Summary of NORDSTROM INC - Yahoo! Finance

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollar, share and square footage amounts in millions except percentages, per share and per square foot amounts)
Nordstrom is a fashion specialty retailer offering high-quality apparel, shoes, cosmetics and accessories for women, men and children. We offer a wide selection of brand name and private label merchandise. We offer our products through multiple channels including full-line 'Nordstrom' stores, off-price 'Nordstrom Rack' stores, 'Jeffrey' boutiques, catalogs and on the Internet at www.nordstrom.com. Our stores are located throughout the United States. In addition, we offer our customers a variety of payment products and services including our loyalty program.
As a multi-channel retailer, we believe we are well positioned to respond to evolving customer needs and expectations. Our goal is to offer knowledgeable, friendly and welcoming service in our stores, online, and through our credit business with an integrated offering and consistent experience. Our salespeople are focused on building deeper relationships with our customers through their product knowledge and ability to offer solutions which save the customer's time. We continue to strive to serve our customers better, using resources such as Personal Book, Fashion Rewards and the ability for our salespeople to seamlessly find inventory anywhere in the company. In 2008, we launched the "Buy Online, Pick Up in Store" service, which allows customers to purchase online, then pick up their item at a Nordstrom store on the same day. We want to create value for our customers through our seamless and unique shopping experience. We've found that there's a great deal of opportunity to grow our sales in existing stores simply by earning a greater share of our customers' business across multiple product categories. We use customer research to better serve our customers' needs and wants, whether it is a new wardrobe of great foundation pieces or an updated item to enhance their current attire. Our customer still wants newness, fashion, quality and brands. Our goal is to provide all of these items, with a best-in-market selection of versatile and compelling fashion brands. Over the course of 2008, it became clear that value and price sensitivity are important factors to our customers. With a broad merchandise offering, we can adjust our mix without changing who we are or how we are positioned in the market. Our merchants are working hard with our vendors to provide the right balance of quality, value and price points to our customers.
RESULTS OF OPERATIONS
2008 Overview
The business environment during 2008 was both challenging and volatile. The first half of the year was relatively stable with quarterly same-store sales decreasing between 6.0% and 6.5%. The second half of 2008 was more volatile as consumers reduced their discretionary spending due to economic concerns and uncertainty, and retailers struggled to align their businesses with significantly lower levels of demand. As a result, our quarterly same-store sales in the second half of 2008 declined between 11.1% and 12.5% and our gross profit was negatively impacted. In response, we needed to make tough choices in the near term while remaining true to our long-term strategy. Even in a challenging and uncertain economy, our strategy remains unchanged in its focus on customers and building strong relationships with them. We strive to provide superior service and compelling merchandise within existing product categories in an effort to grow our share of business with core customers. While the conditions in 2008 required that we significantly reduce expenses, inventory and planned capital expenditures, we believe we have done so while preserving our standards of service, product and shopping experience.
Our variable cost business model provides flexibility that helps mitigate the impact of slower sales trends on profit margins and cash flows. While we believe our model adjusts well to changing market trends, we took additional actions on expenses, working capital and planned capital expenditures to further mitigate operating margin pressure, improve operating cash flow and maintain a healthy balance sheet. We ended the fiscal year with inventory levels aligned with current sales trends. We followed a disciplined approach to finding and executing expense reduction opportunities and will continue these efforts through 2009. Given the current economic conditions, our capital expenditures in 2009 will be significantly reduced compared to our plan last year. These changes include reducing the number of major full-line store remodels from approximately six per year to approximately two per year. Additionally, the economic environment has affected our real estate development partners, who have delayed or canceled several of our planned new full-line stores. We are continuously monitoring our capital expenditure plans as economic conditions change. Although we have reduced our planned capital expenditures overall, we did not reduce our maintenance expenditures budget, as it is important that we maintain the look, feel and experience of shopping in our stores. Overall, we believe we are well positioned to weather the economic downturn, while maintaining an unwavering focus on our customers and positioning the company for the future. Full year earnings before income taxes ("EBT") decreased $525 from $1,173 in 2007 to $648 in 2008. The Retail Stores, Direct and Other segments produced $491 of this decrease due to lower sales and increased markdowns, partially offset by decreased variable costs and savings in fixed expenses. Our Credit segment contributed $34 of the decline in EBT, as our credit card yields were negatively impacted by higher bad debt expense and lower interest rates.
As described in Note 1 of the Notes to Consolidated Financial Statements in Item 8, we have reclassified credit card revenues and expenses in our consolidated statements of earnings to more clearly present our credit card business. Credit card revenues include finance charges, late and other fees generated by our combined Nordstrom private label card and Nordstrom VISA credit card programs, and interchange fees generated by the use of Nordstrom VISA cards at third-party merchants. These revenues were previously included in finance charges and other, net in our consolidated statement of earnings. Selling, general and administrative expenses for our credit segment consist of operational and marketing costs incurred to support and service our credit card programs and bad debt expense, and were previously included in total selling, general and administrative expenses in our consolidated statements of earnings.
Nordstrom, Inc. and subsidiaries 15

