JWN-Q2 2013-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 2013
or
o  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
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1617 Sixth Avenue, Seattle, Washington
 
98101
(Address of principal executive offices)
 
(Zip Code)
206-628-2111
(Registrant’s telephone number, including area code)
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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o  (Do not check if a smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
Common stock outstanding as of August 28, 2013: 194,885,937 shares
 
 

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NORDSTROM, INC.
TABLE OF CONTENTS
 
 
 
Page
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 

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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in millions except per share amounts)
(Unaudited)
 
Quarter Ended
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
Net sales
$
3,104

 
$
2,918

 
$
5,761

 
$
5,453

Credit card revenues
92

 
88

 
184

 
178

Total revenues
3,196

 
3,006

 
5,945

 
5,631

Cost of sales and related buying and occupancy costs
(2,004
)
 
(1,879
)
 
(3,677
)
 
(3,463
)
Selling, general and administrative expenses
(857
)
 
(837
)
 
(1,658
)
 
(1,598
)
Earnings before interest and income taxes
335

 
290

 
610

 
570

Interest expense, net
(37
)
 
(40
)
 
(76
)
 
(80
)
Earnings before income taxes
298

 
250

 
534

 
490

Income tax expense
(114
)
 
(94
)
 
(205
)
 
(185
)
Net earnings
$
184

 
$
156

 
$
329

 
$
305

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.94

 
$
0.76

 
$
1.68

 
$
1.48

Diluted
$
0.93

 
$
0.75

 
$
1.66

 
$
1.45

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
195.5

 
205.2

 
195.5

 
206.3

Diluted
198.8

 
208.7

 
198.9

 
210.0

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Amounts in millions)
(Unaudited)
 
Quarter Ended
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
Net earnings
$
184

 
$
156

 
$
329

 
$
305

Postretirement plan adjustments, net of tax
1

 
2

 
3

 
3

Comprehensive net earnings
$
185

 
$
158

 
$
332

 
$
308

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.


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NORDSTROM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
(Unaudited)
 
August 3, 2013
 
February 2, 2013
 
July 28, 2012
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
1,128

 
$
1,285

 
$
1,258

Accounts receivable, net
2,369

 
2,129

 
2,297

Merchandise inventories
1,464

 
1,360

 
1,394

Current deferred tax assets, net
244

 
227

 
233

Prepaid expenses and other
89

 
80

 
85

Total current assets
5,294

 
5,081

 
5,267

 
 
 
 
 
 
Land, buildings and equipment (net of accumulated depreciation of $4,270, $4,064 and $3,959)
2,810

 
2,579

 
2,499

Goodwill
175

 
175

 
175

Other assets
269

 
254

 
305

Total assets
$
8,548

 
$
8,089

 
$
8,246

 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
1,395

 
$
1,011

 
$
1,345

Accrued salaries, wages and related benefits
322

 
404

 
290

Other current liabilities
837

 
804

 
805

Current portion of long-term debt
407

 
7

 
6

Total current liabilities
2,961

 
2,226

 
2,446

 
 
 
 
 
 
Long-term debt, net
2,715

 
3,124

 
3,133

Deferred property incentives, net
490

 
485

 
493

Other liabilities
351

 
341

 
338

 
 
 
 
 
 
Commitments and contingencies

 

 

 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
Common stock, no par value: 1,000 shares authorized; 195.5, 197.0 and 201.4 shares issued and outstanding
1,762

 
1,645

 
1,582

Retained earnings
313

 
315

 
296

Accumulated other comprehensive loss
(44
)
 
(47
)
 
(42
)
Total shareholders' equity
2,031

 
1,913

 
1,836

Total liabilities and shareholders' equity
$
8,548

 
$
8,089

 
$
8,246

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in millions except per share amounts)
(Unaudited)
 
 
 
 
 
 
 
Accumulated 
 
 
 
 
 
 
 
 
 
Other
 
 
 
Common Stock
 
Retained
 
Comprehensive
 
 
 
Shares
 
Amount
 
Earnings
 
Loss
 
Total
Balance at February 2, 2013
197.0

 
$
1,645

 
$
315

 
$
(47
)
 
$
1,913

Net earnings

 

 
329

 

 
329

Postretirement plan adjustments, net of tax

 

 

 
3

 
3

Dividends ($0.60 per share)

 

 
(117
)
 

 
(117
)
Issuance of common stock under stock compensation plans
2.3

 
84

 

 

 
84

Stock-based compensation

 
33

 

 

 
33

Repurchase of common stock
(3.8
)
 

 
(214
)
 

 
(214
)
Balance at August 3, 2013
195.5

 
$
1,762

 
$
313

 
$
(44
)
 
$
2,031

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Other
 
 
 
Common Stock
 
Retained
 
Comprehensive
 
 
 
Shares
 
Amount
 
Earnings
 
Loss
 
Total
Balance at January 28, 2012
207.6

 
$
1,484

 
$
517

 
$
(45
)
 
$
1,956

Net earnings

 

 
305

 

 
305

Postretirement plan adjustments, net of tax

 

 

 
3

 
3

Dividends ($0.54 per share)

 

 
(112
)
 

 
(112
)
Issuance of common stock under stock compensation plans
2.1

 
72

 

