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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 4, 2018
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)
206-628-2111
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 ¨
 
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO þ
Common stock outstanding as of August 29, 2018: 168,565,459 shares

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

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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in millions except per share amounts)
(Unaudited)
 
Quarter Ended
 
Six Months Ended
 
August 4, 2018

 
July 29, 2017

 
August 4, 2018

 
July 29, 2017

Net sales

$3,980

 

$3,717

 

$7,450

 

$6,996

Credit card revenues, net
87

 
76

 
179

 
152

Total revenues
4,067

 
3,793

 
7,629

 
7,148

Cost of sales and related buying and occupancy costs
(2,589
)
 
(2,451
)
 
(4,877
)
 
(4,607
)
Selling, general and administrative expenses
(1,232
)
 
(1,125
)
 
(2,353
)
 
(2,173
)
Earnings before interest and income taxes
246


217

 
399


368

Interest expense, net
(28
)

(29
)
 
(56
)
 
(76
)
Earnings before income taxes
218

 
188

 
343

 
292

Income tax expense
(56
)
 
(78
)
 
(94
)
 
(119
)
Net earnings

$162

 

$110

 

$249

 

$173

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic

$0.97

 

$0.66

 

$1.48

 

$1.04

Diluted

$0.95

 

$0.65

 

$1.46

 

$1.02

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
167.8

 
166.4

 
167.8

 
166.8

Diluted
170.3

 
168.5

 
170.3

 
168.8

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Amounts in millions)
(Unaudited)
 
Quarter Ended
 
Six Months Ended
 
August 4, 2018

 
July 29, 2017

 
August 4, 2018

 
July 29, 2017

Net earnings

$162

 

$110

 

$249

 

$173

Foreign currency translation adjustment
(4
)
 
32

 
(15
)
 
20

Post retirement plan adjustments, net of tax
1

 
1

 
2

 
2

Cumulative effect of adopted accounting standard

 

 
(5
)
 

Comprehensive net earnings

$159

 

$143

 

$231

 

$195

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

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NORDSTROM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
(Unaudited)
 
August 4, 2018

 
February 3, 2018

 
July 29, 2017

Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents

$1,343

 

$1,181

 

$919

Accounts receivable, net
200

 
145

 
320

Merchandise inventories
2,065

 
2,027

 
2,077

Prepaid expenses and other
439

 
150

 
157

Total current assets
4,047

 
3,503

 
3,473

 
 
 
 
 
 
Land, property and equipment (net of accumulated depreciation of $6,393, $6,105 and $5,866)
3,860

 
3,939

 
3,930

Goodwill
249

 
238

 
238

Other assets
334

 
435

 
520

Total assets

$8,490

 

$8,115

 

$8,161

 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable

$1,840

 

$1,409

 

$1,704

Accrued salaries, wages and related benefits
394

 
578

 
397

Other current liabilities
1,380

 
1,246

 
1,339

Current portion of long-term debt
54

 
56

 
11

Total current liabilities
3,668

 
3,289

 
3,451

 
 
 
 
 
 
Long-term debt, net
2,680

 
2,681

 
2,729

Deferred property incentives, net
480

 
495

 
524

Other liabilities
522

 
673

 
672

 
 
 
 
 
 
Commitments and contingencies (Note 6)

 

 

 
 
 
 
 
 
Shareholders’ equity:
 
 
 
 
 
Common stock, no par value: 1,000 shares authorized; 167.5, 167.0 and 166.2 shares issued and outstanding
2,899

 
2,816

 
2,757

Accumulated deficit
(1,712
)
 
(1,810
)
 
(1,951
)
Accumulated other comprehensive loss
(47
)
 
(29
)
 
(21
)
Total shareholders’ equity
1,140

 
977

 
785

Total liabilities and shareholders’ equity

$8,490

 

$8,115

 

$8,161

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

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NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts in millions except per share amounts)
(Unaudited)
 
 
 
 
 
 
 
Accumulated 

 
 
 
 
 
 
 
 
 
Other

 
 
 
Common Stock
 
Accumulated

 
Comprehensive

 
 
 
Shares

 
Amount

 
Deficit

 
Loss

 
Total

Balance at February 3, 2018
167.0

 

$2,816

 

($1,810
)
 

($29
)
 

$977

Cumulative effect of adopted accounting standards

 

 
60

 
(5
)
 
55

Net earnings

 

 
249

 

 
249

Other comprehensive loss

 

 

 
(13
)
 
(13
)
Dividends ($0.74 per share)

 

 
(124
)
 

 
(124
)
Issuance of common stock under stock compensation plans
1.5

 
49

 

 

 
49

Stock-based compensation
0.8

 
34

 

 

 
34

Repurchase of common stock
(1.8
)
 

 
(87
)
 

 
(87
)
Balance at August 4, 2018
167.5

 

$2,899

 

($1,712
)
 

($47
)
 

$1,140

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated

 
 
 
 
 
 
 
 
 
Other

 
 
 
Common Stock
 
Accumulated

 
Comprehensive

 
 
 
Shares

 
Amount

 
Deficit

 
Loss

 
Total

Balance at January 28, 2017
170.0

 

$2,707

 

($1,794
)
 

($43
)
 

$870

Net earnings

 

 
173

 

 
173

Other comprehensive earnings

 

 

 
22

 
22

Dividends ($0.74 per share)

 

 
(124
)
 

 
(124
)
Issuance of common stock under stock compensation plans
0.4

 
14

 

 

 
14

Stock-based compensation
0.4

 
36

 

 

 
36

Repurchase of common stock
(4.6
)
 

 
(206
)
 

 
(206
)
Balance at July 29, 2017
166.2

 

$2,757

 

($1,951
)
 

($21
)
 

$785

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

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NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
 
Six Months Ended
 
August 4, 2018

 
July 29, 2017

Operating Activities
 
 
 
Net earnings

$249

 

$173

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization expenses
338

 
320

Amortization of deferred property incentives and other, net
(34
)
 
(48
)
Deferred income taxes, net
(13
)
 
(71
)
Stock-based compensation expense
51

 
41

Change in operating assets and liabilities:

 
 
Accounts receivable
(55
)
 
(120
)
Merchandise inventories
(122
)
 
(141
)
Prepaid expenses and other assets
(149
)
 
(24
)
Accounts payable
404

 
319

Accrued salaries, wages and related benefits
(183
)
 
(58
)
Other current liabilities
76

 
117

Deferred property incentives
29

 
46

Other liabilities
3

 
20

Net cash provided by operating activities
594


574

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(269
)
 
(341
)
Other, net
(21
)
 
33

Net cash used in investing activities
(290
)
 
(308
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from long-term borrowings, net of discounts

 
635

Principal payments on long-term borrowings
(5
)
 
(655
)
Increase in cash book overdrafts
63

 
6

Cash dividends paid
(124
)
 
(124
)
Payments for repurchase of common stock
(82
)
 
(211
)
Proceeds from issuances under stock compensation plans
49

 
14

Tax withholding on share-based awards
(17
)
 
(6
)
Other, net
(26
)
 
(13
)
Net cash used in financing activities
(142
)
 
(354
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
162

 
(88
)
Cash and cash equivalents at beginning of period
1,181

 
1,007

Cash and cash equivalents at end of period

$1,343

 

$919

 
 
 
 
Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net

$181

 

$188

Interest, net of capitalized interest
61

 
84

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

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


NOTE 1: BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements include the balances of Nordstrom, Inc. and its subsidiaries (the “Company”). All intercompany transactions and balances are eliminated in consolidation. The interim Condensed Consolidated Financial Statements have been prepared on a basis consistent in all material respects with the accounting policies described and applied in our 2017 Annual Report on Form 10-K (“Annual Report”), except as described in Note 2: Revenue, and reflect all adjustments of a normal recurring nature that are, in management’s opinion, necessary for the fair presentation of the results of operations, financial position and cash flows for the periods presented.
The Condensed Consolidated Financial Statements as of and for the periods ended August 4, 2018 and July 29, 2017 are unaudited. The Condensed Consolidated Balance Sheet as of February 3, 2018 has been derived from the audited Consolidated Financial Statements included in our 2017 Annual Report. The interim Condensed Consolidated Financial Statements should be read together with the Consolidated Financial Statements and related footnote disclosures contained in our 2017 Annual Report.
The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates and assumptions.
Our business, like that of other retailers, is subject to seasonal fluctuations. Our sales are typically higher during our Anniversary Sale in July and the holidays in the fourth quarter. Our Anniversary Sale shifted to the second quarter in 2018 compared with the second and third quarters in 2017. Results for any one quarter are not indicative of the results that may be achieved for a full fiscal year.
Goodwill
We continue to make investments in evolving the customer experience, with a strong emphasis on integrating technology across our business. To support these efforts, we have acquired two retail technology companies. During the first quarter of 2018, we recorded $11 of goodwill as a result of these acquisitions.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases, which was subsequently amended in July 2018 by ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”). This ASU increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as right-of-use assets and lease liabilities. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification dictates whether lease expense is to be recognized based on an effective interest method or on a straight-line basis over the term of the lease. Additional qualitative and quantitative disclosures will be required to give financial statement users information on the amount, timing and judgments related to a reporting entity’s cash flows arising from leases. We plan to adopt this ASU in the first quarter of 2019 and we anticipate using the additional (and optional) transition method provided in ASU 2018-11, which would allow for application of the guidance at the beginning of the period in which it is adopted by recognizing a cumulative-effect adjustment to the opening balance of retained earnings. We expect adoption of this standard will have a material impact on our Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. Under this new guidance, if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment charge shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. This guidance is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact this guidance would have on our Consolidated Financial Statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement — Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This new guidance allows a reclassification from accumulated other comprehensive loss to accumulated deficit for certain tax effects resulting from the 2017 Tax Cuts and Jobs Act (“Tax Act”), which could not be recorded under prior guidance. We elected to early adopt this standard in the first quarter of 2018 and reclassified $5 of tax impacts resulting from the change in the federal corporate tax rate, decreasing the beginning accumulated deficit for the six months ended August 4, 2018.

