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JWN > SEC Filings for JWN > Form 10-Q on 2-Sep-2014All Recent SEC Filings

Show all filings for NORDSTROM INC

Form 10-Q for NORDSTROM INC


2-Sep-2014

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 January 31, 2015, anticipated annual total 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 customer strategy, including expansion into new markets, acquisitions, investments in our stores and online, our ability to realize the anticipated benefits from 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 of our systems or those of a third-party provider that results in the theft, transfer or unauthorized disclosure of customer, employee or company information or compliance with information security and privacy laws and regulations in the event of such an incident,

successful execution of our information technology strategy,

our ability to effectively utilize data in strategic planning and decision-making,

efficient and proper allocation of our capital resources,

reviewing of options and structure for a financial partner in regards to a potential transaction related to our credit card receivables,

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 2013 Annual Report on Form 10-K and in Part II, "Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q, 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 second quarter performance was in line with our expectations, with a total net sales increase of 6.2% and comparable sales increase of 3.3%. Our Anniversary Sale, which historically is our largest sale event of the year, generated a comparable sales increase of 3.6% in the full-price business, which was consistent with recent trends.
During the quarter, we continued to demonstrate our focus on executing our strategy, both in-store and online, and with our full-price and off-price offerings. In today's rapidly changing environment, we strive to position ourselves to serve customers through these multiple touchpoints. In August 2014, we completed the acquisition of Trunk Club, a leading personalized clothing service for men. The men's market is one of the fastest-growing and most rapidly changing segments in retail, and Trunk Club has created a unique approach to capture the imagination of an under-served customer. Founded in 2009, Trunk Club delivers a stylist service that combines the convenience of online with a high-touch, personalized shopping experience. We believe this acquisition represents a natural extension of our core business, aligns with our strategic priorities around a relevant customer experience and accelerates entry into this fast-growing market.
Trunk Club is a high-growth company and expects to achieve operational profitability and more than double its annual sales to over $100 million in 2014, a portion of which will be included in our financial results subsequent to the acquisition. Trunk Club will continue to operate independently and focus on its core business while leveraging our capabilities and resources to scale its business. It will be managed by its current leadership team and remain headquartered in Chicago.
The Nordstrom Rewards program contributes significantly to our overall results, with members shopping more frequently and spending more on average than non-members. We now have 4.1 million active members, a 14% increase over last year. The Company opened nearly 650,000 new accounts so far this year, an increase of 20% compared with the same period last year. Our overall credit portfolio remains healthy, with delinquency and write-off trends remaining around a five-year low, which positions us well as we explore potential partners for the sale of our credit card receivables. As we noted in the first quarter, we are still in the early stages of the process of finding a partner for this potential transaction and we estimate that this will take a total of 12 to 18 months. We will provide an update once the process is complete. We are making ongoing progress in reaching new customers through our store expansion. This fall, we plan to open our first store in Canada, in Calgary, as well as two full-line stores in The Woodlands (Houston), Texas and in Jacksonville, Florida. To date, we have opened 11 Nordstrom Rack stores and plan to open 16 additional stores during the remainder of the year. Nordstrom Rack delivered a second quarter net sales increase of 18% over the same period last year.
We continue to support our customer strategy with the investments we are making in our stores, online and in our fulfillment capabilities. We aim to deliver a superior and integrated customer experience across all channels and we think we are well-positioned to continue our growth. Over the long term, we continue to believe our customer strategy and investments will generate top-quartile shareholder returns through high single-digit sales growth and mid-teens Return on Invested Capital.

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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 online store, Nordstrom Rack stores, Last Chance clearance store and other retail channels, including HauteLook, Nordstromrack.com and 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, which also includes our Canadian operations (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 and income taxes are discussed on a total company basis.
Retail Business
Summary
The following table summarizes the results of our Retail Business for the quarter and six months ended August 2, 2014, compared with the quarter and six months ended August 3, 2013:

                                                          Quarter Ended
                                       August 2, 2014                       August 3, 2013
                                 Amount        % of net sales1        Amount        % of net sales1
Net sales                    $      3,296           100.0 %       $      3,104           100.0 %
Cost of sales and related
buying and occupancy costs         (2,129 )         (64.6 %)            (2,002 )         (64.5 %)
Gross profit                        1,167            35.4 %              1,102            35.5 %
Selling, general and
administrative expenses              (889 )         (27.0 %)              (807 )         (26.0 %)
Earnings before interest and
income taxes                 $        278             8.5 %       $        295             9.5 %

                                                        Six Months Ended
                                       August 2, 2014                       August 3, 2013
                                 Amount        % of net sales1        Amount        % of net sales1
Net sales                    $      6,133           100.0 %       $      5,761           100.0 %
Cost of sales and related
buying and occupancy costs         (3,949 )         (64.4 %)            (3,674 )         (63.8 %)
Gross profit                        2,184            35.6 %              2,087            36.2 %
Selling, general and
administrative expenses            (1,682 )         (27.4 %)            (1,561 )         (27.1 %)
Earnings before interest and
income taxes                 $        502             8.2 %       $        526             9.1 %

