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JWN > SEC Filings for JWN > Form 10-Q on 7-Dec-2011All Recent SEC Filings

Show all filings for NORDSTROM INC

Form 10-Q for NORDSTROM INC


7-Dec-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Dollar and share amounts in millions except per share and per square foot amounts)

The following discussion should be read in conjunction with the Management's Discussion and Analysis section of our 2010 Annual Report on Form 10-K.

CAUTIONARY STATEMENT

Certain statements in this Quarterly Report on Form 10-Q contain or may suggest "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties, including, but not limited to, anticipated financial results (including, but not limited to, our anticipated total and same-store sales results, credit card revenues, gross profit rate, selling, general and administrative expenses, net interest expense, effective tax rate, earnings per share, operating cash flows and Return on Invested Capital ("ROIC")), anticipated store openings, capital expenditures, dividend payout, trends in our operations, compliance with debt covenants, outcome of claims and litigation, the anticipated financial performance of HauteLook and the anticipated impact of the HauteLook acquisition on the company's performance. Such statements are based upon the current beliefs and expectations of the company's management and are subject to significant risks and uncertainties. Actual future results may differ materially from historical results or current expectations depending upon factors including, but not limited to:

- the impact of economic and market conditions and the resultant impact on consumer spending patterns,

- our ability to maintain our relationships with vendors,

- our ability to respond to the business environment, fashion trends and consumer preferences, including changing expectations of service and experience in stores and online,

- effective inventory management,

- successful execution of our growth strategy, including possible expansion into new markets, technological investments and acquisitions, including our ability to realize the anticipated benefits from such acquisitions, and the timely completion of construction associated with newly planned stores, relocations and remodels, which may be impacted by the financial health of third parties,

- our ability to maintain relationships with our employees and to effectively attract, develop and retain our future leaders,

- successful execution of our multi-channel strategy,

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

- impact of the current regulatory environment and financial system and health care reforms,

- the impact of any systems failures and/or security breaches, including any security breaches that result in the theft, transfer or unauthorized disclosure of customer, employee or company information or our compliance with information security and privacy laws and regulations in the event of such an incident,

- our compliance with employment laws and regulations and other laws and regulations applicable to us,

- trends in personal bankruptcies and bad debt write-offs,

- changes in interest rates,

- efficient and proper allocation of our capital resources,

- availability and cost of credit,

- our ability to safeguard our brand and reputation,

- successful execution of our information technology strategy,

- weather conditions, natural disasters, health hazards or other market disruptions, or the prospects of these events and the impact on consumer spending patterns,

- disruptions in our supply chain,

- the geographic locations of our stores,

- the effectiveness of planned advertising, marketing and promotional campaigns,

- our ability to control costs and

- the timing and amounts of share repurchases by the company, if any, or any share issuances by the company, including issuances associated with option exercises or other matters.

These and other factors, including those factors described in Part I, "Item 1A. Risk Factors" in our 2010 Annual Report on Form 10-K and in Part II, "Item 1A. Risk Factors" on page 29 of this report, could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances.

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Table of Contents

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)

OVERVIEW

Our third quarter results continued the performance from the first half of 2011, with eight consecutive quarters of total company same-store sales increases and double-digit increases in total sales. This is a result of consistent execution across all channels, providing compelling new fashion to our customers, and efforts to improve the customer experience in our stores and online.

We believe there is significant potential to drive additional sales volume and achieve profitable growth by improving the customer experience across all channels. As customers' expectations broaden with greater emphasis on speed and convenience, we are increasing our investments in e-commerce to better respond to how customers want to shop. Our online channel continues to be the fastest growing part of our business, and during the quarter we began offering free standard shipping and returns for online purchases. We believe this change makes it easier and more convenient to shop with us. Our combined efforts to enhance the online experience led to meaningful growth in our online sales in the third quarter.

Our strong financial position enables us to continue to make these investments while also growing our business through new stores, remodels and other initiatives. During the first nine months of 2011, we opened three Nordstrom full-line stores, eighteen Nordstrom Rack stores and relocated two Nordstrom Rack stores. We also opened a philanthropic store in New York called treasure&bond, and acquired HauteLook, a leader in the online private sale marketplace. We believe this acquisition will help us further develop our mobile and e-commerce capabilities and enable us to participate in the fast-growing private sales channel.