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


NOTE 2: REVENUE
During the first quarter of fiscal 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers, and all related amendments (“Revenue Standard”), using the modified retrospective adoption method. Results for reporting periods beginning in the first quarter of 2018 are presented under the new Revenue Standard while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605 — Revenue Recognition. Upon adoption, we recorded a net cumulative effect adjustment to decrease beginning accumulated deficit of $55. Excluding the impact of the new Revenue Standard, our second quarter net sales would have been $3,950 for the second quarter and $7,402 for the six months ended August 4, 2018 primarily due to the seasonal timing of the Anniversary Sale at the end of the second quarter. We do not expect the impact of adopting the new Revenue Standard to be material to our Consolidated Statement of Earnings for the year ended February 2, 2019. The impact of adoption on our Condensed Consolidated Balance Sheet for the period ended August 4, 2018 was as follows:
 
August 4, 2018
 
As Reported

 
Revenue Standard Adjustment

 
Excluding Impact of Revenue Standard

Assets
 
 
 
 
 
Merchandise inventories

$2,065

 

$72

 

$2,137

Prepaid expenses and other
439

 
(268
)
 
171

Other assets
334

 
87

 
421

 
 
 

 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
Other current liabilities
1,380

 
(182
)
 
1,198

Other liabilities
522

 
150

 
672

Accumulated deficit
(1,712
)
 
(77
)
 
(1,789
)
Revenue Recognition
NET SALES
We recognize sales revenue net of estimated returns and excluding sales taxes. Revenue from sales to customers shipped from our fulfillment centers, stores and directly from our vendors (“shipped revenues”), which includes shipping revenue when applicable, is recognized at shipping point, the point in time where control has transferred to the customer. Costs to ship orders to customers are expensed as a fulfillment activity at shipping point and commissions from sales at our full-line stores are expensed at the point of sale and both are recorded in selling, general and administrative expenses. Prior to 2018, shipped revenues were recognized upon estimated receipt by the customer and we recorded an estimated in-transit reserve for orders shipped prior to a period’s end, but not yet received by the customer.
We reduce sales and cost of sales by an estimate of customer merchandise returns, which is calculated based on historical return patterns, and record a sales return reserve and an estimated returns asset. Our sales return reserve is classified in other current liabilities and our estimated returns asset, calculated based on the cost of merchandise sold, is classified in prepaid expenses and other on the Condensed Consolidated Balance Sheet. Due to the seasonality of our business, these balances typically increase with higher sales occurring in the last month of a period, such as the Anniversary Sale, and decrease in the following period. Prior to 2018, the estimated cost of merchandise returned was netted with our sales return reserve in other current liabilities.
CREDIT CARD REVENUES, NET
Credit program revenues, net include our portion of the ongoing credit card revenue, net of credit losses, pursuant to the program agreement with TD Bank N.A. (“TD”).
Upon adoption of the new Revenue Standard, the remaining unamortized balances of the investment in contract asset and deferred revenue associated with the sale of the credit card receivables to TD in 2015 and 2017 were eliminated as part of a cumulative-effect adjustment, reducing the opening balance of accumulated deficit for 2018. As a result, the asset amortization and deferred revenue recognition are no longer recorded in credit card revenues, net. Prior to 2018, the investment in contract asset was classified in prepaid expenses and other and other assets, while the deferred revenue was classified in other current liabilities and other liabilities on the Condensed Consolidated Balance Sheet.

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


LOYALTY PROGRAM
The Nordstrom Rewards loyalty program allows customers to accumulate points based on their level of spending, regardless of how they choose to pay. Upon reaching certain point thresholds, customers receive Nordstrom Notes (“Notes”), which can be redeemed for goods or services offered 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 Notes or reimbursements for alterations, Personal Triple Points days, shopping and fashion events and early access to the Anniversary Sale.
As our customers earn points and Notes in the loyalty program, a portion of underlying sales revenue is deferred. We recognize the revenue and related cost of sale when the Notes are ultimately redeemed. The amount of revenue deferred is based on an estimated stand-alone selling price of the points and other loyalty benefits, such as alternations, and included in other current liabilities on the Condensed Consolidated Balance Sheet. Other benefits of the loyalty program, including shopping and fashion events, are recorded in selling, general and administrative expenses as these are not a material right of the program.
Our outstanding performance obligation for the Nordstrom Rewards loyalty program consists of unredeemed points and Notes and was $149 as of August 4, 2018. Almost all Notes are redeemed within six months of issuance. We record breakage revenue of unused points and unredeemed Notes based on expected customer redemption. We estimate, based on historical usage, that 6% of Notes will be unredeemed and recognized as revenue. Prior to 2018, we estimated the net cost of Notes that will be issued and redeemed and recorded this cost as rewards points were accumulated. These costs, as well as reimbursed alterations, were recorded in cost of sales as we provided customers with products and services for these rewards.
GIFT CARDS
We record deferred revenue from the sale of gift cards at the time of purchase. As gift cards are redeemed, we recognize revenue and reduce our contract liability. Though our gift cards do not have an expiration date, we include this deferred revenue in other current liabilities on the Condensed Consolidated Balance Sheet as customers can redeem gift cards at any time.
As of August 4, 2018, our outstanding performance obligation for unredeemed gift cards was $296. Almost all gift cards are redeemed within two years of issuance. We record breakage revenue on unused gift cards based on expected customer redemption. We estimate, based on historical usage, that 2% will be unredeemed and recognized as revenue. Prior to 2018, gift card breakage was recorded in selling, general and administrative expenses and was estimated based on when redemption was considered remote.
Contract Liabilities
Under the new Revenue Standard, contract liabilities represent our obligation to transfer goods or services to customers and include deferred revenue for our loyalty program (including points and Notes) and gift cards. Our contract liabilities are classified as current on the Condensed Consolidated Balance Sheet. Our contract liabilities are as follows:
 
Contract Liabilities

Opening balance as of February 4, 2018

$498

Balance as of May 5, 2018
460

Ending balance as of August 4, 2018
445

The amount of revenue recognized from our beginning contract liability balance was $77 in the second quarter ended 2018 and $228 for the six months ended August 4, 2018.

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


Disaggregation of Revenue
The following table summarizes our disaggregated net sales:
 
Quarter Ended
 
Six Months Ended
 
August 4, 2018

 
July 29, 2017

 
August 4, 2018

 
July 29, 2017

Full-Price1

$2,707

 

$2,850

 

$4,948

 

$5,006

Off-Price1
1,273

 
1,189

 
2,502

 
2,341

Other1

 
(322
)
 

 
(351
)
Total net sales

$3,980

 

$3,717

 

$7,450

 

$6,996

 
 
 
 
 
 
 
 
Digital sales as % of total net sales2
34
%
 
29
%
 
31
%
 
27
%
1 We present our sales with how management views our results internally, including presenting 2018 under the new Revenue Standard and allocating our sales return reserve and the loyalty related adjustments to Full-Price and Off-Price. Amounts in 2018 related to adoption of the new Revenue Standard have not been recast for any prior periods due to the modified retrospective method of adoption. For 2017, Other primarily included unallocated sales return, in-transit and loyalty related adjustments necessary to reconcile sales by business to total net sales. If we applied the sales return reserve allocation and the loyalty related adjustments to the second quarter and six months ended July 29, 2017, Full-Price net sales would decrease $254 and $271, Off-Price net sales would decrease $11 and $28 and Other net sales would increase $265 and $299. This activity is typically higher at the end of the second quarter primarily due to the seasonal timing of the Anniversary Sale.
2 Digital sales are online sales and digitally assisted store sales which include Buy Online, Pickup in Store (“BOPUS”), Reserve Online, Try on in Store (Store Reserve) and Style Boards, a digital selling tool.
The following table summarizes the percent of net sales by merchandise category:
 
