UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 2005 [ ] 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 (IRS Employer incorporation or organization) Identification No.) 1617 Sixth Avenue, Seattle, Washington 98101 ____________________________________________________ (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (206) 628-2111 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 X NO _____ _____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO _____ _____ Common stock outstanding as of May 20, 2005: 136,559 shares of common stock. 1 of 20 2 of 20
NORDSTROM, INC. AND SUBSIDIARIES -------------------------------- INDEX ----- Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Statements of Earnings Quarter ended April 30, 2005 and May 1, 2004 3 Condensed Consolidated Balance Sheets April 30, 2005, January 29, 2005 and May 1, 2004 4 Condensed Consolidated Statements of Shareholders' Equity Quarter ended April 30, 2005 and May 1, 2004 5 Condensed Consolidated Statements of Cash Flows Quarter ended April 30, 2005 and May 1, 2004 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 4. Controls and Procedures 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18 Item 6. Exhibits 18 SIGNATURES 19 INDEX TO EXHIBITS 20
NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (amounts in thousands except per share amounts and percentages) (unaudited) Quarter Ended ---------------------- April 30, May 1, 2005 2004 ---------- ---------- Net sales $1,654,474 $1,535,490 Cost of sales and related buying and occupancy costs (1,046,165) (972,932) ---------- ---------- Gross profit 608,309 562,558 Selling, general and administrative expenses (465,422) (452,734) ---------- ---------- Operating income 142,887 109,824 Interest expense, net (12,639) (36,684) Other income including finance charges, net 42,732 39,487 ---------- ---------- Earnings before income taxes 172,980 112,627 Income tax expense (68,442) (43,900) ---------- ---------- Net earnings $ 104,538 $ 68,727 ========== ========== Basic earnings per share $ 0.77 $ 0.49 Diluted earnings per share $ 0.75 $ 0.48 Basic shares 136,535 139,110 Diluted shares 139,197 141,975 (1) Percent of earnings before income taxes The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. 3 of 20
Quarter Ended ---------------------- April 30, May 1, (% of Sales) 2005 2004 ---------- ---------- Net sales 100.0% 100.0% Cost of sales and related buying and occupancy costs (63.2%) (63.4%) ---------- ---------- Gross profit 36.8% 36.6% Selling, general and administrative expenses (28.1%) (29.4%) ---------- ---------- Operating income 8.6% 7.2% Interest expense, net (0.8%) (2.4%) Other income including finance charges, net 2.6% 2.5% ---------- ---------- Earnings before income taxes 10.5% 7.3% Income tax expense(1) (39.6%) (39.0%) ---------- ---------- Net earnings 6.3% 4.5% ========== ========== The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. 4 of 20
NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (amounts in thousands) (unaudited) April 30, January 29, May 1, 2005 2005 2004 ---------- ---------- ---------- ASSETS Current Assets: Cash and cash equivalents $ 315,695 $ 360,623 $ 172,372 Short-term investments 53,750 41,825 85,000 Accounts receivable, net 629,788 645,663 640,581 Investment in asset backed securities 427,302 422,416 307,663 Merchandise inventories 1,016,640 917,182 1,020,812 Current deferred tax assets 114,127 131,547 127,063 Prepaid expenses and other 53,934 53,188 49,088 ---------- ---------- ---------- Total current assets 2,611,236 2,572,444 2,402,579 Land, buildings and equipment (net of accumulated depreciation of $2,383,289, $2,310,607 and $2,159,707) 1,763,766 1,780,366 1,787,436 Goodwill, net 51,714 51,714 51,714 Tradename, net 84,000 84,000 84,000 Other assets 108,891 116,866 99,045 ---------- ---------- ---------- TOTAL ASSETS $4,619,607 $4,605,390 $4,424,774 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 582,381 $ 482,394 $ 563,733 Accrued salaries, wages and related benefits 172,167 287,904 175,773 Other current liabilities 336,246 354,201 294,613 Income taxes payable 45,181 115,556 53,844 Current portion of long-term debt 100,458 101,097 6,502 ---------- ---------- ---------- Total current liabilities 1,236,433 1,341,152 1,094,465 Long-term debt 928,175 929,010 1,024,283 Deferred property incentives, net 357,694 367,087 399,927 Other liabilities 204,353 179,147 174,469 Shareholders' Equity: Common stock, no par: 500,000 shares authorized; 136,632, 135,665 and 139,816 shares issued and outstanding 619,640 552,655 466,573 Unearned stock compensation (593) (299) (522) Retained earnings 1,266,337 1,227,303 1,254,566 Accumulated other comprehensive earnings 7,568 9,335 11,013 ---------- ---------- ---------- Total shareholders' equity 1,892,952 1,788,994 1,731,630 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,619,607 $4,605,390 $4,424,774 ========== ========== ==========
NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (amounts in thousands) (unaudited) Accumulated Other Common Stock Unearned Retained Comprehensive Shares Amount Compensation Earnings Earnings Total ------------------------------------------------------------------------------- Balance at January 29, 2005 135,665 $552,655 $(299) $1,227,303 $9,335 $1,788,994 Net earnings - - - 104,538 - 104,538 Other comprehensive earnings: Foreign currency translation adjustment - - - - 147 147 Securitization fair value adjustment, net of tax of $1,224 - - - - (1,914) (1,914) -------- Comprehensive net earnings - - - - - 102,771 Cash dividends paid ($0.13 per share) - - - (17,758) - (17,758) Issuance of common stock for: Stock option plans 1,532 55,556 - - - 55,556 Employee stock purchase plan 266 8,768 - - - 8,768 Stock-based compensation 56 2,661 (294) - - 2,367 Repurchase of common stock (887) - - (47,746) - (47,746) ---------------------------------------------------------------------------- Balance at April 30, 2005 136,632 $619,640 $(593) $1,266,337 $7,568 $1,892,952 ============================================================================ The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. 5 of 20
Accumulated Other Common Stock Unearned Retained Comprehensive Shares Amount Compensation Earnings Earnings Total ---------------------------------------------------------------------------- Balance at January 31, 2004 138,377 $424,645 $(597) $1,201,093 $8,868 $1,634,009 Net earnings - - - 68,727 - 68,727 Other comprehensive earnings: Foreign currency translation adjustment - - - - 921 921 Securitization fair value adjustment, net of tax of $(783) - - - - 1,224 1,224 -------- Comprehensive net earnings - - - - - 70,872 Cash dividends paid ($0.11 per share) - - - (15,254) - (15,254) Issuance of common stock for: Stock option plans 1,081 32,396 - - - 32,396 Employee stock purchase plan 285 6,336 - - - 6,336 Stock-based compensation 73 3,196 75 - - 3,271 -------------------------------------------------------------------------- Balance at May 1, 2004 139,816 $466,573 $(522) $1,254,566 $11,013 $1,731,630 ====================== =================================================== The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. 6 of 20
NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) (unaudited) Quarter Ended ------------------------ April 30, May 1, 2005 2004 ---------- ---------- OPERATING ACTIVITIES: Net earnings $104,538 $ 68,727 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of buildings and equipment 69,204 64,917 Amortization of deferred property incentives and other, net (6,903) (8,666) Stock-based compensation expense 1,428 1,264 Deferred income taxes, net 19,610 (3,597) Tax benefit on stock option exercises and employee stock purchases 16,546 6,536 Provision for bad debt expense 5,118 6,390 Change in operating assets and liabilities: Accounts receivable 10,578 18,930 Investment in asset backed securities (9,210) (33,335) Merchandise inventories (99,065) (113,386) Prepaid expenses 666 (933) Other assets 409 691 Accounts payable 97,507 121,052 Accrued salaries, wages and related benefits (118,548) (98,019) Other current liabilities (20,781) (20,077) Income taxes payable (46,971) (27,218) Property incentives 9,839 833 Other liabilities 7,237 7,428 ---------- ---------- Net cash provided by (used in) operating activities 41,202 (8,463) ---------- ---------- INVESTING ACTIVITIES: Capital expenditures (53,021) (48,257) Sales of short-term investments 153,575 1,122,150 Purchases of short-term investments (165,500) (1,031,150) Other, net (691) 1,194 ---------- ---------- Net cash (used in) provided by investing activities (65,637) 43,937 ---------- ---------- FINANCING ACTIVITIES: Principal payments on long-term debt (1,021) (198,739) Decrease in cash book overdrafts (3,756) (21,586) Proceeds from exercise of stock options 39,139 25,920 Proceeds from employee stock purchase plan 8,640 6,276 Cash dividends paid (17,758) (15,254) Repurchase of common stock (47,746) - Other, net 2,009 - ---------- ---------- Net cash used in financing activities (20,493) (203,383) ---------- ---------- Net decrease in cash and cash equivalents (44,928) (167,909) Cash and cash equivalents at beginning of period 360,623 340,281 ---------- ---------- Cash and cash equivalents at end of period $315,695 $172,372 ========== ========== NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts) (unaudited) Note 1 - Summary of Significant Accounting Policies Basis of Presentation - --------------------- The accompanying condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in our 2004 Annual Report. The same accounting policies are followed for preparing quarterly and annual financial data. All adjustments necessary for the fair presentation of the results of operations, financial position and cash flows have been included and are of a normal, recurring nature. Our business, like that of other retailers, is subject to seasonal fluctuations. Our Anniversary sale in July and the holidays in December typically result in higher sales in the second and fourth quarters of our fiscal years. Accordingly, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. Critical Accounting Policies - ---------------------------- 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 regularly evaluate our estimates, including those related to off-balance sheet financing, inventory valuation, sales return accruals, self-insurance liabilities, doubtful accounts, intangible assets, income taxes, post- retirement benefits, contingent liabilities and litigation. 