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 February 1, 2014
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. þ
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 August 2, 2013 the aggregate market value of the Registrant’s voting and non-voting stock held by non-affiliates of the Registrant was approximately $10.0 billion using the closing sales price on that day of $61.99. On March 10, 2014, 189,692,666 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2014 Annual Meeting of Shareholders scheduled to be held on May 7, 2014 are incorporated into Part III.
Nordstrom, Inc. and subsidiaries 1
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Nordstrom, Inc. and subsidiaries 3
PART I
Item 1. Business.
DESCRIPTION OF BUSINESS
Founded in 1901 as a retail shoe business in Seattle, Nordstrom later incorporated in Washington State in 1946 and went on to become one of the leading fashion specialty retailers based in the U.S. We operate 262 U.S. stores located in 35 states as of March 17, 2014, as well as a robust e-commerce business through Nordstrom.com and HauteLook. 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 17, 2014, the Retail segment includes our 117 “Nordstrom” branded full-line stores and online store at Nordstrom.com (“Direct”), 142 off-price “Nordstrom Rack” stores, one clearance store that operates under the name “Last Chance” and other retail channels including our online private sale subsidiary “HauteLook” and our two “Jeffrey” boutiques. Through these multiple retail channels, we strive to deliver the best customer experience possible. We offer 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. In-store purchases are primarily fulfilled from that store’s inventory, but when inventory is unavailable at that store it may also be shipped to our customers from our fulfillment center in Cedar Rapids, Iowa, or from other Nordstrom full-line stores. 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 can also pick up online orders in our Nordstrom full-line stores if inventory is available at one of our locations. These capabilities allow us to better serve customers across various channels and improve sales. Nordstrom Rack stores purchase high-quality brand name merchandise primarily from the same vendors carried in Nordstrom full-line stores and also serve as outlets for clearance merchandise from our Nordstrom stores. Our online private sale retailer, HauteLook, offers limited time sale events on fashion and lifestyle brands, as well as a persistent selection of off-price high-quality brand name merchandise.
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 purposes of our Credit business are to foster greater customer loyalty and drive more sales, we also generate revenues from finance charges and other fees on these cards and save on interchange fees that the Retail Segment would incur if our customers used third-party 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: Financial Statements and Supplementary Data.
FISCAL YEAR
We operate on a 52/53-week fiscal year ending on the Saturday closest to January 31st. References to 2013 and all years except 2012 within this document are based on a 52-week fiscal year, while 2012 is based on a 53-week fiscal year.
TRADEMARKS
We have 152 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, HauteLook, Halogen, BP. and Zella. Each of our trademarks is renewable indefinitely, provided that it is still used in commerce at the time of the renewal.
RETURN POLICY
We have a liberal approach to returns as part of our objective to provide high-quality customer service. We do not have a formal return policy at our Nordstrom full-line stores or online at Nordstrom.com. Our goal is to take care of our customers, which includes making returns and exchanges easy, whether in stores or online, where we offer free shipping and free returns. Our Nordstrom Rack stores generally accept returns up to 90 days from the date of purchase with the original price tag and sales receipt, and also accept returns of HauteLook merchandise. HauteLook generally accepts returns of apparel, footwear and accessories within 30 days from the date of shipment.
SEASONALITY
Due to our Anniversary Sale in July, the holidays in December and the Half-Yearly sales that normally 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 2013, our Anniversary Sale took place in the second quarter, while in 2012 it occurred during both the second and third quarters.
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 are providing great customer service and customer experiences in store and online, which includes compelling price and value, fashion newness, quality of products, selection, convenience, technology, product fulfillment, personalization and appealing and relevant store environments in top locations.
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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. We also purchase and receive a larger amount of merchandise in the fall as we prepare for the holiday shopping season (from late November through December). Beginning in 2012, we increased our investment in pack and hold inventory at Nordstrom Rack, which involves the acquisition of merchandise from some of our full-line stores’ top brands in advance of the upcoming selling seasons to take advantage of strategic buying opportunities. This inventory is typically held for six months on average and has contributed to the growth in our Nordstrom Rack business. We pay for our merchandise purchases under the terms established with our vendors.
In order to offer merchandise that our customers want, we purchase 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, and are available on our website at Nordstrom.com.
EMPLOYEES
During 2013, we employed approximately 62,500 employees on a full- or part-time basis. Due to the seasonal nature of our business, employment increased to approximately 64,500 employees in July 2013 and 66,000 in December 2013. Almost 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 outlook for the fiscal year ending January 31, 2015, anticipated annual same-store sales rate, anticipated Return on Invested Capital and trends in our operations. Such statements are based upon the current beliefs and expectations of the company’s management and are subject to significant risks and uncertainties. Actual future results may differ materially from historical results or current expectations depending upon factors including, but not limited to:
• | successful execution of our customer strategy, including expansion into new markets, acquisitions, investments in our stores and online, our ability to realize the anticipated benefits from growth initiatives, and the timely completion of construction associated with newly planned stores, relocations and remodels, all of which may be impacted by the financial health of third parties, |
• | our ability to manage the transformation of our business/financial model as we increase our investments in growth opportunities, including our online business and our ability to manage related organizational changes, |
• | our ability to maintain relationships with our employees and to effectively attract, develop and retain our future leaders, |
• | effective inventory management, disruptions in our supply chain and our ability to control costs, |
• | the impact of any systems failures, cybersecurity and/or security breaches, including any security breach of our systems or those of a third-party provider that results in the theft, transfer or unauthorized disclosure of customer, employee or company information or compliance with information security and privacy laws and regulations in the event of such an incident, |
• | successful execution of our information technology strategy, |
• | our ability to effectively utilize data in strategic planning and decision-making, |
• | efficient and proper allocation of our capital resources, |
• | our ability to safeguard our reputation and maintain our vendor relationships, |
• | the impact of economic and market conditions and the resultant impact on consumer spending patterns, |
• | our ability to respond to the business environment, fashion trends and consumer preferences, including changing expectations of service and experience in stores and online, |
• | the effectiveness of planned advertising, marketing and promotional campaigns in the highly competitive retail industry, |
• | weather conditions, natural disasters, health hazards, national security or other market disruptions, or the prospects of these events and the impact on consumer spending patterns, |
• | our compliance with applicable banking-related laws and regulations impacting our ability to extend credit to our customers, employment laws and regulations, certain international laws and regulations, other laws and regulations applicable to us, including the outcome of claims and litigation and resolution of tax matters, and ethical standards, |
• | impact of the current regulatory environment and financial system and health care reforms, |
• | compliance with debt covenants, availability and cost of credit, changes in interest rates, and trends in debt repayment patterns, personal bankruptcies and bad debt write-offs, and |
• | the timing and amounts of share repurchases by the company, if any, or any share issuances by the company, including issuances associated with option exercises or other matters. |
These and other factors, including those factors described in Item 1A: Risk 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.
Nordstrom, Inc. and subsidiaries 5
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.
WEBSITE ACCESS
Our website address is Nordstrom.com. We make available free of charge on or through our website our annual and quarterly reports on Form 10-K and Form 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. Our Codes of Ethics, Corporate Governance Guidelines and Committee Charters for the Audit, Compensation, Corporate Governance and Nominating, Finance and Technology Committees are posted on our website. Any amendments to these documents, or waivers of the requirements they contain, will also be available on our website.
For printed versions of these items or any other inquiries, please use the following contact information:
Nordstrom Investor Relations
PO Box 2737
Seattle, Washington 98111
(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.
RISKS DUE TO STRATEGIC AND OPERATIONAL FACTORS
Our customer strategy focuses on providing a seamless, cohesive and high-quality experience across all Nordstrom channels and failure to successfully execute our plans could negatively impact our current business and future profitability.
We are enhancing our customer shopping experience in our stores, online, and in mobile and social channels by pursuing a heightened focus on technology and e-commerce to fuel our growth. With the accelerated pace of change in the retail environment, we may not be able to meet our customers’ changing expectations in how they shop in stores or through e-commerce. If we target the wrong opportunities, fail to make investments at the right time or speed, fail to make the best investments in the right channels or make an investment commitment significantly above or below our needs, it may result in the loss of our competitive position. If these technologies and investments do not perform as expected or are not seamlessly integrated, our profitability and growth could be adversely affected. In addition, if we do not maintain our current systems, we may see interruptions to our business and increased costs in order to bring our systems up to date.
We are continuing our plan to accelerate the number of new Nordstrom Rack store openings. New store openings both at the Rack and in our full-line stores involve certain risks, including the availability of suitable locations, constructing, furnishing and supplying a store in a timely and cost-effective manner and properly balancing our capital investments between new stores, remodels, technology and e-commerce. In addition, we may not accurately assess the demographic or retail environment for a particular location and sales at new, relocated or remodeled stores may not meet our projections, particularly in light of the changing trends between online and brick-and-mortar shopping channels, which could adversely affect our return on investment. We also intend to open stores in new and international markets, such as Canada, Puerto Rico and Manhattan, and expansion will require additional management attention and resources and may distract us from executing our core operations. 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.
