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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 28, 2012

or

 

¨	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)

Registrant’s telephone number, including area code 206-628-2111

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Name of each exchange on which registered
Common stock, without par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO þ

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 the 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 ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company)				Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO þ

As of July 29, 2011 the aggregate market value of the Registrant’s voting and non-voting stock held by non-affiliates of the Registrant was approximately $8.9 billion using the closing sales price on that day of $50.16. On March 9, 2012, 207,923,668 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2012 Annual Meeting of Shareholders scheduled to be held on May 9, 2012 are incorporated into Part III.

 

 

 

 

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TABLE OF CONTENTS
				Page
PART I
Item 1.		Business.		4
Item 1A.		Risk Factors.		6
Item 1B.		Unresolved Staff Comments.		9
Item 2.		Properties.		10
Item 3.		Legal Proceedings.		14
Item 4.		Mine Safety Disclosures.		14
PART II
Item 5.		Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.		15
Item 6.		Selected Financial Data.		17
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.		19
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk.		36
Item 8.		Financial Statements and Supplementary Data.		37
Item 9.		Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.		65
Item 9A.		Controls and Procedures.		65
Item 9B.		Other Information.		67
PART III
Item 10.		Directors, Executive Officers and Corporate Governance.		67
Item 11.		Executive Compensation.		67
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.		68
Item 13.		Certain Relationships and Related Transactions, and Director Independence.		68
Item 14.		Principal Accounting Fees and Services.		68
PART IV
Item 15.		Exhibits, Financial Statement Schedules.		68
Signatures				69
Consent of Independent Registered Public Accounting Firm				70
Exhibit Index				71

 

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PART I

Item 1. Business.

DESCRIPTION OF BUSINESS

Founded in 1901 as a retail shoe business in Seattle, Nordstrom later incorporated in the state of Washington in 1946. We are one of the nation’s leading fashion specialty retailers, with 225 U.S. stores located in 30 states as of March 16, 2012. The west and east coasts of the United States are the areas in which we have the largest presence. We have two reportable segments: Retail and Credit.

As of March 16, 2012, the Retail segment includes our 116 ‘Nordstrom’ branded full-line stores and our online store at www.nordstrom.com, our 105 off-price ‘Nordstrom Rack’ stores and our other retail channels including our online private sale subsidiary ‘HauteLook,’ our two ‘Jeffrey’ boutiques, one philanthropic ‘treasure&bond’ store and one clearance store that operates under the name ‘Last Chance.’ Through these multiple retail channels, we offer our customers a wide selection of high-quality brand name and private label merchandise focused on apparel, shoes, cosmetics and accessories. Our integrated Nordstrom full-line stores and online store allow us to provide our customers with a seamless shopping experience across all channels. Purchases within our stores are primarily fulfilled from that store’s inventory, but may also be shipped to our customers from our fulfillment center in Cedar Rapids, Iowa, or from other Nordstrom full-line stores for inventory unavailable at the original store. Online purchases are primarily shipped to our customers from our Cedar Rapids fulfillment center, but may also be shipped from our Nordstrom full-line stores. Our customers also have the option to pick up online orders in our Nordstrom full-line stores if inventory is available at that location. These capabilities allow us to better serve customers across various channels and improve sales. The Nordstrom Rack stores purchase high-quality name brand merchandise directly from vendors and also serve as outlets for clearance merchandise from our Nordstrom stores. In the first quarter of 2011, we acquired HauteLook, an online private sale retailer offering limited-time sale events on fashion and lifestyle brands. This acquisition enables us to participate in the fast-growing private sale marketplace. See Note 2: HauteLook in Item 8: Financial Statements and Supplementary Data for further discussion. In the third quarter of 2011, we opened treasure&bond, a philanthropic store in New York.

Our Credit segment includes our wholly owned federal savings bank, Nordstrom fsb, through which we provide a private label credit card, two Nordstrom VISA credit cards and a debit card. The credit and debit cards feature a shopping-based loyalty program designed to increase customer visits and spending. Although the primary purpose of our Credit business is to foster greater customer loyalty and drive more sales, we also generate revenues through finance charges and other fees on these cards.

For more information about our business and our reportable segments, see Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 16: Segment Reporting in Item 8.

FISCAL YEAR

We operate on a 52/53-week fiscal year ending on the Saturday closest to January 31st. References to 2011, 2010 and 2009 relate to the 52-week fiscal years ended January 28, 2012, January 29, 2011 and January 30, 2010, respectively. References to 2012 relate to the 53-week fiscal year ending February 2, 2013.

TRADEMARKS

We have 135 trademarks, each of which is the subject of one or more trademark registrations and/or trademark applications. Our most notable trademarks include Nordstrom, Nordstrom Rack, Halogen, Caslon, Classiques Entier and John W. Nordstrom. Each of our trademarks is renewable indefinitely provided that it is still used in commerce at the time of the renewal.

RETURN POLICY

We offer our customers a liberal return policy at our Nordstrom full-line stores and online at www.nordstrom.com. In general, our return policy is considered to be more generous than industry standards. Our Nordstrom Rack stores accept returns up to 30 days from the date of purchase with the original price tag and sales receipt. HauteLook accepts returns of certain specific merchandise categories within 21 days from the date of shipment.

SEASONALITY

Due to our Anniversary Sale in July, the holidays in December and the half-yearly sales that occur in the 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 2012, our Anniversary Sale will shift to the last week of July and the first week of August, which will move one week of event sales to the third quarter.

INVENTORY

We plan our merchandise purchases and receipts to coincide with expected sales trends. For instance, our merchandise purchases and receipts increase prior to our Anniversary Sale, which has historically extended over the last two weeks of July. As discussed above, in 2012, this will shift to the last week of July and the first week of August. Also, we purchase and receive a larger amount of merchandise in the fall as we prepare for the holiday shopping season (from late November through December). We pay for our merchandise purchases under the terms established with our vendors.

In order to offer merchandise that our customers want, we purchase merchandise from a wide variety of high-quality suppliers, including domestic and foreign businesses. We also have arrangements with agents and contract manufacturers to produce our private label merchandise. We expect our suppliers to meet our “Nordstrom Partnership Guidelines,” which address our corporate social responsibility standards for matters such as legal and regulatory compliance, labor, health and safety and the environment.

 

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COMPETITIVE CONDITIONS

We operate in a highly competitive business environment. We compete with other national, regional and local retailers that may carry similar lines of merchandise, including department stores, specialty stores, off-price stores, boutiques and Internet businesses. Our specific competitors vary from market to market. We believe the keys to competing in our industry include, first and foremost, customer service, the shopping experience across all channels, fashion newness, quality of product, breadth of selection, store environment, convenience and location.

EMPLOYEES

During 2011, we employed approximately 56,500 employees on a full- or part-time basis. Due to the seasonal nature of our business, employment increased to approximately 58,000 employees in July 2011 and 61,500 in December 2011. Substantially all of our employees are non-union. We believe our relationship with our employees is good.

CAUTIONARY STATEMENT

Certain statements in this Annual Report on Form 10-K 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 results (such as our anticipated total and same-store sales results, credit card revenues, gross profit rate, selling, general and administrative expenses, net interest expense, effective tax rate, diluted shares outstanding, earnings per diluted share, 53rd week impact to net sales and diluted earnings per share, operating cash flows, dividend payout, Return on Invested Capital (“ROIC”)), anticipated store openings, capital expenditures, trends in our operations, compliance with debt covenants and outcome of claims and litigation. 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 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,

—

effective inventory management,

—

successful execution of our growth strategy, including possible expansion into new markets, technological investments and acquisitions, including our ability to realize the anticipated benefits from such acquisitions, and the timely completion of construction associated with newly planned stores, relocations and remodels, which may be impacted by the financial health of third parties,

—

our ability to maintain relationships with our employees and to effectively attract, develop and retain our future leaders,

—

successful execution of our multi-channel strategy,

—

our compliance with applicable banking and related laws and regulations impacting our ability to extend credit to our customers,

—

impact of the current regulatory environment and financial system and health care reforms,

—

the impact of any systems failures, cybersecurity and/or security breaches, including any security breaches that result 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,

—

our compliance with employment laws and regulations and other laws and regulations applicable to us,

—

availability and cost of credit,

—

our ability to safeguard our brand and reputation,

—

successful execution of our information technology strategy,

—

our ability to maintain our relationships with vendors,

—

trends in personal bankruptcies and bad debt write-offs,

—

changes in interest rates,

—

efficient and proper allocation of our capital resources,

—

weather conditions, natural disasters, health hazards or other market disruptions, or the prospects of these events and the impact on consumer spending patterns,

—

disruptions in our supply chain,

—

the geographic locations of our stores,

—

the effectiveness of planned advertising, marketing and promotional campaigns,

—

our ability to control costs, 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 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.

SEC FILINGS

We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”). All material we file with the SEC is publicly available at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

 

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WEBSITE ACCESS

Our website address is www.nordstrom.com. We make available free of charge on or through our website our annual and quarterly reports on Form 10-K and 10-Q (including related filings in eXtensible Business Reporting Language (“XBRL”) format), current reports on Form 8-K, proxy statements, statements of changes in beneficial ownership of securities on Form 4 and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file the report with or furnish it to the SEC. Interested parties may also access a webcast of quarterly earnings conference calls and other financial events through our website.

CORPORATE GOVERNANCE

We have a long-standing commitment to upholding a high level of ethical standards. In addition, as required by the listing standards of the New York Stock Exchange (“NYSE”) and the rules of the SEC, we have adopted Codes of Business Conduct and Ethics for our employees, officers and directors (“Codes of Ethics”) and Corporate Governance Guidelines. We have posted on our website our Codes of Ethics, our Corporate Governance Guidelines and our Committee Charters for the Audit, Compensation, Corporate Governance and Nominating, and Finance Committees. Any amendments and waivers to these will also be available on our website.

These items are also available in print to any person, without charge, upon request to:

Nordstrom Investor Relations

PO Box 2737

Seattle, Washington 98111-2737

(206) 233-6564

invrelations@nordstrom.com

Item 1A. Risk Factors.

Our business faces many risks. We believe the risks described below outline the items of most concern to us. However, these are not the only risks we face.

ECONOMIC CONDITIONS

We sell high-quality apparel, shoes, cosmetics and accessories, which many consumers consider to be discretionary items. During economic downturns, fewer customers may shop in our stores and on our website, and those who do shop may limit the amount of their purchases, all of which may lead to lower sales, higher markdowns and increased marketing and promotional spending in response to lower demand. Deterioration of economic conditions and consumer confidence may also adversely affect our credit customers’ payment patterns and delinquency rates, increasing our bad debt expense. Some macroeconomic indicators suggest that a modest economic recovery has begun, however key factors such as employment levels, consumer credit and housing market conditions remain weak. A sluggish economic recovery or a renewed downturn could have a significant adverse effect on our business.

IMPACT OF COMPETITIVE MARKET FORCES

The fashion specialty retail industry is highly competitive. We compete with other national, regional, local and online retailers that may carry similar lines of merchandise, including department stores, specialty stores, off-price stores, boutiques and Internet businesses. Online retail shopping is rapidly evolving and we expect competition in the e-commerce market to intensify in the future as the Internet facilitates competitive entry and comparison shopping. If we are unable to remain competitive in the key areas of customer service, the shopping experience across all channels, fashion newness, quality of products, depth of selection, store environment and location, we may lose market share to our competitors and our sales and profitability could suffer.

We believe owning our credit business allows us to fully integrate our loyalty program and drive more sales. Many of our competitors also offer general-purpose credit card products with a variety of loyalty programs. Our Credit segment faces competition from other retailers, large banks and other credit card companies, some of which have substantial financial resources. In addition, there is intense competition for cardholders with “prime” credit ratings who make up a significant portion of our credit portfolio. If we do not effectively anticipate or respond to the competitive banking and credit card environment, we could lose market share to our competitors, which could have an adverse effect on our credit business.

