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Nordstrom Reports Third Quarter 2017 Earnings

SEATTLE--(BUSINESS WIRE)--Nov. 9, 2017-- Nordstrom, Inc. (NYSE: JWN) today reported earnings per diluted share for the third quarter ended October 28, 2017 of $0.67. The estimated reduction in earnings from several hurricanes affecting stores in Puerto Rico, Florida, and Texas was approximately $0.04. Total Company net sales increased 2.0 percent and comparable sales decreased 0.9 percent, compared with the same quarter last year. The estimated lost sales impact from the hurricanes was approximately $20 million, or 60 basis points.

Nordstrom continued its progress in executing its strategy to improve the customer experience:

  • With a test and learn approach in finding innovative ways to improve speed, convenience and personalization for customers, the Company launched Nordstrom Local, its latest retail concept where customers can shop and access Nordstrom services in a convenient, central location.
  • In executing its digital strategy, the Company delivered online sales growth on a year-to-date basis of 14 percent at Nordstrom.com and 26 percent at Nordstromrack.com/HauteLook.
  • The Company strengthened its presence in top markets through two full-line store relocations in Southern California, a new full-line store in Toronto, Canada, and 11 new Nordstrom Rack stores plus one relocation. These stores feature the Company's latest design concepts and digital experiences.
  • As a result of the Company's ongoing efforts to provide newness and limited-distribution product to customers, Nordstrom proprietary labels continued to outperform the company average.
  • The Nordstrom Rewards loyalty program continues to play an important role in reaching new customers and strengthening existing customer relationships. The Company has 9.9 million active Rewards customers in the U.S. and Canada, up 39 percent, from 7.1 million a year ago. Sales from Nordstrom Rewards customers represented 51 percent of third quarter sales, compared with 45 percent a year ago.

THIRD QUARTER SUMMARY

  • Third quarter net earnings were $114 million and earnings before interest and taxes ("EBIT") were $208 million, or 5.9 percent of net sales, compared with net loss of $10 million and EBIT of $55 million, or 1.6 percent of net sales, during the same period in fiscal 2016.
    • Retail EBIT increased $137 million compared with the same quarter last year, primarily reflecting a goodwill impairment charge of $197 million in 2016.
    • Credit EBIT increased $16 million through the strategic partnership with TD Bank, primarily due to credit card revenues growth of 25 percent.
  • Total Company net sales of $3.5 billion for the third quarter increased 2.0 percent compared with the same period in fiscal 2016. Total Company comparable sales for the third quarter decreased 0.9 percent compared with the same quarter last year.
    • In the Nordstrom brand, including U.S. and Canada full-line stores and Nordstrom.com, net sales when combined with Trunk Club, decreased 1.2 percent and comparable sales decreased 1.9 percent. The top-ranking merchandise categories were Men's Apparel and Kids' Apparel. The West was the top-ranking U.S. geographic region.
    • In the Nordstrom Rack brand, which consists of Nordstrom Rack stores and Nordstromrack.com/HauteLook, net sales increased 5.5 percent and comparable sales increased 0.8 percent. The West was the top-ranking geographic region.
  • Retail gross profit, as a percentage of net sales, of 34.7 percent decreased 12 basis points compared with the same period in fiscal 2016. This primarily reflected higher occupancy expenses related to new store growth for Nordstrom Rack and Canada. Net sales growth of 2 percent exceeded inventory growth of 1 percent.
  • Selling, general and administrative expenses, as a percentage of net sales, of 31.2 percent increased 161 basis points compared with the same period in fiscal 2016. This primarily reflected higher technology and supply chain expenses associated with the Company's growth initiatives.
  • Return on invested capital ("ROIC") for the 12 fiscal months ended October 28, 2017 was 10.7 percent compared with 7.2 percent in the prior 12-month period. Results for the prior period were negatively impacted by approximately 340 basis points due to the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016. A reconciliation of this non-GAAP financial measure to the closest GAAP measure is included below.

