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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 November 1, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 001-15059
Nordstrom, Inc.
______________________________________________________
(Exact name of Registrant as specified in its charter)
Washington 91-0515058
_______________________________ ___________________
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1617 Sixth Avenue, Seattle, Washington 98101
____________________________________________________
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (206) 628-2111
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
_____ _____
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES X NO
_____ _____
Common stock outstanding as of November 29, 2003: 137,435,231 shares of
common stock.
1 of 18
NORDSTROM, INC. AND SUBSIDIARIES
--------------------------------
INDEX
-----
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Earnings
Quarter and Year to Date ended November 1, 2003
and October 31, 2002 3
Condensed Consolidated Balance Sheets
November 1, 2003, January 31, 2003 and
October 31, 2002 4
Condensed Consolidated Statements of Cash Flows
Year to Date ended November 1, 2003
and October 31, 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2 of 18
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands except per share amounts)
(unaudited)
Quarter Ended Year to Date Ended
---------------------- ----------------------
November 1, October 31, November 1, October 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales $1,420,610 $1,323,201 $4,559,124 $4,224,490
Cost of sales and related
buying and occupancy (911,314) (872,154) (2,991,967) (2,799,277)
---------- ---------- ---------- ----------
Gross profit 509,296 451,047 1,567,157 1,425,213
Selling, general and
administrative expenses (450,622) (434,921) (1,381,308) (1,317,920)
---------- ---------- ---------- ----------
Operating income 58,674 16,126 185,849 107,293
Interest expense, net (26,681) (20,832) (73,043) (60,486)
Minority interest purchase
and reintegration costs - - - (53,168)
Service charge income
and other, net 42,576 35,006 114,289 103,651
---------- ---------- ---------- ----------
Earnings before income taxes
and cumulative effect of
accounting change 74,569 30,300 227,095 97,290
Income tax expense (29,100) (11,873) (88,600) (53,741)
---------- ---------- ---------- ----------
Earnings before cumulative
effect of accounting change 45,469 18,427 138,495 43,549
Cumulative effect of accounting
change (net of tax of $8,541) - - - (13,359)
---------- ---------- ---------- ----------
Net earnings $ 45,469 $ 18,427 $ 138,495 $ 30,190
========== ========== ========== ==========
Basic earnings per share $ .33 $ .14 $ 1.02 $ .22
========== ========== ========== ==========
Diluted earnings per share $ .33 $ .14 $ 1.01 $ .22
========== ========== ========== ==========
Cash dividends paid per share
of common stock outstanding $ .10 $ .10 $ .30 $ .28
========== ========== ========== ==========
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
3 of 18
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
November 1, January 31, October 31,
2003 2003 2002
---------- ---------- ----------
(Unaudited) (Audited) (Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 154,490 $ 219,344 $ 53,658
Accounts receivable, net 606,172 639,630 623,421
Retained interest in accounts receivable 227,340 124,543 97,936
Merchandise inventories 1,189,996 953,112 1,278,932
Prepaid expenses 50,083 40,261 46,860
Other current assets 111,965 111,138 102,829
---------- ---------- ----------
Total current assets 2,340,046 2,088,028 2,203,636
Land, buildings and equipment (net of
accumulated depreciation of $2,051,968,
$1,882,976, and $1,825,759) 1,736,617 1,761,544 1,754,288
Goodwill, net 56,609 56,609 56,609
Tradename, net 84,000 84,000 84,000
Other assets 155,767 121,726 123,239
---------- ---------- ----------
TOTAL ASSETS $4,373,039 $4,111,907 $4,221,772
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 486 $ 244 $ 571
Accounts payable 647,708 429,808 702,181
Accrued salaries, wages
and related benefits 261,200 260,562 226,840
Income taxes and other accruals 200,133 188,986 158,095
Current portion of long-term debt 6,198 5,545 4,386
---------- ---------- ----------
Total current liabilities 1,115,725 885,145 1,092,073
Long-term debt 1,236,287 1,341,826 1,343,423
Deferred lease credits 376,007 383,100 360,116
Other liabilities 143,726 128,972 101,093
Shareholders' Equity:
Common stock, no par:
500,000,000 shares authorized;
136,970,748, 135,444,041 and
135,427,913 shares issued
and outstanding 384,193 358,069 357,567
Unearned stock compensation (671) (2,010) (2,177)
