• our ability to respond to the business environment and fashion trends

• our ability to safeguard our brand and reputation

• our ability to effectively manage inventory

• efficient and proper allocation of our capital resources

• successful execution of our store growth strategy including the timely completion of construction associated with newly planned stores, relocations and remodels, all of which may be impacted by the financial health of third parties

• our compliance with applicable banking and related laws and regulations impacting our ability to extend credit to our customers

• trends in personal bankruptcies and bad debt write-offs

• availability and cost of credit

• the impact of the current regulatory environment and financial system reforms

• changes in interest rates

• disruptions in our supply chain

• our ability to maintain our relationships with vendors and developers who may be experiencing economic difficulties

• the geographic location of our stores

• our ability to maintain our relationships with our employees and to effectively train and develop our future leaders

• our compliance with information security and privacy laws and regulations, employment laws and regulations and other laws and regulations applicable to the company

• successful execution of our technology strategy

• successful execution of our multi-channel strategy

• risks related to fluctuations in world currencies

• weather conditions and hazards of nature that affect consumer traffic and consumers' purchasing patterns

• the effectiveness of planned advertising, marketing and promotional campaigns

• our ability to control costs

• timing and amounts of any share repurchases, if any, by the company

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 28 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

                                                        Quarter Ended                                 Six Months Ended
                                           August 1, 2009          August 2, 2008          August 1, 2009          August 2, 2008
Net earnings                               $         105           $         143           $         186           $         262
Net earnings as a percentage of
total revenues                                      4.7%                    6.1%                    4.6%                    6.1%
Earnings per diluted share                 $        0.48           $        0.65           $        0.86           $        1.19

Our second quarter typically is the second largest of the year in terms of net sales, containing three of our five annual sales events: Half-Yearly Sale for Women and Kids, Half-Yearly Sale for Men, and the Anniversary Sale. Although earnings per diluted share declined for the quarter and six months ended August 1, 2009 compared to the same periods in 2008 as a result of overall lower sales volume, solid execution of the Anniversary Sale combined with disciplined inventory and expense management allowed us to exceed our earnings plans for the first half of 2009. However, we still remain cautious about the general economic environment.
• Total net sales decreased 6.2% for the quarter and 7.6% for the six months ended August 1, 2009 compared to the same periods in 2008. Total company same-store sales decreased 9.8% for the quarter ended August 1, 2009 compared to a 6.0% same-store sales decrease for the same period in 2008. Same-store sales decreased 11.3% for the six months ended August 1, 2009, compared to a 6.2% decline for the same period last year. Same-store sales performance during the Anniversary event was negative 6.6% compared to last year, which was better than our plans for full-line stores.

• Consistent with the first quarter of 2009, inventory as of the end of the second quarter was aligned with current sales trends. While our gross profit as a percentage of net sales decreased 106 basis points for the quarter and 156 basis points for the six months ended August 1, 2009 compared to the same periods last year, our merchandise margin as a percentage of net sales was flat compared to last year's second quarter and decreased only slightly year-to-date.

• During the second quarter of 2009, we completed an offering of $400 senior unsecured notes at 6.75%, due in June 2014. As a result of this transaction and our continued focus on working capital and expense management, our cash and cash equivalents increased by $447 for the six months ended August 1, 2009 compared to a decrease of $266 for the same period in 2008. We believe our strong cash position as of the end of the quarter, as well as our available short-term credit facilities, will give us adequate liquidity and flexibility over the next several years.

• For the 2009 fiscal year, we currently expect earnings per diluted share in the range of $1.50 to $1.65, increased from our previous guidance in the range of $1.25 to $1.50.

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)
Retail Stores, Direct and Other Segments
Summary
Our Retail Stores segment includes our full-line, Rack and Jeffrey stores; our
Direct segment includes our online store; and our Other segment includes our
product development group and corporate center operations. The following tables
summarize the combined results of our Retail Stores, Direct and Other segments
for the quarter and six months ended August 1, 2009 compared with the quarter
and six months ended August 2, 2008:

                                                                        Quarter Ended
                                                August 1, 2009                                  August 2, 2008
                                        Amount             % of net sales2              Amount             % of net sales2
Net sales                           $    2,145                     100.0%           $    2,287                     100.0%
Cost of sales and related
buying and occupancy costs              (1,405 )                   (65.5% )             (1,473 )                   (64.4% )

Gross profit1                              740                      34.5%                  814                      35.6%

Credit card revenues                         -                        N/A                   (1 )                      N/A
Selling, general and
administrative expenses                   (531 )                   (24.7% )               (545 )                   (23.9% )

Earnings before interest and
income taxes                        $      209                       9.8%           $      268                      11.8%




                                                                       Six Months Ended
                                                August 1, 2009                                  August 2, 2008
                                        Amount             % of net sales2              Amount             % of net sales2
Net sales                           $    3,851                     100.0%           $    4,166                     100.0%
Cost of sales and related
buying and occupancy costs              (2,500 )                   (64.9% )             (2,643 )                   (63.4% )

Gross profit1                            1,351                      35.1%                1,523                      36.6%

Credit card revenues                         -                        N/A                   (1 )                      N/A
Selling, general and
administrative expenses                   (978 )                   (25.4% )             (1,038 )                   (24.9% )

Earnings before interest and
income taxes                        $      373                       9.7%           $      484                      11.7%

1Gross profit is calculated as net sales less Retail Stores, Direct and Other segments cost of sales and related buying and occupancy costs. 2Subtotals and totals may not foot due to rounding.

