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 October 31, 2015
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 25, 2015: 183,867,962 shares
 
 

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NORDSTROM, INC.
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
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
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Net sales
$
3,239

 
$
3,040

 
$
9,953

 
$
9,172

Credit card revenues, net
89

 
100

 
291

 
291

Total revenues
3,328

 
3,140

 
10,244

 
9,463

Cost of sales and related buying and occupancy costs
(2,142
)
 
(1,961
)
 
(6,468
)
 
(5,912
)
Selling, general and administrative expenses
(999
)
 
(917
)
 
(3,018
)
 
(2,693
)
Credit transaction and other, net
(32
)
 
—

 
19

 
—

Earnings before interest and income taxes
155

 
262

 
777

 
858

Interest expense, net
(30
)
 
(34
)
 
(94
)
 
(104
)
Earnings before income taxes
125

 
228

 
683

 
754

Income tax expense
(44
)
 
(86
)
 
(263
)
 
(289
)
Net earnings
$
81

 
$
142

 
$
420

 
$
465

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.43

 
$
0.74

 
$
2.22

 
$
2.45

Diluted
$
0.42

 
$
0.73

 
$
2.17

 
$
2.40

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
187.2

 
190.7

 
189.1

 
190.0

Diluted
191.3

 
194.7

 
193.2

 
193.4

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
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Net earnings
$
81

 
$
142

 
$
420

 
$
465

Postretirement plan adjustments, net of tax
2

 
1

 
5

 
3

Foreign currency translation adjustment
—

 
(3
)
 
(5
)
 
(2
)
Comprehensive net earnings
$
83

 
$
140

 
$
420

 
$
466

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)
 
October 31, 2015
 
January 31, 2015
 
November 1, 2014
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
821

 
$
827

 
$
433

Accounts receivable, net
215

 
2,306

 
2,253

Merchandise inventories
2,402

 
1,733

 
2,228

Current deferred tax assets, net
247

 
256

 
253

Prepaid expenses and other
202

 
102

 
170

Total current assets
3,887

 
5,224

 
5,337

 
 
 
 
 
 
Land, property and equipment (net of accumulated depreciation of $5,020, $4,698 and $4,587)
3,742

 
3,340

 
3,223

Goodwill
447

 
435

 
436

Other assets
510

 
246

 
273

Total assets
$
8,586

 
$
9,245

 
$
9,269

 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
1,688

 
$
1,328

 
$
1,673

Accrued salaries, wages and related benefits
417

 
416

 
377

Other current liabilities
1,075

 
1,048

 
950

Current portion of long-term debt
9

 
8

 
8

Total current liabilities
3,189

 
2,800

 
3,008

 
 
 
 
 
 
Long-term debt, net
2,800

 
3,123

 
3,119

Deferred property incentives, net
568

 
510

 
503

Other liabilities
621

 
372

 
365

 
 
 
 
 
 
Commitments and contingencies (Note 7)

 

 

 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
Common stock, no par value: 1,000 shares authorized; 185.4, 190.1 and 190.1 shares issued and outstanding
2,519

 
2,338

 
2,283

(Accumulated deficit) Retained earnings
(1,047
)
 
166

 
29

Accumulated other comprehensive loss
(64
)
 
(64
)
 
(38
)
Total shareholders' equity
1,408

 
2,440

 
2,274

Total liabilities and shareholders' equity
$
8,586

 
$
9,245

 
$
9,269

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

 
Accumulated 

 
 
 
 
 
 
 
Deficit)

 
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
—

 
—

 
420

 
—

 
420

Other comprehensive earnings
—

 
—

 
—

 
—

 
—

Dividends ($1.11 per share)
—

 
—

 
(211
)
 
—

 
(211
)
Special dividend related to the sale of credit card receivables ($4.85 per share)
—

 
—

 
(905
)
 
—

 
(905
)
Issuance of common stock for Trunk Club acquisition
0.3

 
23

 
—

 
—

 
23

Issuance of common stock under stock compensation plans
1.9

 
104

 
—

 
—

 
104

Stock-based compensation
0.1

 
54

 
—

 
—

 
54

Repurchase of common stock
(7.0
)
 
—

 
(517
)
 
—

 
(517
)
Balance at October 31, 2015
185.4

 
$
2,519

 
$
(1,047
)
 
$
(64
)
 
$
1,408

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

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
 
October 31, 2015
 
November 1, 2014
Operating Activities
 
 
 
Net earnings
$
420

 
$
465

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization expenses
424

 
376

Amortization of deferred property incentives and other, net
(61
)
 
(56
)
Deferred income taxes, net
(78
)
 
(39
)
Stock-based compensation expense
57

 
48

Tax benefit from stock-based compensation
14

 
14

Excess tax benefit from stock-based compensation
(14
)
 
