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JWN > SEC Filings for JWN > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Form 10-K for NORDSTROM INC


18-Mar-2013

Annual Report


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
OVERVIEW
Nordstrom is a leading 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 through our various channels: 'Nordstrom' branded full-line stores and online at www.nordstrom.com, 'Nordstrom Rack' off-price stores, 'Last Chance' clearance store, 'HauteLook' online private sale subsidiary, 'Jeffrey' boutiques and our 'treasure&bond' philanthropic store. Our stores are located in 31 states throughout the United States. In addition, we offer our customers a loyalty program along with a variety of payment products and services, including credit and debit cards. Our 2012 results reflected the ongoing, consistent strength of our business. For the third consecutive year, we achieved double-digit growth in net sales and earnings per diluted share, added over one billion dollars in net sales and delivered same-store sales growth of over 7%. These accomplishments reflect the high level of execution across all channels and our ongoing investments in improving the customer experience as we seek to enhance the merchandise offering, increase relevance with existing and new customers, and aggressively grow our online capabilities.
E-commerce is our fastest-growing business. We continued to make investments to improve the experience online by expanding our merchandise selection, enhancing the website and mobile experience with improvements to search, navigation and checkout, and increasing the speed of fulfillment and delivery. These investments helped drive same-store sales growth of 37% in our Direct channel on top of last year's 29% growth.
We also continue to grow through new opportunities to increase our market share. We announced plans for our initial entry into Canada, beginning with four full-line stores and with the potential for a total of eight to 10 full-line stores and 15 to 20 Rack stores. In addition, we are again increasing the pace of expansion of our Rack stores with plans to grow to over 230 stores by the end of 2016. We also announced plans to open our first full-line store in Manhattan, which will increase our exposure within a premiere retail market. Our strong financial position enables us to invest in our stores through expansion, remodels and other initiatives to improve the customer experience. During 2012, we opened one Nordstrom full-line store, 15 Nordstrom Rack stores and relocated three Nordstrom Rack stores. Increasingly, we are using technology as an enabler of service. As an example, we now have mobile point-of-sale devices at all of our full-line and Rack stores to increase the speed at checkout and drive incremental volume. Additionally, mobile devices in our full-line stores have virtually the same functionality as our cash registers, and we continue to make progress in creating a fully mobile store environment. Our credit business also plays an important role in reaching new customers and strengthening existing customer relationships through our Fashion Rewards program, payment products and our ability to serve customers directly through our wholly owned credit services. The Fashion Rewards program contributes to our overall results, with members shopping more frequently and spending more on average than non-members. In 2012, net sales from our members increased 23% over the prior year. With the launch of our enhanced program in early 2012, we opened over one million new accounts, and ended the year with 3.3 million active members, a 27% increase over last year. Our overall credit card portfolio also remains healthy, with delinquency and write-off trends at pre-recession levels. Our ongoing focus on the customer drives the investments we are making to take advantage of multiple growth opportunities. The opportunities include Canada, Rack, e-commerce, Manhattan and other new full-line stores and provide a platform to deliver sustainable, profitable growth. As our business and operating model evolves with our growth, we remain focused on our overall financial goals of achieving high single-digit total sales growth and mid-teens Return on Invested Capital ("ROIC"), as these measures correlate strongly with shareholder return.

RESULTS OF OPERATIONS
Our reportable segments are Retail and Credit. Our Retail segment includes our Nordstrom branded full-line stores and website, our Nordstrom Rack stores, our Last Chance clearance store 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 earnings before income taxes for Credit, while interest expense and income taxes are discussed on a total company basis.

Similar to many other retailers, Nordstrom follows the retail 4-5-4 reporting calendar, which included an extra week in the fourth quarter of 2012 (the "53rd week"). The analysis of our results of operations, liquidity and capital resources compares the 53 weeks in 2012 to the 52 weeks in 2011. However, the 53rd week is not included in same-store sales calculations. In 2012, the 53rd week contributed approximately $0.04 to earnings per diluted share.


