UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 28, 2017
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to___________
Commission file number 001-15059
NORDSTROM, INC.
(Exact name of registrant as specified in its charter)
Washington | 91-0515058 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1617 Sixth Avenue, Seattle, Washington | 98101 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code (206) 628-2111
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common stock, without par value | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO þ
As of July 29, 2016 the aggregate market value of the Registrant’s voting and non-voting stock held by non-affiliates of the Registrant was approximately $6.1 billion using the closing sales price on that day of $44.23. On March 7, 2017, 166,851,252 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2017 Annual Meeting of Shareholders scheduled to be held on May 16, 2017 are incorporated into Part III.
Nordstrom, Inc. and subsidiaries 1
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Nordstrom, Inc. and subsidiaries 3
PART I
Item 1. Business.
DESCRIPTION OF BUSINESS
Founded in 1901 as a retail shoe business in Seattle, Nordstrom later incorporated in Washington state in 1946 and went on to become one of the leading fashion specialty retailers based in the U.S. As of March 20, 2017, we operate 344 U.S. stores located in 40 states as well as a robust ecommerce business through Nordstrom.com, Nordstromrack.com/HauteLook and TrunkClub.com. We also operate five Nordstrom full-line stores in Canada. The west and east coasts of the U.S. are the areas in which we have the largest presence. We have two reportable segments, which include Retail and Credit.
As of March 20, 2017, the Retail segment includes our 117 Nordstrom-branded full-line stores in the U.S. and Nordstrom.com, 216 off-price Nordstrom Rack stores, five Canada full-line stores, Nordstromrack.com/HauteLook, seven Trunk Club clubhouses and TrunkClub.com, two Jeffrey boutiques and two clearance stores that operate under the name “Last Chance.” Through these multiple retail channels, we strive to deliver the best customer experience possible. We offer an extensive selection of high-quality brand-name and private label merchandise focused on apparel, shoes, cosmetics and accessories. Our integrated Nordstrom full-line stores and online store allow us to provide our customers with a seamless shopping experience. In-store purchases are primarily fulfilled from that store’s inventory, but when inventory is unavailable at that store it may also be shipped to our customers from our fulfillment centers in Cedar Rapids, Iowa and Elizabethtown, Pennsylvania, or from other Nordstrom full-line stores. Online purchases are primarily shipped to our customers from our Cedar Rapids and East Coast fulfillment centers, but may also be shipped from our Nordstrom full-line stores. Our customers can also pick up online orders in our Nordstrom full-line stores if inventory is available at one of our locations. These capabilities allow us to better serve customers across various channels and improve sales. Nordstrom Rack stores purchase merchandise primarily from the same vendors carried in Nordstrom full-line stores and also serve as outlets for clearance merchandise from our Nordstrom stores and other retail channels. Nordstromrack.com/HauteLook offers a persistent selection of off-price merchandise, as well as limited-time sale events on fashion and lifestyle brands and are integrated with a single customer log-in, shared shopping cart and streamlined checkout process. Nordstromrack.com combines the technology expertise of HauteLook with the merchant expertise of Nordstrom Rack. Online purchases are primarily shipped to our customers from our San Bernardino, California fulfillment center. Furthermore, we can accommodate returns from these sites by mail or at any Nordstrom Rack location.
Through our Credit segment, our customers can access a variety of payment products and services, including a Nordstrom-branded private label card, two Nordstrom-branded Visa credit cards and a debit card for Nordstrom purchases. When customers open a Nordstrom credit or debit card, they also join our loyalty program that provides benefits based on their level of spending. Although the primary purposes of our Credit segment are to foster greater customer loyalty and drive more sales, through our program agreement with TD Bank, N.A. (“TD”) (see Note 2: Credit Card Receivable Transaction in Item 8), we also receive credit card revenue.
For more information about our business and our reportable segments, see Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 15: Segment Reporting in Item 8.
FISCAL YEAR
We operate on a 52/53-week fiscal year ending on the Saturday closest to January 31st. References to 2017 and 2012 relate to the 53-week fiscal year ended February 3, 2018 and February 2, 2013. References to 2016 and all other years within this document are based on a 52-week fiscal year.
TRADEMARKS
We have 166 trademarks, each of which is the subject of one or more trademark registrations and/or trademark applications. Our most notable trademarks include Nordstrom, Nordstrom Rack, HauteLook, Trunk Club, Halogen, BP., Caslon, Zella, Tucker+Tate and 14th & Union. Each of our trademarks is renewable indefinitely, provided that it is still used in commerce at the time of the renewal.
RETURN POLICY
We have a fair and liberal approach to returns as part of our objective to provide high-quality customer service. We do not have a formal return policy at our Nordstrom full-line stores or online at Nordstrom.com. Our goal is to take care of our customers, which includes making returns and exchanges easy, whether in stores or online, where we offer free shipping on purchases and returns. Our Nordstrom Rack stores generally accept returns up to 90 days from the date of purchase with the original price tag and sales receipt, and also accept returns of Nordstromrack.com/HauteLook merchandise. Nordstromrack.com/HauteLook generally accepts returns of apparel, footwear and accessories within 90 days from the date of shipment.
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SEASONALITY
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. In 2016, the Anniversary Sale event started one week later in July relative to last year, shifting one week of the event into the third quarter.
NORDSTROM REWARDS
Our Nordstrom Rewards™ loyalty program, which rewards customers based on their level of spending, is one area that enables us to directly engage and strengthen relationships with customers while driving incremental sales and trips. Upon reaching a certain points threshold, customers receive Nordstrom Notes®, which can be redeemed for goods or services. In May 2016, we expanded the program to all customers, when historically this program was offered only to Nordstrom cardholders. Rewards can be earned and redeemed at Nordstrom full-line stores, Nordstrom.com, Nordstrom Rack and Nordstromrack.com/HauteLook. Nordstrom cardholders can also earn rewards at Trunk Club. Customers who participate in our loyalty program through our credit and debit cards receive additional benefits including reimbursements for alterations, Personal Triple Points days, shopping and fashion events and early access to the Anniversary Sale.
COMPETITIVE CONDITIONS
We operate in a highly competitive business environment. We compete with other national, regional, local and online retailers that may carry similar lines of merchandise, including department stores, specialty stores, off-price stores, boutiques and internet businesses. Our specific competitors vary from market to market. We believe the keys to competing in our industry are providing great customer service and customer experiences in stores and online. This includes offering compelling price and value, fashion newness, quality of products, selection, convenience, technology, product fulfillment, personalization and appealing, relevant store environments in top locations.
INVENTORY
We plan our merchandise purchases and receipts to coincide with expected sales trends. For instance, our merchandise purchases and receipts increase prior to our Anniversary Sale, which has historically extended over the last two weeks of July. We also purchase and receive a larger amount of merchandise in the fall as we prepare for the holiday shopping season (from late November through December). At Nordstrom Rack, we invest in pack and hold inventory, which involves the strategic purchase of merchandise from some of our full-line stores’ top brands in advance of the upcoming selling seasons, to take advantage of favorable buying opportunities. This inventory is typically held for six months on average and has been an important component of Nordstrom Rack’s inventory strategy.
In order to offer merchandise that our customers want, we purchase from a wide variety of high-quality suppliers, including domestic and foreign businesses. We also have arrangements with agents and contract manufacturers to produce our private label merchandise. We expect our suppliers to meet our “Nordstrom Partnership Guidelines,” which address our corporate social responsibility standards for matters such as legal and regulatory compliance, labor, health and safety and the environment. This is available on our website at Nordstrom.com.
EMPLOYEES
During 2016, we employed approximately 72,500 employees on a full- or part-time basis. Due to the seasonal nature of our business, employment increased to approximately 74,000 employees in July 2016 and 78,000 in December 2016. All of our employees are non-union. We believe our relationship with our employees is good.
CAUTIONARY STATEMENT
Certain statements in this Annual Report on Form 10-K contain or may suggest “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties including, but not limited to, anticipated financial outlook for the fiscal year ending February 3, 2018, 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:
Strategic and Operational
• | successful execution of our customer strategy, including expansion into new domestic and international markets, acquisitions, investments in our stores and online as well as investments in technology, our ability to realize the anticipated benefits from growth initiatives and our ability to provide a seamless experience across all channels, |
• | timely and effective execution of our ecommerce initiatives and ability to manage the costs and organizational changes associated with this evolving business model, |
• | 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 maintain relationships with our employees and to effectively attract, develop and retain our future leaders, |
• | effective inventory management processes and systems, fulfillment processes and systems, disruptions in our supply chain and our ability to control costs, |
Nordstrom, Inc. and subsidiaries 5
• | the impact of any systems or network 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 costs associated with our program agreement with TD, |
• | our ability to safeguard our reputation and maintain our vendor relationships, |
• | our ability to respond to the business and retail environment, fashion trends and consumer preferences, including changing expectations of service and experience in stores and online, and evolve our business model, |
• | the effectiveness of planned advertising, marketing and promotional campaigns in the highly competitive and promotional retail industry, |
• | 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, |
Economic and External
• | the impact of economic and market conditions and the resultant impact on consumer spending patterns, |
• | the impact of economic or political conditions in the U.S. and countries where our third party vendors operate, |
• | 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 or information technology systems and communications, |
Legal and Regulatory
• | our compliance with applicable domestic and international laws, regulations and ethical standards, including those related to banking, employment and tax and the outcome of claims and litigation and resolution of such matters, |
• | the impact of the current regulatory environment and financial system and health care reforms, and |
• | compliance with debt covenants, availability and cost of credit, changes in our credit rating, changes in interest rates, debt repayment patterns and personal bankruptcies. |
These and other factors, including those factors described in Item 1A: Risk Factors could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances.