Net Sales

                                                 Quarter Ended                                    Six Months Ended
                                      August 1, 2009           August 2, 2008           August 1, 2009            August 2, 2008
Net sales                           $        2,145            $       2,287             $       3,851            $       4,166
Net sales decrease                           (6.2% )                  (4.3% )                   (7.6% )                  (4.1% )
Total company same-store
sales decrease                               (9.8% )                  (6.0% )                  (11.3% )                  (6.2% )

Our second quarter sale events are important contributors to our annual results. During the quarter, our full-line stores hold clearance sales with our Half-Yearly Sale for Women & Kids and our Half-Yearly Sale for Men. Our Anniversary Sale, held in July, is historically the biggest event of the year, offering new merchandise at temporarily reduced prices. Sales results during these events exhibited improvements over trends in non-event periods during the quarter ended August 1, 2009.
Total net sales decreased 6.2% for the quarter and 7.6% for the six months ended August 1, 2009, compared with the same periods in the prior year as same-store sales declines for our full-line stores were partially offset by positive performance by our Direct segment and same-store sales increases at our Rack stores.
Same-store sales for our full-line stores decreased 12.3% for the quarter and 14.2% for the six months ended August 1, 2009 compared to the same periods in 2008. Merchandise categories with results above the same-store sales average for the quarter and six months ended August 1, 2009 included kids' shoes & apparel and junior women's apparel, while the largest decreases came in designer apparel and men's wear. Our merchants continue to work with our vendors to provide a balanced and compelling merchandise offering to our customers. Regionally, California, the Northwest and the Southwest continue to be challenging with same-store sales below the full-line store average for both the quarter and year-to-date.

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)
Our Rack channel delivered same-store sales increases of 0.8% for the quarter and 1.1% for the six months ended August 1, 2009 compared to the same periods last year. For both periods, these results were driven by growth in shoes and women's apparel. Shoes benefited from the sale of junior women's and women's footwear, while women's apparel was led by casual tops, blouses and denim. Sales for our Direct channel grew 3.5% for the quarter and 1.8% for the six months ended August 1, 2009 compared with the same periods last year. For both periods, the increases were driven by dresses and women's shoes. Dresses were led by special occasion while women's shoes benefitted from casual and junior women's footwear.
We expect full year 2009 same-store sales to decrease in the range of 9% to 12%.

Gross Profit

                                 Quarter Ended                       Six Months Ended
                       August 1, 2009     August 2, 2008     August 1, 2009     August 2, 2008
 Gross profit          $        740       $        814         $     1,351      $      1,523
 Gross profit rate1           34.5%              35.6%               35.1%             36.6%

1Gross profit rate is calculated as gross profit divided by net sales.

                                                    Four Quarters Ended
                                             August 1, 2009     August 2, 2008
        Average inventory per square foot    $      46.72      $       51.90
        Inventory turnover rate1                     5.16               5.09

1Inventory turnover rate is calculated as the trailing 12 months cost of sales and related buying and occupancy costs (for all segments) divided by 4-quarter average inventory.
Retail gross profit decreased $74 for the quarter and $172 for the six months ended August 1, 2009, compared with the same periods in 2008. Our retail gross profit rate deteriorated 108 basis points for the quarter and 150 basis points for the six months ended August 1, 2009 compared with the same periods in 2008. Retail gross profit rate is made up of merchandise margin offset by buying and occupancy costs. For both the quarter and six months ended August 1, 2009, the impact of our fixed buying and occupancy costs as a percentage of reduced sales primarily drove the decrease in our gross profit rate. Our merchandise margin rate was relatively flat for the quarter and declined slightly for the six months ended August 1, 2009.
Our inventory turnover rate was approximately flat to last year. The decrease in average inventory per square foot of 10.0% was consistent with our total company same-store sales decrease of 11.3% for the six months ended August 1, 2009. Based on our performance for the first half of 2009, we expect our retail gross profit rate for the full year 2009 to decrease 50 to 100 basis points from 2008 levels of 35.1%.