 

 
72

Stock-based compensation

 
26

 

 

 
26

Repurchase of common stock
(8.3
)
 

 
(414
)
 

 
(414
)
Balance at July 28, 2012
201.4

 
$
1,582

 
$
296

 
$
(42
)
 
$
1,836

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
Operating Activities
 
 
 
Net earnings
$
329

 
$
305

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization expenses
220

 
207

Amortization of deferred property incentives and other, net
(32
)
 
(32
)
Deferred income taxes, net
(35
)
 
(30
)
Stock-based compensation expense
34

 
31

Tax benefit from stock-based compensation
16

 
15

Excess tax benefit from stock-based compensation
(17
)
 
(16
)
Provision for bad debt expense
30

 
31

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(199
)
 
(220
)
Merchandise inventories
(119
)
 
(218
)
Prepaid expenses and other assets
(9
)
 
(1
)
Accounts payable
328

 
326

Accrued salaries, wages and related benefits
(82
)
 
(100
)
Other current liabilities
30

 
37

Deferred property incentives
42

 
32

Other liabilities
11

 
5

Net cash provided by operating activities
547

 
372

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(427
)
 
(219
)
Change in restricted cash

 
200

Change in credit card receivables originated at third parties
(70
)
 
(77
)
Other, net
(7
)
 
(2
)
Net cash used in investing activities
(504
)
 
(98
)
 
 
 
 
Financing Activities
 
 
 
Principal payments on long-term borrowings
(3
)
 
(503
)
Increase in cash book overdrafts
56

 
69

Cash dividends paid
(117
)
 
(112
)
Payments for repurchase of common stock
(219
)
 
(418
)
Proceeds from issuances under stock compensation plans
68

 
57

Excess tax benefit from stock-based compensation
17

 
16

Other, net
(2
)
 
(2
)
Net cash used in financing activities
(200
)
 
(893
)
 
 
 
 
Net decrease in cash and cash equivalents
(157
)
 
(619
)
Cash and cash equivalents at beginning of period
1,285

 
1,877

Cash and cash equivalents at end of period
$
1,128

 
$
1,258

 
 
 
 
Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Interest (net of capitalized interest)
$
81

 
$
85

Income taxes paid, net of refunds
$
235

 
$
222

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share and per option amounts)
(Unaudited)


NOTE 1: BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the balances of Nordstrom, Inc. and its subsidiaries. All intercompany transactions and balances are eliminated in consolidation. The interim condensed consolidated financial statements have been prepared on a basis consistent in all material respects with the accounting policies described and applied in our 2012 Annual Report on Form 10-K ("Annual Report"), and reflect all adjustments that are, in management's opinion, necessary for the fair presentation of the results of operations, financial position and cash flows for the periods presented.
The condensed consolidated financial statements as of and for the periods ended August 3, 2013 and July 28, 2012 are unaudited. The condensed consolidated balance sheet as of February 2, 2013 has been derived from the audited consolidated financial statements included in our 2012 Annual Report. The interim condensed consolidated financial statements should be read together with the consolidated financial statements and related footnote disclosures contained in our 2012 Annual Report.
The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. 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 and assumptions.
Our business, like that of other retailers, is subject to seasonal fluctuations. Due to our Anniversary Sale in July, the holidays in December and the half-yearly sales that occur in our second and fourth quarters, our sales are typically higher in the second and fourth quarters of the fiscal year than in the first and third quarters. In 2013, our Anniversary Sale took place in the second quarter, while in 2012 it occurred during both the second and third quarters. This will impact comparisons of performance to the prior year. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.
Reclassification
Prior to 2013, we presented bad debt expense associated with finance charges and fees as a part of selling, general and administrative expenses. Beginning in the first quarter of 2013, we reclassified these amounts and now present them as a reduction of credit card revenue. Historical results were also reclassified to match the current period presentation. These reclassifications did not impact net earnings, earnings per share, financial position or cash flows.
See Note 9: Segment Reporting for additional changes in the way we view and measure our business and segment performance. None of these changes impact our condensed consolidated financial statements.



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NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share and per option amounts)
(Unaudited)


NOTE 2: ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows: 
 
August 3, 2013
 
February 2, 2013
 
July 28, 2012
Credit card receivables:
 
 
 
 
 
Nordstrom VISA credit card receivables
$
1,419

 
$
1,348

 
$
1,418

Nordstrom private label card receivables
932

 
794

 
876

Total credit card receivables
2,351

 
2,142

 
2,294

Allowance for credit losses
(85
)
 
(85
)
 
(105
)
Credit card receivables, net
2,266

 
2,057

 
2,189

Other accounts receivable1
103

 
72

 
108

Accounts receivable, net
$
2,369

 
$
2,129

 
$
2,297

1Other accounts receivable consist primarily of third party credit and debit card receivables.
Activity in the allowance for credit losses is as follows:
 
Quarter Ended
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
Allowance at beginning of period
$
85

 
$
105

 
$
85

 
$
115

Bad debt provision
16

 
22

 
30

 
31

Write-offs
(21
)
 
(28
)
 
(42
)
 