(15
)
Bad debt expense
26

 
28

Credit transaction and other, net
(46
)
 
—

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(73
)
 
(94
)
Proceeds from sale of credit card receivables originated at Nordstrom
1,297

 
—

Merchandise inventories
(607
)
 
(574
)
Prepaid expenses and other assets
(36
)
 
(60
)
Accounts payable
326

 
314

Accrued salaries, wages and related benefits
(2
)
 
(13
)
Other current liabilities
(34
)
 
38

Deferred property incentives
128

 
77

Other liabilities
4

 
7

Net cash provided by operating activities
1,745

 
516

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(857
)
 
(616
)
Change in credit card receivables originated at third parties
33

 
(10
)
Proceeds from sale of credit card receivables originated at third parties
890

 
—

Other, net
3

 
(12
)
Net cash provided by (used in) investing activities
69

 
(638
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from long-term borrowings, net of discounts
13

 
26

Principal payments on long-term borrowings
(6
)
 
(5
)
Defeasance of long-term debt
(339
)
 
—

Increase (decrease) in cash book overdrafts
7

 
(58
)
Cash dividends paid
(1,116
)
 
(189
)
Payments for repurchase of common stock
(517
)
 
(537
)
Proceeds from issuances under stock compensation plans
90

 
117

Excess tax benefit from stock-based compensation
14

 
15

Other, net
34

 
(8
)
Net cash used in financing activities
(1,820
)
 
(639
)
 
 
 
 
Net decrease in cash and cash equivalents
(6
)
 
(761
)
Cash and cash equivalents at beginning of period
827

 
1,194

Cash and cash equivalents at end of period
$
821

 
$
433

 
 
 
 
Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net of refunds
$
383

 
$
373

Interest, net of capitalized interest
86

 
99

Non-cash investing and financing activities:
 
 
 
Beneficial interest asset acquired from the sale of credit card receivables
62

 
—

Issuance of common stock for Trunk Club acquisition
23

 
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 (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 October 31, 2015 and November 1, 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.
Credit Card Revenues, net
On October 1, 2015, we completed the sale of substantially all of our U.S. Visa and private label credit card portfolio in an agreement with TD Bank, N.A. ("TD") (see Note 2: Credit Card Receivable Transaction). Prior to this agreement, credit card revenues included finance charges, late fees and other revenue generated by our combined Nordstrom private label card and Nordstrom Visa credit card programs, and interchange fees generated by the use of Nordstrom Visa credit cards at third-party merchants. Finance charges and late fees were assessed according to the terms of the related cardholder agreements and recognized as revenue when earned. Credit card revenues were recorded net of estimated uncollectible finance charges and fees.
Following the close of the credit card receivable transaction and pursuant to the new program agreement with TD, credit card revenues, net includes our portion of the ongoing credit card revenue, net of credit losses, from both the sold and newly generated credit card receivables. In addition, credit card revenues, net includes asset amortization and deferred revenue recognition of the assets and liabilities recorded as part of the transaction.
Accounts Receivable, net
Prior to the close of the credit card receivable transaction, accounts receivable included credit card receivables from our Nordstrom private label and Visa credit cards, as well as credit and debit card receivables due from third parties.
Following the close of the credit card receivable transaction (see Note 2: Credit Card Receivable Transaction), our remaining accounts receivable, net includes employee credit card receivables, third-party credit receivables and debit card receivables. We continue to record credit card receivables on our Consolidated Balance Sheets at the outstanding balance, net of an allowance for credit losses.
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 ASU No. 2014-09 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 guidance is now effective for us beginning in the first quarter of 2018. We are currently evaluating the impact the provisions would have on our consolidated 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 2: CREDIT CARD RECEIVABLE TRANSACTION
On October 1, 2015, we completed the sale of substantially all of our U.S. Visa and private label credit card portfolio to TD. In connection with the sale, we entered into a long-term program agreement under which TD is the exclusive issuer of our U.S. consumer credit cards. The following events summarize our credit card receivable transaction:
•
Receivables Reclassification – In the second quarter of 2015, we reclassified substantially all of our U.S. Visa and private label credit card receivables from "held for investment" to "held for sale" and, as such, recorded these receivables at the lower of cost (par) or fair value, resulting in the reversal of an allowance for credit losses of $64.
•
Secured Notes Defeasance – In September 2015, we completed the defeasance of our $325 Series 2011-1 Class A Notes in order to provide the credit card receivables to TD free and clear.
•
Transaction Close – At close we received $2.2 billion in cash consideration reflecting the par value of the receivables sold, and incurred $32 in transaction related expenses during the third quarter.
•
Program Agreement – Pursuant to the agreement, we are obligated to offer and administer our loyalty program and perform other account servicing functions. In return, we receive a portion of the ongoing credit card revenue, net of credit losses, from both the sold and newly generated credit card receivables.
Transaction Accounting
The Purchase and Sale and Program agreements constitute a multiple element arrangement. These agreements were accounted for in accordance with Accounting Standards Codification ("ASC") 605, Revenue Recognition and ASC 860, Transfers and Servicing. We allocated the upfront cash consideration to each of the contract elements, including but not limited to receivables, accounts and loyalty obligations based upon relative selling price or fair value. We then recognized revenue relative to each of the contract elements that were delivered or earned, including receivables sold and accounts delivered, and deferred revenue on each of the elements that remained undelivered or unearned, including loyalty obligations.
We recorded the following assets and liabilities associated with the arrangement:
•
Beneficial interest asset of $62 – represents the present value of the expected profits on the receivables sold.
•
Deferred revenue of $289 – primarily related to our obligation to offer and administer our loyalty program over the term of the agreement.
•
Investment in contract asset of $210 – represents the future economic benefit associated with the arrangement and is equal to the difference between the carrying value of the delivered elements and the upfront cash consideration allocated to those elements.
•
We did not record a servicing asset or liability as our servicing fee approximates that of a market participant and represents adequate compensation.
The beneficial interest asset is carried at fair value (see Note 6: Fair Value Measurements) and is amortized over approximately four years based primarily on the payment rate of the associated receivables. The deferred revenue and investment in contract asset are recognized/amortized over seven years on a straight line basis, following the delivery of the contract obligations and expected life of the agreement. We record each of these items in Credit card revenue, net in our Condensed Consolidated Statements of Earnings.
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, most of which was settled primarily in Nordstrom stock during 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.

