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| JWN > SEC Filings for JWN > Form 10-Q on 9-Jun-2009 | All Recent SEC Filings |
9-Jun-2009
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 January 31, 2009 and in Part II, "Item 1A. Risk Factors" on page 26 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) (Amounts in millions except per share and per square foot amounts)
RESULTS OF OPERATIONS
Overview
First Quarter
2009 2008
Net earnings $ 81 $ 119
Net earnings as a percentage of total revenues 4.5% 6.1%
Earnings per diluted share $ 0.37 $ 0.54
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For the quarter ended May 2, 2009, earnings were $81, or $0.37 per diluted
share, compared with earnings of $119, or $0.54 per diluted share for the
quarter ended May 3, 2008. Included in the 2009 first quarter results was a
benefit of approximately $12, or $0.06 per diluted share, related to the closure
of our 2007 federal tax return audit. For the first quarter of 2009, overall
business trends were consistent with our plan and we maintained our discipline
with respect to inventory and expenses. As a result, our performance was in line
with our planned sales and better than our planned earnings. While the retail
portion of our business is less volatile, recent trends have shown deterioration
in our credit business as delinquency rates continue to increase. Key highlights
of the first quarter include:
Total net sales for the quarter ended May 2, 2009 decreased 9.2% due to
same-store sales decreases, partially offset by the addition of stores. For
the quarter, total company same-store sales decreased 13.2%, compared with a
6.5% same-store sales decline last year. Although full-line same-store sales
decreased, Rack delivered an increase in same-store sales of 1.2%.
Gross profit, as a percentage of net sales, decreased 215 basis points compared with last year's first quarter. Approximately half of the decline was due to the impact of fixed buying and occupancy costs as a percentage of reduced sales, with the remaining decline due to reduced merchandise margins as a percentage of net sales. During the first quarter of 2009, we continued to maintain inventory levels that were consistent with current sales trends.
Retail selling, general and administrative expenses decreased $46 compared to the prior year, inclusive of $17 in expenses in 2009 from stores opened since the first quarter of 2008. We opened six full-line stores and ten Nordstrom Rack stores since the first quarter of 2008, increasing our retail square footage by 5.7%.
Credit selling, general and administrative expenses increased $42 compared with last year's first quarter due to higher levels of bad debt.
For the 2009 fiscal year, we currently expect earnings per diluted share in the range of $1.25 to $1.50, increased from the previous range of $1.10 to $1.40.
Retail Stores, Direct and Other Segments
Summary
Our Retail Stores segment includes our full-line and Rack stores; our Direct
segment includes our online store; and our Other segment includes our product
development group and corporate center operations. The following table
summarizes the combined results of our Retail Stores, Direct and Other segments
for the quarter ended May 2, 2009 compared with the quarter ended May 3, 2008:
First Quarter
2009 2008
Amount % of net sales2 Amount % of net sales2
Net sales $ 1,706 100.0 % $ 1,879 100.0 %
Cost of sales and related buying and
occupancy costs (1,095 ) (64.2 %) (1,170 ) (62.2 %)
Gross profit1 611 35.8 % 709 37.8 %
Selling, general and administrative
expenses (447 ) (26.2 %) (493 ) (26.2 %)
Earnings before interest and income taxes 164 9.6 % 216 11.5 %
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1 Gross profit
is
calculated
as net sales
less Retail
Stores,
Direct and
Other
segments
cost of
sales and
related
buying and
occupancy
costs.
2 Subtotals
and totals
may not foot
due to
rounding.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued) (Amounts in millions except per share and per square foot amounts)
Net Sales
First Quarter
2009 2008
Net sales $ 1,706 $ 1,879
Net sales decrease (9.2% ) (3.8% )
Total company same-store sales decrease (13.2% ) (6.5% )
|
Total net sales for the first quarter decreased 9.2% over the same period in the
prior year as the consumer environment continued to be challenging, with
decreases at our full-line stores offset by increases for our Rack stores.
Same-store sales for our full-line stores decreased 16.5%. The largest decreases
came in men's wear, designer apparel and men's shoes, which were below the
full-line same-store sales average. We have seen the decline in men's apparel
and shoes correspond with the economic downturn. In 2009, consumers continue to
be conservative with their spending, which impacted the results of our designer
category. Merchandise categories with results above the same-store sales average
included junior women's apparel and cosmetics. Our merchants continue to work
with our vendors to provide a balanced and compelling merchandise offering to
our customers.
Regionally, the Northwest, California and the Northeast experienced same-store
sales below the full-line store average.
Our Rack channel delivered a 1.2% same-store sales increase for the quarter
ended May 2, 2009. These results were driven by growth in shoes and women's
apparel categories. Shoes benefited from the sales of junior women's footwear,
while women's apparel was led by trend tops.