(54
)
Recoveries
5

 
6

 
12

 
13

Allowance at end of period
$
85

 
$
105

 
$
85

 
$
105

The allowance for credit losses reflects our best estimate of the losses inherent in our receivables as of the balance sheet date, including uncollectible finance charges and fees. For purposes of determining impairment and recording the associated allowance for credit losses, we evaluate our credit card receivables on a collective basis as they are composed of large groups of smaller-balance homogeneous loans and, therefore, are not individually evaluated for impairment. We record estimated uncollectible principal balances to the bad debt provision while estimated uncollectible finance charges and fees result in a reduction of credit card revenue.
Under certain circumstances, we may make modifications to payment terms for a customer experiencing financial difficulties in an effort to help the customer avoid a charge-off or bankruptcy, and to maximize our recovery of the outstanding balance. These modifications, which meet the accounting definition of troubled debt restructurings ("TDRs"), include reduced or waived fees and finance charges, and/or reduced minimum payments. Receivables classified as TDRs were $45, or 1.9% of our total credit card receivables as of August 3, 2013, $53, or 2.5% of our total credit card receivables as of February 2, 2013 and $58, or 2.5% of our total credit card receivables as of July 28, 2012.


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NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share and per option amounts)
(Unaudited)


Credit Quality
The primary indicators of the credit quality of our credit card receivables are aging and delinquency, particularly the levels of account balances delinquent 30 days or more as these are the accounts most likely to be written off. The following table illustrates the aging and delinquency status of our credit card receivables: 
 
August 3, 2013
 
February 2, 2013
 
July 28, 2012
 
Balance
 
% of total
 
Balance
 
% of total
 
Balance
 
% of total
Current
$
2,241

 
95.3
%
 
$
2,018

 
94.2
%
 
$
2,166

 
94.4
%
1 – 29 days delinquent
74

 
3.2
%
 
84

 
3.9
%
 
84

 
3.7
%
30 days or more delinquent:
 
 
 
 
 
 
 
 
 
 
 
30 – 59 days delinquent
14

 
0.6
%
 
15

 
0.7
%
 
18

 
0.7
%
60 – 89 days delinquent
9

 
0.4
%
 
10

 
0.5
%
 
11

 
0.5
%
90 days or more delinquent
13

 
0.5
%
 
15

 
0.7
%
 
15

 
0.7
%
Total 30 days or more delinquent
36

 
1.5
%
 
40

 
1.9
%
 
44

 
1.9
%
Total credit card receivables
$
2,351

 
100.0
%
 
$
2,142

 
100.0
%
 
$
2,294

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Receivables not accruing finance charges
$
10

 
 
 
$
11

 
 
 
$
10

 
 
Receivables 90 days or more delinquent and still accruing finance charges
$
7

 
 
 
$
8

 
 
 
$
9

 
 
We also evaluate credit quality using FICO credit scores. The following table illustrates the distribution of our credit card receivables across FICO score ranges: 
 
August 3, 2013
 
February 2, 2013
 
July 28, 2012
FICO Score Range1
Balance
 
% of total  
 
Balance
 
% of total  
 
Balance
 
% of total  
801+
$
430

 
18.3
%
 
$
310

 
14.5
%
 
$
441

 
19.2
%
660 – 800
1,455

 
61.9
%
 
1,366

 
63.8
%
 
1,419

 
61.8
%
001 – 659
367

 
15.6
%
 
379

 
17.7
%
 
366

 
16.0
%
Other2
99

 
4.2
%
 
87

 
4.0
%
 
68

 
3.0
%
Total credit card receivables
$
2,351

 
100.0
%
 
$
2,142

 
100.0
%
 
$
2,294

 
100.0
%
1Credit scores for our credit cardholders are updated at least every 60 days for active accounts and every 90 days for inactive accounts. Amounts listed in the table reflect the most recently obtained credit scores as of the dates indicated.
2Other consists of amounts not yet posted to customers' accounts and receivables from customers for whom FICO scores are temporarily unavailable.

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NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share and per option amounts)
(Unaudited)


NOTE 3: DEBT AND CREDIT FACILITIES
Debt
A summary of our long-term debt is as follows:
 
August 3, 2013

February 2, 2013

July 28, 2012
Secured
 
 
 
 
 
Series 2011-1 Class A Notes, 2.28%, due October 2016
$
325

 
$
325

 
$
325

Mortgage payable, 7.68%, due April 2020
44

 
47

 
49

Other
9

 
10

 
11

 
378

 
382

 
385

Unsecured
 
 
 
 
 
Senior notes, 6.75%, due June 2014, net of unamortized discount
400

 
400

 
399

Senior notes, 6.25%, due January 2018, net of unamortized discount
648

 
648

 
648

Senior notes, 4.75%, due May 2020, net of unamortized discount
499

 
498

 
498

Senior notes, 4.00%, due October 2021, net of unamortized discount
499

 
499

 
499

Senior debentures, 6.95%, due March 2028
300

 
300

 
300

Senior notes, 7.00%, due January 2038, net of unamortized discount
344

 
344

 
344

Other
54

 
60

 
66

 
2,744

 
2,749

 
2,754

 
 
 
 
 
 
Total long-term debt
3,122

 
3,131

 
3,139

Less: current portion
(407
)
 