Our increased investments in e-commerce and technology are part of what will enable us to achieve our overall goals of mid-to-high single-digit total sales growth and mid-teens Return on Invested Capital ("ROIC"). As we make these investments to enhance the customer experience, we expect that the increased spending on e-commerce and technology will flow through our expenses at a faster pace than other investments in previous years. These investments are important to our ability to evolve with customers and achieve our long-term growth plans.

Our credit business continues to contribute to an improved customer experience and to our overall performance. In September, our Fashion Rewards customer event drove significant incremental sales compared to the same event in the prior year. For the third quarter of 2011, Fashion Rewards sales increased 22% compared with the same period last year. Fashion Rewards continue to grow and is an important part of our loyalty strategy, as members shop more frequently and spend more with us on average than non-members. Our key credit metrics of delinquency, write-off and payment rates continue to improve, although at a moderating pace in comparison to previous quarters.

We remain focused on our goal of improving customer service and providing a superior shopping experience. We believe our customer-focused strategy allows us to execute our current operating plans across all channels while targeting investments in e-commerce and technology to sustain long-term profitable growth.

RESULTS OF OPERATIONS

Our reportable segments are Retail and Credit. Our Retail segment includes our Nordstrom branded full-line stores and online store, our Nordstrom Rack stores, and our other retail channels including HauteLook, our Jeffrey stores and our treasure&bond store. For purposes of discussion and analysis of our results of operations, we combine our Retail segment results with revenues and expenses in the "Corporate/Other" column of our segment reporting footnote (collectively, the "Retail Business"). We analyze our results of operations through earnings before interest and income taxes for our Retail Business and Credit, while interest expense, income taxes and net earnings are discussed on a total company basis.

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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)

Retail Business

Summary

The following tables summarize the results of our Retail Business for the
quarter and nine months ended October 29, 2011, compared with the quarter and
nine months ended October 30, 2010:



                                                                            Quarter Ended
                                                October 29, 2011                                     October 30, 2010
                                       Amount                 % of net sales                Amount                 % of net sales
Net sales                           $    2,383                        100.0%             $     2,087                     100.0%
Cost of sales and related
buying and occupancy costs              (1,495)                       (62.7%)                 (1,318)                    (63.1%)

Gross profit                               888                         37.3%                     769                      36.9%
Selling, general and
administrative expenses                   (670)                       (28.1%)                   (569)                    (27.3%)

Earnings before interest and
income taxes                        $      218                          9.1%             $       200                       9.6%


                                                                          Nine Months Ended
                                                October 29, 2011                                     October 30, 2010
                                       Amount                 % of net sales                Amount                 % of net sales
Net sales                           $    7,328                        100.0%             $     6,494                     100.0%
Cost of sales and related
buying and occupancy costs              (4,567)                       (62.3%)                 (4,092)                    (63.0%)

Gross profit                             2,761                         37.7%                   2,402                      37.0%
Selling, general and
administrative expenses                 (1,989)                       (27.1%)                 (1,715)                    (26.4%)

Earnings before interest and
income taxes                        $      772                         10.5%             $       687                      10.6%


Retail Business Net Sales

                                                  Quarter Ended                                      Nine Months Ended
                                  October 29, 2011           October 30, 2010          October 29, 2011           October 30, 2010
Net sales:
Nordstrom                           $    1,773               $         1,615             $     5,825              $       5,331
Nordstrom Rack                             528                           427                   1,478                      1,209
Other retail1                               49                             9                     124                         25

Total Retail segment sales               2,350                         2,051                   7,427                      6,565
Corporate/Other                             33                            36                     (99)                       (71)

Total net sales                     $    2,383               $         2,087             $     7,328              $       6,494


Net sales increase                       14.2%                         11.7%                   12.8%                      13.5%

Same-store sales increase
(decrease) by channel:
Nordstrom                                 8.5%                          7.3%                    8.1%                      10.2%
Nordstrom Rack                            6.8%                         (2.2%)                   4.3%                      (0.4%)

Total                                     7.9%                          5.8%                    7.2%                       8.6%


Sales per square foot               $       98               $            88             $       303              $         279

1Other retail includes our HauteLook online private sale subsidiary, our Jeffrey stores and our treasure&bond store.