As we execute our plans and continue to evolve and transform our strategy, we may not adequately manage the related organizational changes to align with our strategy or appropriately monitor, report or communicate the changes in an effective manner. In addition, we may not gather accurate and relevant data or effectively utilize that data, which may impact our strategic planning and decision making.
6
Improvements to our merchandise buying processes and systems could adversely affect our business if not successfully executed.
We are making investments to improve our merchandise planning, procurement and allocation capabilities through 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 or evolve our strategy as the retail environment changes 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 expectations.
If we do not effectively implement our strategic and business planning processes to attract, retain, train and develop talent and 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, and the talents of our workforce to execute our business strategies and objectives. If unexpected turnover occurs without adequate succession plans, the loss of the services of any of these individuals, or any resulting negative perceptions of our business, could damage our reputation and our business.
Even if we take appropriate measures to safeguard our information security and privacy environment from security breaches, we could still expose our customers and our business to risk.
Our Retail and Credit segments involve the collection, storage and transmission of customers’ personal information, consumer preferences and credit card information. In addition, our operations involve the collection, storage and transmission of employee information and company financial and strategic data. Any measures we implement to prevent a security or cybersecurity threat may not be totally effective and may have the potential to harm relations with our customers or decrease activity on our websites by making them more difficult to use. In addition, the regulatory environment surrounding information security, cybersecurity and privacy is increasingly demanding, with new and constantly changing requirements. Security breaches and cyber incidents and their remediation, whether at our company, our third-party providers or other retailers, 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, which could adversely impact our sales. Any such breaches or incidents could subject us to investigation, notification and remediation costs, and if there is additional information that is later discovered related to such security breach or incident, there could be further loss of customers’ trust and business, based upon their reactions to this additional information.
If we fail to appropriately manage our capital, we may negatively impact our operations and shareholder return.
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. If our access to capital is restricted or 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.
Our customer and employee relationships could be negatively affected if we fail to maintain our corporate culture and reputation.
We have a well-recognized culture and reputation that consumers may associate with a high level of integrity, customer service and quality merchandise, and it is one of the reasons customers shop with us and employees choose us as a place of employment. Any significant damage to our reputation could negatively impact sales, diminish customer trust, reduce employee morale and productivity and lead to difficulties in recruiting and retaining qualified employees.
RISKS DUE TO ECONOMIC AND EXTERNAL MARKET FACTORS
A downturn in economic conditions could have a significant adverse effect on our business.
During economic downturns, fewer customers may shop for the high-quality items in our stores and on our websites as they may be seen as discretionary and those who do shop may limit the amount of their purchases. This reduced demand may lead to lower sales, higher markdowns and increased marketing and promotional spending. Deterioration of economic conditions and consumer confidence may also adversely affect our credit customers’ payment patterns and delinquency rates, increasing our bad debt expense.
Our business could suffer if we do not appropriately assess and react to competitive market forces and changes in customer behavior.
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. The retail environment is rapidly evolving with customer shopping preferences continuing to shift online and we expect competition in the e-commerce market to intensify in the future as the Internet facilitates competitive entry and comparison shopping. We may lose market share to our competitors and our sales and profitability could suffer if we are unable to remain competitive in the key areas of price and value, fashion newness, quality of products, depth of selection, convenience, fulfillment, service and the shopping experience, including the online and store environment and location. Our financial model is changing to match customer shopping preferences, but if we do not properly allocate our capital between the store and online environment, or adjust the effectiveness and efficiency of our stores, our overall sales and profitability could suffer.
Nordstrom, Inc. and subsidiaries 7
Our Credit segment faces competition from other retailers who also offer credit card products with associated loyalty programs, large banks and other credit card companies, some of which have substantial financial resources. If we do not effectively anticipate or respond to the competitive banking and credit card environments, we could lose market share to our competitors.
Our sales and customer relationships may be negatively impacted if we do not anticipate and respond to consumer preferences and fashion trends appropriately.
Our ability to predict or respond to constantly changing fashion trends, consumer preferences and spending patterns 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 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.
The results of our Credit operations could be adversely affected by changes in market conditions.
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. These economic and market 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.
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.
RISKS DUE TO LEGAL AND REGULATORY FACTORS
We are subject to certain laws, litigation, regulatory matters and ethical standards, and our failure to comply with or adequately address developments as they arise could adversely affect our reputation and operations.
Our policies, procedures and practices and the technology we implement are designed to comply with federal, state, local and foreign laws, rules and regulations, including those imposed by the SEC and other regulatory agencies, the marketplace, the banking industry and foreign countries, as well as responsible business, social and environmental practices, all of which may change from time to time. 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. In addition, if we fail to comply with applicable laws and regulations or implement responsible business, social and environmental practices, 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.
We continue to face uncertainties due to financial services industry regulation and supervision that could have an adverse affect on our operations.
Federal and state regulation and supervision of the financial industry has increased in recent years due to implementation of consumer protection and financial reform legislation such as the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Financial Reform Act”). The Financial Reform Act significantly restructured regulatory oversight and other aspects of the financial industry, created the Bureau of Consumer Financial Protection (“CFPB”), to supervise and enforce consumer lending laws and regulations, and expanded state authority over consumer lending. The CARD Act included new and revised rules and restrictions on credit card pricing, finance charges and fees, customer billing practices and payment application. We anticipate more regulation and interpretations of the new rules to continue, and, depending on the nature and extent of these new regulations and interpretations, we may be required to make changes to our credit card practices and systems, which could adversely impact the revenues and profitability of our Credit segment. In addition, we operate in a regulated environment where financial supervisory agencies provide oversight over our activities. If we fail to comply with applicable laws and regulations, we could face enforcement actions from these agencies, which could have an adverse impact on us.
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Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The following table summarizes the number of retail stores we own or lease, and the percentage of total store square footage represented by each listed category as of February 1, 2014:
Number of stores | % of total store square footage | |||
Leased stores on leased land | 163 | 36 | % | |
Owned stores on leased land | 61 | 42 | % | |
Owned stores on owned land | 35 | 21 | % | |
Partly owned and partly leased store | 1 | 1 | % | |
Total | 260 | 100 | % | |
The following table summarizes our store activity during the last three years:
Fiscal year | 2013 | 2012 | 2011 | |||||
Number of stores, beginning of year | 240 | 225 | 204 | |||||
Stores opened | 22 | 16 | 22 | |||||
Stores closed | (2 | ) | (1 | ) | (1 | ) | ||
Number of stores, end of year | 260 | 240 | 225 | |||||
Nordstrom | 117 | 117 | 117 | |||||
Nordstrom Rack and Other | 143 | 123 | 108 | |||||
In 2013, we opened 22 Nordstrom Rack stores (Boston, Massachusetts; Upland, California; Washington, D.C.; Ann Arbor, Michigan; Lake Orion, Michigan; Birmingham, Alabama; Columbia, Maryland; Portland, Maine; Cleveland, Ohio; Columbus, Ohio; Concord, California; Millbury, Massachusetts; Oklahoma City, Oklahoma; Atlanta, Georgia; Dallas, Texas; El Paso, Texas; Eugene, Oregon; Louisville, Kentucky; Farmington, Utah; Jacksonville, Florida; Naples, Florida; and Bradenton, Florida), relocated one Nordstrom full-line store (Glendale, California) and relocated two Nordstrom Rack stores (Culver City, California and Honolulu, Hawaii). Additionally, in 2013, we closed our treasure&bond store in New York, New York and one Nordstrom Rack store in Long Beach, California.
To date in 2014, we have opened two Nordstrom Rack stores (Palm Desert, California and San Francisco, California). During the remainder of 2014, we have announced the opening of three Nordstrom full-line stores (The Woodlands, Texas; Calgary, Alberta; and Jacksonville, Florida), and the opening of 25 additional Nordstrom Rack stores (Chicago, Illinois; Riverside, California; Skokie, Illinois; Tulsa, Oklahoma; Wauwatosa, Wisconsin; Brooklyn, New York; Columbus, Ohio; Houston, Texas; Manhasset, New York; Chicago, Illinois; Dayton, Ohio; Houston, Texas; Queens, New York; Brentwood, Tennessee; Brooklyn, New York; Greenville, South Carolina; Livingston, New Jersey; Madison, Wisconsin; Tempe, Arizona; West Palm Beach, Florida; Brandon, Florida; Columbia, South Carolina; Des Moines, Iowa; Philadelphia, Pennsylvania; and Summerlin, Nevada). In February 2014, we announced our plans to close our full-line stores in Vancouver, Washington, and in Portland, Oregon, at the Lloyd Center, in January 2015.