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. Our accounting policies and methodologies in the first quarter of 2005 are consistent with those discussed in our 2004 Annual Report. Stock Compensation - ------------------ We apply APB No. 25, "Accounting for Stock Issued to Employees," in measuring compensation costs under our stock-based compensation programs, which is described more fully in our 2004 Annual Report. We expect to adopt SFAS No. 123(R), "Share-Based Payment" in the first quarter of 2006. In connection with the implementation of SFAS No. 123(R), the SEC Staff issued additional guidance recently for stock options granted to employees who will be eligible to retire before the normal vesting of their stock options. If we had followed the SEC Staff's recently issued guidance, the impact would be immaterial in the first quarters of 2005 and 2004. The table below illustrates the effect on net earnings and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." 7 of 20 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts) (unaudited) Note 1 - Summary of Significant Accounting Policies (Cont.) Note 2 - Postretirement Benefits The expense components of our Supplemental Executive Retirement Plan, which provides retirement benefits to certain officers and select employees, are as follows:
Quarter Ended ---------------------- April 30, May 1, 2005 2004 ---------- ---------- Net earnings, as reported $104,538 $68,727 Add: stock-based compensation expense included in reported net earnings, net of tax 871 771 Deduct: stock-based compensation expense determined under fair value, net of tax (5,717) (5,651) ---------- ---------- Pro forma net earnings $99,692 $63,847 ========== ========== Earnings per share: Basic - as reported $0.77 $0.49 Diluted - as reported $0.75 $0.48 Basic - pro forma $0.73 $0.46 Diluted - pro forma $0.72 $0.45 8 of 20
Quarter Ended ------------------------ April 30, May 1, 2005 2004 ----------- ----------- Service cost $413 $372 Interest cost 1,018 991 Amortization of net loss 414 386 Amortization of prior service cost 240 240 ----------- ----------- Total expense $2,085 $1,989 =========== =========== NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts) (unaudited) Note 3 - Earnings Per Share Note 4 - Accounts Receivable The components of accounts receivable are as follows:
Quarter Ended ------------------------ April 30, May 1, 2005 2004 ----------- ----------- Net earnings $104,538 $68,727 =========== =========== Basic shares 136,535 139,110 Dilutive effect of stock options and performance share units 2,662 2,865 ----------- ----------- Diluted shares 139,197 141,975 =========== =========== Basic earnings per share $0.77 $0.49 Diluted earnings per share $0.75 $0.48 Antidilutive stock options - 1,980 Our restricted trade receivables relate to our Nordstrom private label card, which back the $300,000 Class A notes and the $150,000 variable funding note. The unrestricted trade receivables consist primarily of our Faconnable trade receivables and Nordstrom private label receivables that are not eligible for securitization, such as foreign and employee receivables exceeding a contractual threshold. Other accounts receivable consist primarily of credit card receivables due from third party financial institutions and vendor rebates, which are believed to be fully realizable as they are collected soon after they are earned. 9 of 20
------------------------------------- April 30, January 29, May 1, 2005 2005 2004 ----------- ----------- ----------- Trade receivables: Unrestricted $ 36,936 $ 31,400 $ 30,800 Restricted 533,977 568,062 556,647 Allowance for doubtful accounts (18,495) (19,065) (19,934) ----------- ----------- ----------- Trade receivables, net 552,418 580,397 567,513 Other 77,370 65,266 73,068 ----------- ----------- ----------- Accounts receivable, net $629,788 $645,663 $640,581 =========== =========== =========== NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts) (unaudited) Note 5 - Investment in Asset Backed Securities Our investment in asset backed securities and the off-balance sheet financing are described in Note 9 of our 2004 Annual Report. The following table presents the co-branded Nordstrom VISA credit card balances and the estimated fair value of our investment in asset backed securities: In 2004, we revised the repayment period assumption in our valuation model that we use to determine the fair value of the VISA Trust. The 2004 repayment period assumption is based on historical payment, default and finance charge yield experience on a specific account basis. The prior repayment period assumption was based on our ongoing payment experience, which included payments by card holders who pay their account balance in full each month. While the assumptions used below are different in 2004, the impact of the assumption change was not significant and does not reflect a change in the underlying quality of the portfolio. The following table presents the key assumptions we use to value the asset backed securities:
