JWN-Q3 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 November 2, 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 November 27, 2013: 193,357,203 shares
 
 

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NORDSTROM, INC.
TABLE OF CONTENTS
 
 
 
Page
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 1.
 
 
 
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
 
Nine Months Ended
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
Net sales
$
2,791

 
$
2,713

 
$
8,552

 
$
8,166

Credit card revenues
93

 
92

 
277

 
270

Total revenues
2,884

 
2,805

 
8,829

 
8,436

Cost of sales and related buying and occupancy costs
(1,791
)
 
(1,730
)
 
(5,468
)
 
(5,193
)
Selling, general and administrative expenses
(840
)
 
(798
)
 
(2,498
)
 
(2,396
)
Earnings before interest and income taxes
253

 
277

 
863

 
847

Interest expense, net
(35
)
 
(38
)
 
(111
)
 
(118
)
Earnings before income taxes
218

 
239

 
752

 
729

Income tax expense
(81
)
 
(93
)
 
(286
)
 
(278
)
Net earnings
$
137

 
$
146

 
$
466

 
$
451

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.70

 
$
0.73

 
$
2.39

 
$
2.21

Diluted
$
0.69

 
$
0.71

 
$
2.35

 
$
2.17

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
194.3

 
200.9

 
195.1

 
204.5

Diluted
197.3

 
204.7

 
198.3

 
208.2

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
 
Nine Months Ended
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
Net earnings
$
137

 
$
146

 
$
466

 
$
451

Postretirement plan adjustments, net of tax
2

 
1

 
5

 
4

Comprehensive net earnings
$
139

 
$
147

 
$
471

 
$
455

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)
 
November 2, 2013
 
February 2, 2013
 
October 27, 2012
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
947

 
$
1,285

 
$
1,158

Accounts receivable, net
2,146

 
2,129

 
2,088

Merchandise inventories
1,795

 
1,360

 
1,650

Current deferred tax assets, net
243

 
227

 
222

Prepaid expenses and other
122

 
80

 
115

Total current assets
5,253

 
5,081

 
5,233

 
 
 
 
 
 
Land, buildings and equipment (net of accumulated depreciation of $4,347, $4,064 and $4,013)
2,880

 
2,579

 
2,551

Goodwill
175

 
175

 
175

Other assets
277

 
254

 
306

Total assets
$
8,585

 
$
8,089

 
$
8,265

 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
1,448

 
$
1,011

 
$
1,347

Accrued salaries, wages and related benefits
358

 
404

 
320

Other current liabilities
821

 
804

 
751

Current portion of long-term debt
407

 
7

 
6

Total current liabilities
3,034

 
2,226

 
2,424

 
 
 
 
 
 
Long-term debt, net
2,711

 
3,124

 
3,129

Deferred property incentives, net
491

 
485

 
488

Other liabilities
361

 
341

 
340

 
 
 
 
 
 
Commitments and contingencies

 

 

 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
Common stock, no par value: 1,000 shares authorized; 193.2, 197.0 and 200.7 shares issued and outstanding
1,794

 
1,645

 
1,622

Retained earnings
236

 
315

 
303

Accumulated other comprehensive loss
(42
)
 
(47
)
 
(41
)
Total shareholders' equity
1,988

 
1,913

 
1,884

Total liabilities and shareholders' equity
$
8,585

 
$
8,089

 
$
8,265

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

 

 
466

 

 
466

Postretirement plan adjustments, net of tax

 

 

 
5

 
5

Dividends ($0.90 per share)

 

 
(176
)
 

 
(176
)
Issuance of common stock under stock compensation plans
2.7

 
102

 

 

 
102

Stock-based compensation
0.1

 
47

 

 

 
47

Repurchase of common stock
(6.6
)
 

 
(369
)
 

 
(369
)
Balance at November 2, 2013
193.2

 
$
1,794

 
$
236

 
$
(42
)
 
$
1,988

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 

 
451

 

