UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 2, 2003 [ ] 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 August 30, 2003: 136,065,954 shares of common stock. 1 of 20 NORDSTROM, INC. AND SUBSIDIARIES -------------------------------- INDEX ----- 2 of 20
Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Statements of Earnings Quarter and Year to Date ended August 2, 2003 and July 31, 2002 3 Condensed Consolidated Balance Sheets August 2, 2003, January 31, 2003 and July 31, 2002 4 Condensed Consolidated Statements of Cash Flows Quarter and Year to Date ended August 2, 2003 and July 31, 2002 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Item 4. Controls and Procedures 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 20 NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands except per share amounts) (unaudited) 3 of 20
Quarter Ended Year to Date Ended ---------------------- ---------------------- August 2, July 31, August 2, July 31, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Net sales $1,794,975 $1,655,528 $3,138,514 $2,901,289 Cost of sales and related buying and occupancy (1,192,195) (1,104,035) (2,080,653) (1,927,123) ---------- ---------- ---------- ---------- Gross profit 602,780 551,493 1,057,861 974,166 Selling, general and administrative expenses (504,656) (496,915) (930,686) (882,999) ---------- ---------- ---------- ---------- Operating income 98,124 54,578 127,175 91,167 Interest expense, net (26,134) (19,605) (46,362) (39,654) Minority interest purchase and reintegration costs - (11,121) - (53,168) Service charge income and other, net 36,081 35,341 71,713 68,645 ---------- ---------- ---------- ---------- Earnings before income taxes and cumulative effect of accounting change 108,071 59,193 152,526 66,990 Income tax expense (42,200) (22,858) (59,500) (41,868) ---------- ---------- ---------- ---------- Earnings before cumulative effect of accounting change 65,871 36,335 93,026 25,122 Cumulative effect of accounting change (net of tax of $8,541) - - - (13,359) ---------- ---------- ---------- ---------- Net earnings $ 65,871 $ 36,335 $ 93,026 $ 11,763 ========== ========== ========== ========== Basic earnings per share $ .48 $ .27 $ .69 $ .09 ========== ========== ========== ========== Diluted earnings per share $ .48 $ .27 $ .68 $ .09 ========== ========== ========== ========== Cash dividends paid per share of common stock outstanding $ .10 $ .09 $ .20 $ .18 ========== ========== ========== ========== The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) 4 of 20
August 2, January 31, July 31, 2003 2003 2002 ---------- ---------- ---------- (Unaudited) (Audited) (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 298,779 $ 219,344 $ 244,544 Accounts receivable, net 665,177 639,630 685,465 Retained interest in accounts receivable 218,401 124,543 86,666 Merchandise inventories 1,019,467 953,112 1,039,365 Prepaid expenses 48,053 40,261 36,010 Other current assets 112,613 111,654 105,272 ---------- ---------- ---------- Total current assets 2,362,490 2,088,544 2,197,322 Land, buildings and equipment (net of accumulated depreciation of $2,006,527, $1,882,976, and $1,770,885) 1,735,202 1,761,544 1,805,861 Goodwill, net 56,609 56,609 56,227 Tradename, net 84,000 84,000 84,000 Other assets 158,264 121,726 97,009 ---------- ---------- ---------- TOTAL ASSETS $4,396,565 $4,112,423 $4,240,419 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable $ 139 $ 244 $ 209 Accounts payable 634,762 429,808 688,842 Accrued salaries, wages and related benefits 258,041 260,562 233,279 Income taxes and other accruals 222,071 188,986 173,045 Current portion of long-term debt 6,084 5,545 4,769 ---------- ---------- ---------- Total current liabilities 1,121,097 885,145 1,100,144 Long-term debt 1,300,356 1,341,826 1,343,797 Deferred lease credits 374,782 383,100 389,526 Other liabilities 152,535 128,972 94,478 Shareholders' Equity: Common stock, no par: 500,000,000 shares authorized; 135,891,406, 135,444,041 and 135,089,518 shares issued and outstanding 362,293 358,069 351,587 Unearned stock compensation (746) (2,010) (2,345) Retained earnings 1,080,002 1,014,105 962,699 Accumulated other comprehensive earnings 6,246 3,216 533 ---------- ---------- ---------- Total shareholders' equity 1,447,795 1,373,380 1,312,474 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,396,565 $4,112,423 $4,240,419 ========== ========== ========== The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) 5 of 20
