UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 30, 2005 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 001-15059 Nordstrom, Inc. ______________________________________________________ (Exact name of Registrant as specified in its charter) Washington 91-0515058 _______________________________ ___________________ (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1617 Sixth Avenue, Seattle, Washington 98101 ____________________________________________________ (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (206) 628-2111 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO _____ _____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO _____ _____ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X _____ _____ Common stock outstanding as of August 19, 2005: 273,352 shares of common stock. 1 of 22 2 of 22
NORDSTROM, INC. AND SUBSIDIARIES -------------------------------- INDEX ----- Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Statements of Earnings Quarter and Year to Date ended July 30, 2005 and July 31, 2004 3 Condensed Consolidated Balance Sheets July 30, 2005, January 29, 2005 and July 31, 2004 4 Condensed Consolidated Statements of Shareholders' Equity Year to Date ended July 30, 2005 and July 31, 2004 5 Condensed Consolidated Statements of Cash Flows Year to Date ended July 30, 2005 and July 31, 2004 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 4. Controls and Procedures 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 6. Exhibits 20 SIGNATURES 21 INDEX TO EXHIBITS 22 (1) Subtotals and totals may not foot due to rounding (2) Percent of earnings before income taxes The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements. 3 of 22
NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (amounts in thousands except per share amounts and percentages) (unaudited) Quarter Ended Year to Date Ended ---------------------- ---------------------- July 30, July 31, July 30, July 31, 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net sales $2,106,438 $1,953,480 $3,760,912 $3,488,970 Cost of sales and related buying and occupancy costs (1,347,515) (1,270,892) (2,393,680) (2,243,824) ---------- ---------- ---------- ---------- Gross profit 758,923 682,588 1,367,232 1,245,146 Selling, general and administrative expenses (551,196) (536,233) (1,016,618) (988,967) ---------- ---------- ---------- ---------- Operating income 207,727 146,355 350,614 256,179 Interest expense, net (10,904) (14,091) (23,543) (50,775) Other income including finance charges, net 44,970 43,002 87,702 82,489 ---------- ---------- --------- -------- Earnings before income taxes 241,793 175,266 414,773 287,893 Income tax expense (92,875) (68,351) (161,317) (112,251) ---------- ---------- --------- -------- Net earnings $ 148,918 $ 106,915 $ 253,456 $ 175,642 ========== ========== ========= ========== Basic earnings per share $ 0.54 $ 0.38 $ 0.93 $ 0.63 Diluted earnings per share $ 0.53 $ 0.37 $ 0.91 $ 0.62 Basic shares 273,379 281,469 273,225 279,844 Diluted shares 279,169 286,994 278,832 285,481 Quarter Ended Year to Date Ended ---------------------- ---------------------- July 30, July 31, July 30, July 31, (% of Net sales)(1) 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales and related buying and occupancy costs (64.0%) (65.1%) (63.6%) (64.3%) ---------- ---------- ---------- ---------- Gross profit 36.0% 34.9% 36.4% 35.7% Selling, general and administrative expenses (26.2%) (27.5%) (27.0%) (28.3%) ---------- ---------- ---------- ---------- Operating income 9.9% 7.5% 9.3% 7.3% Interest expense, net (0.5%) (0.7%) (0.6%) (1.5%) Other income including finance charges, net 2.1% 2.2% 2.3% 2.4% ---------- ---------- ---------- ---------- Earnings before income taxes 11.5% 9.0% 11.0% 8.3% Income tax expense(2) (38.4%) (39.0%) (38.9%) (39.0%) ---------- ---------- ---------- ---------- Net earnings 7.1% 5.5% 6.7% 5.0% ========== ========== ========== ========== The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements. 4 of 22
NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (amounts in thousands) (unaudited) July 30, January 29, July 31, 2005 2005 2004 ---------- ---------- ---------- ASSETS Current Assets: Cash and cash equivalents $ 462,875 $ 360,623 $ 319,332 Short-term investments 34,000 41,825 165,575 Accounts receivable, net 701,882 645,663 721,510 Investment in asset backed securities 515,596 422,416 381,940 Merchandise inventories 989,365 917,182 1,024,853 Current deferred tax assets 140,745 131,547 132,158 Prepaid expenses and other 50,101 53,188 48,105 ---------- ---------- ---------- Total current assets 2,894,564 2,572,444 2,793,473 Land, buildings and equipment (net of accumulated depreciation of $2,444,359, $2,310,607 and $2,221,299) 1,771,492 1,780,366 1,772,752 Goodwill, net 51,714 51,714 51,714 Tradename, net 84,000 84,000 84,000 Other assets 114,643 116,866 110,942 ---------- ---------- ---------- TOTAL ASSETS $4,916,413 $4,605,390 $4,812,881 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 714,429 $ 482,394 $ 699,432 Accrued salaries, wages and related benefits 226,307 287,904 241,823 Other current liabilities 365,569 354,201 305,992 Income taxes payable 107,713 115,556 86,309 Current portion of long-term debt 4,840 101,097 103,129 ---------- ---------- ---------- Total current liabilities 1,418,858 1,341,152 1,436,685 Long-term debt 923,952 929,010 927,227 Deferred property incentives, net 355,197 367,087 391,837 Other liabilities 199,724 179,147 185,692 Shareholders' Equity: Common stock, no par: 1,000,000 shares authorized; 273,683, 271,331 and 282,871 shares issued and outstanding 646,684 552,655 517,718 Unearned stock compensation (550) (299) (448) Retained earnings 1,365,888 1,227,303 1,346,035 Accumulated other comprehensive earnings 6,660 9,335 8,135 ---------- ---------- ---------- Total shareholders' equity 2,018,682 1,788,994 1,871,440 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,916,413 $4,605,390 $4,812,881 ========== ========== ========== The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements. 5 of 22
NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (amounts in thousands except per share amounts) (unaudited) Accumulated Other Common Stock Unearned Retained Comprehensive Shares Amount Compensation Earnings Earnings Total ----------------------------------------------------------------------- Balance at January 29, 2005 271,331 $552,655 $(299) $1,227,303 $9,335 $1,788,994 Net earnings - - - 253,456 - 253,456 Other comprehensive earnings: Foreign currency translation adjustment - - - - (1,743) (1,743) Fair value adjustment to investment in asset backed securities, net of tax of $596 - - - - (932) (932) -------- Comprehensive net earnings - - - - - 250,781 Cash dividends paid ($0.15 per share) - - - (40,994) - (40,994) Issuance of common stock for: Stock option plans 4,389 81,439 - - - 81,439 Employee stock purchase plan 532 9,484 - - - 9,484 Stock-based compensation 124 3,106 (251) - - 2,855 Repurchase of common stock (2,693) - - (73,877) - (73,877) --------------------------------------------------------------------- Balance at July 30, 2005 273,683 $646,684 $(550) $1,365,888 $6,660 $2,018,682 ===================================================================== Accumulated Other Common Stock Unearned Retained Comprehensive Shares Amount Compensation Earnings Earnings Total ----------------------------------------------------------------------- Balance at January 31, 2004 276,753 $424,645 $(597) $1,201,093 $8,868 $1,634,009 Net earnings - - - 175,642 - 175,642 Other comprehensive earnings: Foreign currency translation adjustment - - - - 160 160 Fair value adjustment to investment in asset backed securities, net of tax of $571 - - - - (893) (893) -------- Comprehensive net earnings - - - - - 174,909 Cash dividends paid ($0.11 per share) - - - (30,700) - (30,700) Issuance of common stock for: Stock option plans 5,393 82,040 - - - 82,040 Employee stock purchase plan 570 6,683 - - - 6,683 Stock-based compensation 155 4,350 149 - - 4,499 --------------------------------------------------------------------- Balance at July 31, 2004 282,871 $517,718 $(448) $1,346,035 $8,135 $1,871,440 ===================================================================== The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements. 6 of 22
NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) (unaudited) Year to Date Ended ------------------------- July 30, July 31, 2005 2004 ---------- ---------- OPERATING ACTIVITIES: Net earnings $253,456 $175,642 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of buildings and equipment 137,436 130,235 Amortization of deferred property incentives and other, net (15,664) (15,690) Stock-based compensation expense 7,474 5,482 Deferred income taxes, net 2,420 (3,595) Tax benefit on stock option exercises and employee stock purchases 26,872 17,823 Provision for bad debt expense 10,064 12,731 Change in operating assets and liabilities: Accounts receivable (67,230) (68,087) Investment in asset backed securities (94,112) (111,110) Merchandise inventories (71,717) (111,810) Prepaid expenses (71) (463) Other assets (1,936) (10,462) Accounts payable 191,087 193,469 Accrued salaries, wages and related benefits (67,260) (34,864) Other current liabilities (938) (8,710) Income taxes payable (7,842) 1,505 Property incentives 21,613 689 Other liabilities 15,959 19,529 ---------- ---------- Net cash provided by operating activities 339,611 192,314 ---------- ---------- INVESTING ACTIVITIES: Capital expenditures (131,384) (102,201) Proceeds from sale of assets - 5,473 Sales of short-term investments 297,325 1,979,050 Purchases of short-term investments (289,500) (1,968,625) Other, net (139) 205 ---------- ---------- Net cash used in investing activities (123,698) (86,098) ---------- ---------- FINANCING ACTIVITIES: Principal payments on long-term debt (98,650) (201,325) Increase in cash book overdrafts 35,633 33,959 Proceeds from exercise of stock options 55,413 64,624 Proceeds from employee stock purchase plan 8,640 6,277 Cash dividends paid (40,994) (30,700) Repurchase of common stock (73,913) - Other, net 210 - ---------- ---------- Net cash used in financing activities (113,661) (127,165) ---------- ---------- Net increase (decrease) in cash and cash equivalents 102,252 (20,949) Cash and cash equivalents at beginning of period 360,623 340,281 ---------- ---------- Cash and cash equivalents at end of period $462,875 $319,332 ========== ========== NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts and percentages) (unaudited) Note 1 - Summary of Significant Accounting Policies Basis of Presentation - --------------------- The accompanying condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in our 2004 Annual Report. The same accounting policies are followed for preparing quarterly and annual financial data. All adjustments necessary for the fair presentation of the results of operations, financial position and cash flows have been included and are of a normal, recurring nature. Our business, like that of other retailers, is subject to seasonal fluctuations. Our Anniversary Sale in July and the holidays in December typically result in higher sales in the second and fourth quarters of our fiscal years. Accordingly, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. Critical Accounting Policies - ---------------------------- The preparation of our financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We regularly evaluate our estimates, including those related to off-balance sheet financing, inventory valuation, sales return accruals, self-insurance liabilities, doubtful accounts, intangible assets, income taxes, post- retirement benefits, contingent liabilities and litigation. