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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) August 10, 2017
NORDSTROM, INC.
(Exact name of registrant as specified in its charter)
Washington
 
001-15059
 
91-0515058
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(IRS Employer
Identification No.)
1617 Sixth Avenue, Seattle, Washington
 
98101
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code (206) 628-2111
Inapplicable
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
___ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
___ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
___ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
___ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨




ITEM 2.02 Results of Operations and Financial Condition
On August 10, 2017, Nordstrom, Inc. issued an earnings release announcing its results of operations for the quarter and six months ended July 29, 2017, its financial position as of July 29, 2017, and its cash flows for the six months ended July 29, 2017. A copy of this earnings release is attached as Exhibit 99.1.
ITEM 7.01 Regulation FD Disclosure
On August 10, 2017, Nordstrom, Inc. issued an earnings release announcing its results of operations for the quarter and six months ended July 29, 2017, its financial position as of July 29, 2017, and its cash flows for the six months ended July 29, 2017. A copy of this earnings release is attached as Exhibit 99.1.
The information furnished in this Item 7.01 shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, regardless of any general incorporation language in such filing, except as shall be expressly set forth by a specific reference in such filing.
ITEM 9.01 Financial Statements and Exhibits
99.1
 
Nordstrom earnings release dated August 10, 2017 relating to the Company's results of operations for the quarter and six months ended July 29, 2017, its financial position as of July 29, 2017, and its cash flows for the six months ended July 29, 2017.





SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
NORDSTROM, INC.
(Registrant)
 
 
/s/ Robert B. Sari
Robert B. Sari
Senior Vice President,
General Counsel and Corporate Secretary
 


Date: August 10, 2017




EXHIBIT INDEX
 
 
 
EXHIBIT
 
 
NUMBER
 
DESCRIPTION
 
 
 
99.1
 
Nordstrom earnings release dated August 10, 2017 relating to the Company's results of operations for the quarter and six months ended July 29, 2017, its financial position as of July 29, 2017, and its cash flows for the six months ended July 29, 2017.





Exhibit


Exhibit 99.1

https://cdn.kscope.io/2137ba01d3ab83b5032a5b4fc2eafd1f-jwna01a01a03a01a04.jpg

FOR RELEASE:
 
INVESTOR CONTACT: 
 
Trina Schurman
August 10, 2017 at 1:05 PM PDT
 
 
Nordstrom, Inc.
 
 
 
 
(206) 303-6503
 
 
 
 
 
 
 
MEDIA CONTACT:
 
Gigi Ganatra Duff
 
 
 
 
Nordstrom, Inc.
 
 
 
 
(206) 303-3030
Nordstrom Second Quarter 2017 Earnings Achieved Expectations
Results Reflected Positive Anniversary Sale, Inventory and Expense Execution
SEATTLE, Wash. (August 10, 2017) – Nordstrom, Inc. (NYSE: JWN) today reported earnings per diluted share for the second quarter ended July 29, 2017 was $0.65, which achieved Company expectations.
Total Company net sales increased 3.5 percent and comparable sales increased 1.7 percent, compared with the same quarter last year. The Company's Anniversary Sale, historically its largest event of the year, performed better than recent trends. Nordstrom continued its progress in executing its customer strategy while maintaining discipline around inventory and expenses:
•
As a result of the Company's ongoing efforts to provide newness and limited-distribution product to customers, Nordstrom proprietary labels represented three of the top five selling brands during the Anniversary Sale.
•
In executing its digital strategy, the Company delivered online sales growth of 20 percent at Nordstrom.com, reflecting its largest volume day in company history, and 27 percent at Nordstromrack.com/HauteLook.
•
The Nordstrom Rewards loyalty program continues to play an important role in reaching new customers and strengthening existing customer relationships. The Company has 9.4 million active Rewards customers in the U.S. and Canada, up approximately 50 percent, from 6.2 million a year ago. Sales from Nordstrom Rewards customers represented 56 percent of second quarter sales, compared with 48 percent a year ago.
SECOND QUARTER SUMMARY
•
Second quarter net earnings were $110 million and earnings before interest and taxes ("EBIT") were $217 million, or 5.8 percent of net sales, compared with net earnings of $117 million and EBIT of $221 million, or 6.1 percent of net sales, during the same period in fiscal 2016.
•
Retail EBIT decreased $27 million compared with the same quarter last year, primarily reflecting planned technology, occupancy and supply chain expenses supporting the Company's growth initiatives.
•
Credit EBIT increased $23 million through the strategic partnership with TD Bank. Credit card revenues increased 30 percent, which included a reduction in amortization expenses of $5 million related to the sale of the credit card portfolio in October 2015.
•
Total Company net sales of $3.7 billion for the second quarter increased 3.5 percent compared with net sales of $3.6 billion during the same period in fiscal 2016. Total Company comparable sales for the second quarter increased 1.7 percent compared with the same quarter last year.