(7
)
 
(6
)
Total due beyond one year
$
2,715

 
$
3,124

 
$
3,133

Credit Facilities
As of August 3, 2013, we had total short-term borrowing capacity available for general corporate purposes of $800. In March 2013, we terminated both our $600 unsecured revolving credit facility that was scheduled to expire in June 2016, and our $200 2007-A Variable Funding Note that was scheduled to expire in January 2014. We replaced these with a new five-year $800 senior unsecured revolving credit facility ("revolver") that expires in March 2018. Under the terms of our new revolver, we pay a variable rate of interest and a commitment fee based on our debt rating. The new revolver is available for working capital, capital expenditures and general corporate purposes and backs our commercial paper program. During the six months ended August 3, 2013, we had no issuances under our commercial paper program and no borrowings under our new revolver or the $600 credit facility prior to termination.
The new revolver requires that we maintain a leverage ratio, defined as Adjusted Debt to Earnings before Interest, Income Taxes, Depreciation, Amortization and Rent ("EBITDAR"), of less than four times. As of August 3, 2013, we were in compliance with this covenant.
Also in March 2013, our wholly owned subsidiary Nordstrom fsb terminated its $100 variable funding facility. We had no borrowings under this facility prior to termination.


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NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share and per option amounts)
(Unaudited)


NOTE 4: FAIR VALUE MEASUREMENTS
We disclose our financial assets and liabilities that are measured at fair value in our condensed consolidated balance sheets by level within the fair value hierarchy as defined by applicable accounting standards:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Other observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that cannot be corroborated by market data that reflect the reporting entity's own
assumptions
We did not have any financial assets or liabilities that were measured at fair value on a recurring basis as of August 3, 2013, February 2, 2013 or July 28, 2012.
Financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable and accounts payable and approximate fair value due to their short-term nature. We estimate the fair value of our long-term debt using quoted market prices of the same or similar issues, and as such this is considered a Level 2 fair value measurement. The following table summarizes the carrying value and fair value estimate of our long-term debt, including current maturities:
 
August 3, 2013
 
February 2, 2013
 
July 28, 2012
Carrying value of long-term debt1
$
3,122

 
$
3,131

 
$
3,139

Fair value of long-term debt
3,471

 
3,665

 
3,755

1The carrying value of long-term debt includes the remaining adjustment from our previous effective fair value hedge.
We also measure certain non-financial assets at fair value on a nonrecurring basis, primarily goodwill and long-lived tangible and intangible assets, in connection with periodic evaluations for potential impairment. We recorded no impairment charges for these assets for the six months ended August 3, 2013 and July 28, 2012. We estimate the fair value of goodwill and long-lived tangible and intangible assets using primarily unobservable inputs, and as such these are considered Level 3 fair value measurements.
NOTE 5: COMMITMENTS AND CONTINGENT LIABILITIES
During the quarter ended August 3, 2013, we paid approximately $100 to the developer of our Manhattan full-line store. This payment represents the first in a series of installment payments which we committed to make based on the developer meeting construction and development milestones. Our fee interest in the property is subject to lien until project completion or fulfillment of our existing installment payment commitment.
We are subject from time to time to various claims and lawsuits arising in the ordinary course of business, including lawsuits alleging violations of state and/or federal wage and hour and other employment laws, privacy and other consumer-based claims. Some of these lawsuits include certified classes of litigants, or purport or may be determined to be class or collective actions and seek substantial damages or injunctive relief, or both, and some may remain unresolved for several years. We believe the recorded reserves in our condensed consolidated financial statements are adequate in light of the probable and estimable liabilities. As of the date of this report, we do not believe any currently identified claim, proceeding or litigation, either alone or in the aggregate, will have a material impact on our results of operations, financial position or cash flows. Since these matters are subject to inherent uncertainties, our view of them may change in the future.
NOTE 6: SHAREHOLDERS' EQUITY
In February 2012, our Board of Directors authorized a program to repurchase up to $800 of our outstanding common stock, through February 1, 2014. In February 2013, our Board of Directors authorized a new program to repurchase up to $800 of our outstanding common stock, through March 1, 2015, in addition to the remaining amount available for repurchase under our February 2012 authorization. During the six months ended August 3, 2013, we repurchased 3.8 shares of our common stock for an aggregate purchase price of $214 and had $979 in remaining share repurchase capacity. The actual number and timing of future share repurchases, if any, will be subject to market and economic conditions and applicable Securities and Exchange Commission rules.