EXPANSION UPDATE

To date in fiscal 2017, the Company opened 19 stores, relocated three stores and closed two stores. The Company opened the following stores in the third quarter of 2017:

Location   Store Name   Square

Footage

(000's)

  Timing
     
Nordstrom full-line - U.S.
Los Angeles, California1 Century City 154 October 3
Melrose, California Nordstrom Local 4 October 3
San Diego, California2 University Towne Center 155 October 12
 
Nordstrom full-line - Canada
Toronto, Ontario Sherway Gardens 151 September 15
 
Nordstrom Rack
Daly City, California3 Serramonte Center 40 September 7
Glenarden, Maryland Woodmore Towne Center 30 September 7
Minneapolis, Minnesota IDS Center's Crystal Court 39 September 7
Bellevue, Washington Lincoln Square Expansion 43 September 7
Portland, Oregon Cascade Station 28 October 5
Memphis, Tennessee Poplar Commons 33 October 5
Frisco, Texas The Centre at Preston Ridge 33 October 5
Los Angeles, California FIGat7th 27 October 26
Vacaville, California Nut Tree 27 October 26
Norridge, Illinois Harlem Irving Plaza (The HIP) 33 October 26
New York, New York 31st & 6th 47 October 26
Kirkland, Washington   The Village at Totem Lake   35   October 26
 

1Nordstrom relocated its full-line store at Westside Pavilion in Los Angeles to nearby Century City.
2 Nordstrom relocated its full-line store at University Towne Center in San Diego to another location within the same center.
3 Nordstrom relocated its Nordstrom Rack store in Colma to nearby Serramonte Center in Daly City, California.

   
Number of stores October 28, 2017 October 29, 2016
Nordstrom full-line - U.S.1 117 118
Nordstrom full-line - Canada 6 5
Nordstrom Rack 232 215
Other2 11 10
Total 366 348
1 Nordstrom full-line - U.S. total includes the Nordstrom Local store in California.
2 Other includes Trunk Club clubhouses, Jeffrey boutiques and Last Chance clearance stores.
 
Gross square footage 30,223,000 29,783,000
 

FISCAL YEAR 2017 OUTLOOK

The Company updated its annual outlook expectations for earnings per diluted share to incorporate third quarter results. Nordstrom's current expectations for fiscal 2017 are as follows:

   
Prior Outlook   Current Outlook
Net sales (percent) Approximately 4 Approximately 4
Comparable sales (percent) Approximately flat Approximately flat
Retail EBIT (million) $790 to $840 $755 to $785
Credit EBIT (million) Approximately $145 Approximately $165
Earnings per diluted share $2.85 to $3.00 $2.85 to $2.95
 

The Company's outlook includes the following considerations:

  • The full-year impact from several hurricanes that occurred in the third quarter is estimated to impact sales by $26 million, EBIT by $17 million and EPS by $0.06.
  • The 53rd week is expected to add approximately $200 million to total net sales and approximately $0.02 to $0.03 to earnings per diluted share. The 53rd week is not included in comparable sales calculations.
  • The Anniversary Sale, historically the Company's largest event of the year, spanned across the second and third quarters, consistent with the timing in fiscal 2016.
  • The outlook assumptions for Retail EBIT when compared with fiscal 2016 include increased occupancy expenses related to new stores (Nordstrom Rack, Canada and Manhattan flagship men's store) in addition to higher supply chain and technology costs.
  • Retail EBIT in fiscal 2016 included the following non-operational items: higher credit chargeback expenses associated with an industry change in liability rules and severance charges totaling $30 million, or $0.10 in the first quarter; an impairment charge related to Trunk Club of $197 million in the third quarter; and a non-operational legal settlement gain of $22 million, or $0.10, in the fourth quarter.
  • The outlook assumptions for Credit EBIT when compared with fiscal 2016 incorporate higher credit card revenues including a reduction in amortization expenses of $18 million related to the sale of the credit card portfolio.
  • The income tax rate is estimated to be approximately in line with the year-to-date rate for fiscal 2017.
  • Diluted shares outstanding, excluding any future share repurchases, are estimated at 169 million for fiscal 2017.

CONFERENCE CALL INFORMATION

The Company's senior management will host a conference call to discuss third quarter 2017 results and fiscal 2017 outlook at 4:45 p.m. Eastern Standard Time today. To listen to the live call online and view the conference call slides and the speakers' prepared remarks, visit the Investor Relations section of the Company's corporate website at http://investor.nordstrom.com. An archived webcast with the speakers' prepared remarks and the conference call slides will be available in the Quarterly Earnings section for at least one year. Interested parties may also dial 201-689-8354. A telephone replay will be available beginning approximately three hours after the conclusion of the call by dialing 877-660-6853 or 201-612-7415 and entering Conference ID 13672805, until the close of business on November 16, 2017.