August 4, 2018
 
Quarter Ended

 
Six Months Ended

Women’s Apparel
32
%
 
33
%
Shoes
23
%
 
24
%
Men’s Apparel
17
%
 
16
%
Women’s Accessories
11
%
 
11
%
Beauty
11
%
 
11
%
Kids’ Apparel
4
%
 
3
%
Other
2
%
 
2
%
Total
100
%
 
100
%
NOTE 3: SEGMENT REPORTING
We continually monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments. In the first quarter of 2018, as a result of the evolution of our operations, our reportable segments have become progressively more integrated such that we have changed to one reportable “Retail” segment to align with how management operates, evaluates and views the results of our operations. Our principal executive officer, who is our chief operating decision maker (“CODM”), reviews results on a total company, Full-Price and Off-Price basis and uses earnings before interest and taxes as a measure of profitability. We completed the reporting and budgeting in the first quarter of 2018 to better align with how the CODM allocates resources and assesses business performance. As part of this evolution, we now allocate our previous Credit segment results across our other businesses while credit assets are included in Corporate/Other.
Our Retail segment aggregates our two operating segments, Full-Price and Off-Price. Full-Price consists of Nordstrom U.S. full-line stores, Nordstrom.com, Canada, Trunk Club, Jeffrey and Nordstrom Local. Off-Price consists of Nordstrom U.S. Rack stores, Nordstromrack.com/HauteLook and Last Chance clearance stores.
Our Full-Price and Off-Price operating segments both generate revenue by offering customers an extensive selection of high-quality, brand-name and private label merchandise, which includes apparel, shoes, cosmetics and accessories for women, men, young adults and children. We continue to focus on omni-channel initiatives by integrating the operations, merchandising and technology necessary to be consistent with our customers’ expectations of a seamless shopping experience regardless of channel or business. Full-Price and Off-Price have historically had similar economic characteristics and are expected to have similar economic characteristics and long-term financial performance in future periods. They also have other similar qualitative characteristics, including suppliers, method of distribution, type of customer and regulatory environment. Due to their similar qualitative and economic characteristics, we have aggregated our Full-Price and Off-Price operating segments into a single reportable segment.

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


The following table sets forth information for our reportable segment:
 
Quarter Ended
 
Six Months Ended
 
August 4, 2018

 
July 29, 2017

 
August 4, 2018

 
July 29, 2017

Retail segment earnings before interest and income taxes1

$313

 

$359

 

$530

 

$545

Corporate/Other loss before interest and income taxes1
(67
)
 
(142
)
 
(131
)
 
(177
)
Interest expense, net
(28
)
 
(29
)
 
(56
)
 
(76
)
Earnings before income taxes

$218

 

$188

 

$343

 

$292

1 We present our segment results with how management views our results internally, including allocating our sales return reserve and the loyalty related adjustments to Full-Price and Off-Price in 2018. Amounts in 2018 reflect the adoption of the new Revenue Standard, whereas 2017 amounts have not been recast due to the modified retrospective method of adoption described in Note 2: Revenue. If we applied the sales return reserve allocation and the loyalty related adjustments to the second quarter ended 2017 and six months ended July 29, 2017, Retail segment earnings before interest and income taxes would decrease $74 and $68 and Corporate/Other loss before interest and income taxes would decrease $74 and $68. This activity is typically higher at the end of the second quarter primarily due to the seasonal timing of the Anniversary Sale.
NOTE 4: DEBT AND CREDIT FACILITIES
Debt
A summary of our long-term debt, including capital leases, is as follows:
 
August 4, 2018


February 3, 2018


July 29, 2017

Secured
 
 
 
 
 
Mortgage payable, 7.68%, due April 2020

$14

 

$17

 

$22

Other

 
1

 
1

Total secured debt
14

 
18

 
23

 
 
 
 
 
 
Unsecured
 
 
 
 
 
Net of unamortized discount:
 
 
 
 
 
Senior notes, 4.75%, due May 2020
500

 
500

 
499

Senior notes, 4.00%, due October 2021
500

 
500

 
500

Senior notes, 4.00%, due March 2027
349

 
349

 
349

Senior debentures, 6.95%, due March 2028
300

 
300

 
300

Senior notes, 7.00%, due January 2038
146

 
146

 
146

Senior notes, 5.00%, due January 2044
893

 
892

 
890

Other1
32

 
32

 
33

Total unsecured debt
2,720

 
2,719

 
2,717

 
 
 
 
 
 
Total long-term debt
2,734

 
2,737

 
2,740

Less: current portion
(54
)
 
(56
)
 
(11
)
Total due beyond one year

$2,680

 

$2,681

 

$2,729

1 Other unsecured debt includes our Puerto Rico unsecured borrowing facility partially offset by deferred bond issue costs.
During the first quarter of 2017, we issued $350 aggregate principal amount of 4.00% senior unsecured notes due March 2027 and $300 aggregate principal amount of 5.00% senior unsecured notes due January 2044. With the proceeds of these new notes, we retired our $650 senior unsecured notes that were due January 2018. We incurred $18 of net interest expense related to the refinancing, which included the write-off of unamortized balances associated with the debt discount, issue costs and fair value hedge adjustment resulting from the sale of our interest rate swap agreements in 2012. It also included a one-time payment of $24 to 2018 Senior Note holders under a make-whole provision, which represents the net present value of expected coupon payments had the notes been outstanding through the original maturity date.

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


Credit Facilities
As of August 4, 2018, we had total short-term borrowing capacity of $800 under our senior unsecured revolving credit facility (“revolver”) that expires in April 2020. Under the terms of our revolver, we pay a variable rate of interest and a commitment fee based on our debt rating. The revolver is available for working capital, capital expenditures and general corporate purposes. We have the option to increase the revolving commitment by up to $200, to a total of $1,000, provided that we obtain written consent from the lenders.
The revolver requires that we maintain an adjusted debt to earnings before interest, income taxes, depreciation, amortization and rent (“EBITDAR”) leverage ratio of no more than four times. As of August 4, 2018, we were in compliance with this covenant.
Our $800 commercial paper program allows us to use the proceeds to fund operating cash requirements. Under the terms of the commercial paper agreement, we pay a rate of interest based on, among other factors, the maturity of the issuance and market conditions. The issuance of commercial paper has the effect, while it is outstanding, of reducing available liquidity under the revolver by an amount equal to the principal amount of commercial paper.
As of August 4, 2018, we had no issuances outstanding under our commercial paper program and no borrowings outstanding under our revolver.
Our wholly owned subsidiary in Puerto Rico maintains a $52 unsecured borrowing facility to support our expansion into that market. The facility expires in Fall 2018 and borrowings on this facility incur interest based upon the LIBOR plus 1.275% per annum and also incur a fee based on any unused commitment. As of August 4, 2018, we had $47 outstanding on this facility, which is included in the current portion of long-term debt.
NOTE 5: FAIR VALUE MEASUREMENTS
We disclose our financial assets and liabilities that are measured at fair value in our Condensed Consolidated Balance Sheets by level within the fair value hierarchy as defined by applicable accounting standards:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Other observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that cannot be corroborated by market data that reflect the reporting entity’s own assumptions
Financial Instruments Not Measured at Fair Value
Financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, and accounts payable, which approximate fair value due to their short-term nature, and long-term debt.
We estimate the fair value of our long-term debt using quoted market prices of the same or similar issues and, as such, this is considered a Level 2 fair value measurement. The following table summarizes the carrying value and fair value estimate of our long-term debt, including current maturities:
 
August 4, 2018

 
February 3, 2018

 
July 29, 2017

Carrying value of long-term debt

$2,734

 

$2,737

 

$2,740

Fair value of long-term debt
2,797

 
2,827

 
2,908

Non-financial Assets Measured at Fair Value on a Nonrecurring Basis
We also measure certain non-financial assets at fair value on a nonrecurring basis, primarily goodwill and long-lived tangible and intangible assets, in connection with periodic evaluations for potential impairment. We estimate the fair value of these assets using primarily unobservable inputs and, as such, these are considered Level 3 fair value measurements. There were no material impairment charges for these assets for the six months ended August 4, 2018 and July 29, 2017.
NOTE 6: COMMITMENTS AND CONTINGENCIES
Plans for our Nordstrom NYC store, which we currently expect to open in 2019, ultimately include owning a condominium interest in a mixed-use tower and leasing certain nearby properties. As of August 4, 2018, we had approximately $289 of fee interest in land, which is expected to convert to the condominium interest once the store is constructed. We have committed to make future installment payments based on the developer meeting pre-established construction and development milestones. In the event that this project is not completed, the opening may be delayed and we may be subject to future losses or capital commitments in order to complete construction or to monetize our investment.