Year to Date Ended ---------------------- August 2, July 31, 2003 2002 -------- -------- OPERATING ACTIVITIES: Net earnings $93,026 $11,763 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 123,349 111,917 Amortization of deferred lease credits and other, net (12,988) (9,176) Stock-based compensation expense 1,815 2,087 Deferred income taxes, net 3,776 5,184 Cumulative effect of accounting change, net of tax - 13,359 Impairment of IT investment - 15,570 Minority interest purchase expense - 40,389 Change in assets and liabilities: Accounts receivable, net (24,252) (40,264) Retained interest in accounts receivable (91,371) (29,760) Merchandise inventories (62,209) (183,976) Prepaid expenses (973) 2,745 Other assets (6,188) 2,787 Accounts payable 190,796 233,643 Accrued salaries, wages and related benefits (2,217) (5,064) Income taxes and other accruals 25,121 27,972 Other liabilities 9,387 4,098 -------- -------- Net cash provided by operating activities 247,072 203,274 -------- -------- INVESTING ACTIVITIES: Capital expenditures (131,874) (184,507) Additions to deferred lease credits 28,908 58,449 Minority interest purchase - (70,000) Other, net 106 (3,169) -------- -------- Net cash used for investing activities (102,860) (199,227) -------- -------- FINANCING ACTIVITIES: Proceeds from notes payable (105) 61 Proceeds from long-term borrowings - 815 Principal payments on long-term debt (46,003) (84,053) Proceeds from sale of interest rate swap 2,341 - Proceeds from issuance of common stock 6,119 10,086 Cash dividends paid (27,129) (24,267) -------- -------- Net cash used by financing activities (64,777) (97,358) -------- -------- Net increase (decrease) in cash and cash equivalents 79,435 (93,311) Cash and cash equivalents at beginning of period 219,344 337,855 -------- -------- Cash and cash equivalents at end of period $298,779 $244,544 ======== ======== The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (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 2002 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. Due to the seasonal nature of the retail industry, quarterly results are not necessarily indicative of the results for the full fiscal year. Reclassification - ---------------- We reclassified certain prior year amounts to conform to the current year presentation. Change in Fiscal Year - --------------------- On February 1, 2003, our fiscal year-end changed from January 31 to the Saturday closest to January 31. Each fiscal year consists of four 13 week quarters, with an extra week added onto the fourth quarter every five to six years. A one-day transition period is included in our first quarter 2003 results. Stock Compensation - ------------------ We apply APB No. 25, "Accounting for Stock Issued to Employees," in measuring compensation costs under our stock-based compensation programs, which are described more fully in our 2002 Annual Report. If we had elected to recognize compensation cost based on the fair value of the options and shares at grant date, net earnings and earnings per share would have been as follows: 6 of 20
Quarter Ended Year to Date Ended -------------------- -------------------- August 2, July 31, August 2, July 31, 2003 2002 2003 2002 --------- --------- --------- --------- Net earnings, as reported $65,871 $36,335 $93,026 $11,763 Incremental stock-based compensation expense under fair value, net of tax (3,396) (5,611) (9,620) (11,211) --------- --------- --------- --------- Pro forma net earnings $62,475 $30,724 $83,406 $552 ========= ========= ========= ========= Earnings per share: Basic - as reported $0.48 $ 0.27 $0.69 $ 0.09 Diluted - as reported $0.48 $ 0.27 $0.68 $ 0.09 Basic and Diluted - pro forma $0.46 $ 0.23 $0.61 $ 0.00 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 1 - Summary of Significant Accounting Policies (Cont.) Recent Accounting Pronouncements - -------------------------------- In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" for certain decisions made by the FASB as part of the Derivatives Implementation Group process. SFAS No. 149 also amends SFAS No. 133 to incorporate clarifications of the definition of a derivative. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively. Adoption of SFAS No. 149 did not have an impact on our earnings or financial position. Note 2 - Goodwill and Other Intangible Assets The carrying amounts of our intangible assets are as follows: The purchase of the minority interest of Nordstrom.com in the first quarter of 2002 resulted in additional goodwill of $24,178, of which $8,462 was allocated to the Retail Stores reporting unit and $15,716 to the Catalog/Internet reporting unit. Goodwill of $32,431 and Tradename of $84,000 are assigned to the Faconnable reporting unit. Note 3 - Earnings Per Share
Catalog/ Retail Stores Internet segment segment Total --------------------- -------- --------- Goodwill Tradename Goodwill -------- --------- -------- Balance as of February 1, 2003 and August 2, 2003 $ 40,893 $ 84,000 $ 15,716 $ 140,609 7 of 20