Sales for our Direct channel were approximately flat for the quarter ended
May 2, 2009 compared with the same period last year.
We expect full year 2009 same-store sales to decrease in the range of 10% to
15%.
Gross Profit
First Quarter
2009 2008
Gross profit $ 611 $ 709
Gross profit rate1 35.8% 37.8%
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1 Gross profit rate is calculated as gross profit divided by net sales.
First Quarter
2009 2008
Average inventory per square foot $ 48.62 $ 53.00
Inventory turnover rate1 5.08 5.05
1 Inventory
turnover
rate is
calculated
as the
trailing
12 months
cost of
sales and
related
buying and
occupancy
costs (for
all
segments)
divided by
5-quarter
average
inventory.
|
Retail gross profit decreased $98 for the first quarter of 2009 compared with
the first quarter of 2008 while our retail gross profit rate deteriorated 200
basis points for the quarter. Our gross profit rate is made up of both
merchandise margin and buying and occupancy costs. The impact of our fixed
buying and occupancy costs as a percentage of reduced sales drove approximately
half of the decrease in our gross profit rate. Our merchandise margin drove the
remaining decrease, as lower initial markups and an unfavorable merchandise mix
were partially offset by lower markdowns.
Our inventory turnover rate was consistent with last year, while our average
inventory per square foot decreased 8.3% compared with the quarter ended May 3,
2008. Continued efforts to align inventory levels with lower demand resulted in
lower average inventory per square foot.
Based on our performance for the first quarter of 2009, we currently expect our
retail gross profit rate for the full year 2009 to decrease 130 to 200 basis
points from 2008 levels.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued) (Amounts in millions except per share and per square foot amounts)
Selling, General and Administrative Expenses
First Quarter
2009 2008
Selling, general and administrative expenses $ 447 $ 493
Selling, general and administrative rate1 26.2% 26.2%
|
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.
Selling, general and administrative expenses for our Retail Stores, Direct and
Other segments decreased 9%, or $46 compared to last year's first quarter. Lower
variable expenses as well as fixed cost savings drove a decrease of
approximately $63, which was partially offset by $17 in expenses for the six
full-line and ten Rack stores opened since the first quarter of 2008. Retail
square footage increased 1.2, or 5.7% since the first quarter of 2008. Variable
expenses decreased consistent with the decrease in sales. Fixed cost reductions
were primarily in services purchased, advertising and labor.
We currently anticipate our retail selling, general and administrative expenses
to decrease $100 to $200 for 2009.
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 to our customers, thus deepening our relationship with them and driving
higher levels of customer loyalty. Each card enables participation in the
Nordstrom Fashion Rewardsฎ program, through which customers accumulate 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 Notesฎ, 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, helps drive sales
in our Retail Stores and Direct segments.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued) (Amounts in millions except per share and per square foot amounts)
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 condensed consolidated financial statements. In order to view the total
economic contribution of our credit card program, intercompany merchant fees are
also included in the table below. Intercompany merchant fees represent 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 intercompany interchange merchant fee. On a consolidated
basis, we avoid these costs which would be incurred if our customers used
third-party cards.
First Quarter
2009 2008
Finance charge revenue $ 64 $ 51
Interchange 16 16
Late fees and other revenue 6 3
Total credit card revenues 86 70
Interest expense (10 ) (13 )
Net credit card income 76 57
Cost of sales - loyalty program (12 ) (9 )
Selling, general and administrative expenses (92 ) (50 )
Total expense (104 ) (59 )
Credit card charge to earnings before income taxes, as
presented in segment disclosure (28 ) (2 )
Intercompany merchant fees 10 10
Total credit card (charge) contribution $ (18 ) $ 8
Average accounts receivable investment (assuming 80% of
accounts receivable is funded with debt) $ 402 $ 357
Credit card (charge) contribution, net of tax, as a
percentage of average accounts receivable investment1 (10.8% ) 5.6%
1 Based on annualized
first quarter credit
card
(charge) contribution,
net of tax
|
Net Credit Card Income
Credit card revenues include finance charges, interchange fees, late and other
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 credit cards at merchants outside of Nordstrom.
Credit card revenues increased from $70 in the first quarter of 2008 to $86 in
the first quarter of 2009 due to the change in our credit card terms that were
implemented in the fourth quarter of 2008 and growth in our accounts receivable
balance.
Based on results for the first quarter of 2009 as well as the previously
implemented increases in annual percentage rate terms, we expect our credit card
revenues for 2009 to increase $75 to $80.