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Retail Stores, Direct and Other Segments
Summary

Fiscal year                                                2008         2007         2006

Net sales                                                $8,272       $8,828       $8,561
Cost of sales and related buying and occupancy costs     (5,367 )     (5,479 )     (5,316 )
Gross profit1                                             2,905        3,349        3,245
Selling, general and administrative expenses             (2,111 )     (2,183 )     (2,205 )

% of net sales:
Cost of sales and related buying and occupancy costs      64.9%        62.1%        62.1%
Gross profit                                              35.1%        37.9%        37.9%
Selling, general and administrative expenses              25.5%        24.7%        25.8%

1Gross profit is calculated as net sales less Retail Stores, Direct and Other segment cost of sales and related buying and occupancy costs.

Net Sales

  Fiscal year                                            2008         2007         2006

  Net sales                                            $8,272       $8,828       $8,561
  Net sales (decrease) increase                         (6.3% )       3.1%        10.8%
  Same-store sales (decrease) increase                  (9.0% )       3.9%         7.5%
  Sales (decrease) increase by channel:
  Full-line same-store sales                           (12.4% )       2.5%         5.9%
  Rack same-store sales                                  3.1%         8.7%        10.9%
  Net sales - Direct                                     8.4%        17.9%        24.7%
  Percentage of net sales by merchandise category:
  Women's apparel                                         34%          35%          35%
  Shoes                                                   21%          20%          20%
  Men's apparel                                           16%          18%          18%
  Women's accessories                                     12%          11%          10%
  Cosmetics                                               11%          11%          11%
  Children's apparel                                       3%           3%           3%
  Other                                                    3%           2%           3%

  Total                                                  100%         100%         100%

2008 VS 2007 NET SALES
Net sales declined 6.3% in 2008 compared to 2007. The decrease was due to same-store sales declines in our full-line stores, partially offset by increases in same-store sales for Rack and Direct, as well as new store openings. Same-store sales for our full-line stores decreased 12.4% compared to the same period last year. The largest same-store sales decreases came in women's apparel and men's apparel. Women's apparel continues to experience a market-wide downturn and we have seen a decline in men's apparel correspond to the economic downturn, particularly during the fourth quarter. Regionally, business trends were most challenging in markets undergoing the largest housing price corrections. California was the most challenging region throughout 2008, with same-store sales below the full-line store average. All other regions were above the same-store sales average for full-line stores.
Our Rack channel had its seventh consecutive year of positive sales growth with a same-store sales increase of 3.1% for the year. Rack purchases merchandise from third parties and also serves as a clearance channel for our full-line stores. The accessories and men's apparel categories drove this growth. Designer handbags led accessories and premium denim led men's apparel. All regions contributed to the positive same-store sales results.
Our Direct channel net sales increased 8.4% for the year, with results driven by accessories, women's apparel and kids' merchandise categories. The growth in our Direct business was driven by our efforts to better align our merchandise offering and experience with our full-line stores. Our new "Buy Online, Pick Up in Store" service proved to be a convenient and valued service for our customers over the holiday gift-giving season.
During 2008 we opened eight new full-line and six new Rack stores. These new stores represent 3.3% of our total net sales for fiscal 2008, and increased our gross square footage by 6.7% during 2008.
2007 VS 2006 NET SALES
Total net sales increased 3.1% as a result of same-store sales increases as well as from the three full-line stores and one Rack store opened during fiscal 2007. The 2006 fiscal calendar had 53 weeks compared to our normal operating calendar of 52 weeks. In the 53rd week of 2006, we had sales of $118. Excluding the extra week of sales in fiscal 2006, total sales increased 4.6% in fiscal year 2007. The 53rd week is not included in same-store sales calculations.