We also own six merchandise distribution centers (Portland, Oregon; Dubuque, Iowa; Ontario, California; Newark, California; Upper Marlboro, Maryland; and Gainesville, Florida) and we own one fulfillment center on leased land (Cedar Rapids, Iowa), all of 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 fulfillment centers (Fontana, California and San Bernardino, California). We lease an office building in Centennial, Colorado and one in Scottsdale, Arizona, both for use by our Credit segment. Our administrative offices in Seattle, Washington are a combination of leased and owned space. We also lease a data center in Centennial, Colorado.
Nordstrom, Inc. and subsidiaries 9
The following table lists our retail store count and facility square footage by state as of February 1, 2014:
Retail stores by channel | Nordstrom Full-Line Stores | Nordstrom Rack and Other1 | Total | ||||||||||||
State | Count | Square Footage (000’s) | Count | Square Footage (000’s) | Count | Square Footage (000’s) | |||||||||
Alabama | — | — | 1 | 35 | 1 | 35 | |||||||||
Alaska | 1 | 97 | — | — | 1 | 97 | |||||||||
Arizona | 2 | 384 | 6 | 228 | 8 | 612 | |||||||||
California2 | 32 | 5,472 | 34 | 1,344 | 66 | 6,816 | |||||||||
Colorado | 3 | 559 | 4 | 148 | 7 | 707 | |||||||||
Connecticut | 1 | 189 | 1 | 36 | 2 | 225 | |||||||||
Delaware | 1 | 127 | — | — | 1 | 127 | |||||||||
Florida2 | 9 | 1,431 | 10 | 345 | 19 | 1,776 | |||||||||
Georgia | 3 | 555 | 5 | 165 | 8 | 720 | |||||||||
Hawaii | 1 | 211 | 1 | 43 | 2 | 254 | |||||||||
Idaho | — | — | 1 | 37 | 1 | 37 | |||||||||
Illinois | 4 | 947 | 7 | 280 | 11 | 1,227 | |||||||||
Indiana | 1 | 134 | 1 | 35 | 2 | 169 | |||||||||
Kansas | 1 | 219 | 1 | 35 | 2 | 254 | |||||||||
Kentucky | — | — | 1 | 33 | 1 | 33 | |||||||||
Maine | — | — | 1 | 30 | 1 | 30 | |||||||||
Maryland | 4 | 765 | 4 | 156 | 8 | 921 | |||||||||
Massachusetts | 4 | 595 | 5 | 193 | 9 | 788 | |||||||||
Michigan | 3 | 552 | 4 | 145 | 7 | 697 | |||||||||
Minnesota | 1 | 240 | 2 | 75 | 3 | 315 | |||||||||
Missouri | 2 | 342 | 2 | 69 | 4 | 411 | |||||||||
Nevada | 1 | 207 | 1 | 35 | 2 | 242 | |||||||||
New Jersey | 5 | 991 | 2 | 70 | 7 | 1,061 | |||||||||
New York | 2 | 460 | 5 | 151 | 7 | 611 | |||||||||
North Carolina | 2 | 300 | 2 | 74 | 4 | 374 | |||||||||
Ohio | 3 | 549 | 4 | 151 | 7 | 700 | |||||||||
Oklahoma | — | — | 1 | 34 | 1 | 34 | |||||||||
Oregon | 5 | 705 | 5 | 190 | 10 | 895 | |||||||||
Pennsylvania | 2 | 381 | 2 | 85 | 4 | 466 | |||||||||
Rhode Island | 1 | 206 | 1 | 38 | 2 | 244 | |||||||||
Tennessee | 1 | 145 | — | — | 1 | 145 | |||||||||
Texas | 7 | 1,284 | 12 | 423 | 19 | 1,707 | |||||||||
Utah | 2 | 277 | 3 | 101 | 5 | 378 | |||||||||
Virginia | 5 | 894 | 5 | 201 | 10 | 1,095 | |||||||||
Washington2 | 8 | 1,463 | 7 | 276 | 15 | 1,739 | |||||||||
Washington D.C. | — | — | 2 | 75 | 2 | 75 | |||||||||
Total (35 states) | 117 | 20,681 | 143 | 5,336 | 260 | 26,017 | |||||||||
1 Other includes one Last Chance clearance store and two Jeffrey boutiques.
2 California, Washington and Florida had the highest square footage, with a combined 10,331 square feet, representing 40% of the total company square footage.
10
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 include certified classes of litigants, or 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.
Nordstrom, Inc. and subsidiaries 11
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 10, 2014 was 215,000, 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 189,692,666 shares of common stock outstanding.
The high and low prices of our common stock and dividends declared for each quarter of 2013 and 2012 are presented in the table below:
Common Stock Price | |||||||||||
2013 | 2012 | Dividends per Share | |||||||||
High | Low | High | Low | 2013 | 2012 | ||||||
1st Quarter | $58.42 | $52.16 | $56.75 | $48.00 | $0.30 | $0.27 | |||||
2nd Quarter | $63.34 | $57.07 | $57.75 | $46.27 | $0.30 | $0.27 | |||||
3rd Quarter | $62.16 | $55.34 | $58.44 | $51.50 | $0.30 | $0.27 | |||||
4th Quarter | $63.72 | $56.57 | $58.40 | $50.94 | $0.30 | $0.27 | |||||
Full Year | $63.72 | $52.16 | $58.44 | $46.27 | $1.20 | $1.08 | |||||
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 2013 (November 3, 2013 to November 30, 2013) | 0.2 | $61.75 | 0.2 | $810 | |||||||||
December 2013 (December 1, 2013 to January 4, 2014) | 1.1 | $61.09 | 1.1 | $743 | |||||||||
January 2014 (January 5, 2014 to February 1, 2014) | 1.2 | $59.25 | 1.2 | $670 | |||||||||
Total | 2.5 | 2.5 | |||||||||||
1 In February 2013, our Board of Directors authorized a new program to repurchase up to $800 of our outstanding common stock, through March 1, 2015. During 2013, we repurchased 9.1 shares of our common stock for an aggregate purchase price of $523. In December 2013, we completed the $800 repurchase program authorized in February 2012. As of February 1, 2014, we had $670 remaining in 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.
12
STOCK PRICE PERFORMANCE
The following graph compares the cumulative total return of Nordstrom common stock, Standard & Poor’s Retail Index (“S&P Retail”) and Standard & Poor’s 500 Index (“S&P 500”) for each of the last five fiscal years, ending February 1, 2014. The Retail Index is composed of 31 retail companies, including Nordstrom, representing an industry group of the S&P 500 Index. The following graph assumes an initial investment of $100 each in Nordstrom common stock, the S&P Retail and the S&P 500 on January 31, 2009 and assumes reinvestment of dividends on the Nordstrom common stock as well as the S&P Retail and S&P 500 Indexes.
