Document
Table of Contents




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 28, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to___________
Commission File Number: 001-15059
NORDSTROM, INC.
(Exact name of registrant as specified in its charter)
 
Washington
 
91-0515058
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1617 Sixth Avenue, Seattle, Washington
 
98101
(Address of principal executive offices)
 
(Zip Code)
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 November 22, 2017: 166,582,350 shares

1 of 30




Table of Contents




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

2 of 30




Table of Contents




PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in millions except per share amounts)
(Unaudited)
 
Quarter Ended
 
Nine Months Ended
 
October 28, 2017

 
October 29, 2016

 
October 28, 2017

 
October 29, 2016

Net sales

$3,541

 

$3,472

 

$10,537

 

$10,255

Credit card revenues, net
88

 
70

 
239

 
186

Total revenues
3,629

 
3,542

 
10,776

 
10,441

Cost of sales and related buying and occupancy costs
(2,315
)
 
(2,261
)
 
(6,921
)
 
(6,720
)
Selling, general and administrative expenses
(1,106
)
 
(1,029
)
 
(3,280
)
 
(3,143
)
Goodwill impairment

 
(197
)
 

 
(197
)
Earnings before interest and income taxes
208

 
55

 
575

 
381

Interest expense, net
(28
)
 
(30
)
 
(104
)
 
(90
)
Earnings before income taxes
180

 
25

 
471

 
291

Income tax expense
(66
)
 
(35
)
 
(185
)
 
(138
)
Net earnings (loss)

$114

 

($10
)
 

$286

 

$153

 
 
 
 
 
 
 
 
Earnings (Loss) per share:
 
 
 
 
 
 
 
Basic

$0.68

 

($0.06
)
 

$1.72

 

$0.88

Diluted

$0.67

 

($0.06
)
 

$1.70

 

$0.87

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
166.6

 
173.4

 
166.7

 
173.3

Diluted
168.8

 
173.4

 
168.8

 
175.6

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Amounts in millions)
(Unaudited)
 
Quarter Ended
 
Nine Months Ended
 
October 28, 2017

 
October 29, 2016

 
October 28, 2017

 
October 29, 2016

Net earnings (loss)

$114

 

($10
)
 

$286

 

$153

Foreign currency translation adjustment
(11
)
 
(9
)
 
9

 
8

Postretirement plan adjustments, net of tax

 

 
2

 
1

Comprehensive net earnings (loss)

$103

 

($19
)
 

$297

 

$162

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

3 of 30




Table of Contents




NORDSTROM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
(Unaudited)
 
October 28, 2017

 
January 28, 2017

 
October 29, 2016

Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents

$672

 

$1,007

 

$531

Accounts receivable, net
211

 
199

 
216

Merchandise inventories
2,434

 
1,896

 
2,411

Prepaid expenses and other
162

 
140

 
227

Total current assets
3,479

 
3,242

 
3,385

 
 
 
 
 
 
Land, property and equipment (net of accumulated depreciation of $5,952, $5,596 and $5,462)
3,940

 
3,897

 
3,865

Goodwill
238

 
238

 
238

Other assets
529

 
481

 
478

Total assets

$8,186

 

$7,858

 

$7,966

 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable

$1,815

 

$1,340

 

$1,653

Accrued salaries, wages and related benefits
433

 
455

 
391

Other current liabilities
1,166

 
1,223

 
1,186

Current portion of long-term debt
57

 
11

 
11

Total current liabilities
3,471

 
3,029

 
3,241

 
 
 
 
 
 
Long-term debt, net
2,681

 
2,763

 
2,767

Deferred property incentives, net
510

 
521

 
532

Other liabilities
670

 
675

 
566

 
 
 
 
 
 
Commitments and contingencies (Note 4)

 

 

 
 
 
 
 
 
Shareholders’ equity:
 
 
 
 
 
Common stock, no par value: 1,000 shares authorized; 166.6, 170.0 and 173.2 shares issued and outstanding
2,785

 
2,707

 
2,651

Accumulated deficit
(1,899
)
 
(1,794
)
 
(1,742
)
Accumulated other comprehensive loss
(32
)
 
(43
)
 
(49
)
Total shareholders’ equity
854

 
870

 
860

Total liabilities and shareholders’ equity

$8,186

 

$7,858

 

$7,966

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

4 of 30




Table of Contents




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 January 28, 2017
170.0

 

$2,707

 

($1,794
)
 

($43
)
 

$870

Net earnings

 

 
286

 

 
286

Other comprehensive earnings

 

 

 
11

 
11

Dividends ($1.11 per share)

 

 
(185
)
 

 
(185
)
Issuance of common stock under stock compensation plans
0.7

 
25

 

 

 
25

Stock-based compensation
0.5

 
53

 

 

 
53

Repurchase of common stock
(4.6
)
 

 
(206
)
 

 
(206
)
Balance at October 28, 2017
166.6

 

$2,785

 

($1,899
)
 

($32
)
 

$854

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated

 
 
 
 
 
 
 
 
 
Other

 
 
 
Common Stock
 
Accumulated

 
Comprehensive

 
 
 
Shares

 
Amount

 
Deficit

 
Loss

 
Total

Balance at January 30, 2016
173.5

 

$2,539

 

($1,610
)
 

($58
)
 

$871

Net earnings

 

 
153

 

 
153

Other comprehensive earnings

 

 

 
9

 
9

Dividends ($1.11 per share)

 

 
(192
)
 

 
(192
)
Issuance of common stock under stock compensation plans
1.4

 
50

 

 

 
50

Stock-based compensation
0.2

 
62

 

 

 
62

Repurchase of common stock
(1.9
)
 

 
(93
)
 

 
(93
)
Balance at October 29, 2016
173.2

 

$2,651

 

($1,742
)
 

($49
)
 

$860

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

5 of 30




Table of Contents




NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
 
Nine Months Ended
 
October 28, 2017

 
October 29, 2016

Operating Activities
 
 
 
Net earnings

$286

 

$153

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization expenses
479

 
480

Goodwill impairment

 
197

Amortization of deferred property incentives and other, net
(62
)
 
(59
)
Deferred income taxes, net
(82
)
 