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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: ACCOUNTS RECEIVABLE
On October 1, 2015, we completed the sale of substantially all of our U.S. Visa and private label credit card portfolio to TD (see Note 2: Credit Card Receivable Transaction). The receivables sold to TD, which were classified as "held for sale" as of the second quarter of 2015 are no longer reported on our Condensed Consolidated Balance Sheets. We will continue to service these receivables in accordance with the program agreement with TD. The components of accounts receivable are as follows:
 
October 31, 2015
 
January 31, 2015
 
November 1, 2014
Credit card receivables1
$
70

 
$
2,284

 
$
2,228

Allowance for credit losses
(1
)
 
(75
)
 
(75
)
Other accounts receivable2
146

 
97

 
100

Accounts receivable, net
$
215

 
$
2,306

 
$
2,253

1 Credit card receivables consist of employee credit card receivables as of October 31, 2015.
2 Other accounts receivable consists primarily of third-party credit receivables and debit card receivables.
Activity in the allowance for credit losses is as follows:
 
Quarter Ended
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Allowance at beginning of period
$
1

 
$
80

 
$
75

 
$
80

Bad debt expense
6

 
6

 
26

 
28

Write-offs
(11
)
 
(14
)
 
(49
)
 
(52
)
Recoveries
5

 
3

 
13

 
19

Reversal of allowance for credit losses
—

 
—

 
(64
)
 
—

Allowance at end of period
$
1

 
$
75

 
$
1

 
$
75


Prior to the credit card receivable transaction with TD, under certain circumstances we made 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 met the accounting definition of troubled debt restructurings ("TDRs"), included reduced or waived fees and finance charges, and/or reduced minimum payments. Receivables classified as TDRs as of January 31, 2015 and November 1, 2014 are as follows:
 
January 31, 20151
 
November 1, 20141
Credit card receivables classified as TDRs
$
34

 
$
36

Percent of total credit card receivables classified as TDRs
1.5
%
 
1.6
%
1 We no longer present the current period balances as our remaining credit card receivables are insignificant and are no longer meaningful.

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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 the 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. On October 1, 2015, we completed the sale of substantially all of our U.S. Visa and private label credit card portfolio to TD (see Note 2: Credit Card Receivable Transaction). There have been no material changes to the delinquency status or net credit losses of the portfolio sold. The following table illustrates the aging and delinquency status as of January 31, 2015 and November 1, 2014:
 
January 31, 20151
 
November 1, 20141
 
Balance
 
% of total
 
Balance
 
% of total
Current
$
2,134

 
93.4
%
 
$
2,092

 
93.9
%
1 – 29 days delinquent
103

 
4.5
%
 
92

 
4.1
%
30 days or more delinquent:
 
 
 
 
 
 
 
30 – 59 days delinquent
16

 
0.7
%
 
15

 
0.7
%
60 – 89 days delinquent
10

 
0.5
%
 
11

 
0.5
%
90 days or more delinquent
21

 
0.9
%
 
18

 
0.8
%
Total 30 days or more delinquent
47

 
2.1
%
 
44

 
2.0
%
Total credit card receivables
$
2,284

 
100.0
%
 
$
2,228

 
100.0
%
 
 
 