•
In the Nordstrom brand, including U.S. and Canada full-line stores and Nordstrom.com, net sales when combined with Trunk Club, increased 2.4 percent and comparable sales increased 1.4 percent. The top-performing merchandise categories were Women's Apparel and Beauty. The East was the top-ranking U.S. geographic region.
•
In the Nordstrom Rack brand, which consists of Nordstrom Rack stores and Nordstromrack.com/HauteLook, net sales increased 9.8 percent and comparable sales increased 3.1 percent. The East was the top-ranking geographic region.
•
Retail gross profit, as a percentage of net sales, of 34.1 percent decreased 25 basis points compared with the same period in fiscal 2016. This primarily reflected higher occupancy expenses related to new store growth for Nordstrom Rack and Canada in addition to higher loyalty expenses during the Anniversary Sale. This was partially offset by improved merchandise margins, reflecting the continued strength in regular price selling. Net sales growth of 3.5 percent exceeded inventory growth of 2.2 percent.
•
Selling, general and administrative expenses, as a percentage of net sales, of 30.3 percent increased 46 basis points compared with the same period in fiscal 2016, reflected planned technology and supply chain expenses associated with the Company's growth initiatives.
•
Return on invested capital ("ROIC") for the 12 fiscal months ended July 29, 2017 was 8.9 percent compared with 9.1 percent in the prior 12-month period. Results for the current period were negatively impacted by approximately 310 basis points due to the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016. A reconciliation of this non-GAAP financial measure to the closest GAAP measure is included below.
EXPANSION UPDATE
To date in fiscal 2017, the Company opened six Nordstrom Rack stores and closed one full-line store. The Company opened the following stores in the second quarter of 2017:
Location
 
Store Name
 
Square
Footage
(000's)
 
Timing
 
 
 
 
 
 
 
Nordstrom Rack
 
 
 
 
 
 
Novato, California
 
Vintage Oaks Shopping Ctr
 
39
 
May 11
Number of stores
July 29, 2017
 
July 30, 2016
Nordstrom full-line - U.S.
117
 
118
Nordstrom full-line - Canada
5
 
3
Nordstrom Rack
221
 
200
Other1
11
 
8
Total
354
 
329
1 Other includes Trunk Club clubhouses, Jeffrey boutiques and Last Chance clearance stores.
 
Gross square footage
29,803,000
 
28,826,000



FISCAL YEAR 2017 OUTLOOK
The Company updated its annual outlook expectations for earnings per diluted share to incorporate second quarter results. Nordstrom's current expectations for fiscal 2017 are as follows:
 
