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| JWN > SEC Filings for JWN > Form 10-Q on 9-Dec-2008 | All Recent SEC Filings |
9-Dec-2008
Quarterly Report
These and other factors, including those factors described in Part I, "Item 1A. Risk Factors" in our Form 10-K for the fiscal year ended February 2, 2008 and in Part II, "Item 1A. Risk Factors" on page 29 of this report, could affect our financial results and trends and cause actual results and trends to differ materially from those contained in any forward-looking statements we may provide. As a result, while we believe there is a reasonable basis for the forward-looking statements, you should not place undue reliance on those statements. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances. This discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
(Dollar and share amounts in millions except per share and per square foot
amounts)
RESULTS OF OPERATIONS
Overview
Quarter Ended Nine Months Ended
November 1, 2008 November 3, 2007 November 1, 2008 November 3, 2007
Net earnings $ 71 $ 166 $ 333 $ 503
Net earnings as a percentage of net
sales 3.9% 8.4% 5.6% 8.0%
Earnings per diluted share $ 0.33 $ 0.68 $ 1.52 $ 1.98
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Earnings per diluted share decreased $0.35 to $0.33 for the quarter ended
November 1, 2008, and decreased $0.46 to $1.52 for the nine months ended
November 1, 2008, compared with the same periods in the prior year. These
decreases were primarily due to lower sales, lower merchandise margin rates, and
higher bad debt expense, partially offset by lower variable expenses and
performance-related incentives, our continued focus on controlling our fixed
expenses, and the impact of share repurchases. Key highlights include:
• We recorded two non-comparable items in the third quarter of 2008 related to
income taxes and our sales return reserve that had a benefit to earnings per
diluted share of approximately $0.03. In the third quarter of 2007, we
completed the sale of our Façonnable business and our results for that period
include a gain which increased our earnings per share by $0.09.
• Total net sales decreased 8.4% for the quarter and 5.4% for the nine months ended November 1, 2008, compared to the same periods in 2007. Total company same-store sales declined 11.1% and 7.7%, respectively, for the quarter and nine months ended November 1, 2008. Results in full-line stores continued to be challenging, as same-store sales decreased 15.6% in the quarter and 11.0% year-to-date. Nordstrom Rack continued its strong same-store sales performance with an increase of 3.6% in the quarter and 4.8% year-to-date. Sales for the Direct segment increased 8.5% in the quarter and 9.3% year-to-date. Sales in all of our businesses were significantly impacted after the financial markets began to experience severe stress in mid-September.
• Gross profit as a percentage of net sales (gross profit rate) decreased 332 basis points for the quarter and 183 basis points for the nine months ended November 1, 2008, as we responded to slower sales trends and the competitive environment with increased markdowns. Average inventory per square foot decreased 5.4% from the prior year.
• Selling, general and administrative expenses increased $14 for the quarter and decreased $7 for the nine months ended November 1, 2008, compared to the same periods ended November 3, 2007. Our continued focus on expense control resulted in expense growth well below our square footage growth of 5.7% since the third quarter of 2007.
• In the third quarter of 2008, we repurchased 0.8 shares of stock totaling $26, with an average price of $30.82. For the nine months ended November 1, 2008, we repurchased 6.9 shares of stock totaling $238 with an average price of $34.29. We suspended our share repurchase program in September. We may resume the program in the future if economic conditions improve. Third quarter share repurchases had a minimal impact on third quarter earnings per diluted share.
Net Sales
Quarter Ended Nine Months Ended
November 1, 2008 November 3, 2007 November 1, 2008 November 3, 2007
Net sales $ 1,805 $ 1,970 $ 5,971 $ 6,314
Net sales (decrease) increase (8.4%) 5.3% (5.4%) 6.5%
Total company same-store sales
(decrease) increase (11.1%) 2.2% (7.7%) 5.8%
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Total net sales decreased 8.4% for the quarter and 5.4% for the nine months ended November 1, 2008, compared to the same periods in the prior year. These decreases were due to same-store sales declines for our full-line stores, partially offset by increases in same-store sales for our Rack and Direct channels, as well as the opening of seven new full-line stores since November 3, 2007.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
(Dollar and share amounts in millions except per share and per square foot
amounts)
Same-store sales for our full-line stores decreased 15.6% for the quarter and
11.0% for the nine months ended November 1, 2008. The largest same-store sales
decreases in both periods came in women's apparel and men's apparel. Women's
apparel continued to experience a market-wide downturn. While we believe the
current macro environment and fashion cycle contributed to these results, we
plan to continue to focus on our execution to improve performance. Cosmetics and
junior women's apparel were the leading merchandise categories for the quarter,
while cosmetics, accessories and junior women's apparel were the best performing
merchandise categories year-to-date.