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. Our accounting policies and methodologies in 2005 are consistent with those discussed in our 2004 Annual Report. Two-for-one Stock Split - ----------------------- On May 24, 2005, our Board of Directors approved a two-for-one stock split of our outstanding common stock and a proportional increase in the number of common shares authorized from 500,000 to 1,000,000. Additional shares issued as a result of the stock split were distributed on June 30, 2005 to shareholders of record as of June 13, 2005. The shares and per share information included herein have been adjusted to reflect this stock split. Stock Compensation - ------------------ We apply APB No. 25, "Accounting for Stock Issued to Employees," in measuring compensation costs under our stock-based compensation programs, which is described more fully in our 2004 Annual Report. We expect to adopt SFAS No. 123(R), "Share-Based Payment" in the first quarter of 2006. In connection with the implementation of SFAS No. 123(R), the SEC Staff issued additional guidance recently for stock options granted to employees who will be eligible to retire before the normal vesting of their stock options. If we had followed the SEC Staff's recently issued guidance, the impact would be immaterial in the first half of 2005 and 2004. The table below illustrates the effect on net earnings and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." 7 of 22 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts and percentages) (unaudited) Note 1 - Summary of Significant Accounting Policies (Cont.) Note 2 - Post-retirement Benefits The expense components of our Supplemental Executive Retirement Plan, which provides retirement benefits to certain officers and select employees, are as follows:
Quarter Ended Year to Date Ended ---------------------- --------------------- July 30, July 31, July 30, July 31, 2005 2004 2005 2004 ---------- ---------- ---------- --------- Net earnings, as reported $148,918 $106,915 $253,456 $175,642 Add: stock-based compensation expense included in reported net earnings, net of tax 3,696 2,573 4,567 3,344 Deduct: stock-based compensation expense determined under fair value, net of tax (7,911) (7,848) (13,628) (13,673) ---------- ---------- ---------- --------- Pro forma net earnings $144,703 $101,640 $244,395 $165,313 ========== ========== ========== ========= Earnings per share: Basic - as reported $0.54 $0.38 $0.93 $0.63 Diluted - as reported $0.53 $0.37 $0.91 $0.62 Basic - pro forma $0.53 $0.36 $0.89 $0.59 Diluted - pro forma $0.52 $0.35 $0.88 $0.58 8 of 22
Quarter Ended Year to Date Ended ------------------------ ------------------------ July 30, July 31, July 30, July 31, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Service cost $496 $372 $909 $744 Interest cost 1,027 991 2,045 1,982 Amortization of net loss 413 386 827 772 Amortization of prior service cost 255 240 495 480 ----------- ----------- ----------- ----------- Total expense $2,191 $1,989 $4,276 $3,978 =========== =========== =========== =========== NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts and percentages) (unaudited) Note 3 - Earnings Per Share Note 4 - Accounts Receivable The components of accounts receivable are as follows:
Quarter Ended Year to Date Ended ------------------------ ------------------------ July 30, July 31, July 30, July 31, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Net earnings $148,918 $106,915 $253,456 $175,642 =========== =========== =========== =========== Basic shares 273,379 281,469 273,225 279,844 Dilutive effect of stock options and performance share units 5,790 5,525 5,607 5,637 ----------- ----------- ----------- ----------- Diluted shares 279,169 286,994 278,832 285,481 =========== =========== =========== =========== Basic earnings per share $0.54 $0.38 $0.93 $0.63 Diluted earnings per share $0.53 $0.37 $0.91 $0.62 Antidilutive stock options and other 150 - 150 20 Our restricted trade receivables relate to our Nordstrom private label retail card, which back the $300,000 Class A notes and the $150,000 variable funding note. The unrestricted trade receivables consist primarily of our Faconnable trade receivables and Nordstrom private label receivables that are not eligible for securitization, such as foreign and business receivables exceeding a contractual threshold. Other accounts receivable consist primarily of credit card receivables due from third party financial institutions and vendor rebates, which are believed to be fully realizable as they are collected soon after they are earned. 9 of 22
