April 8, 2005
Securities and Exchange Commission
Division of Corporate Finance
450 Fifth Street N.W.
Washington, D.C. 20549
Attn: George F. Ohsiek, Jr., Branch Chief
Dear Mr. Ohsiek, Jr.,
This letter responds to the comments of the Staff set forth in your letter dated
March 16, 2005, relating to the Nordstrom, Inc. Form 8-K filed on February 15,
2005. We have filed our Form 10-K and Annual Report for the fiscal year ended
January 29, 2005, as you will see in the responses below, many of your questions
have been addressed.
1. Please tell us supplementally and disclose the specific nature of the
correction in your lease accounting policy.
(a) Based on your disclosure that you recorded a charge in the
fourth quarter of 2004 relating to a correction in your lease
accounting policy it appears that your historical accounting
for leases may not have been in accordance with GAAP. As a
result, we would expect you to restate your prior period
financial statements unless the correction of the error is
immaterial.
(b) If you are restating your historical financial statements, we
would expect your disclosures to indicate that the restatement
results from the correction of an error.
(c) If restatement is determined to be unnecessary, your
disclosures should indicate that the errors were immaterial to
prior periods.
(d) In this regard, please provide us supplementally your
quantitative and qualitative assessment of the materiality of
these errors for the fiscal years ended January 31, 2002, 2003
and 2004 as well as your quarterly periods ended May 1, 2004,
July 31, 2004 and October 30, 2004. Please ensure your
analysis addresses fully the considerations described in SAB
99 including the impact on income from operations, pretax
income, net income, earnings per share, cash flows from
operating, investing, and financing activities, and the
balance sheet line items for all periods affected.
RESPONSE:
(a) We determined that our accounting for "rent holidays," as described
in the SEC Staff's letter regarding lease accounting dated February
7, 2005, was not correct. We determined that the impact of this
error is not material to our previously issued financial statements.
Please see Attachments 1 and 2, which
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describe our quantitative and qualitative assessments of the impact
of this error.
(b) Since the impact of this error is not material, we have not restated
our prior period financial statements.
(c) We disclosed that the impact of this error was not material to our
prior period financial statements. The details of the correction to
our lease accounting policy are fully disclosed in Note 1: Nature of
Operations and Summary of Significant Accounting Policies in our
2004 Annual Report to Shareholders. An excerpt of that note is as
follows:
"We recognize lease expense on a straight-line basis over the
initial lease term. In 2004, we corrected our lease accounting
policy to recognize lease expense, net of landlord
reimbursements, from the time that we control the leased
property. In the past, we recorded rent expense, net once
lease payments or retail operations started. We recorded a
charge of $7,753 ($4,729 net of tax) in the fourth quarter of
2004 to correct this accounting policy. The impact of this
change was immaterial to prior periods."
(d) See Attachment 1 for our quantitative assessment of the materiality
of the errors for the fiscal years ended January 31, 2002, 2003 and
2004 as well as the quarterly periods ended May 1, 2004, July 31,
2004 and October 30, 2004. See Attachment 2 for our qualitative
assessment.
2. Please tell us supplementally and disclose in your next filing how your
discovery of this error impacted your evaluation of the effectiveness of
your disclosure controls and procedures. Also tell us and disclose whether
you changed your disclosure controls and procedures or internal controls
over financial reporting as a result of your discovery of this error.
RESPONSE: As described in response to the Staff's first comment above, we
determined that the `rent holiday' error was not material to our prior
period financial statements. As this error was not material, we will not
discuss this error in relation to our evaluation of the effectiveness of
our disclosure controls and procedures in our upcoming filings.
Supplementally, we advise the Staff that we have updated our lease
accounting checklist to determine the date that we have control of a
leased asset in order to determine when the lease starts. And, we have
discussed this change in our accounting policy with our finance and real
estate leaders so they are aware of this accounting policy.
3. Please ensure your disclosures in future filings address the material
terms of and accounting for leases.
(a) In this regard, we note there is no disclosure in your Form
10-K for the fiscal year ended January 31, 2004 or in your
subsequent Form 10-Q filings, which addresses the existence of
lease incentives other than developer reimbursements you
receive as incentives to construct stores in certain
developments.