----------------------------------- April 30, January 29, May 1, 2005 2005 2004 ----------- ----------- ----------- Total face value of co-branded Nordstrom VISA credit card principal receivables $619,556 $612,549 $492,946 =========== =========== =========== Securities issued by the VISA Trust: Off-balance sheet (sold to third parties): 2002 Class A & B Notes at par value $200,000 $200,000 $200,000 =========== =========== =========== Amounts recorded on balance sheet: Investment in asset backed securities at fair value $427,302 $422,416 $307,663 =========== =========== =========== 10 of 20
Assumptions used to estimate the fair value of the investment in asset backed securities: Weighted average remaining life (in months) 7.7 8.1 2.3 Average credit losses 7.1% 6.9% 5.1% Average gross yield 15.9% 15.8% 18.4% Weighted average coupon on issued securities 4.3% 3.8% 1.5% Average payment rates 7.7% 7.5% 23.6% Internal rate of returns on investment in asset backed securities 5.4-6.7% 5.2-6.4% 6.7-13.5% NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts) (unaudited) Note 5 - Investment in Asset Backed Securities (Cont.) The following table summarizes the income earned by the investment in asset backed securities that is included in other income including finance charges, net on the condensed consolidated statements of earnings: Note 6 - Debt To manage our interest rate risk, we have an interest rate swap outstanding recorded in other liabilities. Our swap has a $250,000 notional amount, expires in 2009 and is designated as a fully effective fair value hedge. Under the agreement, we receive a fixed rate of 5.63% and pay a variable rate based on LIBOR plus a margin of 2.3% set at six-month intervals (5.20% at April 30, 2005.) The fair value of our interest rate swap is as follows:
Quarter Ended ------------------------ April 30, May 1, 2005 2004 ----------- ----------- Interest income $10,482 $12,242 Gains on sales of receivables and other income 9,589 3,802 ----------- ----------- $20,071 $16,044 =========== =========== Note 7 - Segment Reporting The following tables set forth the information for our reportable segments and a reconciliation to the consolidated totals:
------------------------------------- April 30, January 29, May 1, 2005 2005 2004 ----------- ----------- ----------- Interest rate swap fair value $(9,549) $(7,821) $(12,630) 11 of 20
Quarter ended Retail Credit Catalog/ Corporate April 30, 2005 Stores(1) Operations Internet and Other Eliminations Total - --------------------------------------------------------------------------------------------------- Net sales $1,570,523 $- $83,951 $- $- $1,654,474 Other income including finance charges, net (1,431) 50,029 (19) (5,847) - 42,732 Intersegment revenues 3,783 7,894 - - (11,677) - Interest expense, net (181) (6,237) - (6,221) - (12,639) Earnings before taxes 206,223 11,593 7,566 (52,402) - 172,980 Assets 2,743,957 1,021,194 110,761 743,695 - 4,619,607 Quarter ended Retail Credit Catalog/ Corporate May 1, 2004 Stores(1) Operations Internet and Other Eliminations Total - --------------------------------------------------------------------------------------------------- Net sales $1,454,607 $- $80,883 $- $- $1,535,490 Other income including finance charges, net (2,674) 47,531 (234) (5,136) - 39,487 Intersegment revenues 4,037 7,600 - - (11,637) - Interest expense, net (2) (125) (5,363) 69 (31,265) - (36,684) Earnings before taxes 177,123 10,123 5,991 (80,610) - 112,627 Assets 2,847,705 870,699 102,135 604,235 - 4,424,774 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts) (unaudited) Note 7 - Segment Reporting (Cont.) As of April 30, 2005, January 29, 2005, and May 1, 2004, Retail Stores assets included $35,998 of goodwill and $84,000 of tradename, and Catalog/Internet included $15,716 of goodwill. (1) Beginning in the first quarter of 2005, we started to integrate the merchandise buying and marketing activities of our Retail Stores and Catalog/Internet segments. The expenses for these activities are included in the Retail Stores segment. (2) During the first quarter of 2004, we retired $196,770 of our 8.95% senior notes and $973 of our 6.7% medium-term notes for a total cash payment of $219,587. We recorded a pre-tax charge of $20,842 in interest expense, net related to this purchase. Note 8 - Litigation We are