------------------------------------- July 30, January 29, July 31, 2005 2005 2004 ----------- ----------- ----------- Trade receivables: Unrestricted $ 29,182 $ 31,400 $ 24,228 Restricted 601,972 568,062 618,109 Allowance for doubtful accounts (18,259) (19,065) (19,934) ----------- ----------- ----------- Trade receivables, net 612,895 580,397 622,403 Other 88,987 65,266 99,107 ----------- ----------- ----------- Accounts receivable, net $701,882 $645,663 $721,510 =========== =========== =========== NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts and percentages) (unaudited) Note 5 - Investment in Asset Backed Securities Our investment in asset backed securities and the off-balance sheet financing are described in Note 9 of our 2004 Annual Report. The following table presents the co-branded Nordstrom VISA credit card balances and the estimated fair value of our investment in asset backed securities: In 2004, we revised the repayment period assumption in our valuation model that we use to determine the fair value of the VISA Trust. The 2004 repayment period assumption is based on historical payment, default and finance charge yield experience on a specific account basis. The prior repayment period assumption was based on our ongoing payment experience, which included payments by card holders who pay their account balance in full each month. While the assumptions used below are different in 2004, the impact of the assumption change was not significant and does not reflect a change in the underlying quality of the portfolio. The following table presents the key assumptions we use to value the investment in asset backed securities:
-------------------------------- July 30, January 29, July 31, 2005 2005 2004 ---------- ---------- ---------- Total face value of co-branded Nordstrom VISA credit card principal receivables $703,237 $612,549 $567,975 ========== ========== ========== Securities issued by the VISA Trust: Off-balance sheet (sold to third parties): 2002 Class A & B Notes at par value $200,000 $200,000 $200,000 ========== ========== ========== Amounts recorded on balance sheet: Investment in asset backed securities at fair value $515,596 $422,416 $381,940 ========== ========== ========== 10 of 22
------------------------------------------ July 30, January 29, July 31, 2005 2005 2004 ------------ ------------ ------------ Weighted average remaining life (in months) 7.2 8.1 2.3 Average credit losses 6.9% 6.9% 5.0% Average gross yield 17.5% 15.8% 17.7% Weighted average coupon on issued securities 4.6% 3.8% 1.8% Average payment rates 8.2% 7.5% 24.1% Discount rate on investment in asset backed securities 5.6% to 9.7% 4.5% to 9.0% 7.5% to 13.3% NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts and percentages) (unaudited) Note 5 - Investment in Asset Backed Securities (Cont.) The following table summarizes the income earned by the investment in asset backed securities that is included in other income including finance charges, net on the condensed consolidated statements of earnings: Note 6 - Debt We retired the remaining $96,027 of our 6.7% medium-term notes when they matured in July 2005. To manage our interest rate risk, we have an interest rate swap outstanding recorded in other liabilities. Our swap has a $250,000 notional amount, expires in 2009 and is designated as a fully effective fair value hedge. Under the agreement, we receive a fixed rate of 5.63% and pay a variable rate based on LIBOR plus a margin of 2.3% set at six-month intervals (6.238% at July 30, 2005.) The fair value of our interest rate swap is as follows:
Quarter Ended Year to Date Ended ------------------------ ------------------------ July 30, July 31, July 30, July 31, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Interest income $18,403 $13,426 $32,567 $25,668 Gains on sales of receivables and other income 7,458 3,953 13,344 7,755 ----------- ----------- ----------- ----------- $25,861 $17,379 $45,911 $33,423 =========== =========== =========== =========== 11 of 22
------------------------------------- July 30, January 29, July 31, 2005 2005 2004 ----------- ----------- ----------- Interest rate swap fair value $(10,507) $(7,821) $(11,901) NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts and percentages) (unaudited) Note 7 - Segment Reporting The following tables set forth the information for our reportable segments and a reconciliation to the consolidated totals: As of July 30, 2005, January 29, 2005, and July 31, 2004, Retail Stores assets included $35,998 of goodwill and $84,000 of tradename, and Catalog/Internet assets included $15,716 of goodwill. (1) Beginning in the first quarter of 2005, we started to integrate the merchandise buying and marketing activities of our Retail Stores and Catalog/Internet segments. In 2005, the expenses for these activities are included in the Retail Stores segment. (2) During the first quarter of 2004, we retired $196,770 of our 8.95% senior notes and $973 of our 6.7% medium-term notes for a total cash payment of $219,587. We recorded a pre-tax charge of $20,842 in interest expense, net related to this purchase in Corporate and Other. 12 of 22