(14
)
Stock-based compensation expense
59

 
68

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(11
)
 
(20
)
Merchandise inventories
(465
)
 
(393
)
Prepaid expenses and other assets
(35
)
 
25

Accounts payable
419

 
360

Accrued salaries, wages and related benefits
(22
)
 
(26
)
Other current liabilities
(53
)
 
33

Deferred property incentives
55

 
54

Other liabilities
29

 
20

Net cash provided by operating activities
597


878

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(536
)
 
(625
)
Other, net
29

 
47

Net cash used in investing activities
(507
)
 
(578
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from long-term borrowings, net of discounts
635

 

Principal payments on long-term borrowings
(658
)
 
(7
)
Decrease in cash book overdrafts
(3
)
 
(127
)
Cash dividends paid
(185
)
 
(192
)
Payments for repurchase of common stock
(211
)
 
(91
)
Proceeds from issuances under stock compensation plans
25

 
51

Tax withholding on share-based awards
(7
)
 
(4
)
Other, net
(21
)
 
6

Net cash used in financing activities
(425
)
 
(364
)
 
 
 
 
Net decrease in cash and cash equivalents
(335
)
 
(64
)
Cash and cash equivalents at beginning of period
1,007

 
595

Cash and cash equivalents at end of period

$672

 

$531

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

$291

 

$99

Interest, net of capitalized interest
106

 
83

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

6 of 30




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


NOTE 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 2016 Annual Report on Form 10-K (“Annual Report”), and reflect all adjustments of a normal recurring nature that are, in management’s opinion, necessary for the fair presentation of the results of operations, financial position and cash flows for the periods presented.
The Condensed Consolidated Financial Statements as of and for the periods ended October 28, 2017 and October 29, 2016 are unaudited. The Condensed Consolidated Balance Sheet as of January 28, 2017 has been derived from the audited Consolidated Financial Statements included in our 2016 Annual Report. The interim Condensed Consolidated Financial Statements should be read together with the Consolidated Financial Statements and related footnote disclosures contained in our 2016 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 and the holidays in the fourth quarter. Consistent with the timing in 2016, our 2017 Anniversary Sale began in July and extended one week into the third quarter. Results for any quarter are not indicative of the results that may be achieved for a full fiscal year.
Accounts Receivable
On July 31, 2017, we entered into an agreement with TD Bank USA, N.A. (“TD”) to sell our employee credit card receivables for an amount equal to the gross value of the outstanding receivables. Additionally, we entered into an amended long-term program agreement under which TD will continue to be the exclusive issuer of all our U.S. Visa and private label credit cards and we will continue to perform account servicing functions. As of October 28, 2017, our employee credit card receivables of $54, included in accounts receivable, net on the Condensed Consolidated Balance Sheets, is “held for sale” and, as such, is recorded at the lower of cost or fair value (see Note 3: Fair Value Measurements). Subsequent to quarter end, on November 1, 2017, we completed the sale of our employee credit card receivables to TD.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which was subsequently modified in August 2015 by ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date. The core principle of ASU No. 2014-09 is that companies should recognize revenue when the transfer of promised goods or services to customers occurs in an amount that reflects what the company expects to receive. It requires additional disclosures to describe the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. In 2016, the FASB issued additional ASUs which clarify the implementation guidance on principal versus agent considerations, on identifying performance obligations and licensing, on the revenue recognition criteria and other technical corrections. In our ongoing evaluation of this ASU, we have determined that the new standard will primarily impact us in the following ways: gift card breakage will be estimated based on expected customer redemption periods, rather than when redemption is considered remote; sales attributable to the loyalty program benefits (e.g., points, alterations) will be deferred rather than recording the loyalty program expenses as an increase to cost of sales; remaining unamortized balances of deferred revenue and the investment in contract asset related to the 2015 sale of our receivables to TD will be recorded as a cumulative-effect adjustment directly to retained earnings as of the beginning of the adoption period; revenue related to our online sales will be recognized at the shipping point rather than upon receipt by the customer; and estimated costs of returns will be recorded as a current asset rather than netted with our sales return reserve. We plan to adopt this ASU in the first quarter of 2018 and we anticipate using the modified retrospective adoption method. We are continuing to evaluate the impacts this ASU and related disclosures will have on our Consolidated Financial Statements. 
In February 2016, the FASB issued ASU No. 2016-02, Leases. 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. This ASU is effective for us beginning in the first quarter of 2019. We are currently evaluating the impact of the standard, which will require recognizing and measuring leases at the beginning of the earliest period presented using a modified retrospective approach. We expect adoption of this standard will have a material impact on our Consolidated Financial Statements.

7 of 30




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


In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation — Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payments and presentation within the financial statements. We adopted ASU No. 2016-09 with an effective date of January 29, 2017. The impact of the adoption resulted in the following:
Excess tax benefits and deficiencies resulting from stock-based compensation arrangements are now recorded within income tax expense on the Condensed Consolidated Statement of Earnings when the awards vest or are settled, rather than within equity. Additionally, excess tax benefits are now excluded from assumed future proceeds in our calculation of diluted shares for purposes of determining diluted earnings per share. The prospective adoption of this provision did not have a material effect on the Condensed Consolidated Financial Statements for the nine months ended October 28, 2017. We had no previously unrecognized excess tax benefits that would have resulted in a cumulative-effect adjustment to beginning retained earnings.
Forfeitures on share-based awards are recorded as they occur, rather than our historical method of estimating forfeitures at the grant date. In evaluating the impact of this change, the adjustment to adopt on a modified retrospective basis was immaterial, therefore no adjustment has been made to beginning retained earnings.
Excess tax benefits from stock-based compensation arrangements are classified as cash flows from operations, rather than as cash flows from financing activities. We adopted this change retrospectively, which resulted in an increase to net cash provided by operating activities and an increase in cash flows used in financing activities of $2 for the nine months ended October 29, 2016. Additionally, cash flows related to withholding shares for tax purposes on net-settled awards are classified as financing activities, rather than operating activities. This classification change was also adopted retrospectively, resulting in an increase of $4 to net cash provided by operating activities with an offsetting increase to net cash used in financing activities on the Condensed Consolidated Statement of Cash Flows for the nine months ended October 29, 2016.
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. The ASU 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.