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(b) You say you capitalize property, plant and equipment for these
stores during the construction period in accordance with EITF
Issue No. 97-10 and at the end of the construction period,
developer reimbursements in excess of construction costs are
recorded as deferred lease credits and amortized as a
reduction to rent expense, on a straight-line basis over the
life of the applicable lease or operating covenant.
Construction costs in excess of developer reimbursements are
recorded as prepaid rent and amortized as rent expense on a
straight-line basis over the life of the applicable lease or
operating covenant. Please clarify your disclosure to explain
how and why the guidance in EITF 97-10 is applicable to your
lease transactions.
(c) In addition, your future disclosures should address the
following, as noted in the SEC Staff letter dated February 7,
2005:
- Material lease agreements or arrangements;
- The essential provisions of material leases,
including the
o original term,
o renewal periods,
o reasonably assured rent escalations,
o rent holidays,
o contingent rent,
o rent concessions,
o leasehold improvement incentives, and
o unusual provisions or conditions;
- The accounting policies for leases, including the
treatment of each of the above components of lease
agreements;
- The basis on which contingent rental payments are
determined with specificity, not generality; and
- The amortization period of material leasehold
improvements made either at the inception of the
lease or during the lease term, and how the
amortization period relates to the initial lease
term
RESPONSE:
We have updated our disclosures in our Form 10-K for the fiscal year ended
January 29, 2005 to provide more information. In our responses below we
show excerpts from Note 1 in our consolidated financial statements for the
fiscal year ended January 29, 2005.
(a) Our notes to the consolidated financial statements for the
fiscal year ended January 29, 2005 discuss our incentives;
below is an excerpt from Note 1:
"We also receive incentives based on a percentage of a store's
net sales and recognize these amounts in the year that they
are earned as a reduction to rent expense."
(b) Supplementally, we are providing the Staff with background on
our development agreements. In some development opportunities,
we
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agree with the developer that we will control the
development's construction phase for the store that we will
lease from the developer; sometimes, we also control the
construction of a portion of the developer's areas (e.g.
parking structures) if the construction of that area is
integral to our store's construction. Following the issuance
of EITF 97-10, we recorded our construction expenditures for
the leased stores that we controlled during the construction
phase as fixed assets. If we meet the criteria for
sales-leaseback (under SFAS 98), we record the developer's
construction reimbursement payment as a sales-leaseback. If we
do not meet the sales-leaseback criteria (under SFAS 98), we
record the developer construction reimbursement payment as a
property incentive and amortize the credit to earnings over
the life of the lease.
In our notes to the consolidated financial statements for the
fiscal year ended January 29, 2005, we describe our accounting
policy for landlord incentives in Note 1. The following is the
relevant section of that discussion:
"We receive incentives to construct stores in certain
developments. These incentives are recorded as a
deferred credit and recognized as a reduction to rent
expense on a straight-line basis over the lease term as
described above. At the end of 2004 and 2003, this
deferred credit balance was $394,802 and $407,856."
We have removed the reference to EITF 97-10 from our
disclosures as we believe that our updated discussion more
clearly describes our accounting policy.
(c) Our Form 10-K for the fiscal year ended January 29, 2005
discloses the following:
- Material lease agreements: Excerpt from the notes to the
consolidated financial statements for the fiscal year
ended January 29, 2005, Note 1
"We lease the land or the land and building at many of
our Full-Line stores, and we lease the building at many
of our Rack stores. Additionally, we lease office
facilities, warehouses and equipment. Most of these
leases are classified as operating leases and they
expire at various dates through 2080."
