JWN-Q3 2014-10Q
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 1, 2014
or
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to___________
Commission File Number: 001-15059
NORDSTROM, INC.
(Exact name of registrant as specified in its charter)
 
Washington
 
91-0515058
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1617 Sixth Avenue, Seattle, Washington
 
98101
(Address of principal executive offices)
 
(Zip Code)
206-628-2111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o  (Do not check if a smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
Common stock outstanding as of November 26, 2014: 190,245,098 shares
 
 

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

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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in millions except per share amounts)
(Unaudited)
 
Quarter Ended
 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
Net sales
$
3,040

 
$
2,791

 
$
9,172

 
$
8,552

Credit card revenues
100

 
93

 
291

 
277

Total revenues
3,140

 
2,884

 
9,463

 
8,829

Cost of sales and related buying and occupancy costs
(1,961
)
 
(1,791
)
 
(5,912
)
 
(5,468
)
Selling, general and administrative expenses
(917
)
 
(840
)
 
(2,693
)
 
(2,498
)
Earnings before interest and income taxes
262

 
253

 
858

 
863

Interest expense, net
(34
)
 
(35
)
 
(104
)
 
(111
)
Earnings before income taxes
228

 
218

 
754

 
752

Income tax expense
(86
)
 
(81
)
 
(289
)
 
(286
)
Net earnings
$
142

 
$
137

 
$
465

 
$
466

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.74

 
$
0.70

 
$
2.45

 
$
2.39

Diluted
$
0.73

 
$
0.69

 
$
2.40

 
$
2.35

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
190.7

 
194.3

 
190.0

 
195.1

Diluted
194.7

 
197.3

 
193.4

 
198.3

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Amounts in millions)
(Unaudited)
 
Quarter Ended
 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
Net earnings
$
142

 
$
137

 
$
465

 
$
466

Postretirement plan adjustments, net of tax
1

 
2

 
3

 
5

Foreign currency translation adjustment
(3
)
 
—

 
(2
)
 
—

Comprehensive net earnings
$
140

 
$
139

 
$
466

 
$
471

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


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NORDSTROM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
(Unaudited)
 
November 1, 2014
 
February 1, 2014
 
November 2, 2013
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
433

 
$
1,194

 
$
947

Accounts receivable, net
2,253

 
2,177

 
2,146

Merchandise inventories
2,228

 
1,531

 
1,795

Current deferred tax assets, net
253

 
239

 
243

Prepaid expenses and other
170

 
87

 
122

Total current assets
5,337

 
5,228

 
5,253

 
 
 
 
 
 
Land, buildings and equipment (net of accumulated depreciation of $4,587, $4,395 and $4,347)
3,223

 
2,949

 
2,880

Goodwill
436

 
175

 
175

Other assets
273

 
222

 
277

Total assets
$
9,269

 
$
8,574

 
$
8,585

 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
1,673

 
$
1,263

 
$
1,448

Accrued salaries, wages and related benefits
377

 
395

 
358

Other current liabilities
950

 
876

 
821

Current portion of long-term debt
8

 
7

 
407

Total current liabilities
3,008

 
2,541

 
3,034

 
 
 
 
 
 
Long-term debt, net
3,119

 
3,106

 
2,711

Deferred property incentives, net
503

 
498

 
491

Other liabilities
365

 
349

 
361

 
 
 
 
 
 
Commitments and contingencies

 

 

 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
Common stock, no par value: 1,000 shares authorized; 190.1, 191.2 and 193.2 shares issued and outstanding
2,283

 
1,827

 
1,794

Retained earnings
29

 
292

 
236

Accumulated other comprehensive loss
(38
)
 
(39
)
 
(42
)
Total shareholders' equity
2,274

 
2,080

 
1,988

Total liabilities and shareholders' equity
$
9,269

 
$
8,574

 
$
8,585

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

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NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in millions except per share amounts)
(Unaudited)
 
 
 
 
 
 
 
Accumulated 
 
 
 
 
 
 
 
 
 
Other
 
 
 
Common Stock
 
Retained
 
Comprehensive
 
 
 
Shares
 
Amount
 
Earnings
 
Loss
 
Total
Balance at February 1, 2014
191.2

 
$
1,827

 
$
292

 
$
(39
)
 
$
2,080

Net earnings
—

 
—

 
465

 
—

 
465

Other comprehensive earnings
—

 
—

 
—

 
1

 
1

Dividends ($0.99 per share)
—

 
—

 
(189
)
 
—

 
(189
)
Issuance of common stock for Trunk Club acquisition
3.6

 
280

 
—

 
—

 
280

Issuance of common stock under stock compensation plans
3.0

 
130

 
—

 
—

 
130

Stock-based compensation
0.5

 
46

 
—

 
—

 
46

Repurchase of common stock
(8.2
)
 
—

 
(539
)
 
—

 
(539
)
Balance at November 1, 2014
190.1

 
$
2,283

 
$
29

 
$
(38
)
 
$
2,274

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Other
 
 
 
Common Stock
 
Retained
 
Comprehensive
 
 
 
Shares
 
Amount
 
Earnings
 
Loss
 
Total
Balance at February 2, 2013
197.0

 
$
1,645

 
$
315

 
$
(47
)
 
$
1,913

Net earnings
—

 
—

 
466

 
—

 
466

Other comprehensive earnings
—

 
—

 
—

 
5

 
5

Dividends ($0.90 per share)
—

 
—

 
(176
)
 
—

 
(176
)
Issuance of common stock under stock compensation plans
2.7

 
102

 
—

 
—

 
102

Stock-based compensation
0.1

 
47

 
—

 
—

 
47

Repurchase of common stock
(6.6
)
 
—

 
(369
)
 
—

 
(369
)
Balance at November 2, 2013
193.2

 
$
1,794

 
$
236

 
$
(42
)
 
$
1,988

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

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NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
Operating Activities
 
 
 