 
 
 
 
 
Receivables not accruing finance charges
$
13

 
 
 
$
10

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

 
 
 
13

 
 
1 We no longer present the current period balances as our remaining credit card receivables are insignificant and are no longer meaningful.
We also evaluated credit quality using FICO credit scores. The following table illustrates the distribution of our credit card receivables across FICO score ranges as of January 31, 2015 and November 1, 2014:
 
January 31, 20151
 
November 1, 20141
FICO Score Range2
Balance
 
% of total
 
Balance
 
% of total
801+
$
369

 
16.2
%
 
$
371

 
16.6
%
660 – 800
1,435

 
62.8
%
 
1,391

 
62.4
%
001 – 659
392

 
17.1
%
 
370

 
16.6
%
Other3
88

 
3.9
%
 
96

 
4.4
%
Total credit card receivables
$
2,284

 
100.0
%
 
$
2,228

 
100.0
%
1 We no longer present the current period balances as our remaining credit card receivables are insignificant and are no longer meaningful.
2 Amounts listed in the table reflect the most recently obtained credit scores as of the dates indicated.
3 Other consists of amounts not yet posted to customers' accounts and receivables from customers for whom FICO scores were temporarily unavailable.



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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: DEBT AND CREDIT FACILITIES
Debt
A summary of our long-term debt is as follows:
 
October 31, 2015

January 31, 2015

November 1, 2014
Secured
 
 
 
 
 
Series 2011-1 Class A Notes, 2.28%, due October 2016
$
—

 
$
325

 
$
325

Mortgage payable, 7.68%, due April 2020
32

 
36

 
38

Other
5

 
7

 
7

Total secured debt
37

 
368

 
370

 
 
 
 
 
 
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
600

 
598

 
597

Other
79

 
72

 
67

Total unsecured debt
2,772

 
2,763

 
2,757

 
 
 
 
 
 
Total long-term debt
2,809

 
3,131

 
3,127

Less: current portion
(9
)
 
(8
)
 
(8
)
Total due beyond one year
$
2,800

 
$
3,123

 
$
3,119

Credit Facilities
As of October 31, 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 October 31, 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 October 31, 2015, we were in compliance with this covenant.
As a condition of closing the credit card receivable transaction (see Note 2: Credit Card Receivable Transaction), we defeased the $325 secured Series 2011-1 Class A Notes in order to provide the receivables to TD free and clear.




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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 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
Financial Instruments Measured at Fair Value on a Recurring Basis
We recorded a beneficial interest asset when we completed the sale of substantially all of our U.S. Visa and private label credit card portfolio (see Note 2: Credit Card Receivable Transaction). We determined the fair value of the beneficial interest asset based on a discounted cash flow model using Level 3 inputs in the fair value hierarchy regarding future credit card portfolio performance. Inputs and assumptions include 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% discount rate. Based on historical and expected portfolio performance, we used a monthly payment rate ranging from approximately 6% to 33%, an annual credit loss rate ranging from approximately 1% to 4%, annual revenues ranging from approximately 6% to 18% of credit card receivables and annual expenses ranging from approximately 2% to 9% of credit card receivables. Amortization was the only significant change in value during the quarter and primarily reflects payments received on the receivables sold.
We did not have any financial assets or liabilities that were measured at fair value on a recurring basis as of January 31, 2015 and November 1, 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:
 
October 31, 2015
 
January 31, 2015
 
November 1, 2014
Carrying value of long-term debt1
$
2,809

 
$
3,131

 
$
3,127

Fair value of long-term debt
3,177

 
3,693

 
3,566

1 The carrying value of long-term debt includes the remaining unamortized adjustment from our previous effective fair value hedge.
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, investment in contract asset 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 nine months ended October 31, 2015 and November 1, 2014. We estimate the fair value of goodwill, investment in contract asset and long-lived tangible and intangible assets using primarily unobservable inputs and, as such, these are considered Level 3 fair value measurements.