 
451

Postretirement plan adjustments, net of tax

 

 

 
4

 
4

Dividends ($0.81 per share)

 

 
(166
)
 

 
(166
)
Issuance of common stock under stock compensation plans
2.9

 
101

 

 

 
101

Stock-based compensation
0.1

 
37

 

 

 
37

Repurchase of common stock
(9.9
)
 

 
(499
)
 

 
(499
)
Balance at October 27, 2012
200.7

 
$
1,622

 
$
303

 
$
(41
)
 
$
1,884

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)
 
Nine Months Ended
 
November 2, 2013
 
October 27, 2012
Operating Activities
 
 
 
Net earnings
$
466

 
$
451

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization expenses
332

 
314

Amortization of deferred property incentives and other, net
(40
)
 
(47
)
Deferred income taxes, net
(45
)
 
(31
)
Stock-based compensation expense
47

 
42

Tax benefit from stock-based compensation
17

 
19

Excess tax benefit from stock-based compensation
(19
)
 
(20
)
Provision for bad debt expense
44

 
38

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(59
)
 
(84
)
Merchandise inventories
(385
)
 
(449
)
Prepaid expenses and other assets
(42
)
 
(28
)
Accounts payable
354

 
339

Accrued salaries, wages and related benefits
(47
)
 
(71
)
Other current liabilities
7

 
(18
)
Deferred property incentives
64

 
43

Other liabilities
24

 
9

Net cash provided by operating activities
718

 
507

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(621
)
 
(369
)
Change in restricted cash

 
200

Change in credit card receivables originated at third parties
(1
)
 
(10
)
Other, net
(9
)
 
(7
)
Net cash used in investing activities
(631
)
 
(186
)
 
 
 
 
Financing Activities
 
 
 
Principal payments on long-term borrowings
(5
)
 
(505
)
Increase in cash book overdrafts
29

 
36

Cash dividends paid
(176
)
 
(166
)
Payments for repurchase of common stock
(374
)
 
(506
)
Proceeds from issuances under stock compensation plans
85

 
83

Excess tax benefit from stock-based compensation
19

 
20

Other, net
(3
)
 
(2
)
Net cash used in financing activities
(425
)
 
(1,040
)
 
 
 
 
Net decrease in cash and cash equivalents
(338
)
 
(719
)
Cash and cash equivalents at beginning of period
1,285

 
1,877

Cash and cash equivalents at end of period
$
947

 
$
1,158

 
 
 
 
Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Interest (net of capitalized interest)
$
113

 
$
108

Income taxes paid, net of refunds
$
369

 
$
360

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 of a normal recurring nature 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 November 2, 2013 and October 27, 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 normally 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: 
 
November 2, 2013
 
February 2, 2013
 
October 27, 2012
Credit card receivables:
 
 
 
 
 
Nordstrom VISA credit card receivables
$
1,317

 
$
1,348

 
$
1,315

Nordstrom private label card receivables
831

 
794

 
777

Total credit card receivables
2,148

 
2,142

 
2,092

Allowance for credit losses
(85
)
 
(85
)
 
(95
)
Credit card receivables, net
2,063

 
2,057

 
1,997

Other accounts receivable1
83

 
72

 
91

Accounts receivable, net
$
2,146

 
$
2,129

 
$
2,088

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
 
Nine Months Ended
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
Allowance at beginning of period
$
85

 
$
105

 
$
85

 
$
115

Bad debt provision
14

 
7

 
44

 
38

Write-offs
(19
)
 
(22
)
 
(61
)
 
(76
)
Recoveries
5

 
5

 
17

 
18

Allowance at end of period
$
85

 
$
95

 
$
85

 
$
95

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 are as follows:
 
November 2, 2013
 
February 2, 2013
 
October 27, 2012
Credit card receivables classified as TDRs
$
40

 
$
53

 
$
54

Percent of total credit card receivables classified as TDRs
1.9
%
 
2.5
%
 
2.6
%


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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: 
 