Net earnings
$
465

 
$
466

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization expenses
376

 
332

Amortization of deferred property incentives and other, net
(56
)
 
(40
)
Deferred income taxes, net
(39
)
 
(45
)
Stock-based compensation expense
48

 
47

Tax benefit from stock-based compensation
14

 
17

Excess tax benefit from stock-based compensation
(15
)
 
(19
)
Bad debt expense
28

 
44

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(94
)
 
(59
)
Merchandise inventories
(574
)
 
(385
)
Prepaid expenses and other assets
(60
)
 
(42
)
Accounts payable
314

 
354

Accrued salaries, wages and related benefits
(13
)
 
(47
)
Other current liabilities
38

 
7

Deferred property incentives
77

 
64

Other liabilities
7

 
24

Net cash provided by operating activities
516

 
718

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(616
)
 
(621
)
Change in credit card receivables originated at third parties
(10
)
 
(1
)
Other, net
(12
)
 
(9
)
Net cash used in investing activities
(638
)
 
(631
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from long-term borrowings
26

 
—

Principal payments on long-term borrowings
(5
)
 
(5
)
(Decrease) increase in cash book overdrafts
(58
)
 
29

Cash dividends paid
(189
)
 
(176
)
Payments for repurchase of common stock
(537
)
 
(374
)
Proceeds from issuances under stock compensation plans
117

 
85

Excess tax benefit from stock-based compensation
15

 
19

Other, net
(8
)
 
(3
)
Net cash used in financing activities
(639
)
 
(425
)
 
 
 
 
Net decrease in cash and cash equivalents
(761
)
 
(338
)
Cash and cash equivalents at beginning of period
1,194

 
1,285

Cash and cash equivalents at end of period
$
433

 
$
947

 
 
 
 
Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net of refunds
$
373

 
$
369

Interest, net of capitalized interest
99

 
113

 
 
 
 
Non-cash investing activities:
 
 
 
Issuance of common stock for Trunk Club acquisition
280

 
—

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

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


NOTE 1: BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the balances of Nordstrom, Inc. and its subsidiaries. All intercompany transactions and balances are eliminated in consolidation. The interim condensed consolidated financial statements have been prepared on a basis consistent in all material respects with the accounting policies described and applied in our 2013 Annual Report on Form 10-K ("Annual Report"), and reflect all adjustments of a normal recurring nature that are, in management's opinion, necessary for the fair presentation of the results of operations, financial position and cash flows for the periods presented.
The condensed consolidated financial statements as of and for the periods ended November 1, 2014 and November 2, 2013 are unaudited. The condensed consolidated balance sheet as of February 1, 2014 has been derived from the audited consolidated financial statements included in our 2013 Annual Report. The interim condensed consolidated financial statements should be read together with the consolidated financial statements and related footnote disclosures contained in our 2013 Annual Report.
The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates and assumptions.
Our business, like that of other retailers, is subject to seasonal fluctuations. Due to our Anniversary Sale in July and the holidays in December, our sales are typically higher in the second and fourth quarters than in the first and third quarters of the fiscal year. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.
Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU raises the threshold for a disposal to qualify as discontinued operations and requires new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. Under the new guidance, companies report discontinued operations when they have a disposal that represents a strategic shift that has or will have a major impact on operations or financial results. We are currently evaluating the impact, if any, the provisions of this ASU would have on our consolidated financial statements. If applicable, this ASU would be effective for us beginning in the first quarter of 2015.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The core principle of this ASU is that companies should recognize revenue when the transfer of promised goods or services to customers occurs in an amount that reflects what the company expects to receive. It requires additional disclosures to describe the nature, amount, timing, and uncertainty of revenue and cash flows from contracts with customers. This ASU is effective for us beginning with the first quarter of 2017. We are currently evaluating the impact the provisions of this ASU would have on our consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation. This ASU provides guidance on how to account for share-based payments for performance targets that could be achieved after an employee completes the requisite service period. Under the new guidance, a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. As such, the performance target is not reflected in estimating the grant-date fair value of the award. This ASU is effective for us beginning with the first quarter of 2016. We do not expect the provisions of this ASU to have a material impact on our consolidated financial statements.
NOTE 2: TRUNK CLUB ACQUISITION
On August 22, 2014, we acquired 100% of the outstanding equity of Trunk Club, a personalized clothing service for men. We believe the acquisition will enable us to provide a high-touch personalized shopping experience combined with the convenience of an online platform. This represents a natural extension of our core business, aligns with our strategic priorities around a relevant customer experience and accelerates entry into this fast-growing market.

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


The following bullets summarize of the accounting activity related to Trunk Club and provide reference to relevant disclosures throughout our 10-Q:
•
Consideration – The purchase price fair value of $357 reflects the value of our stock as of the acquisition date. Purchase price consideration is discussed in further detail below.
•
Net Assets Acquired – Of the $357 purchase price fair value, $46 is compensation expense and subject to future performance and vesting. The remaining net purchase price consideration of $311 is allocated to the tangible and intangible assets acquired and liabilities assumed. The net asset allocation is discussed in further detail below.
•
Issuance of Nordstrom Common Stock – 3.6 shares of Nordstrom common stock were issued in the third quarter as part of the acquisition purchase price. Additional shares will be issued, either to be earned as future compensation or associated with adjustment and indemnity holdback releases. Stock issued is discussed in further detail below and also reflected in our Condensed Consolidated Statements of Shareholders' Equity.
•
Issuance of Nordstrom Stock Awards – Trunk Club employees received Nordstrom stock awards in exchange for previously held Trunk Club awards and stock. Stock awards are discussed in further detail within Note 8: Stock-Based Compensation.
•
Long-term Incentive Plan – A long-term incentive plan (the "Value Creation Plan") was created to incentivize certain Trunk Club employees to increase the value of the Trunk Club business. The accounting for this plan is discussed in further detail within Note 8: Stock-Based Compensation.
Trunk Club's financial results have been included in our consolidated statements from the date of acquisition forward, and were not material to our consolidated results for the quarter or nine months ended November 1, 2014. We have not presented pro forma results of operations for any periods prior to the acquisition, as Trunk Club's results of operations were not material to our consolidated results.
The components of the purchase price consideration and the net assets acquired as of the acquisition date are as follows:
 