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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 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 October 31, 2015, we had approximately $176 of fee interest in land, which is expected to convert to a 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.
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. On October 1, 2015, our Board of Directors authorized a program to repurchase up to $1,000 of our outstanding common stock, through March 1, 2017. During the nine months ended October 31, 2015, we repurchased 7.0 shares of our common stock for an aggregate purchase price of $517 and had $1,486 remaining in share repurchase capacity as of October 31, 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.
On October 1, 2015, our Board of Directors authorized a special cash dividend of $4.85 per share of outstanding common stock, using proceeds from the sale of our credit card receivables (see Note 2: Credit Card Receivable Transaction), payable to shareholders of record at the close of business on October 12, 2015. The special cash dividend was in addition to our recurring quarterly dividend of $0.37 per share, paid in September 2015.
Our accumulated deficit was $1,047 as of October 31, 2015, compared with retained earnings of $29 as of November 1, 2014, primarily resulting from the special cash dividend, our recurring quarterly dividends and increased share repurchases.
In November 2015, subsequent to quarter end, we declared a quarterly dividend of $0.37 per share, payable in December 2015.
NOTE 9: STOCK-BASED COMPENSATION
The following table summarizes our stock-based compensation expense:
 
Quarter Ended
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Stock options
$
7

 
$
8

 
$
26

 
$
29

Acquisition-related stock compensation
5

 
4

 
14

 
4

Restricted stock units
4

 
3

 
14

 
9

Performance share units
(1
)
 
—

 
(1
)
 
1

Other
1

 
2

 
4

 
5

Total stock-based compensation expense, before income tax benefit
16

 
17

 
57

 
48

Income tax benefit
(5
)
 
(6
)
 
(18
)
 
(17
)
Total stock-based compensation expense, net of income tax benefit
$
11

 
$
11

 
$
39

 
$
31


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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 our grants:
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
 
Granted
 
Weighted-average grant-date fair value per unit
 
Granted
 
Weighted-average grant-date fair value per unit
Stock options
1.8


$
21

 
1.9

 
$
16

Stock options special dividend adjustment
0.9

 
N/A

 
—

 
N/A

Restricted stock units
0.5

 
77

 
0.5

 
63

Restricted stock units special dividend adjustment
0.1

 
N/A

 
—

 
N/A

Special Dividend Adjustment
In connection with the closing of our credit card receivable transaction on October 1, 2015, our board of directors authorized a special cash dividend of $4.85 per share (see Note 8: Shareholders Equity). As required by our equity incentive plans, an adjustment was made to outstanding awards to prevent dilution of their value resulting from the special cash dividend. The adjustments to awards included increasing the number of outstanding restricted shares, stock options and performance shares, as well as reducing the exercise prices of outstanding stock options. These adjustments did not result in incremental stock-based compensation expense as the anti-dilutive adjustments are required by our equity incentive plans.
NOTE 10: EARNINGS PER SHARE
The computation of earnings per share is as follows:
 
Quarter Ended
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Net earnings
$
81

 
$
142

 
$
420

 
$
465

 
 
 
 
 
 
 
 
Basic shares
187.2

 
190.7

 
189.1

 
190.0

Dilutive effect of stock options and other
4.1

 
4.0

 
4.1

 
3.4

Diluted shares
191.3

 
194.7

 
193.2

 
193.4

 
 
 
 
 
 
 
 
Earnings per basic share
$
0.43

 
$
0.74

 
$
2.22

 
$
2.45

Earnings per diluted share
$
0.42

 
$
0.73

 
$
2.17

 
$
2.40

 
 
 
 
 
 
 
 
Anti-dilutive stock options and other
1.9

 
1.6

 
1.8

 
2.8


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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 11: SEGMENT REPORTING
The following tables set forth information for our reportable segments: 
 
 
Retail
 
Corporate/Other
 
Retail
Business1
 
Credit
 
Total
Quarter Ended October 31, 2015
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
3,169

 
$
70

 
$
3,239

 
$
—

 
$
3,239

Credit card revenues, net
 
—

 
—

 
—

 
89

 
89

Earnings (loss) before interest and income taxes
 
185

 
(37
)
 
148

 
7

 
155

Interest expense, net
 
—

 
(27
)
 
(27
)
 
(3
)
 
(30
)
Earnings (loss) before income taxes
 
185

 
(64
)
 
121

 
4

 
125

Assets2
 
6,140

 
1,869

 
8,009

 
577

 
8,586

 
 
 
 
 
 
 
 
 
 
 
Quarter Ended November 1, 2014
 
 
 
 
 
 
 
 
 

Net sales
 
$
2,991

 
$
49

 
$
3,040

 
$
—

 
$
3,040

Credit card revenues, net
 
—

 
—

 
—

 
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

Assets2
 
5,165

 
1,788

 
6,953

 
2,316

 
9,269

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended October 31, 2015
 
 
 
 
 
 
 
 
 

Net sales
 
$
10,135

 
$
(182
)
 
$
9,953

 
$
—

 
$
9,953

Credit card revenues, net
 
—

 
—

 
—

 
291

 
291

Earnings (loss) before interest and income taxes
 
855

 
(246
)
 
609

 
168

 
777

Interest expense, net
 
—

 
(82
)
 
(82
)
 
(12
)
 