Quarter ended Retail Credit Catalog/ Corporate July 30, 2005 Stores(1) Operations Internet and Other Eliminations Total - --------------------------------------------------------------------------------------------------- Net sales $2,020,234 $- $86,204 $- $- $2,106,438 Intersegment revenues 4,920 11,826 - - (16,746) - Interest expense, net (144) (6,311) - (4,449) - (10,904) Other income including finance charges, net (3,364) 58,706 (17) (10,355) - 44,970 Earnings before taxes 273,585 13,408 10,253 (55,453) - 241,793 Quarter ended Retail Credit Catalog/ Corporate July 31, 2004 Stores Operations Internet and Other Eliminations Total - --------------------------------------------------------------------------------------------------- Net sales $1,868,808 $- $84,672 $- $- $1,953,480 Intersegment revenues 9,723 11,051 - - (20,774) - Interest expense, net (138) (5,862) 18 (8,109) - (14,091) Other income including finance charges, net (1,176) 51,613 (212) (7,223) - 43,002 Earnings before taxes 211,593 9,837 4,246 (50,410) - 175,266 Year to date ended Retail Credit Catalog/ Corporate July 30, 2005 Stores(1) Operations Internet and Other Eliminations Total - --------------------------------------------------------------------------------------------------- Net sales $3,590,757 $- $170,155 $- $- $3,760,912 Intersegment revenues 8,703 19,720 - - (28,423) - Interest expense, net (325) (12,548) - (10,670) - (23,543) Other income including finance charges, net (4,795) 108,735 (36) (16,202) - 87,702 Earnings before taxes 479,808 25,001 17,819 (107,855) - 414,773 Assets 2,721,448 1,169,190 111,066 914,709 - 4,916,413 Year to date ended Retail Credit Catalog/ Corporate July 31, 2004 Stores Operations Internet and Other Eliminations Total - --------------------------------------------------------------------------------------------------- Net sales $3,323,415 $- $165,555 $- $- $3,488,970 Intersegment revenues 13,760 18,651 - - (32,411) - Interest expense, net (2) (263) (11,225) 87 (39,374) - (50,775) Other income including finance charges, net (3,850) 99,144 (446) (12,359) - 82,489 Earnings before taxes 388,716 19,960 10,237 (131,020) - 287,893 Assets 2,736,279 1,042,091 120,729 913,782 - 4,812,881 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts and percentages) (unaudited) Note 8 - Litigation We are involved in routine claims, proceedings, and litigation arising from the normal course of our business. We do not believe any such claim, proceeding or litigation, either alone or in aggregate, will have a material impact on our results of operations, financial position, or liquidity. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Management's Discussion and Analysis section of our 2004 Annual Report. All dollar amounts are in millions except per share amounts. RESULTS OF OPERATIONS - --------------------- Overview - -------- Earnings for the second quarter of 2005 increased 39% to $148.9, or $0.53 per diluted share, from $106.9, or $0.37 per diluted share, for the same period in 2004. For the year to date period ended July 30, 2005, earnings increased 44% to $253.5, or $0.91 per diluted share, from $175.6, or $0.62 per diluted share, for the same period in 2004. For the second quarter of 2005, we planned to achieve same-store sales increases over last year in the low single digits. Our actual same-store sales were 6.2% greater than last year for both the quarter and year to date periods ended July 30, 2005. We held our fixed operating costs in-line with our plan for both the quarter and year to date periods. As a result of the additional same-store sales and the control of fixed operating expenses, we increased our earnings and we improved two key operating metrics for the quarter and year to date periods ended July 30, 2005 as compared to the same periods in 2004: gross profit as a percentage of net sales, which increased 110 basis points for the quarter and 70 basis points for the year to date period, and selling, general and administrative expenses as a percentage of net sales, which improved 130 basis points for the quarter and year to date periods. We refer to these types of rate improvements as "leverage" on additional sales. In the first quarter of 2004, we incurred prepayment and deferred debt costs of $20.8, or $0.08 per diluted share, upon prepayment of $197.7 of long-term debt. We did not incur similar costs in 2005, which also improved our year to date 2005 results in relation to the 2004 results. 13 of 22 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Net Sales - --------- Total net sales increased 7.8% for both the quarter and year to date periods over the same periods in the prior year, primarily due to same-store sales increases. Same-store sales increased 6.2% for both the quarter and year to date periods. Both our Full-Line and Rack stores had overall and same-store sales increases, suggesting that our merchandise offering is continuing to appeal to customers. In addition, same-store sales for our Anniversary Sale event, which has a material impact to the second quarter, increased in the mid-single digit range. For both the quarter and year to date periods: - all of our geographic regions reported same-store sales increases, - our strongest regional performances were in the Southern and Southwest states, and - our best performing merchandise divisions were accessories, men's wear, cosmetics, and the designer and junior segments of women's apparel. In addition, total sales benefited from the six Full-Line stores and two Rack stores opened since August 2003, increasing our retail square footage by 5% during the last two years. Gross profit as a percentage of net sales improved 110 basis points for the quarter and 70 basis points for the year to date period ended July 30, 2005. The quarter and year to date performance was due to leverage on buying and occupancy expenses from increased sales volume and lower markdowns. Our inventory levels declined slightly compared to the prior year, consistent with our goal of improving our inventory turnover rate (the inventory turnover rate for the last four quarters was 4.58 at July 2005 and 4.25 at July 2004). This resulted in a 2.1% reduction in our average inventory per square foot compared to the prior year. Selling, General and Administrative Expense - -------------------------------------------