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NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share and per option amounts)
(Unaudited)


NOTE 7: STOCK-BASED COMPENSATION
The following table summarizes our stock-based compensation expense:
 
Quarter Ended
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
Stock options
$
13

 
$
11

 
$
26

 
$
21

HauteLook stock compensation
2

 
3

 
4

 
5

Performance share units
1

 
2

 
1

 
2

Employee stock purchase plan

 

 
1

 
1

Other
1

 
2

 
2

 
2

Total stock-based compensation expense, before income tax benefit
17

 
18

 
34

 
31

Income tax benefit
(5
)
 
(7
)
 
(11
)
 
(11
)
Total stock-based compensation expense, net of income tax benefit
$
12

 
$
11

 
$
23

 
$
20

During the six months ended August 3, 2013 and July 28, 2012, we granted 3.7 and 2.9 options with estimated weighted-average grant-date fair values per option of $14 and $15.
NOTE 8: EARNINGS PER SHARE
The computation of earnings per share is as follows:
 
Quarter Ended
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
Net earnings
$
184

 
$
156

 
$
329

 
$
305

 
 
 
 
 
 
 
 
Basic shares
195.5

 
205.2

 
195.5

 
206.3

Dilutive effect of stock options and other
3.3

 
3.5

 
3.4

 
3.7

Diluted shares
198.8

 
208.7

 
198.9

 
210.0

 
 
 
 
 
 
 
 
Earnings per basic share
$
0.94

 
$
0.76

 
$
1.68

 
$
1.48

Earnings per diluted share
$
0.93

 
$
0.75

 
$
1.66

 
$
1.45

 
 
 
 
 
 
 
 
Anti-dilutive stock options and other
3.4

 
5.9

 
4.6

 
6.0

NOTE 9: SEGMENT REPORTING
As discussed in Note 1: Basis of Presentation, beginning in the first quarter of 2013, we reclassified amounts in our financial statements to better reflect the way we view and measure our business. As we continue to execute our long-term growth strategy and make investments across operating segments, aligning expenses with the associated benefits enhances our ability to evaluate segment performance. Historical results were also reclassified to match the current period presentation. These reclassifications did not impact net earnings, earnings per share, financial position or cash flows.
We previously recorded all of our Fashion Rewards loyalty program expenses in our Credit segment. We now allocate all of our Fashion Rewards expenses to the Retail segment, including the face value of Nordstrom Notes, which customers earn based on their level of spending and which can be redeemed for goods or services. Consistent with our previous segment reporting, our Retail segment net sales include sales from the redemption of Nordstrom Notes. In order to present the consolidated financial results in accordance with generally accepted accounting principles, our Corporate/Other column includes the elimination of net sales when customers used Nordstrom Notes and also includes an adjustment to reduce the Nordstrom Notes expense from face value to their estimated cost.
In addition, certain technology expenses we previously included in Corporate/Other are now allocated to the Retail and Credit segments.

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NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share and per option amounts)
(Unaudited)


In our Credit segment, we previously presented bad debt expense associated with finance charges and fees as part of selling, general and administrative expenses. We reclassified these amounts and now present them as a reduction of credit card revenue. There was no impact to Credit earnings before income taxes for this reclassification.
The following tables set forth information for our reportable segments: 
 
 
Retail
 
Corporate/Other
 
Total Retail Business1
 
Credit
 
Total
Quarter Ended August 3, 2013
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
3,245

 
$
(141
)
 
$
3,104

 

 
$
3,104

Credit card revenues
 

 

 

 
$
92

 
92

Earnings (loss) before interest and income taxes
 
375

 
(80
)
 
295

 
40

 
335

Interest expense, net
 

 
(31
)
 
(31
)
 
(6
)
 
(37
)
Earnings (loss) before income taxes
 
375

 
(111
)
 
264

 
34

 
298

 
 
 
 
 
 
 
 
 
 
 
Quarter Ended July 28, 2012
 
 
 
 
 
 
 
 
 

Net sales
 
$
3,063

 
$
(145
)
 
$
2,918

 

 
$
2,918

Credit card revenues
 

 

 

 
$
88

 
88

Earnings (loss) before interest and income taxes
 
361

 
(99
)
 
262

 
28

 
290

Interest expense, net
 

 
(33
)
 
(33
)
 
(7
)
 
(40
)
Earnings (loss) before income taxes
 
361

 
(132
)
 
229

 
21

 
250

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended August 3, 2013
 
 
 
 
 
 
 
 
 

Net sales
 
$
5,958

 
$
(197
)
 
$
5,761

 

 
$
5,761

Credit card revenues
 

 

 

 
$
184

 
184

Earnings (loss) before interest and income taxes
 
675

 
(149
)
 
526

 
84

 
610

Interest expense, net
 

 
(64
)
 
(64
)
 
(12
)
 
(76
)
Earnings (loss) before income taxes
 
675

 
(213
)
 
462

 
72

 
534

 
 
 
 
 
 

 
 
 

Six Months Ended July 28, 2012
 
 
 
 
 

 
 
 

Net sales
 
$
5,639

 
$
(186
)
 
$
5,453

 

 
$
5,453

Credit card revenues
 

 

 

 
$
178

 
178

Earnings (loss) before interest and income taxes
 
666

 
(171
)
 
495

 
75

 
570

Interest expense, net
 

 
(67
)
 
(67
)
 
(13
)
 
(80
)
Earnings (loss) before income taxes
 
666

 
(238
)
 
428

 
62

 
490

1Total Retail Business is not a reportable segment, but represents a subtotal of the Retail segment and Corporate/Other, and is consistent with our presentation in Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following table summarizes net sales within our reportable segments:
 
Quarter Ended
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
Nordstrom full-line stores
$
2,098