Retained earnings 1,111,864 1,014,105 967,614
Accumulated other comprehensive
earnings 5,908 2,700 2,063
---------- ---------- ----------
Total shareholders' equity 1,501,294 1,372,864 1,325,067
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,373,039 $4,111,907 $4,221,772
========== ========== ==========
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
4 of 18
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Year to Date Ended
------------------------
November 1, October 31,
2003 2002
---------- ----------
OPERATING ACTIVITIES:
Net earnings $138,495 $30,190
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 185,163 169,851
Amortization of deferred lease credits and other, net (20,316) (14,623)
Stock-based compensation expense 9,548 3,442
Deferred income taxes, net 3,325 8,097
Cumulative effect of accounting change, net of tax - 13,359
Impairment of IT investment - 15,570
Minority interest purchase expense - 40,389
Change in operating assets and liabilities:
Accounts receivable, net 42,221 22,117
Retained interest in accounts receivable (100,814) (36,498)
Merchandise inventories (234,246) (372,605)
Prepaid expenses (4,003) (5,895)
Other assets (6,437) 4,693
Accounts payable 206,355 189,212
Accrued salaries, wages and related benefits (9,015) (12,268)
Income taxes and other accruals 6,478 13,185
Other liabilities 8,913 4,006
---------- ----------
Net cash provided by operating activities 225,667 72,222
---------- ----------
INVESTING ACTIVITIES:
Capital expenditures (204,536) (263,855)
Additions to deferred lease credits 37,157 83,021
Minority interest purchase - (70,000)
Other, net (1,037) (4,661)
---------- ----------
Net cash used for investing activities (168,416) (255,495)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from notes payable 226 423
Proceeds from long-term borrowings - 432
Principal payments on long-term debt (109,374) (84,593)
Proceeds from sale of interest rate swap 2,341 4,931
Proceeds from issuance of common stock 25,438 15,662
Cash dividends paid (40,736) (37,779)
---------- ----------
Net cash used for financing activities (122,105) (100,924)
---------- ----------
Net decrease in cash and cash equivalents (64,854) (284,197)
Cash and cash equivalents at beginning of period 219,344 337,855
---------- ----------
Cash and cash equivalents at end of period $154,490 $53,658
========== ==========
The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of these statements.
5 of 18
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 2002 Annual Report. The same accounting policies are followed for
preparing quarterly and annual financial data. All adjustments necessary for
the fair presentation of the results of operations, financial position and
cash flows have been included and are of a normal, recurring nature.
Due to the seasonal nature of the retail industry, quarterly results are not
necessarily indicative of the results for the full fiscal year.
Reclassification
- ----------------
We reclassified certain prior year amounts to conform to the current year
presentation.
Change in Fiscal Year
- ---------------------
On February 1, 2003, our fiscal year-end changed from January 31 to the
Saturday closest to January 31. Each fiscal year consists of four 13 week
quarters, with an extra week added onto the fourth quarter every five to six
years. A one-day transition period is included in our first quarter 2003
results.
Stock Compensation
- ------------------
We apply APB No. 25, "Accounting for Stock Issued to Employees," in measuring
compensation costs under our stock-based compensation programs, which are
described more fully in our 2002 Annual Report.
If we had elected to recognize compensation cost based on the fair value of
the options and shares at grant date, net earnings and earnings per share
would have been as follows:
Quarter Ended Year to Date Ended
---------------------- ----------------------
November 1, October 31, November 1, October 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net earnings, as reported $45,469 $18,427 $138,495 $30,190
Add: stock-based compensation
expense included in reported
net income, net of tax 4,615 580 5,483 1,740
Deduct: stock-based
compensation expense
determined under fair value,
net of tax (7,390) (5,499) (17,878) (17,870)
---------- ---------- ---------- ----------
Pro forma net earnings $42,694 $13,508 $126,100 $14,060
========== ========== ========== ==========
Earnings per share:
Basic - as reported $0.33 $0.14 $1.02 $0.22
Diluted - as reported $0.33 $0.14 $1.01 $0.22
Basic - pro forma $0.31 $0.10 $0.93 $0.10
Diluted - pro forma $0.31 $0.10 $0.92 $0.10
6 of 18
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
Note 1 - Summary of Significant Accounting Policies (Cont.)