Total net sales increased 14.2% for the quarter and 12.8% for the nine months ended October 29, 2011, compared with the same periods in the prior year. Overall same-store sales increased 7.9% for the quarter and 7.2% for the nine months ended October 29, 2011. During the nine months ended October 29, 2011, we opened three Nordstrom full-line stores, eighteen Nordstrom Rack stores and one treasure&bond store, relocated two Nordstrom Rack stores and acquired HauteLook.

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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)

Nordstrom net sales for the third quarter of 2011 were $1,773, an increase of 9.8% compared with the same period in 2010, while net sales of $5,825 for the nine months ended October 29, 2011, increased 9.3% compared with the same period in 2010. Nordstrom same-store sales increased 8.5% for the quarter and 8.1% for the nine months ended October 29, 2011, compared with the same periods in 2010. Both the average selling price and the number of sales transactions increased for the quarter and nine months ended October 29, 2011, compared with the same periods last year. Category highlights for the quarter and nine months ended October 29, 2011, included Designer, Handbags and Dresses. The South and Midwest were the top-performing geographic regions for Nordstrom full-line stores for both the quarter and nine months ended October 29, 2011. The Direct channel continued to show strong sales growth, outpacing the overall Nordstrom increase.

Nordstrom Rack net sales increased $101, or 23.6%, for the quarter and $269, or 22.2%, for the nine months ended October 29, 2011, compared with the same periods in 2010. Same-store sales at Nordstrom Rack increased 6.8% for the quarter and 4.3% for the nine months ended October 29, 2011. Both the average selling price of Nordstrom Rack merchandise and the number of sales transactions increased for the quarter and nine months ended October 29, 2011, compared with the same periods last year.

Retail Business Gross Profit



                                                   Quarter Ended                                   Nine Months Ended
                                     October 29, 2011         October 30, 2010         October 29, 2011         October 30, 2010
Gross profit                                $   888               $      769                $   2,761                $   2,402
Gross profit rate                             37.3%                    36.9%                    37.7%                    37.0%

                                                                                       October 29, 2011         October 30, 2010
Ending inventory per square foot                                                            $   60.90                $   54.94
Inventory turnover rate1                                                                         5.23                     5.19

1Inventory turnover rate is calculated as the trailing 12-months cost of sales and related buying and occupancy costs (for all segments) divided by the trailing 4-quarter average inventory.

Retail gross profit increased $119 for the quarter and $359 for the nine months ended October 29, 2011, compared with the same periods in 2010, due to higher gross margin, partially offset by an increase in occupancy costs for stores opened during 2011 and 2010. Our retail gross profit rate improved 40 basis points for the quarter and 69 basis points for the nine months ended October 29, 2011, compared with the same periods in 2010. The increase was primarily due to leveraging buying and occupancy costs on higher net sales and strength in regular-price selling. These factors were partially offset by reduced shipping revenue associated with the introduction of free standard shipping and free returns for online purchases in the third quarter.

Our inventory turnover rate increased to 5.23 times for the nine months ended October 29, 2011, from 5.19 times for the same period in the prior year. We ended the quarter with a 10.8% increase in inventory per square foot on a 10.4% increase in sales per square foot, compared with the third quarter of 2010. This reflects a widening selection in our online merchandise offering to better serve our online customers as well as the timing of a seasonal buildup in our store inventory.

Retail Business Selling, General and Administrative Expenses



                                                        Quarter Ended                                   Nine Months Ended
                                          October 29, 2011         October 30, 2010         October 29, 2011         October 30, 2010
Selling, general and administrative
expenses                                      $     670                $     569               $    1,989               $    1,715
Selling, general and administrative
expense rate                                      28.1%                    27.3%                    27.1%                    26.4%
Selling, general and administrative
expense per square foot                       $      28                $      24                $      82                $      74

Our Retail selling, general and administrative expenses ("Retail SG&A") increased $101 for the quarter and $274 for the nine months ended October 29, 2011, compared with the same periods in 2010. The increase was driven by higher sales volume and the opening of 23 stores since the third quarter of 2010. It also reflects investments to improve the shopping experience across channels and specifically to grow our e-commerce business, and includes HauteLook operating and purchase accounting expenses as well as planned increases in marketing and technology spend.