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Our full-line stores had a 2.5% same-store sales increase in 2007, on top of a 5.9% increase in 2006. The Midwest, South and Northwest were our strongest performing regions during 2007. By category, our largest same-store sales increases came from our designer apparel, women's accessories and men's apparel categories. Designer apparel offers fashion-forward and aspirational products, and customer demand for these products was strong. Women's accessories benefited from increased sales of handbags and fashion jewelry. The increase in men's apparel was in part due to growth in our younger contemporary offering. Our Rack same-store sales increased 8.7% in 2007, following a 10.9% increase in 2006. The sales growth came from all regions and merchandise categories. Same-store sales were consistent across all regions, which showed high single-digit increases. The largest same-store sales increases were in accessories and men's apparel. High performance bodywear, watches and sunglasses led the accessories category. The men's increase reflects sales from premium denim, suits and dress shirts.
Nordstrom Direct's 2007 total net sales increased 17.9% to $644. The growth in our Direct business was driven by our efforts to better align our online shopping environment with the customer experience in our full-line stores. This includes aligning our merchandise offering with the full-line stores to create a seamless experience for customers.
During 2007 we opened three new full-line stores and one new Rack store. These new stores represent 1.0% of our total net sales for fiscal 2007, and increased our gross square footage by 2.6% during 2007.

2009 FORECAST OF SAME-STORE SALES
As of March 20, 2009, we have relocated one full-line store and opened two new
Rack stores. In total, we plan to open three new full-line stores and eight
additional Rack stores during the year. This will increase retail square footage
by approximately 3.7%. We expect 2009 same-store sales to decrease approximately
10% to 15%. Based on the pace of business in 2008, same-store sales in the first
half of 2009 are expected to be 300 to 400 basis points lower than the projected
annual rate.
Gross Profit

          Fiscal year                             2008         2007         2006

          Gross profit1                         $2,905       $3,349       $3,245
          Gross profit rate2                     35.1%        37.9%        37.9%
          Average inventory per square foot     $49.00       $52.70       $52.37
          Inventory turnover rate3                5.20         5.16         5.06

1 Gross
profit is
calculated
as net sales
less Retail
Stores,
Direct and
Other
segment cost
of sales and
related
buying and
occupancy
costs.

2 Gross
profit rate
is
calculated
as gross
profit
divided by
net sales.

3 Inventory
turnover
rate is
calculated
as annual
cost of
sales and
related
buying and
occupancy
costs (for
all
segments)
divided by
5-quarter
average
inventory.

2008 VS 2007 GROSS PROFIT
Gross profit dollars decreased $444 from last year while our gross profit rate declined 280 basis points. Our gross profit rate is made up of both merchandise margin rates and buying and occupancy cost rate. The deterioration for the year was driven primarily by a decrease in our merchandise margin rate as we utilized markdowns to respond to slower sales and a more competitive environment. All major merchandise categories at our full-line stores contributed to this decrease. Our buying and occupancy costs as a percentage of sales increased 76 basis points as many of these costs are fixed relative to the sales decline. Our average inventory turnover improved slightly over last year while our average inventory per square foot decreased 7.0% compared to the prior year. Our merchants' efforts to align inventory levels to lower demand resulted in the improvement in our inventory turnover rate and our lower inventory per square foot. Our objective is to match the change in inventory per square foot, which declined 7.0% on average, with our same-store sales rate, which declined 9.0% for the year.
2007 VS 2006 GROSS PROFIT
Our gross profit rate in 2007 was consistent with 2006. During 2007 we experienced increasing inventory levels coupled with slower sales trends. To realign our inventory levels, we took higher markdowns during the last half of the year. The increase in markdowns was offset by a decrease in our buying and occupancy costs, which declined due to lower performance-based incentives and from the sale of our Fa�onnable business in 2007.
The increase in our average inventory per square foot in 2007 compared with 2006 supported the growth of our designer business in apparel, accessories and shoes. Although we encountered softer sales trends during the latter half of 2007, inventory discipline and growth in sales throughout the year resulted in improvement in our inventory turnover rate, which increased 1.9%.
2009 FORECAST OF GROSS PROFIT
In 2009, we expect a 150 to 250 basis point decrease in our gross profit rate. Although we begin 2009 with a good inventory position, we expect continued gross margin pressure as a result of competitive pressure and lower levels of customer demand. We will also incur additional occupancy expense for the three new full-line stores and ten new Rack stores in 2009.