(94
)
Earnings (loss) before income taxes
 
855

 
(328
)
 
527

 
156

 
683

Assets2
 
6,140


1,869

 
8,009

 
577

 
8,586

 
 
 
 
 
 

 
 
 

Nine Months Ended November 1, 2014
 
 
 
 
 

 
 
 

Net sales
 
$
9,339

 
$
(167
)
 
$
9,172

 
$
—

 
$
9,172

Credit card revenues, net
 
—

 
—

 
—

 
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

Assets2
 
5,165


1,788

 
6,953

 
2,316

 
9,269

1 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.
2 Assets 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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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
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Nordstrom full-line stores - U.S.
$
1,634

 
$
1,666

 
$
5,431

 
$
5,423

Nordstrom.com
414

 
371

 
1,518

 
1,291

Nordstrom
2,048

 
2,037

 
6,949

 
6,714

Nordstrom Rack
885

 
816

 
2,573

 
2,316

Nordstromrack.com/HauteLook
129

 
93

 
363

 
249

Other retail1
107

 
45

 
250

 
60

Total Retail segment
3,169

 
2,991

 
10,135

 
9,339

Corporate/Other
70

 
49

 
(182
)
 
(167
)
Total net sales
$
3,239

 
$
3,040

 
$
9,953

 
$
9,172

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


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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 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 realize the expected benefits, respond to potential risks and appropriately manage potential costs associated with the program agreement with TD,
•
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, 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
•
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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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
We continue to execute our strategy to enhance the customer experience and serve more customers through our growth initiatives. While we experienced lower growth than expected during the quarter, we are still confident in achieving our long-term plans. For the third quarter our total net sales increased 6.6%, comparable sales increased 0.9% and we achieved the following milestones towards our growth initiatives:
•
We opened our first international flagship full-line store in Vancouver, British Columbia.
•
We opened two new U.S. full-line stores and 16 Nordstrom Rack stores.
•
We increased our fulfillment capacity by over 50% with the opening of our new East coast fulfillment center.
On September 18th, we opened our first international flagship store in Vancouver, B.C. Not only was it the most successful opening in our company's history, it is a major step forward in store experience and services. We believe our continued expansion in Canada represents a $1 billion sales opportunity by 2020 with six announced full-line stores and the potential for approximately 15 Nordstrom Rack stores.
In our Nordstrom business, we opened two full-line stores, including our first in Milwaukee and second in Minneapolis, and relocated a store in Los Angeles. These stores reflect our latest store design, which is now featured in nine locations. At Nordstrom.com, we made ongoing progress on our strategic priorities around selection, convenience and experience. This included expanded selection of approximately 20% and increased capacity with our new East coast fulfillment center.
Our Nordstrom Rack off-price business gives us access to new markets and a pipeline of new and younger customers. We are serving more customers with 16 additional stores, taking our total Rack store count to 194. Additionally, our online business had a significant gain in new customers to Nordstrom over the last year. Net sales at Nordstromrack.com/HauteLook increased 39%. Similar to our full-price business, we see meaningful synergies for customers to engage with us across stores and online.
Lastly, on October 1st, we completed the sale of our credit portfolio to TD Bank, a premiere global financial institution and experienced credit card partner. Our mutual commitment to having Nordstrom employees serve our customers directly was paramount to this partnership. We are able to retain all aspects of customer-facing activities, aligning with our strategy of enhancing the customer experience while allowing for improvement in capital efficiency. We are returning $1.8 billion net proceeds directly to our shareholders, including a special cash dividend of $905 paid on October 27th, with the remaining proceeds to be applied towards share repurchase.
We are well-positioned through our customer strategy while remaining focused on our current execution, and believe we are on track to achieve our sales ambition of over $20 billion by 2020. We are confident that the execution of our strategy will deliver long-term profitable growth and top-quartile shareholder return.


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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)

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
 
October 31, 2015
 
November 1, 2014
 
Amount
 
% of net sales1
 
Amount
 
% of net sales1
Net sales
$
3,239

 
100.0
%
 
$
3,040

 
100.0
%
Cost of sales and related buying and occupancy costs
(2,140
)
 
(66.1
%)
 
(1,960
)
 
(64.5
%)
Gross profit
1,099

 
33.9
%
 
1,080

 
35.5
%
Selling, general and administrative expenses
(951
)
 
(29.3
%)
 
(875
)
 
(28.8
%)
Earnings before interest and income taxes
$
148

 
4.6
%
 
$
205

 
6.8
%
 
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
 
Amount
 
% of net sales1
 
Amount
 
% of net sales1
Net sales
$
9,953

 
100.0
%
 
$
9,172

 
100.0
%
Cost of sales and related buying and occupancy costs
(6,463
)
 
(64.9
%)
 
(5,908
)
 
(64.4
%)
Gross profit
3,490

 
35.1
%
 
3,264

 
35.6
%
Selling, general and administrative expenses
(2,871
)
 
(28.8
%)
 
(2,557
)
 
(27.9
%)
Other loss
(10
)
 
(0.1
%)
 
—

 
—

Earnings before interest and income taxes
$
609

 
6.1
%
 
$
707

 
7.7
%
1 Subtotals and totals may not foot due to rounding.


