Edgar Filing: NORDSTROM INC

10-Q

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 August 1, 2015

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

For the transition period from ___________ to___________

Commission File Number: 001-15059

NORDSTROM, INC.

(Exact name of registrant as specified in its charter)



Washington		91-0515058
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



1617 Sixth Avenue, Seattle, Washington		98101
(Address of principal executive offices)		(Zip Code)

206-628-2111

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



	Large accelerated filer þ		Accelerated filer o
	Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO þ

Common stock outstanding as of August 26, 2015: 188,234,418 shares

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NORDSTROM, INC.

TABLE OF CONTENTS



		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited).

	Condensed Consolidated Statements of Earnings Quarter and Six Months Ended August 1, 2015 and August 2, 2014	3

	Condensed Consolidated Statements of Comprehensive Earnings Quarter and Six Months Ended August 1, 2015 and August 2, 2014	3

	Condensed Consolidated Balance Sheets August 1, 2015, January 31, 2015 and August 2, 2014	4

	Condensed Consolidated Statements of Shareholders' Equity Six Months Ended August 1, 2015 and August 2, 2014	5

	Condensed Consolidated Statements of Cash Flows Six Months Ended August 1, 2015 and August 2, 2014	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	31

Item 4.	Controls and Procedures.	31

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings.	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	32

Item 6.	Exhibits.	32

SIGNATURES		33

INDEX TO EXHIBITS		34

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

NORDSTROM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Amounts in millions except per share amounts)

(Unaudited)



	Quarter Ended						Six Months Ended
	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Net sales	$	3,598		$	3,296		$	6,714		$	6,133
Credit card revenues	103			96			202			190
Total revenues	3,701			3,392			6,916			6,323
Cost of sales and related buying and occupancy costs	(2,327		)	(2,130		)	(4,326		)	(3,951		)
Selling, general and administrative expenses	(1,048		)	(931		)	(2,019		)	(1,776		)
Credit transaction and other, net	51			—			51			—
Earnings before interest and income taxes	377			331			622			596
Interest expense, net	(32		)	(35		)	(65		)	(70		)
Earnings before income taxes	345			296			557			526
Income tax expense	(134		)	(113		)	(218		)	(203		)
Net earnings	$	211		$	183		$	339		$	323

Earnings per share:
Basic	$	1.11		$	0.97		$	1.78		$	1.70
Diluted	$	1.09		$	0.95		$	1.74		$	1.68

Weighted-average shares outstanding:
Basic	189.4			189.6			190.0			189.7
Diluted	193.5			192.7			194.2			192.7

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

NORDSTROM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(Amounts in millions)

(Unaudited)



	Quarter Ended					Six Months Ended
	August 1, 2015			August 2, 2014		August 1, 2015			August 2, 2014
Net earnings	$	211		$	183	$	339		$	323
Postretirement plan adjustments, net of tax	1			1		3			2
Foreign currency translation adjustment	(10		)	—		(5		)	1
Comprehensive net earnings	$	202		$	184	$	337		$	326

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)



	August 1, 2015			January 31, 2015			August 2, 2014
Assets
Current assets:
Cash and cash equivalents	$	423		$	827		$	772
Accounts receivable held for sale	2,391			—			—
Accounts receivable, net	241			2,306			2,454
Merchandise inventories	2,004			1,733			1,805
Current deferred tax assets, net	256			256			260
Prepaid expenses and other	117			102			96
Total current assets	5,432			5,224			5,387

Land, property and equipment (net of accumulated depreciation of $4,912, $4,698 and $4,587)	3,570			3,340			3,096
Goodwill	447			435			175
Other assets	251			246			248
Total assets	$	9,700		$	9,245		$	8,906

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	1,589		$	1,328		$	1,529
Accrued salaries, wages and related benefits	389			416			358
Other current liabilities	1,145			1,048			944
Current portion of long-term debt	333			8			7
Total current liabilities	3,456			2,800			2,838

Long-term debt, net	2,808			3,123			3,111
Deferred property incentives, net	560			510			498
Other liabilities	385			372			358

Commitments and contingencies (Note 7)

Shareholders' equity:
Common stock, no par value: 1,000 shares authorized; 188.2, 190.1 and 188.6 shares issued and outstanding	2,460			2,338			1,958
Retained earnings	97			166			179
Accumulated other comprehensive loss	(66		)	(64		)	(36		)
Total shareholders' equity	2,491			2,440			2,101
Total liabilities and shareholders' equity	$	9,700		$	9,245		$	8,906

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

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NORDSTROM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Amounts in millions except per share amounts)

(Unaudited)