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


NOTE 7: SHAREHOLDERS’ EQUITY
In February 2017, our Board of Directors authorized a program to repurchase up to $500 of our outstanding common stock through August 31, 2018. During the six months ended August 4, 2018, we repurchased 1.8 shares of our common stock for an aggregate purchase price of $87 and had $327 remaining in share repurchase capacity as of August 4, 2018. There was $319 of unused capacity upon program expiration on August 31, 2018.
In August 2018, subsequent to quarter end, our Board of Directors authorized an additional program to repurchase up to $1,500 of our outstanding common stock, with no expiration date, and we declared a quarterly dividend of $0.37 per share, which will be paid on September 19, 2018 to holders of record as of September 4, 2018. The actual timing, price, manner and amounts of future share repurchases, if any, will be subject to market and economic conditions and applicable Securities and Exchange Commission (“SEC”) rules.
NOTE 8: STOCK-BASED COMPENSATION
The following table summarizes our stock-based compensation expense:
 
Quarter Ended
 
Six Months Ended
 
August 4, 2018

 
July 29, 2017

 
August 4, 2018

 
July 29, 2017

Restricted stock units

$22

 

$15

 

$40

 

$28

Stock options
3

 
5

 
6

 
8

Other
3

 
4

 
5

 
5

Total stock-based compensation expense, before income tax benefit
28

 
24

 
51

 
41

Income tax benefit
(7
)
 
(9
)
 
(13
)
 
(16
)
Total stock-based compensation expense, net of income tax benefit

$21

 

$15

 

$38

 

$25

The following table summarizes our grant allocations:
 
Six Months Ended
 
August 4, 2018
 
July 29, 2017
 
Granted

 
Weighted-average grant-date fair value per unit

 
Granted

 
Weighted-average grant-date fair value per unit

Restricted stock units
2.1

 

$49

 
1.8

 

$43

Stock options



 
0.3

 

$16

Performance share units

 

 
0.1

 

$40

NOTE 9: EARNINGS PER SHARE
The computation of earnings per share is as follows:
 
Quarter Ended
 
Six Months Ended
 
August 4, 2018

 
July 29, 2017

 
August 4, 2018

 
July 29, 2017

Net earnings

$162

 

$110

 

$249

 

$173

 
 
 
 
 
 
 
 
Basic shares
167.8

 
166.4

 
167.8

 
166.8

Dilutive effect of common stock equivalents
2.5

 
2.1

 
2.5

 
2.0

Diluted shares
170.3

 
168.5

 
170.3

 
168.8

 
 
 
 
 
 
 
 
Earnings per basic share

$0.97

 

$0.66

 

$1.48

 

$1.04

Earnings per diluted share

$0.95

 

$0.65

 

$1.46

 

$1.02

 
 
 
 
 
 
 
 
Anti-dilutive common stock equivalents
5.2

 
10.3

 
7.4

 
11.2


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

CAUTIONARY STATEMENT
Certain statements in this Quarterly Report on Form 10-Q contain or may suggest “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties including, but not limited to, our anticipated financial outlook for the fiscal year ending February 2, 2019, our anticipated annual total and comparable sales rates, our anticipated new store openings in existing, new and international markets, our anticipated Return on Invested Capital and trends in our operations. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Our 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 to provide a differentiated and seamless experience across all Nordstrom channels,
timely and effective implementation of our plans to evolve our business model, including development of applications for electronic devices, improvement of customer-facing technology, timely delivery of products purchased digitally, enhancement of inventory management systems, greater and more fluid inventory availability between our digital channels and retail store locations, increased reliance on third parties and greater consistency in marketing and pricing strategies, as well as our ability to manage the costs associated with this evolving business model,
our ability to evolve our business model as necessary to respond to the business and retail environment, as well as fashion trends and consumer preferences, including changing expectations of service and experience in stores and online,
our ability to properly balance our investments in existing and new store locations, especially our investments in our Nordstrom Men’s Store NYC and Nordstrom NYC and our Los Angeles market integration,
successful execution of our information technology strategy, including engagement with third-party service providers,
our ability to effectively utilize internal and third-party data in strategic planning and decision making,
our ability to maintain or expand our presence, including timely completion of construction associated with new, relocated and remodeled stores and fulfillment and distribution centers, all of which may be impacted by third parties and consumer demand,
efficient and proper allocation of our capital resources,
effective inventory management processes and systems, fulfillment and supply chain processes and systems, disruptions in our supply chain and our ability to control costs,
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,
our ability to safeguard our reputation and maintain relationships with our vendors and third-party service providers,
our ability to maintain relationships with and motivate our employees and to effectively attract, develop and retain our future leaders,
our ability to realize the expected benefits, respond to potential risks and appropriately manage costs associated with our program agreement with TD,
the effectiveness of planned advertising, marketing and promotional campaigns in the highly competitive and promotional retail industry,
market fluctuations, increases in operating costs, exit costs and overall liabilities and losses associated with owning and leasing real estate,
potential goodwill impairment charges, future impairment charges and fluctuations in the fair values of reporting units or of assets in the event projected financial results are not achieved within expected time frames,
compliance with debt and operating covenants, availability and cost of credit, changes in our credit rating and changes in interest rates,
the timing, price, manner and amounts of future share repurchases by us, if any, or any share issuances by us,
Economic and External
the impact of the seasonal nature of our business and cyclical customer spending,
the impact of economic and market conditions and the resultant impact on consumer spending and credit patterns,
the impact of economic, environmental 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 and supply chain disruptions, including the effects of tariffs, 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 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, health care, and tax reforms,
the impact of changes in accounting rules and regulations, changes in our interpretation of the rules or regulations, or changes in underlying assumptions, estimates or judgments.

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

These and other factors, including those factors described in Part I, “Item 1A. Risk Factors” in our 2017 Annual Report on Form 10-K and Part II, “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances, except as may be required by law.
OVERVIEW
We strive to be the best fashion retailer in a digital world with our customer strategy centered on three strategic pillars: providing a compelling product offering, delivering outstanding services and experiences, and leveraging the strength of the Nordstrom brand. We are targeting higher shareholder returns through three key deliverables: growing market share, improving profitability and returns, and continuing our disciplined capital allocation approach.
Our second quarter results demonstrated our continued progress in executing our strategy and delivering on our long-term financial commitments:
Net earnings of $162, or $0.95 per diluted share for the second quarter reflected a 7.1% net sales increase with growth across Full-Price and Off-Price.
Through our market-leading presence, digital sales increased by 23% in the second quarter, compared with 20% for the same period last year.
During the first day of our Anniversary Sale, we achieved record digital demand, surpassing our previous peak by 80% at 10 times our average daily demand. Digital sales accounted for more than 40% of our event.
Our strategic brands enable us to provide customers with a compelling product offering. In the second quarter, strategic brand sales grew 13%, making up approximately 45% of Full-Price.
We continue to execute our local market strategy to drive increased customer engagement and gain market share.
Starting in Los Angeles, our largest market, we are bringing our digital and physical assets together in a seamless ecosystem to deliver outstanding services and experiences.
This includes investments in our supply chain capabilities, which are a critical enabler to better serve customers, improve our efficiencies, and better leverage inventory in our local markets. We have identified sites for our West Coast fulfillment center and local omni-channel hub, which are scheduled to open in late 2019.
Our Nordstrom Local concepts are another component of our local market strategy to engage with customers through more convenient access to product and services, such as buy online pick up in store, alterations, store reserve, and personal styling. This fall, we plan to open two additional locations in the Los Angeles market.
We are encouraged with our progress and we plan 2018 to be an inflection point for long-term profitable growth. We are confident in our path forward and are well-positioned to achieve our financial plans for the year and over the long-term.

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


RESULTS OF OPERATIONS
In our ongoing effort to enhance the customer experience, we are focused on providing customers with a seamless experience across our channels. We invested early in our omni-channel capabilities, integrating our operations, merchandising and technology across our stores and online, in both our Full-Price and Off-Price businesses. 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. We have one Retail reportable segment in 2018 and analyze our results on a total Company basis.
We may not calculate certain metrics used to evaluate our business in a consistent manner among industry peers. Provided below are definitions of metrics we present within our analysis:
Comparable Salessales from stores that have been open at least one full year at the beginning of the year
Comparable sales include sales from our online channels
Due to the 53rd week in 2017, our 2018 comparable sales are reported on a like-for-like basis with no impact from event shifts or revenue recognition
Digital Sales – online sales and digitally assisted store sales which include Buy Online, Pickup in Store (“BOPUS”), Reserve Online, Try on in Store (Store Reserve) and Style Board, a digital selling tool
Gross Profit – net sales less cost of sales and related buying and occupancy costs
Inventory Turnover Rate – trailing 12-months cost of sales and related buying and occupancy costs divided by the trailing 4-quarter average inventory
Net Sales
During the first quarter of 2018, we adopted the new revenue recognition standard using the modified retrospective adoption method. Results beginning in the first quarter of 2018 are presented under the new Revenue Standard, while prior period amounts are not adjusted. Also beginning in 2018, we aligned our sales presentation with how we view the results of our operations internally and how our customers shop with us, by our Full-Price and Off-Price businesses.
Full-Price – Nordstrom U.S. full-line stores, Nordstrom.com, Canada, Trunk Club, Jeffrey and Nordstrom Local.
Off-Price – Nordstrom U.S. Rack stores, Nordstromrack.com/HauteLook and Last Chance clearance stores
The following table summarizes net sales and comparable sales for the quarter and six months ended August 4, 2018, compared with the same periods in fiscal 2017:
 
Quarter Ended
 
Six Months Ended
 
August 4, 2018

 
July 29, 2017

 
August 4, 2018

 
July 29, 2017

Net sales by business1:
 
 
 
 
 
 
 
Full-Price

$2,707

 

$2,850

 

$4,948

 

$5,006

Off-Price
1,273

 
1,189

 
2,502

 
2,341

Other

 
(322
)
 

 
(351
)
Total net sales

$3,980

 

$3,717

 

$7,450

 

$6,996

 
 
 
 
 
 
 
 
Comparable sales increase (decrease) by business:
 
 
 
 
 
 
 
Full-Price
4.1
%
 
1.4
%
 
2.6
%
 
(0.4
%)
Off-Price
4.0
%
 
3.1
%
 
2.2
%
 
2.7
%
Total Company
4.0
%
 
1.7
%
 
2.4
%
 
0.6
%
 
 
 
 
 
 
 
 
Digital sales as % of total net sales
34
%
 
29
%
 
31
%
 
27
%
1 We present our sales with how management views our results internally, including presenting 2018 under the new Revenue Standard and allocating our sales return reserve to Full-Price and Off-Price. For 2017, Other primarily included unallocated sales return, in-transit and loyalty related adjustments necessary to reconcile sales by business to total net sales.