8 of 30




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


NOTE 2: DEBT AND CREDIT FACILITIES
Debt
A summary of our long-term debt, including capital leases, is as follows:
 
October 28, 2017


January 28, 2017


October 29, 2016

Secured
 
 
 
 
 
Mortgage payable, 7.68%, due April 2020

$20

 

$24

 

$26

Other
1

 
3

 
3

Total secured debt
21

 
27

 
29

 
 
 
 
 
 
Unsecured
 
 
 
 
 
Net of unamortized discount:
 
 
 
 
 
Senior notes, 6.25%, due January 2018

 
650

 
650

Senior notes, 4.75%, due May 2020
499

 
499

 
499

Senior notes, 4.00%, due October 2021
500

 
500

 
500

Senior notes, 4.00%, due March 2027
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
891

 
602

 
602

Other
32

 
50

 
52

Total unsecured debt
2,717

 
2,747

 
2,749

 
 
 
 
 
 
Total long-term debt
2,738

 
2,774

 
2,778

Less: current portion
(57
)
 
(11
)
 
(11
)
Total due beyond one year

$2,681

 

$2,763

 

$2,767


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.
Credit Facilities
As of October 28, 2017, 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. From time to time we utilize our commercial paper program to fund working capital needs, which has the effect of reducing available liquidity under the revolver until repaid.
As of October 28, 2017, we had no issuances outstanding under our commercial paper program and no borrowings outstanding under our revolver.
The revolver requires that we maintain an adjusted debt to earnings before interest, income taxes, depreciation, amortization and rent (“EBITDAR”) leverage ratio of no more than four times. As of October 28, 2017, we were in compliance with this covenant.

9 of 30




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


NOTE 3: 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 (excluding employee credit card receivables “held for sale”), accounts payable and certificates of deposit, 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:
 
October 28, 2017

 
January 28, 2017

 
October 29, 2016

Carrying value of long-term debt

$2,738

 

$2,774

 

$2,778

Fair value of long-term debt
2,840

 
2,949

 
3,064

Financial Instruments Measured at Fair Value on a Nonrecurring Basis
Our employee credit card receivables are classified as “held for sale” (“receivables held for sale”) and are recorded at the lower of cost or fair value (see Note 1: Basis of Presentation). We estimate the fair value of our receivables held for sale based on a discounted cash flow model using estimates and assumptions regarding future credit card portfolio performance. This fair value estimate is primarily based on Level 3 inputs in the fair value hierarchy. Based upon this assessment, the carrying value of the receivables held for sale approximated fair value at October 28, 2017.
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, investment in contract asset 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.
During the third quarter of 2016, the long-term operating plan for Trunk Club was updated to reflect current expectations for future growth and profitability which were lower than previous expectations. Due to lowered expectations, we tested Trunk Club goodwill for impairment in the third quarter, one quarter prior to the annual evaluation. Step 1 test results indicated that the estimated fair value of the reporting unit was less than the carrying value.
In our Step 2 analysis, we used a combination of the expected present value of future cash flows (income approach) and comparable public companies (market approach) to determine the fair value of the reporting unit. These approaches use primarily unobservable inputs, including discount, sales growth and profit margin rates, which are considered Level 3 fair value measurements. The fair value analysis took into account recent and expected operating performance as well as the overall decline in the retail industry. Within our Retail Segment, we recognized a goodwill impairment charge of $197, reducing Trunk Club goodwill to $64 as of October 29, 2016 from $261 as of January 30, 2016.
There were no material impairment charges for these assets for the nine months ended October 28, 2017.
NOTE 4: COMMITMENTS AND CONTINGENCIES
Plans for our Manhattan full-line 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 October 28, 2017, we had approximately $249 of fee interest in land, which is expected to convert to a condominium interest once the store is constructed. We have committed to make future installment payments based on the developer meeting pre-established construction and development milestones. In the 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 in the land.

10 of 30




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


NOTE 5: 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. Our October 1, 2015 Board authorized share repurchase program expired in March 2017, which had $409 of unused capacity upon program expiration.
During the nine months ended October 28, 2017, we repurchased 4.6 shares of our common stock for an aggregate purchase price of $206 and had $414 remaining in share repurchase capacity as of October 28, 2017. 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.
In November 2017, subsequent to quarter end, we declared a quarterly dividend of $0.37 per share, which will be paid on December 12, 2017.
NOTE 6: STOCK-BASED COMPENSATION
On May 16, 2017, our shareholders approved an amendment to the 2010 Equity Incentive Plan. The amendment increases common stock available for issuance by 6.2. As of October 28, 2017, the aggregate number of shares to be issued under the Plan may not exceed 36.6, plus any shares currently outstanding under the 2004 Plan that are forfeited or expire during the term of the 2010 plan.
The following table summarizes our stock-based compensation expense:
 
Quarter Ended
 
Nine Months Ended
 
October 28, 2017

 
October 29, 2016

 
October 28, 2017

 
October 29, 2016

Restricted stock units

$13

 

$10

 

$40

 

$25

Stock options
5

 
9

 
13

 
28

Acquisition-related stock compensation

 
2

 
1

 
10

Other
1

 

 
5

 
5

Total stock-based compensation expense, before income tax benefit
19

 
21

 
59

 
68

Income tax benefit
(7
)
 
(7
)
 
(22
)
 
(22
)
Total stock-based compensation expense, net of income tax benefit

$12

 

$14

 

$37

 

$46

In 2014, restricted stock units became a growing component of our stock-based compensation mix. During 2017, this trend has continued as our annual grant allocation shifted towards more restricted stock units and less options to better align with our compensation program’s guiding principles. The following table summarizes our grants:
 
Nine Months Ended
 
October 28, 2017
 
October 29, 2016
 
Granted

 
Weighted-average grant-date fair value per unit

 
Granted

 
Weighted-average grant-date fair value per unit

Restricted stock units
1.9

 

$42

 
1.9

 

$44

Stock options
0.3



$16

 
2.9

 

$15

Performance share units
0.1

 

$40

 
0.1

 