SEC FILINGS
We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”). All the materials we file with the SEC are publicly available at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
WEBSITE ACCESS
Our website address is Nordstrom.com. Our annual and quarterly reports on Form 10-K and Form 10-Q (including related filings in eXtensible Business Reporting Language (“XBRL”) format), current reports on Form 8-K, proxy statements, our executives’ statements of changes in beneficial ownership of securities on Form 4 and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are available for free on or through our website as soon as reasonably practicable after we electronically file the report with or furnish it to the SEC. Interested parties may also access a webcast of quarterly earnings conference calls and other financial events through our website.
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CORPORATE GOVERNANCE
We have a long-standing commitment to upholding a high level of ethical standards. In addition, as the listing standards of the New York Stock Exchange (“NYSE”) and the rules of the SEC require, we have adopted Codes of Business Conduct and Ethics for our employees, officers and directors (“Codes of Ethics”) and Corporate Governance Guidelines. Our Codes of Ethics, Corporate Governance Guidelines and Committee Charters for the Audit, Compensation, Corporate Governance and Nominating, Finance and Technology Committees are posted on our website. Any amendments to these documents, or waivers of the requirements they contain, will also be available on our website.
For printed versions of these items or any other inquiries, please contact:
Nordstrom Investor Relations |
1617 Sixth Avenue, Suite 500 |
Seattle, Washington 98101 |
(206) 303-3200 |
invrelations@nordstrom.com |
Item 1A. Risk Factors.
Our business faces many risks. We believe the risks described below outline the items of most concern to us.
RISKS DUE TO STRATEGIC AND OPERATIONAL FACTORS
Our customer strategy focuses on providing a seamless and high-quality experience across all Nordstrom channels and failure to successfully execute our plans could negatively impact our current business and future profitability.
We are enhancing our customer shopping experience in our stores, online and in mobile and social channels by pursuing a heightened focus on technology and ecommerce to fuel our growth. With the accelerated pace of change in the retail environment, we may not be able to meet our customers’ changing expectations in how they shop in stores or through ecommerce. If we target the wrong opportunities, fail to make investments at the right time or pace, fail to make the best investments in the right channels or make an investment commitment significantly above or below our needs, it may harm our competitive position. If these technologies and investments do not perform as expected, are not seamlessly integrated or are not maintained properly, our profitability and growth could be adversely affected.
We are continuing our plan to open new stores. This involves certain risks, including the availability of suitable locations, constructing, furnishing and supplying a store in a timely and cost-effective manner and properly balancing our capital investments between new stores, remodels, technology and ecommerce. In addition, we may not accurately assess the demographic or retail environment for a particular location and sales at new, relocated or remodeled stores may not meet our projections, particularly in light of the changing trends between online and brick-and-mortar shopping channels, which could adversely affect our return on investment. We also intend to open stores in new markets and plan to continue expanding in international markets, such as Manhattan and Canada. These efforts will require additional management attention and resources and may distract us from executing our core operations. In addition, competition from strong local competitors, compliance with foreign and local laws and regulatory requirements and potentially unfavorable tax consequences may cause our business to be adversely impacted.
As we execute our plans and continue to evolve and transform our strategy, we may not adequately manage the related organizational changes to align with our strategy or appropriately monitor, report or communicate the changes in an effective manner. In addition, we may not gather accurate and relevant data or effectively utilize that data, which may impact our strategic planning and decision making.
Our growth strategy as it relates to ecommerce could have adverse impacts on our results of operations if not successfully executed.
We are continuing our investment in ecommerce as advancements in technology have impacted shopping behaviors of consumers. Computers, mobile phones, tablets and other devices allow customers to browse and transact anywhere or anytime. Our growth strategies in this area span the development of applications for electronic devices, improvement of customer-facing technology, timely delivery of products purchased online, enhancement of inventory management systems, greater and more fluid inventory availability between online and retail locations, and greater consistency in marketing and pricing strategies. This business model has a high variable cost structure driven by fulfillment and marketing costs and will continue to require investment in cross-channel operations and supporting technologies. If we do not implement and expand our ecommerce initiatives successfully or we do not realize our anticipated return on these investments, our profitability and growth could be adversely affected. In addition, if customers shift to ecommerce more quickly than we anticipate, we may need to accelerate our ecommerce initiatives and investments and may experience higher costs adversely impacting our profitability.
Nordstrom, Inc. and subsidiaries 7
Our stores located in shopping malls may be adversely affected if the consumer traffic of malls decline.
Many of our stores are located in desirable locations within shopping malls and benefit from the abilities that we and other anchor tenants have to generate consumer traffic. A substantial decline in mall traffic, the development of new shopping malls, the availability of locations within existing or new shopping malls, the success of individual shopping malls and the success of other anchor tenants may negatively impact our ability to maintain or grow our sales in existing stores, as well as our ability to open new stores, which could have an adverse effect on our financial condition or results of operations.
Improvements to our merchandise buying and fulfillment processes and systems could adversely affect our business if not successfully executed.
We are making investments to improve our merchandise planning, procurement, allocation and fulfillment capabilities through changes in personnel, processes, location logistics and technology over a period of several years. If we encounter challenges associated with change management, the ability to hire and retain key personnel involved in these efforts, implementation of associated information technology or adoption of new processes, our ability to continue to successfully execute our strategy or evolve our strategy as the retail environment changes could be adversely affected. As a result, we may not derive the expected benefits to our sales and profitability, or we may incur increased costs relative to our current expectations.
If we do not effectively design and implement our strategic and business planning processes to attract, retain, train and develop talent and future leaders, our business may suffer.
We rely on the experience of our senior management, who have specific knowledge relating to us and our industry that is difficult to replace, and the talents of our workforce to execute our business strategies and objectives. If unexpected turnover occurs without adequate succession plans, the loss of the services of any of these individuals, or any resulting negative perceptions of our business, could damage our reputation and our business.
Even if we take appropriate measures to safeguard our information security and privacy environment from security breaches, our customers and our business could still be exposed to risk.
Nordstrom, our subsidiaries and, in some instances, our third party vendors collect, store and transmit customers’ personal information, consumer preferences and credit card information. In addition, our operations involve the collection, storage and transmission of employee information and Company financial and strategic data. Any measures we implement to prevent a security or cybersecurity threat may not be totally effective and may have the potential to harm relations with our customers or decrease activity on our websites by making them more difficult to use. Security breaches may be the result of intentional or inadvertent activities by our employees or by third parties with whom we have business relationships that may result in the unauthorized release of customer personal or confidential information. In addition, the regulatory environment surrounding information security, cybersecurity and privacy is increasingly demanding, with new and constantly changing requirements. Security breaches and cyber incidents and their remediation, whether at our Company, our third party providers or other retailers, could expose us to a risk of loss or misappropriation of this information, litigation, potential liability, reputation damage and loss of customers’ trust and business, which could adversely impact our sales. Any such breaches or incidents could subject us to investigation, notification and remediation costs, which may not be covered by our insurance policies. If there is additional information that is later discovered related to such security breach or incident, there could be further loss of shareholders’ and customers’ trust and business based upon their reactions to this additional information. Additionally, we could be subject to credit card fraud losses due to external credit card fraud. To the extent that any incident results in the loss, damage or misappropriation of information, we may be materially adversely affected by claims from our customers, financial institutions, regulators, payment card networks and other third parties.
Our business may be impacted by information technology system failures or network disruptions.
Our ability to transact with customers and operate our business depends on the efficient operation of our computer and communications systems. If we encounter an interruption or deterioration in critical processes, or experience the loss of critical data which may result from natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, third party or other disruptions, our business could be harmed. Depending on the severity of the failure, our disaster recovery plans may be inadequate or ineffective. These events could also damage our reputation, result in loss of sales and be expensive to remedy.
Our revenues and operating results are affected by the seasonal nature of our business and cyclical trends in consumer spending.
Our business, like that of other retailers, is subject to seasonal fluctuations and cyclical trends in consumer spending. 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. Any factor that negatively impacts these selling seasons could have an adverse effect on our results of operations for the entire year. To provide shareholders a better understanding of management’s expectations surrounding results, we provide public guidance on our expected operating and financial results for future periods comprised of forward-looking statements subject to certain risks and uncertainties.
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If we fail to appropriately manage our capital, we may negatively impact our operations and shareholder return.
We utilize capital to finance our operations, make capital expenditures and acquisitions, manage our debt levels and return value to our shareholders through dividends and share repurchases. Changes in the credit and capital markets, including market disruptions, limited liquidity and interest rate fluctuations, may increase the cost of financing or restrict access to a potential source of liquidity. A deterioration in our capital structure or the quality and stability of our earnings could result in a downgrade of our credit rating, constraining the capital available to our company. If our access to capital is restricted or our borrowing costs increase, our operations and financial condition could be adversely impacted. Further, if we do not properly allocate our capital to maximize returns, our operations, cash flows and returns to shareholders could be adversely affected.
Ownership and leasing real estate exposes us to possible liabilities and losses.
We own or lease the land and/or buildings for all of our stores and are therefore subject to all of the risks associated with owning and leasing real estate. In particular, the value of the assets could decrease, their operating costs could increase, or a store may not be opened as planned due to changes in the real estate market, demographic trends, site competition, dependence on third party performance or overall economic environment. Additionally, we are potentially subject to liability for environmental conditions, exit costs associated with disposal of a store, commitments to pay base rent for the entire lease term or operate a store for the duration of an operating covenant.
Our customer and employee relationships could be negatively affected if we fail to maintain our corporate culture and reputation.