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

                                                   Quarter Ended                                Six Months Ended
                                       August 1, 2009         August 2, 2008         August 1, 2009          August 2, 2008
Selling, general and
administrative expenses                $        531           $        545             $       978           $      1,038
Selling, general and
administrative rate1                          24.7%                  23.9%                   25.4%                  24.9%

1Selling, 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 3%, or $14, compared with last year's second quarter. Lower variable expenses as well as fixed cost savings, partially offset by incentives tied to company performance and new store expenses, drove the decrease. Variable expense dollars decreased consistent with the decrease in sales while fixed cost reductions were primarily in advertising, services purchased and insurance. During the second quarter, we increased our provision for performance related expense to reflect the improved performance of the overall business relative to our plans. The second quarter of 2009 also includes $15 in expenses for the six full-line and eleven Rack stores opened since the second quarter of 2008. Retail square footage increased 1.2, or 5.7% since the second quarter of 2008. The increase in our selling, general and administrative rate of 88 basis points is primarily attributable to the increase in performance based incentives, partially offset by improvement in our variable selling, general and administrative rate due to a decrease in our variable labor rate. For the six months ended August 1, 2009, our selling, general and administrative dollars decreased $60 to $978 due primarily to lower variable expenses and fixed cost savings, partially offset by $32 of incremental expenses related to our new stores opened since July 2008 and performance-based incentives. Variable expenses decreased consistent with the decrease in sales, similar to the second quarter. Reductions in fixed costs encompassed many areas including advertising, services purchased, non-selling labor and depreciation. The increase in the performance-based incentives, which was a result of better performance versus plan for the six months ended August 1, 2009 compared with the same period in 2008, was the primary driver of the 44 basis point increase in our selling, general and administrative rate for the six months ended August 1, 2009. We anticipate our retail selling, general and administrative expenses to decrease $100 to $150 for 2009.

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)
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.
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.
Interest expense is assigned to the Credit segment in proportion to the amount of estimated capital needed 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 following table 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.

                                                           Quarter Ended                                    Six Months Ended
                                              August 1, 2009           August 2, 2008           August 1, 2009           August 2, 2008
Finance charge revenue                          $         63           $         51              $       127             $         102
Interchange - third party                                 19                     18                       35                        34
Late fees and other revenue                                5                      4                       11                         7

Total credit card revenues                                87                     73                      173                       143
Interest expense                                         (10 )                  (13 )                    (20 )                     (26 )

Net credit card income                                    77                     60                      153                       117


Cost of sales and related buying and
occupancy costs - loyalty program                        (13 )                  (15 )                    (25 )                     (24 )
Selling, general and administrative
expenses                                                 (77 )                  (57 )                   (169 )                    (107 )

Total expense                                            (90 )                  (72 )                   (194 )                    (131 )

Credit card charge to earnings before
income taxes, as presented in segment
disclosure                                               (13 )                  (12 )                    (41 )                     (14 )

Intercompany merchant fees                                14                     15                       24                        25

Total credit card contribution
(charge)                                        $          1           $          3              $       (17 )           $          11


Average accounts receivable investment
(assuming 80% of accounts receivable
is funded with debt)                            $        419           $        381              $       414             $         373
Credit card contribution, net of tax,
as a percentage of average accounts
receivable investment1                                   0.8 %                  2.1 %                   (4.9 %)                    3.7 %

1Based on annualized credit card contribution (charge), net of tax for the quarter and six months ended August 1, 2009 and August 2, 2008.

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 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 to $87 and $173 for the quarter and six months ended August 1, 2009 compared with $73 and $143 for the quarter and six months ended August 2, 2008, as a result of an increase in our annual percentage rate terms implemented in the fourth quarter of 2008 and growth in our accounts receivable balance.
Based on results for the six months ended August 1, 2009 as well as the previously implemented and upcoming increases in annual percentage rate terms, we continue to expect our credit card revenues for 2009 to increase $75 to $80 compared to 2008.
Interest expense decreased from $13 and $26 for the quarter and six months ended August 2, 2008 to $10 and $20 for the quarter and six months ended August 1, 2009, due to declining variable interest rates, partially offset by higher average borrowings.
Cost of Sales
Cost of sales, which includes the estimated cost of Nordstrom Notes that will be issued and redeemed under our Fashion Rewards program, remained relatively constant at $13 and $25 for the quarter and six months ended August 1, 2009 compared with $15 and $24 for the quarter and six months ended August 2, 2008. The slight decrease in cost of sales expense for the second quarter of 2009 compared with the second quarter of 2008 was primarily due to a timing shift in Nordstrom Fashion Rewards events.
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:

                                                            Quarter Ended                              Six Months Ended
                                                August 1, 2009        August 2, 2008         August 1, 2009        August 2, 2008
Operational and marketing expense                 $     25              $      27              $       50           $        51
Bad debt expense                                        52                     30                     119                    56

Total credit selling, general and
administrative expense                            $     77              $      57              $      169           $       107

Operational and marketing expenses, which are incurred to support and service our credit card products, remained relatively constant at $25 and $50 for the quarter and six months ended August 1, 2009 compared with $27 and $51 for the . . .