$44


11 of 30




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


NOTE 7: EARNINGS (LOSS) PER SHARE
The computation of earnings (loss) per share is as follows:
 
Quarter Ended
 
Nine Months Ended
 
October 28, 2017

 
October 29, 2016

 
October 28, 2017

 
October 29, 2016

Net earnings (loss)

$114

 

($10
)
 

$286

 

$153

 
 
 
 
 
 
 
 
Basic shares
166.6

 
173.4

 
166.7

 
173.3

Dilutive effect of common stock equivalents1
2.2

 

 
2.1

 
2.3

Diluted shares
168.8

 
173.4

 
168.8

 
175.6

 
 
 
 
 
 
 
 
Earnings (Loss) per basic share

$0.68

 

($0.06
)
 

$1.72

 

$0.88

Earnings (Loss) per diluted share

$0.67

 

($0.06
)
 

$1.70

 

$0.87

 
 
 
 
 
 
 
 
Anti-dilutive common stock equivalents
10.0

 
6.5

 
10.8

 
9.0

1 Due to the anti-dilutive effect resulting from the reported net loss for the quarter ended October 29, 2016, the impact of potentially dilutive securities on the weighted-average shares outstanding has been omitted from the quarterly calculation of loss per diluted share. The impact of these potentially dilutive securities has been included in the calculation of weighted-average shares for the nine months ended October 29, 2016.

12 of 30




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


NOTE 8: SEGMENT REPORTING
The following table sets forth information for our reportable segments: 
 
 
Retail

 
Corporate/Other

 
Retail
Business

 
Credit

 
Total

Quarter Ended October 28, 2017
 
 
 
 
 
 
 
 
 
 
Net sales
 

$3,351

 

$190

 

$3,541

 

$—

 

$3,541

Credit card revenues, net
 

 

 

 
88

 
88

Earnings (loss) before interest and income taxes
 
168

 
(8
)
 
160

 
48

 
208

Interest expense, net
 

 
(28
)
 
(28
)
 

 
(28
)
Earnings (loss) before income taxes
 
168

 
(36
)
 
132

 
48

 
180

 
 
 
 
 
 
 
 
 
 
 
Quarter Ended October 29, 2016
 
 
 
 
 
 
 
 
 

Net sales
 

$3,317

 

$155

 

$3,472

 

$—

 

$3,472

Credit card revenues, net
 

 

 

 
70

 
70

Earnings before interest and income taxes
 
18

 
5

 
23

 
32

 
55

Interest expense, net
 

 
(30
)
 
(30
)
 

 
(30
)
Earnings (loss) before income taxes
 
18

 
(25
)
 
(7
)
 
32

 
25

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended October 28, 2017
 
 
 
 
 
 
 
 
 

Net sales
 

$10,698

 

($161
)
 

$10,537

 

$—

 

$10,537

Credit card revenues, net
 

 

 

 
239

 
239

Earnings (loss) before interest and income taxes
 
767

 
(316
)
 
451

 
124

 
575

Interest expense, net
 

 
(104
)
 
(104
)
 

 
(104
)
Earnings (loss) before income taxes
 
767

 
(420
)
 
347

 
124

 
471

 
 
 
 
 
 

 
 
 

Nine Months Ended October 29, 2016
 
 
 
 
 

 
 
 

Net sales
 

$10,446

 

($191
)
 

$10,255

 

$—

 

$10,255

Credit card revenues, net
 

 

 

 
186

 
186

Earnings (loss) before interest and income taxes
 
590

 
(274
)
 
316

 
65

 
381

Interest expense, net
 

 
(90
)
 
(90
)
 

 
(90
)
Earnings (loss) before income taxes
 
590

 
(364
)
 
226

 
65

 
291

Retail Business represents a subtotal of the Retail segment and Corporate/Other and is not a reportable segment.

13 of 30




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


The following table summarizes net sales within our reportable segments:
 
Quarter Ended
 
Nine Months Ended
 
October 28, 2017

 
October 29, 2016

 
October 28, 2017

 
October 29, 2016

Nordstrom full-line stores - U.S.1

$1,488

 

$1,568

 

$4,858

 

$5,128

Nordstrom.com
534

 
497

 
1,901

 
1,675

Full-price
2,022

 
2,065

 
6,759

 
6,803

 
 
 
 
 
 
 
 
Nordstrom Rack
966

 
958

 
2,910

 
2,777

Nordstromrack.com/HauteLook
212

 
159

 
609

 
482

Off-price
1,178

 
1,117

 
3,519

 
3,259

 
 
 
 
 
 
 
 
Other retail2
151

 
135

 
420

 
384

Retail segment
3,351

 
3,317

 
10,698

 
10,446

Corporate/Other
190

 
155

 
(161
)
 
(191
)
Total net sales

$3,541

 

$3,472

 

$10,537

 

$10,255

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

14 of 30




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

CAUTIONARY STATEMENT
Certain statements in this Quarterly Report on Form 10-Q contain or may suggest “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties including, but not limited to, our anticipated financial outlook for the fiscal year ending February 3, 2018, 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, including expansion into new domestic and international markets, acquisitions, investments in our stores and online, as well as investments in technology, our ability to realize the anticipated benefits from growth initiatives and our ability to provide a seamless experience across all channels,
our ability to respond to the business and retail environment, fashion trends and consumer preferences, including changing expectations of service and experience in stores and online, and evolve our business model,
timely and effective execution of our ecommerce initiatives and ability to manage the costs and organizational changes associated with this evolving business model,
successful execution of our information technology strategy,
our ability to effectively utilize data in strategic planning and decision making,
timely completion of construction associated with newly planned stores, relocations and remodels, all of which may be impacted by the financial health of third parties,
efficient and proper allocation of our capital resources,
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,
effective inventory management processes and systems, fulfillment processes and systems, disruptions in our supply chain and our ability to control costs,
the effect of the announcement by the members of the Nordstrom family relating to the exploration of a possible “going private transaction” on our relationships with our customers, employees, suppliers and partners, operating results and business generally,
our ability to safeguard our reputation and maintain our vendor relationships,
our ability to maintain relationships with and motivate our employees and to effectively attract, develop and retain our future leaders, which could be impacted by the uncertainty about the possibility of a “going private transaction,”
our ability to realize the expected benefits, respond to potential risks and appropriately manage costs associated with our program agreement with TD Bank USA, N.A. (“TD”),
the effectiveness of planned advertising, marketing and promotional campaigns in the highly competitive and promotional retail industry,
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,
the timing, price, manner and amounts of future share repurchases by the Company, if any, or any share issuances by the Company, including issuances associated with option exercises or other matters,
Economic and External
the impact of economic and market conditions and the resultant impact on consumer spending patterns,
the impact of economic or political conditions in the U.S. and countries where our third party vendors operate,
weather conditions, natural disasters, health hazards, national security or other market disruptions, or the prospects of these events and the resulting impact on consumer spending patterns or information technology systems and communications,
Legal and Regulatory
our compliance with applicable domestic and international laws, regulations and ethical standards, including those related to banking, employment and tax and the outcome of claims and litigation and resolution of such matters,
the impact of the current regulatory environment and financial system and health care reforms, and
compliance with debt covenants, availability and cost of credit, changes in our credit rating, changes in interest rates, debt repayment patterns and personal bankruptcies.
These and other factors, including those factors described in Part I, “Item 1A. Risk Factors” in our 2016 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.