 

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ABILITY TO ANTICIPATE AND RESPOND TO CONSUMER PREFERENCES AND FASHION TRENDS

We strive to ensure the merchandise we offer and our shopping experience, both in store and online, remain current and compelling to our customers. We make decisions regarding inventory purchases well in advance of the season in which it will be sold. Therefore, our ability to predict or respond to constantly changing fashion trends, consumer preferences and spending patterns, and to match our merchandise levels, mix and shopping experience to sales trends and consumer tastes, significantly impacts our sales and operating results. If we do not identify and respond to emerging trends in consumer spending and preferences quickly enough, we may harm our ability to retain our existing customers or attract new customers. If we purchase too much inventory, we may be forced to sell our merchandise at higher average markdown levels and lower average margins, which could harm our business. Conversely, if we fail to purchase enough merchandise, we may lose opportunities for additional sales and damage our relationships with our customers.

GROWTH STRATEGY

Our strategic growth plan focuses on both our stores and on e-commerce. There are risks associated with opening new stores. The availability and cost of suitable locations for our stores depends on a number of factors, including competition from other retailers and businesses, local land use and other regulations, new shopping center construction and developers’ financial condition. New store openings also involve certain risks, including constructing, furnishing and supplying a store in a timely and cost effective manner and accurately assessing the demographic or retail environment for a particular location. Our sales at new, relocated or remodeled stores may not meet our projections, which could adversely affect our return on investment. As part of our growth strategy, we also intend to open stores in new and international markets. Expansion will require management attention and resources and may ultimately be unsuccessful, which could harm our future business development. In addition, competition from strong local competitors, compliance with foreign and local laws and regulatory requirements and potentially unfavorable tax consequences may cause our business to be adversely impacted.

We are also pursuing a heightened focus on technology to enhance our website and mobile capabilities, broaden the selection of our online merchandise offering and improve the speed and quality of our delivery of merchandise to customers. In addition, other growth opportunities may include acquisitions of, or investments in, other businesses, as well as new technologies or other investments to improve the customer shopping experience in our stores and online. If these technologies and investments do not perform as expected, our profitability and growth could be adversely affected.

LEADERSHIP DEVELOPMENT AND SUCCESSION PLANNING

The training and development of our future leaders is important to our long-term success. If we do not effectively implement our strategic and business planning processes to attract, retain, train and develop future leaders, our business may suffer. We rely on the experience of our senior management, who have specific knowledge relating to us and our industry that is difficult to replace. If unexpected leadership turnover occurs without adequate succession plans, the loss of the services of any of these individuals, or any negative perceptions of our business as a result of those losses, could damage our brand image and our business.

MERCHANDISE PLANNING

We are making investments to improve our multi-channel merchandise planning, procurement and allocation capabilities. These efforts involve changes in personnel, processes and technology over a period of several years. If we encounter challenges associated with change management, the ability to hire and retain key personnel involved in these efforts, implementation of associated information technology or adoption of new processes, our ability to continue to successfully execute our strategy could be adversely affected. As a result, we may not derive the expected benefits to our sales and profitability, or we may incur increased costs relative to our current projections.

INFORMATION SECURITY AND PRIVACY

The protection of our customer, employee and company data is vitally important to us. As we operate in multiple retail channels and maintain our own credit operations, we are subject to privacy, security and cybersecurity risks and incidents. Our business involves the storage and transmission of customers’ personal information, consumer preferences and credit card information, in addition to employee information and company financial and strategic data. In addition, we use mobile devices, social networking and other online activities to connect with our customers. Some of our critical systems also depend upon third party providers.

As techniques used to obtain unauthorized access, sabotage systems or otherwise attack our services change frequently and often are unforeseen, we may be unable to anticipate these techniques or to implement adequate preventive measures and they may remain undetected for some period. Concurrently, measures that we may take to prevent risks of fraud and breaches of privacy, security and cybersecurity have the potential to harm relations with our customers or decrease activity on our websites by making them more difficult to use or restricting the ability to meet customers’ expectations in terms of shopping experience. Any measures we implement to prevent a security or cybersecurity risk may not be totally effective. In addition, the regulatory environment surrounding information security, cybersecurity and privacy is increasingly demanding, with new and constantly changing requirements across our business units. Security breaches and cyber incidents and their remediation, whether at our company or our third party providers, could expose us to a risk of loss or misappropriation of this information, litigation, potential liability, reputation damage and loss of customers’ trust and business.

We have expended, and will continue to expend, significant resources to protect our customers and ourselves against these breaches and to ensure an effective response to an internal or external security or cybersecurity breach, either actual or perceived.

 

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CAPITAL MANAGEMENT AND LIQUIDITY

Our access to debt and equity capital, and our ability to invest capital to maximize the total returns to our shareholders, is critical to our long-term success. We utilize capital to finance our operations, make capital expenditures and acquisitions, manage our debt levels and return value to our shareholders through dividends and share repurchases. Our ability to obtain capital and the cost of the capital depend on company performance, financial market conditions and independent rating agencies’ short- and long-term debt ratings, which are based largely on our performance as measured by credit metrics including interest coverage and leverage ratios. If our access to capital is restricted or if our cost of capital increases, our operations and financial condition could be adversely impacted. Further, if we do not properly allocate our capital to maximize returns, our operations, cash flows and returns to shareholders could be adversely affected.

BRAND AND REPUTATION

We have a well-recognized brand that consumers may associate with a high level of customer service and quality merchandise, and is one of the reasons employees choose Nordstrom as a place of employment. Any significant damage to our brand or reputation could negatively impact sales, diminish customer trust, reduce employee morale and productivity and lead to difficulties in recruiting and retaining qualified employees, any of which would harm our business.

INFORMATION TECHNOLOGY STRATEGY

We make investments in information technology and systems developments to advance our competitive position, and we believe they are key to our growth. We must monitor and choose the right investments and implement them at the right pace. Excessive technological change could impact the effectiveness of adoption, and could make it more difficult for us to realize benefits from the technology. Targeting the wrong opportunities, failing to make the best investments or making an investment commitment significantly above or below our needs may result in the loss of our competitive position. In addition, if we do not maintain our current systems, we may see interruptions to our business and increase our costs in order to bring our systems up to date.

LAWS, REGULATIONS AND LITIGATION

Our policies, procedures and practices are designed to comply with federal, state, local and foreign laws, rules and regulations, including those imposed by the SEC, the marketplace, the banking industry and foreign countries, which may change from time to time. These obligations are complex, continuously evolving and the related enforcement is increasingly aggressive, particularly in the state of California, which has increased the cost of compliance. Significant legislative changes, including those that relate to employment matters and health care reform, could impact our relationship with our workforce, which could increase our expenses and adversely affect our operations. Possible legislative changes include changes to an employer’s obligation to recognize collective bargaining units. Recent health care reform could materially increase our employee-related costs and if it is necessary to make changes to the health benefits provided to our employees as a result of health care reform, we may not be able to offer competitive health care benefits to attract and retain employees. In addition, if we fail to comply with applicable laws and regulations we could be subject to damage to our reputation, class action lawsuits, legal and settlement costs, civil and criminal liability, increased cost of regulatory compliance, restatements of our financial statements, disruption of our business and loss of customers. Any required changes to our employment practices could result in the loss of employees, reduced sales, increased employment costs, low employee morale and harm to our business and results of operations. In addition, political and economic factors could lead to unfavorable changes in federal and state tax laws which may increase our tax liabilities. An increase in our tax liabilities could adversely affect our results of operations. We are also regularly involved in various litigation matters that arise in the ordinary course of business. Litigation or regulatory developments could adversely affect our business and financial condition.

FINANCIAL SYSTEM REFORMS

The recent financial crisis resulted in increased legislative and regulatory changes affecting the financial industry. The Credit Card Accountability Responsibility and Disclosure Act of 2009 included new rules and restrictions on credit card pricing, finance charges and fees, customer billing practices and payment application. These rules required us to make changes to our credit card business practices and systems, and we expect more regulations and interpretations of the new rules to emerge. Depending on the nature and extent of the full impact from these rules, and any interpretations or additional rules, the revenues and profitability of our Credit segment could be adversely affected.

In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in July 2010. It significantly restructures regulatory oversight and other aspects of the financial industry, creates a new federal agency to supervise and enforce consumer lending laws and regulations and expands state authority over consumer lending. Numerous regulations will be issued in the near future to implement the requirements of this Act. The final regulatory details remain uncertain at this time. Depending on the nature and extent of these regulations, and the enforcement approach of regulators under the new law, there could be an adverse impact to our Credit segment.

AVAILABILITY AND COST OF MERCHANDISE

Our relationships with our merchandise vendors have been a significant contributor to our success and our position as a retailer of high-quality fashion merchandise. We have no guaranteed supply arrangements with our key vendors, many of whom limit the number of retail channels they use to sell their merchandise. Competition to obtain and sell this merchandise is intense. Nearly all of the brands of our top vendors are sold by competing retailers, and many of our top vendors also have their own dedicated retail stores and websites. If one or more of our top vendors were to limit or reduce our access to their merchandise, our business could be adversely affected. Further, if our merchandise costs increase due to increased raw material or labor costs or other factors, our ability to respond or the effect of our response could adversely affect our sales or gross margins.

 

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CONSUMER CREDIT

Our credit card operations help drive sales in our stores, allow our stores to avoid third-party transaction fees and generate additional revenues from extending credit. Our credit card revenues and profitability are subject in large part to economic and market conditions that are beyond our control, including, but not limited to, interest rates, consumer credit availability, consumer debt levels, unemployment trends, laws and regulations and other factors. Elevated levels of unemployment have historically corresponded with increased credit card delinquencies and write-offs, which may continue in the future. Further, these economic conditions could impair our ability to assess the creditworthiness of our customers if the criteria and/or models we use to underwrite and manage our customers become less predictive of future losses. This could cause our losses to rise and have a negative impact on our results of operations.

BUSINESS CONTINUITY

Our business and operations could be materially and adversely affected by supply chain disruptions, severe weather patterns, natural disasters, widespread pandemics and other natural or man-made disruptions. We derive a significant amount of our total sales from stores located on the west and east coasts of the United States, particularly in California, which increases our exposure to conditions in these regions. These disruptions could cause, among other things, a decrease in consumer spending that would negatively impact our sales; staffing shortages in our stores, distribution centers or corporate offices; interruptions in the flow of merchandise to our stores; disruptions in the operations of our merchandise vendors or property developers; increased costs; and a negative impact on our reputation and long-term growth plans.

ANTI-TAKEOVER PROVISIONS

We are incorporated in the state of Washington and subject to Washington state law. Some provisions of Washington state law could interfere with or restrict takeover bids or other change-in-control events affecting us. For example, one provision prohibits us, except under specified circumstances, from engaging in any significant business transaction with any shareholder who owns 10% or more of our common stock (an “acquiring person”) for a period of five years following the time that the shareholder became an acquiring person.

Item 1B. Unresolved Staff Comments.

None.

 

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Item 2. Properties.

The following table summarizes the number of retail stores owned or leased by us, and the percentage of total store square footage represented by each listed category as of January 28, 2012:

 

		Number of stores				% of total store   square footage
Leased stores on leased land			128				32.3%
Owned stores on leased land			60				43.8%
Owned stores on owned land			36				23.2%
Partly owned and partly leased stores			1				0.7%
Total			225				100.0%

The following table summarizes our store opening activity during the last three years:

 

Fiscal year			2011				2010				2009
Number of stores, beginning of year			204				184				169
Stores opened			22				20				16
Stores closed			(1)				–				(1)
Number of stores, end of year			225				204				184
Nordstrom			117				115				112
Nordstrom Rack and Other			108				89				72

In 2011, we opened three Nordstrom full-line stores (Newark, Delaware; Nashville, Tennessee; and Saint Louis, Missouri), opened eighteen Nordstrom Rack stores (Aventura, Florida; Austin, Texas; Arlington, Texas; Fremont, California; Charlotte, North Carolina; Lakewood, Colorado; Cherry Hill, New Jersey; Washington, D.C.; Annapolis, Maryland; Redondo Beach, California; West Covina, California; Burlington, Massachusetts; Indianapolis, Indiana; Tigard, Oregon; Lenexa, Kansas; Sugar Land, Texas; Tucson, Arizona; and National City, California), relocated two Nordstrom Rack stores (Boulder, Colorado and Henderson, Nevada) and opened one treasure&bond store (New York, New York).