November 2, 2013
 
February 2, 2013
 
October 27, 2012
 
Balance
 
% of total
 
Balance
 
% of total
 
Balance
 
% of total
Current
$
2,028

 
94.4
%
 
$
2,018

 
94.2
%
 
$
1,960

 
93.7
%
1 – 29 days delinquent
82

 
3.8
%
 
84

 
3.9
%
 
89

 
4.2
%
30 days or more delinquent:
 
 
 
 
 
 
 
 
 
 
 
30 – 59 days delinquent
15

 
0.7
%
 
15

 
0.7
%
 
17

 
0.9
%
60 – 89 days delinquent
10

 
0.5
%
 
10

 
0.5
%
 
11

 
0.5
%
90 days or more delinquent
13

 
0.6
%
 
15

 
0.7
%
 
15

 
0.7
%
Total 30 days or more delinquent
38

 
1.8
%
 
40

 
1.9
%
 
43

 
2.1
%
Total credit card receivables
$
2,148

 
100.0
%
 
$
2,142

 
100.0
%
 
$
2,092

 
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: 
 
November 2, 2013
 
February 2, 2013
 
October 27, 2012
FICO Score Range1
Balance
 
% of total  
 
Balance
 
% of total  
 
Balance
 
% of total  
801+
$
329

 
15.3
%
 
$
310

 
14.5
%
 
$
335

 
16.0
%
660 – 800
1,355

 
63.1
%
 
1,366

 
63.8
%
 
1,326

 
63.4
%
001 – 659
368

 
17.1
%
 
379

 
17.7
%
 
359

 
17.1
%
Other2
96

 
4.5
%
 
87

 
4.0
%
 
72

 
3.5
%
Total credit card receivables
$
2,148

 
100.0
%
 
$
2,142

 
100.0
%
 
$
2,092

 
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:
 
November 2, 2013

February 2, 2013

October 27, 2012
Secured
 
 
 
 
 
Series 2011-1 Class A Notes, 2.28%, due October 2016
$
325

 
$
325

 
$
325

Mortgage payable, 7.68%, due April 2020
43

 
47

 
48

Other
9

 
10

 
10

 
377

 
382

 
383

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

 
400

 
400

Senior notes, 6.25%, due January 2018
648

 
648

 
648

Senior notes, 4.75%, due May 2020
499

 
498

 
498

Senior notes, 4.00%, due October 2021
499

 
499

 
499

Senior debentures, 6.95%, due March 2028
300

 
300

 
300

Senior notes, 7.00%, due January 2038
344

 
344

 
344

Unamortized fair value hedge
51

 
60

 
63

 
2,741

 
2,749

 
2,752

 
 
 
 
 
 
Total long-term debt
3,118

 
3,131

 
3,135

Less: current portion
(407
)
 
(7
)
 
(6
)
Total due beyond one year
$
2,711

 
$
3,124

 
$
3,129

Credit Facilities
As of November 2, 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 nine months ended November 2, 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 an adjusted debt to Earnings before Interest, Income Taxes, Depreciation, Amortization and Rent ("EBITDAR") leverage ratio of less than four times. As of November 2, 2013, we were in compliance with this covenant.
Subsequent to the quarter ended November 2, 2013, our wholly owned subsidiary in Puerto Rico entered into a $52 unsecured borrowing facility to support our expansion into that market. The facility expires in November 2018.
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 November 2, 2013, February 2, 2013 or October 27, 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:
 
November 2, 2013
 
February 2, 2013
 
October 27, 2012
Carrying value of long-term debt1
$
3,118

 
$
3,131

 
$
3,135

Fair value of long-term debt
3,463

 
3,665

 
3,746

1The carrying value of long-term debt includes the remaining unamortized 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 nine months ended November 2, 2013 and October 27, 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
As of November 2, 2013, we had approximately $100 of fee interest in our Manhattan full-line store subject to lien. We have committed to make future installment payments based on the developer of the property 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.
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 nine months ended November 2, 2013, we repurchased 6.6 shares of our common stock for an aggregate purchase price of $369 and had $824 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
 
