JWN-Q2 2012-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 28, 2012
OR
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to___________
Commission file number: 001-15059
NORDSTROM, INC.
(Exact name of registrant as specified in its charter)
 
Washington
 
91-0515058
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1617 Sixth Avenue, Seattle, Washington
 
98101
(Address of principal executive offices)
 
(Zip Code)
206-628-2111
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o  (Do not check if a smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
Common stock outstanding as of August 22, 2012: 200,996,156 shares
 
 

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Table of Contents

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

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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in millions except per share amounts)
(Unaudited)
 
Quarter Ended
 
Six Months Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
Net sales
$
2,918

 
$
2,716

 
$
5,453

 
$
4,945

Credit card revenues
91

 
94

 
185

 
188

Total revenues
3,009

 
2,810

 
5,638

 
5,133

Cost of sales and related buying and occupancy costs
(1,879
)
 
(1,723
)
 
(3,463
)
 
(3,108
)
Selling, general and administrative expenses:
 
 
 
 
 
 
 
Retail
(778
)
 
(708
)
 
(1,499
)
 
(1,319
)
Credit
(62
)
 
(59
)
 
(106
)
 
(114
)
Earnings before interest and income taxes
290

 
320

 
570

 
592

Interest expense, net
(40
)
 
(30
)
 
(80
)
 
(61
)
Earnings before income taxes
250

 
290

 
490

 
531

Income tax expense
(94
)
 
(115
)
 
(185
)
 
(211
)
Net earnings
$
156

 
$
175

 
$
305

 
$
320

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.76

 
$
0.81

 
$
1.48

 
$
1.47

Diluted
$
0.75

 
$
0.80

 
$
1.45

 
$
1.44

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
205.2

 
215.9

 
206.3

 
217.5

Diluted
208.7

 
220.3

 
210.0

 
221.8

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

NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Amounts in millions)
(Unaudited)
 
Quarter Ended
 
Six Months Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
Net earnings
$
156

 
$
175

 
$
305

 
$
320

Other comprehensive earnings, net of tax
2

 
—

 
3

 
1

Comprehensive net earnings
$
158

 
$
175

 
$
308

 
$
321

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


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NORDSTROM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
(Unaudited)
 
July 28, 2012
 
January 28, 2012
 
July 30, 2011
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
1,258

 
$
1,877

 
$
1,090

Accounts receivable, net
2,297

 
2,033

 
2,204

Merchandise inventories
1,394

 
1,148

 
1,152

Current deferred tax assets, net
233

 
220

 
228

Prepaid expenses and other
85

 
282

 
89

Total current assets
5,267

 
5,560

 
4,763

 
 
 
 
 
 
Land, buildings and equipment (net of accumulated depreciation of $3,959, $3,791 and $3,686)
2,499

 
2,469

 
2,422

Goodwill
175

 
175

 
200

Other assets
305

 
287

 
351

Total assets
$
8,246

 
$
8,491

 
$
7,736

 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
1,345

 
$
917

 
$
1,087

Accrued salaries, wages and related benefits
290

 
388

 
292

Other current liabilities
805

 
764

 
696

Current portion of long-term debt
6

 
506

 
506

Total current liabilities
2,446

 
2,575

 
2,581

 
 
 
 
 
 
Long-term debt, net
3,133

 
3,141

 
2,296

Deferred property incentives, net
493

 
500

 
505

Other liabilities
338

 
319

 
351

 
 
 
 
 
 
Commitments and contingencies

 

 

 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
Common stock, no par value: 1,000 shares authorized; 201.4, 207.6 and 214.2 shares issued and outstanding
1,582

 
1,484

 
1,402

Retained earnings
296

 
517

 
629

Accumulated other comprehensive loss
(42
)
 
(45
)
 
(28
)
Total shareholders' equity
1,836

 
1,956

 
2,003

Total liabilities and shareholders' equity
$
8,246

 
$
8,491

 
$
7,736

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

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NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in millions except per share amounts)
(Unaudited)
 
 
 
 
 
 
 
Accumulated 

 
 
 
 
 
 
 
 
 
Other

 
 
 
Common Stock
 
Retained

 
Comprehensive

 
 
 
Shares

 
Amount

 
Earnings

 
Loss

 
Total

Balance at January 28, 2012
207.6

 
$
1,484

 
$
517

 
$
(45
)
 
$
1,956

Net earnings
—

 
—

 
305

 
—

 
305

Other comprehensive earnings
—

 
—

 
—

 
3

 
3

Dividends ($0.54 per share)
—

 
—

 
(112
)
 
—

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

 
72

 
—

 
—

 
72

Stock-based compensation
—

 
26

 
—

 
—

 
26

Repurchase of common stock
(8.3
)
 
—

 
(414
)
 
—

 
(414
)
Balance at July 28, 2012
201.4

 
$
1,582

 
$
296

 
$
(42
)
 
$
1,836

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated

 
 
 
 
 
 
 
 
 
Other

 
 
 
Common Stock
 
Retained

 
Comprehensive

 
 
 
Shares

 
Amount

 
Earnings

 
Loss

 
Total

Balance at January 29, 2011
218.0

 
$
1,168

 
$
882

 
$
(29
)
 
$
2,021

Net earnings
—

 
—

 
320

 
—

 
320

Other comprehensive earnings
—

 
—

 
—

 
1

 
1

Dividends ($0.46 per share)
—

 
—

 
(100
)
 