Regionally, business was challenging in the state of California for the quarter
and nine months ended November 1, 2008. However, the Northwest and South were
regions with performance above the full-line same-store sales average for both
the quarter and nine months ended November 1, 2008.
Our Rack channel continued its positive sales growth with same-store sales
increases of 3.6% for the quarter and 4.8% for the nine months ended November 1,
2008. For the quarter, and nine-months ended November 1, 2008, all apparel
divisions as well as accessories drove the growth, especially kids' apparel and
accessories. For both periods, all regions contributed to the positive sales
results.
Our Direct channel delivered net sales increases of 8.5% for the quarter and
9.3% for the nine months ended November 1, 2008. These results were led by the
women's apparel, accessories and kids' merchandise categories, which experienced
strong growth for both periods with net sales increases above Direct's average
net sales increase.
During the third quarter of 2008, as a result of improved information regarding
our customers' return patterns, we changed our estimated sales return reserve.
This adjustment negatively impacted our sales by $19 and reduced our net
earnings and earnings per diluted share by approximately $6 and $0.03,
respectively.
Looking forward, we expect our total company same-store sales to be negative 13%
to negative 16% for the fourth quarter and negative 9% to negative 10% for the
full year.
Gross Profit
Quarter Ended Nine Months Ended
November 1, 2008 November 3, 2007 November 1, 2008 November 3, 2007
Gross profit $ 620 $ 742 $ 2,119 $ 2,357
Gross profit rate 34.3% 37.7% 35.5% 37.3%
Four Quarters Ended
November 1, 2008 November 3, 2007
Average inventory per square foot $ 52.88 $ 55.93
Inventory turnover rate (for the most recent four quarters) 4.88 4.92
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Gross profit decreased $122 for the quarter and $238 for the nine months ended
November 1, 2008. Compared to the same periods last year, our gross profit rate
deteriorated 332 basis points for the quarter and 183 basis points for the nine
months ended November 1, 2008. For both periods, the deterioration was driven
primarily by a decrease in our merchandise margin rate as we utilized markdowns
at our full-line stores to respond to slower sales and a more competitive
environment. All major merchandise categories contributed to these decreases for
both periods. Our buying and occupancy costs as a percentage of sales increased
100 basis points for the quarter as many of our costs are fixed relative to the
sales decline. Buying and occupancy costs as a percentage of sales were
relatively consistent with the prior year for the nine months ended November 1,
2008.
Average inventory per square foot for the four quarters ended November 1, 2008
decreased 5.4% compared to the four quarters ended November 3, 2007. The decline
was primarily due to our continued efforts to align inventory levels with lower
sales expectations by controlling receipts and editing our merchandise offering
to provide our customers with the most compelling fashion, as well as the sale
of our Façonnable business in the third quarter of 2007.
Our four-quarter average inventory turnover rate declined to 4.88 for the third
quarter of 2008 compared to 4.92 for the third quarter of 2007 due to declining
sales trends, mitigated by our continued efforts to control inventory levels.
We expect our gross profit rate to decrease between 250 and 280 basis points for
the 2008 fiscal year when compared with the 2007 fiscal year.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
(Dollar and share amounts in millions except per share and per square foot
amounts)
Selling, General and Administrative Expenses (SG&A)
Quarter Ended Nine Months Ended
November 1, 2008 November 3, 2007 November 1, 2008 November 3, 2007
Selling, general and administrative
expenses $ 567 $ 553 $ 1,716 $ 1,723
SG&A rate 31.4% 28.0% 28.7% 27.3%
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Selling, general and administrative expenses increased $14, compared to last
year's third quarter, primarily due to increased bad debt expense and expenses
related to our new stores opened since November 3, 2007, partially offset by
lower variable expenses as well as cost savings resulting from our continued
focus on controlling fixed expenses. During the third quarter of 2008, bad debt
expense increased by $29 due to increased delinquencies and write-offs
reflecting current consumer credit trends, as well as reserves for higher
projected losses inherent in our current receivable portfolio. Overall, we
believe our credit card portfolio remains high quality compared with the credit
card industry as a whole, with super-prime and prime customers making up
approximately 90% of total spending on our credit cards for the quarter and nine
months ended November 1, 2008. While we expect our delinquency and write-off
rates to continue to be negatively impacted by the current economic conditions,
our rates continue to be some of the lowest in the credit card industry. In
connection with lower sales, we experienced a reduction in variable costs
related to selling labor. Additionally, we have continued the fixed cost saving
initiatives which we began in the first quarter. These factors, as well as the
impact of declining sales, drove an increase of 336 basis points in our SG&A
rate for the quarter.