We have a well-recognized culture and reputation that consumers may associate with a high level of integrity, customer service and quality merchandise, and it is one of the reasons customers shop with us and employees choose us as a place of employment. Any significant damage to our reputation, including factors outside our control or on social media, could negatively impact sales, diminish customer trust, reduce employee morale and productivity and lead to difficulties in recruiting and retaining qualified employees.
The transaction related to the sale of our credit card receivables and resulting program agreement with TD could adversely impact our business.
In October 2015, we completed the sale of a substantial majority of our U.S. Visa and private label credit card portfolio to TD. While this transaction was consummated on terms that allow us to maintain customer-facing activities, if we fail to meet certain service levels under the program agreement with TD, TD has the right to assume certain individual servicing functions. If we lose control of such activities and functions, if we do not successfully respond to potential risks and appropriately manage potential costs associated with the program agreement with TD, or if this transaction negatively impacts the customer service associated with our cards, our operations, cash flows and returns to shareholders could be adversely affected, which could also harm our business reputation and competitive positioning.
The concentration of stock ownership in a small number of our shareholders could limit your ability to influence corporate matters.
We have regularly reported in our annual proxy statements the holdings of members of the Nordstrom family, including Bruce A. Nordstrom, our former Co-President and Chairman of the Board, his sister Anne E. Gittinger and members of the Nordstrom family within our Executive Team. In our proxy statement as of March 7, 2017, for the 2017 Annual Meeting of Shareholders, these individuals beneficially owned an aggregate of approximately 31% of our common stock. As a result, either individually or acting together, they may be able to exercise considerable influence over matters requiring shareholder approval. As reported in our periodic filings, our Board of Directors has from time to time authorized share repurchases. While these share repurchases may be offset in part by share issuances under our equity incentive plans and as consideration for acquisitions, the repurchases may nevertheless have the effect of increasing the overall percentage ownership held by these shareholders. The corporate law of the State of Washington, where the Company is incorporated, provides that approval of a merger or similar significant corporate transaction requires the affirmative vote of two-thirds of a company’s outstanding shares. The beneficial ownership of these shareholders may have the effect of discouraging offers to acquire us, delay or otherwise prevent a significant corporate transaction because the consummation of any such transaction would likely require the approval of these shareholders. As a result, the market price of our common stock could be affected.
Investment and partnerships in new business strategies and acquisitions could disrupt our core business.
We have invested in or are pursuing strategic growth opportunities, which may include acquisitions of, or investments in, other businesses, as well as new technologies or other investments to provide a superior customer shopping experience in our stores and online. Additionally, our business model will continue to rely more on partnerships with third parties for certain strategic initiatives and technologies. If these investments, acquisitions or partnerships do not perform as expected or create operational difficulties, we may record impairment charges and our profitability and growth could be adversely affected.
RISKS DUE TO ECONOMIC AND EXTERNAL MARKET FACTORS
A downturn in economic conditions could have a significant adverse effect on our business.
During economic downturns, fewer customers may shop for the high-quality items in our stores and on our websites, as these products may be seen as discretionary, and those who do shop may limit the amount of their purchases. This reduced demand may lead to lower sales, higher markdowns, an overly promotional environment and increased marketing and promotional spending.
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Our business could suffer if we do not appropriately assess and react to competitive market forces and changes in customer behavior.
We compete with other international, national, regional, local and online retailers that may carry similar lines of merchandise, including department stores, specialty stores, off-price stores, boutiques and internet businesses. The retail environment is rapidly evolving with customer shopping preferences continuing to shift online and we expect competition in the ecommerce market to intensify in the future as the internet continues to facilitate competitive entry and comparison shopping. We may lose market share to our competitors and our sales and profitability could suffer if we are unable to remain competitive. Our financial model is changing to match customer shopping preferences, but if we do not properly allocate our capital between the store and online environment, or adjust the effectiveness and efficiency of our stores and online channels, our overall sales and profitability could suffer.
Our Credit segment faces competition from other retailers who also offer credit card products with associated loyalty programs, large banks and other credit card companies, some of which have substantial financial resources. If we do not effectively anticipate or respond to the competitive banking and credit card environments, we could lose market share to our competitors.
Our sales and customer relationships may be negatively impacted if we do not anticipate and respond to consumer preferences and fashion trends appropriately.
Our ability to predict or respond to constantly changing fashion trends, consumer preferences and spending patterns significantly impacts our sales and operating results. If we do not identify and respond to emerging trends in consumer spending and preferences quickly enough, we may harm our ability to retain our existing customers or attract new customers. If we purchase too much inventory, we may be forced to sell our merchandise at lower average margins, which could harm our business. Conversely, if we fail to purchase enough merchandise, we may lose opportunities for additional sales and potentially harm relationships with our customers.
Our business depends on third parties for the production, supply or delivery of goods, and a disruption could result in lost sales or increased costs.
The continued success of our operations is tied to our timely receipt of quality merchandise from third parties. Our process to identify qualified vendors and access quality products in an efficient manner on acceptable terms and cost can be complex. Violations of law with respect to quality and safety by our importers, manufacturers or distributors could result in delays in shipments and receipt of goods or damage our reputation, resulting in lost sales. These vendors may experience difficulties due to economic or political conditions or the countries in which merchandise is manufactured could become subject to new trade restrictions, including increased customs restrictions, tariffs or quotas. Additionally, changes in tax and trade policies that impact the retail industry, such as increased taxation on imported goods, could have a material adverse effect on our business, results of operations and liquidity.
The results of our Credit operations could be adversely affected by changes in market conditions.
Our net credit card revenues and profitability are subject in large part to economic and market conditions that are beyond our control, including, but not limited to, interest rates, consumer credit availability, consumer debt levels, unemployment trends and other factors. These economic and market conditions could impair our revenues and the profitability of our Credit segment due to factors such as lower demand for credit, unfavorable payment patterns and higher delinquency rates. Additionally, our results may be negatively impacted if there are changes to the credit card risk management policies implemented under our program agreement with TD.
Our business and operations could be materially and adversely affected by supply chain disruptions, port disruptions, severe weather patterns, natural disasters, widespread pandemics and other natural or man-made disruptions.
We derive a significant amount of our total sales from stores located on the west and east coasts of the United States, particularly in California, which increases our exposure to market-disrupting conditions in these regions. These disruptions could cause, among other things, a decrease in consumer spending that would negatively impact our sales, staffing shortages in our stores, distribution centers or corporate offices, interruptions in the flow of merchandise to our stores, disruptions in the operations of our merchandise vendors or property developers, increased costs and a negative impact on our reputation and long-term growth plans.
10
RISKS DUE TO LEGAL AND REGULATORY FACTORS
We are subject to certain laws, litigation, regulatory matters and ethical standards, and our failure to comply with or adequately address developments as they arise could adversely affect our reputation and operations.
Our policies, procedures and practices and the technology we implement are designed to comply with federal, state, local and foreign laws, rules and regulations, including those imposed by the SEC and other regulatory agencies, the marketplace, the banking industry and foreign countries, as well as responsible business, social and environmental practices, all of which may change from time to time. Significant legislative changes, including those that relate to employment matters and health care reform, could impact our relationship with our workforce, which could increase our expenses and adversely affect our operations. In addition, if we fail to comply with applicable laws and regulations or implement responsible business, social, environmental and supply chain practices, we could be subject to damage to our reputation, class action lawsuits, legal and settlement costs, civil and criminal liability, increased cost of regulatory compliance, restatements of our financial statements, disruption of our business and loss of customers. Any required changes to our employment practices could result in the loss of employees, reduced sales, increased employment costs, low employee morale and harm to our business and results of operations. In addition, political and economic factors could lead to unfavorable changes in federal, state and foreign tax laws, which may increase our tax liabilities. An increase in our tax liabilities could adversely affect our results of operations. We are also regularly involved in various litigation matters that arise in the ordinary course of business. Litigation or regulatory developments could adversely affect our business and financial condition.
We continue to face uncertainties due to financial services industry regulation and supervision that could have an adverse affect on our operations.
Federal and state regulation and supervision of the financial industry has increased due to implementation of consumer protection and financial reform legislation such as the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Financial Reform Act”). The Financial Reform Act significantly restructured regulatory oversight and other aspects of the financial industry, created the Consumer Financial Protection Bureau (“CFPB”) to supervise and enforce consumer lending laws and regulations, and expanded state authority over consumer lending. The CARD Act included new and revised rules and restrictions on credit card pricing, finance charges and fees, customer billing practices and payment application. We anticipate more regulation and interpretations of the new rules to continue, and we may be required to make changes, or TD may be required to make changes in connection with the program agreement, to credit card practices and systems which could adversely impact the revenues and profitability of our Credit segment. Compliance with applicable laws and regulations could limit or restrict the activities of our business, whether conducted by us or TD, and any potential enforcement actions by those agencies for failure to comply could have an adverse impact on us.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The following table summarizes the number of retail stores we own or lease, and the percentage of total store square footage represented by each listed category as of January 28, 2017:
Number of stores | |||||||||
Nordstrom Full-Line Stores - U.S. and Canada | Nordstrom Rack and Other1 | % of total store square footage | |||||||