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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)

Our Retail SG&A rate increased 87 basis points for the quarter, compared with the same period in the prior year, driven primarily by the investments to grow our e-commerce business discussed above. Our Retail SG&A rate increased 74 basis points for the nine months ended October 29, 2011, compared with the same period last year, primarily due to HauteLook expenses.

Credit

Summary

The table below provides a detailed view of the operational results of our Credit segment, consistent with the segment disclosure provided in the Notes to Condensed Consolidated Financial Statements. In order to better reflect the economic contribution of our credit and debit card program, intercompany merchant fees are also included in the table below. Intercompany merchant fees represent the estimated intercompany income of our Credit segment from the usage of our cards in the Retail segment. To encourage the use of Nordstrom cards in our stores, the Credit segment does not charge the Retail segment an intercompany interchange merchant fee. On a consolidated basis, we avoid costs that 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 credit card receivable investment metric included in the following table represents our best estimate of the amount of capital for our Credit segment that is financed by equity. Based on our research, 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                                          Quarter Ended
                                                    October 29, 2011                                        October 30, 2010
                                                                  Annualized %                                           Annualized %
                                                                 of average credit                                      of average credit
                                         Amount                 card receivables                 Amount                card receivables
Credit card revenues                    $      95                          18.7%                $     95                         18.4%
Interest expense                               (2)                         (0.6%)                     (4)                        (0.9%)

Net credit card income                         93                          18.1%                      91                         17.5%
Cost of sales and related
buying and occupancy costs -
loyalty program                               (16)                         (3.2%)                    (13)                        (2.7%)
Selling, general and
administrative expenses                       (57)                        (11.1%)                    (61)                       (11.5%)

Total expense                                 (73)                        (14.2%)                    (74)                       (14.2%)

Credit segment earnings before
income taxes, as presented in
segment disclosure                             20                           3.9%                      17                          3.3%

Intercompany merchant fees                     14                           2.9%                      12                          2.3%

Credit segment contribution,
before income taxes                     $      34                           6.7%                $     29                          5.6%


Credit and debit card volume:
Outside                                $    1,015                                               $    947
Inside                                        735                                                    607

Total volume                           $    1,750                                              $   1,554


Average credit card receivables        $    2,036                                              $   2,085
Average credit card receivable
investment (assuming 80% of
accounts receivable is funded
with debt)                              $     407                                               $     417
Annualized Credit segment
contribution, net of tax, as a
percentage of average credit
card receivable investment                  20.5%                                                  17.0%

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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)



                                                                      Nine Months Ended                                   Nine Months Ended
                                                                      October 29, 2011                                    October 30, 2010
                                                                                   Annualized %                                        Annualized %
                                                                                  of average credit                                   of average credit
                                                            Amount               card receivables               Amount               card receivables
Credit card revenues                                       $     283                        18.7%              $     290                       18.0%
Interest expense                                                  (9)                       (0.6%)                   (16)                      (1.0%)

Net credit card income                                           274                        18.1%                    274                       17.0%
Cost of sales and related buying and occupancy costs
- loyalty program                                                (52)                       (3.5%)                   (47)                      (3.0%)
Selling, general and administrative expenses                    (171)                      (11.3%)                  (218)                     (13.5%)

Total expense                                                   (223)                      (14.7%)                  (265)                     (16.5%)

Credit segment earnings before income taxes, as
presented in segment disclosure                                   51                         3.4%                      9                        0.5%

Intercompany merchant fees                                        50                         3.3%                     41                        2.5%

Credit segment contribution, before income taxes           $     101                         6.7%              $      50                        3.1%


Credit and debit card volume:
Outside                                                    $   3,035                                           $   2,828
Inside                                                         2,512                                               2,069

Total volume                                               $   5,547                                           $   4,897


Average credit card receivables                            $   2,019                                           $   2,146
Average credit card receivable investment (assuming
80% of accounts receivable is funded with debt)            $     404                                           $     412
Annualized Credit segment contribution, net of tax,
as a percentage of average credit card receivable
investment                                                     20.1%                                                9.8%

Credit Card Revenues



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