Recent Accounting Pronouncements
- --------------------------------
In January 2003, the FASB issued Interpretation No. 46 (FIN 46) "Consolidation
of Variable Interest Entities", which requires the consolidation of variable
interest entities (VIEs). An entity is considered to be a VIE when its equity
investors lack controlling financial interest or the entity has insufficient
capital to finance its activities without additional subordinated financial
support. Consolidation of a VIE by an investor is required when it is
determined that the majority of the entity's expected losses or residual
returns will be absorbed by that investor. FIN 46 is effective for variable
interest entities created or acquired after January 31, 2003. For variable
interest entities created before February 1, 2003, FIN 46 must be applied for
the first interim or annual period ending after December 15, 2003. We do not
believe the adoption of FIN 46 will have an impact on our financial
statements.
Note 2 - Goodwill and Other Intangible Assets
The carrying amounts of our intangible assets are as follows:
Catalog/
Retail Stores Internet
segment segment Total
--------------------- -------- ---------
Goodwill Tradename Goodwill
-------- --------- --------
Balance as of February 1, 2003
and November 1, 2003 $ 40,893 $ 84,000 $ 15,716 $ 140,609
The purchase of the minority interest of Nordstrom.com in the first quarter of
2002 resulted in additional goodwill of $24,178, of which $8,462 was allocated
to the Retail Stores reporting unit and $15,716 to the Catalog/Internet
reporting unit. Goodwill of $32,431 and Tradename of $84,000 are assigned to
the Faconnable reporting unit.
Note 3 - Earnings Per Share
Quarter Ended Year to Date Ended
------------------------ ------------------------
November 1, October 31, November 1, October 31,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net earnings $45,469 $18,427 $138,495 $30,190
Basic shares 136,303,837 135,207,627 135,907,488 134,995,245
Basic earnings per share $0.33 $0.14 $1.02 $0.22
Dilutive effect of
stock options and
performance share units 1,799,263 558,141 751,286 724,165
Diluted shares 138,103,100 135,765,768 136,658,774 135,719,410
Diluted earnings per share $0.33 $0.14 $1.01 $0.22
Antidilutive stock options 2,974,349 8,692,657 7,578,056 6,546,645
7 of 18
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
Note 4 - Accounts Receivable
The components of accounts receivable are as follows:
November 1, January 31, October 31,
2003 2003 2002
----------- ----------- -----------
Trade receivables:
Unrestricted $29,728 $15,599 $19,895
Restricted 567,396 613,647 601,535
Allowance for doubtful accounts (20,746) (22,385) (22,381)
----------- ----------- -----------
Trade receivables, net 576,378 606,861 599,049
Other 29,794 32,769 24,372
----------- ----------- -----------
Accounts receivable, net $606,172 $639,630 $623,421
=========== =========== ===========
The restricted private label receivables back the $300 million Class A notes
and the $200 million variable funding note issued by us in November 2001.
Other accounts receivable consist primarily of vendor receivables and cosmetic
rebates receivable. As all vendor receivables are fully earned at period end,
no allowance for doubtful vendor receivables has been recorded.
Note 5 - Debt
In the third quarter, we purchased $62,405 of our 8.95% senior notes for a
total cash payment of $72,925. Approximately $7,880 of expense was recognized
in the third quarter of 2003 related to this purchase.
Year to date we have purchased $103,230 of our 8.95% senior notes and $2,500
of our 6.7% medium-term notes for a total cash payment of $122,979.
Approximately $14,303 of expense has been recognized during the year related
to these purchases.
We entered into a variable interest rate swap agreement in the second quarter
of 2003. The swap qualifies as a fair value hedge and is recorded at its
market value of ($10,884) in other liabilities.