August 22, 2014
Purchase Price Consideration
 
Purchase price fair value
$
357

Less: post-combination compensation expense
(46
)
Net purchase price
$
311

 
 
Net Assets Acquired
 
Current assets
$
21

Intangible assets:
 
Trade names
47

Technology
7

Customer relationships
5

Goodwill
261

Other non-current assets
2

Total assets acquired
343

Less: total liabilities assumed
(32
)
Net assets acquired
$
311


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


Purchase Price Consideration
The $357 purchase price includes $46 attributable to Trunk Club employee stock awards that are subject to ongoing vesting requirements. The $46 will be recorded as compensation expense as the related service is performed over the respective employee vesting periods of up to four years after the acquisition date. The $311 net purchase price consisted primarily of 3.6 shares of Nordstrom common stock issued at a closing stock price of $69 per share as of August 22, 2014. The net purchase price also included 0.1 vested replacement Nordstrom stock options with a weighted-average grant date fair value of $61 per share. Of the purchase price consideration, $9 is attributable to an adjustment holdback settled primarily in Nordstrom stock in the fourth quarter of fiscal 2014 and $35 represents an indemnity holdback that will be settled primarily in Nordstrom stock over the next three years upon satisfaction of the representations, warranties and covenants subject to the indemnities.
Net Assets Acquired
We allocated the net purchase price of $311 to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated net purchase price recorded as goodwill. We estimated the fair values of the acquired intangible assets based on discounted cash flow models using estimates and assumptions regarding future operations and cash flows. We will amortize the acquired intangible assets over their estimated lives on a straight-line basis, which approximates the pattern of expected economic benefit. The expected amortization periods for intangible assets acquired are seven years for trade names, two years for technology and 2.5 years for customer relationships. We expect to record total amortization expense of $59 associated with these intangible assets over the next seven years, including $2 in the third quarter of 2014.
Goodwill of $261 is equal to the excess of the net purchase price over the identifiable assets acquired and liabilities assumed and represents the acquisition's benefits that are not attributable to individually identified and separately recognized assets. These benefits include our expected ability to increase innovation and speed in the way we serve customers across channels, Trunk Club's assembled workforce, including its key management, and the going-concern value of acquiring Trunk Club's business as a whole. We assigned this goodwill, which is not deductible for tax purposes, to our Retail segment.
NOTE 3: ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows: 
 
November 1, 2014
 
February 1, 2014
 
November 2, 2013
Credit card receivables:
 
 
 
 
 
Nordstrom VISA credit card receivables
$
1,310

 
$
1,316

 
$
1,317

Nordstrom private label card receivables
918

 
868

 
831

Total credit card receivables
2,228

 
2,184

 
2,148

Allowance for credit losses
(75
)
 
(80
)
 
(85
)
Credit card receivables, net
2,153

 
2,104

 
2,063

Other accounts receivable1
100

 
73

 
83

Accounts receivable, net
$
2,253

 
$
2,177

 
$
2,146

1 Other accounts receivable consist primarily of third-party credit and debit card receivables.
Activity in the allowance for credit losses is as follows:
 
Quarter Ended
 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
Allowance at beginning of period
$
80

 
$
85

 
$
80

 
$
85

Bad debt expense
6

 
14

 
28

 
44

Write-offs
(14
)
 
(19
)
 
(52
)
 
(61
)
Recoveries
3

 
5

 
19

 
17

Allowance at end of period
$
75

 
$
85

 
$
75

 
$
85


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


Under certain circumstances, we may make modifications to payment terms for a customer experiencing financial difficulties in an effort to help the customer avoid a charge-off or bankruptcy, and to maximize our recovery of the outstanding balance. These modifications, which meet the accounting definition of troubled debt restructurings ("TDRs"), include reduced or waived fees and finance charges, and/or reduced minimum payments. Receivables classified as TDRs are as follows:
 
November 1, 2014
 
February 1, 2014
 
November 2, 2013
Credit card receivables classified as TDRs
$
36

 
$
43

 
$
40

Percent of total credit card receivables classified as TDRs
1.6
%
 
2.0
%
 
1.9
%
Credit Quality
We consider a credit card account delinquent if the minimum payment is not received by the payment due date. Our aging method is based on the number of completed billing cycles during which the customer has failed to make a minimum payment. During the third quarter of this year, we modified our write-off policy from 150 days past due to 180 days past due to better align with industry practice.
The primary indicators of the credit quality of our credit card receivables are aging and delinquency, particularly the levels of account balances delinquent 30 days or more, as these are the accounts most likely to be written off. The following table illustrates the aging and delinquency status of our credit card receivables: 
 
November 1, 2014
 
February 1, 2014
 
November 2, 2013
 
Balance
 
% of total
 
Balance
 
% of total
 
Balance
 
% of total
Current
$
2,092

 
93.9
%
 
$
2,046

 
93.7
%
 
$
2,028

 
94.4
%
1 – 29 days delinquent
92

 
4.1
%
 
99

 
4.5
%
 
82

 
3.8
%
30 days or more delinquent:
 
 
 
 
 
 
 
 
 
 
 
30 – 59 days delinquent
15

 
0.7
%
 
16

 
0.7
%
 
15

 
0.7
%
60 – 89 days delinquent
11

 
0.5
%
 
9

 
0.4
%
 
10

 
0.5
%
90 days or more delinquent
18

 
0.8
%
 
14

 
0.7
%
 
13

 
0.6
%
Total 30 days or more delinquent
44

 
2.0
%
 
39

 
1.8
%
 
38

 
1.8
%
Total credit card receivables
$
2,228

 
100.0
%
 
$
2,184

 
100.0
%
 
$
2,148

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Receivables not accruing finance charges
$
10