End of fiscal year | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | |||||||||||
Nordstrom common stock | 100 | 280 | 338 | 409 | 473 | 503 | |||||||||||
Standard & Poor’s Retail | 100 | 156 | 198 | 224 | 285 | 357 | |||||||||||
Standard & Poor’s 500 | 100 | 133 | 161 | 170 | 200 | 240 | |||||||||||
Nordstrom, Inc. and subsidiaries 13
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: Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Fiscal year | 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||
Earnings Results | |||||||||||||||||||
Net sales | $12,166 | $11,762 | $10,497 | $9,310 | $8,258 | ||||||||||||||
Credit card revenues | 374 | 372 | 363 | 365 | 344 | ||||||||||||||
Gross profit1 | 4,429 | 4,330 | 3,905 | 3,413 | 2,930 | ||||||||||||||
Selling, general and administrative (“SG&A”) expenses | (3,453 | ) | (3,357 | ) | (3,019 | ) | (2,660 | ) | (2,440 | ) | |||||||||
Earnings before interest and income taxes (“EBIT”) | 1,350 | 1,345 | 1,249 | 1,118 | 834 | ||||||||||||||
Net earnings | 734 | 735 | 683 | 613 | 441 | ||||||||||||||
Balance Sheet and Cash Flow Data | |||||||||||||||||||
Cash and cash equivalents | $1,194 | $1,285 | $1,877 | $1,506 | $795 | ||||||||||||||
Accounts receivable, net | 2,177 | 2,129 | 2,033 | 2,026 | 2,035 | ||||||||||||||
Merchandise inventories | 1,531 | 1,360 | 1,148 | 977 | 898 | ||||||||||||||
Current assets | 5,228 | 5,081 | 5,560 | 4,824 | 4,054 | ||||||||||||||
Land, buildings and equipment, net | 2,949 | 2,579 | 2,469 | 2,318 | 2,242 | ||||||||||||||
Total assets | 8,574 | 8,089 | 8,491 | 7,462 | 6,579 | ||||||||||||||
Current liabilities | 2,541 | 2,226 | 2,575 | 1,879 | 2,014 | ||||||||||||||
Long-term debt, including current portion | 3,113 | 3,131 | 3,647 | 2,781 | 2,613 | ||||||||||||||
Shareholders’ equity | 2,080 | 1,913 | 1,956 | 2,021 | 1,572 | ||||||||||||||
Cash flow from operations | 1,320 | 1,110 | 1,177 | 1,177 | 1,251 | ||||||||||||||
Performance Metrics | |||||||||||||||||||
Same-store sales percentage change2 | 2.5 | % | 7.3 | % | 7.2 | % | 8.1 | % | (4.2 | %) | |||||||||
Gross profit % of net sales | 36.4 | % | 36.8 | % | 37.2 | % | 36.7 | % | 35.5 | % | |||||||||
Total SG&A % of net sales | 28.4 | % | 28.5 | % | 28.8 | % | 28.6 | % | 29.5 | % | |||||||||
EBIT % of net sales | 11.1 | % | 11.4 | % | 11.9 | % | 12.0 | % | 10.1 | % | |||||||||
Return on shareholders’ equity | 36.8 | % | 38.0 | % | 34.3 | % | 34.1 | % | 31.7 | % | |||||||||
Return on assets | 8.7 | % | 8.9 | % | 8.7 | % | 8.6 | % | 7.1 | % | |||||||||
Return on invested capital (“ROIC”)3 | 13.6 | % | 13.9 | % | 13.3 | % | 13.6 | % | 12.1 | % | |||||||||
Sales per square foot4 | $474 | $470 | $431 | $397 | $368 | ||||||||||||||
4-wall sales per square foot4 | $408 | $417 | $394 | $372 | $337 | ||||||||||||||
Ending inventory per square foot | $58.84 | $53.77 | $46.41 | $40.96 | $39.44 | ||||||||||||||
Inventory turnover rate5 | 5.07 | 5.37 | 5.56 | 5.56 | 5.41 | ||||||||||||||
Per Share Information | |||||||||||||||||||
Earnings per diluted share | $3.71 | $3.56 | $3.14 | $2.75 | $2.01 | ||||||||||||||
Dividends declared per share | 1.20 | 1.08 | 0.92 | 0.76 | 0.64 | ||||||||||||||
Book value per share | 10.87 | 9.71 | 9.42 | 9.27 | 7.22 | ||||||||||||||
Store Information (at year-end) | |||||||||||||||||||
Nordstrom full-line stores | 117 | 117 | 117 | 115 | 112 | ||||||||||||||
Nordstrom Rack and other stores | 143 | 123 | 108 | 89 | 72 | ||||||||||||||
Total square footage | 26,017,000 | 25,290,000 | 24,745,000 | 23,838,000 | 22,773,000 | ||||||||||||||
1 | Gross profit is calculated as net sales less cost of sales and related buying and occupancy costs (for all segments). |
2 | Same-store sales include sales from stores that have been open at least one full year at the beginning of the year. Fiscal year 2012 includes an extra week (the 53rd week) as a result of our 4-5-4 retail reporting calendar. The 53rd week is not included in same-store sales calculations. We also include sales from our Nordstrom online store in same-store sales because of the integration of our Nordstrom full-line stores and online store, as well as HauteLook beginning in 2013. |
3 | See ROIC (Non-GAAP financial measure) on page 26 for additional information and reconciliation to the most directly comparable GAAP financial measure. |
4 | Sales per square foot is calculated as net sales 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. 4-wall sales per square foot is calculated as sales for Nordstrom full-line, Nordstrom Rack and Jeffrey stores divided by their weighted-average square footage. |
5 | 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. Retailers do not uniformly calculate inventory turnover as buying and occupancy costs may be included in selling, general and administrative expenses. As such, our inventory turnover rates may not be comparable to other retailers. |
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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 leading 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 our various channels: “Nordstrom” branded full-line stores and online store at Nordstrom.com, “Nordstrom Rack” off-price stores, “Last Chance” clearance store, “HauteLook” online private sale website and our “Jeffrey” boutiques. Our stores are located in 35 states throughout the United States. In addition, we offer our customers a loyalty program along with a variety of payment products and services, including credit and debit cards.
We achieved several milestones in 2013 with a record high in sales, earnings per diluted share, and cash flow from operations. This marked the fifth consecutive year we generated over one billion dollars in cash flow from operations. Additionally, we generated a Return on Invested Capital of 13.6% while increasing our capital investments by over 50%. Our performance in 2013 reflected our continued progress in executing our customer strategy through investments to drive growth across channels, while maintaining our operating discipline around inventory and expenses. With advancements in technology and specifically in e-commerce, the pace of change is accelerating and redefining the customer experience across all channels. We believe there is tremendous value in having a platform for the customer experience that encompasses full-price and off-price, in-store and online. While each of these channels represents a substantial individual opportunity, there is significant potential for synergies between them to create a unique customer experience across channels to gain market share.
Our Direct business continues to be our fastest-growing customer channel. Direct finished its third consecutive year of approximately 30% or more of same-store sales growth, with a key driver being increased merchandise selection. We also increased our speed of fulfillment and delivery, opened a fulfillment center in San Bernardino and announced plans to open an east coast fulfillment center in 2015 to enable greater customer service.
We are on track to serve more customers through Nordstrom Rack’s accelerated store expansion, with plans to reach approximately 230 stores by 2016, from 140 stores today. Nordstrom Rack net sales increased 12%, driven by 22 new stores, and same-store sales increased 2.7%. Nordstrom Rack sales productivity remains strong at approximately $550 per square foot. Additionally, Rack stores can now accept HauteLook merchandise returns, adding convenience for our customers while driving incremental traffic to our Racks and further integrating the customer experience across channels.
While Nordstrom full-line sales trends were softer than anticipated, we have ongoing initiatives around product, service, and the store environment to elevate the customer experience. Our relocated Glendale, California store incorporated new design concepts that reflect our customers’ desire for stores that are easier to shop, and we plan to incorporate new designs in future renovations and store openings to continue meeting our customers changing expectations. We also enhanced our relevance with existing and new customers, demonstrated in part by our Women’s Apparel business, which was one of our top-performing merchandise categories for the year. We have attracted newer and younger customers with our repositioned Savvy department to offer on-trend fashion at accessible price points and our expanded partnership with Topshop, an internationally renowned trend-leading brand. We expanded Topshop merchandise to 41 full-line stores this year, from 14 at the start of the year.
Our credit business also plays an important role in reaching new customers and strengthening existing customer relationships through our Nordstrom Rewards™ program, payment products and our ability to serve customers directly through our wholly owned credit services. The Nordstrom Rewards program contributes to our overall results, with members shopping more frequently and spending more on average than non-members. For the second consecutive year, we opened over one million new accounts. With 3.8 million active members, 2013 sales from members represented 38% of sales, increasing from 36% in 2012. Our overall credit card portfolio also remains healthy, with delinquency and write-off trends continuing to improve.
We continue to believe strongly in our customer-centric strategy. To improve the customer experience, we continue to make investments in our stores, online and in new markets such as Canada and Manhattan. As a result of our planned growth across all of our channels, our business model continues to evolve to encompass these multiple channels in their various stages of growth. We project that these investments in our customer strategy will help us achieve long-term top-quartile shareholder returns through high single-digit total sales growth and mid-teens Return on Invested Capital.
Nordstrom, Inc. and subsidiaries 15
RESULTS OF OPERATIONS
Our reportable segments are Retail and Credit. Our Retail segment includes our Nordstrom branded full-line stores and online store, Nordstrom Rack stores, Last Chance clearance store and other retail channels, including HauteLook and Jeffrey stores. For purposes of discussion and analysis of our results of operations, we combine our Retail segment results with revenues and expenses in the “Corporate/Other” column of our segment reporting footnote, which also includes our Canadian operations (collectively, the “Retail Business”). We analyze our results of operations through earnings before interest and income taxes for our Retail Business and Credit, while interest expense and income taxes are discussed on a total company basis.
Similar to many other retailers, Nordstrom follows the retail 4-5-4 reporting calendar, which included an extra week in the fourth quarter of 2012 (the “53rd week”). The analysis of our results of operations, liquidity and capital resources compares the 52 weeks in 2013 to the 53 weeks in 2012. However, the 53rd week is not included in same-store sales calculations. In 2012, the 53rd week contributed approximately $0.04 to earnings per diluted share.
As discussed in Note 1: Nature of Operations and Summary of Significant Accounting Policies and Note 16: Segment Reporting in the Notes to Consolidated Financial Statements, beginning in the first quarter of 2013, we reclassified amounts in our financial statements to better reflect the way we view and measure our business. As we continue to execute our long-term growth strategy and make investments across operating segments, aligning expenses with the associated benefits enhances our ability to evaluate segment performance. Historical results were also reclassified to match the current period presentation. These reclassifications did not impact net earnings, earnings per share, financial position or cash flows.
We now allocate Nordstrom Rewards loyalty program expenses to our Retail Business. We previously recorded all Nordstrom Rewards expenses in our Credit segment. In addition, certain technology expenses we previously included in our Retail Business are now allocated to our Credit segment. These changes within our Retail Business and Credit segment did not impact the presentation of expenses in our consolidated financial statements. In our Credit segment, we previously presented bad debt expense associated with finance charges and fees as part of selling, general and administrative expenses. We reclassified these amounts and now present them as a reduction of credit card revenue.
