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JWN > SEC Filings for JWN > Form 10-Q on 3-Sep-2013All Recent SEC Filings

Show all filings for NORDSTROM INC

Form 10-Q for NORDSTROM INC


3-Sep-2013

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)

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 outlook for the fiscal year ending February 1, 2014, anticipated annual same-store sales rate, anticipated Return on Invested Capital and trends in our operations. 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:
successful execution of our growth strategy, including expansion into new markets, acquisitions, investments in our stores and online, our ability to realize the anticipated benefits from such growth initiatives, and 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 ability to manage the transformation of our business/financial model as we increase our investments in growth opportunities, including our online business and our ability to manage related organizational changes,

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

effective inventory management, disruptions in our supply chain and our ability to control costs,

the impact of any systems failures, cybersecurity and/or security breaches, including any security breach that results 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,

successful execution of our information technology strategy,

efficient and proper allocation of our capital resources,

our ability to safeguard our reputation and maintain our vendor relationships,

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

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

the effectiveness of planned advertising, marketing and promotional campaigns in the highly competitive retail industry,

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

our compliance with applicable banking related laws and regulations impacting our ability to extend credit to our customers, employment laws and regulations, certain international laws and regulations, other laws and regulations applicable to us, including the outcome of claims and litigation and resolution of tax matters, and ethical standards,

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

compliance with debt covenants, availability and cost of credit, changes in interest rates, and trends in debt repayment patterns, personal bankruptcies, and bad debt write-offs, 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 2012 Annual Report on Form 10-K, 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
We continually aspire to improve the customer experience, both in stores and online and across our full-price and off-price channels. Over the last several years, we have focused on improving our multi-channel capabilities, and while each channel represents a meaningful growth opportunity individually, the synergies created by the overall customer experience contribute meaningfully to our ability to attract, retain, and serve customers into the future. Our performance in the second quarter and first half of 2013 reflected sales trends softer than we anticipated, mitigated by our discipline in managing inventory and expenses and the variable nature of our financial model. Our Anniversary Sale, which historically is our largest sale event of the year, took place in the second quarter and generated sales consistent with trends. In 2012, the Anniversary Sale occurred during both the second and third quarters. This resulted in a favorable comparison against last year and we expect will result in an unfavorable comparison in the third quarter.
Women's apparel was one of our top-performing merchandise categories during the Anniversary Sale, driven largely by improved execution. During the quarter we continued our efforts to increase our relevance with both existing and new customers. To that end, we plan on expanding upon our partnership with Topshop, an internationally-renowned trend-leading brand, by adding Topshop merchandise to 28 more full-line stores this year, bringing the total to 42 stores. During the first half of 2013, we opened eight new Nordstrom Rack stores, with plans to open 14 more by the end of the year. We are also on track with our expansion into Canada, with the first of our five announced store openings to take place in Calgary in the fall of 2014.
Our Direct channel continues to be one of our fastest-growing businesses. Its sales increased 37% in the second quarter, on top of last year's second-quarter increase of 40%. We are making ongoing investments to further expand our online merchandise selection, improve the website and mobile experience, and continue construction on a second fulfillment center for planned completion in the fall. Additionally, we are developing plans to add a third fulfillment center located on the east coast in 2015.
Our credit business plays an important role in reaching new customers and strengthening existing customer relationships through our Fashion Rewards loyalty program. The Fashion Rewards program contributes to our overall results, with members shopping more frequently and spending more on average than non-members. We now have 3.6 million active members, an 18% increase over last year. Our overall credit portfolio remains healthy, with delinquency and write-off trends stabilizing around a five-year low.
We believe in our long-term strategy and will continue to make investments in our stores, online and in new markets such as Canada. While these strategic investments are expected to limit operating margin expansion over the next several years, we expect to create value through sales and EBIT growth, combined with a more productive capital base. Our long-term financial goals to achieve high single-digit total sales growth and mid-teens Return on Invested Capital ("ROIC") are unchanged, as these measures correlate strongly with shareholder return.