Prior Outlook
Current Outlook
Net sales (percent)
3 to 4 increase
Approximately 4
Comparable sales (percent)
Approximately flat
Approximately flat
Retail EBIT (million)
$780 to $840
$790 to $840
Credit EBIT (million)
Approximately $140
Approximately $145
Earnings per diluted share
$2.75 to $3.00
$2.85 to $3.00
The Company's outlook includes the following considerations:
•
The 53rd week is expected to add approximately $200 million to total net sales and approximately $0.02 to $0.03 to earnings per diluted share. The 53rd week is not included in comparable sales calculations.
•
The Anniversary Sale, historically the Company's largest event of the year, spanned across the second and third quarters, consistent with the timing in fiscal 2016
•
The outlook assumptions for Retail EBIT when compared with fiscal 2016 include increased occupancy expenses related to new stores (Nordstrom Rack, Canada and Manhattan flagship men's store) in addition to higher supply chain and technology costs
•
Retail EBIT in fiscal 2016 included the following non-operational items: higher credit chargeback expenses associated with an industry change in liability rules and severance charges totaling $30 million, or $0.10 in the first quarter; an impairment charge related to Trunk Club of $197 million in the third quarter; and a non-operational legal settlement gain of $22 million, or $0.10, in the fourth quarter
•
The outlook assumptions for Credit EBIT when compared with fiscal 2016 incorporate higher credit card revenues including a reduction in amortization expenses of $18 million related to the sale of the credit card portfolio
•
The income tax rate is estimated at 40 percent for fiscal 2017
•
Diluted shares outstanding, excluding any future share repurchases, are estimated at 169 million for fiscal 2017
CONFERENCE CALL INFORMATION
The Company's senior management will host a conference call to discuss second quarter 2017 results and fiscal 2017 outlook at 4:45 p.m. Eastern Daylight Time today. To listen to the live call online and view the conference call slides and the speakers' prepared remarks, visit the Investor Relations section of the Company's corporate website at http://investor.nordstrom.com. An archived webcast with the speakers' prepared remarks and the conference call slides will be available in the Quarterly Earnings section for at least one year. Interested parties may also dial 201-689-8354. A telephone replay will be available beginning approximately three hours after the conclusion of the call by dialing 877-660-6853 or 201-612-7415 and entering Conference ID 13667039, until the close of business on August 17, 2017.
ABOUT NORDSTROM
Nordstrom, Inc. is a leading fashion specialty retailer based in the U.S. Founded in 1901 as a shoe store in Seattle, today Nordstrom operates 354 stores in 40 states, including 122 full-line stores in the United States, Canada and Puerto Rico; 221 Nordstrom Rack stores; two Jeffrey boutiques; and two clearance stores. Additionally, customers are served online through Nordstrom.com, Nordstromrack.com and HauteLook. The Company also owns Trunk Club, a personalized clothing service serving customers online at TrunkClub.com and its seven clubhouses. Nordstrom, Inc.'s common stock is publicly traded on the NYSE under the symbol JWN.
Certain statements in this news release contain or may suggest "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties including, but not limited to, anticipated financial outlook for the fiscal year ending February 3, 2018, anticipated annual total and comparable sales rates, anticipated new store openings in existing, new and international markets, 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: the effect of the announcement of the exploration of a possible "going private transaction" by the Nordstrom family on our relationships with our customers, suppliers and partners, operating results and business generally; successful execution of our customer strategy, including



expansion into new domestic and international markets, acquisitions, investments in our stores and online, as well as investments in technology, our ability to realize the anticipated benefits from growth initiatives and our ability to provide a seamless experience across all channels; timely and effective execution of our ecommerce initiatives and ability to manage the costs and organizational changes associated with this evolving business model; 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 maintain relationships with and motivate our employees and to effectively attract, develop and retain our future leaders, which could be impacted by the uncertainty about the possibility of a "going private transaction;" effective inventory management processes and systems, fulfillment processes and systems, disruptions in our supply chain and our ability to control costs; the impact of any systems or network failures, cybersecurity and/or security breaches, including any security breach of our systems or those of a third-party provider that results in the theft, transfer or unauthorized disclosure of customer, employee or Company information or compliance with information security and privacy laws and regulations in the event of such an incident; successful execution of our information technology strategy; our ability to effectively utilize data in strategic planning and decision making; efficient and proper allocation of our capital resources; our ability to realize the expected benefits, respond to potential risks and appropriately manage costs associated with our program agreement with TD Bank, N.A.; our ability to safeguard our reputation and maintain our vendor relationships; our ability to respond to the business and retail environment, fashion trends and consumer preferences, including changing expectations of service and experience in stores and online, and evolve our business model; the effectiveness of planned advertising, marketing and promotional campaigns in the highly competitive and promotional retail industry; the timing, price, manner 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; the impact of economic and market conditions and the resultant impact on consumer spending patterns; the impact of economic or political conditions in the U.S. and countries where our third party vendors operate; weather conditions, natural disasters, health hazards, national security or other market disruptions, or the prospects of these events and the resulting impact on consumer spending patterns or information technology systems and communications; our compliance with applicable domestic and international laws, regulations and ethical standards, including those related to banking, employment and tax and the outcome of claims and litigation and resolution of such matters; the impact of the current regulatory environment and financial system and health care reforms; and compliance with debt covenants, availability and cost of credit, changes in our credit rating, changes in interest rates, debt repayment patterns and personal bankruptcies. Our SEC reports, including our Form 10-K for the fiscal year ended January 28, 2017, contain other information on these and other factors that could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances.