Retail Business
Summary
The following table summarizes the results of our Retail Business for the past three years:
Fiscal year | 2013 | 2012 | 2011 | ||||||||||||||||||
Amount | % of net sales1 | Amount | % of net sales1 | Amount | % of net sales1 | ||||||||||||||||
Net sales | $12,166 | 100.0 | % | $11,762 | 100.0 | % | $10,497 | 100.0 | % | ||||||||||||
Cost of sales and related buying and occupancy costs | (7,732 | ) | (63.6 | %) | (7,427 | ) | (63.1 | %) | (6,588 | ) | (62.8 | %) | |||||||||
Gross profit | 4,434 | 36.4 | % | 4,335 | 36.9 | % | 3,909 | 37.2 | % | ||||||||||||
Selling, general and administrative expenses | (3,272 | ) | (26.9 | %) | (3,172 | ) | (27.0 | %) | (2,808 | ) | (26.7 | %) | |||||||||
Earnings before interest and income taxes | $1,162 | 9.6 | % | $1,163 | 9.9 | % | $1,101 | 10.5 | % | ||||||||||||
1 Subtotals and totals may not foot due to rounding.
16
Retail Business Net Sales
Fiscal year | 2013 | 2012 | 2011 | ||||||||
Net sales by channel: | |||||||||||
Nordstrom full-line stores | $7,705 | $7,964 | $7,513 | ||||||||
Direct | 1,622 | 1,269 | 913 | ||||||||
Nordstrom | 9,327 | 9,233 | 8,426 | ||||||||
Nordstrom Rack | 2,738 | 2,445 | 2,045 | ||||||||
HauteLook and Jeffrey | 330 | 271 | 185 | ||||||||
Total Retail segment | 12,395 | 11,949 | 10,656 | ||||||||
Corporate/Other | (229 | ) | (187 | ) | (159 | ) | |||||
Total net sales | $12,166 | $11,762 | $10,497 | ||||||||
Net sales increase | 3.4 | % | 12.1 | % | 12.7 | % | |||||
Same-store sales increase by channel1: | |||||||||||
Nordstrom full-line stores | (2.1 | %) | 3.9 | % | 6.0 | % | |||||
Direct | 29.5 | % | 37.1 | % | 29.5 | % | |||||
Nordstrom | 2.3 | % | 7.5 | % | 8.2 | % | |||||
Nordstrom Rack | 2.7 | % | 7.4 | % | 3.7 | % | |||||
HauteLook | 27.3 | % | — | — | |||||||
Total | 2.5 | % | 7.3 | % | 7.2 | % | |||||
Sales per square foot2 | $474 | $470 | $431 | ||||||||
4-wall sales per square foot2 | $408 | $417 | $394 | ||||||||
Full-line sales per square foot2 | $372 | $385 | $365 | ||||||||
Nordstrom Rack sales per square foot2 | $553 | $568 | $545 | ||||||||
Percentage of net sales by merchandise category: | |||||||||||
Women’s Apparel | 31 | % | 31 | % | 33 | % | |||||
Shoes | 23 | % | 23 | % | 23 | % | |||||
Men’s Apparel | 16 | % | 16 | % | 15 | % | |||||
Women’s Accessories | 14 | % | 13 | % | 12 | % | |||||
Cosmetics | 11 | % | 11 | % | 11 | % | |||||
Kids’ Apparel | 3 | % | 3 | % | 3 | % | |||||
Other | 2 | % | 3 | % | 3 | % | |||||
Total | 100 | % | 100 | % | 100 | % | |||||
1 Same-store sales include sales from stores that have been open at least one full year at the beginning of the year. Fiscal year 2012 includes an extra week (the 53rd week) in the fourth quarter as a result of our 4-5-4 retail reporting calendar. The 53rd week is not included in same-store sales calculations. We also include sales from our Nordstrom online store in same-store sales because of the integration of our Nordstrom full-line stores and online store as well as HauteLook beginning in 2013.
2 Sales per square foot is calculated as net sales 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. 4-wall sales per square foot is calculated as sales for Nordstrom full-line, Nordstrom Rack and Jeffrey stores divided by their weighted-average square footage.
NET SALES – 2013 VS 2012
Our total net sales increase of 3.4% for 2013 was attributable to the same-store sales increase of 2.5%, driven by growth in our Direct channel and Nordstrom Rack’s accelerated store expansion. During the year, we opened 22 new Nordstrom Rack stores and relocated one Nordstrom full-line store and two Nordstrom Rack stores. These additions increased our square footage by 2.9% and represented 1.6% of our total net sales for 2013. The 53rd week in 2012 contributed approximately $162 in additional net sales.
Nordstrom net sales, which consist of the full-line and Direct businesses, were $9,327 in 2013, an increase of 1.0% compared with 2012, with same-store sales up 2.3%. Strong growth in our Direct channel was partially offset by sales decreases at our full-line stores. Both the average selling price and number of items sold increased on a same-store basis in 2013 compared with 2012. Category highlights included Cosmetics, Men’s Shoes and Women’s Apparel.
Nordstrom, Inc. and subsidiaries 17
Full-line net sales for 2013 were $7,705, a decrease of 3.3% compared with 2012, while sales per square foot decreased 3.4%. Both were primarily driven by a same-store sales decrease of 2.1%. The top-performing geographic regions for full-line stores for 2013 were the Southwest and Southeast. The Direct channel continued to show strong sales growth with net sales of $1,622, an increase of 28% compared with 2012, with same-store sales up 30% on a comparable 52-week basis. These increases were driven by expanded merchandise selection and ongoing technology investments to enhance the customer experience.
Nordstrom Rack net sales were $2,738, an increase of 12.0% compared with 2012 primarily due to 37 new store openings in the last two years. Same-store sales increased 2.7% for the year. Sales per square foot decreased 2.6% for the year as a result of the 53rd week in 2012, as well as the growth in new stores that typically take several years to reach the overall average of our mature stores. Cosmetics and Shoes were the strongest-performing categories for the year. Both the average selling price and the number of items sold on a same-store basis increased in 2013 compared with 2012.
NET SALES – 2012 VS 2011
Net sales for 2012 increased 12.1% compared with 2011, driven by a same-store sales increase of 7.3% and strong performances across all channels. During 2012, we opened one Nordstrom full-line store, 15 Nordstrom Rack stores and relocated three Nordstrom Rack stores. These additions represented 1.5% of our total net sales for 2012, and increased our square footage by 2.2%. The 53rd week contributed approximately $162 in additional net sales.
Nordstrom net sales for 2012 were $9,233, an increase of 9.6% compared with 2011, with same-store sales up 7.5%. Our sales growth was due in large part to the ongoing, consistent strength of our business both in store and online. Both the number of items sold and the average selling price increased on a same-store basis in 2012 compared with 2011. Category highlights included Handbags, Men’s Shoes, Men’s Apparel and Cosmetics.
Full-line net sales for 2012 were $7,964, an increase of 6.0% compared with 2011, while sales per square foot increased 5.5%. Same-store sales increased 3.9% for the year. The top-performing geographic regions for full-line stores for 2012 were the South and Midwest. The Direct channel showed strong sales growth with net sales of $1,269, an increase of 39% compared with 2011, with same-store sales up 37% on a comparable 52-week basis.
Nordstrom Rack net sales were $2,445, up 20% compared with 2011, while sales per square foot increased 4.2%. Same-store sales increased 7.4% for the year. Men’s Apparel, Shoes and Women’s Apparel were the strongest-performing categories for the year. Both the number of items sold and the average selling price increased on a same-store basis in 2012 compared with 2011.
Retail Business Gross Profit
Fiscal year | 2013 | 2012 | 2011 | ||||||||
Gross profit1 | $4,434 | $4,335 | $3,909 | ||||||||
Gross profit as a % of net sales | 36.4 | % | 36.9 | % | 37.2 | % | |||||
Ending inventory per square foot | $58.84 | $53.77 | $46.41 | ||||||||
Inventory turnover rate2 | 5.07 | 5.37 | 5.56 | ||||||||
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 – 2013 VS 2012
Our gross profit rate decreased 41 basis points compared with 2012 primarily due to higher expenses associated with the growth in the Nordstrom Rewards customer loyalty program and higher occupancy costs related to our Nordstrom Rack’s accelerated store expansion. The Nordstrom Rewards loyalty program continues to play an important role in reaching new customers and strengthening existing customer relationships. The growth in Nordstrom Rack stores resulted in a higher occupancy expense as sales volume at new stores typically take several years to reach the average of our mature stores and also have substantial pre-opening costs. Retail gross profit increased $99 in 2013 compared with 2012 due to an increase in net sales at Direct and Nordstrom Rack. This was partially offset by a decrease in full-line net sales and increased occupancy costs related to Nordstrom Rack’s accelerated store expansion.