—

 
(100
)
Issuance of common stock for HauteLook acquisition
3.5

 
148

 
—

 
—

 
148

Issuance of common stock under stock compensation plans
2.2

 
63

 
—

 
—

 
63

Stock-based compensation
0.9

 
23

 
—

 
—

 
23

Repurchase of common stock
(10.4
)
 
—

 
(473
)
 
—

 
(473
)
Balance at July 30, 2011
214.2

 
$
1,402

 
$
629

 
$
(28
)
 
$
2,003

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

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NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
 
 
Six Months Ended
 
July 28, 2012
 
July 30, 2011
Operating Activities
 
 
 
Net earnings
$
305

 
$
320

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization expenses
207

 
179

Amortization of deferred property incentives and other, net
(32
)
 
(28
)
Deferred income taxes, net
(30
)
 
(8
)
Stock-based compensation expense
31

 
28

Tax benefit from stock-based compensation
15

 
13

Excess tax benefit from stock-based compensation
(16
)
 
(15
)
Provision for bad debt expense
38

 
51

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(227
)
 
(170
)
Merchandise inventories
(218
)
 
(136
)
Prepaid expenses and other assets
(1
)
 
(9
)
Accounts payable
326

 
285

Accrued salaries, wages and related benefits
(100
)
 
(87
)
Other current liabilities
37

 
34

Deferred property incentives
32

 
42

Other liabilities
5

 
14

Net cash provided by operating activities
372

 
513

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(219
)
 
(248
)
Change in restricted cash
200

 
—

Change in credit card receivables originated at third parties
(77
)
 
(57
)
Other, net
(2
)
 
(3
)
Net cash used in investing activities
(98
)
 
(308
)
 
 
 
 
Financing Activities
 
 
 
Principal payments on long-term borrowings
(503
)
 
(3
)
Increase (decrease) in cash book overdrafts
69

 
(111
)
Cash dividends paid
(112
)
 
(100
)
Payments for repurchase of common stock
(418
)
 
(472
)
Proceeds from issuances under stock compensation plans
57

 
50

Excess tax benefit from stock-based compensation
16

 
15

Other, net
(2
)
 
—

Net cash used in financing activities
(893
)
 
(621
)
 
 
 
 
Net decrease in cash and cash equivalents
(619
)
 
(416
)
Cash and cash equivalents at beginning of period
1,877

 
1,506

Cash and cash equivalents at end of period
$
1,258

 
$
1,090

 
 
 
 
Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Interest (net of capitalized interest)
$
85

 
$
61

Income taxes
$
222

 
$
218

 
 
 
 
Non-cash investing activity:
 
 
 
Issuance of common stock for HauteLook acquisition
$
—

 
$
148

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

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NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share and per option amounts)
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include Nordstrom, Inc. and its subsidiaries. All intercompany transactions and balances are eliminated in consolidation. The interim condensed consolidated financial statements have been prepared on a basis consistent in all material respects with the accounting policies described and applied in our 2011 Annual Report on Form 10-K ("Annual Report"), and reflect all adjustments that are, in management's opinion, necessary for the fair presentation of the results of operations, financial position and cash flows for the periods presented.
The condensed consolidated financial statements as of and for the periods ended July 28, 2012 and July 30, 2011 are unaudited. The condensed consolidated balance sheet as of January 28, 2012 has been derived from the audited consolidated financial statements included in our 2011 Annual Report. The interim condensed consolidated financial statements should be read together with the consolidated financial statements and related footnote disclosures contained in our 2011 Annual Report.
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.
Our business, like that of other retailers, is subject to seasonal fluctuations. Due to our Anniversary Sale in July, the holidays in December and the half-yearly sales that occur in our second and fourth quarters, our sales are typically higher in the second and fourth quarters of the fiscal year than in the first and third quarters. In 2012, our Anniversary Sale shifted to the last week of July and the first week of August to align with the historical timing of our sale event. This moved one week of event sales to the third quarter. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-11, Disclosures about Offsetting Assets and Liabilities, which has requirements that are disclosure-only in nature. This ASU requires disclosures about offsetting and related arrangements for financial instruments and derivative instruments, including gross and net information and evaluation of the effect of netting arrangements on the statement of financial position. We do not expect the provisions of this ASU, which are effective for us beginning with the first quarter of 2013, to have a material impact on our consolidated financial statements.
NOTE 2: HAUTELOOK
On March 23, 2011, we acquired 100% of the outstanding equity of HauteLook, Inc., an online private sale retailer offering limited-time sale events on fashion and lifestyle brands. The terms of this acquisition included upfront consideration of $180 in Nordstrom common stock and an "earn-out" provision ultimately settled in 2011 for $30 in Nordstrom common stock. On the acquisition date, we recorded intangible assets of $62 and goodwill of $146, offset by other net liabilities of $13. In the fourth quarter of 2011, we recognized a goodwill impairment charge of $25, reducing the HauteLook goodwill to $121 due to a reorganization of HauteLook, changes in expected business results and market dynamics. Additionally, as part of the reorganization, we recorded income of $12 related to the settlement of the earn-out liability.