Gross Profit - ------------ Second Quarter Year to Date ------------------- ------------------- 2005 2004 2005 2004 -------- -------- -------- -------- Gross profit as a percentage of net sales 36.0% 34.9% 36.4% 35.7% Selling, general and administrative expenses as a percentage of net sales improved 130 basis points for the quarter and year to date periods. The quarter and year to date performance was primarily from leverage on same-store sales increases as we used our existing infrastructure to support increased sales. We continued to control and leverage our fixed general and administrative expenses, especially non-selling labor. 14 of 22
Second Quarter Year to Date ------------------- ------------------- 2005 2004 2005 2004 -------- -------- -------- -------- Selling, general and administrative expenses as a percentage of net sales 26.2% 27.5% 27.0% 28.3% Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Interest Expense, net - --------------------- Interest expense, net decreased by $3.2 to $10.9 for the quarter ended July 30, 2005 compared to the same period in 2004. The decrease is primarily due to increased interest income from higher cash balances. Interest expense, net decreased by $27.2 to $23.5 for the year to date period ended July 30, 2005 compared to the same period in 2004. The decrease is primarily due to debt prepayment costs of $20.8 incurred in 2004 in connection with a $197.7 debt buyback. We did not incur similar costs in 2005. Other Income Including Finance Charges, net - ------------------------------------------- Other income including finance charges, net increased by $2.0 for the quarter and $5.2 for the year to date period ended July 30, 2005. The increase is primarily due to growth in our co-branded Nordstrom VISA credit card transaction volume and related finance charges. Seasonality - ------------ Our business, like that of other retailers, is subject to seasonal fluctuations. Our Anniversary Sale in July and the holidays in December typically result in higher sales in the second and fourth quarters of our fiscal years. Accordingly, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Overall, cash and short-term investments increased by $94.4 in the first two quarters of 2005 to $496.9 as of July 30, 2005 due to cash from operations, which were partially offset by capital expenditures and a scheduled debt payment. Operating Activities - -------------------- Net cash flow from operating activities increased by $147.3 to $339.6 in 2005 as compared to the prior period primarily due to the increase in our net earnings. Other factors that increased the 2005 cash flow from operations were our increased inventory turnover rate and property incentive receipts associated with stores opening in 2005. Investing Activities - -------------------- Net cash used in investing activities increased in 2005 as compared to 2004, primarily due to capital expenditures for new stores and store remodels; this increase is offset from an overall perspective by the property incentive receipts, which are classified as operating activities. Year to date, we opened one Full-Line store in Atlanta, Georgia. Throughout the remainder of the year, we plan to open three Full-Line stores. Stores will open in San Antonio, Texas at The Shops at La Cantera on September 16th and in Irvine, Calif. at The Irvine Spectrum on September 30th. The final opening of the year will be on November 11th in Dallas, Texas at NorthPark Center. Gross square footage for the year is expected to increase approximately 3.4%, from 19,397,000 to 20,048,000. 15 of 22 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Financing Activities - -------------------- Net cash used in financing activities decreased $13.5 to $113.7 in 2005. In 2004 and 2005, we utilized cash on hand to retire debt. In both years, employee stock option exercises have increased our cash balances. Our cash dividends paid in 2005 increased as we returned a portion of our increased net earnings to our shareholders. In August 2004, our Board of Directors authorized $300.0 of share repurchases. Following this authorization, we repurchased $300.0 of our common shares by the end of 2004. In February 2005, our Board of Directors authorized an additional $500.0 of share repurchases. The actual number and timing of share repurchases will be subject to market conditions and applicable SEC rules. Year to date in 2005, we have purchased 2,691,200 shares for $73.9 at an average price of $27.45 per share. Liquidity - --------- We maintain a level of liquidity to allow us to cover our seasonal cash needs and to minimize our need for short-term borrowings. We believe that our operating cash flows, existing cash and available credit facilities are sufficient to finance our cash requirements for the next 12 months. Over the long term, we strive to manage our cash and capital structure to maximize shareholder return, strengthen our financial position and maintain flexibility for future strategic initiatives. We continuously assess our debt and leverage levels, capital expenditure requirements, principal debt repayments, dividend payouts, potential share repurchases, and future investments or acquisitions. We believe our operating cash flows, existing cash, and available credit facilities, as well as any potential future borrowing facilities will be sufficient to fund scheduled future payments and potential long-term initiatives. CRITICAL ACCOUNTING POLICIES - ---------------------------- The preparation of our financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We regularly evaluate our estimates, including those related to off-balance sheet financing, inventory valuation, sales return accruals, self-insurance liabilities, doubtful accounts, intangible assets, income taxes, post- retirement benefits, contingent liabilities and litigation. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. Our accounting policies and methodologies in 2005 are consistent with those discussed in our 2004 Annual Report. Effective February 2005, Nordstrom Direct sales, which include catalog and Internet, are included in same-store sales. See Note 7 in our Notes to Condensed Consolidated Financial Statements on page 12 for further details. 16 of 22 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT - ------------------------------------------------ The preceding disclosures included forward-looking statements regarding our performance, liquidity, capital expenditures and adequacy of capital resources. These statements are based on our current assumptions and expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Forward- looking statements are qualified by the risks and challenges posed by our ability to predict fashion trends, consumer apparel buying patterns, our ability to control costs, weather conditions, hazards of nature, trends in personal bankruptcies and bad debt write-offs, changes in interest rates, employee relations, our ability to continue our expansion plans, potential opportunities that may be related to the current changes in our industry, changes in governmental or regulatory requirements, and the impact of economic and competitive market forces, including the impact of terrorist activity or the impact of a war on us, our customers and the retail industry. As a result, while we believe there is a reasonable basis for the forward-looking statements, you should not place undue reliance on those statements. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances. This discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements. Item 4. CONTROLS AND PROCEDURES As of the end of the period covered by this Quarterly Report on Form 10-Q, we performed an evaluation under the supervision and with the participation of management, including our President and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities and Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, our President and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures are effective in the timely recording, processing, summarizing and reporting of material financial and non-financial information. There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 17 of 22 PART II - OTHER INFORMATION Item 1. Legal Proceedings - ------------------------- Cosmetics - --------- We were originally named as a defendant along with other department store and specialty retailers in nine separate but virtually identical class action lawsuits filed in various Superior Courts of the State of California in May, June and July 1998 that were consolidated in Marin County Superior Court. In May 2000, plaintiffs filed an amended complaint naming a number of manufacturers of cosmetics and fragrances and two other retailers as additional defendants. Plaintiffs' amended complaint alleges that the retail price of the "prestige" or "Department Store" cosmetics sold in department and specialty stores was collusively controlled by the retailer and manufacturer defendants in violation of the Cartwright Act and the California Unfair Competition Act. Plaintiffs seek treble damages and restitution in an unspecified amount, attorneys' fees and prejudgment interest, on behalf of a class of all California residents who purchased cosmetics and fragrances for personal use from any of the defendants during the four years prior to the filing of the amended complaint. We entered into a settlement agreement with the plaintiffs and the other defendants on July 13, 2003. In furtherance of the settlement agreement, the case was re-filed in the United States District Court for the Northern District of California on behalf of a class of all persons who currently reside in the United States and who purchased "Department Store" cosmetics from the defendants during the period May 29, 1994 through July 16, 2003. The Court gave preliminary approval to the settlement, and a summary notice of class certification and the terms of the settlement were disseminated to class members. On March 30, 2005, the Court entered a final judgment approving the settlement and dismissing the plaintiffs' claims and the claims of all class members with prejudice, in their entirety. On April 29, 2005, two class members who had objected to the settlement filed notices of appeal from the Court's final judgment to the United States Court of Appeals for the Ninth Circuit. It is uncertain when the appeals will be resolved, but the appeal process could take as much as two years or more. If the Court's final judgment approving the settlement is affirmed on appeal, or the appeals are dismissed, the defendants will provide class members with certain free products and pay the plaintiffs' attorneys' fees, awarded by the Court of $24 million. Our share of the cost of the settlement will not have a material adverse effect on our financial condition, results of operations or cash flows. Other - ----- We are involved in various routine legal proceedings incidental to the ordinary course of business. In management's opinion, the outcome of pending legal proceedings, separately and in the aggregate, will not have a material adverse effect on our business or consolidated financial condition. 