involved in routine claims, proceedings, and litigation arising from the normal course of our business. We do not believe any such claim, proceeding or litigation, either alone or in aggregate, will have a material impact on our results of operations, financial position, or liquidity. Note 9 - Subsequent Event On May 24, 2005, our Board of Directors approved a two-for-one stock split of our outstanding common stock and a proportional increase in the number of common shares authorized from 500,000 to 1,000,000. Additional shares issued as a result of the stock split will be distributed on or about June 30, 2005 to shareholders of record as of June 13, 2005. The shares and per share information included herein have not been adjusted to reflect this stock split. We will adjust for the stock split on a retroactive basis beginning in the second quarter of 2005. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Management's Discussion and Analysis section of our 2004 Annual Report. All dollar amounts are in millions except per share amounts. RESULTS OF OPERATIONS - --------------------- Overview - -------- Earnings for the first quarter of 2005 increased 52% to $104.5 or $0.75 per diluted share from $68.7 or $0.48 per diluted share for the same period in 2004. 12 of 20 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) For the first quarter of 2005, we planned to achieve same-store sales increases over last year in the 1% to 3% range. Our actual same-store sales during this period were 6.2% greater than last year. Our fixed operating costs were held in-line with our plan for the quarter and were consistent with last year. As a result of the additional sales and the control of fixed operating expenses, we increased our earnings and we improved two key operating metrics in the first quarter of 2005 as compared to the same quarter in 2004: gross profit as a percentage of net sales increased by 20 basis points to 36.8%, and selling, general and administrative expenses as a percentage of net sales decreased 130 basis points to 28.1%. We refer to these types of rate improvements as "leverage" on additional sales. In the first quarter of 2004, we incurred prepayment and deferred debt costs of $20.8, or $0.08 per diluted share, upon prepayment of $197.7 of long-term debt. We did not incur similar costs in 2005, which also improved our 2005 results in relation to the 2004 results. Sales - ----- Total sales increased 7.7% for the quarter over the same period in the prior year primarily due to same-store sales increases. Same-store sales increased 6.2% for the quarter. Both our Full-Line and Rack stores had overall and same-store sales increases which suggest that our merchandise offering is continuing to appeal to customers. All of our geographic regions and major merchandise divisions reported same-store sales increases in the first quarter of 2005. Our strongest regional performances were in the Southwest and Southern States and our best performing merchandise divisions were cosmetics, accessories, the designer and junior segment of women's apparel and men's apparel. In addition, total sales benefited from the six Full-Line stores and two Rack stores opened since May 2003, increasing our retail square footage by 5% during the last two years. Gross Profit - ------------ Gross profit as a percentage of net sales improved 20 basis points for the quarter ended April 30, 2005. We experienced slightly higher markdown levels compared to the prior period. The higher markdowns were more than offset by leverage on buying and occupancy expenses resulting from the same-store sales increase. We continued to benefit from our perpetual inventory system, which gives us better visibility into sales trends and on-hand content, allowing us to more effectively manage our merchandise and meet customer demand. We maintained our inventory levels consistent with the prior year, even though our sales and square footage grew in the first quarter of 2005. This resulted in a 2.9% decline in our average inventory per square foot compared to the prior year. 13 of 20
First Quarter ------------------- 2005 2004 -------- -------- Gross profit as a percentage of net sales 36.8% 36.6% Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Selling, General and Administrative Expense - ------------------------------------------- Selling, general and administrative expenses as a percentage of net sales improved 130 basis points for the quarter ended April 30, 2005. This was primarily from leverage on same-store sales increases as we used our existing infrastructure to support increased sales. We continued to control and leverage our fixed general and administrative expenses, especially non-selling labor and employee benefits. In addition, our credit expenses, which includes bad debt provisions on the Nordstrom private label charge card, improved over the prior year due to reductions in delinquent receivables. Interest Expense - ---------------- Interest