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


Total Company net sales increased 7.1% and 6.5% for the second quarter ended 2018 and six months ended August 4, 2018, compared with the same periods in 2017. This included an increase of approximately 100 basis points in the second quarter and 200 basis points for the six months ended August 4, 2018, primarily due to the impact of the new Revenue Standard as it relates to the timing of the Anniversary Sale. We expect a corresponding decrease of approximately 100 basis points in the third quarter of 2018. We do not expect the impact of adopting the new Revenue Standard to be material for the year ended February 2, 2019. We do expect the impact of the 53rd week in 2017 to result in a decrease of approximately 100 basis points in 2018 compared with 2017. Digital sales increased 23% in the second quarter ended 2018 and 21% in the six months ended August 4, 2018 compared with the same periods in 2017. To date in fiscal 2018, we opened our Nordstrom Men’s Store NYC and seven Nordstrom Rack stores and closed one full-line store and one Trunk Club clubhouse.
Full-Price net sales decreased 5.0% and 1.2% for the second quarter ended 2018 and six months ended August 4, 2018, compared with the same periods in 2017. This included a decrease of approximately 900 basis points for the second quarter and 400 basis points for the six months ended August 4, 2018, due primarily to the sales return reserve allocation and to a lesser extent the new Revenue Standard. We expect a corresponding increase of approximately 800 basis points in the third quarter of 2018 primarily related to the sales return reserve allocation. Full-Price sales reflected an increase in the average selling price per item sold and the number of items sold. The top-ranking merchandise categories were Kids’ Apparel and Beauty for the quarter and six months ended August 4, 2018.
Off-Price net sales increased 7.0% and 6.9% for the second quarter ended 2018 and six months ended August 4, 2018, compared with the same periods in 2017. This reflected an increase in the number of items sold, partially offset by a decrease in the average selling price per item sold. The increase in sales included a decrease of approximately 150 basis points for the second quarter and 50 basis points for the six months ended August 4, 2018, primarily due to the new Revenue Standard. Shoes was the top-performing merchandise category for the quarter and six months ended August 4, 2018.
Credit Card Revenue, Net
Credit program revenues, net includes our portion of the credit card revenue, net of credit losses, from credit card receivables pursuant to our program agreement with TD.
Credit card revenue, net was $87 for the quarter ended August 4, 2018, compared with $76 for the same period in 2017 and $179 for the six months ended August 4, 2018, compared with $152 for the same period in 2017. The increases of $11 and $27 for the quarter and six months ended August 4, 2018 were a result of our strategic partnership with TD to responsibly grow our receivables and associated revenues as well as efforts to drive new account growth.
Gross Profit
The following table summarizes gross profit:
 
Quarter Ended
 
Six Months Ended
 
August 4, 2018

 
July 29, 2017

 
August 4, 2018

 
July 29, 2017

Gross profit

$1,391

 

$1,266

 

$2,573

 

$2,389

Gross profit as a % of net sales
35.0
%
 
34.0
%
 
34.5
%
 
34.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
August 4, 2018

 
July 29, 2017

Inventory turnover rate
 
 
 
 
4.74

 
4.53

Our gross profit rate increased 91 basis points for the second quarter ended 2018 and 39 basis points for the six months ended August 4, 2018, compared with the same periods in 2017. This increase included a favorable shift of $30 million due to the impact of the new Revenue Standard as it relates to the timing of the Anniversary Sale, which is expected to fully reverse in the third quarter. In addition, the increase was driven by higher product margins from favorable regular price selling trends and leverage on occupancy expenses. Continued inventory execution led to improvements in inventory turnover rate as of August 4, 2018. For additional information on the impacts of the new Revenue Standard, see Note 2: Revenue in Item 1.

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


Selling, General and Administrative Expenses 
Selling, general and administrative expenses (“SG&A”) are summarized in the following table:
 
Quarter Ended
 
Six Months Ended
 
August 4, 2018

 
July 29, 2017

 
August 4, 2018


July 29, 2017

Selling, general and administrative expenses

$1,232

 

$1,125

 

$2,353

 

$2,173

Selling, general and administrative expenses as a % of net sales
31.0
%
 
30.3
%
 
31.6
%
 
31.1
%
SG&A increased $107 and 71 basis points for the second quarter ended 2018 and $180 and 53 basis points for the six months ended August 4, 2018, primarily due to higher supply chain expenses related to planned growth and the Anniversary Sale.
Earnings Before Interest and Income Taxes 
Earnings before interest and income taxes (“EBIT”) are summarized in the following table:
 
Quarter Ended
 
Six Months Ended
 
August 4, 2018

 
July 29, 2017

 
August 4, 2018

 
July 29, 2017

Earnings before interest and income taxes

$246

 

$217

 

$399

 

$368

Earnings before interest and income taxes as a % of net sales
6.2
%
 
5.8
%
 
5.4
%
 
5.3
%
EBIT increased $29 and 33 basis points for the second quarter ended 2018 and $31 and 10 basis points for the six months ended August 4, 2018. The increase in EBIT included a favorable shift of $30 primarily due to the impact of the new Revenue Standard as it relates to the timing of the Anniversary Sale, which is expected to fully reverse in the third quarter.
Interest Expense, net
Interest expense, net was $28 for the second quarter ended 2018, compared with $29 for the same period in 2017, and $56 for the six months ended August 4, 2018, compared with $76 for the same period in 2017. The decrease for the six months ended August 4, 2018, is due to a net interest expense charge of $18 related to the $650 debt refinancing completed in the first quarter of 2017 (see Note 4: Debt and Credit Facilities in Item 1).
Income Tax Expense
Income tax expense is summarized in the following table:
 
Quarter Ended
 
Six Months Ended
 
August 4, 2018

 
July 29, 2017

 
August 4, 2018

 
July 29, 2017

Income tax expense

$56

 

$78

 

$94

 

$119

Effective tax rate
25.7
%
 
41.8
%
 
27.4
%
 
40.7
%
The effective tax rate decreased for the second quarter ended 2018 and six months ended August 4, 2018, compared with the same periods in 2017, primarily due to the lower statutory tax rate enacted under the Tax Act.
Earnings Per Share
Earnings per share is as follows:
 
Quarter Ended
 
Six Months Ended
 
August 4, 2018

 
July 29, 2017

 
August 4, 2018

 
July 29, 2017

Basic

$0.97

 

$0.66

 

$1.48

 

$1.04

Diluted

$0.95

 

$0.65

 

$1.46

 

$1.02

Earnings per diluted share increased $0.30 for the second quarter ended 2018 and increased $0.44 for the six months ended August 4, 2018, compared with the same periods in 2017 due to higher sales volume, a lower tax rate and the impact of the new Revenue Standard as it relates to the timing of the Anniversary Sale.

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


Fiscal Year 2018 Outlook
We raised our annual outlook expectations for sales and earnings per diluted share to incorporate our first half results. Our current expectations for fiscal 2018 are as follows:
 
Prior Outlook
Current Outlook
Net sales
$15.2 to $15.4 billion
$15.4 to $15.5 billion
Credit card revenues
Mid-teens growth
Mid-teens growth
Comparable sales (percent)
0.5 to 1.5
1.5 to 2
EBIT
$895 to $940 million
$925 to $960 million
Earnings per diluted share (excluding the impact of any future share repurchases)
$3.35 to $3.55
$3.50 to $3.65
Our updated full year outlook incorporated the following assumptions:
For the second half of fiscal 2018, we expect the third quarter to contribute approximately 30 percent of EBIT and the fourth quarter to contribute approximately 70 percent of EBIT.
Third quarter EBIT margin is expected to deleverage on fixed expenses and reflect an unfavorable shift of $30. This represents the reversal of the second quarter benefit of the new Revenue Standard as it relates to the timing of the Anniversary Sale.
Fourth quarter EBIT is expected to leverage from higher sales volume and reflect a favorable comparison of $16 from a one-time employee investment in 2017 associated with last year’s tax reform. When normalizing for this one-time impact, we anticipate the fourth quarter’s EBIT contribution to the second half will be generally consistent with historical trends.