1 Subtotals and totals may not foot due to rounding.

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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 2, 2014       August 3, 2013       August 2, 2014       August 3, 2013
Net sales by channel:
Nordstrom full-line stores   $       2,074        $       2,098        $       3,757        $       3,815
Direct                                 519                  425                  920                  726
Nordstrom                            2,593                2,523                4,677                4,541
Nordstrom Rack                         759                  645                1,500                1,261
HauteLook, Nordstromrack.com
and Jeffrey                             86                   77                  171                  156
Total Retail segment                 3,438                3,245                6,348                5,958
Corporate/Other                       (142 )               (141 )               (215 )               (197 )
Total net sales              $       3,296        $       3,104        $       6,133        $       5,761

Net sales increase                     6.2 %                6.4 %                6.4 %                5.6 %

Comparable sales increase
(decrease) by channel:1
Nordstrom full-line stores            (1.2 %)              (0.7 %)              (1.5 %)              (0.4 %)
Direct                                22.0 %               37.2 %               26.6 %               31.7 %
Nordstrom                              2.7 %                4.2 %                3.0 %                3.7 %
Nordstrom Rack                         4.0 %                2.4 %                5.2 %                1.6 %
HauteLook and
Nordstromrack.com                     14.9 %               23.1 %               12.6 %               28.6 %
Total                                  3.3 %                4.4 %                3.6 %                3.6 %

Sales per square foot2       $         125        $         121        $         233        $         226
4-wall sales per square
foot2                                  107                  108                  201                  200
Full-line sales per square
foot2                                  100                  101                  182                  184
Nordstrom Rack sales per
square foot2                           133                  134                  269                  267

1 Comparable sales include sales from stores that have been open at least one full year at the beginning of the year. We also include sales from our Nordstrom online store in comparable sales because of the integration of our Nordstrom full-line stores and online store as well as HauteLook and Nordstromrack.com. 2 Sales per square foot is calculated as net sales divided by weighted-average square footage. Weighted-average square footage includes a percentage of year-end square footage for new stores equal to the percentage of the year during which they were open. 4-wall sales per square foot is calculated as sales for Nordstrom full-line, Nordstrom Rack and Jeffrey stores divided by their weighted-average square footage.
Total company net sales increased 6.2% for the quarter and 6.4% for the six months ended August 2, 2014, compared with the same periods in 2013. Overall comparable sales increased 3.3% for the quarter and 3.6% for the six months ended August 2, 2014, led by the growth at Direct. Anniversary Sale comparable sales, which is the Company's largest sale event of the year, increased 3.6%. Nordstrom net sales, which consists of the full-line and Direct businesses, were $2,593 for the second quarter of 2014, an increase of 2.7% compared with the same period in 2013, while net sales were $4,677 for the six months ended August 2, 2014, an increase of 3.0% compared with the same period in 2013. Strong growth in our Direct channel was partially offset by softer sales at our full-line stores. Both the average selling price and the number of items sold increased on a comparable basis for the quarter and six months ended August 2, 2014. Category highlights for the quarter ended August 2, 2014 included Cosmetics, Accessories and Men's Apparel, while category highlights for the six months ended August 2, 2014 included Accessories, Cosmetics and Women's Apparel. Sales per square foot increased 2.7% for the second quarter of 2014, while it increased 3.1% for the six months ended August 2, 2014, compared with the same periods in 2013.

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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)

Full-line comparable sales decreased 1.2% for the quarter and 1.5% for the six months ended August 2, 2014, compared with the same periods in 2013. The top-performing geographic regions for full-line stores for the quarter and six months ended August 2, 2014 were the Southeast and Southwest. Full-line sales per square foot decreased 1.2% in the second quarter of 2014 and 1.5% for the six months ended August 2, 2014, when compared with the same periods in 2013. The Direct channel continued to experience outsized sales growth with an increase of 22% in the second quarter of 2014 and 27% for the six months ended August 2, 2014, driven by expanded merchandise selection.
Nordstrom Rack net sales increased $114, or 18%, for the quarter and $239, or 19%, for the six months ended August 2, 2014, compared with the same periods in 2013, reflecting incremental volume from existing stores and the impact of 25 store openings since the second quarter of fiscal 2013. Nordstrom Rack comparable sales increased 4.0% for the quarter and 5.2% for the six months ended August 2, 2014. Both the average selling price and the number of items sold increased on a comparable basis for the quarter and six months ended August 2, 2014. Category highlights for the second quarter of 2014 and the six months ended August 2, 2014 included Shoes and Accessories.