 
$
2,114

 
$
3,815

 
$
3,830

Direct
425

 
309

 
726

 
551

Nordstrom
2,523

 
2,423

 
4,541


4,381

Nordstrom Rack
645

 
577

 
1,261

 
1,134

HauteLook and Jeffrey
77

 
63

 
156

 
124

Total Retail segment
3,245

 
3,063

 
5,958

 
5,639

Corporate/Other
(141
)
 
(145
)
 
(197
)
 
(186
)
Total net sales
$
3,104

 
$
2,918

 
$
5,761

 
$
5,453


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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except per share and per square foot amounts)

CAUTIONARY STATEMENT
Certain statements in this Quarterly Report on Form 10-Q contain or may suggest "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties, including, but not limited to, anticipated financial outlook for the fiscal year ending February 1, 2014, anticipated annual same-store sales rate, anticipated Return on Invested Capital and trends in our operations. Such statements are based upon the current beliefs and expectations of the company's management and are subject to significant risks and uncertainties. Actual future results may differ materially from historical results or current expectations depending upon factors including, but not limited to:
successful execution of our growth strategy, including expansion into new markets, acquisitions, investments in our stores and online, our ability to realize the anticipated benefits from such growth initiatives, and the timely completion of construction associated with newly planned stores, relocations and remodels, all of which may be impacted by the financial health of third parties,
our ability to manage the transformation of our business/financial model as we increase our investments in growth opportunities, including our online business and our ability to manage related organizational changes,
our ability to maintain relationships with our employees and to effectively attract, develop and retain our future leaders,
effective inventory management, disruptions in our supply chain and our ability to control costs,
the impact of any systems failures, cybersecurity and/or security breaches, including any security breach that results in the theft, transfer or unauthorized disclosure of customer, employee or company information or our compliance with information security and privacy laws and regulations in the event of such an incident,
successful execution of our information technology strategy,
efficient and proper allocation of our capital resources,
our ability to safeguard our reputation and maintain our vendor relationships,
the impact of economic and market conditions and the resultant impact on consumer spending patterns,
our ability to respond to the business environment, fashion trends and consumer preferences, including changing expectations of service and experience in stores and online,
the effectiveness of planned advertising, marketing and promotional campaigns in the highly competitive retail industry,
weather conditions, natural disasters, health hazards, national security or other market disruptions, or the prospects of these events and the impact on consumer spending patterns,
our compliance with applicable banking related laws and regulations impacting our ability to extend credit to our customers, employment laws and regulations, certain international laws and regulations, other laws and regulations applicable to us, including the outcome of claims and litigation and resolution of tax matters, and ethical standards,
impact of the current regulatory environment and financial system and health care reforms,
compliance with debt covenants, availability and cost of credit, changes in interest rates, and trends in debt repayment patterns, personal bankruptcies, and bad debt write-offs, and
the timing and amounts of share repurchases by the company, if any, or any share issuances by the company, including issuances associated with option exercises or other matters.
These and other factors, including those factors described in Part I, "Item 1A. Risk Factors" in our 2012 Annual Report on Form 10-K, could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

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


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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

RESULTS OF OPERATIONS
Our reportable segments are Retail and Credit. Our Retail segment includes our Nordstrom branded full-line stores and website, our Nordstrom Rack stores, our Last Chance clearance store and our other retail channels including HauteLook and our Jeffrey stores. For purposes of discussion and analysis of our results of operations, we combine our Retail segment results with revenues and expenses in the "Corporate/Other" column of Note 9: Segment Reporting in the Notes to Condensed Consolidated Financial Statements (collectively, the "Retail Business"). We analyze our results of operations through earnings before interest and income taxes for our Retail Business and Credit segment, while interest expense and income taxes are discussed on a total company basis.
As discussed in Note 1: Basis of Presentation and Note 9: Segment Reporting in the Notes to Condensed Consolidated Financial Statements, beginning in the first quarter of 2013, we reclassified amounts in our financial statements to better reflect the way we view and measure our business. As we continue to execute our long-term growth strategy and make investments across operating segments, aligning expenses with the associated benefits enhances our ability to evaluate segment performance. Historical results were also reclassified to match the current period presentation. These reclassifications did not impact net earnings, earnings per share, financial position or cash flows.
We now allocate Fashion Rewards loyalty program expenses to our Retail Business. We previously recorded all of our Fashion Rewards expenses in our Credit segment. In addition, certain technology expenses we previously included in our Retail Business are now allocated to our Credit segment. These changes within our Retail Business and Credit segment did not impact the presentation of expenses in our consolidated financial statements. In our Credit segment, we previously presented bad debt expense associated with finance charges and fees as part of selling, general and administrative expenses. We reclassified these amounts and now present them as a reduction of credit card revenue.
Retail Business
Summary
The following table summarizes the results of our Retail Business for the quarter and six months ended August 3, 2013, compared with the quarter and six months ended July 28, 2012: 
 
Quarter Ended
 
August 3, 2013
 
July 28, 2012
 
Amount
 
% of net sales
 
Amount
 
% of net sales
Net sales
$
3,104

 
100.0
%
 
$
2,918

 
100.0
%
Cost of sales and related buying and occupancy costs
(2,002
)
 
(64.5
%)
 
(1,878
)
 
(64.4
%)
Gross profit
1,102

 
35.5
%
 
1,040

 
35.6
%
Selling, general and administrative expenses
(807
)
 