								Accumulated
								Other
	Common Stock				Retained			Comprehensive
	Shares		Amount		Earnings			Loss			Total
Balance at January 31, 2015	190.1		$	2,338	$	166		$	(64	)	$	2,440
Net earnings	—		—		339			—			339
Other comprehensive earnings	—		—		—			(2		)	(2		)
Dividends ($0.74 per share)	—		—		(142		)	—			(142		)
Issuance of common stock under stock compensation plans	1.5		84		—			—			84
Stock-based compensation	0.1		38		—			—			38
Repurchase of common stock	(3.5	)	—		(266		)	—			(266		)
Balance at August 1, 2015	188.2		$	2,460	$	97		$	(66	)	$	2,491


								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	—		—		323			—			323
Other comprehensive earnings	—		—		—			3			3
Dividends ($0.66 per share)	—		—		(125		)	—			(125		)
Issuance of common stock under stock compensation plans	2.3		101		—			—			101
Stock-based compensation	—		30		—			—			30
Repurchase of common stock	(4.9	)	—		(311		)	—			(311		)
Balance at August 2, 2014	188.6		$	1,958	$	179		$	(36	)	$	2,101

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

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NORDSTROM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)



	Six Months Ended
	August 1, 2015			August 2, 2014
Operating Activities
Net earnings	$	339		$	323
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization expenses	277			244
Amortization of deferred property incentives and other, net	(41		)	(40		)
Deferred income taxes, net	(24		)	(43		)
Stock-based compensation expense	41			31
Tax benefit from stock-based compensation	13			10
Excess tax benefit from stock-based compensation	(13		)	(11		)
Bad debt expense	20			22
Credit transaction and other, net	(54		)	—
Change in operating assets and liabilities:
Accounts receivable	(216		)	(221		)
Merchandise inventories	(280		)	(263		)
Prepaid expenses and other assets	(19		)	(11		)
Accounts payable	240			241
Accrued salaries, wages and related benefits	(30		)	(35		)
Other current liabilities	56			68
Deferred property incentives	97			48
Other liabilities	9			6
Net cash provided by operating activities	415			369

Investing Activities
Capital expenditures	(521		)	(376		)
Change in credit card receivables originated at third parties	(64		)	(77		)
Other, net	4			(9		)
Net cash used in investing activities	(581		)	(462		)

Financing Activities
Proceeds from long-term borrowings, net of discounts	16			13
Principal payments on long-term borrowings	(4		)	(4		)
Increase in cash book overdrafts	49			15
Cash dividends paid	(142		)	(125		)
Payments for repurchase of common stock	(267		)	(326		)
Proceeds from issuances under stock compensation plans	71			91
Excess tax benefit from stock-based compensation	13			11
Other, net	26			(4		)
Net cash used in financing activities	(238		)	(329		)

Net decrease in cash and cash equivalents	(404		)	(422		)
Cash and cash equivalents at beginning of period	827			1,194
Cash and cash equivalents at end of period	$	423		$	772

Supplemental Cash Flow Information
Cash paid during the period for:
Income taxes, net of refunds	$	209		$	219
Interest, net of capitalized interest	70			78

Non-cash activities:
Accounts receivable reclassified from held for investment to held for sale	2,391			—

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 (the "Company"). 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 2014 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 August 1, 2015 and August 2, 2014 are unaudited. The condensed consolidated balance sheet as of January 31, 2015 has been derived from the audited consolidated financial statements included in our 2014 Annual Report. The interim condensed consolidated financial statements should be read together with the consolidated financial statements and related footnote disclosures contained in our 2014 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 the fourth quarter, 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 May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which was subsequently modified in August 2015 by ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date. 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 now effective for us beginning in the first quarter of 2018, rather than the first quarter of 2017. We are currently evaluating the impact the provisions of this ASU would have on our consolidated financial statements.

NOTE 2: CREDIT CARD RECEIVABLE TRANSACTION

On May 25, 2015, we entered into an agreement with TD Bank, N.A. ("TD") to sell substantially all of our U.S. Visa and private label credit card portfolio for an amount equal to the gross value of the outstanding receivables ("par"). In addition, we have entered into a long-term program agreement under which TD will become the exclusive issuer of our U.S. Nordstrom-branded Visa and private label consumer credit card portfolio. We will continue to perform account servicing functions, maintaining the current deep integration between our credit and retail operations.