Table of Contents

Retail Business
Summary
The following table summarizes the results of our Retail Business for the past
three fiscal years:
Fiscal year                          2012                           2011                           2010
                                        % of net                       % of net                        % of net
                           Amount          sales          Amount          sales           Amount          sales
Net sales                   $11,762          100.0 %       $10,497          100.0 %         $9,310         100.0 %
Cost of sales and
related buying and
occupancy costs              (7,318 )        (62.2 %)       (6,517 )        (62.1 %)        (5,831 )       (62.6 %)
Gross profit                  4,444           37.8 %         3,980           37.9 %          3,479          37.4 %
Selling, general and
administrative
expenses                     (3,166 )        (26.9 %)       (2,807 )        (26.7 %)        (2,412 )       (25.9 %)
Earnings before
interest and income
taxes                        $1,278           10.9 %        $1,173           11.2 %         $1,067          11.5 %


Retail Business Net Sales
Fiscal year                                          2012         2011        2010
Net sales by channel:
Nordstrom full-line stores                         $7,964       $7,513      $6,995
Direct                                              1,269          913         705
Nordstrom                                           9,233        8,426       7,700
Nordstrom Rack                                      2,445        2,045       1,691
Other retail1                                         271          185          29
Total Retail segment                               11,949       10,656       9,420
Corporate/Other                                      (187 )       (159 )      (110 )
Total net sales                                   $11,762      $10,497      $9,310

Net sales increase                                   12.1 %       12.7 %      12.7 %

Same-store sales increase by channel:
Nordstrom full-line stores                            3.9 %        6.0 %       7.9 %
Direct                                               37.1 %       29.5 %      25.1 %
Nordstrom                                             7.5 %        8.2 %       9.3 %
Nordstrom Rack                                        7.4 %        3.7 %       0.7 %
Total                                                 7.3 %        7.2 %       8.1 %

Sales per square foot                                $470         $431        $397
4-wall sales per square foot2                        $417         $394        $372

Percentage of net sales by merchandise category:
Women's apparel                                        31 %         33 %        34 %
Shoes                                                  23 %         23 %        23 %
Men's apparel                                          16 %         15 %        15 %
Women's accessories                                    13 %         12 %        12 %
Cosmetics                                              11 %         11 %        10 %
Kids' apparel                                           3 %          3 %         3 %
Other                                                   3 %          3 %         3 %
Total                                                 100 %        100 %       100 %

1 Other retail includes our HauteLook online private sale subsidiary, our Jeffrey stores and our treasure&bond store.
2 4-wall sales per square foot is calculated as sales for Nordstrom full-line, Nordstrom Rack, Jeffrey and treasure&bond stores divided by their weighted-average square footage. Weighted-average square footage includes a percentage of period-end square footage for new stores equal to the percentage of the period during which they were open.

Nordstrom, Inc. and subsidiaries 17


Table of Contents

NET SALES - 2012 VS 2011
Our total net sales increase of 12.1% for 2012 was driven by the same-store sales increase of 7.3% and strong performances across all channels. Our sales productivity continued to improve, reaching a high of $470 in sales per square foot in 2012 from increases in both our stores and online. During the year, we opened one Nordstrom full-line store, 15 Nordstrom Rack stores and relocated three Nordstrom Rack stores. These additions represented 1.5% of our total net sales for 2012, and increased our square footage by 2.2%. The 53rd week contributed approximately $162 in additional net sales.
Nordstrom net sales for 2012 were $9,233, an increase of 9.6% compared with 2011, with same-store sales up 7.5%. Our sales growth was due in large part to the ongoing, consistent strength of our business both in store and online. We enhanced our Fashion Rewards loyalty program and expanded our relationship with our customers. At the same time, we made investments to improve the in-store, online and mobile experience. Both the number of items sold and the average selling price increased in 2012 compared with 2011. Category highlights included Handbags, Men's Shoes, Men's Apparel and Cosmetics. We also saw improvements in our Women's Apparel business in the second half of the year.