For the nine months ended November 1, 2008, our SG&A dollars decreased $7 to
$1,716 due to lower performance-related incentives and cost savings initiatives
implemented in the first quarter, partially offset by increased bad debt expense
and expenses related to our new stores opened since November 3, 2007. Lower
overall company performance led to a decrease in performance-related incentives.
Additionally, we experienced a decrease in variable selling costs, similar to
the third quarter. The increase in bad debt was due to increased delinquencies
and write-offs reflecting current consumer trends and higher projected losses
inherent in our current receivable portfolio and bringing the co-branded
Nordstrom VISA credit card portfolio on-balance sheet on May 1, 2007. These
items, as well as the impact of declining sales, drove an increase of 146 basis
points in our SG&A rate year-to-date.
We expect our SG&A rate to increase 160 to 190 basis points for the 2008 fiscal
year when compared with the 2007 fiscal year.
Finance Charges and Other, net
Quarter Ended Nine Months Ended
November 1, 2008 November 3, 2007 November 1, 2008 November 3, 2007
Finance charges and other, net $ 74 $ 69 $ 220 $ 195
Finance charges and other, net as a
percentage of net sales 4.1% 3.5% 3.7% 3.1%
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Finance charges and other, net were relatively flat for the quarter ended
November 1, 2008 compared with the quarter ended November 3, 2007. While our
average accounts receivable increased, the growth in our portfolio was partially
offset by a decrease in the average prime rate charged to our customers.
For the nine months ended November 1, 2008, finance charges and other, net
increased $25 from the same period in 2007, primarily due to our 2007
securitization transaction. Prior to May 1, 2007, the co-branded Nordstrom VISA
credit card portfolio was "off-balance sheet" and income was recorded net of
interest expense and write-offs. Beginning May 1, 2007, all of the finance
charges and other income related to the portfolio have been recorded in finance
charges and other, net. Accordingly, finance charges and other, net for the nine
months ended November 1, 2008 does not reflect write-offs or interest expense,
which are now recorded in SG&A and Interest expense, net, respectively. Similar
to the quarter, growth in our accounts receivable year-to-date was partially
offset by a decrease in the average prime rate.
Gain on sale of Façonnable
In the third quarter of 2007, we closed the sale of the Façonnable business, and
realized a gain on the sale of $34. The impact to reported earnings per diluted
share was $0.09, net of tax of $13.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
(Dollar and share amounts in millions except per share and per square foot
amounts)
Interest Expense, net
Interest expense, net increased by $13 to $33 for the quarter ended November 1,
2008. For the nine months ended November 1, 2008, interest expense, net
increased by $54 to $98. The increase for both periods was primarily due to
higher average debt levels resulting from our $1,000 debt offering in the fourth
quarter of 2007. For the nine months ended November 1, 2008, the increase was
also due to the $850 securitization transaction in May 2007. For additional
discussion of the recent changes to our capital structure, refer to our Adjusted
Debt to EBITDAR disclosure on page 26.
Income Tax Expense
Quarter Ended Nine Months Ended
November 1, 2008 November 3, 2007 November 1, 2008 November 3, 2007
Income tax expense $ 23 $ 106 $ 192 $ 316
Effective tax rate 24.3% 39.0% 36.6% 38.5%
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Our effective income tax rate decreased for both the quarter and nine months
ended November 1, 2008, due to a change to our deferred tax assets primarily
driven by the closure of several tax years under audit, partially offset by a
permanent item related to investment valuation. The net impact increased
earnings per diluted share by approximately $0.06.
Seasonality
Our business, like that of other retailers, is subject to seasonal fluctuations.