Our credit card receivables have historically been "held for investment" and recorded at par value less an allowance for credit losses. During the second quarter of 2015, in accordance with generally accepted accounting principles ("GAAP"), we reclassified these receivables as "held for sale" and, as such, the receivables are now recorded at the lower of cost (par) or fair value (see Note 6: Fair Value Measurements). The reclassification of these receivables resulted in the reversal of the allowance for credit losses of $64 and is recorded in Credit transaction and other, net on the Condensed Consolidated Statements of Earnings.

Upon closing, we expect to receive approximately $1.8 billion, net of transaction costs and $325 in debt reduction. Under the program agreement, we will be entitled to receive a substantial portion of revenue generated by the credit card portfolio. The transaction is subject to regulatory approvals and other customary conditions, and is expected to close by the end of the year.

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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 3: TRUNK CLUB ACQUISITION

On August 22, 2014, we acquired 100% of the outstanding equity of Trunk Club, a personalized clothing service for men. The purchase price of $357 was partially offset by $46 attributable to Trunk Club employee stock awards that are subject to ongoing vesting requirements and are recorded as compensation expense. Of the purchase price consideration, $35 represents an indemnity holdback that will be settled primarily in Nordstrom stock, most of which we expect to settle in the third quarter of fiscal 2015, upon satisfaction of the representations, warranties and covenants subject to the indemnities. 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. On the acquisition date, we recorded current assets of $21, intangible assets of $59, goodwill of $261, and other non-current assets of $2, offset by net liabilities of $32.

NOTE 4: ACCOUNTS RECEIVABLE

We entered into an agreement in May 2015 to sell substantially all of our U.S. Visa and private label credit card portfolio. These receivables are now classified as "held for sale" and recorded at the lower of cost (par) or fair value. Our receivables are held at cost as of August 1, 2015 (see Note 2: Credit Card Receivable Transaction and Note 6: Fair Value Measurements). The components of accounts receivable are as follows:



	August 1, 2015			January 31, 2015			August 2, 2014
Credit card receivables held for investment	$	120		$	2,284		$	2,420
Allowance for credit losses	(1		)	(75		)	(80		)
Other accounts receivable¹	122			97			114
Accounts receivable, net	$	241		$	2,306		$	2,454

Accounts receivable held for sale	$	2,391		$	—		$	—

¹Other accounts receivable consist primarily of debit card receivables and third-party receivables.

As our U.S. Visa and private label receivables have been reclassified as "held for sale," the allowance for credit losses on these receivables has been reversed as of August 1, 2015. Activity in the allowance for credit losses is as follows:



	Quarter Ended						Six Months Ended
	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Allowance at beginning of period	$	70		$	80		$	75		$	80
Bad debt expense	10			7			20			22
Write-offs	(18		)	(19		)	(38		)	(38		)
Recoveries	3			12			8			16
Reversal of allowance on receivables held for sale	(64		)	—			(64		)	—
Allowance at end of period	$	1		$	80		$	1		$	80

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:



	August 1, 2015			January 31, 2015			August 2, 2014
Credit card receivables classified as TDRs	$	30		$	34		$	38
Percent of total credit card receivables classified as TDRs	1.2		%	1.5		%	1.6		%

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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)

Credit Quality

The primary indicators of the credit quality of our credit card receivables are aging and delinquency, particularly the levels of account balances delinquent 30 days or more, as these are the accounts most likely to be written off. The following table illustrates the aging and delinquency status of our credit card receivables "held for sale" and "held for investment":



	August 1, 2015				January 31, 2015				August 2, 2014
	Balance		% of total		Balance		% of total		Balance		% of total
Current	$	2,377	94.7	%	$	2,134	93.4	%	$	2,301	95.1	%
1 – 29 days delinquent	91		3.6	%	103		4.5	%	82		3.4	%
30 days or more delinquent:
30 – 59 days delinquent	15		0.6	%	16		0.7	%	15		0.6	%
60 – 89 days delinquent	10		0.4	%	10		0.5	%	9		0.4	%
90 days or more delinquent	18		0.7	%	21		0.9	%	13		0.5	%
Total 30 days or more delinquent	43		1.7	%	47		2.1	%	37		1.5	%
Total credit card receivables	$	2,511	100.0	%	$	2,284	100.0	%	$	2,420	100.0	%

Receivables not accruing finance charges	$	10			$	13			$	11
Receivables 90 days or more delinquent and still accruing finance charges	12				13				7

We also evaluate credit quality using FICO credit scores. The following table illustrates the distribution of our credit card receivables "held for sale" and "held for investment" across FICO score ranges:



	August 1, 2015				January 31, 2015				August 2, 2014
FICO Score Range¹	Balance		% of total		Balance		% of total		Balance		% of total
801+	$	497	19.8	%	$	369	16.2	%	$	481	19.8	%
660 – 800	1,513		60.3	%	1,435		62.8	%	1,478		61.1	%
001 – 659	395		15.7	%	392		17.1	%	365		15.1	%
Other²	106		4.2	%	88		3.9	%	96		4.0	%
Total credit card receivables	$	2,511	100.0	%	$	2,284	100.0	%	$	2,420	100.0	%

¹ Credit scores for our credit cardholders are updated at least every 90 days. 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 5: DEBT AND CREDIT FACILITIES

Debt

A summary of our long-term debt is as follows:



	August 1, 2015			January 31, 2015			August 2, 2014
Secured
Series 2011-1 Class A Notes, 2.28%, due October 2016	$	325		$	325		$	325
Mortgage payable, 7.68%, due April 2020	33			36			39
Other	9			7			8
Total secured debt	367			368			372

Unsecured
Net of unamortized discount:
Senior notes, 6.25%, due January 2018	649			649			649
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			146
Senior notes, 5.00%, due January 2044	599			598			596
Other	82			72			57
Total unsecured debt	2,774			2,763			2,746

Total long-term debt	3,141			3,131			3,118
Less: current portion	(333		)	(8		)	(7		)
Total due beyond one year	$	2,808		$	3,123		$	3,111

Credit Facilities

As of August 1, 2015, we had total short-term borrowing capacity available for general corporate purposes of $800. In April 2015, we terminated our $800 senior unsecured revolving credit facility that was scheduled to expire in March 2018. We replaced this with a five-year $800 senior unsecured revolving credit facility ("revolver") that expires in April 2020, with an option to extend for an additional two years. 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 other general corporate purposes. As of August 1, 2015, we had no issuances outstanding under our commercial paper program and no borrowings outstanding 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 August 1, 2015, we were in compliance with this covenant.

As a condition of the pending credit card portfolio transaction (see Note 2: Credit Card Receivable Transaction), we are required to defease the $325 secured Series 2011-1 Class A Notes to provide the receivables free and clear. The $325 has been reclassified from long-term debt to current portion of long-term debt during the second quarter of 2015, as we expect to defease the debt by the end of the year.

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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 6: 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 August 1, 2015, January 31, 2015 and August 2, 2014.

Financial Instruments Not Measured at Fair Value

Financial instruments not measured at fair value include cash and cash equivalents, accounts payable and long-term debt. Cash and cash equivalents and accounts payable 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:



	August 1, 2015		January 31, 2015		August 2, 2014
Carrying value of long-term debt¹	$	3,141	$	3,131	$	3,118
Fair value of long-term debt	3,526		3,693		3,551

¹The carrying value of long-term debt includes the remaining unamortized adjustment from our previous effective fair value hedge.

Financial Instruments Measured at Fair Value on a Nonrecurring Basis

Our U.S. Visa and private label credit card receivables are "held for sale" and are recorded at the lower of cost (par) or fair value (see Note 2: Credit Card Receivable Transaction). We estimate the fair value of our credit card receivables "held for sale" based on a discounted cash flow model using estimates and assumptions regarding future credit card portfolio performance. This fair value estimate is primarily based on Level 3 inputs in the fair value hierarchy, including the discount rate, payment rate, credit losses, revenues and expenses. Based on comparable market participant capital structures in the banking and credit card industries, we used a 12.0% discount rate. Based on historical and expected portfolio performance, we used a monthly payment rate ranging from 6.4% to 32.6%, an annual credit loss rate ranging from 1.2% to 3.9%, annual revenues ranging from 6.0% to 16.9% of credit card receivables and annual expenses ranging from 2.3% to 10.0% of credit card receivables.

The estimated fair value of our credit card receivables "held for sale" was approximately 3% above par. This premium is solely associated with our credit card receivables "held for sale," does not encompass other terms and elements within our contract with TD and may not be representative of a gain or loss upon consummation of the transaction.

Non-financial Assets Measured at Fair Value on a Nonrecurring Basis

We 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. There were no material impairment charges for these assets for the six months ended August 1, 2015 and August 2, 2014. 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 7: COMMITMENTS AND CONTINGENT LIABILITIES

Plans for our Manhattan full-line store ultimately include owning a condominium interest in a mixed-use tower and leasing certain nearby properties. As of August 1, 2015, we had approximately $125 of fee interest in land, which is expected to convert to the condominium interest once the store is constructed. We have committed to make future installment payments based on the developer meeting pre-established construction and development milestones. In the unlikely event that this project is not completed, the opening may be delayed and we may potentially be subject to future losses or capital commitments in order to complete construction or to monetize our investment in the land.