Nine Months Ended
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
Stock options
$
10

 
$
8

 
$
36

 
$
29

HauteLook stock compensation
2

 
2

 
6

 
7

Performance share units

 
1

 
1

 
3

Employee stock purchase plan

 

 
1

 
1

Other
1

 

 
3

 
2

Total stock-based compensation expense, before income tax benefit
13

 
11

 
47

 
42

Income tax benefit
(5
)
 
(3
)
 
(16
)
 
(14
)
Total stock-based compensation expense, net of income tax benefit
$
8

 
$
8

 
$
31

 
$
28

During the nine months ended November 2, 2013 and October 27, 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
 
Nine Months Ended
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
Net earnings
$
137

 
$
146

 
$
466

 
$
451

 
 
 
 
 
 
 
 
Basic shares
194.3

 
200.9

 
195.1

 
204.5

Dilutive effect of stock options and other
3.0

 
3.8

 
3.2

 
3.7

Diluted shares
197.3

 
204.7

 
198.3

 
208.2

 
 
 
 
 
 
 
 
Earnings per basic share
$
0.70

 
$
0.73

 
$
2.39

 
$
2.21

Earnings per diluted share
$
0.69

 
$
0.71

 
$
2.35

 
$
2.17

 
 
 
 
 
 
 
 
Anti-dilutive stock options and other
4.5

 
2.4

 
4.6

 
4.8

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 Nordstrom Rewards loyalty program expenses in our Credit segment. We now allocate all of our Nordstrom 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 November 2, 2013
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,749

 
$
42

 
$
2,791

 
$

 
$
2,791

Credit card revenues
 

 

 

 
93

 
93

Earnings (loss) before interest and income taxes
 
274

 
(66
)
 
208

 
45

 
253

Interest expense, net
 

 
(29
)
 
(29
)
 
(6
)
 
(35
)
Earnings (loss) before income taxes
 
274

 
(95
)
 
179

 
39

 
218

 
 
 
 
 
 
 
 
 
 
 
Quarter Ended October 27, 2012
 
 
 
 
 
 
 
 
 

Net sales
 
$
2,657

 
$
56

 
$
2,713

 
$

 
$
2,713

Credit card revenues
 

 

 

 
92

 
92

Earnings (loss) before interest and income taxes
 
257

 
(31
)
 
226

 
51

 
277

Interest expense, net
 

 
(32
)
 
(32
)
 
(6
)
 
(38
)
Earnings (loss) before income taxes
 
257

 
(63
)
 
194

 
45

 
239

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended November 2, 2013
 
 
 
 
 
 
 
 
 

Net sales
 
$
8,707

 
$
(155
)
 
$
8,552

 
$

 
$
8,552

Credit card revenues
 

 

 

 
277

 
277

Earnings (loss) before interest and income taxes
 
949

 
(215
)
 
734

 
129

 
863

Interest expense, net
 

 
(93
)
 
(93
)
 
(18
)
 
(111
)
Earnings (loss) before income taxes
 
949

 
(308
)
 
641

 
111

 
752

 
 
 
 
 
 

 
 
 

Nine Months Ended October 27, 2012
 
 
 
 
 

 
 
 

Net sales
 
$
8,296

 
$
(130
)
 
$
8,166

 
$

 
$
8,166

Credit card revenues
 

 

 

 
270

 
270

Earnings (loss) before interest and income taxes
 
923

 
(202
)
 
721

 
126

 
847

Interest expense, net
 

 
(99
)
 
(99
)
 
(19
)
 
(118
)
Earnings (loss) before income taxes
 
923

 
(301
)
 
622

 
107

 
729

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
 
Nine Months Ended
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
Nordstrom full-line stores
$
1,657