 
 
 
$
13

 
 
 
$
10

 
 
Receivables 90 days or more delinquent and still accruing finance charges
13

 
 
 
8

 
 
 
7

 
 
We also evaluate credit quality using FICO credit scores. The following table illustrates the distribution of our credit card receivables across FICO score ranges: 
 
November 1, 2014
 
February 1, 2014
 
November 2, 2013
FICO Score Range1
Balance
 
% of total
 
Balance
 
% of total
 
Balance
 
% of total
801+
$
371

 
16.6
%
 
$
313

 
14.3
%
 
$
329

 
15.3
%
660 – 800
1,391

 
62.4
%
 
1,393

 
63.8
%
 
1,355

 
63.1
%
001 – 659
370

 
16.6
%
 
379

 
17.4
%
 
368

 
17.1
%
Other2
96

 
4.4
%
 
99

 
4.5
%
 
96

 
4.5
%
Total credit card receivables
$
2,228

 
100.0
%
 
$
2,184

 
100.0
%
 
$
2,148

 
100.0
%
1 Credit scores for our credit cardholders are updated at least every 60 days for active accounts and every 90 days for inactive accounts. Amounts listed in the table reflect the most recently obtained credit scores as of the dates indicated.
2 Other consists of amounts not yet posted to customers' accounts and receivables from customers for whom FICO scores are temporarily unavailable.

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


NOTE 4: DEBT AND CREDIT FACILITIES
Debt
A summary of our long-term debt is as follows:
 
November 1, 2014

February 1, 2014

November 2, 2013
Secured
 
 
 
 
 
Series 2011-1 Class A Notes, 2.28%, due October 2016
$
325

 
$
325

 
$
325

Mortgage payable, 7.68%, due April 2020
38

 
42

 
43

Other
7

 
9

 
9

Total secured debt
370

 
376

 
377

 
 
 
 
 
 
Unsecured
 
 
 
 
 
Net of unamortized discount:
 
 
 
 
 
Senior notes, 6.75%, due June 2014
—

 
—

 
400

Senior notes, 6.25%, due January 2018
649

 
648

 
648

Senior notes, 4.75%, due May 2020
499

 
499

 
499

Senior notes, 4.00%, due October 2021
499

 
499

 
499

Senior debentures, 6.95%, due March 2028
300

 
300

 
300

Senior notes, 7.00%, due January 2038
146

 
146

 
344

Senior notes, 5.00%, due January 2044
597

 
595

 
—

Unamortized fair value hedge and other
67

 
50

 
51

Total unsecured debt
2,757

 
2,737

 
2,741

 
 
 
 
 
 
Total long-term debt
3,127

 
3,113

 
3,118

Less: current portion
(8
)
 
(7
)
 
(407
)
Total due beyond one year
$
3,119

 
$
3,106

 
$
2,711

Credit Facilities
As of November 1, 2014, we had total short-term borrowing capacity available for general corporate purposes of $800, which is our $800 senior unsecured revolving credit facility ("revolver") that expires in March 2018. Under the terms of our revolver, we pay a variable rate of interest and a commitment fee based on our debt rating. The revolver is available for working capital, capital expenditures and general corporate purposes and backs our commercial paper program. During the nine months ended November 1, 2014, we had no issuances under our commercial paper program and no borrowings under our revolver.
The revolver requires that we maintain an adjusted debt to earnings before interest, income taxes, depreciation, amortization and rent ("EBITDAR") leverage ratio of less than four times. As of November 1, 2014, we were in compliance with this covenant.

In November 2013, our wholly owned subsidiary in Puerto Rico entered into a $52 unsecured borrowing facility to support our expansion into that market. The facility expires in November 2018 and borrowings on this facility incur interest based upon the one-month LIBOR plus 1.275% per annum. As of November 1, 2014, we had $28 outstanding on this facility.


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


NOTE 5: FAIR VALUE MEASUREMENTS
We disclose our financial assets and liabilities that are measured at fair value in our Condensed Consolidated Balance Sheets by level within the fair value hierarchy as defined by applicable accounting standards:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Other observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that cannot be corroborated by market data that reflect the reporting entity's own
assumptions
We did not have any financial assets or liabilities that were measured at fair value on a recurring basis as of November 1, 2014, February 1, 2014 or November 2, 2013.
Financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable and accounts payable and approximate fair value due to their short-term nature. We estimate the fair value of our long-term debt using quoted market prices of the same or similar issues and, as such, this is considered a Level 2 fair value measurement. The following table summarizes the carrying value and fair value estimate of our long-term debt, including current maturities:
 
November 1, 2014
 
February 1, 2014
 
November 2, 2013
Carrying value of long-term debt1
$
3,127

 
$
3,113

 
$
3,118

Fair value of long-term debt
3,566

 
3,511

 
3,463

1 The carrying value of long-term debt includes the remaining unamortized adjustment from our previous effective fair value hedge.
We also measure certain non-financial assets at fair value on a nonrecurring basis, primarily goodwill and long-lived tangible and intangible assets, in connection with periodic evaluations for potential impairment. We recorded no material impairment charges for these assets for the nine months ended November 1, 2014 and November 2, 2013. We estimate the fair value of goodwill and long-lived tangible and intangible assets using primarily unobservable inputs and, as such, these are considered Level 3 fair value measurements.
NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES
As of November 1, 2014, we had approximately $126 of fee interest in our Manhattan full-line store subject to lien. We have committed to make future installment payments based on the developer of the property meeting construction and development milestones. Our fee interest in the property is subject to lien until project completion or fulfillment of our existing installment payment commitment.
NOTE 7: SHAREHOLDERS' EQUITY
In February 2013, our Board of Directors authorized a program to repurchase up to $800 of our outstanding common stock, through March 1, 2015. In September 2014, our Board of Directors authorized a new program to repurchase up to $1,000 of our outstanding common stock, through March 1, 2016. During the nine months ended November 1, 2014, we repurchased 8.2 shares of our common stock for an aggregate purchase price of $539 and had $1,131 in remaining share repurchase capacity as of November 1, 2014. 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 ("Commission") rules.
Our retained earnings was $29 as of November 1, 2014, compared with retained earnings of $236 as of November 2, 2013, as a result of increased share repurchases and our recurring quarterly dividends, partially offset by net earnings.
Subsequent to quarter end, in November 2014, we declared a quarterly dividend of $0.33 per share, payable in December 2014.