8 of 18
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
Note 6 - Segment Reporting
The following tables set forth the information for our reportable segments and
a reconciliation to the consolidated totals:
Quarter ended Retail Credit Catalog/ Corporate
November 1, 2003 Stores Operations Internet and Other Eliminations Total
- ---------------------------------------------------------------------------------------------------
Revenues from external
customers $1,352,542 - $68,068 - - $1,420,610
Service charge income - $35,837 - - - 35,837
Intersegment revenues 6,245 6,942 - - $(13,187) -
Interest expense, net 390 5,549 (62) $20,804 - 26,681
Earnings before taxes 121,136 3,853 (482) (49,938) - 74,569
Net earnings (loss) 73,864 2,350 (295) (30,450) - 45,469
Quarter ended Retail Credit Catalog/ Corporate
October 31, 2002 Stores Operations Internet and Other Eliminations Total
- ---------------------------------------------------------------------------------------------------
Revenues from external
customers $1,261,124 - $62,077 - - $1,323,201
Service charge income - $33,311 - - - 33,311
Intersegment revenues 9,492 7,157 - - $(16,649) -
Interest expense, net 119 6,054 382 $14,277 - 20,832
Earnings before taxes and
cumulative effect of
accounting change 86,274 4,963 (4,051) (56,886) - 30,300
Net earnings (loss) 52,506 3,020 (2,463) (34,636) - 18,427
Year to date ended Retail Credit Catalog/ Corporate
November 1, 2003 Stores Operations Internet and Other Eliminations Total
- ---------------------------------------------------------------------------------------------------
Revenues from external
customers $4,353,627 - $205,497 - - $4,559,124
Service charge income - $104,506 - - - 104,506
Intersegment revenues 20,766 24,180 - - $(44,946) -
Interest expense, net 508 16,364 (74) $56,245 - 73,043
Earnings before taxes 379,128 15,559 (1,967) (165,625) - 227,095
Net earnings (loss) 231,213 9,489 (1,200) (101,007) - 138,495
Assets 2,940,898 810,184 103,433 518,524 - 4,373,039
Year to date ended Retail Credit Catalog/ Corporate
October 31, 2002 Stores Operations Internet and Other Eliminations Total
- ---------------------------------------------------------------------------------------------------
Revenues from external
customers $4,040,382 - $184,108 - - $4,224,490
Service charge income - $97,773 - - - 97,773
Intersegment revenues 22,731 23,265 - - $(45,996) -
Interest expense, net 120 17,967 719 $41,680 - 60,486
Earnings before taxes and
cumulative effect of
accounting change 300,673 18,431 (20,074) (201,740) - 97,290
Net earnings (loss) 169,950 11,237 (12,238) (138,759) - 30,190
Assets 2,981,671 710,215 97,497 432,389 - 4,221,772
Note 7 - Nordstrom.com
During 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 on the share purchase,
as we do not believe it is probable that this benefit will be realized. The
impact of not recognizing this income tax benefit increased our prior year to
date effective tax rate to 55.2% before the cumulative effect of accounting
change.
9 of 18
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
Note 7 - Nordstrom.com (Cont.)
Also in 2002, $10,432 of expense was recognized related to the purchase of the
outstanding Nordstrom.com options and warrants.
The following table presents the charges resulting from the minority interest
purchase and reintegration of Nordstrom.com.
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
----------------
Total minority interest purchase and reintegration costs $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 Superior
Court. In May 2000, plaintiffs filed an amended complaint naming a number of
manufacturers of cosmetics and fragrances and two other retailers as
additional defendants. Plaintiffs' amended complaint alleges that the retail
price of the "prestige" or "Department Store" cosmetics sold in department and
specialty stores was collusively controlled by the retailer and manufacturer
defendants in violation of the Cartwright Act and the California Unfair
Competition Act.
Plaintiffs seek treble damages and restitution in an unspecified amount,
attorneys' fees and prejudgment interest, on behalf of a class of all
California residents who purchased cosmetics and fragrances for personal use
from any of the defendants during the four years prior to the filing of the
amended complaint. Defendants, including us, have answered the amended
complaint denying the allegations. The defendants have produced documents and
responded to plaintiffs' other discovery requests, including providing
witnesses for depositions.
We entered into a settlement agreement with the plaintiffs and the other
defendants on July 16, 2003. In furtherance of the settlement agreement, the
case was refiled in the United States District Court for the Northern District
of California on behalf of a class of all persons who currently reside in the
United States and who purchased "Department Store" cosmetics from the
defendants during the period May 29, 1994 through July 16, 2003. The Court
has given preliminary approval to the settlement. A summary notice of class
certification and the terms of the settlement will be disseminated to class
members. A hearing on whether the Court will grant final approval of the
settlement is scheduled for June 8, 2004. If approved by the Court, the
settlement will result in the plaintiffs' claims and the claims of all class
members being dismissed, with prejudice, in their entirety. In connection
with the settlement agreement, the defendants will provide class members with
certain free products and pay the plaintiffs' attorneys' fees. Our share of
the cost of the settlement will not have a material adverse effect on our
financial condition.
10 of 18
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
Note 8 - Litigation (Cont.)
We have entered into the settlement agreement solely to avoid protracted and
costly litigation. There has been no finding or admission of any wrongdoing
by us in this lawsuit.