 
$
1,730

 
$
5,472

 
$
5,560

Direct
305

 
248

 
1,031

 
799

Nordstrom
1,962

 
1,978

 
6,503


6,359

Nordstrom Rack
709

 
613

 
1,970

 
1,747

HauteLook and Jeffrey
78

 
66

 
234

 
190

Total Retail segment
2,749

 
2,657

 
8,707

 
8,296

Corporate/Other
42

 
56

 
(155
)
 
(130
)
Total net sales
$
2,791

 
$
2,713

 
$
8,552

 
$
8,166


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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 regular-price and off-price channels. Over the years, our ability to deliver a compelling service experience has been the biggest driver of our results and ability to create shareholder value. We have focused on improving our multi-channel capabilities, and while each channel represents a meaningful growth opportunity individually, the synergies they create contribute significantly to our ability to attract, retain, and serve customers into the future.
Our performance in the third quarter was consistent with the first half of the year. While our overall sales performance was below our initial expectations, we were encouraged with the momentum in our Direct and Rack businesses. Our continued disciplined execution around inventory and expenses has helped mitigate the sales softness in our full-line stores. Third quarter results were also impacted by a timing shift of our Anniversary Sale, historically our largest sale event of the year, which took place in the second quarter this year, but occurred in both the second and third quarters last year. Combined second and third quarter same-store sales, which eliminates the impact of the Anniversary Sale event shift, yields an increase of 2.4% compared with the same period last year. The estimated impact of the event shift increased earnings per diluted share in the second quarter and reduced earnings per diluted share in the third quarter by approximately $0.06.
Women's apparel continued its momentum, performing above the Nordstrom average for both the quarter and year-to-date. We successfully executed our strategic changes in Women’s apparel through increased focus on key brands, an improved shopping environment and product innovation. We are appealing to new customers with our repositioned Savvy department and with the expansion of Topshop merchandise, now in 41 stores and online, with more planned for next year.
During the third quarter, we relocated our Glendale, California store and incorporated new design concepts that reflect our customers’ desire for stores that are easier to shop. We emphasized selling floor flexibility to enable us to quickly adjust and evolve departments over time. We used this approach in our 2013 remodels and plan to incorporate additional new designs in our future renovations and store openings.
Our Direct sales grew 29% year-to-date and is our fastest-growing business. With two consecutive years of at least 30% sales growth, we are on track for a similar increase this year. We continue to make investments to expand our online merchandise selection and personalize the customer experience, and are finalizing plans to add a third fulfillment center on the east coast in 2015 to better meet customers’ expectations of fast and reliable delivery.
Rack net sales increased 16% during the quarter compared with the same period last year, reflecting 20 stores opened since the third quarter of 2012. During the first nine months of 2013, we opened 18 Nordstrom Rack stores and relocated one Nordstrom Rack store. Some of these store openings represented new markets for us, including two in new states. We also expanded the services we offer by enabling our mobile point-of-sale devices in the Rack to locate and send merchandise to customers from any of our Rack stores. In addition, our Rack stores can now accept HauteLook merchandise returns, adding convenience for our customers while driving incremental traffic to our Racks and further integrating the customer experience across channels.
Our HauteLook business grew over 25% year-to-date. HauteLook has nearly 15 million members, which has more than tripled since our acquisition in 2011. We recently opened a 900,000 square foot fulfillment center in California that will support significant growth across all of our channels. In addition, we added to HauteLook a persistent selection of Nordstrom Rack merchandise to complement the existing flash sale offering. We are encouraged by both the growth and integration taking place in this part of our business.
Our credit business plays an important role in reaching new customers and strengthening existing customer relationships through our Nordstrom Rewards loyalty program. We now have 3.7 million active members, a 15% increase over last year. Our overall credit card portfolio remains healthy, with delinquency and write-off trends around a five-year low.
Our long-term strategy to improve the customer experience is creating multiple growth opportunities. We continue to make investments in our stores, online and in new markets such as Canada and Manhattan. While we are making improvements within each individual channel, we recognize that our customers view us simply as Nordstrom. Our customers who shop with us in multiple channels spend three to four times more than other customers. To create a seamless customer experience, we continue to leverage technology, Nordstrom Rewards, inventory access, supply chain, marketing, and merchandise returns across the company.