15 of 30




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


OVERVIEW
Our third quarter net earnings were $114, or $0.67 per diluted share. The estimated reduction in earnings from three hurricanes affecting our business in Puerto Rico, Florida, and Texas in the quarter was approximately $0.04 per diluted share.
Our net sales increased 2.0%, and comparable sales decreased 0.9% during the quarter. The estimated lost sales impact from the hurricanes was approximately $20, or 60 basis points. When adjusted for this impact, our overall sales performance was generally in-line with our expectations. This reflected consistent trends in our full-price business while we experienced softer sales in our off-price business. Our merchandise margins continued to be relatively stable, reflecting our ongoing progress in supporting a healthy regular-price selling business. For the third quarter and the balance of the year, our inventory plans are aligned with our current sales trends.
Core to our strategy, we are focused on providing a differentiated selection of the best products, coupled with a high level of service and experience. We are continually testing and learning from new concepts to deliver experiences that improve speed, convenience, and personalization for our customers:
Our most recent example is Nordstrom Local, a test retail concept in West Hollywood, California focused on services. This location allows customers more convenient access to personal stylists, alterations and online order pickups and returns.
We recently expanded Reserve Online and Try-In Store to more than 50 stores across the country. This service is a convenient way for customers to shop and it frees up their time. If they use that time to do additional shopping in our stores, it may result in a lift in their spend. Another way we are connecting the digital and in-store experience is through Style Boards. This digital selling tool leverages the expertise of our salespeople and enables customers to receive personalized product recommendations on their mobile phones.
Collaborating with popular fashion influencer Something Navy, we launched an exclusive capsule collection with our in-house Treasure & Bond brand. This launch was our largest ever, generating $2 in demand on the first day. We continue to grow limited distribution products and our private label brands continue to outperform the company average.
Looking ahead to the remainder of the year, we are focused on making Nordstrom a convenient place for customers to do their holiday shopping.
We have invested in key categories and brands that resonate most with our customers. To support peak volumes we expect during the holidays, we are expanding our online selection.
To make shopping faster and easier, we offer:
Buy Online Pick up In-Store with an option for curbside service in our full-line stores. In major markets, including Seattle, Chicago, Dallas and San Diego, 24-hour curbside pickup will be available for the holidays.
Reserve Online and Try In-Store in more than 50 of our full-line stores
Same-day delivery services in several markets
The combination of our physical and digital assets represents a competitive advantage. Our omni-channel business model provides for favorable economics related to driving customer spend, reducing the cost of serving customers, and elevating the Nordstrom and Nordstrom Rack brands. We are well-positioned to execute on our customer strategy and remain focused on delivering a differentiated customer experience.

16 of 30




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


RESULTS OF OPERATIONS
Our reportable segments are Retail and Credit. We analyze our results of operations through earnings before interest and income taxes for our Retail Business and Credit, while interest expense, income taxes and earnings per share are discussed on a total Company basis.
Retail Business
Our Retail Business includes our Nordstrom U.S. and Canada full-line stores (including Nordstrom Local), Nordstrom.com, Nordstrom Rack stores, Nordstromrack.com/HauteLook, Trunk Club, Jeffrey boutiques and Last Chance clearance stores. For purposes of discussion and analysis of our results of operations of our Retail Business, we combine our Retail segment results with revenues and expenses in the “Corporate/Other” column of Note 8: Segment Reporting in Item 1 (collectively, the “Retail Business”).
Certain metrics we use to evaluate the Retail Business may not be calculated in a consistent manner among industry peers. Provided below are definitions of metrics we present within our analysis of the Retail Business:
Comparable Sales – includes sales from stores that have been open at least one full year at the beginning of the year
Total Company comparable sales includes sales from our online channels
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 (for all segments) divided by the trailing 4-quarter average inventory
Total Sales Per Square Foot – net sales divided by weighted-average square footage
4-wall Sales Per Square Foot – sales for Nordstrom U.S. and Canada full-line stores, Nordstrom Rack stores, Trunk Club clubhouses, Jeffrey boutiques and Last Chance clearance stores divided by their weighted-average square footage
Summary
The following table summarizes the results of our Retail Business: 
 
Quarter Ended
 
October 28, 2017
 
October 29, 2016
 
Amount

 
% of net sales1

 
Amount

 
% of net sales1

Net sales

$3,541

 
100.0
%
 

$3,472

 
100.0
%
Cost of sales and related buying and occupancy costs
(2,311
)
 
(65.3
%)
 
(2,262
)
 
(65.2
%)
Gross profit
1,230

 
34.7
%
 
1,210

 
34.8
%
Selling, general and administrative expenses
(1,070
)
 
(30.2
%)
 
(990
)
 
(28.5
%)
Goodwill impairment

 

 
(197
)
 
(5.7
%)
Earnings before interest and income taxes

$160

 
4.5
%
 

$23

 
0.6
%
 
 
Nine Months Ended
 
October 28, 2017
 
October 29, 2016
 
Amount

 
% of net sales1

 
Amount

 
% of net sales1

Net sales

$10,537

 
100.0
%
 

$10,255

 
100.0
%
Cost of sales and related buying and occupancy costs
(6,914
)
 
(65.6
%)
 
(6,718
)
 
(65.5
%)
Gross profit
3,623

 
34.4
%
 
3,537

 
34.5
%
Selling, general and administrative expenses
(3,172
)
 
(30.1
%)
 
(3,024
)
 
(29.5
%)
Goodwill impairment

 

 
(197
)
 
(1.9
%)
Earnings before interest and income taxes

$451

 
4.3
%
 

$316

 
3.1
%
1 Subtotals and totals may not foot due to rounding.

