compared to
$.08 in the third quarter of last year. For the nine months ended October 31,
2002, diluted earnings per share before one-time charges were $0.75 compared
to $.55 for the same period last year.
Year-over-year net income before and after non-recurring items are as follows:
Nine Months
Ended
October 31,
-------------------------------------------
2002 2001
-------------------- --------------------
Diluted Diluted
Dollars EPS Dollars EPS
--------- --------- --------- ---------
Reported net income $ 30,190 $ 0.22 $ 73,949 $ 0.55
Non-recurring items, net of tax:
Minority interest purchase and
reintegration costs 48,184 0.36 - -
Cumulative effect of accounting
change (net of tax) 13,359 0.10 - -
Write-off of IT investment 9,498 0.07 - -
--------- --------- --------- ---------
Net income before non-recurring
items $ 101,231 $ 0.75 $ 73,949 $ 0.55
========= ========= ========= =========
Sales
- -----
Year-over-year changes in total company sales and comparable-store sales are
as follows:
QTD % Change YTD % Change
------------------ ------------------
Calendar 4-5-4* Calendar 4-5-4*
-------- -------- -------- --------
Total Company sales 6.8% 7.8% 5.5% 5.7%
Comparable-store sales 2.6% 3.7% 1.2% 1.3%
* the 13 and 39 week periods ended November 2, 2002 and November 3, 2001.
11 of 19
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
Total sales for the three and the nine-month periods increased primarily as a
result of new store openings. Since November 1, 2001, we opened seven full-
line stores and five Nordstrom Rack stores. Comparable store sales for the
quarter and the nine-month period increased primarily as a result of moderate
sales growth at full-line stores and strong sales growth at Nordstrom Rack
stores.
Gross Profit
- ------------
Gross profit as a percentage of sales increased to 33.9% for the three-month
period ended October 31, 2002, compared to 32.5% for the same period last
year. The increase for the quarter was partially due to the fact that we did
not repeat a clearance event that occurred in the third quarter of 2001. In
addition, we reduced our inventory shrinkage accrual based upon the results of
our mid-year physical inventory. Gross profit as a percentage of sales
increased to 33.7% for the nine-month period ended October 31, 2002, compared
to 33.1% for the same period last year. The increase for the nine-month
period benefited from the third quarter improvement. Also contributing to the
nine-month increase were high markdowns taken in the second quarter of the
prior year to reduce excess inventory. These margin improvements were
partially offset by increased occupancy costs from store openings in the
current year.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses increased as a percentage of
sales for the three-month period ended October 31, 2002. This was a result of
new store selling expenses and pre-opening costs, higher distribution costs
related to an increase in merchandise volumes and higher IT expenses related
to the implementation of our perpetual inventory system. For the nine-month
period ended October 31, 2002, selling, general and administrative expenses
improved slightly as a percentage of sales before a one-time charge of
$15,570. The improvement was due to decreased payroll and benefits expenses,
lower bad debt expense and lower catalog costs at Nordstrom Direct, partially
offset by higher distribution costs and 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 in the second quarter.
Interest Expense
- ----------------
Interest expense, net increased in the three and nine-month periods ended
October 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 increased for the three-month period
ended October 31, 2002, but decreased slightly for the nine-month period ended
October 31, 2002 compared to the same periods in 2001. The increase for the
three-month period was due to higher securitization income. The decrease for
the nine-month period resulted from lower service charge and late fee income
due to lower service charge rates. This was partially offset by higher
securitization income, which benefited from higher sales, increased balances
on our Visa receivable portfolio, and lower projected write-offs.
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 $42,736. No tax benefit was recognized, as we do not
believe it is probable that this benefit will be realized.
12 of 19
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
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 September 2002.
The purchase of the minority interest of Nordstrom.com resulted in additional
goodwill of $24,057.
The following table presents the charges associated with the minority interest
purchase and reintegration costs.
Nine Months
Ended
October 31, 2002
----------------
Excess of the purchase price over the
fair market value of the preferred stock $40,389
Nordstrom.com option/warrant buyback expense 10,432
Professional fees incurred 2,347
----------------
$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 higher sales 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 nine-month period ended
October 31, 2002 decreased $94,047 compared to the same period last year.
This decrease was primarily a result of an increase in merchandise inventories
due in part to new stores, partially offset by an increase in net earnings
before noncash items and an increase in accounts payable.