expense, net decreased by $24.0 to $12.6 for the quarter ended April 30, 2005 compared to the same period in 2004. The decrease is primarily due to debt prepayment costs of $20.8 incurred in 2004 in connection with a $197.7 debt buyback. Other Income Including Finance Charges, net - ------------------------------------------- Other income including finance charges, net increased by $3.2 for the quarter ended April 30, 2005. The increase is primarily due to growth in our co- branded Nordstrom VISA credit card transaction volume and related finance charges. Seasonality - ------------ Our business, like that of other retailers, is subject to seasonal fluctuations. Our Anniversary sale in July and the holidays in December typically result in higher sales in the second and fourth quarters of our fiscal years. Accordingly, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Overall, cash and short-term investments decreased by $33.0 in the first quarter of 2005 to $369.4 as of April 30, 2005, as we used our cash from operations for capital expenditures and dividends. Operating Activities - -------------------- Cash flow from operating activities increased by $49.7 to $41.2 in 2005 as compared to the prior period, due to higher net earnings, slower growth in our investment in asset backed securities and increased property incentives. Payments received for property incentives increased in the first quarter of 2005 in connection with the planned increase in new stores opening in fiscal 2005 as compared to the prior period. This was partially offset by the increase in performance-based compensation payments as a result of the improvement in our 2004 financial results as compared to 2003. 14 of 20
First Quarter ------------------- 2005 2004 -------- -------- Selling, general and administrative expenses as a percentage of net sales 28.1% 29.4% Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Investing Activities - -------------------- Net cash used in investing activities increased in 2005 as compared to 2004. While capital expenditures remained consistent with the prior period, we used cash to purchase a net $11.9 of our short-term investments in 2005, compared to receiving cash of $91.0, net by selling short-term investments in the prior period. Year to date, we opened one Full-Line store in Atlanta, Georgia. Additionally, we expect to open three Full-Line stores this year, in San Antonio, Texas; Irvine, California; and Dallas, Texas. Gross square footage for the year is expected to increase approximately 3 percent, from 19,397,000 at the beginning of 2005 to 20,019,000. Financing Activities - -------------------- Net cash used in financing activities decreased in 2005 as compared to 2004. In the first quarter of 2004, we retired $196.8 of our 8.95% senior notes and $1.0 of our 6.7% medium-term notes for a total cash payment of $219.6, which included prepayment premiums of $21.8. Our debt to capital ratio decreased from 37.3% at May 1, 2004 to 35.2% at April 30, 2005. In the second quarter of 2005, we plan to repay the remaining $96.0 of our 6.7% medium-term notes that are due in July 2005 with cash on hand. This will reduce our debt to capital ratio even further to approximately 33%. In February 2005, our Board of Directors authorized $500.0 of share repurchases. The prior $300.0 authorization was completed during the fourth quarter of 2004. The actual number and timing of share repurchases will be subject to market conditions and applicable SEC rules. Year to date, we have purchased 887,200 shares for $47.7 at an average price of $53.82 per share. There were no share repurchases for the same period in 2004. In the first quarter of 2005, the repurchases of our common stock was offset by proceeds from the exercise of stock options and the employee stock purchase plan of $47.8 compared to $32.2 for the same period in the prior year. Liquidity - --------- We maintain a level of liquidity to allow us to cover our seasonal cash needs and to minimize our need for short-term borrowings. We believe that our operating cash flows, existing cash and available credit facilities are sufficient to finance our cash requirements for the next 12 months. We plan to pay the remaining $96.0 of our 6.7% medium-term notes due in July 2005 with existing cash. Over the long term, we strive to manage our cash and capital structure to maximize shareholder return, strengthen our financial position and maintain flexibility for future strategic initiatives. We continuously assess our debt and leverage levels, capital expenditure requirements, principal debt payments, dividend payouts, potential share repurchases, and future investments or acquisitions. We believe our operating cash flows, existing cash, and available credit facilities, as well as any potential future borrowing facilities will be sufficient to fund these scheduled future payments and potential long-term initiatives. 