18 of 22 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - -------------------------------------------------------------------- (1) Included in this balance are 1,215 shares that were not redeemed as part of a publicly announced repurchase plan or program. These shares were tendered by an employee to Nordstrom for tax withholding purposes. (2) Included in this balance are 264 shares that were not redeemed as part of a publicly announced repurchase plan or program. These shares were tendered by an employee to Nordstrom for tax withholding purposes. (3) In February 2005, the Board of Directors authorized $500.0 of share repurchases. The prior $300.0 authorization was completed during the fourth quarter of 2004. The actual number and timing of share repurchases will be subject to market conditions and applicable SEC rules. Year to date, we have purchased 2,691,200 shares for $73.9 at an average price of $27.45 per share. 19 of 22
(c) Repurchases ----------- (dollars in millions except per share amounts) Total Total Number Maximum Number (or Number of Average of Shares (or Units) Approximate Dollar Value) Shares Price Paid Purchased as Part of of Shares (or Units) that (or Units) Per Share Publicly Announced May Yet Be Purchased Under Purchased (or Units) Plans or Programs the Plans or Programs (3) ---------- ---------- -------------------- -------------------------- May 2005 609,015 (1) $26.78 607,800 $436.0 (5/1/05 to 5/28/05) ---------- ---------- -------------------- -------------------------- Jun. 2005 309,264 (2) $31.89 309,000 $426.1 (5/29/05 to 7/2/05) ---------- ---------- -------------------- -------------------------- Jul. 2005 - $- - $426.1 (7/3/05 to 7/30/05) ---------- ---------- -------------------- -------------------------- Total 918,279 $28.50 916,800 $426.1 ---------- ---------- -------------------- -------------------------- Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- There were no abstentions and no broker non-votes. (2) Ratification of the Appointment of Independent Auditors The vote was 125,013 for, 2,136 against, and there were 737 abstentions. There were no broker non-votes. Item 6. Exhibits - ----------------- Exhibits are incorporated herein by reference or are filed with this report as set forth in the Index to Exhibits on page 22 hereof. 20 of 22
(amounts in thousands) We held our Annual Shareholders Meeting on May 24, 2005, at which time the shareholders voted on the following proposals: (1) Election of Directors Name of Candidate For Withheld ---------------------- ----------- ----------- Phyllis J. Campbell 126,495 1,391 Enrique Hernandez, Jr. 126,494 1,391 Jeanne P. Jackson 126,211 1,675 Robert G. Miller 126,478 1,408 Blake W. Nordstrom 126,014 1,871 Bruce A. Nordstrom 125,438 2,447 John N. Nordstrom 125,515 2,371 Alfred E. Osborne, Jr., Ph.D. 124,747 3,138 Alison A. Winter 127,078 807 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORDSTROM, INC. (Registrant) /s/ Michael G. Koppel ---------------------------------------------------- Michael G. Koppel Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: September 1, 2005 ----------------- 21 of 22 22 of 22
NORDSTROM INC. AND SUBSIDIARIES Exhibit Index Exhibit Method of Filing - ------- ---------------- 31.1 Certification of President Filed herewith electronically required by Section 302(a) of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Filed herewith electronically Officer required by Section 302(a) of the Sarbanes-Oxley Act of 2002 32.1 Certification of President and Furnished herewith electronically Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1 Certification required by Section 302(a) of the Sarbanes-Oxley Act of 2002 I, Blake W. Nordstrom, certify that: 1. I have reviewed this report on Form 10-Q of Nordstrom, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f))for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 1, 2005 /s/ Blake W. Nordstrom ----------------- ---------------------- Blake W. Nordstrom President of Nordstrom, Inc.
Exhibit 31.2 Certification required by Section 302(a) of the Sarbanes-Oxley Act of 2002 I, Michael G. Koppel, certify that: 1. I have reviewed this report on Form 10-Q of Nordstrom, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 1, 2005 /s/ Michael G. Koppel ----------------- --------------------- Michael G. Koppel Executive Vice President and Chief Financial Officer of Nordstrom, Inc.
Exhibit 32.1 NORDSTROM, INC. 1617 SIXTH AVENUE SEATTLE, WASHINGTON 98101 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Nordstrom, Inc (the "Company") on Form 10-Q for the period ended July 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Blake W. Nordstrom, President (Principal Executive Officer), and Michael G. Koppel, Executive Vice President and Chief Financial Officer (Principal Financial Officer), of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: - The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and - The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. September 1, 2005 /s/ Blake W. Nordstrom ---------------------- Blake W. Nordstrom President /s/ Michael G. Koppel ---------------------- Michael G. Koppel Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to Nordstrom, Inc. and will be retained by Nordstrom, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.