(26.0
%)
 
(778
)
 
(26.6
%)
Earnings before interest and income taxes
$
295

 
9.5
%
 
$
262

 
9.0
%
 
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
Amount
 
% of net sales
 
Amount
 
% of net sales
Net sales
5,761

 
100.0
%
 
$
5,453

 
100.0
%
Cost of sales and related buying and occupancy costs
(3,674
)
 
(63.8
%)
 
(3,461
)
 
(63.5
%)
Gross profit
2,087

 
36.2
%
 
1,992

 
36.5
%
Selling, general and administrative expenses
(1,561
)
 
(27.1
%)
 
(1,497
)
 
(27.5
%)
Earnings before interest and income taxes
526

 
9.1
%
 
$
495

 
9.1
%


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

Retail Business Net Sales
 
Quarter Ended
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
Net sales by channel:
 
 
 
 
 
 
 
Nordstrom full-line stores
$
2,098

 
$
2,114

 
$
3,815

 
$
3,830

Direct
425

 
309

 
726

 
551

Nordstrom
2,523

 
2,423

 
4,541

 
4,381

Nordstrom Rack
645

 
577

 
1,261

 
1,134

HauteLook and Jeffrey
77

 
63

 
156

 
124

Total Retail segment
3,245

 
3,063

 
5,958

 
5,639

Corporate/Other
(141
)
 
(145
)
 
(197
)
 
(186
)
Total net sales
$
3,104

 
$
2,918

 
$
5,761


$
5,453

 
 
 
 
 
 
 
 
Net sales increase
6.4
%
 
7.4
%
 
5.6
%
 
10.3
%
 
 
 
 
 
 
 
 
Same-store sales increase (decrease) by channel:1
 
 
 
 
 
 
 
Nordstrom full-line stores
(0.7
%)
 
1.1
%
 
(0.4
%)
 
3.1
%
Direct
37.2
%
 
39.7
%
 
31.7
%
 
41.6
%
Nordstrom
4.2
%
 
4.9
%
 
3.7
%
 
6.8
%
Nordstrom Rack
2.4
%
 
7.7
%
 
1.6
%
 
7.3
%
HauteLook2
23.1
%
 

 
28.6
%
 
%
Total
4.4
%
 
4.5
%
 
3.6
%
 
6.3
%
 
 
 
 
 
 
 
 
Sales per square foot
$
121

 
$
117

 
$
226

 
$
219

4-wall sales per square foot3
$
108

 
$
108

 
$
200

 
$
200

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

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

Nordstrom Rack net sales increased $69, or 12% for the quarter and $127, or 11% for the six months ended August 3, 2013, compared with the same periods in 2012. We opened eight Nordstrom Rack stores during the first six months of 2013.
Nordstrom Rack same-store sales increased 2.4% for the quarter and 1.6% for the six months ended August 3, 2013. Both the number of items sold and the average selling price increased on a same-store basis for the quarter and six months ended August 3, 2013.
Retail Business Gross Profit 
 
Quarter Ended
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
Gross profit1
$
1,102


$
1,040


$
2,087


$
1,992

Gross profit rate
35.5
%

35.6
%

36.2
%

36.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
August 3, 2013
 
July 28, 2012
Ending inventory per square foot
 
 
 
 
$
57.26

 
$
55.83

Inventory turnover rate2
 
 
 
 
5.20

 
5.28

1Retail cost of sales includes the estimated cost of Nordstrom Notes and complimentary alterations credits that are expected to be issued and redeemed under our Fashion Rewards program. We provide these benefits to our cardholders, as participation in the Fashion Rewards program enhances customer loyalty and drives incremental sales.
2Inventory turnover rate is calculated as the trailing 12-months cost of sales and related buying and occupancy costs (for all channels) divided by the trailing 4-quarter average inventory.
Our retail gross profit rate decreased 13 basis points for the quarter and 30 basis points for the six months ended August 3, 2013, compared with the same periods in 2012. These decreases were primarily due to the growth in the Fashion Rewards customer loyalty program. Retail gross profit increased $62 for the quarter and $95 for the six months ended August 3, 2013, compared with the same periods in 2012, due primarily to increased sales, partially offset by an increase in occupancy costs related to investments in new stores.
For the first two quarters of 2013, our regular-priced selling at Nordstrom was consistent with last year and our inventory turnover rate decreased to 5.20 times for the trailing 12-months ended August 3, 2013, from 5.28 times for the same period in the prior year. The decrease in inventory turnover rate is primarily due to our increased investment in pack and hold inventory at Nordstrom Rack, which helps us take advantage of strategic buying opportunities to secure top brands and to fuel our Rack new store growth. On a per square foot basis, we ended the quarter with a 3.9% increase in sales on a 2.6% increase in ending inventory primarily due to the impact of the Anniversary Sale event shift.
Retail Business Selling, General and Administrative Expenses 
 
Quarter Ended
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
Selling, general and administrative expenses
$
807

 
$
778

 
$
1,561

 
$
1,497

Selling, general and administrative expense rate
26.0
%
 
26.6
%
 
27.1
%
 
27.5
%
Our Retail selling, general and administrative expenses ("Retail SG&A") rate decreased 66 basis points for the quarter and 37 basis points for the six months ended August 3, 2013, compared with the same periods in 2012. The improvements primarily were due to leverage on increased sales, including the impact of the Anniversary Sale event shift and a reduction in variable expenses correlated with our performance. This was partially offset by investments related to technology, our planned entry into Canada and accelerated Rack store expansion, along with higher fulfillment expenses supporting online growth. Our Retail SG&A increased $29, or 3.8%, for the quarter and $64, or 4.2% for the six months ended August 3, 2013, compared with the same periods in 2012. The increases were primarily due to higher sales volume and the incremental costs related to investments in technology, partially offset by the reduction of variable expenses correlated to our performance.