To date in 2012, we have opened one Nordstrom Rack store (Orange, California) and relocated one Nordstrom Rack store (Seattle, Washington). During the remainder of 2012, we have announced the future opening of one Nordstrom full-line store (Salt Lake City, Utah), the opening of eleven additional Nordstrom Rack stores (Boise, Idaho; Alpharetta, Georgia; Farmington, Connecticut; Temecula, California; Willow Grove, Pennsylvania; Phoenix, Arizona; Manchester, Missouri; San Diego, California; Huntington Beach, California; Warwick, Rhode Island; and Tysons Corner, Virginia) and the relocation of one Nordstrom Rack store (Long Island, New York).

We also own six merchandise distribution centers (Portland, Oregon; Dubuque, Iowa; Ontario, California; Newark, California; Upper Marlboro, Maryland; and Gainesville, Florida) and own one fulfillment center on leased land (Cedar Rapids, Iowa), which are utilized by our Retail segment. HauteLook, which is also included in our Retail segment, leases two administrative offices (Los Angeles, California and New York, New York) and two distribution centers (both in Commerce, California). Our administrative offices in Seattle, Washington are a combination of leased and owned space. We also lease an office building in the Denver, Colorado metropolitan area for our Credit segment.

 

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As of January 28, 2012, the total square footage of our Nordstrom full-line stores was 20,679,000, and the total square footage of our Nordstrom Rack and other stores was 4,066,000. The following table lists our retail store facilities as of January 28, 2012:

 

 

1This store has been subsequently relocated.

 

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1This store has been  subsequently relocated.		2This store has been subsequently  closed.

 

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1This store has been subsequently relocated.

 

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Item 3. Legal Proceedings.

We are subject from time to time to various claims and lawsuits arising in the ordinary course of business including lawsuits alleging violations of state and/or federal wage and hour and other employment laws, privacy and other consumer-based claims. Some of these lawsuits purport or may be determined to be class or collective actions and seek substantial damages or injunctive relief, or both, and some may remain unresolved for several years. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities. As of the date of this report, we do not believe any currently identified claim, proceeding or litigation, either alone or in the aggregate, will have a material impact on our results of operations, financial position or cash flows. Since these matters are subject to inherent uncertainties, our view of them may change in the future.

Item 4. Mine Safety Disclosures.

None.

 

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PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

MARKET, SHAREHOLDER AND DIVIDEND INFORMATION

Our common stock, without par value, is traded on the New York Stock Exchange under the symbol “JWN.” The approximate number of holders of common stock as of March 9, 2012 was 178,000, based upon the number of registered and beneficial shareholders, as well as the number of employee shareholders in the Nordstrom 401(k) Plan and Profit Sharing Plan. On this date we had 207,923,668 shares of common stock outstanding.

The high and low prices of our common stock and dividends declared for each quarter of 2011 and 2010 are presented in the table below:

 

								Common Stock Price
						2011												2010								Dividends per Share
		High						Low						High						Low						2011				2010
1st Quarter			$48.70						$40.03						$46.22						$32.78						$0.23				$0.16
2nd Quarter			$52.15						$41.88						$44.00						$30.75						$0.23				$0.20
3rd Quarter			$53.35						$37.28						$39.99						$28.44						$0.23				$0.20
4th Quarter			$51.75						$44.22						$43.95						$38.34						$0.23				$0.20
Full Year			$53.35						$37.28						$46.22						$28.44						$0.92				$0.76

SHARE REPURCHASES

Dollar and share amounts in millions, except per share amounts

Following is a summary of our fourth quarter share repurchases:

 

		Total Number of Shares (or Units) Purchased				Average Price Paid Per Share (or Unit)				Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs				Maximum Number (or       Approximate Dollar Value)       of Shares (or Units) that May       Yet Be Purchased Under       the Plans or Programs1
November 2011 (October 30, 2011 to November 26, 2011)			0.7				$48.96				0.7				$431
December 2011 (November 27, 2011 to December 31, 2011)			1.6	2			$48.10				1.4				$363
January 2012 (January 1, 2012 to January 28, 2012)			1.1				$49.17				1.1				$310
Total			3.4				$48.65				3.2

 

1

In August 2010, our Board of Directors authorized a program (the “2010 Program”) to repurchase up to $500 of our outstanding common stock, through January 28, 2012. In May 2011, our Board of Directors authorized a new program (the “2011 Program”) to repurchase up to $750 of our outstanding common stock, through February 2, 2013, in addition to the remaining amount available for repurchase under the 2010 Program. During 2011, we repurchased 18.5 shares of our common stock for an aggregate purchase price of $851. We completed our 2010 Program in the second quarter of 2011, and as of January 28, 2012, had $310 in remaining share repurchase capacity under the 2011 Program. Subsequent to year-end, in February 2012, our Board of Directors authorized a new program (the “2012 Program”) to repurchase up to $800 of our outstanding common stock, through February 1, 2014, in addition to the amount available for repurchase under the 2011 Program. 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.

2	Includes 0.2 of restricted stock units related to the HauteLook acquisition that were cancelled in connection with the HauteLook acquisition amendment.

 

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STOCK PRICE PERFORMANCE

The following graph compares for each of the last five fiscal years, ending January 28, 2012, the cumulative total return of Nordstrom common stock, Standard & Poor’s Retail Index and Standard & Poor’s 500 Index. The Retail Index is comprised of 32 retail companies, including Nordstrom, representing an industry group of the Standard & Poor’s 500 Index. The cumulative total return of Nordstrom common stock assumes $100 invested on February 3, 2007 in Nordstrom common stock and assumes reinvestment of dividends.

 

 

End of fiscal year		2006				2007				2008				2009				2010				2011
Nordstrom common stock			100				70				23				65				78				95
Standard & Poor’s Retail Index			100				81				49				76				95				106
Standard & Poor’s 500 Index			100				96				57				74				88				91

 

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Item 6. Selected Financial Data.

Dollars in millions except per square foot and per share amounts

The following selected financial data are derived from the audited consolidated financial statements and should be read in conjunction with Item 1A: Risk Factors, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K.

 

Fiscal year		2011				2010				2009				2008				20077
Earnings Results
Net sales			$10,497				$9,310				$8,258				$8,272				$8,828
Credit card revenues			380				390				369				301				252
Gross profit1			3,905				3,413				2,930				2,855				3,302
Selling, general and administrative (“SG&A”) expenses:
Retail			(2,807)				(2,412)				(2,109)				(2,103)				(2,161)
Credit			(229)				(273)				(356)				(274)				(198)
Earnings on investment in asset-backed securities, net2			–				–				–				–				18
Earnings before interest and income taxes (“EBIT”)			1,249				1,118				834				779				1,247
Interest expense, net			(130)				(127)				(138)				(131)				(74)
Earnings before income taxes (“EBT”)			1,119				991				696				648				1,173
Net earnings			683				613				441				401				715
Balance Sheet and Cash Flow Data
Accounts receivable, net			$2,033				$2,026				$2,035				$1,942				$1,788
Merchandise inventories			1,148				977				898				900				956
Current assets			5,560				4,824				4,054				3,217				3,361
Land, buildings and equipment, net			2,469				2,318				2,242				2,221				1,983
Total assets			8,491				7,462				6,579				5,661				5,600
Current liabilities			2,575				1,879				2,014				1,601				1,635
Long-term debt, including current portion			3,647				2,781				2,613				2,238				2,497
Shareholders’ equity			1,956				2,021				1,572				1,210				1,115
Cash flow from operations			1,177				1,177				1,251				848				312
Performance Metrics
Same-store sales percentage change3			7.2%				8.1%				(4.2%)				(9.0%)				3.9%
Gross profit % of net sales			37.2%				36.7%				35.5%				34.5%				37.4%
Retail SG&A % of net sales			26.7%				25.9%				25.5%				25.4%				24.5%
Total SG&A % of net sales			28.9%				28.8%				29.8%				28.7%				26.7%
EBIT % of total revenues			11.5%				11.5%				9.7%				9.1%				13.7%
EBT % of total revenues			10.3%				10.2%				8.1%				7.6%				12.9%
Net earnings % of total revenues			6.3%				6.3%				5.1%				4.7%				7.9%
Return on shareholders’ equity			34.3%				34.1%				31.7%				34.5%				43.6%
Return on assets			8.7%				8.6%				7.1%				7.0%				13.1%
Return on invested capital (“ROIC”)4			13.3%				13.6%				12.1%				11.6%				19.4%
Sales per square foot5			$431				$397				$368				$388				$435
Retail SG&A expense per square foot5			$115				$103				$94				$99				$106
Inventory turnover rate6			5.56				5.56				5.41				5.20				5.16
Per Share Information
Earnings per diluted share			$3.14				$2.75				$2.01				$1.83				$2.88
Dividends declared per share			0.92				0.76				0.64				0.64				0.54
Book value per share			9.42				9.27				7.22				5.62				5.05
Store Information (at year-end)
Nordstrom full-line stores			117				115				112				109				101
Nordstrom Rack and other stores			108				89				72				60				55
Total square footage			24,745,000				23,838,000				22,773,000				21,876,000				20,502,000

¹Gross profit is calculated as net sales less cost of sales and related buying and occupancy costs (for all segments).

 

2	On May 1, 2007, we combined our Nordstrom private label credit card and Nordstrom VISA credit card programs into one securitization program. At that time, the Nordstrom VISA credit card receivables were brought on-balance sheet.

3	Same-store sales include sales from stores that have been open at least one full year at the beginning of the year. We also include sales from our Nordstrom online store in same-store sales because of the substantial integration of our Nordstrom full-line stores and online store.

4	See Non-GAAP Financial Measure beginning on the following page for additional information and reconciliation to the most directly comparable GAAP financial measure.

5	Sales per square foot and Retail SG&A expense per square foot are calculated as net sales and Retail SG&A expense, respectively, divided by weighted-average square footage.

Weighted-average square footage includes a percentage of year-end square footage for new stores equal to the percentage of the year during which they were open.

6	Inventory turnover rate is calculated as annual cost of sales and related buying and occupancy costs (for all segments) divided by 4-quarter average inventory.

7

During  the third quarter of 2007, we completed the sale of our Façonnable business and realized a gain on sale of $34 ($21, net of tax). Results of operations for fiscal year 2007 include the international Façonnable boutiques through August 31, 2007 and the domestic Façonnable boutiques through October 31, 2007.

 

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NON-GAAP FINANCIAL MEASURE

Return on Invested Capital (“ROIC”)

We define ROIC as follows:

 

ROIC =		Net Operating Profit After Taxes
		Average Invested Capital

We believe that ROIC is a useful financial measure for investors in evaluating our operating performance. When analyzed in conjunction with our net earnings and total assets and compared with return on assets (net earnings divided by average total assets), it provides investors with a useful tool to evaluate our ongoing operations and our management of assets from period to period. ROIC is one of our key financial metrics, and we also incorporate it into our executive incentive measures. We believe that overall performance as measured by ROIC correlates directly to shareholders’ return over the long term. ROIC is not a measure of financial performance under GAAP, should not be considered a substitute for return on assets, net earnings or total assets as determined in accordance with GAAP, and may not be comparable with similarly titled measures reported by other companies. The closest measure calculated using GAAP amounts is return on assets. The following is a comparison of return on assets to ROIC:

 

		12 fiscal months ended
		January 28, 2012				January 29, 2011				January 30, 2010				January 31, 2009				February 2, 2008
Net earnings			$683				$613				$441				$401				$715
Add: income tax expense			436				378				255				247				458
Add: interest expense			132				128				138				131				74
Earnings before interest and income tax expense			1,251				1,119				834				779				1,247
Add: rent expense			78				62				43				37				48
Less: estimated depreciation on capitalized operating leases1			(42	)			(32	)			(23	)			(19	)			(26	)
Net operating profit			1,287				1,149				854				797				1,269
Estimated income tax expense2			(501	)			(439	)			(313	)			(303	)			(497	)
Net operating profit after tax			$786				$710				$541				$494				$772
Average total assets3			$7,890				$7,091				$6,197				$5,768				$5,455
Less: average non-interest-bearing current liabilities4			(2,041	)			(1,796	)			(1,562	)			(1,447	)			(1,506	)
Less: average deferred property incentives3			(504	)			(487	)			(462	)			(400	)			(359	)
Add: average estimated asset base of capitalized operating leases5			555				425				311				322				395
Average invested capital			$5,900				$5,233				$4,484				$4,243				$3,985
Return on assets			8.7%				8.6%				7.1%				7.0%				13.1%
ROIC			13.3%				13.6%				12.1%				11.6%				19.4%

 

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 purchased the property. Asset base is calculated as described in footnote 5 below.