Our Anniversary Sale in July and the holidays in December typically result in
higher sales in the second and fourth quarters of our fiscal years. Accordingly,
results for any quarter are not necessarily indicative of the results that may
be achieved for a full fiscal year.
Credit Card Contribution
The Nordstrom Credit card products are designed to grow retail sales and
customer relationships by providing superior payment products, services and
loyalty benefits. We believe these products and the related loyalty benefits
have resulted in beneficial shifts in customer spending patterns and incremental
sales. The following table illustrates a detailed view of our operational
results of the Credit segment, consistent with the segment disclosure provided
in the Notes to the Condensed Consolidated Financial Statements:
Quarter Ended Nine Months Ended
November 1, 2008 November 3, 2007 November 1, 2008 November 3, 2007
Finance charges and other income1 $ 74 $ 74 $ 218 $ 196
Interest expense (13 ) (18 ) (39 ) (46 )
Net credit card income 61 56 179 150
Bad debt expense1 (50) (29) (106) (71)
Operational and marketing expense (38) (31) (114) (103)
Total expense (88) (60) (220) (174)
Credit card charge to earnings
before income taxes, as presented
in segment disclosure $ (27) $ (4) $ (41) $ (24)
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1For the quarter and
nine months ended
November 3, 2007, the
one-time transitional
charge-offs on the
co-branded Nordstrom
VISA credit card
receivables of $8 and
$15 are included in
finance charges and
other, net,
respectively, on our
condensed consolidated
statement of earnings.
In the above disclosure
this amount is included
in bad debt expense
rather than finance
charges and other
income. These
charge-offs represent
actual write-offs on the
Nordstrom VISA credit
card portfolio during
the eight-month
transitional period.
In order to view the total economic contribution of our credit card program, the
following additional items need to be considered:
• Off-balance sheet finance charges and other income, interest expense and bad
debt expense: During the first quarter of 2007, we combined our Nordstrom
private label card and co-branded Nordstrom VISA credit card programs into
one securitization program. At that time the Nordstrom co-branded VISA
credit card receivables were brought on-balance sheet. For comparability
between years, off-balance sheet amounts are shown for additional finance
charges and other income, interest expense and bad debt expense. This
combined presentation mitigates the impact of the change in the
securitization program.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)(Dollar and share amounts in millions except per share
and per square foot amounts)
• Intercompany merchant fees and other: This represents the additional
intercompany income of our credit business from the usage of our cards in
the Retail and Direct segments. These amounts represent costs which would
have been incurred by our Retail stores and our Direct segment if our
customers used third-party cards.
The following table illustrates total credit card contribution, including the items discussed above:
Quarter Ended Nine Months Ended
November 1, November 3, November 1, November 3,
2008 2007 2008 2007
Finance charges and other income
(from page 20) $ 74 $ 74 $ 218 $ 196
Off-balance sheet finance
charges and other income - 2 - 21
Intercompany merchant fees and
other 10 10 35 34
Total finance charges and other
income 84 86 253 251
Interest expense (from page 20) (13 ) (18 ) (39 ) (46 )
Off-balance sheet interest
expense - - - (6 )
Total interest expense (13 ) (18 ) (39 ) (52 )
Total net credit card income 71 68 214 199
Bad debt expense (from page 20) (50 ) (29 ) (106 ) (71 )
Off-balance sheet bad debt
expense - - - (7 )
Total bad debt expense (50 ) (29 ) (106 ) (78 )
Operational and marketing
expense (from page 20) (38 ) (31 ) (114 ) (103 )
Total expense (88 ) (60 ) (220 ) (181 )
Total pre-tax credit card
(charge) contribution $ (17 ) $ 8 $ (6 ) $ 18
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Interest expense decreased to $13 and $39 for the quarter and nine months ended
November 1, 2008, from $18 and $52 for the quarter and nine months ended
November 3, 2007, due to declining variable interest rates, partially offset by
higher average borrowings.
Operational and marketing expense increased to $38 and $114 for the quarter and
nine months ended November 1, 2008 compared with $31 and $103 for the quarter
and nine months ended November 3, 2007, primarily due to additional marketing
expenses related to an increase in promotional programs in 2008.
Credit division expenses include a bad debt provision. Bad debt expense can be
summarized as follows:
Quarter Ended Nine Months Ended
November 1, November 3, November 1, November 3,
. . .
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