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


Adjusted Return on Invested Capital (“Adjusted ROIC”) (Non-GAAP financial measure)
We believe that Adjusted ROIC is a useful financial measure for investors in evaluating the efficiency and effectiveness of the capital we have invested in our business to generate returns. Adjusted ROIC adjusts our operating leases as if they met the criteria for capital leases or we had purchased the properties. This provides additional supplemental information that reflects the investment in our off-balance sheet operating leases, controls for differences in capital structure between us and our competitors and provides investors and credit agencies with another way to comparably evaluate the efficiency and effectiveness of our capital investments over time. In addition, we incorporate Adjusted ROIC into our executive incentive measures and it is an important indicator of shareholders’ return over the long term.
We define Adjusted ROIC as our adjusted net operating profit after tax divided by our average invested capital using the trailing 12-month average. Adjusted 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. Estimated depreciation on capitalized operating leases and average estimated asset base of capitalized operating leases are not calculated in accordance with, or an alternative for, GAAP and should not be considered in isolation or as a substitution of our results as reported under GAAP. The financial measure calculated under GAAP which is most directly comparable to Adjusted ROIC is return on assets.
For the 12 fiscal months ended August 4, 2018, our Adjusted ROIC increased to 10.8% compared with 8.9% for the 12 fiscal months ended July 29, 2017. Results for the prior period were negatively impacted by approximately 310 basis points due to the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016.
The following is a reconciliation of the components of Adjusted ROIC and return on assets:
 
12 Fiscal Months Ended
 
August 4, 2018


July 29, 2017

Net earnings

$513

 

$364

Add: income tax expense1
329

 
346

Add: interest expense
124

 
139

Earnings before interest and income tax expense
966

 
849

 
 
 
 
Add: rent expense, net
249

 
230

Less: estimated depreciation on capitalized operating leases2
(133
)
 
(123
)
Adjusted net operating profit
1,082

 
956

 
 
 
 
Less: estimated income tax expense
(422
)
 
(438
)
Adjusted net operating profit after tax

$660

 

$518

 
 
 
 
Average total assets

$8,175

 

$8,018

Less: average non-interest-bearing current liabilities3
(3,371
)
 
(3,173
)
Less: average deferred property incentives and deferred rent liability3
(635
)
 
(646
)
Add: average estimated asset base of capitalized operating leases2
1,962

 
1,636

Average invested capital

$6,131

 

$5,835

 
 
 
 
Return on assets4
6.3
%
 
4.5
%
Adjusted ROIC4
10.8
%
 
8.9
%
1 Results for the 12 fiscal months ended August 4, 2018 include a $42 unfavorable impact related to the Tax Act.
2 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. The asset base is calculated 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.
3 Balances associated with our deferred rent liability have been classified as long-term liabilities as of January 28, 2017.
4 Results for the 12 fiscal months ended July 29, 2017 include the $197 impact of the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016, which negatively impacted the prior period return on assets by approximately 230 basis points and Adjusted ROIC by approximately 310 basis points.

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


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 facility and potential future borrowings are sufficient to meet 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 August 4, 2018, our existing cash and cash equivalents on-hand of $1,343, available credit facility of $800 and potential future operating cash flows and borrowings will be sufficient to fund these scheduled future payments and potential long-term initiatives.
The following is a summary of our cash flows by activity:
 
Six Months Ended
Fiscal year
August 4, 2018

 
July 29, 2017

Net cash provided by operating activities

$594

 

$574

Net cash used in investing activities
(290
)
 
(308
)
Net cash used in financing activities
(142
)
 
(354
)
Operating Activities
Net cash provided by operating activities increased $20 for the period ended August 4, 2018, compared with the same period in 2017, primarily due to the timing of the payments for inventory purchases and higher net earnings, partially offset by the timing of payroll and increased incentive compensation payouts, which included $16 for our one-time investment in employees paid in 2018 in response to the Tax Act.
Investing Activities
Net cash used in investing activities decreased $18 for the period ended August 4, 2018, compared with the same period in 2017, primarily due to planned reductions in capital expenditures, partially offset by the acquisitions of two retail technology companies, which were classified in other investing activities, net (see Note 1: Basis of Presentation in Item 1).
Financing Activities
Net cash used in financing activities decreased $212 for the period ended August 4, 2018, compared with the same period in 2017, primarily due to decreased share repurchase activity.
Borrowing Activity
During the first quarter of 2017, we issued $350 aggregate principal amount of 4.00% senior unsecured notes due March 2027 and $300 aggregate principal amount of 5.00% senior unsecured notes due January 2044. We recorded debt issuance costs incurred as a result of the issuance in other financing activities, net in the Condensed Consolidated Statements of Cash Flows in Item 1. With the proceeds of these new notes, we retired our $650 senior unsecured notes that were due January 2018.

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


Free Cash Flow (Non-GAAP financial measure)
Free Cash Flow is one of our key liquidity measures, and when used in conjunction with GAAP measures, provides investors with a meaningful analysis of our ability to generate cash from our business. For the six months ended August 4, 2018, we had Free Cash Flow of $388 compared with $239 for the six months ended July 29, 2017.
Beginning in the first quarter of fiscal 2018, we no longer adjust free cash flow for cash dividends paid. We believe this presentation is more reflective of our operating performance and more consistent with the way we manage our business, how our peers calculate free cash flows and prevailing industry practice. Prior period Free Cash Flow financial measures have been recast to conform with current period presentation.
Free Cash Flow is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, operating cash flows 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 Free Cash Flow is net cash provided by operating activities. The following is a reconciliation of net cash provided by operating activities to Free Cash Flow:
 
Six Months Ended
 
August 4, 2018

 
July 29, 2017

Net cash provided by operating activities

$594

 

$574

Less: capital expenditures
(269
)
 
(341
)
Add: change in cash book overdrafts
63

 
6

Free Cash Flow

$388



$239

Adjusted EBITDA (Non-GAAP financial measure)
Adjusted earnings before interest, income taxes, depreciation and amortization (“EBITDA”) is our key financial metric to reflect our view of cash flow from net earnings. Adjusted EBITDA excludes significant items which are non-operating in nature in order to evaluate our core operating performance against prior periods. The financial measure calculated under GAAP which is most directly comparable to Adjusted EBITDA is net earnings. As of August 4, 2018 and July 29, 2017, Adjusted EBITDA was $697 and $650.
Adjusted EBITDA is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for net earnings, overall change in cash or liquidity of the business as a whole. 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 following is a reconciliation of net earnings to Adjusted EBITDA:
 
Six Months Ended
 
August 4, 2018

 
July 29, 2017

Net earnings

$249

 

$173

Add: income tax expense
94

 
119

Add: interest expense, net
56

 
76

Earnings before interest and income taxes
399


368







Add: depreciation and amortization expenses
338


320

Less: amortization of deferred property incentives
(40
)

(38
)
Adjusted EBITDA

$697



$650


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


Credit Capacity and Commitments
As of August 4, 2018, we had total short-term borrowing capacity of $800 under our senior unsecured revolving credit facility (“revolver”) that expires in April 2020. Under the terms of our revolver, we pay a variable rate of interest and a commitment fee based on our debt rating. The revolver is available for working capital, capital expenditures and general corporate purposes. We have the option to increase the revolving commitment by up to $200, to a total of $1,000, provided that we obtain written consent from the lenders.
Our wholly owned subsidiary in Puerto Rico maintains a $52 unsecured borrowing facility to support our expansion into that market. The facility expires in Fall 2018 and borrowings on this facility incur interest based upon the LIBOR plus 1.275% per annum and also incur a fee based on any unused commitment. As of August 4, 2018, we had $47 outstanding on this facility.
As of August 4, 2018, we had no issuances outstanding under our commercial paper program and no borrowings outstanding under our revolver.
Impact of Credit Ratings
Under the terms of our revolver, any borrowings we may enter into will accrue interest for Euro-Dollar Rate Loans at a floating base rate tied to LIBOR, for Canadian Dealer Offer Rate Loans at a floating rate tied to CDOR, and for Base Rate Loans at the highest of: (i) the Euro-Dollar rate plus 100 basis points, (ii) the federal funds rate plus 50 basis points and (iii) the prime rate.
The rate depends upon the type of borrowing incurred, plus in each case an applicable margin. This applicable margin varies depending upon the credit ratings assigned to our long-term unsecured debt. At the time of this report, our long-term unsecured debt ratings, outlook and resulting applicable margin were as follows:
 
Credit
Ratings
 
Outlook
Moody’s
Baa1
 
Stable
Standard & Poor’s
BBB+
 
Stable
 
Base Interest
Rate
 
Applicable
Margin

Euro-Dollar Rate Loan
LIBOR
 
1.02
%
Canadian Dealer Offer Rate Loan
CDOR
 
1.02
%
Base Rate Loan
various
 

Should the ratings assigned to our long-term unsecured debt improve, the applicable margin associated with any such borrowings may decrease, resulting in a lower borrowing cost under this facility. Should the ratings assigned to our long-term unsecured debt worsen, the applicable margin associated with our borrowings may increase, resulting in a higher borrowing cost under this facility.
Debt Covenants
The revolver requires that we maintain an adjusted debt to earnings before interest, income taxes, depreciation, amortization and rent (“EBITDAR”) leverage ratio of no more than four times. As of August 4, 2018, we were in compliance with this covenant.