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


NOTE 3: ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows: 
 
July 28, 2012
 
January 28, 2012
 
July 30, 2011
Credit card receivables:
 
 
 
 
 
Nordstrom VISA credit card receivables
$
1,418

 
$
1,347

 
$
1,455

Nordstrom private label card receivables
876

 
727

 
782

Total credit card receivables
2,294

 
2,074

 
2,237

Allowance for credit losses
(105
)
 
(115
)
 
(125
)
Credit card receivables, net
2,189

 
1,959

 
2,112

Other accounts receivable
108

 
74

 
92

Accounts receivable, net
$
2,297

 
$
2,033

 
$
2,204

Other accounts receivable consist primarily of credit and debit card receivables due from third-party financial institutions.
Activity in the allowance for credit losses for the quarter and six months ended July 28, 2012 and July 30, 2011 is as follows:
 
Quarter Ended
 
Six Months Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
Allowance at beginning of period
$
105

 
$
135

 
$
115

 
$
145

Bad debt provision
25

 
26

 
38

 
51

Write-offs
(31
)
 
(42
)
 
(61
)
 
(82
)
Recoveries
6

 
6

 
13

 
11

Allowance at end of period
$
105

 
$
125

 
$
105

 
$
125

For purposes of determining impairment and recording the associated allowance for credit losses, we evaluate our credit card receivables on a collective basis as they are composed of large groups of smaller-balance homogeneous loans and, therefore, are not individually evaluated for impairment.
Under certain circumstances, we may make modifications to payment terms for a customer experiencing financial difficulties in an effort to help the customer avoid bankruptcy and to maximize our recovery of the outstanding balance. These modifications, which meet the definition of troubled debt restructurings ("TDRs"), include reduced or waived fees and finance charges, and/or reduced minimum payments. Receivables classified as TDRs were $58, or 2.5% of our total credit card receivables as of July 28, 2012, $58, or 2.8% of our total credit card receivables as of January 28, 2012 and $60, or 2.7% of our total credit card receivables as of July 30, 2011. As with other aged receivables in our portfolio, the allowance for credit losses related to receivables classified as TDRs is primarily based on our historical aging and delinquency trends and write-off experience, with qualitative consideration of factors affecting the credit quality of our portfolio, including amounts of and trends in TDRs.

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


Credit Quality
The primary indicators of the credit quality of our credit card receivables are aging and delinquency, particularly the levels of account balances delinquent 30 days or more as these are the accounts most likely to be written off. The following table illustrates the aging and delinquency status of our credit card receivables: 
 
July 28, 2012
 
January 28, 2012
 
July 30, 2011
 
Balance
 
% of Total
 
Balance
 
% of Total
 
Balance
 
% of Total
Current
$
2,166

 
94.4
%
 
$
1,928

 
93.0
%
 
$
2,075

 
92.8
%
1 – 29 days delinquent
84

 
3.7
%
 
92

 
4.4
%
 
101

 
4.5
%
30+ days delinquent:
 
 
 
 
 
 
 
 
 
 
 
30 – 59 days delinquent
18

 
0.7
%
 
20

 
1.0
%
 
23

 
1.0
%
60 – 89 days delinquent
11

 
0.5
%
 
13

 
0.6
%
 
15

 
0.7
%
90 days or more delinquent
15

 
0.7
%
 
21

 
1.0
%
 
23

 
1.0
%
Total 30+ days delinquent
44

 
1.9
%
 
54

 
2.6
%
 
61

 
2.7
%
Total credit card receivables
$
2,294

 
100.0
%
 
$
2,074

 
100.0
%
 
$
2,237

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Receivables not accruing finance charges
$
10

 
 
 
$
15

 
 
 
$
19

 
 
Receivables 90 days or more delinquent and still accruing finance charges
$
9

 
 
 
$
11

 
 
 
$
12

 
 
 
We also evaluate credit quality using FICO credit scores. The following table illustrates the distribution of our credit card receivables across FICO score ranges: 
 
July 28, 2012
 
January 28, 2012
 
July 30, 2011
FICO Score Range1
Balance
 
% of Total  
 
Balance
 
% of Total  
 
Balance
 
% of Total  
801+
$
441

 
19.2
%
 
$
307

 
14.8
%
 
$
419

 
18.7
%
720 – 800
838

 
36.5
%
 
741

 
35.7
%
 
805

 
36.0
%
660 – 719
581

 
25.3
%
 
572

 
27.6
%
 
561

 
25.1
%
600 – 659
261

 
11.4
%
 
270

 
13.0
%
 
259

 
11.6
%
001 – 599
105

 
4.6
%
 
120

 
5.8
%
 
128

 
5.7
%
Other2
68

 
3.0
%
 
64

 
3.1
%
 
65

 
2.9
%
Total credit card receivables
$
2,294

 
100.0
%
 
$
2,074

 
100.0
%
 
$
2,237

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

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


NOTE 4: DEBT AND CREDIT FACILITIES
Debt
A summary of our long-term debt is as follows:
 
July 28, 2012
 
January 28, 2012
 
July 30, 2011
Secured
 
 
 
 
 
Series 2007-2 Class A Notes, one-month LIBOR plus 0.06% per year, due April 2012
—

 
$
454

 
$
454

Series 2007-2 Class B Notes, one-month LIBOR plus 0.18% per year, due April 2012
—

 
46

 
46

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

 
325

 
—

Mortgage payable, 7.68%, due April 2020
49

 
51

 
54

Other
11

 
12

 
13

 
385

 
888

 
567

Unsecured
 
 
 
 
 
Senior notes, 6.75%, due June 2014, net of unamortized discount
399

 
399

 
399

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

 
648

 
647

Senior notes, 4.75%, due May 2020, net of unamortized discount
498

 
498

 
498

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

 
499

 
—

Senior debentures, 6.95%, due March 2028
300

 
300

 
300

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

 
343

 
343

Other
66

 
72

 
48

 
2,754

 
2,759

 
2,235

 
 
