Nordstrom Reports Second Quarter 2018 Earnings, Raises Full Year Outlook

Strong Top-line Growth; Digital Sales Up 23 Percent

SEATTLE--(BUSINESS WIRE)--Aug. 16, 2018-- Nordstrom, Inc. (NYSE: JWN) today reported earnings per diluted share for the second quarter ended August 4, 2018 of $0.95, which exceeded Company expectations, reflecting top-line growth across its Full-Price and Off-Price businesses. Based on first half results, the Company raised its full year earnings per diluted share expectations to $3.50 to $3.65 from its prior outlook of $3.35 to $3.55.

Total Company net sales increased 7.1 percent for the second quarter ended August 4, 2018 compared with the quarter ended July 29, 2017. This reflected a favorable shift of approximately 100 basis points primarily due to the impact of the new revenue recognition standard as it relates to the timing of the Anniversary Sale. This impact is expected to fully reverse in the third quarter. Comparable sales are reported on a like-for-like basis with no impact from event shifts due to the 53-week calendar in 2017 or revenue recognition. Comparable sales increased 4.0 percent in the second quarter, compared with the 13-week period ended August 5, 2017.

Nordstrom's customer strategy is centered on three strategic pillars: providing a compelling product offering, delivering outstanding services and experiences and leveraging the strength of the Nordstrom brand. During the quarter, the Company continued its progress in executing its strategy and delivering on its long-term financial commitments for higher returns to shareholders:

• In executing its digital strategy, the Company increased digital sales by 23 percent in the second quarter, compared with 20 percent for the same period last year. Digital sales represented 34 percent of second quarter sales, up from 29 percent a year ago.
• During the first day of its Anniversary Sale, Nordstrom achieved record digital demand, surpassing its previous peak by 80 percent.
• In Off-Price, comparable sales increased 4.0 percent, exceeding expectations.

SECOND QUARTER SUMMARY

• Second quarter net earnings were $162 million compared with $110 million during the same period in fiscal 2017. The increase was driven primarily by higher sales volume, a lower effective tax rate and the impact of the new revenue recognition standard as it relates to the timing of the Anniversary Sale.
• Earnings before interest and taxes ("EBIT") were $246 million, or 6.2 percent of net sales, compared with $217 million, or 5.8 percent of net sales, during the same period in fiscal 2017. The increase in EBIT included a favorable shift of $30 million primarily due to the impact of the new revenue recognition standard as it relates to the timing of the Anniversary Sale, which is expected to fully reverse in the third quarter.
• In Full-Price, comparable sales increased 4.1 percent. The top-ranking merchandise categories were Kids' Apparel and Beauty.
• In Off-Price, comparable sales increased 4.0 percent.
• Sales from Nordstrom Rewards customers represented 58 percent of second quarter sales, compared with 56 percent a year ago.
• Gross profit, as a percentage of net sales, of 35.0 percent increased 91 basis points compared with the same period in fiscal 2017. This increase included a favorable shift of $30 million due to the impact of the new revenue recognition standard as it relates to the timing of the Anniversary Sale, which is expected to fully reverse in the third quarter. In addition, the increase was driven by higher product margins from continued regular price selling trends and leverage on occupancy expenses.
• The Company ended the second quarter with a positive spread between inventory and sales growth, in-line with expectations.
• Selling, general and administrative expenses, as a percentage of net sales, of 31.0 percent increased 71 basis points compared with the same period in fiscal 2017, primarily due to higher supply chain expenses related to planned growth and the Anniversary Sale. The Company is on track to achieve its plan for mid-single-digit growth in selling, general and administrative expenses for the year.
• During the six months ended August 4, 2018, the Company repurchased 1.8 million shares of its common stock for $87 million. A total capacity of $327 million remains available under its existing share repurchase authorization. The actual timing, price, manner and amounts of future share repurchases, if any, will be subject to market and economic conditions and applicable Securities and Exchange Commission ("SEC") rules.

EXPANSION UPDATE

To date in fiscal 2018, the Company opened eight stores, closed two stores and relocated one store.

FISCAL YEAR 2018 OUTLOOK

The Company raised its annual outlook expectations for sales and earnings per diluted share to incorporate its first half results. Nordstrom's current expectations for fiscal 2018 are as follows:

The Company's updated full year outlook incorporated the following assumptions:

• For the second half of fiscal 2018, the Company expects the third quarter to contribute approximately 30 percent of EBIT and the fourth quarter to contribute approximately 70 percent of EBIT.
• Third quarter EBIT margin is expected to deleverage on fixed expenses and reflect an unfavorable shift of $30 million. This represents the reversal of the second quarter benefit of the new revenue recognition standard as it relates to the timing of the Anniversary Sale.
• Fourth quarter EBIT is expected to leverage from higher sales volume and reflect a favorable comparison of $16 million from a one-time employee investment associated with last year's tax reform. When normalizing for this one-time impact, fourth quarter's EBIT contribution to the second half is generally consistent with historical trends.