NORDSTROM, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited; amounts in millions, except per share amounts)
 
Quarter Ended
 
Six Months Ended
 
July 29, 2017
 
July 30, 2016
 
July 29, 2017
 
July 30, 2016
Net sales
$
3,717

 
$
3,592

 
$
6,996

 
$
6,784

Credit card revenues, net
76

 
59

 
152

 
116

Total revenues
3,793

 
3,651

 
7,148

 
6,900

Cost of sales and related buying and occupancy costs
(2,451
)
 
(2,359
)
 
(4,607
)
 
(4,459
)
Selling, general and administrative expenses
(1,125
)
 
(1,071
)
 
(2,173
)
 
(2,114
)
Earnings before interest and income taxes
217

 
221

 
368

 
327

Interest expense, net
(29
)
 
(30
)
 
(76
)
 
(61
)
Earnings before income taxes
188

 
191

 
292

 
266

Income tax expense
(78
)
 
(74
)
 
(119
)
 
(103
)
Net earnings
$
110

 
$
117

 
$
173

 
$
163

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.66

 
$
0.67

 
$
1.04

 
$
0.94

Diluted
$
0.65

 
$
0.67

 
$
1.02

 
$
0.93

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
166.4

 
173.5

 
166.8

 
173.3

Diluted
168.5

 
174.8

 
168.8

 
175.2




NORDSTROM, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited; amounts in millions)
 
July 29, 2017
 
January 28, 2017
 
July 30, 2016
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
919

 
$
1,007

 
$
892

Accounts receivable, net
320

 
199

 
263

Merchandise inventories
2,077

 
1,896

 
2,032

Prepaid expenses and other
157

 
140

 
163

Total current assets
3,473

 
3,242

 
3,350

 
 
 
 
 
 
Land, property and equipment (net of accumulated depreciation of $5,866, $5,596 and $5,330)
3,930

 
3,897

 
3,812

Goodwill
238

 
238

 
435

Other assets
520

 
481

 
533

Total assets
$
8,161

 
$
7,858

 
$
8,130

 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
1,704

 
$
1,340

 
$
1,604

Accrued salaries, wages and related benefits
397

 
455

 
381

Other current liabilities
1,339

 
1,223

 
1,326

Current portion of long-term debt
11

 
11

 
10

Total current liabilities
3,451

 
3,029

 
3,321

 
 
 
 
 
 
Long-term debt, net
2,729

 
2,763

 
2,772

Deferred property incentives, net
524

 
521

 
530

Other liabilities
672

 
675

 
570

 
 
 
 
 
 
Commitments and contingencies

 

 

 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
Common stock, no par value: 1,000 shares authorized; 166.2, 170.0 and 173.3 shares issued and outstanding
2,757

 
2,707

 
2,612

Accumulated deficit
(1,951
)
 
(1,794
)
 
(1,635
)
Accumulated other comprehensive loss
(21
)
 
(43
)
 
(40
)
Total shareholders' equity
785

 
870

 
937

Total liabilities and shareholders' equity
$
8,161

 
$
7,858

 
$
8,130




NORDSTROM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; amounts in millions)
 