Leased stores on leased land | 24 | 225 | 42 | % | |||||
Owned stores on leased land | 63 | — | 38 | % | |||||
Owned stores on owned land | 35 | 1 | 19 | % | |||||
Partly owned and partly leased store | 1 | — | 1 | % | |||||
Total | 123 | 226 | 100 | % | |||||
1 Other includes Trunk Club clubhouses, Jeffrey boutiques and Last Chance stores.
Nordstrom, Inc. and subsidiaries 11
The following table summarizes our store openings and closures for fiscal 2016 and announced store openings and closures for fiscal 2017 by state/province:
Number of stores | ||||||||||||
Fiscal year | 2016 | Announced 2017 | ||||||||||
State/Province | Nordstrom Full-Line Stores - U.S. and Canada | Nordstrom Rack and Other1 | Nordstrom Full-Line Stores - U.S. and Canada | Nordstrom Rack and Other1 | ||||||||
Openings | ||||||||||||
U.S. | ||||||||||||
Arizona | — | 1 | — | — | ||||||||
California | — | 4 | — | 2 | ||||||||
Colorado | — | 1 | — | — | ||||||||
Florida | — | 1 | — | 1 | ||||||||
Hawaii | — | 1 | — | — | ||||||||
Illinois | — | 3 | — | 2 | ||||||||
Indiana | — | — | — | 1 | ||||||||
Louisiana | — | 2 | — | — | ||||||||
Maryland | — | — | — | 1 | ||||||||
Massachusetts | — | 2 | — | — | ||||||||
Michigan | — | 1 | — | — | ||||||||
Minnesota | — | — | — | 2 | ||||||||
New Mexico | — | 1 | — | — | ||||||||
New York | — | — | — | 1 | ||||||||
Oregon | — | — | — | 1 | ||||||||
Pennsylvania | — | 3 | — | — | ||||||||
South Carolina | — | 1 | — | — | ||||||||
Tennessee | — | — | — | 1 | ||||||||
Texas | 1 | — | — | 2 | ||||||||
Utah | — | 1 | — | — | ||||||||
Virginia | — | 1 | — | — | ||||||||
Washington | — | — | — | 2 | ||||||||
Washington D.C. | — | 1 | — | — | ||||||||
Canada | ||||||||||||
Ontario | 2 | — | 1 | — | ||||||||
Total Openings | 3 | 24 | 1 | 16 | ||||||||
Closures: California | 1 | — | 1 | — | ||||||||
1 Other includes Trunk Club clubhouses, Jeffrey boutiques and Last Chance stores.
12
The following table lists our U.S. and Canada retail store count and facility square footage by state/province as of January 28, 2017:
Retail stores by channel | Nordstrom Full-Line Stores - U.S. and Canada | Nordstrom Rack and Other1 | Total | ||||||||||||
State/Province | Count | Square Footage (000’s) | Count | Square Footage (000’s) | Count | Square Footage (000’s) | |||||||||
U.S. | |||||||||||||||
Alabama | — | — | 1 | 35 | 1 | 35 | |||||||||
Alaska | 1 | 97 | 1 | 35 | 2 | 132 | |||||||||
Arizona | 2 | 384 | 8 | 287 | 10 | 671 | |||||||||
California2 | 31 | 5,328 | 50 | 1,865 | 81 | 7,193 | |||||||||
Colorado | 3 | 559 | 6 | 213 | 9 | 772 | |||||||||
Connecticut | 1 | 189 | 1 | 36 | 2 | 225 | |||||||||
Delaware | 1 | 127 | 1 | 32 | 2 | 159 | |||||||||
Florida2 | 9 | 1,389 | 15 | 519 | 24 | 1,908 | |||||||||
Georgia | 2 | 383 | 5 | 165 | 7 | 548 | |||||||||
Hawaii | 1 | 195 | 2 | 78 | 3 | 273 | |||||||||
Idaho | — | — | 1 | 37 | 1 | 37 | |||||||||
Illinois | 4 | 947 | 14 | 524 | 18 | 1,471 | |||||||||
Indiana | 1 | 134 | 1 | 35 | 2 | 169 | |||||||||
Iowa | — | — | 1 | 35 | 1 | 35 | |||||||||
Kansas | 1 | 219 | 1 | 35 | 2 | 254 | |||||||||
Kentucky | — | — | 1 | 33 | 1 | 33 | |||||||||
Louisiana | — | — | 3 | 90 | 3 | 90 | |||||||||
Maine | — | — | 1 | 30 | 1 | 30 | |||||||||
Maryland | 4 | 765 | 4 | 156 | 8 | 921 | |||||||||
Massachusetts | 4 | 595 | 8 | 275 | 12 | 870 | |||||||||
Michigan | 3 | 552 | 5 | 178 | 8 | 730 | |||||||||
Minnesota | 2 | 380 | 3 | 108 | 5 | 488 | |||||||||
Missouri | 2 | 342 | 2 | 69 | 4 | 411 | |||||||||
Nevada | 1 | 207 | 3 | 101 | 4 | 308 | |||||||||
New Jersey | 5 | 991 | 7 | 248 | 12 | 1,239 | |||||||||
New Mexico | — | — | 1 | 34 | 1 | 34 | |||||||||
New York | 2 | 460 | 13 | 426 | 15 | 886 | |||||||||
North Carolina | 2 | 300 | 2 | 74 | 4 | 374 | |||||||||
Ohio | 3 | 549 | 6 | 224 | 9 | 773 | |||||||||
Oklahoma | — | — | 2 | 67 | 2 | 67 | |||||||||
Oregon | 4 | 555 | 5 | 190 | 9 | 745 | |||||||||
Pennsylvania | 2 | 381 | 6 | 214 | 8 | 595 | |||||||||
Puerto Rico | 1 | 143 | — | — | 1 | 143 | |||||||||
Rhode Island | 1 | 206 | 1 | 38 | 2 | 244 | |||||||||
South Carolina | — | — | 4 | 104 | 4 | 104 | |||||||||
Tennessee | 1 | 145 | 1 | 36 | 2 | 181 | |||||||||
Texas2 | 9 | 1,562 | 16 | 540 | 25 | 2,102 | |||||||||
Utah | 2 | 277 | 4 | 126 | 6 | 403 | |||||||||
Virginia | 5 | 894 | 7 | 268 | 12 | 1,162 | |||||||||
Washington | 7 | 1,392 | 7 | 276 | 14 | 1,668 | |||||||||
Washington D.C. | — | — | 4 | 120 | 4 | 120 | |||||||||
Wisconsin | 1 | 150 | 2 | 67 | 3 | 217 | |||||||||
Canada | |||||||||||||||
Alberta | 1 | 142 | — | — | 1 | 142 | |||||||||
British Columbia | 1 | 231 | — | — | 1 | 231 | |||||||||
Ontario | 3 | 599 | — | — | 3 | 599 | |||||||||
Total | 123 | 21,769 | 226 | 8,023 | 349 | 29,792 | |||||||||
1 Other includes seven Trunk Club clubhouses, two Jeffrey boutiques and two Last Chance stores.
2 California, Texas and Florida had the highest square footage, with a combined 11,203 square feet, representing 38% of the total Company square footage.
Nordstrom, Inc. and subsidiaries 13
Our headquarters are located in Seattle, Washington, where our offices consist of both leased and owned space. We also lease a facility in Centennial, Colorado.
For use by our Retail segment, we have:
• | six owned merchandise distribution centers (Portland, Oregon; Dubuque, Iowa; Ontario, California; Newark, California; Upper Marlboro, Maryland and Gainesville, Florida), |
• | two owned fulfillment centers (Cedar Rapids, Iowa and Elizabethtown, Pennsylvania), |
• | one leased fulfillment center (San Bernardino, California) and |
• | three leased administrative offices (Chicago, Illinois; Los Angeles, California and New York City, New York). |
For use by our Credit segment, we have:
• | two leased office buildings (Centennial, Colorado and Scottsdale, Arizona). |
Item 3. Legal Proceedings.
We are subject from time to time to various claims and lawsuits arising in the ordinary course of business, including lawsuits alleging violations of state and/or federal wage and hour and other employment laws, privacy and other consumer-based claims. Some of these lawsuits include certified classes of litigants, or purport or may be determined to be class or collective actions and seek substantial damages or injunctive relief, or both, and some may remain unresolved for several years. We believe the recorded reserves in our Consolidated Financial Statements are adequate in light of the probable and estimable liabilities. As of the date of this report, we do not believe any currently identified claim, proceeding or litigation, either alone or in the aggregate, will have a material impact on our results of operations, financial position or cash flows. Since these matters are subject to inherent uncertainties, our view of them may change in the future.
Item 4. Mine Safety Disclosures.
None.
14
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
MARKET, SHAREHOLDER AND DIVIDEND INFORMATION
Our common stock, without par value, is traded on the New York Stock Exchange under the symbol “JWN.” The approximate number of holders of common stock as of March 7, 2017 was 219,000 based upon the number of registered and beneficial shareholders and the number of employee shareholders in the Nordstrom 401(k) Plan. On this date we had 166,851,252 shares of common stock outstanding.
The high and low prices of our common stock and dividends declared for each quarter of 2016 and 2015 are presented in the table below:
Common Stock Price | ||||||||||||
2016 | 2015 | Dividends per Share | ||||||||||
High | Low | High | Low | 2016 | 2015 | |||||||
1st Quarter | $59.37 | $46.65 | $83.16 | $74.51 | $0.37 | $0.37 | ||||||
2nd Quarter | $51.74 | $35.01 | $80.23 | $72.01 | $0.37 | $0.37 | ||||||
3rd Quarter | $55.23 | $39.05 | $79.98 | $63.73 | $0.37 | $5.22 | ||||||
4th Quarter | $62.82 | $42.32 | $67.27 | $44.49 | $0.37 | $0.37 | ||||||
Full Year | $62.82 | $35.01 | $83.16 | $44.49 | $1.48 | $6.33 | ||||||
SHARE REPURCHASES
Dollar and share amounts in millions, except per share amounts
The following is a summary of our fourth quarter share repurchases:
Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||
November 2016 (October 30, 2016 to November 26, 2016) | 0.2 | $51.11 | 0.2 | $708 | |||||||||
December 2016 (November 27, 2016 to December 31, 2016) | 1.6 | $50.71 | 1.6 | $629 | |||||||||
January 2017 (January 1, 2017 to January 28, 2017) | 2.2 | $45.20 | 2.2 | $529 | |||||||||
Total | 4.0 | $47.99 | 4.0 | ||||||||||
Our October 1, 2015 Board authorized share repurchase program, which had $529 of remaining capacity as of January 28, 2017, expired on March 1, 2017. There was $409 of unused capacity upon program expiration. In February 2017, our Board of Directors authorized an additional program to repurchase up to $500 of our outstanding common stock, through August 31, 2018. The actual number, price, manner and timing of future share repurchases, if any, will be subject to market and economic conditions and applicable SEC rules.