ABOUT NORDSTROM

Nordstrom, Inc. is a leading fashion retailer based in the U.S. Founded in 1901 as a shoe store in Seattle, today Nordstrom operates 366 stores in 40 states, including 122 full-line stores in the United States, Canada and Puerto Rico; 232 Nordstrom Rack stores; two Jeffrey boutiques; two clearance stores; seven Trunk Club clubhouses; and its Nordstrom Local service concept. Additionally, customers are served online through Nordstrom.com, Nordstromrack.com, HauteLook, and TrunkClub.com. Nordstrom, Inc.'s common stock is publicly traded on the NYSE under the symbol JWN.

Certain statements in this news release 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, our anticipated financial outlook for the fiscal year ending February 3, 2018, our anticipated annual total and comparable sales rates, our anticipated new store openings in existing, new and international markets, our anticipated Return on Invested Capital and trends in our operations. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Our 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 domestic and international markets, acquisitions, investments in our stores and online, as well as investments in technology, our ability to realize the anticipated benefits from growth initiatives and our ability to provide a seamless experience across all channels; our ability to respond to the business and retail environment, fashion trends and consumer preferences, including changing expectations of service and experience in stores and online, and evolve our business model; timely and effective execution of our ecommerce initiatives and ability to manage the costs and organizational changes associated with this evolving business model; successful execution of our information technology strategy; our ability to effectively utilize data in strategic planning and decision making; 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; efficient and proper allocation of our capital resources; the impact of any systems or network 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; effective inventory management processes and systems, fulfillment processes and systems, disruptions in our supply chain and our ability to control costs; the effect of the announcement by the members of the Nordstrom family relating to the exploration of a possible “going private transaction” on our relationships with our customers, employees, suppliers and partners, operating results and business generally; our ability to safeguard our reputation and maintain our vendor relationships; our ability to maintain relationships with and motivate our employees and to effectively attract, develop and retain our future leaders, which could be impacted by the uncertainty about the possibility of a “going private transaction;” our ability to realize the expected benefits, respond to potential risks and appropriately manage costs associated with our program agreement with TD Bank USA, N.A. (“TD”); the effectiveness of planned advertising, marketing and promotional campaigns in the highly competitive and promotional retail industry; the timing, price, manner and amounts of future share repurchases by the Company, if any, or any share issuances by the Company, including issuances associated with option exercises or other matters; the impact of economic and market conditions and the resultant impact on consumer spending patterns; the impact of economic or political conditions in the U.S. and countries where our third party vendors operate; weather conditions, natural disasters, health hazards, national security or other market disruptions, or the prospects of these events and the resulting impact on consumer spending patterns or information technology systems and communications; our compliance with applicable domestic and international laws, regulations and ethical standards, including those related to banking, employment and tax and the outcome of claims and litigation and resolution of such matters; the impact of the current regulatory environment and financial system and health care reforms; and compliance with debt covenants, availability and cost of credit, changes in our credit rating, changes in interest rates, debt repayment patterns and personal bankruptcies. Our SEC reports, including our Form 10-K for the fiscal year ended January 28, 2017, and our Form 10-Q for the fiscal quarters ended April 29, 2017 and July 29, 2017, contain other information on these and other factors that could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances, except as required by law.

 

NORDSTROM, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited; amounts in millions, except per share amounts)

   
Quarter Ended Nine Months Ended
October 28, 2017   October 29, 2016 October 28, 2017   October 29, 2016
Net sales $ 3,541 $ 3,472 $ 10,537 $ 10,255
Credit card revenues, net 88   70   239   186  
Total revenues 3,629 3,542 10,776 10,441
Cost of sales and related buying and occupancy costs (2,315 ) (2,261 ) (6,921 ) (6,720 )
Selling, general and administrative expenses (1,106 ) (1,029 ) (3,280 ) (3,143 )
Goodwill impairment   (197 )   (197 )
Earnings before interest and income taxes 208 55 575 381
Interest expense, net (28 ) (30 ) (104 ) (90 )
Earnings before income taxes 180 25 471 291
Income tax expense (66 ) (35 ) (185 ) (138 )
Net earnings (loss) $ 114   $ (10 ) $ 286   $ 153  
 
Earnings (Loss) per share:
Basic $ 0.68 $ (0.06 ) $ 1.72 $ 0.88
Diluted $ 0.67 $ (0.06 ) $ 1.70 $ 0.87
 
Weighted-average shares outstanding:
Basic 166.6 173.4 166.7 173.3
Diluted 168.8 173.4 168.8 175.6
 