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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)

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 Nordstrom Rewards loyalty program expenses to our Retail Business. We previously recorded all Nordstrom 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 nine months ended November 2, 2013, compared with the quarter and nine months ended October 27, 2012: 
 
Quarter Ended
 
November 2, 2013
 
October 27, 2012
 
Amount
 
% of net sales1
 
Amount
 
% of net sales1
Net sales
$
2,791

 
100.0
%
 
$
2,713

 
100.0
%
Cost of sales and related buying and occupancy costs
(1,790
)
 
(64.1
%)
 
(1,729
)
 
(63.7
%)
Gross profit
1,001

 
35.9
%
 
984

 
36.3
%
Selling, general and administrative expenses
(793
)
 
(28.4
%)
 
(758
)
 
(27.9
%)
Earnings before interest and income taxes
$
208

 
7.5
%
 
$
226

 
8.3
%
 
 
Nine Months Ended
 
November 2, 2013
 
October 27, 2012
 
Amount
 
% of net sales1
 
Amount
 
% of net sales1
Net sales
$
8,552

 
100.0
%
 
$
8,166

 
100.0
%
Cost of sales and related buying and occupancy costs
(5,464
)
 
(63.9
%)
 
(5,190
)
 
(63.6
%)
Gross profit
3,088

 
36.1
%
 
2,976

 
36.4
%
Selling, general and administrative expenses
(2,354
)
 
(27.5
%)
 
(2,255
)
 
(27.6
%)
Earnings before interest and income taxes
$
734

 
8.6
%
 
$
721

 
8.8
%
1Subtotals and totals may not foot due to rounding.

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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
 
Nine Months Ended
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
Net sales by channel:
 
 
 
 
 
 
 
Nordstrom full-line stores
$
1,657

 
$
1,730

 
$
5,472

 
$
5,560

Direct
305

 
248

 
1,031

 
799

Nordstrom
1,962

 
1,978

 
6,503

 
6,359

Nordstrom Rack
709

 
613

 
1,970

 
1,747

HauteLook and Jeffrey
78

 
66

 
234

 
190

Total Retail segment
2,749

 
2,657

 
8,707

 
8,296

Corporate/Other
42

 
56

 
(155
)
 
(130
)
Total net sales
$
2,791

 
$
2,713

 
$
8,552


$
8,166

 
 
 
 
 
 
 
 
Net sales increase
2.9
%
 
13.8
%
 
4.7
%
 
11.4
%
 
 
 
 
 
 
 
 
Same-store sales increase (decrease) by channel:1
 
 
 
 
 
 
 
Nordstrom full-line stores
(4.2
%)
 
8.1
%
 
(1.5
%)
 
4.6
%
Direct
23.2
%
 
38.3
%
 
29.0
%
 
40.6
%
Nordstrom
(0.7
%)
 
11.2
%
 
2.3
%
 
8.1
%
Nordstrom Rack
3.7
%
 
8.1
%
 
2.3
%
 
7.5
%
HauteLook2
22.3
%
 

 
26.4
%
 

Total
0.1
%
 
10.7
%
 
2.5
%
 
7.7
%
 
 
 
 
 
 
 