Other
- -----
We are subject to routine litigation incidental to our business. No material
liability is expected.
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 2002 Annual Report.
RESULTS OF OPERATIONS:
- ----------------------
Overview
- --------
Earnings for the third quarter of 2003 increased to $45,469 or $0.33 per
diluted share from $18,427 or $0.14 per diluted share for the same period in
2002. This increase was driven by a 5.0% increase in same store sales,
improved margin due to lower markdowns, leveraging on buying and occupancy
expenses as well as selling, general and administrative expenses and overall
expense control.
Earnings for the year to date period ended November 1, 2003 increased to
$138,495 or $1.01 per diluted share from $30,190 or $0.22 per diluted share
for the same period in 2002. The increase for the year to date period was
partially attributable to charges taken in 2002 to write-off an IT investment,
acquire and reintegrate the minority interest of Nordstrom.com and to adopt a
new accounting pronouncement.
Excluding the nonrecurring and impairment charges taken in 2002, year to date
earnings increased $37,264 or 36.8% when compared to the same period last
year. This increase was the result of a 2.6% increase in same store sales,
leveraging on buying and occupancy expenses as well as selling, general and
administrative expenses and overall expense control.
11 of 18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
Year-over-year net income before and after nonrecurring and impairment charges
are as follows:
Year to Date Ended
-------------------------------------------
November 1, 2003 October 31, 2002
-------------------- --------------------
Diluted Diluted
Dollars EPS Dollars EPS
--------- --------- --------- ---------
Reported net income $138,495 $1.01 $30,190 $0.22
Nonrecurring and impairment
charges, net of tax:
Minority interest purchase and
reintegration costs - - 48,184 0.36
Cumulative effect of accounting
change - - 13,359 0.10
Write-off of IT investment - - 9,498 0.07
--------- --------- --------- ---------
Net income before nonrecurring
and impairment charges $138,495 $1.01 $101,231 $0.75
========= ========= ========= =========
Sales
- -----
Total sales for the quarter and year to date on a 4-5-4 comparable basis
increased 9.8% and 7.2% due to same store sales increases and store openings.
Same store sales on a 4-5-4 comparable basis increased 5.0% for the quarter
and 2.6% year to date due to several factors, including a strong merchandise
offering and an improved retail climate. Year to date sales also benefited
from strong sales events. For the twelve months ended November 1, 2003, we
have opened four full-line stores and two Nordstrom Rack stores. See our GAAP
sales reconciliation on page 14.
Our strongest performing merchandise divisions for the quarter were women's
designer apparel, accessories, shoes, cosmetics, women's active wear and men's
wear. Our weakest divisions were women's special sizes and children's
apparel.
Gross Profit
- ------------
QTD 2003 QTD 2002 YTD 2003 YTD 2002
-------- -------- -------- --------
Gross profit as a percent of sales 35.9% 34.1% 34.4% 33.7%
Gross profit as a percentage of sales improved 176 basis points for the
quarter and 64 basis points for the year to date period ended November 1,
2003, compared to the same periods last year. The quarter perfomance was due
to lower markdowns, which resulted from better inventory management, and
leveraging of buying and occupancy expenses. Year to date perfomance was
driven by the leveraging of buying and occupancy expenses. Inventory levels
continued to show favorable trends as overall inventory control resulted in a
10.8% decrease in our inventory per square foot.
12 of 18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
Selling, General and Administrative
- -----------------------------------
QTD 2003 QTD 2002 YTD 2003 YTD 2002
-------- -------- -------- --------
Selling, general and
administrative expense
as a percent of sales 31.8% 32.9% 30.3% 31.1%
The year to date 2002 selling, general and administrative expense includes an
impairment charge of $15,570 related to the write-down of an information
technology investment in a supply chain tool at our manufacturing division.
Without this charge, 2002 selling, general and administrative expenses as a
percentage of sales on a year to date basis would have been 30.8%.
Excluding the effects of the impairment charge, the quarter and year to date
decreases resulted from leverage on better than expected same store sales and
overall expense control. We saw the most significant improvements in
information technology expenses, selling expenses and distribution costs.
Interest Expense
- ----------------
Interest expense, net increased $5,849 for the quarter ended November 1, 2003
when compared to the same period in 2002 due to $7,880 in additional expense
resulting from the repurchase of $62,405 in debt during the quarter. The
additional expense was partially offset by lower interest expense resulting
from the reduced debt balance outstanding. Year to date we have repurchased
$105,730 in debt resulting in additional expense of $14,303.