17 of 30




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


Retail Business Net Sales
In our ongoing effort to enhance the customer experience, we are focused on providing customers with a seamless experience across our channels. While our customers may engage with us through multiple channels, we know they value the overall Nordstrom brand experience and view us simply as Nordstrom, which is ultimately how we view our business. The following is a summary of our net sales by channel for our Retail Business:
 
Quarter Ended
 
Nine Months Ended
 
October 28, 2017

 
October 29, 2016

 
October 28, 2017

 
October 29, 2016

Net sales by channel:
 
 
 
 
 
 
 
Nordstrom full-line stores - U.S.1

$1,488

 

$1,568

 

$4,858

 

$5,128

Nordstrom.com
534

 
497

 
1,901

 
1,675

Full-price
2,022

 
2,065

 
6,759

 
6,803

 
 
 
 
 
 
 
 
Nordstrom Rack
966

 
958

 
2,910

 
2,777

Nordstromrack.com/HauteLook
212

 
159

 
609

 
482

Off-price
1,178

 
1,117

 
3,519

 
3,259

 
 
 
 
 
 
 
 
Other retail2
151

 
135

 
420

 
384

Retail segment
3,351

 
3,317

 
10,698

 
10,446

Corporate/Other
190

 
155

 
(161
)
 
(191
)
Total net sales

$3,541

 

$3,472

 

$10,537

 

$10,255

 
 
 
 
 
 
 
 
Net sales increase
2.0
%
 
7.2
%
 
2.7
%
 
3.0
%
 
 
 
 
 
 
 
 
Comparable sales increase (decrease) by channel:
 
 
 
 
 
 
 
Nordstrom full-line stores - U.S.
(4.9
%)
 
(4.5
%)
 
(5.2
%)
 
(6.3
%)
Nordstrom.com
7.5
%
 
20.1
%
 
13.5
%
 
10.3
%
Full-price
(1.9
%)
 
0.5
%
 
(0.5
%)
 
(2.6
%)
Nordstrom Rack
(5.0
%)
 
0.9
%
 
(2.3
%)
 
0.4
%
Nordstromrack.com/HauteLook
33.6
%
 
23.2
%
 
26.3
%
 
32.9
%
Off-price
0.8
%
 
3.9
%
 
2.0
%
 
4.6
%
Total Company
(0.9
%)
 
2.4
%
 
0.1
%
 
(0.2
%)
 
 
 
 
 
 
 
 
Sales per square foot:
 
 
 
 
 
 
 
Total sales per square foot

$118

 

$119

 

$353

 

$355

4-wall sales per square foot
86

 
90

 
271

 
283

Full-line sales per square foot - U.S.
72

 
76

 
235

 
247

Nordstrom Rack sales per square foot
118

 
127

 
361

 
376

1 Nordstrom full-line stores - U.S. includes Nordstrom Local.
2 Other retail includes Nordstrom Canada full-line stores, Trunk Club and Jeffrey boutiques.
Total Company net sales increased 2.0% for the third quarter and 2.7% for the nine months ended October 28, 2017, compared with the same periods in 2016, while comparable sales decreased 0.9% for the third quarter and increased 0.1% for the nine months ended October 28, 2017. The estimated lost sales impact from the hurricanes impacting Puerto Rico, Florida and Texas was approximately $20, or 60 basis points for the third quarter and 20 basis points for the nine months ended October 28, 2017. To date in fiscal 2017, we opened 17 Nordstrom Rack stores, one Canada full-line store and one Nordstrom Local store, relocated two U.S. full-line stores and one Nordstrom Rack store and closed two U.S. full-line stores.

18 of 30




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


Full-price net sales, which consists of U.S. full-line and Nordstrom.com channels, decreased 2.1% for the third quarter and 0.7% for the nine months ended October 28, 2017, compared with the same periods in 2016, while comparable sales decreased 1.9% for the third quarter and 0.5% for the nine months ended October 28, 2017. Also on a comparable basis for the third quarter and the nine months ended October 28, 2017, full-price experienced a decrease in the total number of items sold, partially offset by an increase in the average selling price per item sold. The top-performing merchandise category was Men’s Apparel for the third quarter and Women’s Apparel for the nine months ended October 28, 2017. The West was the top-performing U.S. geographic region for the third quarter and the nine months ended October 28, 2017.
Off-price net sales, which consists of Nordstrom Rack and Nordstromrack.com/HauteLook channels, increased 5.5% for the third quarter and 8.0% for the nine months ended October 28, 2017, compared with the same periods in 2016, while comparable sales increased 0.8% and 2.0% for the third quarter and nine months ended October 28, 2017. For the quarter and year-to-date period ended October 28, 2017, Nordstrom Rack experienced a decrease in the average selling price per item sold and in the total number of items sold on a comparable basis. The top-performing Nordstrom Rack merchandise category was Cosmetics for the third quarter and the nine months ended October 28, 2017. The West was the top-performing geographic region for the third quarter and the nine months ended October 28, 2017.
Other retail net sales increased for the third quarter and nine months ended October 28, 2017, compared with the same periods in 2016 due to increases in Canada sales, partially offset by lower sales in Trunk Club.
Retail Business Gross Profit
The following table summarizes the Retail Business gross profit (“Retail GP”):
 
Quarter Ended
 
Nine Months Ended
 
October 28, 2017

 
October 29, 2016

 
October 28, 2017

 
October 29, 2016

Retail gross profit

$1,230



$1,210



$3,623



$3,537

Retail gross profit as a % of net sales
34.7
%

34.8
%

34.4
%

34.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
October 28, 2017

 
October 29, 2016

Ending inventory per square foot
 
 
 