15 of 20 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) CRITICAL ACCOUNTING POLICIES - ---------------------------- 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 regularly evaluate our estimates, including those related to off-balance sheet financing, inventory valuation, sales return accruals, self-insurance liabilities, doubtful accounts, intangible assets, income taxes, post- retirement benefits, contingent liabilities and litigation. 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. Our accounting policies and methodologies in the first quarter of 2005 are consistent with those discussed in our 2004 Annual Report. Effective February 2005, Nordstrom Direct sales, which include catalog and Internet, are included in same-store sales. See Note 7 in our Notes to Condensed Consolidated Financial Statements on page 11 for further details. FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT - ------------------------------------------------ The preceding disclosures included forward-looking statements regarding our performance, liquidity, capital expenditures and adequacy of capital resources. These statements are based on our current assumptions and expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Forward- looking statements are qualified by the risks and challenges posed by our ability to predict fashion trends, consumer apparel buying patterns, our ability to control costs, weather conditions, hazards of nature, trends in personal bankruptcies and bad debt write-offs, changes in interest rates, employee relations, our ability to continue our expansion plans, potential opportunities that may be related to the current changes in our industry, changes in governmental or regulatory requirements, and the impact of economic and competitive market forces, including the impact of terrorist activity or the impact of a war on us, our customers and the retail industry. As a result, while we believe there is a reasonable basis for the forward-looking statements, you should not place undue reliance on those statements. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements. Item 4. CONTROLS AND PROCEDURES As of the end of the period covered by this Quarterly Report on Form 10-Q, we performed an evaluation under the supervision and with the participation of management, including our President and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities and Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, our President and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures are effective in the timely recording, processing, summarizing and reporting of material financial and non-financial information. There has been no change 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 has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 16 of 20 PART II - OTHER INFORMATION Item 1. Legal Proceedings - ------------------------- Cosmetics - --------- We were originally named as a defendant along with other department store and specialty retailers in nine separate but virtually identical class action lawsuits filed in various Superior Courts of the State of California in May, June and July 1998 that were consolidated in Marin County Superior Court. In May 2000, plaintiffs filed an amended complaint naming a number of manufacturers of cosmetics and fragrances and two other retailers as additional defendants. Plaintiffs' amended complaint alleges that the retail price of the "prestige" or "Department Store" cosmetics sold in department and specialty stores was collusively controlled by the retailer and manufacturer defendants in violation of the Cartwright Act and the California Unfair Competition Act. Plaintiffs seek treble damages and restitution in an unspecified amount, attorneys' fees and prejudgment interest, on behalf of a class of all California residents who purchased cosmetics and fragrances for personal use from any of the defendants during the four years prior to the filing of the amended complaint. We entered into a settlement agreement with the plaintiffs and the other defendants on July 13, 2003. In furtherance of the settlement agreement, the case was re-filed in the United States District Court for the Northern District of California on behalf of a class of all persons who currently reside in the United States and who purchased "Department Store" cosmetics from the defendants during the period May 29, 1994 through July 16, 2003. The Court gave preliminary approval to the settlement, and a summary notice of class certification and the terms of the settlement were disseminated to class members. On March 30, 2005, the Court entered a final judgment approving the settlement and dismissing the plaintiffs' claims and the claims of all class members with prejudice, in their entirety. On April 29, 2005, two class members who had objected to the settlement filed notices of appeal from the Court's final judgment to the United States Court of Appeals for the Ninth Circuit. It is uncertain when the appeals will be resolved, but the appeal