Nordstrom, Inc. and subsidiaries 17

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Selling, General and Administrative Expenses

    Fiscal year                                        2008         2007         2006

    Selling, general and administrative expenses     $2,111       $2,183       $2,205
    Selling, general and administrative rate1         25.5%        24.7%        25.8%

1 Selling, general and administrative rate is calculated as selling, general and administrative expenses for our Retail Stores, Direct and Other segments as a percentage of net sales.
2008 VS 2007 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Our selling, general and administrative expenses decreased $72 due to lower variable expenses as well as costs savings resulting from our focus on controlling fixed expenses, partially offset by the additional expenses related to our new stores. During 2008, we opened eight new full-line stores and six new Rack stores, which contributed $72 of additional expenses.
Our selling, general and administrative expenses as a percentage of net sales increased 79 basis points. The increase as a percentage of net sales was due to the fixed nature of many of our selling, general and administrative expenses and the impact of declining sales.
2007 VS 2006 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were relatively flat in 2007 compared with 2006. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to decreases in our incentive costs tied to company performance.
2009 FORECAST OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES In 2009, our selling, general and administrative dollars are expected to decrease $85 to $175, dependent on our sales performance in 2009. We anticipate our variable expense model to continue to adjust to sales trends. Additionally, continuing to manage headcount to our business, as well as targeted reductions in merit-based salary awards, discretionary spending and marketing and technology will reduce our fixed expenses. We expect $42 of additional selling, general and administrative expenses from new stores, which will partially offset the reduction in fixed and variable expenses.
We expect our selling, general and administrative expenses as a percentage of net sales to be slightly higher in 2009 compared with 2008, due to the fixed nature of many of these expenses in relation to our expected decline in net sales.
Gain on Sale of Fa�onnable
During the third quarter of 2007, we completed the sale of the Fa�onnable business in exchange for cash of $216, net of transaction costs, and realized a gain on sale of $34. The impact to reported earnings per diluted share for the year was $0.09, net of tax of $13.

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Credit Segment
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 that owning our credit card business allows us to fully integrate our rewards program with our retail stores and provide superior service and experience to our customers, thus deepening our relationship with customers and driving higher levels of long-term customer loyalty. Each card enables participation in the Nordstrom Fashion Rewards� program, through which the customer accumulates points based on their level of spending (two points per dollar spent at Nordstrom and one point per dollar spent outside of Nordstrom stores). Upon reaching two thousand points, customers receive twenty dollars in Nordstrom Notes�, which can be redeemed for goods or services in our stores. As customers increase their level of spending they receive additional benefits, including rewards such as complimentary shipping and alterations in our retail stores. We believe the Fashion Rewards program, including these additional rewards, drives sales in our Retail Stores and Direct segments.
The table below illustrates a detailed view of the operational results of our Credit segment, consistent with the segment disclosure provided in the notes to the consolidated financial statements. In order to view the total economic contribution of our credit card program, the following items are also included in the table below:
� During 2007, we combined our Nordstrom private label credit card and Nordstrom VISA credit card programs into one securitization program. At this time the Nordstrom VISA credit card receivables were brought on-balance sheet. While the underlying economics of the business did not change (Nordstrom has always owned 100% of its Credit segment), the accounting for this business segment did change. For comparability between years, off-balance sheet income (expense), net (credit card revenues, net of bad debt and interest expense) is shown to mitigate the impact of the change in accounting.