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


NOTE 8: STOCK-BASED COMPENSATION
The following table summarizes our stock-based compensation expense:
 
Quarter Ended
 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
Stock options
$
8

 
$
10

 
$
29

 
$
36

Trunk Club stock compensation
4

 
—

 
4

 
—

Restricted stock units
3

 
—

 
9

 
—

Employee stock purchase plan
—

 
—

 
1

 
1

Other
2

 
3

 
5

 
10

Total stock-based compensation expense, before income tax benefit
17

 
13

 
48

 
47

Income tax benefit
(6
)
 
(5
)
 
(17
)
 
(16
)
Total stock-based compensation expense, net of income tax benefit
$
11

 
$
8

 
$
31

 
$
31

Beginning in the quarter ended May 3, 2014, we grant our employees a combination of options and restricted stock units. The following table summarizes our grants, excluding Trunk Club:
 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
Units granted
 
Weighted-average grant-date fair value per unit
 
Units granted
 
Weighted-average grant-date fair value per unit
Stock options
1.9


$
16

 
3.7

 
$
14

Restricted stock units
0.5

 
63

 
—

 
—

Trunk Club
As discussed in Note 2: Trunk Club Acquisition, consideration for our acquisition, payable in Nordstrom stock, includes ongoing vesting requirements for Trunk Club's employees. These amounts are recorded as compensation expense as the related service is performed over the respective employee vesting periods of up to four years after the acquisition date. The weighted-average grant date fair value of stock options granted was $59 per share. As of November 1, 2014, the total unrecognized stock-based compensation expense related to Trunk Club options was $15, which is expected to be recognized over a weighted-average period of 34 months. The total unrecognized stock-based compensation expense related to Trunk Club restricted stock was $22, which is expected to be recognized over a weighted-average period of 33 months.
A summary of the stock option and restricted stock award activity related to Trunk Club is as follows:
 
Quarter Ended November 1, 2014
 
Stock Options
 
Restricted Stock
 
Shares
 
Weighted-average exercise price per unit
 
Shares
 
Weighted-average grant date fair value per unit
Outstanding, beginning of period
—

 
$
—

 
—

 
$
—

Granted
0.5

 
4

 
0.5

 
69

Stock options exercised
(0.1
)
 
3

 
—

 
—

Restricted stock vested
—

 
—

 
—

 
69

Forfeited
—

 
7

 
—

 
—

Outstanding, end of period
0.4

 
$
4

 
0.5

 
$
69


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


Additionally, in the third quarter, we granted to certain Trunk Club employees units of the Value Creation Plan. It was created to incentivize Trunk Club employees to increase the value of the Trunk Club business. It provides for a range of payouts from $0 to $100 based on growth in value of the Trunk Club business or achievement of certain sales and EBITDA thresholds. The final payout amount will be determined at the end of fiscal 2018 and settled in fiscal 2019 at our discretion in either cash or stock. We intend to settle the Value Creation Plan in stock.
Stock-based compensation guidance requires that we estimate the grant date fair value for each possible outcome of the performance conditions and recognize expense based upon the outcome that is deemed probable. If at any time it becomes probable that another outcome will be achieved, compensation expense will be cumulatively adjusted based on the grant date fair value associated with that outcome.
As of the quarter ended November 1, 2014, based on the payout scenario we believe is probable, we estimated the grant date fair value of $10 per unit using the Black-Scholes valuation model. Stock-based compensation expense will be recognized on an accelerated basis due to the performance criteria and graded vesting features of the Value Creation Plan. In the third quarter, we recognized $1 in stock-based compensation expense associated with the Value Creation Plan.
As of November 1, 2014, we have granted 0.8 of the 1.0 units available for grant. Total unrecognized stock-based compensation expense related to non-vested Value Creation Plan units was $7, which we expect to recognize over the next 46 months. If it becomes probable that a payout of $0 will be achieved, a cumulative adjustment will be recorded to reverse all expense previously recognized. Conversely, if it becomes probable that a maximum payout will be achieved through satisfaction of the sales and EBITDA thresholds, a cumulative adjustment will be recorded to recognize the portion of the $100 that has been earned through the date of the adjustment with the remaining compensation expense recognized over the remaining performance period.
NOTE 9: EARNINGS PER SHARE
The computation of earnings per share is as follows:
 
Quarter Ended
 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
Net earnings
$
142

 
$
137

 
$
465

 
$
466

 
 
 
 
 
 
 
 
Basic shares
190.7

 
194.3

 
190.0

 
195.1

Dilutive effect of stock options and other
4.0

 
3.0

 
3.4

 
3.2

Diluted shares
194.7

 
197.3

 
193.4

 
198.3

 
 
 
 
 
 
 
 
Earnings per basic share
$
0.74

 
$
0.70

 
$
2.45

 
$
2.39

Earnings per diluted share
$
0.73

 
$
0.69

 
$
2.40

 
$
2.35

 
 
 
 
 
 
 
 
Anti-dilutive stock options and other
1.6

 
4.5

 
2.8

 
4.6




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


NOTE 10: SEGMENT REPORTING
The following tables set forth information for our reportable segments: 
 
 
Retail
 
Corporate/Other
 
Total
Retail
Business1
 
Credit
 
Total
Quarter Ended November 1, 2014
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,991