2	Based upon our effective tax rate multiplied by the net operating profit for the 12 fiscal months ended January 28, 2012, January 29, 2011, January 30, 2010, January 31, 2009 and February 2, 2008.

³Based upon the trailing 12-month average, including cash and cash equivalents.

⁴Based upon the trailing 12-month average for accounts payable, accrued salaries, wages and related benefits, and other current liabilities.

 

5

Based upon the trailing 12-month average of the monthly asset base, which is calculated as the trailing 12-months 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.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Dollar, share and square footage amounts in millions except percentages, per share and per square foot amounts

OVERVIEW

Nordstrom is a fashion specialty retailer offering high-quality apparel, shoes, cosmetics and accessories for women, men and children. We offer a wide selection of brand name and private label merchandise through various channels: our ‘Nordstrom’ branded full-line stores and website, our off-price ‘Nordstrom Rack’ stores, our online private sale subsidiary ‘HauteLook,’ our ‘Jeffrey’ boutiques and our philanthropic ‘treasure&bond’ store. Our stores are located in 30 states throughout the United States. In addition, we offer our customers a variety of payment products and services, including credit and debit cards with an associated loyalty program.

In 2011, we achieved record total net sales of $10,497, an increase of 12.7%, while growing earnings before interest and taxes (“EBIT”) by 11.7%. This reflects our ongoing efforts to improve the customer experience across all channels, combined with consistent execution and various growth initiatives. As customers’ expectations of service evolve, the consistency of the customer experience across all channels becomes more important, including factors such as expanded selection, multi-channel capabilities, personalization, speed, convenience and price.

To enhance the customer experience online, we have accelerated our investments in e-commerce. We acquired HauteLook, a leader in the online private sale marketplace. We believe this acquisition will help us further develop our mobile and e-commerce capabilities and enable us to participate in the fast-growing private sales channel. In the third quarter, we began offering free standard shipping and free returns for online purchases and did limited testing of same-day delivery. We also made enhancements to our website and mobile website. We believe these changes make it easier and more convenient to shop with us. Our combined efforts to enhance the online experience led to a meaningful sales increase in the online channel, which is where we expect to have the strongest percentage growth in the future.

Our strong financial position enables us to continue to make investments in the customer experience to improve our store and online business while also growing through new stores, remodels and other initiatives. During 2011, we opened three Nordstrom full-line stores, eighteen Nordstrom Rack stores and remodeled six Nordstrom full-line stores. We also opened a philanthropic store in New York called treasure&bond. In 2012, we plan to open one Nordstrom full-line store and have announced twelve new Nordstrom Rack stores. In addition, we have announced plans to relocate two existing Nordstrom Rack stores and remodel eight Nordstrom full-line stores.

Our overall goals are to achieve high single-digit total sales growth and mid-teens Return on Invested Capital (“ROIC”). We believe that top-line growth and ROIC correlate strongly with shareholders’ return. As we continue to invest in new stores and remodels, we also want to enhance the customer experience through increased spending on e-commerce and technology. These investments flow through our expenses at a faster pace than other investments in previous years. We believe they will increase our ROIC through high growth in sales dollars and EBIT, as opposed to EBIT margin, with an incrementally productive capital base.

Fashion Rewards plays an important part in building customer loyalty, and our Fashion Rewards members shop more frequently and spend more with us on average than non-members. Approximately one-third of our sales are from Fashion Rewards customers and the program continues to grow as more members use our tender as a convenient way to shop and earn rewards. During the year, customer payment rates continued to improve, resulting in decreasing delinquency and write-off trends, while our credit and debit card volumes increased. In January 2012, we enhanced our Fashion Rewards program, giving customers more control over how and when they can earn rewards and extending more benefits to our cardholders.

As we look forward to 2012, we remain focused on improving customer service and providing a superior shopping experience. We have a customer-driven strategy, allowing us to execute our current operating plans across all channels while targeting investments in e-commerce and technology to enhance our platform for sustainable, profitable growth.

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, and our other retail channels including HauteLook, our Jeffrey stores and our treasure&bond store. 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 our segment reporting footnote (collectively, the “Retail Business”). We analyze our results of operations through earnings before interest and income taxes for our Retail Business and earnings before income taxes for Credit, while interest expense and income taxes are discussed on a total company basis.

 

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Retail Business

Summary

The following table summarizes the results of our Retail Business for the fiscal years ended January 28, 2012, January 29, 2011 and January 30, 2010:

 

			$000,000.00				$000,000.00				$000,000.00				$000,000.00				$000,000.00				$000,000.00
Fiscal year		2011								2010								2009
		Amount				% of net     sales				Amount				% of net     sales				Amount				% of net   sales
Net sales			$10,497				100.0%				$9,310				100.0%				$8,258				100.0%
Cost of sales and related buying and occupancy costs			(6,517)				(62.1%)				(5,831)				(62.6%)				(5,273)				(63.9%)
Gross profit			3,980				37.9%				3,479				37.4%				2,985				36.1%
Other revenues			–				N/A				–				N/A				(1)				N/A
Selling, general and administrative expenses			(2,807)				(26.7%)				(2,412)				(25.9%)				(2,109)				(25.5%)
Earnings before interest and income taxes			$1,173				11.2%				$1,067				11.5%				$875				10.6%

Retail Business Net Sales

 

Fiscal year		2011				2010				2009
Net sales by channel:
Nordstrom			$8,426				$7,700				$6,923
Nordstrom Rack			2,045				1,691				1,411
Other retail1			185				29				29
Total Retail segment			10,656				9,420				8,363
Corporate/Other			(159	)			(110	)			(105)
Total net sales			$10,497				$9,310				$8,258
Net sales increase (decrease)			12.7%				12.7%				(0.2%)
Same-store sales increase (decrease) by channel:
Nordstrom			8.2%				9.3%				(5.0%)
Nordstrom Rack			3.7%				0.7%				2.5%
Total			7.2%				8.1%				(4.2%)
Sales per square foot			$431				$397				$368
Percentage of net sales by merchandise category:
Women’s apparel			33%				34%				34%
Shoes			23%				23%				22%
Men’s apparel			15%				15%				15%
Women’s accessories			12%				12%				12%
Cosmetics			11%				10%				11%
Children’s apparel			3%				3%				3%
Other			3%				3%				3%
Total			100%				100%				100%

¹Other retail includes our HauteLook online private sale subsidiary, our Jeffrey stores and our treasure&bond store.

NET SALES – 2011 VS 2010

Net sales for 2011 increased 12.7% compared with 2010 driven by the strength of our Nordstrom full-line stores, rapid growth in our online business and improving results at Nordstrom Rack. During the year, we opened three Nordstrom full-line stores, eighteen Nordstrom Rack stores and one treasure&bond store, relocated two Nordstrom Rack stores and acquired HauteLook. These additions represented 4.0% of our total net sales for 2011, and increased our gross square footage by 3.8%. Same-store sales increased 7.2%, with increases of 8.2% at Nordstrom and 3.7% at Nordstrom Rack.

Nordstrom net sales for 2011 were $8,426, an increase of 9.4% compared with 2010, with same-store sales up 8.2%. Our sales growth was due in large part to our investments and efforts to build stronger relationships with customers and to improve the shopping experience across all channels. In addition, our merchandising, inventory management and multi-channel initiatives continue to drive our sales growth. Both the average selling price and the number of items sold increased in 2011 compared with 2010. Category highlights included Designer, Handbags and Shoes. The South and Midwest were the top-performing geographic regions for 2011. The Direct channel continued to outpace the overall Nordstrom increase, with a net sales increase of 29.5% in 2011 compared with 2010.

Nordstrom Rack net sales were $2,045, an increase of 21.0% compared with 2010, while same-store sales increased 3.7% for the year. Shoes, Dresses and Accessories were the strongest performing categories for the year. Both the average selling price and the number of items sold increased in 2011 compared with 2010.

 

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NET SALES – 2010 VS 2009

Net sales for 2010 increased 12.7% compared with 2009, while same-store sales increased 8.1%. During the year, we opened three Nordstrom full-line stores, relocated one Nordstrom full-line store, opened seventeen Nordstrom Rack stores and relocated one Nordstrom Rack store. These stores represented 3.3% of our total net sales for 2010, and increased our gross square footage by 4.7%.

Nordstrom net sales were $7,700, up 11.2% compared with 2009, with same-store sales up 9.3%. The number of items sold increased in 2010 compared with 2009, while the average selling price of Nordstrom merchandise was approximately flat. Category highlights included Jewelry, Shoes and Dresses. The Midwest and South were the top-performing geographic regions for 2010. Our sales growth was due in large part to the success of our merchandising, inventory management and multi-channel initiatives, including an updated inventory platform that allowed for shared inventory across all of our Nordstrom full-line stores and our website. These enhancements increased sales and led to significant improvements in our sell-through and inventory turnover rates beginning in the second half of 2009 and continuing throughout 2010.

Nordstrom Rack net sales were $1,720, up 19.5% compared with 2009, while same-store sales increased 0.7% for the year. Cosmetics and Shoes were the strongest performing categories for the year. The number of items sold increased in 2010 compared with 2009, partially offset by declines in the average selling price of Nordstrom Rack merchandise.

Retail Business Gross Profit

 

Fiscal year		2011				2010				2009
Gross profit1			$3,980				$3,479				$2,985
Gross profit rate			37.9%				37.4%				36.1%
Average inventory per square foot			$48.71				$45.31				$43.96
Inventory turnover rate2			5.56				5.56				5.41

 

1

Retailers do not uniformly record the costs of buying and occupancy and supply chain operations (freight, purchasing, receiving, distribution, etc.) between gross profit and selling, general and administrative expense. As such, our gross profit and selling, general and administrative expenses and rates may not be comparable to other retailers’ expenses and rates.

2	Inventory turnover rate is calculated as annual cost of sales and related buying and occupancy costs (for all segments) divided by 4-quarter average inventory.

GROSS PROFIT – 2011 VS 2010

Retail gross profit increased $501 in 2011 compared with 2010 due to higher sales and merchandise margin, partially offset by an increase in occupancy costs for stores opened during both 2011 and 2010. Our gross profit rate improved 54 basis points compared with 2010 primarily due to leveraging buying and occupancy costs on higher net sales.

Our merchandising efforts enabled us to manage inventory levels consistent with our sales trends, with an increase in our average inventory per square foot of 7.5% on an 8.5% increase in sales per square foot. Our inventory turnover rate remained in-line with the high rate achieved in 2010, reflecting the strong execution and discipline of our buying organization and the ongoing benefits from our multi-channel capabilities that contributed to a flow of fresh merchandise throughout the year.

GROSS PROFIT – 2010 VS 2009

Retail gross profit increased $494 in 2010 compared with 2009 primarily due to higher sales and merchandise margin, partially offset by increases in occupancy costs for Nordstrom full-line and Nordstrom Rack stores opened during both 2010 and 2009. Our gross profit rate improved 123 basis points compared with 2009 primarily due to improvement in our merchandise margin, as well as leveraging buying and occupancy costs on higher net sales. Both our regular-priced selling and inventory turnover rate increased in 2010 compared with 2009, and our average inventory per square foot increased 3.1%.

 

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Retail Business Selling, General and Administrative Expenses

 

Fiscal year		2011				2010				2009
Selling, general and administrative expenses			$2,807				$2,412				$2,109
Selling, general and administrative rate			26.7%				25.9%				25.5%
Selling, general and administrative expense per square foot1			$115				$103				$94

 

1	Retail SG&A expense per square foot is calculated as Retail SG&A expense divided by weighted-average square footage. Weighted-average square footage includes a percentage of year-end square footage for new stores equal to the percentage of the year during which they were open.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES – 2011 VS 2010

Our Retail selling, general and administrative expenses (“Retail SG&A”) increased $395 in 2011 compared with 2010. This increase reflects initiatives to improve the shopping experience across all channels and specifically to grow our e-commerce business. These include HauteLook operating and purchase accounting expenses, planned increases in marketing and technology spending and increased fulfillment expenses associated with the introduction of free standard shipping and free returns for online purchases in the third quarter of 2011. The increase was also due in part to higher sales volume and the opening of twenty-two stores in 2011. As a result, our Retail SG&A rate increased 84 basis points for 2011 compared with 2010. We continue to leverage SG&A expense in our stores, with improvements of approximately 35 basis points in 2011, compared with 2010.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES – 2010 VS 2009

Our Retail selling, general and administrative expenses increased $303 in 2010 compared with 2009. The majority of the increase in expense dollars was due to higher sales volume and expenses for new stores. Our Retail SG&A rate increased 38 basis points for 2010 compared with 2009. The increase was in part due to planned increases in marketing and technology expenses in areas such as online marketing and social media. The increased Retail SG&A rate also reflects higher fulfillment costs as we shipped more items to our customers.