CONFERENCE CALL INFORMATION

The Company's senior management will host a conference call to discuss second quarter 2018 results and fiscal 2018 outlook at 4:45 p.m. Eastern Daylight Time today. To listen to the live call online and to view conference call slides, which will be posted in advance of the call, visit the Investor Relations section of the Company's corporate website at http://investor.nordstrom.com and go to Webcasts & Presentations. 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 13682106, until the close of business on August 23, 2018.

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 372 stores in 40 states, including 122 full-line stores in the United States, Canada and Puerto Rico; 239 Nordstrom Rack stores; two Jeffrey boutiques; two clearance stores; six 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. The words "will," "may," "designed to," "outlook," "believes," "should," "anticipates," "plans," "expects," "intends," "estimates," "forecasts" and similar expressions identify certain of these forward-looking statements. The Company also may provide forward-looking statements in oral statements or other written materials released to the public. All statements contained or incorporated in this news release or in any other public statements that address such future events or expectations are forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements are discussed in the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 2018 and its Form 10-Q for the fiscal quarter ended May 5, 2018. 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.
SUMMARY OF NET SALES
(unaudited; amounts in millions)

During the first quarter of 2018, we adopted the new revenue recognition standard (Revenue Standard) using the modified retrospective adoption method. Results beginning in the first quarter of 2018 are presented under the new Revenue Standard, while prior period amounts are not adjusted. Also beginning in 2018, we aligned our sales presentation with how we view the results of our operations internally and how our customers view us, by our Full-Price and Off-Price businesses.

Our Full-Price business includes our Nordstrom U.S. full-line stores, Nordstrom.com, Canada, Trunk Club, Jeffrey and Nordstrom Local. Our Off-Price business includes Nordstrom U.S. Rack stores, Nordstromrack.com/HauteLook and Last Chance clearance stores. The following table summarizes net sales and comparable sales within our business for the quarter and six months ended August 4, 2018 compared with the same periods in fiscal 2017:

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

We believe that Adjusted ROIC is a useful financial measure for investors in evaluating the efficiency and effectiveness of the capital we have invested in our business to generate returns. Adjusted ROIC adjusts our operating leases as if they met the criteria for capital leases or we had purchased the properties. This provides additional supplemental information that reflects the investment in our off-balance sheet operating leases, controls for differences in capital structure between us and our competitors and provides investors and credit agencies with another way to comparably evaluate the efficiency and effectiveness of our capital investments over time. In addition, we incorporate Adjusted ROIC into our executive incentive measures and it is an important component of shareholders' return over the long term.

We define Adjusted ROIC as our adjusted net operating profit after tax divided by our average invested capital using the trailing 12-month average. Adjusted 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. Estimated depreciation on capitalized operating leases and average estimated asset base of capitalized operating leases are not calculated in accordance with, or an alternative for, GAAP and should not be considered in isolation or as a substitution of our results as reported under GAAP. The financial measure calculated under GAAP which is most directly comparable to Adjusted ROIC is return on assets.

For the 12 fiscal months ended August 4, 2018, our Adjusted ROIC increased to 10.8% compared with 8.9% for the 12 fiscal months ended July 29, 2017. Results for the prior period were negatively impacted by approximately 310 basis points due to the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016.

The following is a reconciliation of the components of Adjusted ROIC and return on assets:

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 August 4, 2018, our Adjusted Debt to EBITDAR was 2.5, and as of July 29, 2017, it was 2.4.

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:

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 six months ended August 4, 2018, we had Free Cash Flow of $388 compared with $239 for the six months ended July 29, 2017.

Beginning in the first quarter of fiscal 2018, we no longer adjust free cash flow for cash dividends paid. We believe that no longer reducing free cash flow by dividends paid is more reflective of our operating performance and more consistent with the way we manage our business, how our peers calculate free cash flows and prevailing industry practice. Prior period Free Cash Flow financial measures have been recast to conform with current period presentation.

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:

NORDSTROM, INC.
ADJUSTED EBITDA (NON-GAAP FINANCIAL MEASURE)
(unaudited; amounts in millions)

Adjusted earnings before interest, income taxes, depreciation and amortization (“EBITDA”) is our key financial metric to reflect our view of cash flow from net earnings. Adjusted EBITDA excludes significant items which are non-operating in nature in order to evaluate our core operating performance against prior periods and increase comparability with our peers. The financial measure calculated under GAAP which is most directly comparable to Adjusted EBITDA is net earnings. As of August 4, 2018 and July 29, 2017, Adjusted EBITDA was $697 and $650.

Adjusted EBITDA is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for net earnings, overall change in cash or liquidity of the business as a whole. 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 following is a reconciliation of net earnings to Adjusted EBITDA:

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Source: Nordstrom, Inc.

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