 

$80.54

 

$80.94

Inventory turnover rate
 
 
 
 
4.39

 
4.31

Retail GP decreased 12 basis points for the third quarter and 11 basis points for the nine months ended October 28, 2017, compared with the same periods in 2016, primarily due to higher planned occupancy expenses related to new store growth for Nordstrom Rack and Canada. Continued focus on inventory execution led to improvements in both ending inventory per square foot and the inventory turnover rate as of October 28, 2017.
Retail Business Selling, General and Administrative Expenses 
Retail Business selling, general and administrative expenses (“Retail SG&A”) are summarized in the following table:
 
Quarter Ended
 
Nine Months Ended
 
October 28, 2017

 
October 29, 2016

 
October 28, 2017

 
October 29, 2016

Retail selling, general and administrative expenses

$1,070

 

$990

 

$3,172

 

$3,024

Retail selling, general and administrative expenses as a % of net sales
30.2
%
 
28.5
%
 
30.1
%
 
29.5
%
Retail SG&A increased $80 and 168 basis points for the third quarter and increased $148 and 61 basis points for the nine months ended October 28, 2017, primarily due to planned increases in technology and supply chain expenses associated with our growth initiatives.

19 of 30




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


Credit Segment
The Nordstrom credit and debit card products are designed to strengthen customer relationships and grow retail sales by providing loyalty benefits, valuable services and payment products. We believe our credit business allows us to build deeper relationships with our customers by fully integrating the Nordstrom Rewards program with our retail business and provide better service, which in turn fosters greater customer loyalty. Nordstrom cardholders tend to visit our stores more frequently and spend more than non-cardholders. Nordstrom private label credit and debit cards can be used at all of our U.S. retail channels, while Nordstrom Visa credit cards may also be used for purchases outside of Nordstrom (“outside volume”).
Summary
The table below provides a detailed view of the operational results of our Credit segment, consistent with Note 8: Segment Reporting in Item 1:
 
Quarter Ended
 
Nine Months Ended
 
October 28, 2017

 
October 29, 2016

 
October 28, 2017

 
October 29, 2016

Credit card revenues, net

$88

 

$70

 

$239

 

$186

Credit expenses
(40
)
 
(38
)
 
(115
)
 
(121
)
Earnings before interest and income taxes

$48

 

$32

 
124

 
65

 
 
 
 
 
 
 
 
Credit and debit card volume1:
 
 
 
 
 
 
 
Inside

$1,205

 

$1,239

 

$4,202

 

$4,215

Outside
1,084

 
1,023

 
3,146

 
3,106

Total volume

$2,289

 

$2,262

 

$7,348

 

$7,321

1 Credit and debit card volume represents sales on the total portfolio plus applicable sales taxes.
Credit Card Revenues, net
The following is a summary of our credit card revenues, net:
 
Quarter Ended
 
Nine Months Ended
 
October 28, 2017

 
October 29, 2016

 
October 28, 2017

 
October 29, 2016

Credit program revenues, net

$85

 

$67

 

$229

 

$176

Other
3

 
3

 
10

 
10

Total credit card revenues, net

$88

 

$70

 

$239

 

$186

Pursuant to our program agreement with TD, we receive our portion of the ongoing credit card revenue, net of credit losses, from both sold and newly generated credit card receivables, which is recorded in credit program revenues, net. Asset amortization and deferred revenue recognition associated with the assets and liabilities recorded as part of the transaction are also recognized in credit program revenues, net. Revenue earned under the program agreement is impacted by the credit quality of receivables, both owned and serviced, and factors such as deteriorating economic conditions, declining creditworthiness of cardholders and the execution of account management and collection activities may heighten the risk of credit losses. Other credit card revenues include finance charge revenue, interchange fees and late fees on our accounts receivable retained (including debit and employee receivables). Subsequent to quarter end, on November 1, 2017, we completed the sale of our employee credit card receivables to TD (see Note 1: Basis of Presentation in Item 1).
Credit card revenues, net increased $18 for the third quarter and $53 for the nine months ended October 28, 2017, compared with the same periods in 2016, reflecting our strategic partnership with TD to responsibly grow our receivables and associated revenues. There was also a reduction in amortization expense related to the sale of the credit card portfolio.
Credit Expenses
Total credit expenses were relatively flat for the third quarter, compared with the same period in 2016, and decreased $6 for the nine months ended October 28, 2017, primarily due to lower processing costs driven by operational efficiencies.

20 of 30




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


Total Company Results
Interest Expense, net
Interest expense, net was $28 for the third quarter, compared with $30 for the same period in 2016, and $104 for the nine months ended October 28, 2017, compared with $90 for the same period in 2016. The increase for the nine months ended October 28, 2017 was primarily due to a net interest expense charge of $18 related to the $650 debt refinancing completed in the first quarter of 2017 (see Note 2: Debt and Credit Facilities in Item 1).
Income Tax Expense
Income tax expense is summarized in the following table:
 
Quarter Ended
 
Nine Months Ended
 
October 28, 2017

 
October 29, 2016

 
October 28, 2017

 
October 29, 2016

Income tax expense

$66

 

$35

 

$185

 

$138

Effective tax rate
36.7
%
 
140.3
%
 
39.2
%
 
47.4
%
The effective tax rate decreased for the third quarter and nine months ended October 28, 2017, compared with the same periods in 2016, primarily due to the non-deductible goodwill impairment charge of $197 related to Trunk Club in the third quarter of 2016. Excluding the impact of the Trunk Club impairment, our effective tax rate for both the third quarter and nine months ended October 28, 2017 increased approximately 300 basis points primarily due to changes in tax reserves and an increase in the valuation allowance for foreign net operating losses.
Earnings (Loss) Per Share
Earnings (Loss) per share is as follows:
 
Quarter Ended
 
Nine Months Ended
 
October 28, 2017

 
October 29, 2016

 
October 28, 2017

 
October 29, 2016

Basic

$0.68

 

($0.06
)
 

$1.72

 

$0.88

Diluted

$0.67

 

($0.06
)
 