 

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Credit Segment

The Nordstrom credit and debit card products are designed to strengthen customer relationships and grow retail sales by providing valuable services, loyalty benefits and payment products. We believe that owning all aspects of our credit business allows us to fully integrate our rewards program with our retail stores and provide better service to our customers, thus deepening our relationship with them and driving greater customer loyalty. Our cardholders tend to visit our stores more frequently and spend more with us than non-cardholders, and we believe the Nordstrom Fashion Rewards^® program helps drive sales in our Retail segment. Our Nordstrom private label credit and debit cards can be used only in Nordstrom stores and on our website (“inside volume”), while our Nordstrom VISA cards also may be used for purchases outside of Nordstrom (“outside volume”). Cardholders participate in the Fashion Rewards program, through which they accumulate points based on their level of spending (generally two points per dollar spent at Nordstrom and one point per dollar spent outside of Nordstrom). Upon reaching two thousand points, customers receive twenty dollars in Nordstrom Notes^®, which can be redeemed for goods or services in our stores or online. Starting in January 2012, all Fashion Rewards customers receive a credit for complimentary alterations and personal triple points days, in addition to early access to sales events. As part of these changes, Nordstrom Rack is also now included with all bonus points events and the spend requirements for customers to achieve our two highest benefit levels have been lowered. With increased spending, Fashion Rewards customers can receive additional amounts of these benefits as well as access to exclusive fashion and shopping events.

The table below provides a detailed view of the operational results of our Credit segment, consistent with the segment disclosure provided in the Notes to 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. Intercompany merchant fees represent the estimated intercompany income of our Credit segment from the usage of our cards in the Retail segment. To encourage the use of Nordstrom cards in our stores, the Credit segment does not charge the Retail segment an intercompany interchange merchant fee. On a consolidated basis, we avoid costs that would be incurred if our customers used third-party cards.

Interest expense is assigned to the Credit segment in proportion to the amount of estimated capital needed to fund our credit card receivables, which assumes a mix of 80% debt and 20% equity. The average credit card receivable investment metric included in the following table represents our best estimate of the amount of capital for our Credit segment that is financed by equity. Based on our research, debt as a percentage of credit card receivables for other credit card companies ranges from 70% to 90%. We believe that debt equal to 80% of our credit card receivables is appropriate given our overall capital structure goals.

 

Fiscal year		2011								2010								2009
		Amount				% of credit    card    receivables				Amount				% of credit   card   receivables				Amount				% of credit   card   receivables
Credit card revenues			$380				18.6%				$390				18.7%				$370				17.6%
Interest expense			(13)				(0.7%)				(21)				(1.0%)				(41)				(2.0%)
Net credit card income			367				17.9%				369				17.7%				329				15.7%
Cost of sales and related buying and occupancy costs – loyalty program			(75)				(3.7%)				(66)				(3.2%)				(55)				(2.6%)
Selling, general and administrative expenses			(229)				(11.2%)				(273)				(13.1%)				(356)				(17.0%)
Total expense			(304)				(14.9%)				(339)				(16.3%)				(411)				(19.6%)
Credit segment earnings (loss) before income taxes, as presented in segment disclosure			63				3.1%				30				1.4%				(82)				(3.9%)
Intercompany merchant fees			71				3.5%				58				2.8%				50				2.4%
Credit segment contribution (loss), before income taxes			$134				6.6%				$88				4.2%				$(32)				(1.5%)
Credit and debit card volume:
Outside			$4,101								$3,838								$3,603
Inside			3,596								2,953								2,521
Total volume			$7,697								$6,791								$6,124
Average credit card receivables			$2,047								$2,088								$2,099
Average credit card receivable investment (assuming 80% of accounts receivable is funded with debt)			$409								$418								$420
Credit segment contribution (loss), net of tax, as a percentage of average credit card receivable investment			20.0%								12.8%								(4.7%)

 

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Credit Card Revenues

 

Fiscal year		2011				2010				2009
Finance charge revenue		$	251			$	266			$	264
Interchange - third party			82				76				71
Late fees and other revenue			47				48				35
Total credit card revenues		$	380			$	390			$	370

Credit card revenues include finance charges, interchange fees, late fees and other revenue. Finance charges represent interest earned on unpaid balances while late fees are assessed when cardholders pay less than their minimum balance by the payment due date. Interchange fees are earned from the use of Nordstrom VISA credit cards at merchants outside of Nordstrom.

CREDIT CARD REVENUES – 2011 VS 2010

Credit card revenues decreased $10 in 2011 compared with 2010 primarily due to a decrease in finance charge revenue, partially offset by an increase in interchange fees. Continued improvements in customer payment rates drove lower finance charge yields and slightly lower receivables, which resulted in a decrease in finance charge revenue. Our average credit card receivable balance in 2011 was $2,047, a decrease of $41, or 1.9%, from 2010. These decreases were partially offset by an increase in interchange revenue due to increased use of our Nordstrom VISA credit cards at third parties.

CREDIT CARD REVENUES – 2010 VS 2009

Credit card revenues increased $20 in 2010 compared with 2009 primarily due to higher late fees, particularly in the first half of the year. Improving economic conditions over the year led to an increase in general consumer spending, improved payment rates, lower revolving balances and reduced delinquencies. Our average credit card receivable balance in 2010 was $2,088, a decrease of $11, or 0.5%, from 2009.

Slightly higher average annual percentage rates, partially offset by lower revolving balances from improvements in customer payment rates, resulted in a small increase in finance charges in 2010 compared with 2009. Increased use of our Nordstrom VISA credit cards at third parties resulted in an increase in interchange fees in 2010 compared with 2009. Delinquencies increased during the first half of 2010 compared with the first half of 2009. Additionally, legal and regulatory changes in 2009 and 2010 affected our pricing and billing terms. Taken together, these factors resulted in an increase in late fees and other revenue in 2010 compared with 2009.

Credit Segment Interest Expense

Interest expense decreased to $13 in 2011 from $21 in 2010 and $41 in 2009 due to lower average interest rates applicable to the Credit segment.

Credit Segment Cost of Sales and Related Buying and Occupancy Costs

COST OF SALES AND RELATED BUYING AND OCCUPANCY COSTS – 2011 VS 2010

Cost of sales and related buying and occupancy costs, which includes the estimated cost of Nordstrom Notes that will be issued and redeemed under our Fashion Rewards program, increased to $75 in 2011 compared with $66 in 2010. The increase was due to additional expenses related to the Fashion Rewards program as a result of a 13.3% increase in volume on Nordstrom credit and debit cards and increased utilization of program benefits. We provide these benefits to our customers as participation in the Fashion Rewards program generates enhanced customer loyalty and incremental sales in our stores.

COST OF SALES AND RELATED BUYING AND OCCUPANCY COSTS – 2010 VS 2009

Cost of sales and related buying and occupancy costs increased to $66 in 2010 compared with $55 in 2009. The increase was due to a 10.9% increase in volume on Nordstrom credit and debit cards and increased utilization of program benefits.

Credit Segment Selling, General and Administrative Expenses

Selling, general and administrative expenses for our Credit segment (“Credit SG&A”) are made up of operational and marketing expenses, and bad debt. These expenses are summarized in the following table:

 

Fiscal year		2011				2010				2009
Operational and marketing expenses		$	128			$	124			$	105
Bad debt provision			101				149				251
Total selling, general and administrative expenses		$	229			$	273			$	356

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES – 2011 VS 2010

Total Credit SG&A decreased $44 in 2011 compared with 2010, due to lower bad debt expense. The decrease in bad debt expense reflects continued improvement in our portfolio trends, the overall performance of our credit portfolio and economic trends, which are further discussed below. Operational and marketing expenses are incurred to support and service our credit and debit card products and the related rewards program.

 

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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES – 2010 VS 2009

Total Credit SG&A decreased $83 in 2010 compared with 2009, due primarily to lower bad debt expense, partially offset by increases in operational and marketing expenses. The decrease in bad debt expense reflected continued improvement in our portfolio trends which are further discussed below. The increase in operational and marketing expenses was primarily driven by increased information technology expenses, higher collection agency fees from higher recoveries and expenses related to our Fashion Rewards program.

Allowance for Credit Losses and Credit Trends

The following table illustrates activity in the allowance for credit losses for the past three fiscal years:

 

Fiscal year		2011		2010		2009
Allowance at beginning of year		$145		$190		$138
Bad debt provision		101		149		251
Write-offs		(153)		(211)		(209)
Recoveries		22		17		10
Allowance at end of year		$115		$145		$190
Net write-offs as a percentage of average credit card receivables		6.3%		9.2%		9.5%
30+ days delinquent as a percentage of ending credit card receivables		2.6%		3.0%		5.3%
Allowance as a percentage of ending credit card receivables		5.5%		6.9%		8.8%

CREDIT TRENDS

During 2011, our delinquency and net write-off results continued the improvements that began in 2010. Write-offs were higher during the first half of both 2011 and 2010, reflecting accounts that became delinquent during the second half of the prior years. For the full year, net write-offs in 2011 were $131, or 6.3% of average credit card receivables, a significant improvement over 2010 which remained consistent with 2009. Delinquencies have improved in both 2011 and 2010, and combined with the write-off results, we reduced our allowance for credit losses by $30 in 2011 and by $45 in 2010.

CREDIT QUALITY

The quality of our credit card receivables at any time reflects, among other factors, general economic conditions, the creditworthiness of our cardholders and the success of our account management and collection activities. In general, credit quality tends to decline, and the risk of credit losses tends to increase, during periods of deteriorating economic conditions. Through our underwriting and risk management standards and practices, we seek to maintain a high quality cardholder portfolio, thereby mitigating our exposure to credit losses. As of January 28, 2012, 78.1% of our credit card receivables were from cardholders with FICO scores of 660 or above (generally considered “prime” according to industry standards) compared with 76.2% as of January 29, 2011.

Total Company Results

Interest Expense, Net

 

Fiscal year		2011		2010		2009
Interest on long-term debt and short-term borrowings		$139		$133		$148
Less:
Interest income		(2)		(1)		(3)
Capitalized interest		(7)		(5)		(7)
Interest expense, net		$130		$127		$138

INTEREST EXPENSE, NET – 2011 VS 2010

Interest expense, net increased $3 in 2011 compared with 2010 due to higher debt balances, partially offset by lower average interest rates.

INTEREST EXPENSE, NET – 2010 VS 2009

Interest expense, net decreased $11 in 2010 compared with 2009 due to lower average interest rates, partially offset by higher debt balances.

 

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Income Tax Expense

 

			00000000				00000000				00000000
Fiscal year		2011				2010				2009
Income tax expense			$436				$378				$255
Effective tax rate			39.0%				38.2%				36.6%

The following table illustrates the components of our effective tax rate for 2011, 2010 and 2009:

 

			0000000				0000000				0000000
Fiscal year		2011				2010				2009
Statutory rate			35.0%				35.0%				35.0%
State and local income taxes, net of federal income taxes			3.6				3.4				3.5
Non-taxable acquisition-related items			0.6				–				–
Deferred tax adjustment			–				–				(1.8)
Permanent differences			0.1				(0.2)				(0.6)
Other, net			(0.3	)			–				0.5
Effective tax rate			39.0%				38.2%				36.6%

INCOME TAX EXPENSE – 2011 VS 2010

The increase in the effective tax rate for 2011 compared with 2010 was primarily due to non-taxable acquisition-related items, including goodwill impairment.