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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 8: 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. There was $73 of unused capacity upon program expiration. In September 2014, our Board of Directors authorized a program to repurchase up to $1,000 of our outstanding common stock, through March 1, 2016. During the six months ended August 1, 2015, we repurchased 3.5 shares of our common stock for an aggregate purchase price of $266 and had $736 remaining in share repurchase capacity as of August 1, 2015. The actual number, price, manner and timing of future share repurchases, if any, will be subject to market and economic conditions and applicable Securities and Exchange Commission ("Commission") rules.

In August 2015, subsequent to quarter end, we declared a quarterly dividend of $0.37 per share, payable in September 2015.

NOTE 9: STOCK-BASED COMPENSATION

The following table summarizes our stock-based compensation expense:



	Quarter Ended						Six Months Ended
	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Stock options	$	10		$	11		$	19		$	21
Acquisition-related stock compensation	4			—			9			1
Restricted stock units	6			4			10			6
Performance share units	—			1			—			—
Other	2			2			3			3
Total stock-based compensation expense, before income tax benefit	22			18			41			31
Income tax benefit	(7		)	(7		)	(13		)	(11		)
Total stock-based compensation expense, net of income tax benefit	$	15		$	11		$	28		$	20

The following table summarizes our grants:



	Six Months Ended
	August 1, 2015			August 2, 2014
	Granted	Weighted-average grant-date fair value per unit		Granted	Weighted-average grant-date fair value per unit
Stock options	1.7	$	21	1.9	$	16
Restricted stock units	0.4	78		0.5	62

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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: EARNINGS PER SHARE

The computation of earnings per share is as follows:



	Quarter Ended				Six Months Ended
	August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014
Net earnings	$	211	$	183	$	339	$	323

Basic shares	189.4		189.6		190.0		189.7
Dilutive effect of stock options and other	4.1		3.1		4.2		3.0
Diluted shares	193.5		192.7		194.2		192.7

Earnings per basic share	$	1.11	$	0.97	$	1.78	$	1.70
Earnings per diluted share	$	1.09	$	0.95	$	1.74	$	1.68

Anti-dilutive stock options and other	1.7		1.8		1.7		3.4

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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 11: SEGMENT REPORTING

The following tables set forth information for our reportable segments:



	Retail		Corporate/Other			Retail Business¹			Credit			Total
Quarter Ended August 1, 2015
Net sales	$	3,775	$	(177	)	$	3,598		$	—		$	3,598
Credit card revenues	—		—			—			103			103
Earnings (loss) before interest and income taxes	384		(121		)	263			114			377
Interest expense, net	—		(27		)	(27		)	(5		)	(32		)
Earnings (loss) before income taxes	384		(148		)	236			109			345
Goodwill	447		—			447			—			447
Assets²	5,369		1,529			6,898			2,802			9,700

Quarter Ended August 2, 2014
Net sales	$	3,438	$	(142	)	$	3,296		$	—		$	3,296
Credit card revenues	—		—			—			96			96
Earnings (loss) before interest and income taxes	367		(89		)	278			53			331
Interest expense, net	—		(30		)	(30		)	(5		)	(35		)
Earnings (loss) before income taxes	367		(119		)	248			48			296
Goodwill	175		—			175			—			175
Assets²	4,480		1,901			6,381			2,525			8,906

Six Months Ended August 1, 2015
Net sales	$	6,966	$	(252	)	$	6,714		$	—		$	6,714
Credit card revenues	—		—			—			202			202
Earnings (loss) before interest and income taxes	670		(209		)	461			161			622
Interest expense, net	—		(55		)	(55		)	(10		)	(65		)
Earnings (loss) before income taxes	670		(264		)	406			151			557
Goodwill	447		—			447			—			447
Assets²	5,369		1,529			6,898			2,802			9,700

Six Months Ended August 2, 2014
Net sales	$	6,348	$	(215	)	$	6,133		$	—		$	6,133
Credit card revenues	—		—			—			190			190
Earnings (loss) before interest and income taxes	677		(175		)	502			94			596
Interest expense, net	—		(61		)	(61		)	(9		)	(70		)
Earnings (loss) before income taxes	677		(236		)	441			85			526
Goodwill	175		—			175			—			175
Assets²	4,480		1,901			6,381			2,525			8,906

¹Retail 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.

²Assets in Corporate/Other include unallocated assets in corporate headquarters, consisting primarily of cash, land, property and equipment and deferred tax assets.