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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)

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 and our Jeffrey stores. 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 Note 9: Segment Reporting in the Notes to Condensed Consolidated Financial Statements (collectively, the "Retail Business"). We analyze our results of operations through earnings before interest and income taxes for our Retail Business and Credit segment, while interest expense and income taxes are discussed on a total company basis. As discussed in Note 1: Basis of Presentation and Note 9: Segment Reporting in the Notes to Condensed Consolidated Financial Statements, beginning in the first quarter of 2013, we reclassified amounts in our financial statements to better reflect the way we view and measure our business. As we continue to execute our long-term growth strategy and make investments across operating segments, aligning expenses with the associated benefits enhances our ability to evaluate segment performance. Historical results were also reclassified to match the current period presentation. These reclassifications did not impact net earnings, earnings per share, financial position or cash flows.
We now allocate Fashion Rewards loyalty program expenses to our Retail Business. We previously recorded all of our Fashion Rewards expenses in our Credit segment. In addition, certain technology expenses we previously included in our Retail Business are now allocated to our Credit segment. These changes within our Retail Business and Credit segment did not impact the presentation of expenses in our consolidated financial statements. In our Credit segment, we previously presented bad debt expense associated with finance charges and fees as part of selling, general and administrative expenses. We reclassified these amounts and now present them as a reduction of credit card revenue. Retail Business
Summary
The following table summarizes the results of our Retail Business for the quarter and six months ended August 3, 2013, compared with the quarter and six months ended July 28, 2012:

                                                         Quarter Ended
                                     August 3, 2013                         July 28, 2012
                               Amount         % of net sales         Amount         % of net sales
Net sales                  $       3,104            100.0 %      $       2,918            100.0 %
Cost of sales and related
buying and occupancy costs        (2,002 )          (64.5 %)            (1,878 )          (64.4 %)
Gross profit                       1,102             35.5 %              1,040             35.6 %
Selling, general and
administrative expenses             (807 )          (26.0 %)              (778 )          (26.6 %)
Earnings before interest
and income taxes           $         295              9.5 %      $         262              9.0 %

                                                       Six Months Ended
                                     August 3, 2013                         July 28, 2012
                               Amount         % of net sales         Amount         % of net sales
Net sales                          5,761            100.0 %      $       5,453            100.0 %
Cost of sales and related
buying and occupancy costs        (3,674 )          (63.8 %)            (3,461 )          (63.5 %)
Gross profit                       2,087             36.2 %              1,992             36.5 %
Selling, general and
administrative expenses           (1,561 )          (27.1 %)            (1,497 )          (27.5 %)
Earnings before interest
and income taxes                     526              9.1 %      $         495              9.1 %

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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)

Retail Business Net Sales
                                       Quarter Ended                           Six Months Ended
                             August 3, 2013       July 28, 2012       August 3, 2013       July 28, 2012
Net sales by channel:
Nordstrom full-line stores $        2,098        $        2,114     $        3,815        $        3,830
Direct                                425                   309                726                   551
Nordstrom                           2,523                 2,423              4,541                 4,381
Nordstrom Rack                        645                   577              1,261                 1,134
HauteLook and Jeffrey                  77                    63                156                   124
Total Retail segment                3,245                 3,063              5,958                 5,639
Corporate/Other                      (141 )                (145 )             (197 )                (186 )
Total net sales            $        3,104        $        2,918     $        5,761        $        5,453

Net sales increase                    6.4 %                 7.4 %              5.6 %                10.3 %

Same-store sales increase
(decrease) by channel:1
Nordstrom full-line stores           (0.7 %)                1.1 %             (0.4 %)                3.1 %
Direct                               37.2 %                39.7 %             31.7 %                41.6 %
Nordstrom                             4.2 %                 4.9 %              3.7 %                 6.8 %
Nordstrom Rack                        2.4 %                 7.7 %              1.6 %                 7.3 %
HauteLook2                           23.1 %                   -               28.6 %                   - %
Total                                 4.4 %                 4.5 %              3.6 %                 6.3 %

Sales per square foot      $          121        $          117     $          226        $          219
4-wall sales per square
foot3                      $          108        $          108     $          200        $          200