Full-line net sales for 2012 were $7,964, an increase of 6.0% compared with 2011, with same-store sales up 3.9%. The top-performing geographic regions for full-line stores for 2012 were the South and Midwest. The Direct channel continued to show strong sales growth with net sales of $1,269, an increase of 39% compared with 2011, with same-store sales up 37% on a comparable 52-week basis. These increases significantly outpaced our overall performance and are reflective of how customers are responding to our ongoing e-commerce initiatives.
Nordstrom Rack net sales were $2,445, an increase of 20% compared with 2011, while same-store sales increased 7.4% for the year. Men's Apparel, Shoes and Women's Apparel were the strongest performing categories for the year. Both the number of items sold and the average selling price increased in 2012 compared with 2011.
NET SALES - 2011 VS 2010
Net sales for 2011 increased 12.7% compared with 2010, while same-store sales increased 7.2%. During 2011, we opened three Nordstrom full-line stores, 18 Nordstrom Rack stores and one treasure&bond store, relocated two Nordstrom Rack stores and acquired HauteLook. These additions represented 4.0% of our total net sales for 2011, and increased our square footage by 3.8%.
Nordstrom net sales for 2011 were $8,426, up 9.4% compared with 2010, with same-store sales up 8.2%. Our sales growth was driven by our merchandising, inventory management and multi-channel initiatives as well as our efforts to build stronger relationships with customers and to improve the shopping experience across all channels. Both the average selling price and the number of items sold increased in 2011 compared with 2010. Category highlights included Designer, Handbags and Shoes.

Full-line net sales for 2011 were $7,513, an increase of 7.4% compared with 2010, with same-store sales up 6.0%. The top-performing geographic regions for full-line stores for 2011 were the South and Midwest. The Direct channel continued to show strong sales growth with net sales of $913, an increase of 30% in 2011 compared with 2010.
Nordstrom Rack net sales were $2,045, up 21% compared with 2010, while same-store sales increased 3.7% for the year. Shoes, Dresses and Accessories were the strongest performing categories for the year. Both the average selling price and the number of items sold increased in 2011 compared with 2010.


Table of Contents

Retail Business Gross Profit
Fiscal year                         2012        2011        2010
Gross profit1                     $4,444      $3,980      $3,479
Gross profit rate                   37.8 %      37.9 %      37.4 %
Ending inventory per square foot  $53.77      $46.41      $40.96
Inventory turnover rate2            5.37        5.56        5.56

1 Retailers do not uniformly record the costs of buying and occupancy and supply chain operations (freight, purchasing, receiving, distribution, etc.) between gross profit and selling, general and administrative expense. As such, our gross profit and selling, general and administrative expenses and rates may not be comparable to other retailers' expenses and rates.

2 Inventory turnover rate is calculated as annual cost of sales and related buying and occupancy costs (for all segments) divided by 4-quarter average inventory.

GROSS PROFIT - 2012 VS 2011
Retail gross profit increased $464 in 2012 compared with 2011 due to our strong sales performance, partially offset by an increase in occupancy costs for our investments in new stores and remodeling of existing stores. Our gross profit rate decreased 13 basis points compared with 2011 primarily due to accelerated Rack growth, which carries a lower gross profit rate relative to our other channels, and overall occupancy costs that outpace sales in the early years following a store opening. With Rack's high sales productivity and return on invested capital, as well as the availability of what we believe are numerous quality locations, we plan to continue to grow our Rack channel.
Our inventory turnover rate decreased to 5.37 times in 2012, from 5.56 times in 2011. This was primarily due to our increased investment in pack and hold inventory at Nordstrom Rack, which involves the acquisition of merchandise from some of our top brands in advance of the upcoming selling seasons in order to take advantage of strategic buying opportunities. We hold this inventory in our warehouses for six months on average until the next selling season and it represents approximately 10% of our total inventory at the end of 2012 compared with 3% in 2011. On a per square foot basis, we ended the year with a 15.8% increase in our ending inventory on a 9.0% increase in sales compared with 2011. The increase in ending inventory per square foot relative to the increase in sales per square foot is primarily due to Rack's growth.