 
$
49

 
$
3,040

 
$
—

 
$
3,040

Credit card revenues
 
—

 
—

 
—

 
100

 
100

Earnings (loss) before interest and income taxes
 
254

 
(49
)
 
205

 
57

 
262

Interest expense, net
 
—

 
(29
)
 
(29
)
 
(5
)
 
(34
)
Earnings (loss) before income taxes
 
254

 
(78
)
 
176

 
52

 
228

Goodwill
 
436

 
—

 
436

 
—

 
436

Total assets
 
5,165

 
1,788

 
6,953

 
2,316

 
9,269

 
 
 
 
 
 
 
 
 
 
 
Quarter Ended November 2, 2013
 
 
 
 
 
 
 
 
 

Net sales
 
$
2,749

 
$
42

 
$
2,791

 
$
—

 
$
2,791

Credit card revenues
 
—

 
—

 
—

 
93

 
93

Earnings (loss) before interest and income taxes
 
274

 
(66
)
 
208

 
45

 
253

Interest expense, net
 
—

 
(29
)
 
(29
)
 
(6
)
 
(35
)
Earnings (loss) before income taxes
 
274

 
(95
)
 
179

 
39

 
218

Goodwill
 
175

 
—

 
175

 
—

 
175

Total assets
 
4,400

 
1,960

 
6,360

 
2,225

 
8,585

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended November 1, 2014
 
 
 
 
 
 
 
 
 

Net sales
 
$
9,339

 
$
(167
)
 
$
9,172

 
$
—

 
$
9,172

Credit card revenues
 
—

 
—

 
—

 
291

 
291

Earnings (loss) before interest and income taxes
 
931

 
(224
)
 
707

 
151

 
858

Interest expense, net
 
—

 
(90
)
 
(90
)
 
(14
)
 
(104
)
Earnings (loss) before income taxes
 
931

 
(314
)
 
617

 
137

 
754

Goodwill
 
436


—

 
436

 
—

 
436

Total assets
 
5,165


1,788

 
6,953

 
2,316

 
9,269

 
 
 
 
 
 

 
 
 

Nine Months Ended November 2, 2013
 
 
 
 
 

 
 
 

Net sales
 
$
8,707

 
$
(155
)
 
$
8,552

 
$
—

 
$
8,552

Credit card revenues
 
—

 
—

 
—

 
277

 
277

Earnings (loss) before interest and income taxes
 
949

 
(215
)
 
734

 
129

 
863

Interest expense, net
 
—

 
(93
)
 
(93
)
 
(18
)
 
(111
)
Earnings (loss) before income taxes
 
949

 
(308
)
 
641

 
111

 
752

Goodwill
 
175


—

 
175

 
—

 
175

Total assets
 
4,400


1,960

 
6,360

 
2,225

 
8,585

1 Total Retail Business is not a reportable segment, but represents a subtotal of the Retail segment and Corporate/Other, and is consistent with our presentation in Management's Discussion and Analysis of Financial Condition and Results of Operations.




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


The following table summarizes net sales within our reportable segments:
 
Quarter Ended
 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
Nordstrom full-line stores
$
1,666

 
$
1,657

 
$
5,423

 
$
5,472

Direct
371

 
305

 
1,291

 
1,031

Nordstrom
2,037

 
1,962

 
6,714

 
6,503

Nordstrom Rack
816

 
709

 
2,316

 
1,970

Nordstromrack.com and HauteLook
93

 
69

 
249

 
207

Other retail1
45

 
9

 
60

 
27

Total Retail segment
2,991

 
2,749

 
9,339

 
8,707

Corporate/Other
49

 
42

 
(167
)
 
(155
)
Total net sales
$
3,040

 
$
2,791

 
$
9,172

 
$
8,552

1 Other retail includes our Jeffrey boutiques, Trunk Club and our Nordstrom Canada full-line store.


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

CAUTIONARY STATEMENT
Certain statements in this Quarterly Report on Form 10-Q contain or may suggest "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties, including, but not limited to, anticipated financial outlook for the fiscal year ending January 31, 2015, anticipated annual total 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,
•
reviewing of options and structure for a financial partner in regards to a potential transaction related to our credit card receivables,
•
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 resulting 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 Part I, "Item 1A. Risk Factors" in our 2013 Annual Report on Form 10-K and in Part II, "Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q, could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances.

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

OVERVIEW
Our third quarter performance reflects our ongoing commitment to our customer strategy, which we believe is critical to our business in delivering a superior customer experience. Our focus on this strategy positions us to engage with the customer across multiple channels – in full-price, off-price, stores and online. Most importantly, we know the customer views us simply as Nordstrom. With customers increasingly valuing speed, convenience and personalization, we are focused on creating synergies across our business through service and experience, product, customer acquisition and retention, and enterprise capabilities.
Our ongoing strategic investments to enhance the customer experience have fueled growth in stores and online. This quarter, our entry into Canada represents a new market with our first store opening in Calgary, Alberta, in September. Over the last several years, our team has focused on establishing the infrastructure, processes and community relationships required to operate in Canada. We've been encouraged with both the feedback we have received from our customers and the store's performance, which has exceeded our expectations. We are on track with our commitment to open five additional full-line stores in Canada over the next three years, with the next store openings planned in Ottawa and Vancouver in 2015.
In the third quarter, we generated net sales growth of 8.9 percent compared with the same period last year, driven by multiple aspects of our growth strategy. This quarter, in addition to our first store in Canada, we opened a second full-line store in the Houston, Texas, market and our first full-line store in Jacksonville, Florida. We also opened 16 Nordstrom Rack stores, which contributed to Nordstrom Rack's net sales growth of 15%. Our total company comparable sales increased 3.9%, which reflects sales trends generally consistent with the first half of the year.
Additionally, we completed our acquisition of Trunk Club, a personalized clothing service for men which offers a differentiated way to serve customers through a personalized, relevant and convenient shopping experience. Trunk Club is complementary to our business, aligning with our strategic priorities to increase relevance with customers and strengthen our capabilities. The business is on track with its growth plans, which includes a fifth Trunk Club showroom that will open in Manhattan in December.
We have made significant progress in our customer strategy this quarter, demonstrated by our top-line growth, which has been supported by the continued investments in our stores and online. We believe our execution of our customer strategy will deliver top-quartile shareholder returns, through achieving our long-term financial goals of high single-digit sales growth and mid-teens Return on Invested Capital.