process could take as much as two years or more. If the Court's final judgment approving the settlement is affirmed on appeal, or the appeals are dismissed, the defendants will provide class members with certain free products and pay the plaintiffs' attorneys' fees, awarded by the Court of $24 million. Our share of the cost of the settlement will not have a material adverse effect on our financial condition, results of operations or cash flows. Other - ----- We are involved in various routine legal proceedings incidental to the ordinary course of business. In management's opinion, the outcome of pending legal proceedings, separately and in the aggregate, will not have a material adverse effect on our business or consolidated financial condition. 17 of 20 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - -------------------------------------------------------------------- (1) Included in this balance are 557 shares that were not redeemed as part of a publicly announced repurchase plan or program. These shares were owned and tendered by an employee to Nordstrom as payment for an option exercise. (2) In February 2005, the Board of Directors authorized $500.0 of share repurchases. The prior $300.0 authorization was completed during the fourth quarter of 2004. The actual number and timing of share repurchases will be subject to market conditions and applicable SEC rules. Year to date, we have purchased 887,200 shares for $47.7 at an average price of $53.82 per share. Item 6. Exhibits - ----------------- Exhibits are incorporated herein by reference or are filed with this report as set forth in the Index to Exhibits on page 20 hereof. 18 of 20
(c) Repurchases ----------- (dollars in millions except per share amounts) Total Total Number Maximum Number (or Number of Average of Shares (or Units) Approximate Dollar Value) Shares Price Paid Purchased as Part of of Shares (or Units) that (or Units) Per Share Publicly Announced May Yet Be Purchased Under Purchased (or Units) Plans or Programs the Plans or Programs (2) ---------- ---------- -------------------- -------------------------- Feb. 2005 - - - - (1/30/05 to 2/26/05) ---------- ---------- -------------------- -------------------------- Mar. 2005 467,200 $53.73 467,200 $475 (2/27/05 to 4/2/05) ---------- ---------- -------------------- -------------------------- April 2005 420,557 (1) $53.92 420,000 $452 (4/3/05 to 4/30/05) ---------- ---------- -------------------- -------------------------- Total 887,757 $53.82 887,200 $452 ---------- ---------- -------------------- -------------------------- 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/ Michael G. Koppel ---------------------------------------------------- Michael G. Koppel Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: June 7, 2005 ----------------- 19 of 20 NORDSTROM INC. AND SUBSIDIARIES 20 of 20
Exhibit Index Exhibit Method of Filing - ------- ---------------- 31.1 Certification of President Filed herewith electronically required by Section 302(a) of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Filed herewith electronically Officer required by Section 302(a) of the Sarbanes-Oxley Act of 2002 32.1 Certification of President and Furnished herewith electronically Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1 Certification required by Section 302(a) of the Sarbanes-Oxley Act of 2002 I, Blake W. Nordstrom, certify that: 1. I have reviewed this report on Form 10-Q of Nordstrom, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f))for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 7, 2005 /s/ Blake W. Nordstrom ------------- ---------------------- Blake W. Nordstrom President of Nordstrom, Inc.
Exhibit 31.2 Certification required by Section 302(a) of the Sarbanes-Oxley Act of 2002 I, Michael G. Koppel, certify that: 1. I have reviewed this report on Form 10-Q of Nordstrom, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 7, 2005 /s/ Michael G. Koppel ------------ --------------------- Michael G. Koppel Executive Vice President and Chief Financial Officer of Nordstrom, Inc.
Exhibit 32.1 NORDSTROM, INC. 1617 SIXTH AVENUE SEATTLE, WASHINGTON 98101 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Nordstrom, Inc (the "Company") on Form 10-Q for the period ended April 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Blake W. Nordstrom, President (Principal Executive Officer), and Michael G. Koppel, Executive Vice President and Chief Financial Officer (Principal Financial Officer), of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: - The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and - The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. June 7, 2005 /s/ Blake W. Nordstrom ---------------------- Blake W. Nordstrom President /s/ Michael G. Koppel ---------------------- Michael G. Koppel Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to Nordstrom, Inc. and will be retained by Nordstrom, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.