INCOME TAX EXPENSE – 2010 VS 2009

The increase in the effective tax rate for 2010 compared with 2009 was primarily due to the impact of a non-recurring benefit of approximately $12 from a deferred tax adjustment during the first quarter of 2009 related to the closure of our 2007 federal tax return audit.

Fourth Quarter Results

 

Quarter ended		January 28, 2012				January 29, 2011
Net sales			$3,169				$2,816
Credit card revenues			97				100
Gross profit			1,196				1,058
Selling, general and administrative (“SG&A”) expenses:
Retail			(818)				(697)
Credit			(58)				(55)
Net earnings			236				232
Earnings per diluted share			$1.11				$1.04
% of net sales:
Gross profit			37.7%				37.6%
Retail SG&A			25.8%				24.8%

Nordstrom’s fourth quarter performance was consistent with the strong trends the company experienced throughout 2011. Net earnings for the fourth quarter of 2011 were $236, or $1.11 per diluted share, compared with $232, or $1.04 per diluted share, in 2010.

NET SALES

Total sales for the quarter increased 12.5% to $3,169. Same-store sales increased 7.1%, with increases of 8.4% at Nordstrom and 2.2% at Nordstrom Rack.

Nordstrom same-store sales increased 8.4% for the quarter. Both the average selling price of our merchandise and the number of items sold increased for the quarter ended January 28, 2012 compared with the same period last year. Category highlights for the quarter were Handbags, Designer and Cosmetics. The South and Midwest were the top-performing geographic regions relative to the fourth quarter of 2010. The Direct channel continued to show strong performance, with a net sales increase of 35.1% in the fourth quarter of 2011, compared with the same period in 2010.

Nordstrom Rack net sales increased $85, or 17.7% for the quarter. Nordstrom Rack same-store sales increased 2.2% for the fourth quarter of 2011 compared with the fourth quarter of 2010. The average selling price of Nordstrom Rack merchandise increased while the number of items sold decreased for the quarter, compared with the same period in the prior year. Shoes and Accessories were the leading categories for Nordstrom Rack.

 

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GROSS PROFIT

Our gross profit rate increased 12 basis points to 37.7% from 37.6% last year. The increase was driven by the ability to leverage buying and occupancy expenses. Our average inventory per square foot increased 11.9% on an 8.4% increase in sales per square foot compared with the fourth quarter of 2010. The higher increase in inventory per square foot, compared with the increase in sales per square foot, resulted from growing our inventory to what we consider to be an appropriate level to support our anticipated sales volume in the coming months.

SELLING, GENERAL & ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for our Retail Business increased $121 compared with last year’s fourth quarter. The increase was primarily attributable to various customer facing e-commerce initiatives, including HauteLook, and sales growth in both existing and new stores. Our Retail SG&A rate increased approximately 107 basis points, driven primarily by HauteLook, including the impact of goodwill impairment.

In the fourth quarter, selling, general and administrative expenses for our Credit segment were $58, slightly up from $55 in 2010. The increase was primarily driven by higher collection agency fees from increased recovery efforts and an increase in information technology and marketing expenses, partially offset by lower bad debt expense resulting from continued improvements in our credit trends.

For further information on our quarterly results in 2011 and 2010, refer to Note 17: Selected Quarterly Data in the Notes to Consolidated Financial Statements in Item 8.

2012 Outlook

Our expectations for 2012 are as follows:

 

Same-store sales		4 to 6 percent increase
Credit card revenues		$0 to $10 increase
Gross profit rate1		5 to 35 basis point decrease
Selling, general and administrative expenses:
Retail		$265 to $330 increase
Credit		$10 to $20 increase
Interest expense, net		$25 to $30 increase
Effective tax rate		39.0 percent
Earnings per diluted share		$3.30 to $3.45
Diluted shares outstanding		213.0

¹Includes both our Retail gross profit and the cost of our loyalty program, which is recorded in our Credit segment, as a percentage of net sales.

We plan to open one Nordstrom full-line store and have announced plans to open twelve Nordstrom Rack stores and relocate two Nordstrom Rack stores during 2012. This will increase our retail square footage by approximately 2.2%.

We expect our gross profit rate to decrease approximately 5 to 35 basis points, after the significant increases in 2011 and 2010. The decrease is expected as a result of an increasing mix of Nordstrom Rack stores, a reduction in shipping revenue as a result of launching free shipping and free returns for online purchases in 2011 and expenses related to our enhanced Fashion Rewards program.

The majority of the increase in our Retail SG&A expenses relates to our expectations for increased variable expenses consistent with the planned increase in sales, additional expenses from stores opened during 2011 and 2012 and accelerated investments in our business to improve the customer experience both in store and online.

For our Credit segment, we expect credit card revenues to be flat to slightly higher as a result of increased volume, offset by higher payment rates. We expect Credit SG&A expenses to increase $10 to $20 when compared with 2011 results as no planned reduction in our allowance for credit losses is expected while 2011 included $30 of reductions.

Interest expense, net is anticipated to increase $25 to $30 due to higher debt levels and a higher average cost of debt.

The guidance above includes the impact of the 53rd week of 2012, which we expect to add approximately $160 to $170 to net sales, and approximately $0.03 to $0.05 to earnings per diluted share.

 

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Return on Invested Capital (“ROIC”) (Non-GAAP financial measure)

We define ROIC as follows:

 

ROIC =		Net Operating Profit After Taxes
		Average Invested Capital

We believe that ROIC is a useful financial measure for investors in evaluating our operating performance. When analyzed in conjunction with our net earnings and total assets and compared with return on assets (net earnings divided by average total assets), it provides investors with a useful tool to evaluate our ongoing operations and our management of assets from period to period. ROIC is one of our key financial metrics, and we also incorporate it into our executive incentive measures. We believe that overall performance as measured by ROIC correlates directly to shareholders’ return over the long term. For the 12 fiscal months ended January 28, 2012, our ROIC decreased to 13.3% compared with 13.6% for the 12 fiscal months ended January 29, 2011. ROIC is not a measure of financial performance under GAAP, should not be considered a substitute for return on assets, net earnings or total assets as determined in accordance with GAAP, and may not be comparable with similarly titled measures reported by other companies. The closest measure calculated using GAAP amounts is return on assets, which increased to 8.7% from 8.6% for the 12 fiscal months ended January 28, 2012, compared with the 12 fiscal months ended January 29, 2011. The following is a comparison of return on assets to ROIC:

 

		12 fiscal months ended
		January 28, 2012		January 29, 2011
Net earnings		$683			$613
Add: income tax expense		436			378
Add: interest expense		132			128
Earnings before interest and income tax expense		1,251			1,119
Add: rent expense		78			62
Less: estimated depreciation on capitalized operating leases1		(42)			(32)
Net operating profit		1,287			1,149
Estimated income tax expense2		(501)			(439)
Net operating profit after tax		$786			$710
Average total assets3		$7,890			$7,091
Less: average non-interest-bearing current liabilities4		(2,041)			(1,796)
Less: average deferred property incentives3		(504)			(487)
Add: average estimated asset base of capitalized operating leases5		555			425
Average invested capital		$5,900			$5,233
Return on assets		8.7%			8.6%
ROIC		13.3%			13.6%

 

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 purchased the property. Asset base is calculated as described in footnote 5 below.

²Based upon our effective tax rate multiplied by the net operating profit for the 12 fiscal months ended January 28, 2012 and January 29, 2011.

³Based upon the trailing 12-month average, including cash and cash equivalents.

⁴Based upon the trailing 12-month average for accounts payable, accrued salaries, wages and related benefits, and other current liabilities.

 

5

Based upon the trailing 12-month average of the monthly asset base, which is calculated as the trailing 12-months 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.

Our ROIC decreased compared with the prior year primarily due to an increase in our average invested capital, attributable primarily to growth in cash and cash equivalents. This was partly offset by an increase in our net operating profit after tax.

 

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LIQUIDITY AND CAPITAL RESOURCES

We maintain a level of liquidity sufficient to allow us to cover our seasonal cash needs and to maintain appropriate levels of short-term borrowings. We believe that our operating cash flows, available credit facilities and potential future borrowings are sufficient to finance our cash requirements for the next 12 months and beyond.

Over the long term, we manage our cash and capital structure to maximize shareholder return, maintain our financial position, manage refinancing risk and allow flexibility for strategic initiatives. We regularly assess our debt and leverage levels, capital expenditure requirements, debt service payments, dividend payouts, potential share repurchases and other future investments. We believe our existing cash on-hand, operating cash flows, available credit facilities and potential future borrowings will be sufficient to fund these scheduled future payments and potential long-term initiatives.

Operating Activities

Net cash provided by operating activities was $1,177 in each of 2011 and 2010. The majority of our operating cash inflows are derived from sales. We also receive cash payments for property incentives from developers. Our operating cash outflows generally consist of payments to our merchandise vendors (net of vendor allowances), payments to our employees for wages, salaries and other employee benefits and payments to our landlords for rent. Operating cash outflows also include payments for income taxes and interest payments on our short- and long-term borrowings.

Cash provided by operating activities was flat in 2011 compared with 2010 due to higher sales and earnings offset primarily by changes in working capital, including increased inventory purchases to align with sales trends.

In 2012, we expect our operating cash flows to increase as a result of higher sales and earnings.

Investing Activities

Net cash used in investing activities was $728 in 2011 and $462 in 2010. Our investing cash flows primarily consist of capital expenditures, changes in restricted cash accumulated for our next debt maturity in April 2012 and changes in credit card receivables associated with cardholder purchases outside of Nordstrom using our Nordstrom VISA credit cards.

CAPITAL EXPENDITURES

Our capital expenditures over the last three years totaled $1,270, with $511 in 2011, $399 in 2010 and $360 in 2009. Capital expenditures included investments in new stores, relocations and remodels and information technology improvements.

Capital expenditures increased in 2011 compared with 2010 primarily due to e-commerce and technology investments and the timing of expenditures incurred for new stores and remodels. The following table summarizes our store count and square footage activity:

 

				Store count														Square footage
Fiscal year				2011				2010				2009						2011				2010				2009
Total, beginning of year					204				184				169						23.8				22.8				21.9
Store openings:
Nordstrom full-line stores					3				3				3						0.4				0.4				0.5
Nordstrom Rack and other stores					19				17				13						0.7				0.6				0.4
Closed stores					(1)				–				(1)						(0.2)				–				–
Total, end of year					225				204				184						24.7				23.8				22.8

We relocated two Nordstrom Rack stores in 2011, compared with one Nordstrom full-line store and one Nordstrom Rack store in 2010. Our 2011 store openings and relocations increased our gross square footage by 3.8%.

To date in 2012, we have opened one Nordstrom Rack store and relocated one Nordstrom Rack store. During the remainder of 2012, we anticipate opening one Nordstrom full-line store and eleven Nordstrom Rack stores, as well as relocating one Nordstrom Rack store. This will increase our gross square footage by approximately 2.2%.

We received property incentives from our developers of $78 in 2011, $95 in 2010 and $96 in 2009. These incentives are included in our cash provided by operations in our consolidated statements of cash flows. However, operationally we view these as an offset to our capital expenditures. Our capital expenditure percentages, net of property incentives, by category are summarized as follows:

 

Fiscal year		2011				2010				2009
Category and expenditure percentage:
New store openings, relocations and remodels			62%				67%				74%
Information technology			20%				15%				13%
Other			18%				18%				13%
Total			100%				100%				100%

Other capital expenditures consist of ongoing improvements to our stores in the ordinary course of business and expenditures related to various growth initiatives.

 

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We expect that our capital expenditures, net of property incentives, will be approximately $3,300 over the next five years, with approximately $480 to $520 in 2012. Over these five years, we expect that approximately 60% of our net capital expenditures will be for new store openings, relocations and remodels, 30% for information technology and 10% for other projects. Our current five-year plan includes thirteen new stores and three relocations announced through 2013, and two new stores announced with dates to be determined. These would represent a 3.3% increase in square footage. Of the announced new stores, twelve will be Nordstrom Rack stores. We believe that we have the capacity for additional capital investments should opportunities arise.

CHANGE IN RESTRICTED CASH

In connection with the April 2012 maturity of our securitized Series 2007-2 Class A & B Notes totaling $500, we began making monthly cash deposits into a restricted account in December 2011. As of January 28, 2012, we had accumulated $200, which is included in our consolidated balance sheet in prepaid expense and other. See further discussion in Credit Capacity and Commitments below.