 
 
 
 
Total long-term debt
3,139

 
3,647

 
2,802

Less: current portion
(6
)
 
(506
)
 
(506
)
Total due beyond one year
$
3,133

 
$
3,141

 
$
2,296

 
In April 2012, we retired our Series 2007-2 Class A & B Notes ("the Notes") totaling $500, which had been secured by our restricted receivables. The Notes were retired using cash that had been accumulated monthly into a restricted account beginning in December 2011. Prior to the retirement, the accumulated cash was included in our condensed consolidated balance sheet in prepaid expenses and other.
Credit Facilities
As of July 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") that expires in June 2016, and $200 under our 2007-A Variable Funding Note ("2007-A VFN") that expires in January 2013. For the six months ended July 28, 2012, we had no issuances under our commercial paper program and no borrowings under our revolver or our 2007-A VFN.
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. As of July 28, 2012, we were in compliance with this covenant.

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


NOTE 5: FAIR VALUE MEASUREMENTS
We disclose our financial assets and liabilities that are measured at fair value in our condensed consolidated balance sheets on a recurring basis, by level within the fair value hierarchy as defined by applicable accounting standards:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Other observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that cannot be corroborated by market data that reflect the reporting entity's own
assumptions

We did not have any financial assets or liabilities that were measured at fair value on a recurring basis as of July 28, 2012 or January 28, 2012. The following table presents our financial assets and liabilities that were measured at fair value on a recurring basis as of July 30, 2011, by level within the fair value hierarchy:
 
Fair Value 
Hierarchy
 
July 30, 2011
Assets:
 
 
 
Interest rate swap
Level 2
 
$
48

Liabilities:
 
 
 
HauteLook earn-out liability
Level 3
 
$
44

Interest Rate Swap
The estimated fair value of our interest rate swap agreements (collectively, the "swap") was a $48 asset as of July 30, 2011. In January 2012, we sold our interest rate swap. During 2011, before the sale of our swap, we estimated the fair value of our interest rate swap based upon observable market-based inputs for identical or comparable arrangements from reputable third-party brokers, adjusted for credit risk. As such, these were considered Level 2 fair value measurements.

HauteLook Earn-out
The estimated fair value of our HauteLook earn-out was a $44 liability as of July 30, 2011. On November 23, 2011, we settled the earn-out provisions for $30 and have no remaining liability related to the earn-out. During 2011, before the settlement, we estimated the fair value of the HauteLook earn-out liability using a valuation model based on our expectations of HauteLook’s future performance, estimates of volatility around those expectations and the risk-adjusted discount rate. As such, this was considered a Level 3 fair value measurement.
Other
Financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable and debt. The carrying value of cash and cash equivalents, accounts receivable, net and accounts payable approximate fair value due to their short-term nature. The estimated fair value of our long-term debt, including current maturities and the remaining fair value adjustment from our previous effective fair value hedge, was $3,755 as of July 28, 2012, compared with a carrying value of $3,139. We estimated the fair value of long-term debt using quoted market prices of the same or similar issues, and as such, this is considered a Level 1 fair value measurement.
We also measure certain non-financial assets at fair value on a non-recurring basis, primarily goodwill and long-lived tangible and intangible assets, in connection with periodic evaluations for potential impairment. We recorded no impairment charges for these assets for the six months ended July 28, 2012 and July 30, 2011.
NOTE 6: CONTINGENT LIABILITIES
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 condensed consolidated financial statements are adequate in light of the probable and estimable liabilities. As of the date of this report, we do not believe any currently identified claim, proceeding or litigation, either alone or in the aggregate, will have a material impact on our results of operations, financial position or cash flows. Since these matters are subject to inherent uncertainties, our view of them may change in the future.

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


NOTE 7: SHAREHOLDERS' EQUITY
In May 2011, our Board of Directors authorized a program (the "2011 Program") to repurchase up to $750 of our outstanding common stock, through February 2, 2013. 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 remaining amount available for repurchase under the 2011 Program. For the six months ended July 28, 2012, we repurchased 8.3 shares of our common stock for an aggregate purchase price of $414 and had $696 in remaining share repurchase capacity. The actual number and timing of future share repurchases, if any, will be subject to market and economic conditions and applicable Securities and Exchange Commission rules.
NOTE 8: STOCK-BASED COMPENSATION
The following table summarizes our stock-based compensation expense:
 
Quarter Ended
 
Six Months Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
Stock options
$
11

 
$
10

 
$
21

 
$
18

HauteLook stock compensation
3

 
4

 
5

 
6

Performance share units
2

 
—

 
2

 
1

Employee stock purchase plan
—

 
1

 
1

 
1

Other
2

 
2

 
2

 
2

Total stock-based compensation expense, before income tax benefit
$
18

 
$
17

 
$
31

 
$
28

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

 
$
10

 
$
20

 
$
17

During the six months ended July 28, 2012 and July 30, 2011, we granted 2.9 and 2.7 options with weighted average grant-date fair values per option of $15 in each period.
NOTE 9: EARNINGS PER SHARE
The computation of earnings per share is as follows:
 
Quarter Ended
 
Six Months Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
Net earnings
$
156

 
$
175

 
$
305

 
$
320

 
 
 
 
 
 
 
 
Basic shares
205.2

 
215.9

 
206.3

 
217.5

Dilutive effect of stock options and other
3.5

 
4.4

 
3.7

 
4.3

Diluted shares
208.7

 
220.3

 
210.0

 
221.8

 
 