Retail Business Gross Profit
                                            Quarter Ended                        Six Months Ended
                                  August 2, 2014     August 3, 2013     August 2, 2014      August 3, 2013
Gross profit1                    $       1,167      $       1,102      $         2,184     $       2,087
Gross profit as a % of net sales          35.4 %             35.5 %               35.6 %            36.2 %

                                                                        August 2, 2014      August 3, 2013
Ending inventory per square foot                                       $         68.27     $       57.26
Inventory turnover rate2                                                          4.83              5.20

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 the trailing 12-months' cost of sales and related buying and occupancy costs (for all segments) divided by the trailing 4-quarter average inventory.
Our Retail gross profit rate decreased 7 basis points for the quarter ended August 2, 2014 and 61 basis points for the six months ended August 2, 2014, compared with the same periods in the prior year. These decreases were primarily due to planned occupancy costs associated with Nordstrom Rack's accelerated store expansion and in addition, for the six months ended August 2, 2014, increased markdowns in response to the promotional environment. Our Retail gross profit increased $65 for the second quarter of 2014 and $97 for the six months ended August 2, 2014, compared with the same periods in 2013, due primarily to increased sales, partially offset by an increase in occupancy costs driven by investments in new Nordstrom Rack stores.
For the second quarter of 2014, our inventory turnover rate decreased to 4.83 times for the trailing 12-months ended August 2, 2014, from 5.20 times for the same period in 2013. The decrease in our inventory turnover rate was primarily due to our increased investment in pack and hold inventory at Nordstrom Rack. Pack and hold inventory helps us take advantage of strategic buying opportunities to secure top brands and is fueling our Nordstrom Rack new store growth and Nordstromrack.com. Ending inventory per square foot increased 19.2% compared with the same period in fiscal 2013, which outpaced the sales per square foot increase of 2.7%. The difference primarily reflected planned investments to fuel off-price growth, including increased levels of pack and hold inventory at Nordstrom Rack, and planned investments in the full-price business to drive online growth and in well-performing merchandise categories. Retail Business Selling, General and Administrative Expenses

                                           Quarter Ended                          Six Months Ended
                                August 2, 2014       August 3, 2013      August 2, 2014      August 3, 2013
Selling, general and
administrative expenses       $           889      $          807       $         1,682     $       1,561
Selling, general and
administrative expense as a %
of net sales                             27.0 %              26.0 %                27.4 %            27.1 %

Our Retail selling, general and administrative expenses ("Retail SG&A") rate increased 97 basis points and $82 for the quarter ended August 2, 2014, and 33 basis points and $121 for the six months ended August 2, 2014. These increases were primarily due to ongoing investments in fulfillment and technology and the planned entry into Canada.

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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 represent the estimated costs that would be incurred if our cardholders used third-party cards instead of ours.
Interest expense at the Credit segment is equal to the amount of interest related to securitized debt plus an amount assigned to the Credit segment in proportion to the 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 appropriate, and therefore assign interest expense to the Credit segment as if it carried debt of up to 80% of the credit card receivables.

                                                            Quarter Ended
                                        August 2, 2014                         August 3, 2013
                                                 Annualized %                           Annualized %
                                               of average credit                      of average credit
                                 Amount        card receivables1        Amount        card receivables1
Credit card revenues         $         96             18.1 %        $         92             17.6 %
Credit expenses                       (43 )           (8.3 %)                (52 )           (9.9 %)
Credit segment earnings
before interest and income
taxes2                                 53              9.8 %                  40              7.7 %
Interest expense                       (5 )           (0.9 %)                 (6 )           (1.2 %)
Intercompany merchant fees             31              5.8 %                  28              5.5 %
Credit segment contribution,
before income taxes          $         79             14.8 %        $         62             12.0 %

Credit and debit card
volume3:
Outside                      $      1,095                           $      1,077
Inside                              1,571                                  1,426
Total volume                 $      2,666                           $      2,503

Average credit card
receivables                  $      2,132                           $      2,074

1 Subtotals and totals may not foot due to rounding.
2 As presented in Note 9: Segment Reporting in the Notes to Condensed Consolidated Financial Statements.
3 Volume represents sales plus applicable taxes.

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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
                                        August 2, 2014                         August 3, 2013
                                                 Annualized %                           Annualized %
                                               of average credit                      of average credit
                                 Amount        card receivables1        Amount        card receivables1
Credit card revenues         $        190             18.2 %        $        184             18.0 %
Credit expenses                       (96 )           (9.3 %)               (100 )           (9.8 %)
Credit segment earnings
before interest and income
taxes2                                 94              9.0 %                  84              8.2 %
Interest expense                       (9 )           (0.9 %)                (12 )           (1.2 %)
Intercompany merchant fees             54              5.2 %                  48              4.7 %
Credit segment contribution,
before income taxes          $        139             13.3 %        $        120             11.8 %

Credit and debit card
volume3:
Outside                      $      2,146                           $      2,124
Inside                              2,719                                  2,444
Total volume                 $      4,865                           $      4,568

Average credit card
receivables                  $      2,089                           $      2,044

1 Subtotals and totals may not foot due to rounding.
2 As presented in Note 9: Segment Reporting in the Notes to Condensed Consolidated Financial Statements.
3 Volume represents sales plus applicable taxes.

Credit Card Revenues
                                           Quarter Ended                            Six Months Ended
                                August 2, 2014         August 3, 2013      August 2, 2014      August 3, 2013
Finance charge revenue       $           61          $             59     $          122     $            120
Interchange - third-party                22                        22                 44                   43
Late fees and other revenue              13                        11                 24                   21
Total Credit card revenues   $           96          $             92     $          190     $            184

. . .

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