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


Adjusted Debt to EBITDAR (Non-GAAP financial measure)
Adjusted Debt to EBITDAR is one of our key financial metrics, and we believe that our debt levels are best analyzed using this measure. Our goal is to manage debt levels to maintain an investment-grade credit rating and operate with an efficient capital structure. In evaluating our debt levels, this measure provides a reflection of our credit worthiness that could impact our credit rating and borrowing costs. We also have a debt covenant that requires an adjusted debt to EBITDAR leverage ratio of no more than four times. As of August 4, 2018, our Adjusted Debt to EBITDAR was 2.5, and as of July 29, 2017, it was 2.4.
Adjusted Debt to EBITDAR is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, debt to net earnings, net earnings, debt 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 Adjusted Debt to EBITDAR is debt to net earnings. The following is a reconciliation of the components of Adjusted Debt to EBITDAR and debt to net earnings:
 
20181

 
20171

Debt

$2,734

 

$2,740

Add: estimated capitalized operating lease liability2
1,993

 
1,841

Adjusted Debt

$4,727

 

$4,581

 
 
 
 
Net earnings

$513

 

$364

Add: income tax expense3
329

 
346

Add: interest expense, net
115

 
136

Earnings before interest and income taxes
957

 
846

 
 
 
 
Add: depreciation and amortization expenses
683

 
646

Add: rent expense, net
249

 
230

Add: non-cash acquisition-related charges4
1

 
204

Adjusted EBITDAR

$1,890

 

$1,926

 
 
 
 
Debt to Net Earnings5
5.3

 
7.5

Adjusted Debt to EBITDAR
2.5

 
2.4

1 The components of Adjusted Debt are as of August 4, 2018 and July 29, 2017, while the components of Adjusted EBITDAR are for the 12 months ended August 4, 2018 and July 29, 2017.
2 Based upon the estimated lease liability as of the end of the period, 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 debt 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.
3 Results for the 12 fiscal months ended August 4, 2018 include a $42 unfavorable impact related to the Tax Act.
4 Non-cash acquisition-related charges for the 12 months ended July 29, 2017 include the goodwill impairment charge of $197 related to Trunk Club.
5 Results for the period ended July 29, 2017 include the $197 impact of the Trunk Club goodwill impairment charge, which approximates 260 basis points.

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


CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We believe that the estimates, assumptions and judgments involved in the accounting policies referred to in our Annual Report on Form 10-K for the year ended February 3, 2018 have the greatest potential effect on our financial statements, so we consider these to be our critical accounting policies and estimates. Our management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors.
Except as disclosed in Note 2: Revenue of Item 1, pertaining to our adoption of the new Revenue Standard, there have been no significant changes to our significant accounting policies as described in our Annual Report on Form 10-K filed with the SEC on March 19, 2018.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We discussed our interest rate risk and our foreign currency exchange risk in Part II, “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our 2017 Annual Report on Form 10-K filed with the SEC on March 19, 2018. There have been no material changes to these risks since that time.
Item 4. Controls and Procedures.
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company performed an evaluation under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the design and effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective in the timely and accurate recording, processing, summarizing and reporting of material financial and non-financial information within the time periods specified within the SEC’s rules and forms. Our principal executive officer and principal financial officer also concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 1. 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 Condensed 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 1A. Risk Factors.
There have been no other material changes to the risk factors we discussed in Part I, “Item 1A. Risk Factors” of our 2017 Annual Report on Form 10-K filed with the SEC on March 19, 2018, as updated by our subsequent quarterly report on Form 10-Q filed with the SEC on June 7, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) SHARE REPURCHASES
(Dollar and share amounts in millions, except per share amounts)
The following is a summary of our second 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

May 2018
(May 6, 2018 to June 2, 2018)
0.6

 

$48.26

 
0.6

 

$371

June 2018
(June 3, 2018 to July 7, 2018)
0.7

 

$50.99

 
0.7

 

$337

July 2018
(July 8, 2018 to August 4, 2018)
0.2

 

$50.78

 
0.2

 

$327

Total
1.5

 

$49.81

 
1.5

 
 
Our February 2017 Board authorized share repurchase program, which had $327 of remaining capacity as of August 4, 2018, expired on August 31, 2018. There was $319 of unused capacity upon program expiration. In August 2018, our Board of Directors authorized an additional program to repurchase up to $1,500 of our outstanding common stock, with no expiration date. The actual timing, price, manner and amounts of future share repurchases, if any, will be subject to market and economic conditions and applicable SEC rules.
Item 6. Exhibits.
Exhibits are incorporated herein by reference or are filed or furnished with this report as set forth in the Exhibit Index on page 27 hereof.

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NORDSTROM, INC.
Exhibit Index
Exhibit
 
Method of Filing
 
 
Filed herewith electronically
 
 
 
 
 
 
 
Filed herewith electronically
 
 
 
 
 
 
 
Filed herewith electronically
 
 
 
 
 
 
 
Filed herewith electronically
 
 
 
 
 
 
 
Furnished herewith electronically
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
Filed herewith electronically
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
Filed herewith electronically
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
Filed herewith electronically
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document
 
Filed herewith electronically
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
Filed herewith electronically
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
Filed herewith electronically
 
 
 
 
 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
NORDSTROM, INC.
(Registrant)
 
 
/s/ Anne L. Bramman
Anne L. Bramman
Chief Financial Officer
(Principal Financial Officer)
 
 
Date:
September 5, 2018

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Exhibit


Exhibit 3.1

BYLAWS
OF
NORDSTROM, INC.
(Amended and Restated as of May 8, 2018)
ARTICLE I
Offices
The principal office of the corporation in the state of Washington shall be located in the city of Seattle. The corporation may have such other offices, either within or without the state of Washington, as the Board of Directors may designate or as the business of the corporation may require from time to time.
The registered office of the corporation required by the Washington Business Corporation Act to be maintained in the state of Washington may be, but need not be, identical with the principal office in the state of Washington and the address of the registered office may be changed from time to time by the Board of Directors or by officers designated by the Board of Directors.
ARTICLE II
Shareholders
Section 1.    Annual Meetings. The annual meeting of the shareholders shall be held on the third Tuesday in the month of May each year, at the hour of 11:00 a.m., unless the Board of Directors shall have designated a different hour and day in the month of May to hold said meeting. The meeting shall be for the purpose of electing directors and the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday in the state of Washington and if the Board of Directors has not designated some other day in the month of May for such meeting, such meeting shall be held at the same hour and place on the next succeeding business day not a holiday. The failure to hold an annual meeting at the time stated in these Bylaws does not affect the validity of any corporate action. If the election of directors shall not be held on the day designated herein or by the Board of Directors for any annual meeting of the shareholders, or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as conveniently may be.
Section 2.    Special Meetings. Special meetings of the shareholders may be called for any purpose or purposes, unless otherwise prescribed by statute, at any time by the Non-Executive Chairman of the Board of Directors, by the President (or any Co-President) if there is not then a Non-Executive Chairman of the Board of Directors or by the Board of Directors and shall be called by the Non-Executive Chairman of the Board of Directors or the President (or any Co-President) at the request of holders of not less than 10% of all outstanding shares of the corporation entitled to vote on any issue proposed to be considered at the meeting. Only business within the purpose or purposes described in the meeting notice may be conducted at a special shareholder's meeting.
Section 3.    Place of Meeting. The Board of Directors may designate any place, either within or without the state of Washington, as the place of meeting for any annual meeting or for any special meeting of the corporation. If no such designation is made, the place of meeting shall be the principal offices of the corporation in the state of Washington.
Section 4.    Notice of Meetings. Written notice of annual or special meetings of shareholders stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given by the Secretary, or persons authorized to call the meeting, to each shareholder of record entitled to vote at the meeting, not less than ten (10) nor more than sixty (60) days prior to the date of the meeting, unless otherwise prescribed by statute.
Section 5.    Waiver of Notice. Notice of the time, place and purpose of any meeting may be waived in writing (either before or after such meeting) and will be waived by any shareholder by attendance of the shareholder in person or by proxy, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. Any shareholder waiving notice of a meeting shall be bound by the proceedings of the meeting in all respects as if due notice thereof had been given.





Section 6.    Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or to make a determination of shareholders for any other proper purpose, the Board of Directors may fix in advance a record date for any such determination of shareholders, such date to be not more than seventy (70) days and, in the case of a meeting of shareholders, not less than ten (10) days, prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the day before the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section, the determination shall apply to any adjournment thereof, unless the Board of Directors fixes a new record date, which it must do if the meeting is adjourned more than one hundred twenty (120) days after the date fixed for the original meeting.
Section 7.    Voting Lists. After fixing a record date for a shareholders' meeting, the corporation shall prepare an alphabetical list of the names of all shareholders on the record date who are entitled to notice of the shareholders' meeting. The list shall show the address of and number of shares held by each shareholder. A shareholder, shareholder's agent, or a shareholder's attorney may inspect the shareholder list, at the shareholder's expense, beginning ten (10) days prior to the shareholders' meeting and continuing through the meeting, at the corporation's principal office or at a place identified in the meeting notice in the city where the meeting will be held during regular business hours. The shareholder list shall be kept open for inspection at the time and place of such meeting or any adjournment.
Section 8.    Quorum and Adjourned Meetings. Unless the Articles of Incorporation or applicable law provide otherwise, a majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. Once a share is represented at a meeting, other than to object to holding the meeting or transacting business, it is deemed to be present for the remainder of the meeting and any adjournment thereof unless a new record date is set or is required to be set for the adjourned meeting. A majority of the shares represented at a meeting, even if less than a quorum, may adjourn the meeting from time to time without further notice. The Non-Executive Chairman, or the President if there is not then a Non-Executive Chairman, may recess or adjourn the meeting from time to time without further notice. At a reconvened meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting. Business may continue to be conducted at a duly organized meeting and at any adjournment of such meeting (unless a new record date is or must be set for the adjourned meeting), notwithstanding the withdrawal of enough shares from either meeting to leave less than a quorum.
Section 9.    Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by the shareholder's duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy.
Section 10.    Voting of Shares. Every shareholder of record shall have the right at every shareholders' meeting to one vote for every share standing in the shareholder's name on the books of the corporation. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. If a quorum exists, action on a matter, other than election of directors, is approved by the shareholders if the votes cast favoring the action exceed the votes cast opposing the action, unless the Articles of Incorporation or applicable law require a greater number of affirmative votes. Notwithstanding the foregoing, shares of the corporation may not be voted if they are owned, directly or indirectly, by another corporation and the corporation owns, directly or indirectly, a majority of shares of the other corporation entitled to vote for directors of the other corporation.
Section 11.    Acceptance of Votes. If the name signed on a vote, consent, waiver or proxy appointment does not correspond to the name of a shareholder of the corporation, the corporation may accept the vote, consent, waiver or proxy appointment and give effect to it as the act of the shareholder if: (i) the shareholder is an entity and the name signed purports to be that of an officer, partner or agent of the entity; (ii) the name signed purports to be that of an administrator, executor, guardian or conservator representing the shareholder; (iii) the name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder; (iv) the name signed purports to be that of a pledgee, beneficial owner or attorney-in-fact of the shareholder; or (v) two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all co-owners.