 
 
 
 
 
 
Earnings per basic share
$
0.76

 
$
0.81

 
$
1.48

 
$
1.47

Earnings per diluted share
$
0.75

 
$
0.80

 
$
1.45

 
$
1.44

 
 
 
 
 
 
 
 
Anti-dilutive stock options and other
5.9

 
3.9

 
6.0

 
4.2


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


NOTE 10: SEGMENT REPORTING
The following tables set forth information for our reportable segments: 
 
Retail
 
Credit
 
Corporate/Other
 
Total
Quarter Ended July 28, 2012
 
 
 
 
 
 
 
Net sales
$
3,063

 
—

 
$
(145
)
 
$
2,918

Credit card revenues
—

 
$
91

 
—

 
91

Earnings (loss) before interest and income taxes
446

 
—

 
(156
)
 
290

Interest expense, net
—

 
(7
)
 
(33
)
 
(40
)
Earnings (loss) before income taxes
446

 
(7
)
 
(189
)
 
250

 
 
 
 
 
 
 
 
Quarter Ended July 30, 2011
 
 
 
 
 
 

Net sales
$
2,818

 
—

 
$
(102
)
 
$
2,716

Credit card revenues
—

 
$
94

 
—

 
94

Earnings (loss) before interest and income taxes
407

 
13

 
(100
)
 
320

Interest expense, net
—

 
(3
)
 
(27
)
 
(30
)
Earnings (loss) before income taxes
407

 
10

 
(127
)
 
290

 
 
 
 
 
 
 
 
Six Months Ended July 28, 2012
 
 
 
 
 
 

Net sales
$
5,639

 
—

 
$
(186
)
 
$
5,453

Credit card revenues
—

 
$
185

 
—

 
185

Earnings (loss) before interest and income taxes
818

 
27

 
(275
)
 
570

Interest expense, net
—

 
(13
)
 
(67
)
 
(80
)
Earnings (loss) before income taxes
818

 
14

 
(342
)
 
490

Goodwill
175

 
—

 
—

 
175

 
 
 
 
 
 
 
 
Six Months Ended July 30, 2011
 
 
 
 
 
 

Net sales
$
5,077

 
—

 
$
(132
)
 
$
4,945

Credit card revenues
—

 
$
188

 
—

 
188

Earnings (loss) before interest and income taxes
754

 
38

 
(200
)
 
592

Interest expense, net
—

 
(7
)
 
(54
)
 
(61
)
Earnings (loss) before income taxes
754

 
31

 
(254
)
 
531

Goodwill
200

 
—

 
—

 
200

The following table summarizes net sales within our reportable segments:
 
Quarter Ended
 
Six Months Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
Nordstrom full-line stores
$
2,114

 
$
2,063

 
$
3,830

 
$
3,662

Direct
309

 
222

 
551

 
390

Nordstrom
2,423

 
2,285

 
4,381


4,052

Nordstrom Rack
577

 
484

 
1,134

 
950

Other retail1
63

 
49

 
124

 
75

Total Retail segment
3,063

 
2,818

 
5,639

 
5,077

Corporate/Other
(145
)
 
(102
)
 
(186
)
 
(132
)
Total net sales
$
2,918

 
$
2,716

 
$
5,453

 
$
4,945

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

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

CAUTIONARY STATEMENT
Certain statements in this Quarterly Report on Form 10-Q contain or may suggest "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties, including, but not limited to, anticipated financial outlook for the fiscal year ending February 2, 2013, anticipated annual same-store sales rate, anticipated Return on Invested Capital and trends in our operations. Such statements are based upon the current beliefs and expectations of the company's management and are subject to significant risks and uncertainties. Actual future results may differ materially from historical results or current expectations depending upon factors including, but not limited to:
•
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, our ability to realize the anticipated benefits from such growth initiatives, and the timely completion of construction associated with newly planned stores, relocations and remodels, all of which may be impacted by the financial health of third parties,
•
our ability to manage the change in our business/financial model as we increase our investment in e-commerce and our online business,
•
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, including planning, procurement and allocation capabilities,
•
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, including the outcome of claims and litigation and resolution of tax matters,
•
compliance with debt covenants and 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, including those factors described in Part I, "Item 1A. Risk Factors" in our 2011 Annual Report on Form 10-K, could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances.
 