� Intercompany merchant fees represents the estimated intercompany income of our credit business from the usage of our cards in the Retail Stores and Direct segments. To encourage the use of Nordstrom cards in our stores, the Credit segment does not charge the Retail Stores and Direct segments an interchange merchant fee. On a consolidated basis, we avoid these costs which would be incurred if our customers used third-party cards.

Fiscal year                                                2008          2007           2006
Finance charge revenue                                     $215          $194            $96
Late fees and other revenue                                  18            12              9
Interchange                                                  69            47              -

Total credit card revenues                                  302           253            105
Interest expense                                            (50 )         (64 )          (37 )

Net credit card income                                      252           189             68

Cost of sales - loyalty program                             (50 )         (47 )          (38 )
Selling, general and administrative expenses1              (275 )        (198 )          (92 )

Total expense                                              (325 )        (245 )         (130 )

Other income and expense, net1                                1            18            109

Credit card (charge) contribution to earnings
before income tax
expense, as presented in segment disclosure                 (72 )         (38 )           47

Off-balance sheet income (expense), net2                      -             9             (6 )
Intercompany merchant fees                                   48            48             43

Total credit card (charge) contribution                    $(24 )         $19            $84

Average accounts receivable investment (assuming
80% of accounts
receivable is funded with debt)                            $382          $332           $283
Credit card (charge) contribution, net of tax, as
a percentage of average
accounts receivable investment                            (3.9% )        3.5%          18.1%

1In 2007, the one-time transitional charge-offs on the Nordstrom VISA receivables of $21 are included in other income and expense, net on our consolidated statement of earnings. In the above disclosure this amount is included in selling, general and administrative expenses. These charge-offs represent actual write-offs on the Nordstrom VISA credit card portfolio during the eight-month transitional period.
2Includes off-balance sheet finance charges and other income of $22 in 2007 and $37 in 2006, off-balance sheet interest expense of $6 in 2007 and $21 in 2006, and off-balance sheet bad debt expense of $7 in 2007 and $22 in 2006.
CREDIT CARD REVENUES
Credit card revenues include finance charges, late and other fees, and interchange fees. The majority of our credit accounts have finance charge rates that vary with changes in the prime rate. Interchange fees are earned from the use of Nordstrom VISA cards at merchants outside of Nordstrom.
Credit card revenues increased from $253 in 2007 to $302 in 2008 in part due to the Nordstrom VISA portfolio being on-balance sheet for a full year in fiscal 2008 compared to only three quarters in fiscal 2007, as well as overall portfolio growth. During the first three quarters of fiscal 2008, the positive impact we saw on finance charge revenue as a result of portfolio growth was partially offset by a significant reduction in the average prime rate as most of our Nordstrom private label and VISA cards have annual percentage rate terms that are tied to the prime rate. However, during the fourth quarter of 2008, finance charge revenues improved slightly due to a change in our credit card pricing terms effective November 15, 2008.
The increase in credit card revenues from $105 in 2006 to $253 in 2007 is due to bringing the Nordstrom VISA portfolio on-balance sheet as of May 1, 2007, as well as portfolio growth year over year.

Nordstrom, Inc. and subsidiaries 19

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INTEREST EXPENSE
Interest is assigned to the Credit segment proportionate to the amount of debt estimated to fund our credit card receivables, which assumes a mix of 80% debt and 20% equity. The average accounts receivable investment metric included in the table on the previous page represents our best estimate of the amount of capital for our credit card program that is financed by equity. As a means of assigning comparable cost of capital for our credit card business, we believe it is important to maintain a capital structure similar to other financial institutions. Based on our research, we have found that debt as a percentage of credit card receivables for other credit card companies ranges from 70% to 90%. We believe that debt equal to 80% of our credit card receivables is appropriate given our overall capital structure goals.
Interest expense decreased to $50 in 2008 from $64 in 2007 due to declining variable interest rates, partially offset by higher average borrowings. Interest expense increased in 2007 compared to 2006 due to higher variable interest rates and higher average borrowings due to bringing the Nordstrom VISA portfolio on-balance sheet as well as year over year portfolio growth.

COST OF SALES
. . .