Interest expense 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 above 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 $10 in the first quarter of 2009 from $13 in the
first quarter of 2008 due to declining variable interest rates, partially offset
by higher average borrowings.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued) (Amounts in millions except per share and per square foot amounts)
Cost of Sales
Cost of sales includes the estimated cost of Nordstrom Notes that will be issued
and redeemed under our Fashion Rewards program. The increase in cost of sales
expense to $12 in the first quarter of 2009 compared with $9 in the first
quarter in 2008 was primarily due to a Nordstrom Fashion Rewards triple point
event held for Nordstrom cardholders in the first quarter of 2009. This event
replaced a Nordstrom Fashion Rewards event in 2008 that began in late April and
extended into May last year.
Credit Selling, General and Administrative Expenses
Selling, general and administrative expenses for our credit segment are made up
of operational and marketing expenses and bad debt. These expenses are
summarized in the following table:
First Quarter
2009 2008
Operational and marketing expense $ 25 $ 24
Bad debt expense 67 26
Total credit selling, general and administrative expense $ 92 $ 50
|
Operational and marketing expenses, which are incurred to support and service
our credit card products, remained relatively constant at $25 for the first
quarter of 2009 compared with $24 for the first quarter of 2008. This reflects
expenses that are relatively fixed when compared to portfolio growth and our
continued focus on controlling expenses.
Bad debt expense increased to $67 in the first quarter of 2009 from $26 in the
first quarter of 2008 due to increased delinquencies and write-offs reflecting
current consumer credit trends, as well as reserves for higher projected losses
inherent in the receivables portfolio as of May 2, 2009.
The following table illustrates the activity in the allowance for doubtful
accounts for the first quarter of 2009 and 2008:
First Quarter
2009 2008
Allowance at beginning of period $ 138 $ 73
Bad debt provision 67 26
Net write-offs (44 ) (23 )
Allowance at end of period $ 161 $ 76
Allowance as a percentage of accounts receivable 8.0% 4.3%
Bad debt provision as a percentage of average accounts
receivable1 13.3% 5.8%
Net write-offs as a percentage of average accounts
receivable2 8.7% 4.9%
|
1 Based upon annualized first quarter bad debt provision.
2 Based upon annualized first quarter net write-offs.
We increased our allowance for doubtful accounts by $23 during the first quarter of 2009 due to our expectations around future write-offs. We experienced an increase in delinquencies in the first quarter and believe they are a key indicator that write-offs will continue to be elevated through the remainder of 2009. We currently expect our credit selling, general and administrative expenses to increase $35 to $45 for 2009, due to rising unemployment rates, which we believe leads to higher delinquencies and ultimately higher write-offs. We continue to take actions to reduce our risk exposure by tightening underwriting and account management standards. However, additional deterioration in the overall economic environment, including continued deterioration in the labor market, could cause delinquencies to increase beyond our current expectations, resulting in additional bad debt expense.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued) (Amounts in millions except per share and per square foot amounts)
Total Company Results
Income Tax Expense
First Quarter
2009 2008
Income tax expense $ 34 $ 77
Effective tax rate 29.4% 39.3%
|
Our effective tax rate decreased to 29.4% for the first quarter of 2009, from
39.3% for the same period in 2008. The decrease was due to a benefit of
approximately $12, or $0.06 per diluted share, included in the 2009 first
quarter results related to the closure of our 2007 federal tax return audit.
Including the impact of this settlement, we expect our effective tax rate to be
between 36.5% and 37.0% for 2009.
Seasonality
Our business, like that of other retailers, is subject to seasonal fluctuations.
Our Anniversary Sale in July, the holidays in December, and our Half-yearly
sales events 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued) (Amounts in millions except per share and per square foot amounts)
Return on Invested Capital (ROIC) (Non-GAAP financial measure)
We define Return on Invested Capital as follows:
Net Operating Profit after Taxes (NOPAT)
ROIC =
Average Invested Capital
Numerator = NOPAT Denominator = Average Invested Capital
Net Earnings Average total assets
+ Income tax expense - Average non-interest-bearing current
liabilities
+ Interest expense, net - Average deferred property incentives
= EBIT + Average estimated asset base of
capitalized operating leases
+ Rent expense = Average invested capital
- Estimated depreciation on
capitalized operating leases
= Net operating profit
- Estimated income tax expense
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= NOPAT
We believe that ROIC is a useful financial measure for investors in evaluating our operating performance for the periods presented. When read in conjunction with our net earnings and total assets and compared to return on assets, it provides investors with a useful tool to evaluate our ongoing operations and our management of assets from period to period. Over the past several years, we have incorporated ROIC into our key financial metrics, and since 2005 have used it as an executive incentive measure. Our research has shown historically that overall . . .
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