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

OVERVIEW
We continued to drive strong sales momentum through the first half of 2012 across all channels. We have achieved eleven consecutive quarters of total company same-store sales increases, reflecting our ongoing efforts to improve the customer experience across all channels and aggressively pursue opportunities to grow and evolve with the customer.
During the second quarter we began our Anniversary Sale, which historically has generated significant volume for us. This year the event started one week later in July relative to last year, shifting one week of the event into the fiscal third quarter. While the overall event exceeded our expectations through the end of July, the event shift drove unfavorable comparisons against the second quarter of last year, but we expect favorable comparisons in the third quarter.
Online shopping was available for the first time during the nine-day Early Access period prior to the start of the Anniversary Sale for our Fashion Rewards customers. Fashion Rewards plays an important part in building customer loyalty as our Fashion Rewards members shop more frequently and spend more with us on average than non-members. With the launch of our enhanced program earlier this year, we have been pleased with the initial response, as reflected by increases in new accounts, rewards spend and Nordstrom card penetration compared with last year.
Allowing our Fashion Rewards customers the opportunity to pre-shop the Anniversary Sale online builds on the enhancements we made to our Fashion Rewards program earlier this year and reflects our ongoing efforts to improve the online experience. We continue to invest in improving the customer experience in that channel, including expanding merchandise selection, adding functionality to our website, providing richer mobile content and imagery for products and expediting the check-out and delivery process. These investments helped drive the 40% second quarter sales growth in our Direct channel and our total company same-store sales increase of 4.5%.
We also continue to grow through new stores and other initiatives. During the first half of the year, we opened one Nordstrom full-line store and six Nordstrom Rack stores, and relocated one Nordstrom Rack store. We also announced our plans to open our first full-line store in New York City. Given the strong performance of the Nordstrom Rack business and availability of quality locations, we are accelerating the expansion of this business, with plans to have over 230 Rack stores by the end of 2016. At the same time, our core store business remains strong and we are delivering a more technology-enabled experience in our stores with better tools to take care of the customer.
Strategic partnerships also help us build capabilities and add to the customer experience. In the past, we've made acquisitions of Jeffrey and HauteLook and established partnerships, such as with kidswear brand Peek...Aren't You Curious. More recently, we invested in Bonobos, a fast-growing online men's clothing retailer, and announced our U.S. exclusive partnership this fall with Topshop and Topman, internationally renowned brands with trend-leading fashion at affordable prices. All of these partnerships contribute to our efforts to increase our relevance with more customers, offer a more compelling experience and ultimately enable sustainable growth.
Our credit business contributes to an improved customer experience and increased retail sales as our Nordstrom credit and debit card products are designed to strengthen customer relationships and build loyalty through the Fashion Rewards program. During the second quarter, our credit metrics continued to improve, with decreased delinquency and write-off trends compared with the same period in 2011.
We remain focused on enhancing the customer experience as a means of delivering strong growth and gaining greater market share. We are moving fast as we accelerate our growth, supported by the increased level of investments we are making. Our overall goals to achieve high single-digit total sales growth and mid-teens Return on Invested Capital ("ROIC") remain unchanged, as these measures correlate strongly with shareholder return. In the first half of 2012, we performed better than planned and are on track to achieve these long-term financial goals. Even with the additional investments, we expect 2012 to produce the highest earnings before interest and income taxes ("EBIT") dollar results in our history.
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 our Credit segment, while interest expense and income taxes are discussed on a total company basis.
 

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

Retail Business
Summary
The following table summarizes the results of our Retail Business for the quarter and six months ended July 28, 2012, compared with the quarter and six months ended July 30, 2011: 
 
Quarter Ended
 
July 28, 2012
 
July 30, 2011
 
Amount
 
% of net sales
 
Amount
 
% of net sales
Net sales
$
2,918

 
100.0
%
 
$
2,716

 
100.0
%
Cost of sales and related buying and occupancy costs
(1,850
)
 
(63.4
%)
 
(1,701
)
 
(62.6
%)
Gross profit
1,068

 
36.6
%
 
1,015

 
37.4
%
Selling, general and administrative expenses
(778
)
 
(26.6
%)
 
(708
)
 
(26.0
%)
Earnings before interest and income taxes
$
290

 
9.9
%
 
$
307

 
11.3
%
 
Six Months Ended
 
July 28, 2012
 
July 30, 2011
 
Amount
 
% of net sales
 
Amount
 
% of net sales
Net sales
$
5,453

 
100.0
%
 
$
4,945

 
100.0
%
Cost of sales and related buying and occupancy costs
(3,411
)
 
(62.6
%)
 
(3,072
)
 
(62.1
%)
Gross profit
2,042

 
37.4
%
 
1,873

 
37.9
%
Selling, general and administrative expenses
(1,499
)
 
(27.5
%)
 
(1,319
)
 
(26.7
%)
Earnings before interest and income taxes
$
543

 
10.0
%
 
$
554

 
11.2
%

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

Retail Business Net Sales
 
Quarter Ended
 
Six Months Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
Net sales by channel:
 
 
 
 
 
 
 
Nordstrom full-line stores
$
2,114

 
$
2,063

 
$
3,830

 
$
3,662

Direct
309

 
222

 
551

 
390

Nordstrom
2,423

 
2,285

 
4,381

 
4,052

Nordstrom Rack
577

 
484

 
1,134

 
950

Other retail1
63

 
49

 
124

 
75

Total Retail segment
3,063

 
2,818

 
5,639

 
5,077

Corporate/Other
(145
)
 
(102
)
 
(186
)
 
(132
)
Total net sales
$
2,918

 
$
2,716

 
$
5,453


$
4,945

 
 
 
 
 
 
 
 
Net sales increase
7.4
%
 
12.4
%
 
10.3
%
 
12.2
%
 
 
 
 
 
 
 
 
Same-store sales increase by channel:
 
 
 
 
 
 
 
Nordstrom full-line stores
1.1
%
 
6.0
%
 
3.1
%
 
6.4
%
Direct
39.7
%
 
29.0
%
 
41.6
%
 
23.4
%
Nordstrom
4.9
%
 
7.9
%
 
6.8
%
 
7.8
%
Nordstrom Rack
7.7
%
 
4.8
%
 
7.3
%
 
3.0
%
Total
4.5
%
 
7.3
%
 
6.3
%
 
6.9
%
 
 
 
 
 
 
 