Section 12.    Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the corporation. Nominations of persons for election to the Board of Directors may be made at any annual meeting of shareholders (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any shareholder of the corporation (i) who is a shareholder of record on the date of the giving of the notice provided for in this Section 12 and on the record date for the determination of shareholders entitled to vote at the annual meeting and (ii) who timely complies with the notice procedures and form of notice set forth in this Section 12. This Section 12 shall be the exclusive means for a shareholder to submit nominations of persons for election to the Board of Directors.
Section 12.1.    Procedure for Nomination by Shareholders. To be timely, a shareholder's notice must be given to the Secretary of this corporation in proper form and must be delivered to or mailed and received at the principal executive offices of the corporation not less than ninety (90) days nor more than one hundred twenty (120) days prior to the anniversary of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after the anniversary date, or no annual meeting was held in the immediately preceding year, notice by the shareholder in order to be timely must be so received no later than the close of business on the tenth (10th) day following the day on which the notice of the annual meeting date was mailed to shareholders.
To be in the proper form, a shareholder's notice must be in written form and must set forth (a) as to each person whom the shareholder proposes to nominate for election as a director (i) the name, age, business address and residence address of the proposed nominee, (ii) the principal occupation or employment of the proposed nominee, (iii) (A) the class or series and number of shares of capital stock of the corporation which are owned beneficially or of record by the proposed nominee and any affiliates or associates of such person, (B) the name of each nominee holder of shares of all stock of the corporation owned beneficially but not of record by such person or any affiliates or associates of such person, and the number of such shares of stock of the corporation held by each such nominee holder, (C) whether and the extent to which any derivative instrument, swap, option, warrant, short interest, hedge or profit interest or other transaction has been entered into by or on behalf of such person, or any affiliates or associates of such person, with respect to stock of the corporation and (D) whether and the extent to which any other transaction, agreement, arrangement or understanding (including any short position or any borrowing or lending of shares of stock of the corporation) has been made by, or on behalf of such person, or any affiliates or associates of such person, the effect or intent of any of the foregoing being to mitigate loss to, or to manage risk or benefit of stock price changes for, such person, or any affiliates or associates of such person, or to increase or decrease the voting power or pecuniary or economic interest of such person, or any affiliates or associates of such person, with respect to stock of the corporation, (iv) as an appendix, a completed and signed questionnaire, representation and agreement required by Section 12.3 of this Article II and (v) any other information relating to the proposed nominee that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder and (b) as to the shareholder giving the notice, and the beneficial owner, if any, on whose behalf the nomination is being made, (i) the name and record address of the shareholder giving the notice and the name and principal place of business of such beneficial owner, (ii) (A) the class or series and number of shares of capital stock of the corporation which are owned beneficially or of record by such person and any affiliates or associates of such person, (B) the name of each nominee holder of shares of all stock of the corporation owned beneficially but not of record by such person or any affiliates or associates of such person, and the number of such shares of stock of the corporation held by each such nominee holder, (C) whether and the extent to which any derivative instrument, swap, option, warrant, short interest, hedge or profit interest or other transaction has been entered into by or on behalf of such person, or any affiliates or associates of such person, with respect to stock of the corporation and (D) whether and the extent to which any other transaction, agreement, arrangement or understanding (including any short position or any borrowing or lending of shares of stock of the corporation) has been made by or on behalf of such person, or any affiliates or associates of such person, the effect or intent of any of the foregoing being to mitigate loss to, or to manage risk or benefit of stock price changes for, such person, or any affiliates or associates of such person, or to increase or decrease the voting power or pecuniary or economic interest of such person, or any affiliates or associates of such person, with respect to stock of the corporation, (iii) a reasonably detailed description of (A) all agreements, arrangements or understandings (whether written or oral) between or among such person, or any affiliates or associates of such person, and each proposed nominee, or any affiliates or associates of such proposed nominee, (B) all agreements, arrangements or understandings (whether written or oral) between or among such person, or any affiliates or associates of such person, and any other person or persons (including their names) pursuant to which the nomination(s) are being made by such person, or otherwise relating to the corporation or their ownership of capital stock of the corporation, and (C) any material interest of such person, or any affiliates or associates of such person, in such nomination, including any anticipated benefit therefrom to such person, or any affiliates or associates of such person, (iv) a representation that the shareholder intends to appear in person or by proxy at the





meeting to nominate the person named in its notice, (v) a representation whether the shareholder intends to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the corporation's outstanding capital stock required to elect the nominee and/or solicit proxies from shareholders in support of the nomination, (vi) any performance related fees (other than an asset based fee) that such shareholder is entitled to based on any increase or decrease in the price or value of shares of any class or series of this corporation, and (vii) any other information relating to such person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. The notice must be accompanied by a written consent of each proposed nominee to be named as a nominee and to serve as a director if elected. The corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as an independent director of the corporation or that could be material to a reasonable shareholder's understanding of the independence, or lack thereof, of such nominee.
A shareholder providing notice of any nomination proposed to be made at an annual meeting shall further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice pursuant to this Section 12 of this Article II shall be true and correct as of the record date for determining the shareholders entitled to receive notice of the annual meeting, and such update and supplement shall be delivered to or be mailed and received by the Secretary at the principal executive offices of the corporation not later than five (5) business days after the record date for determining the shareholders entitled to receive notice of such annual meeting.
Section 12.2.    Compliance with Procedures. If the chairman of the annual meeting determines that a nomination was not made in accordance with the foregoing procedures, the chairman shall declare to the meeting that the nomination was defective and the defective nomination shall be disregarded. Notwithstanding anything to the contrary in these Bylaws, unless otherwise required by law, (i) no person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures (including providing the required information) set forth in this Section 12, whether such proposed nominee is to be included in the corporation's proxy statement or presented to shareholders by means of an independently financed proxy solicitation and (ii) if the shareholder (or a qualified representative) giving the notice does not appear at the meeting to present the nomination such nomination may be disregarded, notwithstanding that proxies in respect to such nomination may have been received by the corporation.
Section 12.3.    Submission of Questionnaire; Representation and Agreement. To be eligible to be a shareholder nominee for election or reelection as a director of the corporation, a person must deliver (in accordance with the time periods prescribed for delivery of notice under Section 12.1 of this Article II) to the Secretary of the corporation at the principal executive offices of the corporation a written questionnaire with respect to the background and qualification of such person and the background of any other person or entity on whose behalf the nomination is being made (which questionnaire shall be provided to such person by the Secretary upon written request) and a written representation and agreement (in the form provided to such person by the Secretary upon written request) that such person (i) is not and will not become a party to (A) any agreement, arrangement or understanding (whether written or oral) with and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a director of the corporation, will act or vote on any issue or question (a "Voting Commitment") that has not been disclosed to the corporation or (B) any Voting Commitment that could limit or interfere with such person's ability to comply, if elected as a director of the corporation, with such person's fiduciary duties under applicable law, (ii) is not and will not become a party to any agreement, arrangement or understanding (whether written or oral) with any person or entity other than the corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein, (iii) in such person's individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as a director of the corporation, and will comply with, applicable law and all applicable publicly disclosed corporate governance, conflict of interest, corporate opportunities, code of conduct and ethics, confidentiality and stock ownership and trading policies and guidelines of the corporation and (iv) if elected as a director of the corporation, will act in the best interests of the corporation and its shareholders and not in the interests of individual constituencies.
Section 13.    Business at Shareholder Meetings. At any annual or special meeting of shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual or special meeting of shareholders, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof), or (c) otherwise properly brought before the annual or special meeting by any shareholder who is a shareholder of record on the date of the giving of the written notice





required by this Section 13 and on the record date for determination of shareholders entitled to vote at the meeting. This Sect