GROSS PROFIT - 2011 VS 2010
Retail gross profit increased $501 in 2011 compared with 2010 primarily due to
higher sales and merchandise margin, partially offset by increases in occupancy
costs for stores opened during both 2011 and 2010. Our gross profit rate
improved 54 basis points compared with 2010 primarily due to leveraging buying
and occupancy costs on higher net sales. Our increase in ending inventory per
square foot of 13.3% on an 8.5% increase in sales per square foot is a result of
our growth initiatives including expansion of our Rack business.
Retail Business Selling, General and Administrative Expenses
Fiscal year                                     2012        2011        2010
Selling, general and administrative expenses  $3,166      $2,807      $2,412
Selling, general and administrative rate        26.9 %      26.7 %      25.9 %

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - 2012 VS 2011 Our Retail selling, general and administrative expenses ("Retail SG&A") increased $359 in 2012 compared with 2011. This increase reflects the investments we made to improve the customer experience across all channels and specifically in our e-commerce business as we expanded our capabilities and increased the speed of fulfillment and delivery. The increase also reflected higher sales volume and the opening of 16 stores in 2012. Our Retail SG&A rate increased 18 basis points for 2012 compared with 2011 due to the increased investments, partially offset by leverage on increased sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - 2011 VS 2010 Our Retail SG&A expenses increased $395 in 2011 compared with 2010. This increase reflects initiatives to improve the shopping experience across all channels and specifically to grow our e-commerce business. The increase was also due in part to higher sales volume and the opening of 22 stores in 2011. As a result, our Retail SG&A rate increased 84 basis points for 2011 compared with 2010. We continued to leverage SG&A expense in our stores, with an improvement of approximately 35 basis points in 2011, compared with 2010.

Nordstrom, Inc. and subsidiaries 19


Table of Contents

Credit Segment
The Nordstrom credit and debit card products are designed to strengthen customer relationships and grow retail sales by providing loyalty benefits, valuable services and payment products. We believe that owning all aspects of our credit business allows us to build deeper relationships with our customers by fully integrating our rewards program with our retail stores and providing better service, which in turn fosters greater customer loyalty. Our cardholders tend to visit our stores more frequently and spend more with us than non-cardholders, and we believe the Nordstrom Fashion RewardsŪ program helps drive sales in our Retail segment. Our Nordstrom private label credit and debit cards can be used only in our Nordstrom full-line and Rack stores and on our website ("inside volume"), while our Nordstrom VISA cards also may be used for purchases outside of Nordstrom ("outside volume"). Cardholders participate in the Nordstrom Fashion Rewards program through which customers accumulate points based on their level of spending. Upon reaching a certain threshold, customers receive Nordstrom NotesŪ, which can be redeemed for goods or services in our full-line stores, at Nordstrom Rack and online. Fashion Rewards customers receive a credit for complimentary alterations and a personal triple points day, in addition to early access to sales events. With increased spending, they can receive additional amounts of these benefits as well as access to exclusive fashion and shopping events.
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 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, which represents the estimated 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 debt and equity needed to fund our credit card receivables. Based on our research, debt as a percentage of credit card receivables for other credit card companies ranges from 70% to 90%. As such, we believe a mix of 80% debt and 20% equity, as represented by the average credit card receivable investment metric below, is appropriate.

Fiscal year                                  2012                            2011                            2010
                                               % of average                    % of average                    % of average
                                              credit card                      credit card                     credit card
                                  Amount      receivables         Amount       receivables        Amount       receivables
Credit card revenues                 $386              18.6 %         $380             18.6 %         $390             18.7 %
Interest expense                      (26 )            (1.2 %)         (13 )           (0.7 %)         (21 )           (1.0 %)
Net credit card income                360              17.3 %          367             17.9 %          369             17.7 %
Cost of sales and related
buying and occupancy costs -
loyalty program                      (114 )            (5.5 %)         (75 )           (3.7 %)         (66 )           (3.2 %)
Selling, general and
administrative expenses              (205 )            (9.8 %)        (229 )          (11.2 %)        (273 )          (13.1 %)
Total expense                        (319 )           (15.3 %)        (304 )          (14.9 %)        (339 )          (16.3 %)
Credit segment earnings before
income taxes, as presented in
segment disclosure                     41               2.0 %           63              3.1 %           30              1.4 %
Intercompany merchant fees             89               4.3 %           71              3.5 %           58              2.8 %
Credit segment contribution,
before income taxes                  $130               6.3 %         $134              6.6 %          $88              4.2 %

Credit and debit card volume:
Outside                            $4,305                           $4,101                          $3,838
Inside                              4,484                            3,596                           2,953
Total volume                       $8,789                           $7,697                          $6,791

Average credit card
receivables                        $2,076                           $2,047                          $2,088
Average credit card receivable
investment1                          $415                             $409                            $418
Credit segment contribution2         19.4 %                           20.0 %                          12.8 %

1 Assumes 80% of accounts receivable is funded with debt.
2 Net of tax, calculated as a percentage of our average credit card receivable investment.