Six Months Ended
 
July 29, 2017
 
July 30, 2016
Operating Activities
 
 
 
Net earnings
$
173

 
$
163

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization expenses
320

 
319

Amortization of deferred property incentives and other, net
(48
)
 
(35
)
Deferred income taxes, net
(71
)
 
(53
)
Stock-based compensation expense
41

 
47

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(120
)
 
(66
)
Merchandise inventories
(141
)
 
(59
)
Prepaid expenses and other assets
(24
)
 
96

Accounts payable
319

 
262

Accrued salaries, wages and related benefits
(58
)
 
(36
)
Other current liabilities
117

 
175

Deferred property incentives
46

 
31

Other liabilities
20

 
12

Net cash provided by operating activities
574

 
856

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(341
)
 
(407
)
Other, net
33

 
33

Net cash used in investing activities
(308
)
 
(374
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from long-term borrowings, net of discounts
635

 
—

Principal payments on long-term borrowings
(655
)
 
(5
)
Increase (decrease) in cash book overdrafts
6

 
(18
)
Cash dividends paid
(124
)
 
(128
)
Payments for repurchase of common stock
(211
)
 
(59
)
Proceeds from issuances under stock compensation plans
14

 
30

Tax withholding on share-based awards
(6
)
 
(4
)
Other, net
(13
)
 
(1
)
Net cash used in financing activities
(354
)
 
(185
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(88
)
 
297

Cash and cash equivalents at beginning of period
1,007

 
595

Cash and cash equivalents at end of period
$
919

 
$
892




NORDSTROM, INC.
STATEMENTS OF EARNINGS — RETAIL BUSINESS AND CREDIT
(unaudited; dollar amounts in millions)
Retail Business
Our Retail Business includes our Nordstrom U.S. and Canada full-line stores, Nordstrom.com, Nordstrom Rack stores, Nordstromrack.com/HauteLook, Trunk Club, Jeffrey boutiques and Last Chance clearance stores. It also includes unallocated corporate center expenses. The following tables summarize the results of our Retail Business for the quarter and six months ended July 29, 2017 compared with the same periods in fiscal 2016:
 
Quarter Ended
 
July 29, 2017
 
July 30, 2016
 
Amount
 
% of net sales1
 
Amount
 
% of net sales1
Net sales
$
3,717

 
100.0
%
 
$
3,592

 
100.0
%
Cost of sales and related buying and occupancy costs
(2,449
)
 
(65.9
%)
 
(2,358
)
 
(65.6
%)
Gross profit
1,268

 
34.1
%
 
1,234

 
34.4
%
Selling, general and administrative expenses
(1,091
)
 
(29.4
%)
 
(1,030
)
 
(28.7
%)
Earnings before interest and income taxes
$
177

 
4.8
%
 
$
204

 
5.7
%
 
 
Six Months Ended
 
July 29, 2017
 
July 30, 2016
 
Amount
 
% of net sales1
 
Amount
 
% of net sales1
Net sales
$
6,996

 
100.0
%
 
$
6,784

 
100.0
%
Cost of sales and related buying and occupancy costs
(4,603
)
 
(65.8
%)
 
(4,456
)
 
(65.7
%)
Gross profit
2,393

 
34.2
%
 
2,328

 
34.3
%
Selling, general and administrative expenses
(2,101
)
 
(30.0
%)
 
(2,034
)
 
(30.0
%)
Earnings before interest and income taxes
$
292

 
4.2
%
 
$
294

 
4.3
%
1 Subtotals and totals may not foot due to rounding.
The following table summarizes net sales and comparable sales within our Retail Business:
 
Quarter Ended
 
Six Months Ended
 
July 29, 2017
 
July 30, 2016
 
July 29, 2017
 
July 30, 2016
 
Sales
 
Comp %
 
Sales
 
Comp %
 
Sales
 
Comp %

 
Sales
 
Comp %

Nordstrom full-line stores - U.S.
$
1,887

 
(4.4
%)
 