 
Sales per square foot
$
117

 
$
112

 
$
219

 
$
205

4-wall sales per square foot2
$
108

 
$
105

 
$
200

 
$
191

1Other retail includes our HauteLook online private sale subsidiary, our Jeffrey stores and our treasure&bond store.
24-wall sales per square foot is calculated as Nordstrom full-line and Nordstrom Rack sales divided by Nordstrom full-line and Nordstrom Rack weighted-average square footage. Weighted-average square footage includes a percentage of period-end square footage for new stores equal to the percentage of the period during which they were open.
Total company net sales increased 7.4% for the quarter and 10.3% for the six months ended July 28, 2012, compared with the same periods in 2011. Overall same-store sales increased 4.5% for the quarter and 6.3% for the six months ended July 28, 2012. During the six months ended July 28, 2012, we opened one Nordstrom full-line store, six Nordstrom Rack stores and relocated one Nordstrom Rack store.
Nordstrom net sales for the second quarter of 2012 were $2,423, an increase of 6.1% compared with the same period in 2011, while net sales were $4,381 for the six months ended July 28, 2012, an increase of 8.1% compared with the same period in 2011. Nordstrom same-store sales increased 4.9% for the quarter and 6.8% for the six months ended July 28, 2012, compared with the same periods in 2011. Both the average selling price and the number of items sold increased for the quarter and six months ended July 28, 2012, compared with the same periods last year. Category highlights for both the quarter and six months ended July 28, 2012, included Handbags, Women's Shoes and Cosmetics. Full-line same-store sales increased 1.1% for the quarter and 3.1% for the six months ended July 28, 2012, compared with the same periods in 2011. The South and Midwest were the top-performing geographic regions for full-line stores for both the quarter and six months ended July 28, 2012. The Direct channel continued to show strong sales growth with an increase of 39.7% in the second quarter of 2012 and 41.6% in the first half of 2012, compared with the same periods in the prior year. These increases significantly outpaced our overall performance and are reflective of how customers are responding to our ongoing e-commerce initiatives. Nordstrom net sales and same-store sales for the quarter and six months ended July 28, 2012 were unfavorably impacted by the Anniversary Sale shift, which moved one week of the event into the fiscal third quarter.
Nordstrom Rack net sales increased $93, or 18.9%, for the quarter and $184, or 19.3% for the six months ended July 28, 2012, compared with the same periods in 2011. Nordstrom Rack same-store sales increased 7.7% for the quarter and 7.3% for the six months ended July 28, 2012. Both the number of items sold and the average selling price of Nordstrom Rack merchandise increased for the quarter and six months ended July 28, 2012, compared with the same periods last year.

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

Retail Business Gross Profit 
 
Quarter Ended
 
Six Months Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
Gross profit
$
1,068

 
$
1,015

 
$
2,042

 
$
1,873

Gross profit rate
36.6
%
 
37.4
%
 
37.4
%
 
37.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
July 28, 2012
 
July 30, 2011
Ending inventory per square foot
 
 
 
 
$
55.83

 
$
47.43

Inventory turnover rate1
 
 
 
 
5.28

 
5.49

1Inventory turnover rate is calculated as the trailing 12-months cost of sales and related buying and occupancy costs (for all segments) divided by the trailing 4-quarter average inventory.
Retail gross profit increased $53 for the quarter and $169 for the six months ended July 28, 2012, compared with the same periods in 2011, due to higher sales, partially offset by an increase in occupancy costs for stores opened during 2012 and 2011. Our retail gross profit rate decreased 76 basis points for the quarter and 44 basis points for the six months ended July 28, 2012, compared with the same periods in 2011, primarily due to a combination of the Anniversary Sale shift and our strategic growth initiatives, such as the launch of free shipping and free returns for online purchases beginning in the third quarter of 2011, which reduced shipping revenue.
Our regular-priced selling increased while our inventory turnover rate decreased to 5.28 times for the trailing 12-months ended July 28, 2012, from 5.49 times for the same period in the prior year. We ended the quarter with a 17.7% increase in ending inventory per square foot on a 4.5% increase in sales per square foot, compared with the second quarter of 2011. The increase in ending inventory per square foot relative to the increase in sales per square foot is primarily due to the planned buildup of inventory related to the second week of the Anniversary Sale, which shifted into the third quarter, and our growth initiatives, including the expansion of our Rack business.
Retail Business Selling, General and Administrative Expenses 
 
Quarter Ended
 
Six Months Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
Selling, general and administrative expenses
$
778

 
$
708

 
$
1,499

 
$
1,319

Selling, general and administrative expense rate
26.6
%
 
26.0
%
 
27.5
%
 
26.7
%
Our Retail selling, general and administrative expenses ("Retail SG&A") increased $70, or 9.9%, for the quarter and $180, or 13.7% for the six months ended July 28, 2012, compared with the same periods in 2011. The increases were primarily due to a continuation of various initiatives, which began in the second half of 2011, to improve the customer experience across all channels and specifically to grow our e-commerce business. These include higher planned fulfillment and technology expenses. The increases also reflected higher sales volume and the opening of 17 stores since the second quarter of 2011. As a result of our higher fulfillment and technology expenses, our Retail SG&A rate increased 61 basis points for the quarter and 82 basis points for the six months ended July 28, 2012, compared with the same periods in the prior year.

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

Credit Segment
Summary
The table below provides a detailed view of the operational results of our Credit segment, consistent with the segment disclosure provided in the Notes to Condensed Consolidated Financial Statements. In order to better reflect the economic contribution of our credit and debit card program, intercompany merchant fees are also included in the table below. Intercompany merchant fees represent the estimated intercompany income of our Credit segment from the usage of our cards in the Retail segment. The Credit segment does not charge the Retail segment an intercompany interchange merchant fee and 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. 
 