Nordstrom, Inc. and subsidiaries 15
STOCK PRICE PERFORMANCE
The following graph compares the cumulative total return of Nordstrom common stock, Standard & Poor’s Retail Index (“S&P Retail”) and Standard & Poor’s 500 Index (“S&P 500”) for each of the last five fiscal years, ending January 28, 2017. The Retail Index is composed of 33 retail companies, including Nordstrom, representing an industry group of the S&P 500. The following graph assumes an initial investment of $100 each in Nordstrom common stock, the S&P Retail and the S&P 500 on January 28, 2012 and assumes reinvestment of dividends.
End of fiscal year | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||
Nordstrom common stock | 100 | 116 | 123 | 166 | 118 | 106 | |||||||||||
Standard & Poor’s Retail Index | 100 | 127 | 159 | 196 | 227 | 269 | |||||||||||
Standard & Poor’s 500 Index | 100 | 118 | 141 | 165 | 162 | 196 | |||||||||||
16
Item 6. Selected Financial Data.
Dollars in millions except per square foot and per share amounts
The following selected financial data are derived from the audited Consolidated Financial Statements and should be read in conjunction with Item 1A: Risk Factors, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8: Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Fiscal year | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||
Earnings Results | |||||||||||||||||||
Net sales | $14,498 | $14,095 | $13,110 | $12,166 | $11,762 | ||||||||||||||
Credit card revenues, net1 | 259 | 342 | 396 | 374 | 372 | ||||||||||||||
Gross profit | 5,058 | 4,927 | 4,704 | 4,429 | 4,330 | ||||||||||||||
Selling, general and administrative (“SG&A”) expenses | (4,315 | ) | (4,168 | ) | (3,777 | ) | (3,453 | ) | (3,357 | ) | |||||||||
Earnings before interest and income taxes (“EBIT”) | 805 | 1,101 | 1,323 | 1,350 | 1,345 | ||||||||||||||
Net earnings | 354 | 600 | 720 | 734 | 735 | ||||||||||||||
Balance Sheet and Cash Flow Data | |||||||||||||||||||
Cash and cash equivalents | $1,007 | $595 | $827 | $1,194 | $1,285 | ||||||||||||||
Merchandise inventories | 1,896 | 1,945 | 1,733 | 1,531 | 1,360 | ||||||||||||||
Land, property and equipment, net | 3,897 | 3,735 | 3,340 | 2,949 | 2,579 | ||||||||||||||
Total assets1 | 7,858 | 7,698 | 9,245 | 8,574 | 8,089 | ||||||||||||||
Total long-term debt1 | 2,774 | 2,805 | 3,131 | 3,113 | 3,131 | ||||||||||||||
Cash flow from operations1 | 1,648 | 2,451 | 1,220 | 1,320 | 1,110 | ||||||||||||||
Capital expenditures | 846 | 1,082 | 861 | 803 | 513 | ||||||||||||||
Performance Metrics | |||||||||||||||||||
Comparable sales (decrease) increase | (0.4 | %) | 2.7 | % | 4.0 | % | 2.5 | % | 7.3 | % | |||||||||
Gross profit % of net sales | 34.9 | % | 35.0 | % | 35.9 | % | 36.4 | % | 36.8 | % | |||||||||
SG&A % of net sales | 29.8 | % | 29.6 | % | 28.8 | % | 28.4 | % | 28.5 | % | |||||||||
EBIT % of net sales | 5.6 | % | 7.8 | % | 10.1 | % | 11.1 | % | 11.4 | % | |||||||||
Capital expenditures % of net sales | 5.8 | % | 7.7 | % | 6.6 | % | 6.6 | % | 4.4 | % | |||||||||
Return on assets | 4.5 | % | 6.6 | % | 8.1 | % | 8.7 | % | 8.9 | % | |||||||||
Return on invested capital (“ROIC”)2 | 8.4 | % | 10.7 | % | 12.6 | % | 13.6 | % | 13.9 | % | |||||||||
Sales per square foot | $498 | $507 | $493 | $474 | $470 | ||||||||||||||
4-wall sales per square foot | $392 | $410 | $413 | $408 | $417 | ||||||||||||||
Inventory turnover rate | 4.53 | 4.54 | 4.67 | 5.07 | 5.37 | ||||||||||||||
Per Share Information | |||||||||||||||||||
Earnings per diluted share | $2.02 | $3.15 | $3.72 | $3.71 | $3.56 | ||||||||||||||
Dividends declared per share1 | 1.48 | 6.33 | 1.32 | 1.20 | 1.08 | ||||||||||||||
Store Information (at year-end) | |||||||||||||||||||
Nordstrom full-line stores - U.S. and Canada | 123 | 121 | 117 | 117 | 117 | ||||||||||||||
Nordstrom Rack and other3 | 226 | 202 | 175 | 143 | 123 | ||||||||||||||
Total square footage | 29,792,000 | 28,610,000 | 27,061,000 | 26,017,000 | 25,290,000 | ||||||||||||||
1 Amounts were impacted by the October 1, 2015 credit card receivable transaction. For further information regarding these impacts, see Note 2: Credit Card Receivable Transaction and Note 11: Shareholders’ Equity in Item 8.
2 See ROIC (Non-GAAP financial measure) in Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information and reconciliation to the most directly comparable GAAP financial measure.
3 Other includes Trunk Club clubhouses, Jeffrey boutiques and Last Chance stores.
Nordstrom, Inc. and subsidiaries 17
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Dollar, share and square footage amounts in millions except percentages, per share and per square foot amounts
OVERVIEW
Nordstrom is a leading fashion specialty retailer offering apparel, shoes, cosmetics and accessories for women, men, young adults and children. We offer an extensive selection of high-quality brand-name and private label merchandise through our various channels, including Nordstrom U.S. and Canada full-line stores, Nordstrom.com, Nordstrom Rack stores, Nordstromrack.com/HauteLook, Trunk Club clubhouses and TrunkClub.com, Jeffrey boutiques and Last Chance clearance stores. As of January 28, 2017, our stores are located in 40 states throughout the United States and in three provinces in Canada. Our customers can participate in our Nordstrom Rewards loyalty program which allows them to earn points based on their level of spending. We also offer our customers a variety of payment products and services, including credit and debit cards.
Our 2016 earnings per diluted share of $2.02, which included a goodwill impairment charge of $1.12, exceeded our outlook of $1.70 to $1.80. Our results were driven by continued operational efficiencies in inventory and expense execution and demonstrated our team’s speed and agility in responding to changes in business conditions. We reached record sales of $14.5 billion for the year, reflecting a net sales increase of 2.9% and comparable sales decrease of 0.4% primarily driven by full-line stores. We achieved the following milestones in multiple growth areas:
• | Our expansion into Canada where we currently have five full-line stores, including two that opened last fall, contributed total sales of $300 in 2016. |
• | Nordstrom.com sales reached over $2.5 billion, representing approximately 25% of full-price sales. |
• | Our off-price business reached $4.5 billion, with growth mainly driven by our online net sales increase of 32% and 21 new store openings. Off-price continues to be our largest source of new customers, gaining approximately 6 million in 2016. |
• | Our expanded Nordstrom Rewards program, which launched in the second quarter, drove a strong customer response with 3.7 million customers joining through our non-tender offer. We ended the year with a total of 7.8 million active Nordstrom Rewards customers. |
• | Our working capital improvements contributed to the $1.6 billion in operating cash flow and $0.6 billion in free cash flow. |
From a merchandising perspective, we strive to offer a curated selection of the best brands. As we look for new opportunities through our vendor partnerships, we will continue to be strategic and pursue partnerships that are similar to our portfolio and maintain relevance with our customers by delivering newness. Our strategies around product differentiation include our ongoing efforts to grow limited distribution brands such as Ivy Park, J.Crew and Good American, in addition to our Nordstrom exclusive offering.
In 2016, we made focused efforts to improve our productivity, particularly around our technology, supply chain and marketing. In technology, we increased the productivity of delivering features to enhance the customer experience. In supply chain, we focused on overall profitability by reducing split shipments and editing out less profitable items online. In marketing, we strengthened our capabilities around digital engagement so that we reach customers in a more efficient and cost-effective manner. Through these efforts, we made significant progress in improving operational efficiencies, reflected by moderated expense growth of 10% in these three key areas, relative to an annual average of 20% over the past five years.
With customer expectations changing faster than ever, it is important that we remain focused on the customer. Moving forward, we believe our strategies give us a platform for enhanced capabilities to better serve customers and increase market share. Our obsession with our customers keeps us focused on speed, convenience and personalization. We have good momentum in place and will continue to make changes to ensure we are best serving customers and improving our business now and into the future.
18
RESULTS OF OPERATIONS
Our reportable segments are Retail and Credit. We analyze our results of operations through earnings before interest and income taxes for our Retail Business and Credit, while interest expense, income taxes and earnings per share are discussed on a total Company basis.