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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)

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
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Net sales by channel:
 
 
 
 
 
 
 
Nordstrom full-line stores - U.S.
$
1,634

 
$
1,666

 
$
5,431

 
$
5,423

Nordstrom.com
414

 
371

 
1,518

 
1,291

Nordstrom
2,048

 
2,037

 
6,949

 
6,714

Nordstrom Rack
885

 
816

 
2,573

 
2,316

Nordstromrack.com/HauteLook
129

 
93

 
363

 
249

Other retail1
107

 
45

 
250

 
60

Retail segment
3,169

 
2,991

 
10,135

 
9,339

Corporate/Other
70

 
49

 
(182
)
 
(167
)
Total net sales
$
3,239

 
$
3,040

 
$
9,953

 
$
9,172

 
 
 
 
 
 
 
 
Net sales increase
6.6
%
 
8.9
%
 
8.5
%
 
7.3
%
 
 
 
 
 
 
 
 
Comparable sales increase (decrease) by channel:2
 
 
 
 
 
 
 
Nordstrom full-line stores - U.S.
(2.2
%)
 
0.0
%
 
(0.2
%)
 
(1.0
%)
Nordstrom.com
11.4
%
 
21.8
%
 
17.6
%
 
25.2
%
Nordstrom
0.3
%
 
3.4
%
 
3.2
%
 
3.2
%
Nordstrom Rack
(2.2
%)
 
1.7
%
 
(0.2
%)
 
4.0
%
Nordstromrack.com/HauteLook
38.8
%
 
33.8
%
 
46.1
%
 
19.7
%
Total company
0.9
%
 
3.9
%
 
3.5
%
 
3.8
%
 
 
 
 
 
 
 
 
Sales per square foot:3
 
 
 
 
 
 
 
Total sales per square foot
$
116

 
$
114

 
$
361

 
$
347

4-wall sales per square foot
93

 
94

 
296

 
295

U.S. full-line sales per square foot
79

 
81

 
264

 
262

Nordstrom Rack sales per square foot
130

 
138

 
389

 
408

1 Other retail includes Trunk Club, Nordstrom Canada full-line stores and Jeffrey boutiques.
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 (Nordstrom.com and Nordstromrack.com/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 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 6.6% for the quarter and 8.5% for the nine months ended October 31, 2015, compared with the same periods in 2014. During the nine months ended October 31, 2015, we opened five full-line stores, relocated one full-line store and opened 27 Nordstrom Rack stores. Overall comparable sales increased 0.9% for the quarter and 3.5% for the nine months ended October 31, 2015.


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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)

Nordstrom net sales, which consists of U.S. full-line and Nordstrom.com businesses, increased to $2,048, or 0.5%, for the third quarter of 2015 and to $6,949, or 3.5%, for the nine months ended October 31, 2015, compared with the same periods in 2014. These increases were driven by growth at Nordstrom.com and new store openings. Although both the number of items sold and the average selling price increased on a comparable basis for the quarter and nine months ended October 31, 2015, the growth in number of transactions decelerated relative to the first half of the year. The top-performing merchandise category for the quarter ended October 31, 2015 was Cosmetics and for the nine months ended October 31, 2015 were Cosmetics and Women's Apparel.
U.S. full-line stores' comparable sales decreased 2.2% for the quarter and 0.2% for the nine months ended October 31, 2015, compared with the same periods in 2014. The top-performing geographic regions for full-line stores for the quarter ended October 31, 2015 were the Northwest and Southern California, while the top-performing geographic regions for the nine months ended October 31, 2015 were the Northwest and Southwest.
Both of our online channels' net sales increased in the quarter and nine months ended October 31, 2015, driven by increased merchandise selection. Nordstrom.com net sales increased 11.4% in the quarter and 18% in the nine months ended October 31, 2015. Nordstromrack.com/HauteLook net sales increased 39% in the third quarter of 2015 and 46% in the nine months ended October 31, 2015.
Nordstrom Rack net sales increased $69, or 8.5%, for the quarter and $257, or 11.1%, for the nine months ended October 31, 2015, compared with the same periods in 2014. Nordstrom Rack comparable sales decreased 2.2% for the quarter and 0.2% for the nine months ended October 31, 2015. The average selling price increased, while the number of items sold decreased on a comparable basis for the quarter and nine months ended October 31, 2015. Nordstrom Rack sales per square foot decreased 6.4% for the third quarter and 4.7% for the nine months ended October 31, 2015 primarily due to new store openings.
Retail Business Gross Profit
The following table summarizes the Retail Business gross profit:
 