 
Sales per square foot
$
109

 
$
109

 
$
335

 
$
328

4-wall sales per square foot3
$
92

 
$
94

 
$
292

 
$
294

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 2.9% for the quarter and 4.7% for the nine months ended November 2, 2013, compared with the same periods in 2012. Overall same-store sales increased 0.1% for the quarter and 2.5% for the nine months ended November 2, 2013. Total company net sales and same-store sales for the third quarter were unfavorably impacted by the Anniversary Sale event shift, which took place in the second quarter in 2013, but occurred during the second and third quarter in the prior year. Combined second and third quarter same-store sales, which eliminates the impact of the Anniversary Sale event shift, increased 2.4% compared with the same period in 2012.
Nordstrom net sales for the third quarter of 2013 were $1,962, a decrease of 0.8% compared with the same period in 2012, while net sales were $6,503 for the nine months ended November 2, 2013, an increase of 2.3% compared with the same period in 2012. Nordstrom same-store sales decreased 0.7% for the third quarter and increased 2.3% for the nine months ended November 2, 2013 compared with the same periods in 2012. The average selling price increased on a same-store basis for the quarter and nine months ended November 2, 2013. On a same-store basis, the number of items sold decreased for the quarter ended November 2, 2013 and increased for the nine months ended November 2, 2013. Category highlights for the quarter ended November 2, 2013 included Cosmetics, Women's Apparel, and Women's Shoes, and category highlights for the nine months ended November 2, 2013 included Cosmetics, Men's Shoes, and Men's Apparel.

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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)

Full-line same-store sales decreased 4.2% for the quarter and 1.5% for the nine months ended November 2, 2013, compared with the same periods in 2012. The top-performing geographic regions for full-line stores for the quarter ended November 2, 2013 were the Southwest and Southern California, while the top-performing geographic regions for full-line stores for the nine months ended November 2, 2013 were the Southwest and the Southeast. The Direct channel continued to generate strong sales growth with an increase of 23.2% in the third quarter of 2013 and 29.0% for the nine months ended November 2, 2013. These increases continue to outpace our overall performance and are reflective of how customers are responding to our ongoing e-commerce initiatives.
Nordstrom Rack net sales increased $95, or 16% for the quarter and $223, or 13% for the nine months ended November 2, 2013, compared with the same periods in 2012. We opened 18 Nordstrom Rack stores during the first nine months of 2013. Nordstrom Rack same-store sales increased 3.7% for the quarter and 2.3% for the nine months ended November 2, 2013. Both the number of items sold and the average selling price increased on a same-store basis for the quarter and nine months ended November 2, 2013.
Retail Business Gross Profit 
 
Quarter Ended
 
Nine Months Ended
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
Gross profit1
$
1,001


$
984


$
3,088


$
2,976

Gross profit rate
35.9
%

36.3
%

36.1
%

36.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
November 2, 2013
 
October 27, 2012
Ending inventory per square foot
 
 
 
 
$
69.28

 
$
65.42

Inventory turnover rate2
 
 
 
 
4.97

 
5.07

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 Nordstrom Rewards program. We provide these benefits to our cardholders, as participation in the Nordstrom 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 40 basis points for the quarter and 33 basis points for the nine months ended November 2, 2013, compared with the same periods in 2012. These decreases were primarily due to higher occupancy costs related to our accelerated Rack store expansion. In addition, for the nine months ended November 2, 2013, the decrease in the Retail gross profit rate when compared with the same period in 2012 was attributable to the growth in the Nordstrom Rewards customer loyalty program. Retail gross profit increased $17 for the quarter and $112 for the nine months ended November 2, 2013, compared with the same periods in 2012, due primarily to increased sales and improvements in markdown rates, partially offset by an increase in occupancy costs related to investments in new stores.
For the first three quarters of 2013, our regular-priced selling at Nordstrom was consistent with last year and our inventory turnover rate decreased to 4.97 times for the trailing 12-months ended November 2, 2013, from 5.07 times for the same period in the prior year. The decrease in our inventory turnover rate was 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 0.3% increase in sales on a 5.9% increase in ending inventory primarily due to the impact of the Anniversary Sale event shift and investments in pack-and-hold inventory.