$
1,978

 
(6.5
%)
 
$
3,369

 
(5.3
%)
 
$
3,560

 
(7.0
%)
Nordstrom.com
819

 
19.8
%
 
683

 
9.4
%
 
1,367

 
16.0
%
 
1,178

 
6.7
%
Full-price
2,706

 
1.8
%
 
2,661

 
(2.8
%)
 
4,736

 
—
%
 
4,738

 
(4.0
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nordstrom Rack
990

 
(1.0
%)
 
926

 
1.1
%
 
1,944

 
(0.9
%)
 
1,819

 
0.2
%
Nordstromrack.com/HauteLook
199

 
26.7
%
 
157

 
34.7
%
 
397

 
22.8
%
 
323

 
38.3
%
Off-price
1,189

 
3.1
%
 
1,083

 
5.3
%
 
2,341

 
2.7
%
 
2,142

 
4.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other retail1
144

 
 
 
127

 
 
 
270

 
 
 
249

 
 
Retail segment
4,039

 
 
 
3,871

 
 
 
7,347

 
 
 
7,129

 
 
Corporate/Other
(322
)
 
 
 
(279
)
 
 
 
(351
)
 
 
 
(345
)
 
 
Total net sales
$
3,717

 
1.7
%
 
$
3,592

 
(1.2
%)
 
$
6,996

 
0.6
%
 
$
6,784

 
(1.5
%)
1 Other retail includes Nordstrom Canada full-line stores, Trunk Club and Jeffrey boutiques.



Credit
The following table summarizes the results of our Credit segment for the quarter and six months ended July 29, 2017 compared with the same periods in 2016:
 
Quarter Ended
 
Six Months Ended
 
July 29, 2017
 
July 30, 2016
 
July 29, 2017
 
July 30, 2016
Credit card revenues, net
$
76

 
$
59

 
$
152

 
$
116

Credit expenses
(36
)
 
(42
)
 
(76
)
 
(83
)
Earnings before interest and income taxes
$
40

 
$
17

 
$
76

 
$
33




NORDSTROM, INC.
RETURN ON INVESTED CAPITAL (NON-GAAP FINANCIAL MEASURE)
(unaudited; dollar amounts in millions)
We believe ROIC is a useful financial measure for investors in evaluating the efficiency and effectiveness of our use of capital and believe ROIC is an important component of shareholders' return over the long term. In addition, we incorporate ROIC in our executive incentive compensation measures. For the 12 fiscal months ended July 29, 2017, our ROIC decreased to 8.9% compared with 9.1% for the 12 fiscal months ended July 30, 2016. Results for the current period were negatively impacted by approximately 310 basis points due to the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016.
We define ROIC as our net operating profit after tax divided by our average invested capital using the trailing 12-month average. ROIC is not a measure of financial performance under generally accepted accounting principles ("GAAP") and should be considered in addition to, and not as a substitute for, return on assets, net earnings, total assets or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies' methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to ROIC is return on assets. The following is a reconciliation of the components of ROIC and return on assets:
 
12 Fiscal Months Ended
 
July 29, 2017
 
July 30, 2016

Net earnings
$
364

 
$
424

Add: income tax expense
346

 
261

Add: interest expense
139

 
121

Earnings before interest and income tax expense
849

 
806

 
 
 
 
Add: rent expense
230

 
190

Less: estimated depreciation on capitalized operating leases1
(123
)
 
(101
)
Net operating profit
956

 
895

 
 
 
 
Less: estimated income tax expense
(438
)
 
(341
)
Net operating profit after tax
$
518

 
$
554

 
 
 
 
Average total assets
$
8,018

 
$
8,332

Less: average non-interest-bearing current liabilities2
(3,173
)
 
(3,062
)
Less: average deferred property incentives and deferred rent liability2
(646
)
 
(549
)
Add: average estimated asset base of capitalized operating leases3
1,636

 
1,388

Average invested capital
$
5,835

 
$
6,109

 
 
 
 