1 Same-store sales include sales from stores that have been open at least one full year at the beginning of the year. Fiscal year 2012 includes an extra week (the 53rd week) as a result of our 4-5-4 retail reporting calendar. We report same-store sales by comparing the fiscal 2013 period against the same fiscal period in 2012. The 53rd week is not included in same-store sales calculations. 2Beginning in 2013, HauteLook is included in our same-store sales calculation. 34-wall sales per square foot is calculated as net sales for Nordstrom full-line, Nordstrom Rack, and Jeffrey 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.
Total company net sales increased 6.4% for the quarter and 5.6% for the six months ended August 3, 2013, compared with the same periods in 2012. Overall same-store sales increased 4.4% for the quarter and 3.6% for the six months ended August 3, 2013. Total company net sales and same-store sales for the second quarter were favorably impacted by the Anniversary Sale, which took place in the second quarter in 2013, but occurred during both the second and third quarters in the prior year. Same-store sales increased approximately 250 basis points in the second quarter as a result of the Anniversary Sale shift. Nordstrom net sales for the second quarter of 2013 were $2,523, an increase of 4.1% compared with the same period in 2012, while net sales were $4,541 for the six months ended August 3, 2013, an increase of 3.7% compared with the same period in 2012. Nordstrom same-store sales increased 4.2% for the second quarter and 3.7% for the six months ended August 3, 2013 compared with the same periods in 2012. Both the number of items sold and the average selling price increased on a same-store basis for the quarter and six months ended August 3, 2013. Category highlights for the quarter ended August 3, 2013 included Men's Shoes, Men's Apparel and Kids' Apparel, while category highlights for the six months ended August 3, 2013 included Men's Shoes, Men's Apparel and Cosmetics. Full-line same-store sales decreased 0.7% for the quarter and 0.4% for the six months ended August 3, 2013, compared with the same periods in 2012. The top-performing geographic regions for full-line stores for both the quarter and six months ended August 3, 2013 were the Southeast and the Southwest. The Direct channel continued to generate strong sales growth with an increase of 37.2% in the second quarter of 2013 and 31.7% for the six months ended August 3, 2013. These increases continue to significantly outpace our overall performance and are reflective of how customers are responding to our ongoing e-commerce initiatives.

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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)

Nordstrom Rack net sales increased $69, or 12% for the quarter and $127, or 11% for the six months ended August 3, 2013, compared with the same periods in 2012. We opened eight Nordstrom Rack stores during the first six months of 2013. Nordstrom Rack same-store sales increased 2.4% for the quarter and 1.6% for the six months ended August 3, 2013. Both the number of items sold and the average selling price increased on a same-store basis for the quarter and six months ended August 3, 2013.

Retail Business Gross Profit
                                            Quarter Ended                         Six Months Ended
                                  August 3, 2013      July 28, 2012       August 3, 2013      July 28, 2012
Gross profit1                    $        1,102      $        1,040     $          2,087     $        1,992
Gross profit rate                          35.5 %              35.6 %               36.2 %             36.5 %

                                                                          August 3, 2013      July 28, 2012
Ending inventory per square foot                                        $          57.26     $        55.83
Inventory turnover rate2                                                            5.20               5.28

1Retail cost of sales includes the estimated cost of Nordstrom Notes and complimentary alterations credits that are expected to be issued and redeemed under our Fashion Rewards program. We provide these benefits to our cardholders, as participation in the Fashion Rewards program enhances customer loyalty and drives incremental sales.
2Inventory turnover rate is calculated as the trailing 12-months cost of sales and related buying and occupancy costs (for all channels) divided by the trailing 4-quarter average inventory.
Our retail gross profit rate decreased 13 basis points for the quarter and 30 basis points for the six months ended August 3, 2013, compared with the same periods in 2012. These decreases were primarily due to the growth in the Fashion Rewards customer loyalty program. Retail gross profit increased $62 for the quarter and $95 for the six months ended August 3, 2013, compared with the same periods in 2012, due primarily to increased sales, partially offset by an increase in occupancy costs related to investments in new stores.
For the first two quarters of 2013, our regular-priced selling at Nordstrom was consistent with last year and our inventory turnover rate decreased to 5.20 times for the trailing 12-months ended August 3, 2013, from 5.28 times for the same period in the prior year. The decrease in inventory turnover rate is primarily due to our increased investment in pack and hold inventory at Nordstrom Rack, which helps us take advantage of strategic buying opportunities to secure top brands and to fuel our Rack new store growth. On a per square foot basis, we ended the quarter with a 3.9% increase in sales on a 2.6% increase in ending inventory primarily due to the impact of the Anniversary Sale event shift.
Retail Business Selling, General and Administrative Expenses