$1.70

 

$0.87

Earnings per diluted share increased for the third quarter and nine months ended October 28, 2017 primarily due to the Trunk Club goodwill impairment charge of $197 in 2016, which had an impact of approximately $0.90 per share for both the quarter and nine months ended October 29, 2016. Excluding the impact of the impairment, earnings per diluted share decreased for the quarter and nine months ended October 28, 2017 primarily due to planned increases in technology and supply chain expenses associated with our growth initiatives. Additionally, the estimated reduction in earnings from three hurricanes affecting stores in Puerto Rico, Florida and Texas in the quarter was approximately $0.04 per share.
2017 Outlook
We updated our annual earnings per diluted share expectations to incorporate our third quarter results and the estimated impacts of the three hurricanes. Nordstrom’s expectations for fiscal 2017, which include the impact of the 53rd week, are as follows:
 
Current Outlook
Net sales (percent)
Approximately 4
Comparable sales (percent)
Approximately flat
Retail EBIT
$755 to $785
Credit EBIT
Approximately $165
Earnings per diluted share (excluding the impact of any future share repurchases)
$2.85 to $2.95
The income tax rate is estimated to be approximately in line with the rate for the nine months ended October 28, 2017. The 53rd week is expected to add approximately $200 to net sales and approximately $0.02 to $0.03 to earnings per diluted share. The 53rd week is not included in comparable sales calculations. The full-year impact from three hurricanes that occurred in the third quarter is estimated to impact sales by $26, EBIT by $17 and EPS by $0.06 per share. The damage in Puerto Rico was extensive, requiring us to close the store as we continue our repair efforts.

21 of 30




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


Return on Invested Capital (“ROIC”) (Non-GAAP financial measure)
We believe ROIC is a useful financial measure for investors in evaluating the efficiency and effectiveness of our use of capital and believe ROIC is an important component of shareholders’ return over the long term. In addition, we incorporate ROIC in our executive incentive compensation measures. For the 12 fiscal months ended October 28, 2017, our ROIC increased to 10.7% compared with 7.2% for the 12 fiscal months ended October 29, 2016. Results for the prior period were negatively impacted by approximately 340 basis points due to the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016.
We define ROIC as our net operating profit after tax divided by our average invested capital using the trailing 12-month average. ROIC is not a measure of financial performance under generally accepted accounting principles (“GAAP”) and should be considered in addition to, and not as a substitute for, return on assets, net earnings, total assets or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to ROIC is return on assets. The following is a reconciliation of the components of ROIC and return on assets:
 
12 Fiscal Months Ended
 
October 28, 2017

 
October 29, 2016

Net earnings

$488

 

$333

Add: income tax expense
376

 
252

Add: interest expense
139

 
121

Earnings before interest and income tax expense
1,003

 
706

 
 
 
 
Add: rent expense
237

 
195

Less: estimated depreciation on capitalized operating leases1
(126
)
 
(103
)
Net operating profit
1,114

 
798

 
 
 
 
Less: estimated income tax expense
(486
)
 
(383
)
Net operating profit after tax

$628

 

$415

 
 
 
 
Average total assets

$8,009

 

$7,987

Less: average non-interest-bearing current liabilities2
(3,211
)
 
(3,105
)
Less: average deferred property incentives and deferred rent liability2
(646
)
 
(541
)
Add: average estimated asset base of capitalized operating leases3
1,718

 
1,452

Average invested capital

$5,870

 

$5,793

 
 
 
 
Return on assets4
6.1
%
 
4.2
%
ROIC4
10.7
%
 
7.2
%
1 Capitalized operating leases is our best estimate of the asset base we would record for our leases that are classified as operating if they had met the criteria for a capital lease or we had purchased the property. Asset base is calculated as described in footnote 3 below.
2 Balances associated with our deferred rent liability have been classified as long-term liabilities in the current period.
3 Based upon the trailing 12-month average of the monthly asset base. The asset base for each month is calculated as the trailing 12 months of rent expense multiplied by eight. The multiple of eight times rent expense is a commonly used method of estimating the asset base we would record for our capitalized operating leases described in footnote 1.
4 Results for the 12 fiscal months ended October 29, 2016 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 250 basis points and ROIC by 340 basis points.

22 of 30




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


LIQUIDITY AND CAPITAL RESOURCES
We strive to maintain a level of liquidity sufficient to allow us to cover our seasonal cash needs and to maintain appropriate levels of short-term borrowings. We believe that our operating cash flows, available credit facilities and potential future borrowings are sufficient to finance our cash requirements for the next 12 months and beyond.
Over the long term, we manage our cash and capital structure to maximize shareholder return, maintain our financial position, manage refinancing risk and allow flexibility for strategic initiatives. We regularly assess our debt and leverage levels, capital expenditure requirements, debt service payments, dividend payouts, potential share repurchases and other future investments. We believe that as of October 28, 2017, our existing cash and cash equivalents on-hand of $672, available credit facilities of $800 and potential future operating cash flows and borrowings will be sufficient to fund these scheduled future payments and potential long-term initiatives.
Operating Activities
Net cash provided by operating activities decreased $281 for the nine months ended October 28, 2017, compared with the same period in 2016, primarily due to the timing of a tax refund received in 2016 and tax payments in 2017.
Investing Activities
Net cash used in investing activities decreased $71 for the nine months ended October 28, 2017, compared with the same period in 2016, primarily due to a planned reduction in capital expenditures associated with fewer Canadian store openings.
Financing Activities
Net cash used in financing activities increased $61 for the nine months ended October 28, 2017, compared with the same period in 2016, primarily due to increased share repurchase activity, which occurred in the first quarter of 2017.
Short-term and Long-term 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. See Note 2: Debt and Credit Facilities in Item 1 for additional information.
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 nine months ended October 28, 2017, we had Free Cash Flow of ($127) compared with ($66) for the nine months ended October 29, 2016.
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:
 
Nine Months Ended
 
October 28, 2017

 
October 29, 2016

Net cash provided by operating activities

$597

 

$878

Less: capital expenditures
(536
)
 
(625
)
Less: cash dividends paid
(185
)
 
(192
)
Less: change in cash book overdrafts
(3
)