RETAIL BUSINESS
Our Retail Business includes our Nordstrom U.S. and Canada full-line stores, Nordstrom.com, Nordstrom Rack stores, Nordstromrack.com/HauteLook, Trunk Club, Jeffrey boutiques and Last Chance clearance stores. 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 15: Segment Reporting in Item 8 (collectively, the “Retail Business”).
Certain metrics we use to evaluate the Retail Business may not be calculated in a consistent manner among industry peers. Provided below are definitions of metrics we present within our analysis of the Retail Business:
• | Comparable Sales – sales from stores that have been open at least one full year at the beginning of the year. Total Company comparable sales include sales from our online channels. |
• | Gross Profit – net sales less cost of sales and related buying and occupancy costs. |
• | Inventory Turnover Rate – annual cost of sales and related buying and occupancy costs (for all segments) divided by the trailing 4-quarter average inventory. |
• | Total Sales Per Square Foot – net sales divided by weighted-average square footage. |
• | 4-wall Sales Per Square Foot – sales for Nordstrom U.S. and Canada full-line stores, Nordstrom Rack stores, Trunk Club clubhouses, Jeffrey boutiques and Last Chance clearance stores divided by their weighted-average square footage. |
Summary
The following table summarizes the results of our Retail Business:
Fiscal year | 2016 | 2015 | 2014 | ||||||||||||||||||
Amount | % of net sales1 | Amount | % of net sales1 | Amount | % of net sales1 | ||||||||||||||||
Net sales | $14,498 | 100.0 | % | $14,095 | 100.0 | % | $13,110 | 100.0 | % | ||||||||||||
Cost of sales and related buying and occupancy costs | (9,434 | ) | (65.1 | %) | (9,161 | ) | (65.0 | %) | (8,401 | ) | (64.1 | %) | |||||||||
Gross profit | 5,064 | 34.9 | % | 4,934 | 35.0 | % | 4,709 | 35.9 | % | ||||||||||||
Selling, general and administrative expenses | (4,159 | ) | (28.7 | %) | (4,016 | ) | (28.5 | %) | (3,588 | ) | (27.4 | %) | |||||||||
Goodwill impairment | (197 | ) | (1.4 | %) | — | — | — | — | |||||||||||||
Earnings before interest and income taxes | $708 | 4.9 | % | $918 | 6.5 | % | $1,121 | 8.6 | % | ||||||||||||
1 Subtotals and totals may not foot due to rounding.
Nordstrom, Inc. and subsidiaries 19
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. The following is a summary of our net sales by channel for our Retail Business:
Fiscal year | 2016 | 2015 | 2014 | ||||||||
Net sales by channel: | |||||||||||
Nordstrom full-line stores - U.S. | $7,186 | $7,633 | $7,682 | ||||||||
Nordstrom.com | 2,519 | 2,300 | 1,996 | ||||||||
Full-price | 9,705 | 9,933 | 9,678 | ||||||||
Nordstrom Rack | 3,809 | 3,533 | 3,215 | ||||||||
Nordstromrack.com/HauteLook | 700 | 532 | 360 | ||||||||
Off-price | 4,509 | 4,065 | 3,575 | ||||||||
Other retail1 | 554 | 378 | 116 | ||||||||
Retail segment | 14,768 | 14,376 | 13,369 | ||||||||
Corporate/Other | (270 | ) | (281 | ) | (259 | ) | |||||
Total net sales | $14,498 | $14,095 | $13,110 | ||||||||
Net sales increase | 2.9 | % | 7.5 | % | 7.8 | % | |||||
Comparable sales increase (decrease) by channel: | |||||||||||
Nordstrom full-line stores - U.S. | (6.4 | %) | (1.1 | %) | (0.5 | %) | |||||
Nordstrom.com | 9.5 | % | 15.2 | % | 23.1 | % | |||||
Full-price | (2.7 | %) | 2.3 | % | 3.6 | % | |||||
Nordstrom Rack | 0.2 | % | (1.0 | %) | 3.8 | % | |||||
Nordstromrack.com/HauteLook | 31.7 | % | 47.4 | % | 22.1 | % | |||||
Off-price | 4.5 | % | 4.3 | % | 5.7 | % | |||||
Total Company | (0.4 | %) | 2.7 | % | 4.0 | % | |||||
Sales per square foot: | |||||||||||
Total sales per square foot | $498 | $507 | $493 | ||||||||
4-wall sales per square foot | 392 | 410 | 413 | ||||||||
Full-line sales per square foot - U.S. | 346 | 370 | 371 | ||||||||
Nordstrom Rack sales per square foot | 507 | 523 | 552 | ||||||||
1 Other retail includes Nordstrom Canada full-line stores, Trunk Club and Jeffrey boutiques.
Net Sales (2016 vs. 2015)
In 2016, total Company net sales increased 2.9%, while comparable sales decreased 0.4%. During the year, we opened three Nordstrom full-line stores, including two in Canada, and 21 Nordstrom Rack stores.
Full-price net sales, which consist of the U.S. full-line and Nordstrom.com channels, decreased 2.3% compared with 2015, while comparable sales decreased 2.7%. Also on a comparable basis, full-price sales reflected a decrease in the total number of items sold, partially offset by an increase in the average selling price per item sold. The top-performing merchandise category was Beauty. The West was the top-performing geographic region.
Off-price net sales, which consists of Nordstrom Rack and Nordstromrack.com/HauteLook channels, increased 10.9%, compared with 2015 and comparable sales increased 4.5%. Nordstromrack.com/HauteLook had a comparable sales increase of 31.7% and now represents over 15% of off-price sales. Nordstrom Rack net sales increased 7.8%, primarily attributable to 21 new store openings in 2016. On a comparable basis, the total number of items sold increased at Nordstrom Rack, partially offset by a decrease in the average selling price per item sold. Kids was the top-performing merchandise category, and the East was the top-performing geographic region.
20
Net Sales (2015 vs. 2014)
In 2015, total Company net sales increased 7.5%, while comparable sales increased 2.7%. During the year, we opened five Nordstrom full-line stores, including two in Canada, and 27 Nordstrom Rack stores.
Full-price net sales increased 2.6% compared with 2014, while on a comparable basis, sales increased 2.3%. These increases reflected continued momentum in our Nordstrom.com channel, which increased 15%. Also on a comparable basis, the total number of items sold and the average selling price per item sold increased. The top-performing merchandise categories included Beauty and Women’s Apparel. The Northwest was the top-performing U.S. full-line store geographic region.
Off-price net sales increased 13.7%, compared with 2014, while on a comparable basis, sales increased 4.3%. Nordstromrack.com/HauteLook experienced outsized growth, with a net sales increase of 47%. Nordstrom Rack net sales increased 9.9%, attributable to new store openings. On a comparable basis, the average retail price per item sold increased at Nordstrom Rack, offset by a decrease in the total number of items sold. Shoes and Beauty were the top-performing merchandise categories and the South was the top-performing geographic region.
Retail Business Gross Profit
The following table summarizes the Retail Business gross profit (“Retail GP”):
Fiscal year | 2016 | 2015 | 2014 | ||||||||
Retail gross profit | $5,064 | $4,934 | $4,709 | ||||||||
Retail gross profit as a % of net sales | 34.9 | % | 35.0 | % | 35.9 | % | |||||
Ending inventory per square foot | $63.64 | $67.97 | $64.05 | ||||||||
Inventory turnover rate | 4.53 | 4.54 | 4.67 | ||||||||
Gross Profit (2016 vs. 2015)
Our Retail GP rate was relatively flat compared with 2015, reflecting higher occupancy costs associated with Nordstrom Rack and Canada store growth, in addition to increased markdowns in the first half of the year to realign inventory to sales trends. This was offset by strong inventory execution during the remainder of the year and reduced competitive markdowns. Our ending inventory per square foot decrease of 6.4% in 2016 reflected this strong inventory execution.
Gross Profit (2015 vs. 2014)
Our Retail GP rate decreased 92 basis points compared with 2014 primarily due to higher cost of sales driven by increased markdowns from lower than planned sales and in response to an elevated promotional environment during the second half of the year. Retail GP increased $225 in 2015 compared with 2014 due to an increase in net sales, partially offset by increased markdowns.
Our inventory turnover rate decreased to 4.54 in 2015 due to softer sales trends experienced during the second half of the year. Our ending inventory per square foot increased 6.1% in 2015, which outpaced our sales per square foot increase of 2.9%. The growth of our online channels contributed to increases in inventory without corresponding increases in square footage.
Retail Business Selling, General and Administrative Expenses
Retail Business selling, general and administrative expenses (“Retail SG&A”) are summarized in the following table:
Fiscal year | 2016 | 2015 | 2014 | ||||||||
Selling, general and administrative expenses | $4,159 | $4,016 | $3,588 | ||||||||
Selling, general and administrative expenses as a % of net sales | 28.7 | % | 28.5 | % | 27.4 | % | |||||
Selling, General and Administrative Expenses (2016 vs. 2015)
Our Retail SG&A rate increased 19 basis points in 2016 and increased $143 compared with 2015 primarily due to technology and fulfillment expenses.
Selling, General and Administrative Expenses (2015 vs. 2014)
Our Retail SG&A rate increased 112 basis points in 2015 compared with 2014 due to growth initiatives related to Trunk Club and Canada, higher fulfillment costs supporting online growth and asset impairment charges (see Note 1: Nature of Operations and Summary of Significant Accounting Policies in Item 8). Our Retail SG&A increased $428 in 2015 due primarily to increased sales and growth initiatives related to Canada and Trunk Club.