Table of Contents

Credit Card Revenues
Fiscal year                  2012     2011     2010
Finance charge revenue       $254     $251     $266
Interchange - third party      84       82       76
Late fees and other revenue    48       47       48
Total credit card revenues   $386     $380     $390

Credit card revenues include finance charges, interchange fees, late fees and other revenue. Finance charges represent interest earned on unpaid balances while interchange fees are earned from the use of Nordstrom VISA credit cards at merchants outside of Nordstrom. Late fees are assessed when a credit card account becomes delinquent. We consider an account delinquent if the minimum payment is not received by the payment due date.
CREDIT CARD REVENUES - 2012 VS 2011
Credit card revenues increased $6 in 2012 compared with 2011 primarily due to an extra week (the 53rd week) of revenue in 2012 as a result of our 4-5-4 retail reporting calendar. The increase is also due to growth in total volume that was offset by continued improvements in customer payment rates. Our average credit card receivable balance in 2012 was $2,076, an increase of $29, or 1.4%, from 2011.
CREDIT CARD REVENUES - 2011 VS 2010
Credit card revenues decreased $10 in 2011 compared with 2010 primarily due to a decrease in finance charge revenue resulting from continued improvements in customer payment rates that drove lower finance charge yields and slightly lower receivables. Our average credit card receivable balance in 2011 was $2,047, a decrease of $41, or 1.9%, from 2010. These decreases were partially offset by an increase in interchange revenue due to increased use of our Nordstrom VISA credit cards at third parties.
Credit Segment Interest Expense
Interest expense increased to $26 in 2012 from $13 in 2011 and $21 in 2010 primarily due to higher average interest rates applicable to the Credit segment. Credit Segment Cost of Sales and Related Buying and Occupancy Costs
COST OF SALES AND RELATED BUYING AND OCCUPANCY COSTS - 2012 VS 2011 Cost of sales and related buying and occupancy costs, which include the estimated cost of Nordstrom Notes that we expect to issue and ultimately be redeemed and complimentary alterations under our Fashion Rewards program, increased to $114 in 2012 compared with $75 in 2011. The increase was due to enhancements to our Fashion Rewards program and increases in Nordstrom credit and debit card volumes of 14.2%. We provide the Fashion Rewards benefits to our members, as participation in the program enhances customer loyalty and drives incremental sales in our stores and online.

COST OF SALES AND RELATED BUYING AND OCCUPANCY COSTS - 2011 VS 2010
Cost of sales and related buying and occupancy costs increased to $75 in 2011
compared with $66 in 2010. The increase was due to additional expenses related
to the Fashion Rewards program as a result of a 13.3% increase in volume on
Nordstrom credit and debit cards and increased utilization of program benefits.
Credit Segment Selling, General and Administrative Expenses
Fiscal year                                                2012     2011     2010
Operational and marketing expenses                         $149     $128     $124
Bad debt provision                                           56      101      149
Total Credit selling, general and administrative expenses  $205     $229     $273

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - 2012 VS 2011
Total Credit SG&A decreased $24 in 2012 compared with 2011, due to lower bad debt expense, partially offset by increases in operational and marketing expenses. The decrease in bad debt expense reflects continued improvement in our portfolio delinquencies and write-off results, which are further discussed below. The increase in operational and marketing expenses was primarily driven by enhancements in our Fashion Rewards benefits.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - 2011 VS 2010 Total Credit SG&A decreased $44 in 2011 compared with 2010, due primarily to lower bad debt expense. The decrease in bad debt expense reflected continued improvement in our portfolio trends, the overall performance of our credit portfolio and economic trends.

Nordstrom, Inc. and subsidiaries 21


Table of Contents

Allowance for Credit Losses and Credit Trends The following table illustrates activity in the allowance for credit losses: . . .

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