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Our inventory turnover rate decreased to 5.07 times in 2013, from 5.37 times in 2012. This was primarily due to our increased investment in pack and hold inventory at Nordstrom Rack, which helped fuel the growth in that channel. We began increasing our pack and hold inventory investment in 2012, which involves the acquisition of merchandise from some of our top brands in advance of the upcoming selling seasons in order to take advantage of strategic buying opportunities. We hold this inventory in our warehouses for six months on average until the next selling season and it represented approximately 11%, 9% and 3% of our total inventory at the end of 2013, 2012 and 2011. On a per square foot basis, we ended the year with a 9.4% increase in our ending inventory on a 0.8% increase in sales compared with 2012. The increase in ending inventory per square foot relative to the increase in sales per square foot was primarily due to the impact of the 53rd week in 2012, which decreased inventory levels in our full-line stores and included an additional week of sales in 2012. In 2013, we also planned inventory increases in full-line stores to fuel growth in well-performing merchandise categories and increased our pack and hold inventory at Nordstrom Rack.
GROSS PROFIT – 2012 VS 2011
Our retail gross profit rate decreased 38 basis points compared with 2011 primarily due to accelerated Nordstrom Rack growth and higher expenses associated with the growth in the Nordstrom Rewards program. Retail gross profit increased $426 in 2012 compared with 2011 primarily due to our strong sales performance, partially offset by increases in occupancy costs for our investments in new stores and remodeling of existing stores.
Retail Business Selling, General and Administrative Expenses
Fiscal year | 2013 | 2012 | 2011 | ||||||||
Selling, general and administrative expenses | $3,272 | $3,172 | $2,808 | ||||||||
Selling, general and administrative expenses as a % of net sales | 26.9 | % | 27.0 | % | 26.7 | % | |||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES – 2013 VS 2012
Our Retail selling, general and administrative expenses (“Retail SG&A”) rate decreased 8 basis points in 2013 compared with 2012 due to expense leverage from increased sales volume. Our Retail SG&A increased $100 in 2013 compared with 2012 due primarily to growth-related investments in our e-commerce business, Nordstrom Rack’s accelerated store expansion and our planned entry into Canada. The increase also reflected expenses associated with higher sales volume and the opening of 22 new Nordstrom Rack stores in 2013.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES – 2012 VS 2011
Our Retail SG&A rate increased 23 basis points in 2012 compared with 2011 due to the investments we made to improve the customer experience across all channels and specifically in our e-commerce business as we expanded our capabilities and increased the speed of fulfillment and delivery. This was partially offset by leverage on increased sales. Our Retail SG&A expenses increased $364 in 2012 compared with 2011 due to the increased investments, higher sales volume and opening 16 stores in 2012.
Nordstrom, Inc. and subsidiaries 19
Credit Segment
The Nordstrom credit and debit card products are designed to strengthen customer relationships and grow retail sales by providing loyalty benefits, valuable services and payment products. We believe our credit business allows us to build deeper relationships with our customers by fully integrating our rewards program with our retail stores and providing better service, which in turn fosters greater customer loyalty. Our cardholders tend to visit our stores more frequently and spend more with us than non-cardholders. Our Nordstrom private label credit and debit cards can be used only at our Nordstrom full-line stores, Nordstrom Rack stores and online at Nordstrom.com (“inside volume”), while our Nordstrom VISA cards also may be used for purchases outside of Nordstrom (“outside volume”). Cardholders participate in the Nordstrom Rewards program through which cardholders accumulate points for their purchases. Upon reaching a certain points threshold, cardholders receive Nordstrom Notes®, which can be redeemed for goods or services at Nordstrom full-line stores, Nordstrom Rack and online at Nordstrom.com. Nordstrom Rewards customers receive reimbursement for alterations, get Personal Triple Points days and have early access to sales events. With increased spending, they 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, which represents the estimated costs that would be incurred if our cardholders used third-party cards instead of ours.
Interest expense at the Credit segment is equal to the amount of interest related to securitized debt plus an amount assigned to the Credit segment in proportion to the estimated debt and equity needed to fund our credit card receivables. Based on our research, debt as a percentage of credit card receivables for other credit card companies ranges from 70% to 90%. As such, we believe a mix of 80% debt and 20% equity is appropriate, and therefore assign interest expense to the Credit segment as if it carried debt of up to 80% of the credit card receivables. Our average credit card receivable investment metric below represents the remaining 20% to fund our credit card receivables.
Fiscal year | 2013 | 2012 | 2011 | ||||||||||||||||||
Amount | % of average credit card receivables1 | Amount | % of average credit card receivables1 | Amount | % of average credit card receivables1 | ||||||||||||||||
Credit card revenues | $374 | 17.7 | % | $372 | 17.9 | % | $363 | 17.7 | % | ||||||||||||
Credit expenses | (186 | ) | (8.8 | %) | (190 | ) | (9.1 | %) | (215 | ) | (10.5 | %) | |||||||||
Credit segment earnings before income taxes, as presented in segment disclosure | 188 | 8.9 | % | 182 | 8.8 | % | 148 | 7.2 | % | ||||||||||||
Interest expense | (24 | ) | (1.2 | %) | (26 | ) | (1.2 | %) | (13 | ) | (0.7 | %) | |||||||||
Intercompany merchant fees | 97 | 4.6 | % | 89 | 4.3 | % | 71 | 3.5 | % | ||||||||||||
Credit segment contribution, before income taxes | $261 | 12.4 | % | $245 | 11.8 | % | $206 | 10.0 | % | ||||||||||||
Credit and debit card volume2: | |||||||||||||||||||||
Outside | $4,273 | $4,305 | $4,101 | ||||||||||||||||||
Inside | 4,935 | 4,484 | 3,596 | ||||||||||||||||||
Total volume | $9,208 | $8,789 | $7,697 | ||||||||||||||||||
Average credit card receivables | $2,108 | $2,076 | $2,047 | ||||||||||||||||||
Average credit card receivable investment | $422 | $415 | $409 | ||||||||||||||||||
Credit segment contribution3 | 38.2 | % | 36.6 | % | 30.6 | % | |||||||||||||||
1 Subtotals and totals may not foot due to rounding.
2 Volume represents sales plus applicable taxes.
3 Credit segment contribution, net of tax, calculated as a percentage of our average credit card receivable investment.
20
Credit Card Revenues
Fiscal year | 2013 | 2012 | 2011 | ||||||||
Finance charge revenue | $244 | $246 | $240 | ||||||||
Interchange — third party | 86 | 84 | 82 | ||||||||
Late fees and other revenue | 44 | 42 | 41 | ||||||||
Total Credit card revenues | $374 | $372 | $363 | ||||||||
Credit card revenues include finance charges, interchange fees, late fees and other revenue. Finance charges represent interest earned on unpaid balances while interchange fees are earned from the use of Nordstrom VISA credit cards at merchants outside of Nordstrom. Late fees are assessed when a credit card account becomes past due. We consider an account delinquent if the minimum payment is not received by the payment due date. Credit card revenues are recorded net of estimated uncollectible finance charges and fees.
CREDIT CARD REVENUES – 2013 VS 2012
Credit card revenues were flat compared with 2012. This was due to growth in total volume that was offset by continued improvements in cardholder payment rates.
CREDIT CARD REVENUES – 2012 VS 2011
Credit card revenues increased $9 in 2012 compared with 2011 primarily due to an extra week (the 53rd week) of revenue in 2012 as a result of our 4-5-4 retail reporting calendar. The increase was also due to growth in total volume that was offset by continued improvements in cardholder payment rates. Our average credit card receivable balance in 2012 was $2,076, a decrease of $29, or 1.4%, from 2011.
Credit Expenses
Fiscal year | 2013 | 2012 | 2011 | ||||||||
Operational expenses | $129 | $143 | $127 | ||||||||
Bad debt expense | 52 | 42 | 84 | ||||||||
Occupancy expenses | 5 | 5 | 4 | ||||||||
Total Credit expenses | $186 | $190 | $215 | ||||||||
CREDIT EXPENSES – 2013 VS 2012
Total Credit expenses decreased $4 in 2013 compared with 2012, due to lower operational and marketing expenses resulting primarily from the conversion of our Nordstrom Rewards travel benefit into Nordstrom Notes during 2013. Bad debt expense was lower in 2012 due to the $30 reduction of our allowance for credit losses in 2012 compared to a $5 reduction in 2013. We experienced continued improvement in our portfolio delinquencies and write-off results during 2013, which are further discussed below.
CREDIT EXPENSES – 2012 VS 2011
Total Credit expenses decreased $25 in 2012 compared with 2011, primarily due to lower bad debt expense, partially offset by higher operational expenses. The decrease in bad debt expense reflected continued improvement in our portfolio and overall economic trends. Operational and marketing expenses increased primarily due to increased account acquisition expenses.