Retail Business Goodwill Impairment
We recognized a goodwill impairment charge of $197 in 2016 related to Trunk Club (see Note 8: Fair Value Measurements in Item 8).
Nordstrom, Inc. and subsidiaries 21
CREDIT SEGMENT
The Nordstrom credit and debit card products are designed to strengthen customer relationships and grow retail sales by providing loyalty benefits, valuable services and payment products. We believe our credit business allows us to build deeper relationships with our customers by fully integrating the Nordstrom Rewards program with our retail business and providing better service, which in turn fosters greater customer loyalty. Nordstrom cardholders tend to visit our stores more frequently and spend more than non-cardholders. Nordstrom private label credit and debit cards can be used at all of our U.S. retail channels, while Nordstrom Visa credit cards also may be used for purchases outside of Nordstrom (“outside volume”).
In October 2015, we completed the sale of a substantial majority of our U.S. Visa and private label credit card portfolio to TD (see Note 2: Credit Card Receivable Transaction in Item 8).
Summary
The table below provides a detailed view of the operational results of our Credit segment, consistent with Note 15: Segment Reporting in Item 8:
Fiscal year | 2016 | 2015 | 2014 | |||||||||
Credit card revenues, net | $259 | $342 | $396 | |||||||||
Credit expenses | (162 | ) | (159 | ) | (194 | ) | ||||||
Earnings before interest and income taxes | 97 | 183 | 202 | |||||||||
Interest expense1 | — | (13 | ) | (18 | ) | |||||||
Earnings before income taxes | $97 | $170 | $184 | |||||||||
Credit and debit card volume2: | ||||||||||||
Outside | $4,160 | $4,309 | $4,331 | |||||||||
Inside | 5,858 | 5,953 | 5,475 | |||||||||
Total volume | $10,018 | $10,262 | $9,806 | |||||||||
1 Prior to the credit card receivable transaction on October 1, 2015, interest expense was allocated to the Credit segment as if it carried debt of up to 80% of the credit card receivables.
2 Volume represents sales on the total portfolio plus applicable taxes.
Credit Card Revenues, net
The following is a summary of our credit card revenues, net:
Fiscal year | 2016 | 2015 | 2014 | ||||||||
Finance charge revenue | $6 | $173 | $253 | ||||||||
Interchange fees | 5 | 61 | 89 | ||||||||
Late fees and other revenue | 2 | 44 | 54 | ||||||||
Credit program revenues, net | 246 | 64 | — | ||||||||
Total credit card revenues, net | $259 | $342 | $396 | ||||||||
Following the close of the credit card receivable transaction and pursuant to the program agreement with TD, we receive our portion of the ongoing credit card revenue, net of credit losses, from both the sold and newly generated credit card receivables, which is recorded in credit program revenues, net. Asset amortization and deferred revenue recognition associated with the assets and liabilities recorded as part of the transaction are also recorded in credit program revenues, net. Revenue earned under the program agreement is impacted by the credit quality of receivables, both owned and serviced, and factors such as deteriorating economic conditions, declining creditworthiness of cardholders and the success of account management and collection activities may heighten the risk of credit losses.
Prior to the close of the credit card receivable transaction, credit card revenues included finance charges, interchange fees, late fees and other revenue, recorded net of estimated uncollectible finance charges and fees. Finance charges represent interest earned on unpaid balances while interchange fees are earned from the use of Nordstrom Visa credit cards at merchants outside of Nordstrom. Late fees are assessed when a credit card account becomes past due. We continue to recognize revenue in this manner for the credit card receivables retained subsequent to the close of the credit card receivable transaction.
Credit Card Revenues, net decreased $83 in 2016 and $54 in 2015 due to the credit card receivable transaction and the new program agreement.
22
Credit Expenses
Credit expenses consist of operational, bad debt and occupancy expenses. Credit expenses in 2016 were relatively flat compared with 2015 as there was a $64 gain partially offset by $32 of expenses incurred in 2015 associated with the credit card receivable transaction. Excluding the net impact of these items, credit expenses decreased $29 in 2016 primarily due to the decrease in bad debt expense since the sale of the credit card receivables in October of 2015.
TOTAL COMPANY RESULTS
Interest Expense, Net
Interest expense is summarized in the following table:
Fiscal year | 2016 | 2015 | 2014 | ||||||||
Interest on long-term debt and short-term borrowings | $147 | $153 | $156 | ||||||||
Less: | |||||||||||
Interest income | (1 | ) | — | (1 | ) | ||||||
Capitalized interest | (25 | ) | (28 | ) | (17 | ) | |||||
Interest expense, net | $121 | $125 | $138 | ||||||||
Interest Expense, Net (2016 vs. 2015)
Interest expense, net decreased $4 in 2016 compared with 2015 primarily due to the defeasance of our $325 Series 2011-1 Class A Notes in the third quarter of 2015.
Interest Expense, Net (2015 vs. 2014)
Interest expense, net decreased $13 in 2015 compared with 2014 due to an increase in capitalized interest resulting from planned capital investments related to technology, our Manhattan store and Nordstrom Rack and Canada store openings in 2015.
Income Tax Expense
Income tax expense is summarized in the following table:
Fiscal year | 2016 | 2015 | 2014 | ||||||||
Income tax expense | $330 | $376 | $465 | ||||||||
Effective tax rate | 48.2 | % | 38.6 | % | 39.2 | % | |||||
The following table illustrates the components of our effective tax rate:
Fiscal year | 2016 | 2015 | 2014 | |||||
Statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||
Goodwill impairment | 10.1 | % | — | — | ||||
State and local income taxes, net of federal income taxes | 5.1 | % | 4.1 | % | 3.8 | % | ||
Non-deductible acquisition-related items | 0.6 | % | 0.4 | % | 0.9 | % | ||
Federal credits | (0.6 | %) | (0.6 | %) | (0.2 | %) | ||
Other, net | (2.0 | %) | (0.3 | %) | (0.3 | %) | ||
Effective tax rate | 48.2 | % | 38.6 | % | 39.2 | % | ||
Income Tax Expense (2016 vs. 2015)
The increase in the effective tax rate for 2016 compared with 2015 was primarily due to the non-deductible goodwill impairment charge of $197 related to Trunk Club (see Note 8: Fair Value Measurements in Item 8). Excluding the impact of the Trunk Club goodwill impairment, our effective tax rate for 2016 would have decreased approximately 1% compared with the prior year primarily due to an increase in nontaxable income.
Income Tax Expense (2015 vs. 2014)
The decrease in the effective tax rate for 2015 compared with 2014 was primarily due to a decrease in non-deductible acquisition-related items and the benefit of income tax credits in 2015.
Nordstrom, Inc. and subsidiaries 23
Earnings Per Share
Earnings per share is as follows:
1 A reconciliation of adjusted earnings per share, a non-GAAP financial measure, to the closest GAAP measure is included on page 25.
Fiscal year | 2016 | 2015 | 2014 | ||||||||
Basic | $2.05 | $3.22 | $3.79 | ||||||||
Diluted: | |||||||||||
Actual | $2.02 | $3.15 | $3.72 | ||||||||
Adjusted1 | $3.14 | N/A | N/A | ||||||||
Earnings Per Diluted Share (2016 vs. 2015)
The decrease in diluted earnings per share (“EPS”) for 2016 compared with 2015 was primarily due to the goodwill impairment charge of $197 related to Trunk Club. Excluding the goodwill impairment charge, adjusted earnings per diluted share compared with actual EPS for 2015 was relatively flat due to higher technology and fulfillment costs supporting multi-channel growth, offset by a decrease in shares outstanding as a result of share repurchases during the year.
Earnings Per Diluted Share (2015 vs. 2014)
The decrease in EPS for 2015 compared with 2014 was primarily due to lower Retail Business earnings before interest and income taxes. This decrease was partially offset by a decrease in weighted average shares outstanding resulting from an increase in share repurchases.
Fourth Quarter Results
The following are our results for the fourth quarters of 2016 and 2015:
Quarter ended | January 28, 2017 | January 30, 2016 | |||||
Net sales | $4,243 | $4,143 | |||||
Credit card revenues, net | 73 | 51 | |||||
Gross profit | 1,523 | 1,443 | |||||
Gross profit (% of net sales) | 35.9 | % | 34.8 | % | |||
Retail SG&A expenses | (1,134 | ) | (1,136 | ) | |||
Retail SG&A expenses (% of net sales) | (26.7 | %) | (27.4 | %) | |||
Credit expenses | (42 | ) | (36 | ) | |||
Net earnings | 201 | 180 | |||||
EPS (diluted) | $1.15 | $1.00 | |||||
Net Sales
Total Company net sales increased 2.4% in the fourth quarter of 2016, compared with the same period in 2015, while comparable sales decreased 0.9%.
Full-price net sales decreased 2.8% for the quarter ended January 28, 2017, compared with the same period in 2015, while comparable sales decreased 2.9%. Also on a comparable basis for the quarter, full-price sales reflected a decrease in the number of items sold, partially offset by an increase in the average selling price per item sold. For the fourth quarter, the top-performing merchandise categories were Women’s Apparel and Beauty, and the East was the top-performing geographic region.
Off-price net sales increased 10.7% for the quarter ended January 28, 2017, compared with the same period in 2015, while comparable sales increased 4.3%. Nordstrom Rack net sales increased 7.4% attributable to 21 new store openings since the end of 2015. On a comparable basis, the number of items sold increased at Nordstrom Rack, partially offset by a decrease in the average selling price per item sold. Kids was the top-performing merchandise category and the East was the top-performing geographic region for the quarter ended January 28, 2017.