Service Charge Income and Other
- -------------------------------
Service charge income and other, net increased for the quarter and year to
date periods ended November 1, 2003 primarily due to gains recorded from our
VISA securitization. Securitization gains continued as increased sales on our
VISA cards have resulted in higher receivable balances and related revenues,
while the cost of funds declined and bad debt write-offs remained stable.
Additionally, during the quarter we recorded approximately $4,048 in gains
resulting from the relocation of two of our stores.
Minority Interest Purchase and Reintegration Costs
- --------------------------------------------------
During 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 on the share purchase,
as we do not believe it is probable that this benefit will be realized. The
impact of not recognizing this income tax benefit increased our prior year to
date effective tax rate to 55.2% before the cumulative effect of accounting
change.
Also in 2002, $10,432 of expense was recognized related to the purchase of the
outstanding Nordstrom.com options and warrants.
13 of 18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
The following table presents the charges resulting from the minority interest
purchase and reintegration of Nordstrom.com:
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
----------------
Total minority interest purchase and reintegration costs $53,168
================
Cumulative Effect of Accounting Change
- --------------------------------------
During the first quarter of 2002, we completed the initial 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 $0.10 per share on a diluted basis.
Seasonality
- ------------
Our business, like that of other retailers, is subject to seasonal
fluctuations. Our anniversary sale in July and the holidays in December
result in higher sales in the second and fourth quarters of the fiscal year.
Accordingly, results for any quarter are not necessarily indicative of the
results that may be achieved for a full fiscal year.
GAAP Sales Reconciliation (Dollars in millions)
- -----------------------------------------------
We converted to a 4-5-4 Retail Calendar at the beginning of 2003. This change
in our fiscal calendar has resulted in one less day of sales being included in
our second quarter versus the same period in the prior year and one additional
day of sales for the current year to date versus the same period last year.
Sales performance numbers included in this document have been calculated on a
comparative 4-5-4 basis. We believe that adjusting for the difference in days
provides a more comparable basis (4-5-4 vs 4-5-4) from which to evaluate sales
performance. The following reconciliation bridges the reported GAAP sales to
the 4-5-4 comparable sales.
% Change % Change
Dollar Total Comp
Sales Reconciliation ($M) QTD 2003 QTD 2002 Increase Sales Sales
- ---------------------------- --------- --------- -------- --------- --------
Number of Days Reported GAAP 91 92
Reported GAAP Sales $1,420.6 $1,323.2 $97.4 7.4% 2.5%
Less Aug. 1-3, 2002 sales - ($72.9)
Plus Nov 1-2, 2002 sales - $43.2
--------- ---------
Reported 4-5-4 sales $1,420.6 $1,293.5 $127.1 9.8% 5.0%
--------- ---------
4-5-4 Adjusted Days 91 91
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
% Change % Change
Dollar Total Comp
Sales Reconciliation ($M) YTD 2003 YTD 2002 Increase Sales Sales
- ---------------------------- --------- --------- -------- --------- --------
Number of Days Reported GAAP 274 273
Reported GAAP Sales $4,559.1 $4,224.5 $334.6 7.9% 2.9%
Less Feb. 1, 2003 ($18.2) -
Less Feb. 1-2, 2002 sales - ($30.4)
Plus Nov. 1-2, 2002 sales - $43.2
--------- ---------
Reported 4-5-4 sales $4,540.9 $4,237.3 $303.6 7.2% 2.6%
--------- ---------
4-5-4 Adjusted Days 273 273
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 year to date period ended
November 1, 2003 increased compared to the same period last year. This
increase was primarily a result of a decrease in inventory due to overall
inventory control, partially offset by an increase in the retained interest of
our VISA securitization. The increase in the retained interest was a result
of increased sales on our VISA card.
Capital Expenditures
- --------------------
For the year to date period ended November 1, 2003, net cash used in investing
activities decreased primarily due to the $70,000 payment for the acquisition
of the outstanding shares of Nordstrom.com, Inc. series C preferred stock in
2002. In addition, net capital expenditures decreased from a planned
reduction in store openings.