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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 table summarizes net sales within our reportable segments:



	Quarter Ended						Six Months Ended
	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Nordstrom full-line stores - U.S.	$	2,097		$	2,074		$	3,796		$	3,757
Nordstrom.com	625			519			1,105			920
Nordstrom	2,722			2,593			4,901			4,677
Nordstrom Rack	857			759			1,688			1,500
Nordstromrack.com/HauteLook	117			78			234			155
Other retail¹	79			8			143			16
Total Retail segment	3,775			3,438			6,966			6,348
Corporate/Other	(177		)	(142		)	(252		)	(215		)
Total net sales	$	3,598		$	3,296		$	6,714		$	6,133

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

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(Dollar and share amounts in millions except per share and per square foot amounts)

CAUTIONARY STATEMENT

Certain statements in this Quarterly Report on Form 10-Q contain or may suggest "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties, including, but not limited to, anticipated financial outlook for the fiscal year ending January 30, 2016, anticipated annual total and comparable sales rates, anticipated new store openings in existing, new and international markets, 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 domestic and international markets, acquisitions, investments in our stores and online, our ability to realize the anticipated benefits from growth initiatives and our ability to provide a seamless experience across all channels,


•	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 investment opportunities in 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 successfully close the U.S. Visa and private label credit card portfolio transaction,


•	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, debt repayment patterns, personal bankruptcies and bad debt write-offs, and


•	the timing, price, manner 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 2014 Annual Report on Form 10-K could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

OVERVIEW

With our customer at the center of our strategy, we're focused on delivering a seamless customer experience by linking our businesses through service and experience, product and capabilities. This is important because we know when customers engage with us across multiple touch points, their lifetime value and spend increase significantly.

Our second quarter performance reflected continued execution of our strategy. We achieved 9.2% sales growth, marking the fourth consecutive quarter of high single-digit increases. Our top-line strength combined with expense and inventory discipline helped us deliver a successful quarter. Key contributors to our growth in the second quarter include:


•	The Anniversary Sale, which is our largest event of the year, contributed to our top-line strength and achieved our expectations.


•	Our growth investments, including our entry into Canada, the acquisition of Trunk Club and the Nordstromrack.com launch, collectively added over $100 to our top line, driving over one-third of our net sales growth.


•	Nordstrom Rack generated a net sales increase of 13%, which represented the 26th consecutive quarter of double-digit growth.


•	Our combined full-line and Nordstrom.com business delivered a 4.8% comparable sales increase, reflecting ongoing strength in our existing business and continued trends over the past year.

We consider full-line stores to be the core of our brand, providing our customers with the high level of service they expect. In the third quarter, we plan to open a flagship store in Vancouver, B.C., which is expected to be one of our largest volume stores. In the U.S., we will open two full-line stores (Minneapolis and Milwaukee) and relocate a store in Los Angeles.

Growth of Nordstrom Rack is a key element of our strategy, representing our biggest source of new customers and an entry point to the Nordstrom brand. We are on track with our accelerated store growth, with 16 openings planned in the third quarter, for a total of 194 stores by the end of the year.

Roughly a year ago, we acquired Trunk Club, a personalized clothing service for men. Trunk Club stylists have collaborated with our buying teams to pilot Trunk Club's service to women, with a full launch expected in September. We're excited about the shared synergies, similar to our experience with the launch of Nordstromrack.com last spring, when we combined HauteLook's e-commerce talent with Nordstrom Rack's merchant expertise.

Mobile is an important enabler of convenience for our customers. To evolve with our customers' rapidly changing expectations, we're rolling out new features at a rate three times faster than last year. In addition to our ongoing mobile enhancements, we launched a unique text-to-buy feature for our salespeople, enabling customers to buy product via text.

We are creating excitement and attracting new customers through our differentiated merchandise offerings. In particular, we're having success in our younger customer-focused departments, which are now among our fastest growing categories. As recent examples, we are expanding Topshop, Madewell and Brandy Melville to more doors this year.

We are confident in our ability to execute our customer strategy and continue to leverage capabilities across channels to serve customers on their terms. We believe our investments in our customer strategy will help us deliver top-tier total shareholder returns through high single-digit total 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, Trunk Club, Jeffrey and our Last Chance clearance store. For purposes of discussion and analysis of our results of operations of our Retail Business, we combine our Retail segment results with revenues and expenses in the "Corporate/Other" column of Note 11: Segment Reporting (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:



	Quarter Ended
	August 1, 2015					August 2, 2014
	Amount			% of net sales¹		Amount			% of net sales¹
Net sales	$	3,598		100.0	%	$	3,296		100.0	%
Cost of sales and related buying and occupancy costs	(2,326		)	(64.6	%)	(2,129		)	(64.6	%)
Gross profit	1,272			35.4	%	1,167			35.4	%
Selling, general and administrative expenses	(999		)	(27.8	%)	(889		)	(27.0	%)
Other loss	(10		)	(0.3	%)	—			—
Earnings before interest and income taxes	$	263		7.3	%	$	278		8.5	%

	Six Months Ended
	August 1, 2015					August 2, 2014
	Amount			% of net sales¹		Amount			% of net sales¹
Net sales	$	6,714		100.0	%	$	6,133		100.0	%
Cost of sales and related buying and occupancy costs	(4,323		)	(64.4	%)	(3,949		)	(64.4	%)
Gross profit	2,391			35.6	%	2,184			35.6	%
Selling, general and administrative expenses	(1,920		)	(28.6	%)	(1,682		)	(27.4	%)
Other loss	(10		)	(0.1	%)	—			—
Earnings before interest and income taxes	$	461		6.9	%	$	502		8.2	%

¹Subtotals 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 value the overall Nordstrom brand experience and 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:



	Quarter Ended						Six Months Ended
	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Net sales by channel:
Nordstrom full-line stores - U.S.	$	2,097		$	2,074		$	3,796		$	3,757
Nordstrom.com	625			519			1,105			920
Nordstrom	2,722			2,593			4,901			4,677
Nordstrom Rack	857			759			1,688			1,500
Nordstromrack.com/HauteLook	117			78			234			155
Other retail¹	79			8			143			16
Retail segment	3,775			3,438			6,966			6,348
Corporate/Other	(177		)	(142		)	(252		)	(215		)
Total net sales	$	3,598		$	3,296		$	6,714		$	6,133

Net sales increase	9.2		%	6.2		%	9.5		%	6.4		%

Comparable sales increase (decrease) by channel:²
Nordstrom full-line stores - U.S.	0.8		%	(1.2		%)	0.7		%	(1.5		%)
Nordstrom.com	20.4		%	22.0		%	20.1		%	26.6		%
Nordstrom	4.8		%	2.7		%	4.5		%	3.0		%
Nordstrom Rack	1.7		%	4.0		%	0.8		%	5.2		%
Nordstromrack.com/HauteLook	49.6		%	14.9		%	50.4		%	12.6		%
Total company	4.9		%	3.3		%	4.6		%	3.6		%

Sales per square foot:³
Total sales per square foot	$	131		$	125		$	245		$	233
4-wall sales per square foot	109			107			204			201
U.S. full-line sales per square foot	102			100			185			182
Nordstrom Rack sales per square foot	129			133			259			269

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

²Comparable 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 (Nordstrom.com and Nordstromrack.com/HauteLook) in comparable sales because of the integration with our stores.

³Sales 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 our Nordstrom U.S. full-line stores, Nordstrom Rack stores, Jeffrey boutiques, Nordstrom Canada full-line stores, Last Chance and Trunk Club clubhouses divided by their weighted-average square footage.

Total company net sales increased 9.2% for the quarter and 9.5% for the six months ended August 1, 2015, compared with the same periods in 2014. During the six months ended August 1, 2015, we opened two full-line stores and 11 Nordstrom Rack stores, including one Nordstrom Rack in the second quarter of 2015. Overall comparable sales increased 4.9% for the quarter and 4.6% for the six months ended August 1, 2015, 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 U.S. full-line and Nordstrom.com businesses, increased to $2,722, or 5.0%, for the second quarter of 2015 and to $4,901, or 4.8%, for the six months ended August 1, 2015, compared with the same periods in 2014. These increases reflected continued momentum in Nordstrom.com and ongoing improvement in sales trends at our full-line stores. Both the number of items sold and the average selling price increased on a comparable basis for the quarter and six months ended August 1, 2015. Top-performing merchandise categories for the quarter and six months ended August 1, 2015 were Women's Apparel and Cosmetics.

U.S. full-line stores' comparable sales increased 0.8% for the quarter and 0.7% for the six months ended August 1, 2015, compared with the same periods in 2014. The top-performing geographic regions for full-line stores for the quarter ended August 1, 2015 were the Southwest and Southeast, while the top-performing geographic regions for the six months ended August 1, 2015 were the Northwest and Southwest.

Our online channels continued to experience outsized growth, driven by increased merchandise selection. Nordstrom.com net sales increased 20% in both the quarter and six months ended August 1, 2015. Nordstromrack.com/HauteLook net sales increased 50% in both the second quarter of 2015 and the six months ended August 1, 2015.