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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

Credit Segment
Summary
The table below provides a detailed view of the operational results of our Credit segment, consistent with the segment disclosure provided in Note 9: Segment Reporting in the Notes to Condensed Consolidated Financial Statements. In order to better reflect the economic contribution of our credit and debit card program, intercompany merchant fees are also included in the table below, which represents the estimated costs that would be incurred if our cardholders used third party cards.
Interest expense is assigned to the Credit segment in proportion to the amount of estimated debt and equity needed to fund our credit card receivables. Based on our research, debt as a percentage of credit card receivables for other credit card companies ranges from 70% to 90%. As such, we believe a mix of 80% debt and 20% equity is an appropriate estimate. 
 
Quarter Ended
 
Quarter Ended
 
August 3, 2013
 
July 28, 2012
 
Amount
 
Annualized % of average credit card receivables
 
Amount
 
Annualized % of average credit card receivables
Credit card revenues
$
92

 
17.6
%
 
$
88

 
17.1
%
Occupancy, selling, general and administrative expenses
(52
)
 
(9.9
%)
 
(60
)
 
(11.7
%)
Credit segment earnings before interest and income taxes, as presented in segment disclosure
40

 
7.7
%
 
28

 
5.5
%
Interest expense
(6
)
 
(1.2
%)
 
(7
)
 
(1.2
%)
Intercompany merchant fees
28

 
5.5
%
 
26

 
5.0
%
Credit segment contribution, before income taxes
$
62

 
12.0
%
 
$
47

 
9.2
%
 
 
 
 
 
 
 
 
Credit and debit card volume:
 
 
 
 
 
 
 
Outside
$
1,077

 
 
 
$
1,066

 
 
Inside
1,426

 
 
 
1,283

 
 
Total volume
$
2,503

 
 
 
$
2,349

 
 
 
 
 
 
 
 
 
 
Average credit card receivables
$
2,074

 
 
 
$
2,039

 
 


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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

 
Six Months Ended
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
Amount
 
Annualized % of average credit card receivables
 
Amount
 
Annualized % of average credit card receivables
Credit card revenues
$
184

 
18.0
%
 
$
178

 
17.6
%
Occupancy, selling, general and administrative expenses
(100
)
 
(9.8
%)
 
(103
)
 
(10.1
%)
Credit segment earnings before interest and income taxes, as presented in segment disclosure
84

 
8.2
%
 
75

 
7.5
%
Interest expense
(12
)
 
(1.2
%)
 
(13
)
 
(1.2
%)
Intercompany merchant fees
48

 
4.7
%
 
43

 
4.3
%
Credit segment contribution, before income taxes
$
120

 
11.8
%
 
$
105

 
10.5
%
 
 
 
 
 
 
 
 
Credit and debit card volume:
 
 
 
 
 
 
 
Outside
$
2,124

 
 
 
$
2,081

 
 
Inside
2,444

 
 
 
2,175

 
 
Total volume
$
4,568

 
 
 
$
4,256

 
 
 
 
 
 
 
 
 
 
Average credit card receivables
$
2,044

 
 
 
$
2,012

 
 
Credit Card Revenues 
 
Quarter Ended
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
Finance charge revenue
$
59

 
$
58

 
$
120

 
$
118

Interchange – third party
22

 
19

 
43

 
39

Late fees and other revenue
11

 
11

 
21

 
21

Total credit card revenues
$
92

 
$
88

 
$
184

 
$
178

Credit card revenues include finance charges, interchange fees, late fees and other revenue. Finance charges represent interest earned on unpaid balances while interchange fees are earned from the use of Nordstrom VISA credit cards at merchants outside of Nordstrom. Late fees are assessed when a credit card account becomes past due. We consider an account delinquent if the minimum payment is not received by the payment due date.
Credit card revenues increased $4 for the quarter and $6 for the six months ended August 3, 2013, compared with the same periods in the prior year, due to a 6.6% increase in total quarterly volume and a 7.3% increase in volume for the six month period that was partially offset by continued improvements in customer payment rates.


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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

Credit Segment Occupancy, Selling, General and Administrative Expenses
Occupancy, selling, general and administrative expenses for our Credit segment ("Credit expenses") are summarized in the following table: 
 
Quarter Ended
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
Occupancy expenses
$
2

 
$
1

 
$
3

 
$
2

Operational and marketing expenses
34

 
37

 
$
67

 
$
70

Bad debt provision
16

 
22

 
30

 
31

Total Credit occupancy, selling, general and administrative expenses
$
52