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

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, Nordstromrack.com, HauteLook and other retail channels, including Trunk Club, Jeffrey, our Canadian operations and our Last Chance clearance store. For purposes of discussion and analysis of our results of operations, we combine our Retail segment results with revenues and expenses in the "Corporate/Other" column of Note 10: Segment Reporting in the Notes to Condensed Consolidated Financial Statements (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.
Retail Business
Summary
The following table summarizes the results of our Retail Business for the quarter and nine months ended November 1, 2014, compared with the quarter and nine months ended November 2, 2013: 
 
Quarter Ended
 
November 1, 2014
 
November 2, 2013
 
Amount
 
% of net sales1
 
Amount
 
% of net sales1
Net sales
$
3,040

 
100.0
%
 
$
2,791

 
100.0
%
Cost of sales and related buying and occupancy costs
(1,960
)
 
(64.5
%)
 
(1,790
)
 
(64.1
%)
Gross profit
1,080

 
35.5
%
 
1,001

 
35.9
%
Selling, general and administrative expenses
(875
)
 
(28.8
%)
 
(793
)
 
(28.4
%)
Earnings before interest and income taxes
$
205

 
6.8
%
 
$
208

 
7.5
%
 
 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
Amount
 
% of net sales1
 
Amount
 
% of net sales1
Net sales
$
9,172

 
100.0
%
 
$
8,552

 
100.0
%
Cost of sales and related buying and occupancy costs
(5,908
)
 
(64.4
%)
 
(5,464
)
 
63.9
%
Gross profit
3,264

 
35.6
%
 
3,088

 
36.1
%
Selling, general and administrative expenses
(2,557
)
 
(27.9
%)
 
(2,354
)
 
(27.5
%)
Earnings before interest and income taxes
$
707

 
7.7
%
 
$
734

 
8.6
%
1 Subtotals and totals may not foot due to rounding.

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

Retail Business Net Sales
In our ongoing effort to enhance the customer experience, we are focused on providing customers with a seamless experience across our channels. While our customers may engage with us through multiple channels, we know they view us simply as Nordstrom, which is ultimately how we view our business. To provide additional transparency into our net sales by channel, we present the following summary of our Retail Business for the quarter and nine months ended November 1, 2014:
 
Quarter Ended
 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
Net sales by channel:
 
 
 
 
 
 
 
Nordstrom full-line stores
$
1,666

 
$
1,657

 
$
5,423

 
$
5,472

Direct
371

 
305

 
1,291

 
1,031

Nordstrom
2,037

 
1,962

 
6,714

 
6,503

Nordstrom Rack
816

 
709

 
2,316

 
1,970

Nordstromrack.com and HauteLook
93

 
69

 
249

 
207

Other retail1
45

 
9

 
60

 
27

Total Retail segment
2,991

 
2,749

 
9,339

 
8,707

Corporate/Other
49

 
42

 
(167
)
 
(155
)
Total net sales
$
3,040

 
$
2,791

 
$
9,172

 
$
8,552

 
 
 
 
 
 
 
 
Net sales increase
8.9
%
 
2.9
%
 
7.3
%
 
4.7
%
 
 
 
 
 
 
 
 
Comparable sales increase (decrease) by channel:2
 
 
 
 
 
 
 
Nordstrom full-line stores
0.0
%
 
(4.2
%)
 
(1.0
%)
 
(1.5
%)
Direct
21.8
%
 
23.2
%
 
25.2
%
 
29.0
%
Nordstrom
3.4
%
 
(0.7
%)
 
3.2
%
 
2.3
%
Nordstrom Rack
1.7
%
 
3.7
%
 
4.0
%
 
2.3
%
Nordstromrack.com and HauteLook
33.8
%
 
22.3
%
 
19.7
%
 
26.4
%
Total company
3.9
%
 
0.1
%
 
3.8
%
 
2.5
%
 
 
 
 
 
 
 
 
Sales per square foot:3
 
 
 
 
 
 
 
Total sales per square foot
$
114

 
$
109

 
$
347

 
$
335

4-wall sales per square foot
94

 
92

 
295

 
292

Full-line sales per square foot
81

 
80

 
262

 
264

Nordstrom Rack sales per square foot
138

 
142

 
408

 
409

1 Other retail includes our Jeffrey boutiques, Trunk Club and our Nordstrom Canada full-line store.
2 Comparable sales include sales from stores that have been open at least one full year at the beginning of the year. We also include sales from our online channels (Direct, Nordstromrack.com and HauteLook) in comparable sales because of the integration with our stores.
3 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 stores, Nordstrom Rack, our Jeffrey boutiques, our Canada full-line store, our Last Chance store and Trunk Club showrooms divided by their weighted-average square footage.
Total company net sales increased 8.9% for the quarter and 7.3% for the nine months ended November 1, 2014, compared with the same periods in 2013. To date, we have opened three full-line stores and 27 Nordstrom Rack stores, including 16 Nordstrom Rack openings in the third quarter of 2014. Overall comparable sales increased 3.9% for the quarter and 3.8% for the nine months ended November 1, 2014, driven by growth in our Nordstrom business.