NORDSTROM, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited; amounts in millions)

     
October 28, 2017 January 28, 2017 October 29, 2016
Assets
Current assets:
Cash and cash equivalents $ 672 $ 1,007 $ 531
Accounts receivable, net 211 199 216
Merchandise inventories 2,434 1,896 2,411
Prepaid expenses and other 162   140   227  
Total current assets 3,479 3,242 3,385
 
Land, property and equipment (net of accumulated depreciation of $5,952, $5,596 and $5,462) 3,940 3,897 3,865
Goodwill 238 238 238
Other assets 529   481   478  
Total assets $ 8,186   $ 7,858   $ 7,966  
 
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,815 $ 1,340 $ 1,653
Accrued salaries, wages and related benefits 433 455 391
Other current liabilities 1,166 1,223 1,186
Current portion of long-term debt 57   11   11  
Total current liabilities 3,471 3,029 3,241
 
Long-term debt, net 2,681 2,763 2,767
Deferred property incentives, net 510 521 532
Other liabilities 670 675 566
 
Commitments and contingencies
 
Shareholders' equity:
Common stock, no par value: 1,000 shares authorized; 166.6, 170.0 and 173.2 shares issued and outstanding 2,785 2,707 2,651
Accumulated deficit (1,899 ) (1,794 ) (1,742 )
Accumulated other comprehensive loss (32 ) (43 ) (49 )
Total shareholders' equity 854   870   860  
Total liabilities and shareholders' equity $ 8,186   $ 7,858   $ 7,966  
 

NORDSTROM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; amounts in millions)

 
Nine Months Ended
October 28, 2017   October 29, 2016
Operating Activities
Net earnings $ 286 $ 153
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization expenses 479 480
Goodwill impairment 197
Amortization of deferred property incentives and other, net (62 ) (59 )
Deferred income taxes, net (82 ) (14 )
Stock-based compensation expense 59 68
Change in operating assets and liabilities:
Accounts receivable (11 ) (20 )
Merchandise inventories (465 ) (393 )
Prepaid expenses and other assets (35 ) 25
Accounts payable 419 360
Accrued salaries, wages and related benefits (22 ) (26 )
Other current liabilities (53 ) 33
Deferred property incentives 55 54
Other liabilities 29   20  
Net cash provided by operating activities 597   878  
 
Investing Activities
Capital expenditures (536 ) (625 )
Other, net 29   47  
Net cash used in investing activities (507 ) (578 )
 
Financing Activities
Proceeds from long-term borrowings, net of discounts 635
Principal payments on long-term borrowings (658 ) (7 )
Decrease in cash book overdrafts (3 ) (127 )
Cash dividends paid (185 ) (192 )
Payments for repurchase of common stock (211 ) (91 )
Proceeds from issuances under stock compensation plans 25 51
Tax withholding on share-based awards (7 ) (4 )
Other, net (21 ) 6  
Net cash used in financing activities (425 ) (364 )
 
Net decrease in cash and cash equivalents (335 ) (64 )
Cash and cash equivalents at beginning of period 1,007   595  
Cash and cash equivalents at end of period $ 672   $ 531  
 

NORDSTROM, INC.
STATEMENTS OF EARNINGS — RETAIL BUSINESS AND CREDIT
(unaudited; dollar amounts in millions)

Retail Business

Our Retail Business includes our Nordstrom U.S. and Canada full-line stores, Nordstrom.com, Nordstrom Rack stores, Nordstromrack.com/HauteLook, Trunk Club, Jeffrey boutiques and Last Chance clearance stores. It also includes unallocated corporate center expenses. The following tables summarize the results of our Retail Business for the quarter and nine months ended October 28, 2017 compared with the same periods in fiscal 2016:

 
Quarter Ended
October 28, 2017   October 29, 2016
Amount   % of net sales1 Amount   % of net sales1
Net sales $ 3,541 100.0 % $ 3,472 100.0 %
Cost of sales and related buying and occupancy costs (2,311 ) (65.3 %) (2,262 ) (65.2 %)
Gross profit 1,230 34.7 % 1,210 34.8 %
Selling, general and administrative expenses (1,070 ) (30.2 %) (990 ) (28.5 %)
Goodwill impairment   % (197 ) (5.7 %)
Earnings before interest and income taxes $ 160   4.5 % $ 23   0.6 %
 