Credit Card Revenues, net
Credit card revenues, net increased $22 for the quarter, compared with the same period in the prior year, primarily due to higher amortization of the beneficial interest asset in the fourth quarter of 2015.
Gross Profit
Our total Company gross profit rate increased 106 basis points compared with the same period in 2015, reflecting strong inventory execution in addition to reduced competitive markdowns. Inventory declined 2.5%, which reflected a positive spread of 5 percentage points relative to sales growth.
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Retail Selling, General and Administrative Expenses
Our Retail SG&A rate decreased 67 basis points primarily due to asset impairment charges occurring in the fourth quarter of 2015 and a non-operational legal settlement gain of $22 in 2016. This was partially offset by performance-related costs associated with company performance.
Credit Expenses
In the fourth quarter of 2016, total credit expenses increased $6 compared with the fourth quarter of 2015, driven primarily by increased credit card settlement fees and labor.
For further information on our quarterly results in 2016 and 2015, refer to Note 16: Selected Quarterly Data in Item 8.
Adjusted Earnings and Adjusted Earnings Per Share (Non-GAAP financial measures)
We believe that Adjusted Earnings and Adjusted Earnings Per Share provide useful information to investors in evaluating our business performance for the quarter and year ended January 28, 2017. The effect of excluding certain items from net earnings provides management and shareholders an alternative measure to use in evaluating our business performance period over period.
Adjusted Earnings and Adjusted Earnings Per Share are not measures of financial performance under generally accepted accounting principles (“GAAP”) and should be considered in addition to, and not as a substitute for, net earnings, earnings per share and diluted earnings per share or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies’ financial measures and therefore may not be comparable to methods used by other companies. The financial measures calculated under GAAP which are most directly comparable to Adjusted Earnings and Adjusted Earnings Per Share are net earnings and diluted earnings per share, which are reconciled below:
Quarter Ended January 28, 2017 | Year Ended January 28, 2017 | ||||||||||||||
Amount | Amount Per Share | Amount | Amount Per Share | ||||||||||||
Net earnings | $201 | $1.15 | $354 | $2.02 | |||||||||||
Trunk Club goodwill impairment | — | — | 197 | 1.12 | |||||||||||
Tax effect of non-deductible charges in interim period1 | 39 | 0.22 | — | — | |||||||||||
Adjusted Earnings | $240 | $1.37 | $551 | $3.14 | |||||||||||
1 The effect of taxes on the adjustments used to arrive at Adjusted Earnings is calculated based on applying the estimated annual effective tax rate to Adjusted Earnings plus other tax items for each interim period and is a result of the non-deductible goodwill impairment charge in the third quarter of 2016.
2017 Outlook
Our expectations for 2017, which include the impact of the 53rd week, are as follows:
Net sales (percent) | 3 to 4 increase |
Comparable sales (percent) | Approximately flat |
Retail EBIT | $780 to $840 million |
Credit EBIT | Approximately $135 million |
Earnings per diluted share (excluding the impact of any future share repurchase) | $2.75 to $3.00 |
The 53rd week is estimated to add approximately $200 million to total sales and is not included in comparable sales calculations.
Nordstrom, Inc. and subsidiaries 25
Return on Invested Capital (“ROIC”) (Non-GAAP financial measure)
We believe ROIC is a useful financial measure for investors in evaluating the efficiency and effectiveness of our use of capital and believe ROIC is an important component of shareholders’ return over the long term. In addition, we incorporate ROIC in our executive incentive compensation measures. For the 12 fiscal months ended January 28, 2017, our ROIC decreased compared with the 12 fiscal months ended January 30, 2016, primarily due to reduced earnings largely impacted by the Trunk Club goodwill impairment (see Note 8: Fair Value Measurements in Item 8). The Trunk Club goodwill impairment had a negative impact on ROIC of 3.3%.
We define ROIC as our net operating profit after tax divided by our average invested capital using the trailing 12-month average. ROIC is not a measure of financial performance under generally accepted accounting principles (“GAAP”) and should be considered in addition to, and not as a substitute for, return on assets, net earnings, total assets or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to ROIC is return on assets. The following is a reconciliation of the components of ROIC and return on assets:
12 Fiscal Months Ended | |||||||||||||||||||
January 28, 2017 | January 30, 2016 | January 31, 2015 | February 1, 2014 | February 2, 2013 | |||||||||||||||
Net earnings | $354 | $600 | $720 | $734 | $735 | ||||||||||||||
Add: income tax expense | 330 | 376 | 465 | 455 | 450 | ||||||||||||||
Add: interest expense | 122 | 125 | 139 | 162 | 162 | ||||||||||||||
Earnings before interest and income tax expense | 806 | 1,101 | 1,324 | 1,351 | 1,347 | ||||||||||||||
Add: rent expense | 202 | 176 | 137 | 125 | 105 | ||||||||||||||
Less: estimated depreciation on capitalized operating leases1 | (108 | ) | (94 | ) | (74 | ) | (67 | ) | (56 | ) | |||||||||
Net operating profit | 900 | 1,183 | 1,387 | 1,409 | 1,396 | ||||||||||||||
Less: estimated income tax expense | (416 | ) | (456 | ) | (544 | ) | (539 | ) | (530 | ) | |||||||||
Net operating profit after tax | $484 | $727 | $843 | $870 | $866 | ||||||||||||||
Average total assets | $7,917 | $9,076 | $8,860 | $8,398 | $8,274 | ||||||||||||||
Less: average non-interest-bearing current liabilities2 | (3,012 | ) | (2,993 | ) | (2,730 | ) | (2,430 | ) | (2,262 | ) | |||||||||
Less: average deferred property incentives and deferred rent liability2 | (644 | ) | (548 | ) | (502 | ) | (489 | ) | (494 | ) | |||||||||
Add: average estimated asset base of capitalized operating leases3 | 1,512 | 1,236 | 1,058 | 929 | 724 | ||||||||||||||
Average invested capital | $5,773 | $6,771 | $6,686 | $6,408 | $6,242 | ||||||||||||||
Return on assets | 4.5 | % | 6.6 | % | 8.1 | % | 8.7 | % | 8.9 | % | |||||||||
ROIC | 8.4 | % | 10.7 | % | 12.6 | % | 13.6 | % | 13.9 | % | |||||||||
1 Capitalized operating leases is our best estimate of the asset base we would record for our leases that are classified as operating if they had met the criteria for a capital lease or we had purchased the property. Asset base is calculated as described in footnote 3 below.
2 Balances associated with our deferred rent liability have been classified as long-term liabilities in the current period.
3 Based upon the trailing 12-month average of the monthly asset base. The asset base for each month is calculated as the trailing 12 months of rent expense multiplied by eight. The multiple of eight times rent expense is a commonly used method of estimating the asset base we would record for our capitalized operating leases described in footnote 1.
26
LIQUIDITY AND CAPITAL RESOURCES
We strive to maintain a level of liquidity sufficient to allow us to cover our seasonal cash needs and to maintain appropriate levels of short-term borrowings. We believe that our operating cash flows, available credit facilities and potential future borrowings are sufficient to finance our cash requirements for the next 12 months and beyond.
Over the long term, we manage our cash and capital structure to maximize shareholder return, maintain our financial position, manage refinancing risk and allow flexibility for strategic initiatives. We regularly assess our debt and leverage levels, capital expenditure requirements, debt service payments, dividend payouts, potential share repurchases and other future investments. We believe that as of January 28, 2017, our existing cash and cash equivalents on-hand of $1,007, available credit facilities of $800 and potential future operating cash flows and borrowings will be sufficient to fund these scheduled future payments and potential long-term initiatives.
Operating Activities
The majority of our operating cash inflows are derived from sales. We also receive cash payments for property incentives from developers. Our operating cash outflows generally consist of payments to our merchandise vendors (net of vendor allowances), payments to our employees for wages, salaries and other employee benefits and payments to our landlords for rent. Operating cash outflows also include payments for income taxes and interest payments on our short-term and long-term borrowings. Net cash provided by operating activities was $1,648 in 2016, $2,451 in 2015 and $1,220 in 2014.
Net cash provided by operating activities decreased by $803 between 2016 and 2015, primarily due to $1,297 of proceeds in 2015 from the sale of our credit card receivables originated at Nordstrom (see Note 2: Credit Card Receivable Transaction in Item 8). When removing the impact of the sale proceeds, operating cash flows increased from 2015 primarily due to improvements in working capital.
Net cash provided by operating activities increased by $1,231 between 2015 and 2014, primarily due to sale proceeds from the credit card receivable transaction. Also within operating activities, deferred income taxes, net and prepaid expenses and other assets were impacted by a change in an IRS rule regarding repairs of real property.
Investing Activities
Net cash used in investing activities was $791 in 2016, $144 in 2015 and $889 in 2014. The increase in cash used in 2016 compared with 2015 is primarily due to $890 of proceeds in 2015 from the sale of our credit card receivables originated at third parties, partially offset by a decrease in capital expenditures in 2016.
Capital Expenditures
Our capital expenditures over the last three years totaled $2,789, with $846 in 2016, $1,082 in 2015 and $861 in 2014. Capital expenditures decreased in 2016 compared with 2015 due to reduced spend associated with full-line relocations and new full-line stores.
We receive property incentives from our developers, which we view operationally as an offset to our capital expenditures. Developer incentives of $65 in 2016, $156 in 2015 and $110 in 2014 are included in our cash provided by operations in our Consolidated Statements of Cash Flows in Item 8.
Our capital expenditure percentages, net of property incentives, by category are summarized as follows:
Fiscal year | 2016 | 2015 | 2014 | |||||
Category and expenditure allocation: | ||||||||