                                           Quarter Ended                         Six Months Ended
                                August 3, 2013       July 28, 2012       August 3, 2013      July 28, 2012
Selling, general and
administrative expenses       $           807      $          778       $         1,561     $       1,497
Selling, general and
administrative expense rate              26.0 %              26.6 %                27.1 %            27.5 %

Our Retail selling, general and administrative expenses ("Retail SG&A") rate decreased 66 basis points for the quarter and 37 basis points for the six months ended August 3, 2013, compared with the same periods in 2012. The improvements primarily were due to leverage on increased sales, including the impact of the Anniversary Sale event shift and a reduction in variable expenses correlated with our performance. This was partially offset by investments related to technology, our planned entry into Canada and accelerated Rack store expansion, along with higher fulfillment expenses supporting online growth. Our Retail SG&A increased $29, or 3.8%, for the quarter and $64, or 4.2% for the six months ended August 3, 2013, compared with the same periods in 2012. The increases were primarily due to higher sales volume and the incremental costs related to investments in technology, partially offset by the reduction of variable expenses correlated to our performance.

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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)

Credit Segment
Summary
The table below provides a detailed view of the operational results of our Credit segment, consistent with the segment disclosure provided in Note 9:
Segment Reporting 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, which represents the estimated costs that would be incurred if our cardholders 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 is an appropriate estimate.

                                         Quarter Ended                           Quarter Ended
                                        August 3, 2013                           July 28, 2012
                                                  Annualized %                            Annualized %
                                                of average credit                       of average credit
                                 Amount         card receivables         Amount         card receivables
Credit card revenues         $          92             17.6 %        $          88              17.1 %
Occupancy, selling, general
and administrative expenses            (52 )           (9.9 %)                 (60 )           (11.7 %)
Credit segment earnings
before interest and income
taxes, as presented in
segment disclosure                      40              7.7 %                   28               5.5 %
Interest expense                        (6 )           (1.2 %)                  (7 )            (1.2 %)
Intercompany merchant fees              28              5.5 %                   26               5.0 %
Credit segment contribution,
before income taxes          $          62             12.0 %        $          47               9.2 %

Credit and debit card
volume:
Outside                      $       1,077                           $       1,066
Inside                               1,426                                   1,283
Total volume                 $       2,503                           $       2,349

Average credit card
receivables                  $       2,074                           $       2,039

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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)

                                      Six Months Ended                         Six Months Ended
                                       August 3, 2013                           July 28, 2012
                                                 Annualized %                             Annualized %
                                               of average credit                        of average credit
                                Amount         card receivables          Amount         card receivables
Credit card revenues       $          184             18.0 %        $          178              17.6 %
Occupancy, selling,
general and administrative
expenses                             (100 )           (9.8 %)                 (103 )           (10.1 %)
Credit segment earnings
before interest and income
taxes, as presented in
segment disclosure                     84              8.2 %                    75               7.5 %
Interest expense                      (12 )           (1.2 %)                  (13 )            (1.2 %)
Intercompany merchant fees             48              4.7 %                    43               4.3 %
Credit segment
contribution, before
income taxes               $          120             11.8 %        $          105              10.5 %

Credit and debit card
volume:
Outside                    $        2,124                           $        2,081
Inside                              2,444                                    2,175
Total volume               $        4,568                           $        4,256

Average credit card
receivables                $        2,044                           $        2,012


Credit Card Revenues
                                           Quarter Ended                              Six Months Ended
                                August 3, 2013          July 28, 2012       August 3, 2013       July 28, 2012
Finance charge revenue      $            59          $              58     $           120     $            118
Interchange - third party                22                         19                  43                   39
Late fees and other revenue              11                         11                  21                   21
Total credit card revenues  $            92          $              88     $           184     $            178

Credit card revenues include finance charges, interchange fees, late fees and . . .

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