Nordstrom Rack net sales increased $98, or 13%, for the quarter and $188, or 13%, for the six months ended August 1, 2015, compared with the same periods in 2014. Nordstrom Rack comparable sales increased 1.7% for the quarter and 0.8% for the six months ended August 1, 2015. The average selling price increased, while the number of items sold decreased on a comparable basis for the quarter and six months ended August 1, 2015. Top-performing merchandise categories for the second quarter of 2015 included Shoes and Specialized, while the top-performing merchandise categories for the six months ended August 1, 2015 were Shoes and Cosmetics. Nordstrom Rack sales per square foot decreased 2.9% for the second quarter and 3.8% for the six months ended August 1, 2015 primarily due to new store openings.

Retail Business Gross Profit

The following table summarizes the Retail Business gross profit:



	Quarter Ended						Six Months Ended
	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Retail gross profit¹	$	1,272		$	1,167		$	2,391		$	2,184
Retail gross profit as a % of net sales	35.4		%	35.4		%	35.6		%	35.6		%

							August 1, 2015			August 2, 2014
Ending inventory per square foot							$	72.72		$	68.27
Inventory turnover rate²							4.49			4.83

¹Retailers do not uniformly record the costs of buying and occupancy and supply chain operations (freight, purchasing, receiving, distribution, fulfillment, etc.) between gross profit and selling, general and administrative expenses. As such, our gross profit and selling, general and administrative expenses and rates may not be comparable to other retailers' expenses and rates.

²Inventory 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. 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' rates.

Our Retail gross profit rate was flat for the quarter and six months ended August 1, 2015. Our Retail gross profit increased $105 for the second quarter of 2015 and $207 for the six months ended August 1, 2015, compared with the same periods in 2014, due primarily to increased sales, partially offset by Nordstrom Rack's continued store expansion.

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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 4.49 times for the trailing 12-months ended August 1, 2015, from 4.83 times for the same period in 2014, due to planned inventory growth. The increase in ending inventory per square foot was due to planned growth across all channels. As we continue to grow our online channels, we expect increases in inventory without corresponding increases in square footage.

Ending inventory includes pack and hold inventory of $199 and $211 on August 1, 2015 and August 2, 2014, which represents strategic purchases of merchandise for upcoming selling seasons.

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						Six Months Ended
	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Selling, general and administrative expenses	$	999		$	889		$	1,920		$	1,682
Selling, general and administrative expenses as a % of net sales	27.8		%	27.0		%	28.6		%	27.4		%

Our Retail SG&A rate increased 82 basis points for the quarter and 118 basis points for the six months ended August 1, 2015, reflecting planned growth initiatives related to Trunk Club and Canada and higher fulfillment costs associated with online growth. Retail SG&A increased $110 for the quarter and $238 for the six months ended August 1, 2015 primarily due to planned growth initiatives related to Trunk Club and Canada and an increase in sales.

Other Loss

Other loss of $10 for the quarter and six months ended August 1, 2015 was due to impairment of an equity method investment as we determined it was no longer recoverable.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

Credit Segment

Summary

The table below provides a detailed view of the operational results of our Credit segment, consistent with Note 11: Segment Reporting. 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.

We reached an agreement in May 2015 to sell substantially all of our U.S. Visa and private label credit card portfolio. These receivables are now classified as "held for sale" (see Note 2: Credit Card Receivable Transaction).

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.



	Quarter Ended
	August 1, 2015					August 2, 2014
	Amount			Annualized % of average credit card receivables¹		Amount			Annualized % of average credit card receivables¹
Credit card revenues	$	103		18.5	%	$	96		18.1	%
Credit expenses	(50		)	(9.0	%)	(43		)	(8.3	%)
Credit transaction, net	61			10.9	%	—			—
Earnings before interest and income taxes²	114			20.5	%	53			9.8	%
Interest expense	(5		)	(0.9	%)	(5		)	(0.9	%)
Intercompany merchant fees	34			6.2	%	31			5.8	%
Credit segment contribution, before income taxes	$	143		25.8	%	$	79		14.8	%

Credit and debit card volume³:
Outside	$	1,097				$	1,095
Inside	1,730					1,571
Total volume	$	2,827				$	2,666

Average credit card receivables	$	2,219				$	2,132

¹Subtotals and totals may not foot due to rounding.

²As presented in Note 11: Segment Reporting.

³Volume represents sales plus applicable taxes.

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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)



	Six Months Ended
	August 1, 2015				August 2, 2014
	Amount		Annualized % of average credit card receivables¹		Amount		Annualized % of average credit card receivables¹
Credit card revenues	$	202	18.6	%	$	190	18.2	%
Credit expenses	(102