Nine Months Ended
October 28, 2017 October 29, 2016
Amount % of net sales1 Amount % of net sales1
Net sales $ 10,537 100.0 % $ 10,255 100.0 %
Cost of sales and related buying and occupancy costs (6,914 ) (65.6 %) (6,718 ) (65.5 %)
Gross profit 3,623 34.4 % 3,537 34.5 %
Selling, general and administrative expenses (3,172 ) (30.1 %) (3,024 ) (29.5 %)
Goodwill impairment   % (197 ) (1.9 %)
Earnings before interest and income taxes $ 451   4.3 % $ 316   3.1 %
 

1 Subtotals and totals may not foot due to rounding.

The following table summarizes net sales and comparable sales within our Retail Business:

   
Quarter Ended Nine Months Ended
October 28, 2017   October 29, 2016 October 28, 2017   October 29, 2016
Sales   Comp % Sales   Comp % Sales  

Comp %

Sales   Comp %
Nordstrom full-line stores - U.S. $ 1,488 (4.9 %) $ 1,568 (4.5 %) $ 4,858 (5.2 %) $ 5,128 (6.3 %)
Nordstrom.com 534   7.5 % 497   20.1 % 1,901   13.5 % 1,675   10.3 %
Full-price 2,022 (1.9 %) 2,065 0.5 % 6,759 (0.5 %) 6,803 (2.6 %)
 
Nordstrom Rack 966 (5.0 %) 958 0.9 % 2,910 (2.3 %) 2,777 0.4 %
Nordstromrack.com/HauteLook 212   33.6 % 159   23.2 % 609   26.3 % 482   32.9 %
Off-price 1,178 0.8 % 1,117 3.9 % 3,519 2.0 % 3,259 4.6 %
 
Other retail1 151   135   420   384  
Retail segment 3,351 3,317 10,698 10,446
Corporate/Other 190   155   (161 ) (191 )
Total net sales $ 3,541   (0.9 %) $ 3,472   2.4 % $ 10,537   0.1 % $ 10,255   (0.2 %)
 

1 Other retail includes Nordstrom Canada full-line stores, Trunk Club and Jeffrey boutiques.

Credit

The following table summarizes the results of our Credit segment for the quarter and nine months ended October 28, 2017 compared with the same periods in 2016:

   
Quarter Ended Nine Months Ended
October 28, 2017   October 29, 2016 October 28, 2017   October 29, 2016
Credit card revenues, net $ 88 $ 70 $ 239 $ 186
Credit expenses (40 ) (38 ) (115 ) (121 )
Earnings before interest and income taxes $ 48   $ 32   $ 124   $ 65  
 

NORDSTROM, INC.
RETURN ON INVESTED CAPITAL (NON-GAAP FINANCIAL MEASURE)
(unaudited; dollar amounts in millions)

We believe ROIC is a useful financial measure for investors in evaluating the efficiency and effectiveness of our use of capital and believe ROIC is an important component of shareholders' return over the long term. In addition, we incorporate ROIC in our executive incentive compensation measures. For the 12 fiscal months ended October 28, 2017, our ROIC increased to 10.7% compared with 7.2% for the 12 fiscal months ended October 29, 2016. Results for the prior period were negatively impacted by approximately 340 basis points due to the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016.

We define ROIC as our net operating profit after tax divided by our average invested capital using the trailing 12-month average. ROIC is not a measure of financial performance under generally accepted accounting principles ("GAAP") and should be considered in addition to, and not as a substitute for, return on assets, net earnings, total assets or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies' methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to ROIC is return on assets. The following is a reconciliation of the components of ROIC and return on assets:

 
12 Fiscal Months Ended
October 28, 2017   October 29, 2016
Net earnings $ 488 $ 333
Add: income tax expense 376 252
Add: interest expense 139   121  
Earnings before interest and income tax expense 1,003 706
 
Add: rent expense 237 195
Less: estimated depreciation on capitalized operating leases1 (126 ) (103 )
Net operating profit 1,114 798
 
Less: estimated income tax expense (486 ) (383 )
Net operating profit after tax $ 628   $ 415  
 
Average total assets $ 8,009 $ 7,987
Less: average non-interest-bearing current liabilities2 (3,211 ) (3,105 )
Less: average deferred property incentives and deferred rent liability2 (646 ) (541 )
Add: average estimated asset base of capitalized operating leases3 1,718   1,452  
Average invested capital $ 5,870   $ 5,793  
 