Quarter Ended
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Retail gross profit1
$
1,099


$
1,080


$
3,490


$
3,264

Retail gross profit as a % of net sales
33.9
%

35.5
%

35.1
%

35.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
October 31, 2015
 
November 1, 2014
Ending inventory per square foot
 
 
 
 
$
83.98

 
$
81.69

Inventory turnover rate2
 
 
 
 
4.32

 
4.52

1 Retailers 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.
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. 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 decreased 162 basis points for the quarter primarily due to higher markdowns in addition to Nordstrom Rack's continued store expansion. For the nine months ended October 31, 2015, our Retail gross profit rate decreased 53 basis points primarily due to higher markdowns. Our Retail gross profit increased $19 for the third quarter of 2015 primarily due to increased sales, partially offset by higher markdowns and Nordstrom Rack's continued store expansion. Retail gross profit increased $226 for the nine months ended October 31, 2015, compared with the same period in 2014, primarily due to increased sales, partially offset by Nordstrom Rack's continued store expansion.


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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)

Our inventory turnover rate of 4.32 times decreased for the period ended October 31, 2015, compared with the same period in 2014, due to softer sales trends experienced during the quarter. Though our ending inventory per square foot of $83.98 increased for the period ended October 31, 2015, our ending inventory increase of 8.0% was in-line with the increase in net sales.
Ending inventory includes pack and hold inventory of $162 and $169 on October 31, 2015 and November 1, 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
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Selling, general and administrative expenses
$
951

 
$
875

 
$
2,871

 
$
2,557

Selling, general and administrative expenses as a % of net sales
29.3
%
 
28.8
%
 
28.8
%
 
27.9
%
Our Retail SG&A rate increased 58 basis points for the quarter and 97 basis points for the nine months ended October 31, 2015 due to planned growth initiatives related to Trunk Club and Canada, and higher fulfillment costs associated with online growth. Retail SG&A increased $76 for the quarter and $314 for the nine months ended October 31, 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 nine months ended October 31, 2015 was due to impairment of an equity method investment as we determined it was no longer recoverable.


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

Credit Segment
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 cardholders used third-party cards instead of ours in our stores or on our websites.
On October 1, 2015, we completed the sale of substantially all of our U.S. Visa and private label credit card portfolio to TD (see Note 2: Credit Card Receivable Transaction).
Prior to October 1, 2015, interest expense at the Credit segment was 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 ranged from 70% to 90%. As such, we considered a mix of 80% debt and 20% equity appropriate, and therefore assigned interest expense to the Credit segment as if it carried debt of up to 80% of the credit card receivables. Subsequent to the sale, we no longer allocate interest expense to the Credit segment as we do not fund the accounts receivable now owned by TD.
 
Quarter Ended
 
October 31, 2015
 
November 1, 2014
Credit card revenues, net
$
89

 
$
100

Credit expenses
(50
)
 
(43
)
Credit transaction, net
(32
)
 
—

Earnings before interest and income taxes1
7

 
57

Interest expense
(3
)
 
(5
)
Intercompany merchant fees
24

 
23

Credit segment contribution, before income taxes
$
28

 
$
75

 
 
 
 
Credit and debit card volume2:
 
 
 
Outside
$
1,059

 
$
1,074

Inside
1,243

 
1,160

Total volume
$
2,302

 
$
2,234

 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
Credit card revenues, net
$
291

 
$
291

Credit expenses
(152
)
 
(140
)
Credit transaction, net
29

 
—

Earnings before interest and income taxes1
168

 
151

Interest expense
(12
)
 
(14
)
Intercompany merchant fees
83

 
77

Credit segment contribution, before income taxes
$
239

 
$
214

 
 
 
 
Credit and debit card volume2:
 
 
 
Outside
$
3,209

 
$
3,220

Inside
4,242

 
3,879

Total volume
$
7,451

 
$
7,099

1 As presented in Note 11: Segment Reporting.
2 Volume represents sales plus applicable taxes on all Nordstrom branded credit and debit cards, including those owned by TD.



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

Credit Card Revenues, net
The following is a summary of our credit card revenues, net:
 
Quarter Ended
 
Nine Months Ended
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Finance charge revenue
$
45

 
$
64

 
$
173

 
$
186

Interchange
15

 
22

 
60

 
66

Late fees and other
14

 
14

 
43

 
39

Credit program revenues, net
15

 
—

 
15

 
—

Total credit card revenues, net
$
89

 
$
100