Nordstrom, Inc. and subsidiaries 21
Allowance for Credit Losses and Credit Trends
The following table illustrates activity in the allowance for credit losses:
Fiscal year | 2013 | 2012 | 2011 | ||||||||
Allowance at beginning of year | $85 | $115 | $145 | ||||||||
Bad debt expense | 52 | 42 | 84 | ||||||||
Write-offs | (80 | ) | (97 | ) | (136 | ) | |||||
Recoveries | 23 | 25 | 22 | ||||||||
Allowance at end of year | $80 | $85 | $115 | ||||||||
Net write-offs as a percentage of average credit card receivables | 2.7 | % | 3.5 | % | 5.4 | % | |||||
Net write-offs (including finance charges and fees) as a percentage of average credit card receivables | 3.2 | % | 4.1 | % | 6.3 | % | |||||
30 days or more delinquent as a percentage of ending credit card receivables | 1.8 | % | 1.9 | % | 2.6 | % | |||||
Allowance as a percentage of ending credit card receivables | 3.7 | % | 4.0 | % | 5.5 | % | |||||
CREDIT TRENDS
During 2013, our delinquency and net write-off results continued to improve. Net write-offs in 2013 were $57, compared with $72 in 2012 and $114 in 2011. As delinquencies and net write-offs improved in both 2013 and 2012, we reduced our allowance for credit losses by $5 in 2013 and $30 in 2012.
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 February 1, 2014, 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 78.3% as of February 2, 2013. See Note 3: Accounts Receivable in Item 8: Financial Statements and Supplementary Data for additional information.
Intercompany Merchant Fees
Intercompany merchant fees represent the estimated costs that would be incurred if our cardholders used third-party cards in our Nordstrom stores and online. In 2013, this estimate increased to $97 or 4.6% of average credit card receivables from $89 or 4.3% in 2012. This was primarily driven by the increased use of our credit and debit cards in store and online, as reflected by an increase in inside volume as a percent of total volume from 51.0% in 2012 to 53.6% in 2013.
Total Company Results
Interest Expense, Net
Fiscal year | 2013 | 2012 | 2011 | ||||||||
Interest on long-term debt and short-term borrowings | $176 | $167 | $139 | ||||||||
Less: | |||||||||||
Interest income | (1 | ) | (2 | ) | (2 | ) | |||||
Capitalized interest | (14 | ) | (5 | ) | (7 | ) | |||||
Interest expense, net | $161 | $160 | $130 | ||||||||
INTEREST EXPENSE, NET – 2013 VS 2012
Interest expense, net increased $1 in 2013 compared with 2012 due to $14 in non-recurring charges related to the debt refinancing, partially offset by an increase in capitalized interest resulting primarily from planned capital investments related to our Manhattan store and accelerated Nordstrom Rack growth. See further discussion of our debt retirement and exchange transaction at Note 8: Debt and Credit Facilities in Item 8: Financial Statements and Supplementary Data.
INTEREST EXPENSE, NET – 2012 VS 2011
Interest expense, net increased $30 in 2012 compared with 2011 due to higher average interest rates and higher average debt balances.
22
Income Tax Expense
Fiscal year | 2013 | 2012 | 2011 | ||||||||
Income tax expense | $455 | $450 | $436 | ||||||||
Effective tax rate | 38.3 | % | 38.0 | % | 39.0 | % | |||||
The following table illustrates the components of our effective tax rate for 2013, 2012 and 2011:
Fiscal year | 2013 | 2012 | 2011 | |||||
Statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||
State and local income taxes, net of federal income taxes | 3.6 | 3.6 | 3.6 | |||||
Non-taxable acquisition-related items | — | — | 0.6 | |||||
Other, net | (0.3 | ) | (0.6 | ) | (0.2 | ) | ||
Effective tax rate | 38.3 | % | 38.0 | % | 39.0 | % | ||
INCOME TAX EXPENSE – 2013 VS 2012
The increase in the effective tax rate for 2013 compared with 2012 was primarily due to changes in our estimated state tax reserves.
INCOME TAX EXPENSE – 2012 VS 2011
The decrease in the effective tax rate for 2012 compared with 2011 was primarily due to the impact of non-taxable HauteLook acquisition-related expenses in 2011, including a goodwill impairment.
Fourth Quarter Results
Quarter ended | February 1, 2014 | February 2, 2013 | |||||
Net sales | $3,614 | $3,596 | |||||
Credit card revenues | 97 | 102 | |||||
Gross profit | 1,345 | 1,357 | |||||
Gross profit (% of net sales) | 37.2 | % | 37.8 | % | |||
Retail SG&A expenses | (918 | ) | (917 | ) | |||
Retail SG&A (% of net sales) | (25.4 | %) | (25.5 | %) | |||
Credit expenses | (38 | ) | (46 | ) | |||
Net earnings | 268 | 284 | |||||
Earnings per diluted share | $1.37 | $1.40 | |||||
Nordstrom’s fourth quarter performance reflected the trends we saw throughout the year. We continued to make progress executing our customer strategy through investments to drive growth across channels, while maintaining disciplined execution around inventory and expenses. Net earnings for the fourth quarter of 2013 were $268, or $1.37 per diluted share, compared with $284, or $1.40 per diluted share, in 2012. Earnings per diluted share for the fourth quarter of 2013 included $0.04 per diluted share of non-recurring expenses related to our debt refinancing. Additionally, the 53rd week in 2012 contributed approximately $0.04 to earnings per diluted share.
Nordstrom, Inc. and subsidiaries 23
NET SALES
Total net sales increased in the fourth quarter by 0.5% driven by a same-store sales increase of 2.6%, and partially offset by the impact of the 53rd week, which contributed approximately $162 in additional net sales in 2012.
Nordstrom net sales, which consist of the full-line and Direct businesses, for the fourth quarter of 2013 decreased $50, or 1.7% compared with the same period in 2012, while same-store sales increased 2.2%. Both the number of items sold and the average selling price of our merchandise on a same-store basis increased for the fourth quarter of 2013, compared with the same period last year. Category highlights for the quarter were Cosmetics, Accessories and Men's Shoes. Momentum continued in Women’s Apparel, which outperformed the Nordstrom average for the quarter.
Full-line net sales for the quarter decreased $171, or 7.1% compared with the same period in 2012, with a decrease in same-store sales of 3.3%. The top-performing geographic regions for full-line stores for the quarter were the Southwest and Southeast. Direct net sales increased $121 in the fourth quarter compared with the same period last year, while same-store sales increased 30% on top of last year’s 31% increase for the same period, driven by expanded merchandise selection and ongoing technology investments to enhance the customer experience.
Nordstrom Rack net sales for the quarter increased $71, or 10.2%, reflecting 22 new Nordstrom Rack store openings in 2013, while same-store sales increased 3.6% compared with the fourth quarter of 2012. Both the number of items sold and the average selling price of Nordstrom Rack merchandise on a same-store basis increased for the quarter, compared with the same period in the prior year. Accessories, Cosmetics and Shoes were the category highlights for Nordstrom Rack.
GROSS PROFIT
Our total company gross profit rate decreased 55 basis points compared with the same period in the prior year, primarily due to heightened promotional activity during the holidays and higher occupancy costs related to Nordstrom Rack’s accelerated store expansion. Sales per square foot decreased 2.4% compared with the same period in fiscal 2012, but increased 2.2% when excluding last year’s 53rd week. Ending inventory per square foot increased 9.4% compared with the same period in fiscal 2012, outpacing the adjusted increase in sales per square foot. This was primarily attributable to the planned investment in pack and hold inventory at Nordstrom Rack, which represented 11% of total inventory at the end of fiscal 2013, compared with 9% in fiscal 2012. The increase also reflected planned inventory increases in full-line stores to fuel growth in well-performing merchandise categories.
RETAIL SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Our Retail SG&A rate decreased 8 basis points primarily due to lower selling expenses, partially offset by growth-related investments for the planned entry into Canada and for Nordstrom Rack’s accelerated store expansion. Selling, general and administrative expenses for our Retail Business increased $1 compared with last year’s fourth quarter. The increase was primarily attributable to higher fulfillment costs, partially offset by lower selling expenses and an additional week of expenses in 2012 due to the 53rd week.
CREDIT EXPENSES
In the fourth quarter, expenses for our Credit segment of $38 decreased from $46 in the prior year. The decrease was primarily driven by lower operational and marketing expenses from the conversion of our Nordstrom Rewards travel benefit into Nordstrom Notes during the fourth quarter of 2013.
For further information on our quarterly results in 2013 and 2012, refer to Note 17: Selected Quarterly Data in the Notes to Consolidated Financial Statements in Item 8: Financial Statements and Supplementary Data.