We opened two full-line stores in Austin, TX and Richmond, VA during the third
quarter of 2003 as well as two Nordstrom Rack stores in Chicago, IL and
Sunrise, FL. Year to date, we have opened a total of three full-line stores
and two Nordstrom Rack stores. Additionally, in November 2003, we opened a
full-line store in Wellington Green, FL. No other stores are scheduled to
open in 2003. Gross square footage for the year increased approximately 4%
from 18,428,000 to 19,131,000.
Financing
- ---------
For the year to date period ended November 1, 2003, cash used by financing
activities increased primarily due to our current year debt repurchase
partially offset by the scheduled retirement of $76,750 in medium-term notes
in the prior year.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
Debt Buyback
- ------------
In the third quarter, we purchased $62,405 of our 8.95% senior notes for a
total cash payment of $72,925. Approximately $7,880 of expense was recognized
in the third quarter of 2003 related to this purchase.
Year to date we have purchased $103,230 of our 8.95% senior notes and $2,500
of our 6.7% medium-term notes for a total cash payment of $122,979.
Approximately $14,303 of expense has been recognized during the year related
to these purchases.
CRITICAL ACCOUNTING POLICIES:
- -----------------------------
The preparation of our financial statements requires that we make estimates
and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and disclosure of contingent assets and liabilities.
We regularly evaluate our estimates including those related to doubtful
accounts, inventory valuation, intangible assets, sales return, income taxes,
self-insurance liabilities, post-retirement benefits, contingent liabilities
and litigation. We base our estimates on historical experience and other
assumptions that we believe to be reasonable under the circumstances. Actual
results may differ from these estimates. No changes to our methodologies have
occurred since our disclosures in the 2002 Annual Report.
Recent Accounting Pronouncements
- --------------------------------
In January 2003, the FASB issued Interpretation No. 46 (FIN 46) "Consolidation
of Variable Interest Entities", which requires the consolidation of variable
interest entities (VIEs). An entity is considered to be a VIE when its equity
investors lack controlling financial interest or the entity has insufficient
capital to finance its activities without additional subordinated financial
support. Consolidation of a VIE by an investor is required when it is
determined that the majority of the entity's expected losses or residual
returns will be absorbed by that investor. FIN 46 is effective for variable
interest entities created or acquired after January 31, 2003. For variable
interest entities created before February 1, 2003, FIN 46 must be applied for
the first interim or annual period ending after December 15, 2003. We do not
believe the adoption of FIN 46 will have an impact on our financial
statements.
FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT:
- -------------------------------------------------
The preceding disclosures included 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, changing
interest rates 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 the
impact of economic and competitive market forces, including the impact of
terrorist activity or the impact of war. 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. This discussion and analysis should be
read in conjunction with the condensed consolidated financial statements.
16 of 18
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 our Chief Financial Officer concluded
that our disclosure controls and procedures are effective in the timely
recording, processing, summarizing and reporting of material financial and
non-financial information.
There have been no changes 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.
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
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
--------
3.2 Bylaws, as amended and restated on November 18, 2003.
10.1 Nordstrom Supplemental Executive Retirement Plan (2003 Restatement).
31.1 Certification of President required by Section 302(a)
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer required by Section 302(a)
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of President regarding periodic report
containing financial statements as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer regarding periodic report
containing financial statements as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
-------------------
We filed a Form 8-K on August 7, 2003 attaching a press release to
announce our preliminary July 2003 sales results.
We filed a Form 8-K on August 21, 2003 attaching a press release to
announce our results of operations for the quarter ended August 2,
2003.
We filed a Form 8-K on September 4, 2003 attaching a press release to
announce our preliminary August 2003 sales results.
We filed a Form 8-K on October 9, 2003 attaching a press release to
announce our preliminary September 2003 sales results.
17 of 18
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 8, 2003
------------------
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NORDSTROM INC. AND SUBSIDIARIES
Exhibit Index
Exhibit Method of Filing
- ------- ----------------
3.1 Bylaws, as amended and restated on Filed herewith electronically
November 18, 2003
10.1 Nordstrom Supplemental Executive Filed herewith electronically
Retirement Plan (2003
Restatement)
31.1 Certification of President Filed herewith electronically
required by Section 302(a) of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Filed herewith electronically
Officer required by Section 302(a)
of the Sarbanes-Oxley Act of 2002
32.1 Certification of President Filed herewith electronically
regarding periodic report
containing financial statements as
required by Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Filed herewith electronically
Officer regarding periodic report
containing financial statements as
required by Section 906 of the
Sarbanes-Oxley Act of 2002