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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 Selling, General and Administrative Expenses 
 
Quarter Ended
 
Nine Months Ended
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
Selling, general and administrative expenses
$
793

 
$
758

 
$
2,354

 
$
2,255

Selling, general and administrative expense rate
28.4
%
 
27.9
%
 
27.5
%
 
27.6
%
Our Retail selling, general and administrative expenses ("Retail SG&A") rate increased 46 basis points for the quarter ended November 2, 2013, compared with the same period in 2012, mostly due to expense deleverage from the impact of the Anniversary Sale event shift and our planned growth-related investments in technology, fulfillment and the Rack and Canada expansion. Our Retail SG&A rate decreased 10 basis points for the nine months ended November 2, 2013, compared with the same period in 2012, primarily due to a reduction in variable expenses correlated with our performance. Our Retail SG&A increased $35, or 4.6%, for the quarter and $99, or 4.3% for the nine months ended November 2, 2013, compared with the same periods in 2012. The increases were primarily due to higher sales volume and the incremental costs related to our planned growth-related investments.
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
 
November 2, 2013
 
October 27, 2012
 
Amount
 
Annualized % of average credit card receivables1
 
Amount
 
Annualized % of average credit card receivables1
Credit card revenues
$
93

 
17.6
%
 
$
92

 
17.7
%
Credit expenses
(48
)
 
(9.1
%)
 
(41
)
 
(8.0
%)
Credit segment earnings before interest and income taxes, as presented in segment disclosure
45

 
8.5
%
 
51

 
9.7
%
Interest expense
(6
)
 
(1.1
%)
 
(6
)
 
(1.2
%)
Intercompany merchant fees
20

 
3.9
%
 
18

 
3.5
%
Credit segment contribution, before income taxes
$
59

 
11.2
%
 
$
63

 
12.0
%
 
 
 
 
 
 
 
 
Credit and debit card volume:
 
 
 
 
 
 
 
Outside
$
1,052

 
 
 
$
1,055

 
 
Inside
1,033

 
 
 
936

 
 
Total volume
$
2,085

 
 
 
$
1,991

 
 
 
 
 
 
 
 
 
 
Average credit card receivables
$
2,113

 
 
 
$
2,096

 
 
1Subtotals and totals may not foot due to rounding.



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

 
Nine Months Ended
 
Nine Months Ended
 
November 2, 2013
 
October 27, 2012
 
Amount
 
Annualized % of average credit card receivables1
 
Amount
 
Annualized % of average credit card receivables1
Credit card revenues
$
277

 
17.9
%
 
$
270

 
17.6
%
Credit expenses
(148
)
 
(9.6
%)
 
(144
)
 
(9.4
%)
Credit segment earnings before interest and income taxes, as presented in segment disclosure
129

 
8.3
%
 
126

 
8.2
%
Interest expense
(18
)
 
(1.2
%)
 
(19
)
 
(1.2
%)
Intercompany merchant fees
68

 
4.4
%
 
61

 
4.0
%
Credit segment contribution, before income taxes
$
179

 
11.6
%
 
$
168

 
11.0
%
 
 
 
 
 
 
 
 
Credit and debit card volume:
 
 
 
 
 
 
 
Outside
$
3,176

 
 
 
$
3,136

 
 
Inside
3,476

 
 
 
3,111

 
 
Total volume
$
6,652

 
 
 
$
6,247

 
 
 
 
 
 
 
 
 
 
Average credit card receivables
$
2,066

 
 
 
$
2,039

 
 
1Subtotals and totals may not foot due to rounding.
Credit Card Revenues 
 
Quarter Ended
 
Nine Months Ended
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
Finance charge revenue
$
61

 
$
61

 
$
181

 
$
179

Interchange – third party
21

 
20

 
64

 
59

Late fees and other revenue
11

 
11

 
32

 
32

Total credit card revenues
$
93

 
$
92

 
$
277

 
$
270

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 $1 for the quarter and $7 for the nine months ended November 2, 2013, compared with the same periods in the prior year, due to a 4.7% increase in total quarterly volume and a 6.5% increase in total volume for the nine 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 Expenses
Credit expenses are summarized in the following table: 
 
Quarter Ended
 
Nine Months Ended
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012