Return on assets4
4.5
%
 
5.1
%
ROIC4
8.9
%
 
9.1
%
 
1 Capitalized operating leases is our best estimate of the asset base we would record for our leases that are classified as operating if they had met the criteria for a capital lease or we had purchased the property. Asset base is calculated as described in footnote 3 below.
2 Balances associated with our deferred rent liability have been classified as long-term liabilities in the current period.
3 Based upon the trailing 12-month average of the monthly asset base. The asset base for each month is calculated as the trailing 12 months of rent expense multiplied by eight. The multiple of eight times rent expense is a commonly used method of estimating the asset base we would record for our capitalized operating leases described in footnote 1.
4 Results for the 12 fiscal months ended July 29, 2017 include the $197 impact of the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016.



NORDSTROM, INC.
ADJUSTED DEBT TO EBITDAR (NON-GAAP FINANCIAL MEASURE)
(unaudited; dollar amounts in millions)
Adjusted Debt to earnings before interest, income taxes, depreciation, amortization and rent ("EBITDAR") is one of our key financial metrics, and we believe that our debt levels are best analyzed using this measure. Our goal is to manage debt levels to maintain an investment-grade credit rating and operate with an efficient capital structure. In evaluating our debt levels, this measure provides a reflection of our credit worthiness that could impact our credit rating and borrowing costs. We also have a debt covenant that requires an adjusted debt to EBITDAR leverage ratio of no more than four times. As of July 29, 2017, our Adjusted Debt to EBITDAR was 2.4, compared with 2.6 as of July 30, 2016.
Adjusted Debt to EBITDAR is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, debt to net earnings, net earnings, debt or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies' methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to Adjusted Debt to EBITDAR is debt to net earnings. The following is a reconciliation of the components of Adjusted Debt to EBITDAR and debt to net earnings:
 
20171
 
20161
Debt
$
2,740

 
$
2,782

Add: estimated capitalized operating lease liability2
1,841

 
1,518

Less: fair value hedge adjustment included in long-term debt
—

 
(18
)
Adjusted Debt
$
4,581

 
$
4,282

 
 
 
 
Net earnings
$
364

 
$
424

Add: income tax expense
346

 
261

Add: interest expense, net
136

 
121

Earnings before interest and income taxes
846

 
806

 
 
 
 
Add: depreciation and amortization expenses
646

 
617

Add: rent expense
230

 
190

Add: non-cash acquisition-related charges
204

 
7

EBITDAR
$
1,926

 
$
1,620

 
 
 
 
Debt to Net Earnings
7.5

 
6.6

Adjusted Debt to EBITDAR
2.4

 
2.6

1 The components of Adjusted Debt are as of July 29, 2017 and July 30, 2016, while the components of EBITDAR are for the 12 months ended July 29, 2017 and July 30, 2016.
2 Based upon the estimated lease liability as of the end of the period, calculated as the trailing 12 months of rent expense multiplied by eight. The multiple of eight times rent expense is a commonly used method of estimating the debt we would record for our leases that are classified as operating if they had met the criteria for a capital lease or we had purchased the property.



NORDSTROM, INC.
FREE CASH FLOW (NON-GAAP FINANCIAL MEASURE)
(unaudited; amounts in millions)
Free Cash Flow is one of our key liquidity measures, and when used in conjunction with GAAP measures, provides investors with a meaningful analysis of our ability to generate cash from our business. For the six months ended July 29, 2017, we had Free Cash Flow of $115 compared with $303 for the six months ended July 30, 2016.
Free Cash Flow is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, operating cash flows or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies' methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to Free Cash Flow is net cash provided by operating activities. The following is a reconciliation of net cash provided by operating activities to Free Cash Flow:
 
Six Months Ended
 
July 29, 2017
 
July 30, 2016
Net cash provided by operating activities
$
574

 
$
856

Less: capital expenditures
(341
)
 
(407
)
Less: cash dividends paid
(124
)
 
(128
)
Add (Less): change in cash book overdrafts
6

 
(18
)
Free Cash Flow
$
115

 
$
303