Quarter Ended
 
Quarter Ended
 
July 28, 2012
 
July 30, 2011
 
Amount
 
Annualized % of average credit card receivables
 
Amount
 
Annualized % of average credit card receivables
Credit card revenues
$
91

 
17.8
%
 
$
94

 
18.4
%
Interest expense
(7
)
 
(1.2
%)
 
(3
)
 
(0.6
%)
Net credit card income
84

 
16.6
%
 
91

 
17.9
%
Cost of sales and related buying and occupancy costs – loyalty program
(29
)
 
(5.8
%)
 
(22
)
 
(4.2
%)
Selling, general and administrative expenses
(62
)
 
(12.1
%)
 
(59
)
 
(11.7
%)
Total expense
(91
)
 
(17.9
%)
 
(81
)
 
(15.9
%)
Credit segment earnings before income taxes, as presented in segment disclosure
(7
)
 
(1.3
%)
 
10

 
2.0
%
Intercompany merchant fees
26

 
5.0
%
 
22

 
4.2
%
Credit segment contribution, before income taxes
$
19

 
3.7
%
 
$
32

 
6.2
%
 
 
 
 
 
 
 
 
Credit and debit card volume:
 
 
 
 
 
 
 
Outside
$
1,066

 
 
 
$
1,038

 
 
Inside
1,283

 
 
 
1,072

 
 
Total volume
$
2,349

 
 
 
$
2,110

 
 
 
 
 
 
 
 
 
 
Average credit card receivables
$
2,039

 
 
 
$
2,032

 
 
Average credit card receivable investment1
$
408

 
 
 
$
406

 
 
Annualized Credit segment contribution2
11.5
%
 
 
 
18.7
%
 
 
 
1Assumes 80% of accounts receivable is funded with debt.
2Net of tax, calculated as a percentage of our average credit card receivable investment.

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

 
Six Months Ended
 
Six Months Ended
 
July 28, 2012
 
July 30, 2011
 
Amount
 
Annualized % of average credit card receivables
 
Amount
 
Annualized % of average credit card receivables
Credit card revenues
$
185

 
18.3
%
 
$
188

 
18.7
%
Interest expense
(13
)
 
(1.2
%)
 
(7
)
 
(0.6
%)
Net credit card income
172

 
17.1
%
 
181

 
18.1
%
Cost of sales and related buying and occupancy costs – loyalty program
(52
)
 
(5.2
%)
 
(36
)
 
(3.6
%)
Selling, general and administrative expenses
(106
)
 
(10.5
%)
 
(114
)
 
(11.4
%)
Total expense
(158
)
 
(15.7
%)
 
(150
)
 
(15.0
%)
Credit segment earnings before income taxes, as presented in segment disclosure
14

 
1.4
%
 
31

 
3.1
%
Intercompany merchant fees
43

 
4.3
%
 
36

 
3.5
%
Credit segment contribution, before income taxes
$
57

 
5.7
%
 
$
67

 
6.6
%
 
 
 
 
 
 
 
 
Credit and debit card volume:
 
 
 
 
 
 
 
Outside
$
2,081

 
 
 
$
2,020

 
 
Inside
2,175

 
 
 
1,777

 
 
Total volume
$
4,256

 
 
 
$
3,797

 
 
 
 
 
 
 
 
 
 
Average credit card receivables
$
2,012

 
 
 
$
2,011

 
 
Average credit card receivable investment1
$
402

 
 
 
$
402

 
 
Annualized Credit segment contribution2
17.7
%
 
 
 
20.0
%
 
 

1Assumes 80% of accounts receivable is funded with debt.
2Net of tax, calculated as a percentage of our average credit card receivable investment.
 Credit Card Revenues 
 
Quarter Ended
 
Six Months Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
Finance charge revenue
$
61

 
$
61

 
$
123

 
$
125

Interchange – third party
19

 
21

 
39

 
40

Late fees and other revenue
11

 
12

 
23

 
23

Total credit card revenues
$
91

 
$
94

 
$
185

 
$
188

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 decreased slightly for both the quarter and the six months ended July 28, 2012, compared with the same periods in the prior year, due to increases in total volume that were offset by continued improvements in customer payment rates.
Credit Segment Interest Expense
Interest expense increased to $7 for the quarter and $13 for the six months ended July 28, 2012, from $3 for the quarter and $7 for the six months ended July 30, 2011, due to higher average interest rates applicable to the Credit segment.


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

Credit Segment Cost of Sales and Related Buying and Occupancy Costs
Cost of sales and related buying and occupancy costs, which include the estimated cost of Nordstrom Notes and complimentary alterations credits that are expected to be issued and redeemed under our Fashion Rewards program, increased $7 for the quarter and $16 for the six months ended July 28, 2012, compared with the same periods in the prior year. The increases were due to improvements to our Fashion Rewards benefits and increases in volume on Nordstrom credit and debit cards of 11.4% for the quarter and 12.1% for the six months ended July 28, 2012, compared with the same periods in the prior year. We provide these benefits to our cardholders, as participation in the Fashion Rewards program enhances customer loyalty and drives incremental sales in our stores.
Credit Segment Selling, General and Administrative Expenses
Selling, general and administrative expenses for our Credit segment ("Credit SG&A") are summarized in the following table: 
 
Quarter Ended
 
Six Months Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
Operational and marketing expenses
$
37

 
$
33

 
$
68

 
$
63

Bad debt provision
25

 
26

 
38

 
51

Total Credit selling, general and administrative expenses