- Essential provisions of material leases: Excerpt from
the notes to the consolidated financial statements for
the fiscal year ended January 29, 2005, Note 1
"We have no significant individual or master lease
agreements."
o Original term: Excerpt from the notes to the
consolidated financial statements for the fiscal
year ended January 29, 2005, Note 1
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"Our fixed, non-cancelable terms of the lease generally
are 20 to 30 years for Full Line stores and 10 to 15
years for Rack stores."
o Renewal periods: Excerpt from the notes to the
consolidated financial statement for the fiscal
year ended January 29, 2005s, Note 1
"Many of our leases include options that allow us to
extend the lease term beyond the initial commitment
period, subject to terms agreed to at lease inception."
o Rent escalations: Excerpt from the notes to the
consolidated financial statements for the fiscal
year ended January 29, 2005, Note 1
"For leases that contain predetermined, fixed
escalations of the minimum rentals, we recognize the
rent expense on a straight-line basis and record the
difference between the rent expense and the rental
amount payable under the leases in liabilities.
o Rent holiday: See excerpt above in 1(c).
o Contingent rent: Excerpt from the notes to the
consolidated financial statements for the fiscal
year ended January 29, 2005, Note 1
"Some of our leases require additional payments based on
sales and are recorded in rent expense when the
contingent rent is probable."
o Rent concessions: We do not have any rent
concessions in our lease agreements.
o Leasehold improvement incentives: Excerpt from the
notes to the consolidated financial statements for
the fiscal year ended January 29, 2005, Note 1
"We receive incentives to construct stores in certain
developments. These incentives are recorded as a
deferred credit and recognized as a reduction to rent
expense on a straight-line basis over the lease term as
described above."
o Unusual provisions or conditions: We do not have
any other unusual provisions or conditions that
are predominate in our lease agreements.
- Accounting policies for leases: See the above response.
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- As discussed above, some of our leases have contingent
rent, which is based on sales. See the above disclosure.
- Amortization period for leasehold improvements: Excerpt
from the notes to the consolidated financial statements
for the fiscal year ended January 29, 2005, Note 1
"Leasehold improvements made at the inception of the
lease are amortized over the shorter of the asset life
or the initial lease term. Leasehold improvements made
during the lease term are also amortized over the
shorter of the asset life or the initial lease term."
Please call me at (206) 373-4068 if you need any other information or would like
to discuss the above response. Thank you for your consideration.
Sincerely,
Nordstrom, Inc.
/s/ Michael G. Koppel
Michael G. Koppel
Executive Vice President and Chief Financial Officer
NORDSTROM, INC.
SAB 99 MATERIALITY ANALYSIS - QUANTITATIVE ANALYSIS Attachment 1
CORRECTION IN LEASE ACCOUNTING POLICY
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
2001 2002
---------------------------------------- ---------------------------------------
FYE 1/31/2002 FYE 1/31/2003
---------------------------------------- ---------------------------------------
Adj. - Incr Percentage Adj. - Incr Percentage
Impact As Reported (Decr) Change As Reported (Decr) Change
- ------ ----------- ----------- ---------- ----------- ----------- ----------
Income from operations $ 145,636 $ (696) -0.5% $ 191,424 $ (2,135) -1.1%
Pretax income 204,488 (696) -0.3% 195,624 (2,135) -1.1%
Net income 124,688 (425) -0.3% 90,224 (1,302) -1.4%
Basic earnings per share 0.93 - 0.0% 0.67 (0.01) -1.5%
Diluted earnings per share 0.93 (0.01) -1.1% 0.66 - 0.0%
Total liabilities 2,736,691 6,335 0.2% 2,739,043 8,470 0.3%
Cash flows from operating activities 426,402 - N/A 283,159 - N/A
Cash flows from investing activities (272,769) - N/A (284,006) - N/A
Cash flows from financing activities 158,963 - N/A (117,664) - N/A
2003
---------------------------------------
FYE 1/31/2004
---------------------------------------
Adj. - Incr Percentage
Impact As Reported (Decr) Change
- ------ ----------- ----------- ----------
Income from operations $ 334,003 $ 315 0.1%
Pretax income 398,141 315 0.1%
Net income 242,841 192 0.1%
Basic earnings per share 1.78 - 0.0%
Diluted earnings per share 1.76 - 0.0%
Total liabilities 2,831,679 8,155 0.3%
Cash flows from operating activities 573,225 - N/A
Cash flows from investing activities (208,856) - N/A
Cash flows from financing activities (107,489) - N/A
2004
----------------------------------------------------------------------------------