CHANGE IN CREDIT CARD RECEIVABLES ORIGINATED AT THIRD PARTIES

The Nordstrom VISA credit cards allow our customers to make purchases at merchants outside of our stores and accumulate points for our Nordstrom Fashion Rewards^® program. In 2011, change in credit card receivables from customers’ third-party purchases using their Nordstrom VISA credit cards decreased to $7, compared with $66 in 2010, as a result of improved payment rates.

Financing Activities

Net cash used in financing activities was $78 in 2011 compared with $4 in 2010. Our financing activities include our short-term and long-term borrowing activity, repurchases of common stock and dividends paid.

SHORT-TERM AND LONG-TERM BORROWING ACTIVITY

During 2011, we issued $500 of senior unsecured notes at 4.00%, due October 2021. After deducting the original issue discount of $1, net proceeds from the offering were $499. Additionally, we issued $325 Series 2011-1 Class A Notes at 2.28%, due October 2016. We had no short-term borrowings and no amounts outstanding on our revolving line of credit during the year.

During 2011, we received proceeds of $72 from the sale of our interest rate swap agreements (collectively, the “swap”) with a $650 notional amount maturing in 2018. Under the swap, we received a fixed rate of 6.25% and paid a variable rate based on one-month LIBOR plus a margin of 2.9%. As of the swap’s sale date, the accumulated adjustment to our long-term debt was $72, which will be amortized as a reduction of interest expense over the remaining life of the related debt.

SHARE REPURCHASES

In August 2010, our Board of Directors authorized a program (the “2010 Program”) to repurchase up to $500 of our outstanding common stock, through January 28, 2012. In May 2011, our Board of Directors authorized a new program (the “2011 Program”) to repurchase up to $750 of our outstanding common stock, through February 2, 2013, in addition to the remaining amount available for repurchase under the 2010 Program. During 2011, we repurchased 18.5 shares of our common stock for an aggregate purchase price of $851. We completed our 2010 Program in the second quarter of 2011, and as of January 28, 2012, had $310 in remaining share repurchase capacity under the 2011 Program. Subsequent to year-end, in February 2012, our Board of Directors authorized a new program (the “2012 Program”) to repurchase up to $800 of our outstanding common stock, through February 1, 2014, in addition to the amount available for repurchase under the 2011 Program. 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.

DIVIDENDS

In 2011, we paid dividends of $197, or $0.92 per share, compared with $167, or $0.76 per share, in 2010. During the first quarter of 2011, we increased our quarterly dividend from $0.20 per share to $0.23 per share. In determining the amount of dividends to pay, we analyze our dividend payout ratio and dividend yield, while taking into consideration our current and projected operating performance and liquidity. We target a 25% to 30% dividend payout ratio, which is calculated as our dividend payments divided by net earnings.

In February 2012, we declared a quarterly dividend of $0.27 per share, increased from $0.23 per share in 2011.

 

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Free Cash Flow (Non-GAAP financial measure)

We define Free Cash Flow as:

Free Cash Flow = Net Cash Provided By Operating Activities – Capital Expenditures – Cash Dividends Paid +/(–) Change in Credit Card Receivables Originated at Third Parties +/(–) Change in Cash Book Overdrafts

Free Cash Flow is one of our key liquidity measures, and in conjunction with GAAP measures, provides us with a meaningful analysis of our cash flows. We believe that our ability to generate cash is more appropriately analyzed using this measure. Free Cash Flow is not a measure of liquidity under GAAP and should not be considered a substitute for operating cash flows as determined in accordance with GAAP. In addition, Free Cash Flow does have limitations:

 

—

Free Cash Flow does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs; and

—

Other companies in our industry may calculate Free Cash Flow differently than we do, limiting its usefulness as a comparative measure.

To compensate for these limitations, we analyze Free Cash Flow in conjunction with other GAAP financial and performance measures impacting liquidity, including operating cash flows. The closest GAAP measure calculated using GAAP amounts is net cash provided by operating activities, which was $1,177 for each of the 12 months ended January 28, 2012 and January 29, 2011. The following is a reconciliation of our net cash provided by operating activities and Free Cash Flow:

 

Fiscal year			2011				2010
Net cash provided by operating activities			$1,177				$1,177
Less: capital expenditures			(511	)			(399)
Less: cash dividends paid			(197	)			(167)
Less: change in credit card receivables originated at third parties			(7	)			(66)
(Less) Add: change in cash book overdrafts			(30	)			37
Free Cash Flow			$432				$582
Net cash used in investing activities			$(728	)			$(462)
Net cash used in financing activities			$(78	)			$(4)

Credit Capacity and Commitments

As of January 28, 2012, we had total short-term borrowing capacity available for general corporate purposes of $800. Of the total capacity, we had $600 under our commercial paper program, which is backed by our unsecured revolving credit facility (“revolver”) and $200 under our 2007-A Variable Funding Note (“2007-A VFN”).

During 2011, we entered into a new revolver with a capacity of $600, which expires in June 2016. This revolver replaced our previous $650 unsecured line of credit which was scheduled to expire in August 2012. Under the terms of the revolver, we pay a variable rate of interest and a commitment fee based on our debt rating. The revolver is available for working capital, capital expenditures and general corporate purposes, including liquidity support for our commercial paper program. We have the option to increase the revolving commitment by up to $100, to a total of $700, provided that we obtain written consent from the new lenders. During 2011, we had no borrowings under our revolver.

Our $600 commercial paper program allows us to use the proceeds to fund share repurchases as well as operating cash requirements. Under the terms of the commercial paper agreement, we pay a rate of interest based on, among other factors, the maturity of the issuance and market conditions. The issuance of commercial paper has the effect, while it is outstanding, of reducing borrowing capacity under our revolver by an amount equal to the principal amount of commercial paper. During 2011, we had no outstanding issuances under our $600 commercial paper program.

During 2011, we amended the terms of our 2007-A VFN to reduce the borrowing capacity to $200, maturing in January 2013, from the previous $300 facility. The 2007-A VFN is backed by all of the Nordstrom private label card receivables and a 90% interest in the co-branded Nordstrom VISA credit card receivables. Borrowings under the 2007-A VFN incur interest based upon one-month LIBOR plus 35 basis points. We pay a commitment fee for the notes based on the size of the commitment. During 2011, we had no borrowings against this facility.

Our wholly owned federal savings bank, Nordstrom fsb, also maintains a variable funding facility with a short-term credit capacity of $100. This facility is backed by the remaining 10% interest in the Nordstrom VISA credit card receivables and is available, if needed, to provide liquidity support to Nordstrom fsb. Borrowings under the facility incur interest based upon the cost of commercial paper issued by the third-party bank conduit plus specified fees. During 2011, Nordstrom fsb had no borrowings under this facility.

We currently have an automatic shelf registration statement on file with the Securities and Exchange Commission, whereby we are authorized to issue registered debt.

 

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Our next debt maturity is in April 2012 for our $500 securitized Series 2007-2 Class A & B Notes. In connection with this debt maturity, we began making monthly cash deposits into a restricted account in December 2011. As of January 28, 2012, we had accumulated $200, which is included in our consolidated balance sheet in prepaid expense and other. After evaluating credit markets and our financing needs as we approached this maturity, we issued $500 of senior unsecured notes and $325 of securitized Series 2011-1 Class A Notes, in the second half of 2011. This will allow us to maintain an Adjusted Debt to Earnings before Interest, Income Taxes, Depreciation, Amortization and Rent ratio within our targeted range. We continue to monitor credit markets and our potential future financing needs in order to ensure we have adequate cash on hand. In the first quarter of 2012, we expect to retire the Series 2007-2 Class A & B Notes with the accumulated restricted cash upon maturity.

We maintain trade and standby letters of credit to facilitate international payments. As of January 28, 2012, we have $10 available under a trade letter of credit, with $2 outstanding. We additionally hold a $15 standby letter of credit, with $1 outstanding under this facility at the end of the year.

Impact of Credit Ratings

Under the terms of our $600 revolver, any borrowings we may enter into will accrue interest at a floating base rate tied to LIBOR in the case of Euro-Dollar Rate Loans and to the highest of: (i) the Euro-Dollar rate plus 100 basis points, (ii) the federal funds rate plus 50 basis points and (iii) the prime rate in the case of Base Rate Loans.

The rate depends upon the type of borrowing incurred, plus in each case an applicable margin. This applicable margin varies depending upon the credit ratings assigned to our long-term unsecured debt. At the time of this report, our long-term unsecured debt ratings, outlook and resulting applicable margin were as follows:

 

			$000,000,000				$000,000,000
		Credit Ratings				Outlook
Moody’s			Baa1				Stable
Standard & Poor’s			A–				Stable
		Base Interest Rate				Applicable   Margin
Euro-Dollar Rate Loan			LIBOR				1.125%
Base Rate Loan			various				0.125%

Should the ratings assigned to our long-term unsecured debt improve, the applicable margin associated with any such borrowings may decrease, resulting in a slightly lower cost of capital under this facility. Should the ratings assigned to our long-term unsecured debt worsen, the applicable margin associated with our borrowings may increase, resulting in a slightly higher cost of capital under this facility.

Debt Covenants

The revolver requires that we maintain a leverage ratio, defined as Adjusted Debt to Earnings before Interest, Income Taxes, Depreciation, Amortization and Rent (“EBITDAR”), of less than four times (see the following additional discussion of Adjusted Debt to EBITDAR).

As of January 28, 2012 and January 29, 2011, we were in compliance with this covenant. We will continue to monitor this covenant to ensure that we make any necessary adjustments to our plans, and we believe that we will remain in compliance with this covenant during 2012.

 

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Adjusted Debt to EBITDAR (Non-GAAP financial measure)

Adjusted Debt to EBITDAR is one of our key financial metrics, and we believe that our debt levels are best analyzed using this measure. Our current goal is to manage debt levels to maintain an investment-grade credit rating as well as operate with an efficient capital structure for our size, growth plans and industry. Investment-grade credit ratings are important to maintaining access to a variety of short-term and long-term sources of funding, and we rely on these funding sources to continue to grow our business. We believe a higher ratio, among other factors, could result in rating agency downgrades. In contrast, we believe a lower ratio would result in a higher cost of capital and could negatively impact shareholder returns. As of January 28, 2012, our Adjusted Debt to EBITDAR was 2.4 compared with 2.2 as of January 29, 2011. The increase was primarily the result of increased levels of debt as a result of new borrowings during 2011, a portion of which was done in anticipation of pre-funding our next debt maturity in April 2012 for our $500 securitized Series 2007-2 Class A & B Notes.

Adjusted Debt to EBITDAR is not a measure of financial performance under GAAP and should not be considered a substitute for debt to net earnings, net earnings or debt as determined in accordance with GAAP. In addition, Adjusted Debt to EBITDAR does have limitations:

 

—

Adjusted Debt is not exact, but rather our best estimate of the total company debt we would hold if we had purchased the property and issued debt associated with our operating leases;

—

EBITDAR does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, including leases, or the cash requirements necessary to service interest or principal payments on our debt; and

—

Other companies in our industry may calculate Adjusted Debt to EBITDAR differently than we do, limiting its usefulness as a comparative measure.

To compensate for these limitations, we analyze Adjusted Debt to EBITDAR in conjunction with other GAAP financial and performance measures impacting liquidity, including operating cash flows, capital spending and net earnings. The closest measure calculated using GAAP amounts is debt to net earnings, which was 5.3 and 4.5 for 2011 and 2010. The following is a comparison of debt to net earnings and Adjusted Debt to EBITDAR:

 

		20111				20101
Debt			$3,647				$2,781
Add: rent expense x 82			627				500
Less: fair value hedge adjustment included in long-term debt			(72)				(25)
Adjusted Debt			$4,202				$3,256
Net earnings			683				613
Add: income tax expense			436				378
Add: interest expense, net			130				127
Earnings before interest and income taxes			1,249				1,118
Add: depreciation and amortization expenses			371				327
Add: rent expense			78				62
Add: non-cash acquisition-related charges			21				–
EBITDAR			$1,719				$1,507
Debt to Net Earnings			5.3				4.5
Adjusted Debt to EBITDAR			2.4				2.2

 

1	The components of Adjusted Debt are as of January 28, 2012 and January 29, 2011, while the components of EBITDAR are for the 12 months ended January 28, 2012 and January 29, 2011.