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

Nordstrom net sales, which consists of the full-line and Direct businesses, were $2,037 for the third quarter of 2014, an increase of 3.8% compared with the same period in 2013, while net sales were $6,714 for the nine months ended November 1, 2014, an increase of 3.2% compared with the same period in 2013. These increases reflected continued momentum in our Direct channel and slight improvements in our full-line stores. Both the average selling price and the number of items sold increased on a comparable basis for the quarter and nine months ended November 1, 2014. Top-performing merchandise categories for the quarter and nine months ended November 1, 2014 included Accessories, Cosmetics and Men's Apparel. Total sales per square foot increased 5.0% for the third quarter of 2014, while it increased 3.7% for the nine months ended November 1, 2014, compared with the same periods in 2013.
Full-line comparable sales were flat for the quarter and decreased 1.0% for the nine months ended November 1, 2014, compared with the same periods in 2013. The top-performing geographic regions for full-line stores for the quarter ended November 1, 2014 were the Southeast, Southwest and Midwest, while the top-performing geographic regions for the nine months ended November 1, 2014 were the Southeast and Southwest. Full-line sales per square foot increased 0.6% in the third quarter of 2014 and decreased 0.9% for the nine months ended November 1, 2014, when compared with the same periods in 2013.
Our online channels continued to experience outsized growth, driven by increased merchandise selection at Direct, Nordstromrack.com and HauteLook. The Direct channel net sales increased 22% in the third quarter of 2014 and 25% for the nine months ended November 1, 2014. Our Nordstromrack.com/HauteLook channel net sales increased 34% in the third quarter of 2014 and 20% for the nine months ended November 1, 2014.
Nordstrom Rack net sales increased $107, or 15%, for the quarter and $346, or 18%, for the nine months ended November 1, 2014, compared with the same periods in 2013, reflecting incremental volume from existing stores and the impact of 31 store openings since the third quarter of fiscal 2013. Nordstrom Rack comparable sales increased 1.7% for the quarter and 4.0% for the nine months ended November 1, 2014. The average selling price increased on a comparable basis for the quarter and nine months ended November 1, 2014. Also, on a comparable basis, the number of items sold decreased for the quarter ended November 1, 2014 and increased for the nine months ended November 1, 2014. Category highlights for the third quarter of 2014 included Shoes and Women's Apparel while category highlights for the nine months ended November 1, 2014 included Shoes and Accessories. Nordstrom Rack sales per square foot decreased slightly for the third quarter and nine months ended November 1, 2014 due primarily to new store openings.
Retail Business Gross Profit
The following table summarizes the Retail Business gross profit:
 
Quarter Ended
 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
Gross profit1
$
1,080


$
1,001


$
3,264


$
3,088

Gross profit as a % of net sales
35.5
%

35.9
%

35.6
%

36.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
November 1, 2014
 
November 2, 2013
Ending inventory per square foot
 
 
 
 
$
81.69

 
$
69.28

Inventory turnover rate2
 
 
 
 
4.52

 
4.97

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 the trailing 12-months' cost of sales and related buying and occupancy costs (for all segments) divided by the trailing 4-quarter average inventory.
Our Retail gross profit rate decreased 34 basis points for the quarter ended November 1, 2014 compared with the quarter ended November 2, 2013, primarily due to Nordstrom Rack's accelerated store expansion and increased competitive markdowns. For the nine months ended November 1, 2014, our Retail gross profit decreased 53 basis points compared with the same period in the prior year primarily due to increased competitive markdowns and Nordstrom Rack's accelerated store expansion. Our Retail gross profit increased $79 for the third quarter of 2014 due primarily to increased sales, partially offset by Nordstrom Rack's accelerated store expansion. Our Retail gross profit increased $176 for the nine months ended November 1, 2014, compared with the same periods in 2013, due primarily to increased sales, partially offset by increased competitive markdowns.

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

Our inventory turnover rate decreased to 4.52 times for the trailing 12-months ended November 1, 2014, from 4.97 times for the same period in 2013. Ending inventory per square foot increased 18% compared with the same period in 2013, which outpaced the sales per square foot increase of 5.0%. The majority of the increase in ending inventory per square foot was planned, primarily for full-line and Nordstrom Rack store growth. The remainder of the increase represented higher than planned inventory growth related to Nordstrom Rack. We are executing plans intended to align inventory to an appropriate level by the end of the fiscal year.
Retail Business Selling, General and Administrative Expenses 
Retail Business selling, general and administrative expenses ("Retail SG&A") are summarized in the following table:
 
Quarter Ended
 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
Selling, general and administrative expenses
$
875

 
$
793

 
$
2,557

 
$
2,354

Selling, general and administrative expense as a % of net sales
28.8
%
 
28.4
%
 
27.9
%
 
27.5
%
Our Retail SG&A rate increased 37 basis points for the quarter ended November 1, 2014 primarily due to expenses related to the acquisition of Trunk Club, partially offset by lower variable expenses. Our Retail SG&A rate increased 35 basis points for the nine months ended November 1, 2014 primarily due to expenses related to the acquisition of Trunk Club. Retail SG&A expenses increased $82 for the quarter ended November 1, 2014 and $203 for the nine months ended November 1, 2014 primarily due to an increase in sales, ongoing investments in technology and, in addition, for the quarter ended November 1, 2014, expenses related to the acquisition of Trunk Club.
Credit Segment
Summary
The table below provides a detailed view of the operational results of our Credit segment, consistent with the segment disclosure provided in Note 10: Segment Reporting in the Notes to Condensed Consolidated Financial Statements. In order to better reflect the economic contribution of our credit and debit card program, intercompany merchant fees are also included in the table below, which represent 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.

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

 
Quarter Ended
 
November 1, 2014
 
November 2, 2013
 
Amount
 
Annualized % of average credit card receivables1
 
Amount
 
Annualized % of average credit card receivables1
Credit card revenues
$
100

 
18.4
%
 
$
93

 
17.6
%
Credit expenses
(43
)
 
(8.0
%)
 
(48
)
 
(9.1
%)
Earnings before interest and income taxes2
57

 
10.5
%
 
45

 
8.5
%
Interest expense
(5
)
 
(0.9
%)
 
(6
)
 
(1.1