Q1 Q2
---------------------------------------- ---------------------------------------
Adj. - Incr Percentage Adj. - Incr Percentage
Impact As Reported (Decr) Change As Reported (Decr) Change
- ------ ----------- ----------- ---------- ----------- ----------- ----------
Income from operations $ 109,824 $ 238 0.2% $ 146,355 $ 239 0.2%
Pretax income 112,627 238 0.2% 175,266 239 0.1%
Net income 68,727 145 0.2% 106,915 146 0.1%
Basic earnings per share 0.49 0.01 2.0% 0.76 - 0.0%
Diluted earnings per share 0.48 0.01 2.1% 0.75 - 0.0%
Total liabilities 2,593,444 7,917 0.3% 2,911,904 7,678 0.3%
Cash flows from operating activities (15,274) - N/A 191,625 - N/A
Cash flows from investing activities (46,230) - N/A (95,834) - N/A
Cash flows from financing activities (181,797) - N/A (127,165) - N/A
2004
---------------------------------------
Q3
---------------------------------------
Adj. - Incr Percentage
Impact As Reported (Decr) Change
- ------ ----------- ----------- ----------
Income from operations $ 91,398 $ (179) -0.2%
Pretax income 122,913 (179) -0.1%
Net income 77,828 (113) -0.1%
Basic earnings per share 0.55 - 0.0%
Diluted earnings per share 0.54 - 0.0%
Total liabilities 2,851,561 7,857 0.3%
Cash flows from operating activities 215,072 - N/A
Cash flows from investing activities (149,361) - N/A
Cash flows from financing activities (246,585) - N/A
NORDSTROM, INC. ATTACHMENT 2
QUALITATIVE ASSESSMENT
SAB 99 includes a list of factors that a company should consider to determine if
an error that is below a material quantitative measure may still be material for
qualitative reasons.
QUALITATIVE CONSIDERATION RESPONSE
Whether the misstatement arises from The misstatement involves recording
an item capable of precise rent expense during the store build
measurement or whether it arises out period. These amounts are
from an estimate and, if so, the known and are not subject to
degree of imprecision inherent in estimate.
the estimate.
Whether the misstatement masks a As seen in Attachment 1 on
change in earnings or other trends. quantitative factors, this change
does not mask a change in earnings
or other trends.
Whether the misstatement hides a In prior periods, we did not know
failure to meet analysts' consensus that our accounting policy was
expectations for the enterprise. incorrect. Our guidance, as well
as analysts' expectations, followed
the consistently incorrect
accounting policy.
Whether the misstatement changes a The net earnings effect of this
loss into income or vice versa. error never changed our net
earnings into a net loss.
Whether the misstatement concerns a The rent holiday issue impacted our
segment or other portion of the Retail Segment. This item did not
registrant's business that has been change the significant role of the
identified as playing a significant Retail Segment.
role in the registrant's operations or
profitability.
Whether the misstatement affects the This change does not impact our
registrant's compliance with compliance with any regulatory
regulatory requirements. requirements.
Whether the misstatement affects the Our loan covenants or other
registrant's compliance with loan contractual requirements would not
covenants or other contractual have been impacted if we recorded
requirements. the rent expense properly.
Whether the misstatement has the Our bonus program includes
effect of increasing management's `Earnings Before Taxes' as a key
compensation - for example, by performance measure. This measure
satisfying requirements for the is set each year based upon our
award of bonuses or other forms of annual budget. The rent holiday
incentive compensation. error was made in both the annual
budget and in the actual results. As a
result, this error had no impact on
management's bonus or other forms of
incentive compensation.
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Whether the misstatement involves Misstatement does not conceal an
concealment of an unlawful unlawful transaction.
transaction.
Whether the misstatement was The misstatement was not made
intentional. intentionally.
Whether the misstatement was made to Misstatement was not made to manage
manage earnings. earnings.
When considering the above information, we believe that a reasonable person
would not form a different opinion about our results if they used either the
unadjusted or the adjusted earnings statements for the years presented.
Accordingly, we believe that in accordance with SAB 99, the qualitative factors
indicate that this change is not material to our financial statements. We have
also considered APB 28, Interim Financial Reporting, paragraph 29 and believe
that our conclusions for SAB 99 apply to equally to this guidance.
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