2	The multiple of eight times rent expense used to calculate Adjusted Debt 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.

 

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Contractual Obligations

The following table summarizes our contractual obligations and the expected effect on our liquidity and cash flows as of January 28, 2012. We expect to fund these commitments primarily with operating cash flows generated in the normal course of business and credit available to us under existing and potential future facilities.

 

		Total				Less than 1 year				1-3 years				3-5 years				More than   5 years
Long-term debt			$5,303				$674				$729				$614				$3,286
Capital lease obligations			13				2				4				4				3
Operating leases			1,063				122				229				206				506
Purchase obligations			1,443				1,273				141				28				1
Other long-term liabilities			261				–				45				29				187
Total			$8,083				$2,071				$1,148				$881				$3,983

Included in the required debt repayments disclosed above are estimated total interest payments of $1,725 as of January 28, 2012, payable over the remaining life of the debts.

The capital and operating lease obligations in the table above do not include payments for operating expenses that are required by most of our lease agreements. Such expenses, which include common area charges, real estate taxes and other executory costs, totaled $69 in 2011, $65 in 2010 and $60 in 2009. In addition, some of our leases require additional rental payments based on a percentage of our sales, referred to as “percentage rent.” Percentage rent, which is also excluded from the obligations in the table above, was $12 in 2011 and $9 in each of 2010 and 2009.

Purchase obligations primarily consist of purchase orders for unreceived goods or services and capital expenditure commitments.

Other long-term liabilities consist of workers’ compensation and general liability insurance reserves and postretirement benefits. The payment amounts presented above were estimated based on historical payment trends. Other long-term liabilities not requiring cash payments, such as deferred property incentives and deferred revenue, were excluded from the table above. Also excluded from the table above are unrecognized tax benefits of $18, as we are unable to reasonably estimate the timing of future cash payments, if any, for these liabilities.

Off-Balance Sheet Arrangements

We enter into commitments to extend credit to customers for use at third parties through our Nordstrom VISA credit cards. The unused credit card capacity available to our customers represents an off-balance sheet commitment. As of January 28, 2012, this unfunded commitment was $14,284.

We had no other off-balance sheet arrangements, other than operating leases entered into in the normal course of business, during 2011.

CRITICAL ACCOUNTING ESTIMATES

The preparation of our financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We 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. The following discussion highlights the estimates we believe are critical and should be read in conjunction with the Notes to Consolidated Financial Statements in Item 8. Our management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosures that follow.

Allowance for Credit Losses

The allowance for credit losses reflects our best estimate of the losses inherent in our credit card receivables as of the balance sheet date, including uncollectible finance charges and fees. We estimate such credit losses based on several factors, including historical aging and delinquency trends, write-off experience, concentration and risk metrics, and general economic conditions.

We believe the allowance for credit losses is adequate to cover anticipated losses in our credit card receivables under current conditions; however, significant deterioration in any of the factors mentioned above could materially change these expectations. During 2011, our delinquency and net write-off results continued the improvements began in 2010. As a result of these improvements, we reduced our allowance for credit losses by $30 during 2011, from $145 to $115, and by $45 during 2010, from $190 to $145. A 10% change in our allowance for credit losses would have affected net earnings by $7 for the fiscal year ended January 28, 2012.

 

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Revenue Recognition

We recognize revenue from sales at our retail stores at the point of sale, net of an allowance for estimated sales returns. Revenue from our sales to customers shipped directly from our stores and our online and catalog sales includes shipping revenue, when applicable, and is recognized upon estimated receipt by the customer. We estimate customer merchandise returns based on historical return patterns and reduce sales and cost of sales accordingly.

Although we believe we have sufficient current and historical knowledge to record reasonable estimates of sales returns, there is a possibility that actual returns could differ from recorded amounts. In the past three years, we have made no material changes to our estimates included in the calculations of our sales return reserve. A 10% change in the sales return reserve would have had a $6 impact on our net earnings for the year ended January 28, 2012.

Inventory

Our merchandise inventories are stated at the lower of cost or market value using the retail inventory method. Under the retail method, the valuation of inventories and the resulting gross margins are determined by applying a calculated cost-to-retail ratio to the retail value of ending inventory. To determine if the retail value of our inventory should be marked down, we consider current and anticipated demand, customer preferences, age of the merchandise and fashion trends. Inherent in the retail inventory method are certain management judgments that may affect the ending inventory valuation as well as gross margin.

We reserve for obsolescence based on historical trends and specific identification. Our obsolescence reserve contains uncertainties as the calculations require management to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends.

We do not believe that the assumptions used in these estimates will change significantly based on prior experience. In the past three years, we have made no material changes to our estimates included in the calculations of the obsolescence reserve. A 10% change in the obsolescence reserve would not have had a material effect on our net earnings for the year ended January 28, 2012.

Goodwill

We review our goodwill annually for impairment, or when circumstances indicate its carrying value may not be recoverable. We perform this evaluation at the reporting unit level, comprised of the principal business units within our Retail segment. To assess the fair value of our HauteLook goodwill, we utilize both an income approach and a market approach. To determine the fair value of goodwill related to nordstrom.com and Jeffrey, we utilize a market approach. We compare the fair value of the reporting unit to its carrying value to determine if there is potential goodwill impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value of the goodwill.

As part of our impairment testing, we utilize certain assumptions and apply judgment regarding a number of factors. Significant estimates in the market approach include identifying similar companies and acquisitions with comparable business factors such as size, growth, profitability, risk and return of investment and assessing comparable earnings or revenue multiples in estimating the fair value of the reporting unit. Assumptions in the income approach include future cash flows for the business, future growth rates and discount rates. Estimates of cash flows may differ from actual cash flows due to, among other things, economic conditions, changes to the business model or changes in operating performance. Based on the results of our 2011 review, we recognized an impairment charge of $25 related to our HauteLook goodwill. We did not recognize an impairment loss for goodwill in 2010. A 10% change in our fair value measurement for HauteLook goodwill would have impacted net earnings by approximately $15 for the fiscal year ended January 28, 2012.

Income Taxes

We regularly evaluate the likelihood of realizing the benefit for income tax positions we have taken in various federal, state and foreign filings by considering all relevant facts, circumstances and information available to us. If we believe it is more likely than not that our position will be sustained, we recognize a benefit at the largest amount which we believe is cumulatively greater than 50% likely to be realized. Our unrecognized tax benefit was $21 as of January 28, 2012 and $43 as of January 29, 2011.

Unrecognized tax benefits require significant management judgment regarding applicable statutes and their related interpretation, the status of various income tax audits and our particular facts and circumstances. Also, as audits are completed or statutes of limitations lapse, it may be necessary to record adjustments to our taxes payable, deferred tax assets, tax reserves or income tax expense. Such adjustments did not materially impact our effective income tax rate in 2011 or 2010.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 to our consolidated financial statements for a discussion of recent accounting pronouncements. We do not expect any of these pronouncements to have a material effect on our results of operations, liquidity or capital resources.

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Dollars in millions

INTEREST RATE RISK

We are exposed to interest rate risk primarily from changes in short-term interest rates. As of January 28, 2012, we had cash and cash equivalents of $1,877, which generate interest income at variable rates, and gross credit card receivables of $2,074, which generate finance charge income at a combination of fixed and variable rates. Additionally, we have long-term debt of $3,647, including $500 that bears interest at floating LIBOR-based rates and is scheduled to mature in April 2012. Interest rate fluctuations can affect our interest income, credit card revenues and interest expense. See Note 3: Accounts Receivable and Note 8: Debt and Credit Facilities in Item 8 for additional information.

We use sensitivity analyses to measure and assess our interest rate risk exposure. For purposes of presenting the potential earnings effect of a reasonably possible hypothetical change in interest rates from our reporting date, we utilized two sensitivity scenarios: (i) linear growth of approximately 140 basis points over the year, and (ii) linear decline of approximately 20 basis points over the year, due to the fact that current interest rates are at or near historically low levels. Other key parameters and assumptions in our sensitivity analyses include the average cash and cash equivalents balance, average credit card receivables balance and no new floating rate debt issuance. The first hypothetical scenario would result in an approximate $10 increase in future earnings, while the second hypothetical scenario would not have a material effect on future earnings.

We occasionally enter into interest rate swaps typically to convert fixed-rate debt to variable-rate debt. We did not have interest rate swaps on our debt as of January 28, 2012, although we continue to amortize, as a reduction of interest expense, the remaining adjustment to long-term debt originating from gains realized on previously designated fair value hedges. For our long-term fixed-rate debt, our exposure to interest rate changes is limited to the change in fair value of the debt. As of January 28, 2012, the fair value of our fixed-rate debt was $3,652.

FOREIGN CURRENCY EXCHANGE RISK

The majority of our revenues, expenses and capital expenditures are transacted in U.S. dollars. However, we periodically enter into merchandise purchase orders denominated primarily in Euros. From time to time we may use forward contracts to hedge against fluctuations in foreign currency prices. As of January 28, 2012, we had no outstanding forward contracts.

 

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Item 8. Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Nordstrom, Inc.

Seattle, Washington

We have audited the accompanying consolidated balance sheets of Nordstrom, Inc. and subsidiaries (the “Company”) as of January 28, 2012 and January 29, 2011, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for each of the three years in the period ended January 28, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Nordstrom, Inc. and subsidiaries as of January 28, 2012 and January 29, 2011, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 2012, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 28, 2012, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

/s/ Deloitte & Touche LLP

Seattle, Washington

March 16, 2012

 

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Nordstrom, Inc.

Consolidated Statements of Earnings

In millions except per share amounts

 

Fiscal year		2011				2010				2009
Net sales			$10,497				$9,310				$8,258
Credit card revenues			380				390				369
Total revenues			10,877				9,700				8,627
Cost of sales and related buying and occupancy costs			(6,592	)			(5,897	)			(5,328)
Selling, general and administrative expenses:
Retail			(2,807	)			(2,412	)			(2,109)
Credit			(229	)			(273	)			(356)
Earnings before interest and income taxes			1,249				1,118				834
Interest expense, net			(130	)			(127	)			(138)
Earnings before income taxes			1,119				991				696
Income tax expense			(436	)			(378	)			(255)
Net earnings			$683				$613				$441
Earnings per share:
Basic			$3.20				$2.80				$2.03
Diluted			$3.14				$2.75				$2.01
Weighted-average shares outstanding:
Basic			213.5				218.8				216.8
Diluted			217.7				222.6				219.7

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

 

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Nordstrom, Inc.

Consolidated Balance Sheets

In millions

 

		January 28, 2012				January 29, 2011
Assets
Current assets:
Cash and cash equivalents			$1,877				$1,506
Accounts receivable, net			2,033				2,026
Merchandise inventories			1,148				977
Current deferred tax assets, net			220				236
Prepaid expenses and other			282				79
Total current assets			5,560				4,824
Land, buildings and equipment, net			2,469				2,318
Goodwill			175				53
Other assets			287				267
Total assets			$8,491				$7,462
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable			$917				$846
Accrued salaries, wages and related benefits			388				375
Other current liabilities			764				652
Current portion of long-term debt			506				6
Total current liabilities			2,575				1,879
Long-term debt, net			3,141				2,775
Deferred property incentives, net			500				495
Other liabilities			319				292
Commitments and contingencies
Shareholders’ equity:
Common stock, no par value: 1,000 shares authorized; 207.6 and 218.0 shares issued and outstanding			1,484				1,168
Retained earnings			517				882
Accumulated other comprehensive loss			(45	)			(29)
Total shareholders’ equity			1,956				2,021
Total liabilities and shareholders’ equity			$8,491				$7,462

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

 

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Nordstrom, Inc.

Consolidated Statements of Shareholders’ Equity

In millions except per share amounts

 

Common Stock

Retained

Accumulated Other Comprehensive

Shares

Amount

Earnings

Loss

Total

Balance at January 31, 2009

215.4

$997

$223

$(10

)

$1,210

Net earnings

–

–

441

–

441

Other comprehensive loss:

Postretirement plan adjustments, net of tax of $6

–

–

–

(9

)

(9)

Comprehensive net earnings

432