24
2014 Outlook
Our expectations for 2014 are as follows:
Total sales | 5.5 to 7.5 percent increase |
Same-store sales | 2 to 4 percent increase |
Credit card revenues | $0 to $5 increase |
Gross profit rate1 | 10 to 30 basis point decrease |
Selling, general and administrative expenses (% of net sales) | 10 to 30 basis point increase |
Interest expense, net | Approximately $25 decrease |
Effective tax rate | 39.0 percent |
Earnings per diluted share2 | $3.75 to $3.90 |
Diluted shares outstanding2 | Approximately 196 million |
1 Gross profit is calculated as net sales less cost of sales and related buying and occupancy costs (for all segments).
2 This outlook does not include the impact of any future share repurchases.
Capital expenditures, net of property incentives, of $840 to $880 million are expected in 2014, an increase from $714 in 2013. The majority of the increase represents investments to fuel online and Nordstrom Rack store growth in addition to our planned entry into Canada. To date in 2014, we have opened two Nordstrom Rack stores. We plan to open 27 Nordstrom Rack stores and three Nordstrom full-line stores in total during 2014. In February 2014, we announced our plans to close our full-line stores in Vancouver, Washington, and in Portland, Oregon, at the Lloyd Center, in January 2015. The planned net store openings are expected to increase our retail square footage by approximately 4.4%.
We expect our planned entry into Canada to decrease earnings primarily due to ongoing infrastructure and pre-opening expenses. The estimated loss before interest and taxes for Canada is expected to be approximately $35 in 2014, compared with a loss before interest and taxes of $14 in 2013. This guidance also incorporates Nordstrom Rack’s accelerated store expansion and increased technology investments to improve service and experience across all channels. These expenses are expected to contribute to our overall increase in depreciation and rent expense of 14% compared with 2013.
Interest expense, net is expected to decrease primarily due to a one-time charge of $14 related to the debt refinancing transaction in 2013.
Nordstrom, Inc. and subsidiaries 25
Return on Invested Capital (“ROIC”) (Non-GAAP financial measure)
We believe that ROIC is a useful financial measure for investors in evaluating the efficiency and effectiveness of our use of capital and believe ROIC is an important component of shareholders’ return over the long term. In addition, we incorporate ROIC in our executive incentive compensation measures. For the 12 fiscal months ended February 1, 2014, our ROIC decreased to 13.6% compared with 13.9% for the 12 fiscal months ended February 2, 2013. Our ROIC decreased compared with the prior year primarily due to an increase in our invested capital as a result of expansion into Manhattan and accelerated Nordstrom Rack store growth.
ROIC is not a measure of financial performance under generally accepted accounting principles (“GAAP”) and should be considered in addition to, and not as a substitute for, return on assets, net earnings, total assets or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to ROIC is return on assets. The following is a reconciliation of the components of ROIC and return on assets:
12 Fiscal months ended | |||||||||||||||||||
February 1, 2014 | February 2, 2013 | January 28, 2012 | January 29, 2011 | January 30, 2010 | |||||||||||||||
Net earnings | $734 | $735 | $683 | $613 | $441 | ||||||||||||||
Add: income tax expense | 455 | 450 | 436 | 378 | 255 | ||||||||||||||
Add: interest expense | 162 | 162 | 132 | 128 | 138 | ||||||||||||||
Earnings before interest and income tax expense | 1,351 | 1,347 | 1,251 | 1,119 | 834 | ||||||||||||||
Add: rent expense | 125 | 105 | 78 | 62 | 43 | ||||||||||||||
Less: estimated depreciation on capitalized operating leases1 | (67 | ) | (56 | ) | (42 | ) | (32 | ) | (23 | ) | |||||||||
Net operating profit | 1,409 | 1,396 | 1,287 | 1,149 | 854 | ||||||||||||||
Estimated income tax expense2 | (539 | ) | (530 | ) | (501 | ) | (439 | ) | (313 | ) | |||||||||
Net operating profit after tax | $870 | $866 | $786 | $710 | $541 | ||||||||||||||
Average total assets3 | $8,398 | $8,274 | $7,890 | $7,091 | $6,197 | ||||||||||||||
Less: average non-interest-bearing current liabilities4 | (2,430 | ) | (2,262 | ) | (2,041 | ) | (1,796 | ) | (1,562 | ) | |||||||||
Less: average deferred property incentives3 | (489 | ) | (494 | ) | (504 | ) | (487 | ) | (462 | ) | |||||||||
Add: average estimated asset base of capitalized operating leases5 | 929 | 724 | 555 | 425 | 311 | ||||||||||||||
Average invested capital | $6,408 | $6,242 | $5,900 | $5,233 | $4,484 | ||||||||||||||
Return on assets | 8.7 | % | 8.9 | % | 8.7 | % | 8.6 | % | 7.1 | % | |||||||||
ROIC | 13.6 | % | 13.9 | % | 13.3 | % | 13.6 | % | 12.1 | % | |||||||||
1 Capitalized operating leases is our best estimate of the asset base we would record for our leases that are classified as operating if they had met the criteria for a capital lease, or we had purchased the property. Asset base is calculated as described in footnote 5 below.
2 Based upon our effective tax rate multiplied by the net operating profit for the 12 fiscal months ended February 1, 2014, February 2, 2013, January 28, 2012, January 29, 2011 and January 30, 2010.
3 Based upon the trailing 12-month average.
4 Based 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. The asset base for each month is calculated as the trailing 12-months of rent expense multiplied by eight. The multiple of eight times rent expense is a commonly used method of estimating the asset base we would record for our capitalized operating leases described in footnote 1.
26
LIQUIDITY AND CAPITAL RESOURCES
We strive to 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 that as of February 1, 2014, our existing cash and cash equivalents on-hand of $1,194, available credit facilities of $800 and potential future operating cash flows and borrowings will be sufficient to fund these scheduled future payments and potential long-term initiatives.
Operating Activities
Net cash provided by operating activities was $1,320 in 2013 and $1,110 in 2012. 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-term and long-term borrowings.
Cash provided by operating activities increased in 2013 compared with 2012, resulting from less state tax payments made in 2013 due to additional payments made in 2012 as a result of the 53rd week, along with increased property incentives received from developers and changes in working capital.
Investing Activities
Net cash used in investing activities was $822 in 2013 and $369 in 2012. Our investing cash flows primarily consist of capital expenditures, changes in restricted cash accumulated for debt maturities 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 $1,827, with $803 in 2013, $513 in 2012 and $511 in 2011.
Capital expenditures increased in 2013 compared with 2012 as we continued to make progress executing our customer strategy through increased investments in technology, e-commerce, remodels and new stores, including Nordstrom Rack and our Manhattan full-line store. The following table summarizes our store count and square footage activity:
Store count | Square footage | |||||||||||||||||
Fiscal year | 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | ||||||||||||
Total, beginning of year | 240 | 225 | 204 | 25.3 | 24.7 | 23.8 | ||||||||||||
Store openings: | ||||||||||||||||||
Nordstrom full-line stores | — | 1 | 3 | — | 0.1 | 0.4 | ||||||||||||
Nordstrom Rack and other stores | 22 | 15 | 19 | 0.7 | 0.6 | 0.7 | ||||||||||||
Closed stores | (2 | ) | (1 | ) | (1 | ) | — | (0.1 | ) | (0.2 | ) | |||||||
Total, end of year | 260 | 240 | 225 | 26.0 | 25.3 | 24.7 | ||||||||||||
We relocated one Nordstrom full-line store and two Nordstrom Rack stores in 2013, compared with three Nordstrom Rack relocations in 2012. Our 2013 new store openings and relocations increased our square footage by 2.9%.
To date in 2014, we have opened two Nordstrom Rack stores. We plan to open 27 Nordstrom Rack stores and three full-line stores in 2014. In February 2014, we announced our plans to close our full-line stores in Vancouver, Washington, and in Portland, Oregon, at the Lloyd Center, in January 2015. The planned net store openings are expected to increase our retail square footage by approximately 4.4%.
Nordstrom, Inc. and subsidiaries 27
We received property incentives from our developers of $89 in 2013, $58 in 2012 and $78 in 2011. These incentives are included in our cash provided by operations in our Consolidated Statements of Cash Flows in Item 8: Financial Statements and Supplementary Data. 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 | 2013 | 2012 | 2011 | |||||
Category and expenditure percentage: | ||||||||
New store openings, relocations and remodels | 62 | % | 54 | % | 62 | % | ||
Information technology | 27 | % | 27 | % | 20 | % | ||
Other | 11 | % | 19 | % | 18 | % | ||
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.
We expect to significantly increase our capital expenditures, net of property incentives, over the next five years to approximately $3,900, compared with $2,200 over the previous five years. We plan to spend approximately $840 to $880 in 2014 compared with $714 in 2013. Both of these increases are primarily due to technology initiatives and our planned entrance into new markets such as Canada, as well as new Nordstrom Rack and full-line stores. In addition, the growth in capital expenditures over the next five years includes costs for our Manhattan store. Over these next five years, we expect that approximately 44% of our net capital expenditures will be for new store openings, relocations, remodels and other with an additional