Capital Expenditures
- --------------------
For the nine month period ended October 31, 2002, net cash used in investing
activities increased $53,557 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. This was partially offset by a
decrease in capital expenditures for new stores.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
During the third quarter of fiscal 2002, we opened four full-line stores in
Dulles, VA; St. Louis, MO; Coral Gables, FL and Orlando, FL. We also opened
one Nordstrom Rack store in Long Beach, CA and one Faconnable boutique in
Coral Gables, FL. Year to date, we have opened a total of seven full-line
stores, four Nordstrom Rack stores and one Faconnable boutique. Additionally,
in November 2002, we opened a full-line store in Las Vegas, NV. No other
stores are scheduled to open in 2002. Total square footage of our stores was
18,221,000 as of October 31, 2002, compared to 16,998,000 as of October 31,
2001.
Financing
- ---------
For the nine month period ended October 31, 2002, cash used by financing
activities increased $138,031 primarily due to the scheduled retirement of
$76,750 in medium-term notes in the current year and proceeds from notes
payable of $84,603 in the prior year.
CRITICAL ACCOUNTING POLICIES:
- -----------------------------
The preparation of our financial statements requires 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 including estimates of
inventory shrinkage and obsolescence, intangible assets, income taxes, self-
insurance liabilities, pensions, contingent liabilities and litigation. We
base our estimates on historical experience and other assumptions that we
believe to be reasonable under the circumstances. Actual results may differ
from these estimates.
Inventory
- ---------
The implementation of our new perpetual inventory system this year has
improved the timeliness and completeness of recording price changes, including
markdowns. Our mid-year physical inventory completed in the third quarter
indicated that the higher than expected level of markdowns that we have
experienced year to date had a favorable impact on our shrinkage results.
Accordingly, we have adjusted our shrinkage accrual in the third quarter based
on this information. Further adjustment may be needed based on our final
year-end physical inventory. The improvement in recording markdowns may also
impact the required level of our inventory obsolescence reserve. We are
currently evaluating this impact and an adjustment to our obsolescence reserve
may be necessary in the fourth quarter.
Realization of Streamline Deferred Tax Asset
- --------------------------------------------
As of October 31, 2002, we have $32,857 of capital loss carryforward related
to the write off of our investment in Streamline.com, Inc. We can use these
capital loss carryforwards only if we 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.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
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 11, 2001 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
In September 2002, we sold the interest rate swap that converted our $300
million, 8.95% fixed-rate debt to variable rate. We received cash of $4.9
million, which will be recognized as income evenly over the remaining life of
the related debt.
In October 2002, we entered into a new interest rate swap agreement which will
convert our $250 million 5.625% fixed-rate debt to variable rate effective
January 15, 2003. The variable rate is based on the 6-month LIBOR rate plus
1.31% (initial rate 3.25%). The $1.9 million fair value of the swap has been
recorded on our balance sheet in accordance with SFAS No. 133. The interest
rate swap will reduce interest payments on our 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.
Item 4. CONTROLS AND PROCEDURES
Within the last 90 days, our President and Chief Financial Officer evaluated
our disclosure controls and procedures and believe that they are effective in
the timely recording, processing, summarizing and reporting of material
financial and non-financial information.
Additionally, during the quarter ended October 31, 2002, we did not make any
significant changes in, or take any corrective actions regarding, our internal
controls or other factors that could significantly affect these controls. We
review our internal controls for effectiveness on an ongoing basis. We plan
to continue our review process, including both internal and external audit
examinations, as part of the evaluation of our disclosure controls and
internal controls.
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 8 in Notes to Condensed Consolidated Financial Statements
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Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
--------
3.1 By-laws, as amended and restated on November 22, 2002.
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 September 12, 2002 to submit to the Securities and
Exchange Commission the sworn statements required by the Securities and
Exchange Commission's "Order Requiring the Filing of Sworn Statements Pursuant
to Section 21(a)(1) of the Securities Exchange Act of 1934" (File No. 4-460,
June 27, 2002).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORDSTROM, INC.
(Registrant)
/s/ Michael G. Koppel
----------------------------------------------------
Michael G. Koppel
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
Date: December 6, 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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 6, 2002 /s/ Blake W. Nordstrom
------------------ ----------------------
Blake W. Nordstrom
President
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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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 6, 2002 /s/ Michael G. Koppel
------------------ ----------------------
Michael G. Koppel
Executive Vice President and
Chief Financial Officer
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NORDSTROM INC. AND SUBSIDIARIES
Exhibit Index
Exhibit Method of Filing
- ------- ----------------
3.1 By-laws, as amended and resated Filed herewith electronically
on November 22, 2002
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