Return on assets4 6.1 % 4.2 %
ROIC4 10.7 % 7.2 %
 

1 Capitalized operating leases is our best estimate of the asset base we would record for our leases that are classified as operating if they had met the criteria for a capital lease or we had purchased the property. Asset base is calculated as described in footnote 3 below.
2 Balances associated with our deferred rent liability have been classified as long-term liabilities in the current period.
3 Based upon the trailing 12-month average of the monthly asset base. The asset base for each month is calculated as the trailing 12 months of rent expense multiplied by eight. The multiple of eight times rent expense is a commonly used method of estimating the asset base we would record for our capitalized operating leases described in footnote 1.
4 Results for the 12 fiscal months ended October 29, 2016 include the $197 impact of the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016, which negatively impacted the prior period return on assets by approximately 250 basis points and ROIC by 340 basis points.

NORDSTROM, INC.
ADJUSTED DEBT TO EBITDAR (NON-GAAP FINANCIAL MEASURE)
(unaudited; dollar amounts in millions)

Adjusted Debt to earnings before interest, income taxes, depreciation, amortization and rent ("EBITDAR") is one of our key financial metrics, and we believe that our debt levels are best analyzed using this measure. Our goal is to manage debt levels to maintain an investment-grade credit rating and operate with an efficient capital structure. In evaluating our debt levels, this measure provides a reflection of our credit worthiness that could impact our credit rating and borrowing costs. We also have a debt covenant that requires an adjusted debt to EBITDAR leverage ratio of no more than four times. As of October 28, 2017 and October 29, 2016, our Adjusted Debt to EBITDAR was 2.5.

Adjusted Debt to EBITDAR is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, debt to net earnings, net earnings, debt or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies' methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to Adjusted Debt to EBITDAR is debt to net earnings. The following is a reconciliation of the components of Adjusted Debt to EBITDAR and debt to net earnings:

   
20171 20161
Debt $ 2,738 $ 2,778
Add: estimated capitalized operating lease liability2 1,896 1,561
Less: fair value hedge adjustment included in long-term debt   (14 )
Adjusted Debt $ 4,634   $ 4,325  
 
Net earnings $ 488 $ 333
Add: income tax expense 376 252
Add: interest expense, net 135   121  
Earnings before interest and income taxes 999 706
 
Add: depreciation and amortization expenses 644 631
Add: rent expense 237 195
Add: non-cash acquisition-related charges3 10   197  
EBITDAR $ 1,890   $ 1,729  
 
Debt to Net Earnings4 5.6 8.3
Adjusted Debt to EBITDAR 2.5 2.5
 

1 The components of Adjusted Debt are as of October 28, 2017 and October 29, 2016, while the components of EBITDAR are for the 12 months ended October 28, 2017 and October 29, 2016.
2 Based upon the estimated lease liability as of the end of the period, calculated as the trailing 12 months of rent expense multiplied by eight. The multiple of eight times rent expense is a commonly used method of estimating the debt we would record for our leases that are classified as operating if they had met the criteria for a capital lease or we had purchased the property.
3 Non-cash acquisition-related charges for the 12 months ended October 29, 2016 include the goodwill impairment charge of $197 related to Trunk Club.
4 Results for the period ended October 29, 2016 include the $197 impact of the Trunk Club goodwill impairment charge, which approximates 310 basis points.

NORDSTROM, INC.
FREE CASH FLOW (NON-GAAP FINANCIAL MEASURE)
(unaudited; amounts in millions)

Free Cash Flow is one of our key liquidity measures, and when used in conjunction with GAAP measures, provides investors with a meaningful analysis of our ability to generate cash from our business. For the nine months ended October 28, 2017, we had Free Cash Flow of ($127) compared with ($66) for the nine months ended October 29, 2016.

Free Cash Flow is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, operating cash flows or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies' methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to Free Cash Flow is net cash provided by operating activities. The following is a reconciliation of net cash provided by operating activities to Free Cash Flow:

 
Nine Months Ended
October 28, 2017   October 29, 2016
Net cash provided by operating activities $ 597 $ 878
Less: capital expenditures (536 ) (625 )
Less: cash dividends paid (185 ) (192 )
Less: change in cash book overdrafts (3 ) (127 )
Free Cash Flow $ (127 ) $ (66 )

Source: Nordstrom, Inc.

Nordstrom, Inc.
INVESTOR CONTACT:
Trina Schurman, 206-303-6503
or
MEDIA CONTACT:
Gigi Ganatra Duff, 206-303-3030