Quarter Ended Year to Date Ended ------------------------ ------------------------ August 2, July 31, August 2, July 31, 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net earnings $65,871 $36,335 $93,026 $11,763 Basic shares 135,843,977 135,066,212 135,710,396 134,887,294 Basic earnings per share $0.48 $0.27 $0.69 $0.09 Dilutive effect of stock options and performance share units 494,171 753,673 305,907 878,448 Diluted shares 136,338,148 135,819,885 136,016,303 135,765,742 Diluted earnings per share $0.48 $0.27 $0.68 $0.09 Antidilutive stock options 8,224,504 6,764,220 9,686,838 6,542,883 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 4 - Accounts Receivable The components of accounts receivable are as follows: The restricted private label receivables back the $300 million Class A notes and the $200 million variable funding note issued by us in November 2001. Other accounts receivable consist primarily of vendor receivables and cosmetic rebates receivable. As all vendor receivables are fully earned at period end, no allowance for doubtful vendor receivables has been recorded. Note 5 - Debt In the second quarter, we purchased $40,825 of our 8.95% senior notes and $2,500 of our 6.7% medium-term notes for a total cash payment of $50,054. Approximately $6,423 of expense was recognized in the second quarter of 2003 related to this purchase. In August 2003, we purchased an additional $14,500 of our 8.95% senior notes for a total cash payment of $16,397. Approximately $1,800 of expense will be recognized in the third quarter of 2003 related to this purchase. We entered into a variable interest rate swap agreement in the second quarter of 2003. The swap has a $250,000 notional amount and a 5.5-year term. 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 (3.55% at August 2, 2003). The swap agreement qualifies as a fair value hedge and is recorded at its market value of ($15,283) in other liabilities. 8 of 20
August 2, January 31, July 31, 2003 2003 2002 ----------- ----------- ----------- Trade receivables: Unrestricted $19,675 $15,599 $18,393 Restricted 638,572 613,647 658,775 Allowance for doubtful accounts (21,146) (22,385) (22,131) ----------- ----------- ----------- Trade receivables, net 637,101 606,861 655,037 Other 28,076 32,769 30,428 ----------- ----------- ----------- Accounts receivable, net $665,177 $639,630 $685,465 =========== =========== =========== NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 6 - Segment Reporting The following tables set forth the information for our reportable segments and a reconciliation to the consolidated totals: Note 7 - Nordstrom.com During 2002, we purchased the outstanding shares of Nordstrom.com, Inc. series C preferred stock for $70,000. The excess of the purchase price over the fair market value of the preferred stock and professional fees resulted in a one- time charge of $42,736. No tax benefit was recognized on the share purchase, as we do not believe it is probable that this benefit will be realized. The impact of not recognizing this income tax benefit increased our prior year to date effective tax rate to 62.5% before the cumulative effect of accounting change. 9 of 20
Quarter ended Retail Credit Catalog/ Corporate August 2, 2003 Stores Operations Internet and Other Eliminations Total - --------------------------------------------------------------------------------------------------- Revenues from external customers $1,723,687 - $71,288 - - $1,794,975 Service charge income - $32,622 - - - 32,622 Intersegment revenues 8,270 10,390 - - $(18,660) - Interest expense, net 24 5,442 4 $20,664 - 26,134 Earnings before taxes 162,196 5,326 974 (60,425) - 108,071 Net earnings (loss) 98,833 3,242 597 (36,801) - 65,871 Quarter ended Retail Credit Catalog/ Corporate July 31, 2002 Stores Operations Internet and Other Eliminations Total - --------------------------------------------------------------------------------------------------- Revenues from external customers $1,592,131 - $63,397 - - $1,655,528 Service charge income - $33,041 - - - 33,041 Intersegment revenues 9,421 9,583 - - $(19,004) - Interest expense, net (183) 5,474 152 $14,162 - 19,605 Earnings before taxes and cumulative effect of accounting change 115,562 6,850 (13,506) (49,713) - 59,193 Net earnings (loss) 70,433 4,175 (8,238) (30,035) - 36,335 Year to date ended Retail Credit Catalog/ Corporate August 2, 2003 Stores Operations Internet and Other Eliminations Total - --------------------------------------------------------------------------------------------------- Revenues from external customers $3,001,085 - $137,429 - - $3,138,514 Service charge income - $66,554 - - - 66,554 Intersegment revenues 14,521 17,238 - - $(31,759) - Interest expense, net 118 10,815 (12) $35,441 - 46,362 Earnings before taxes 257,992 11,706 (1,485) (115,687) - 152,526 Net earnings (loss) 157,349 7,139 (905) (70,557) - 93,026 Assets 2,757,778 860,089 105,128 673,570 - 4,396,565 Year to date ended Retail Credit Catalog/ Corporate July 31, 2002 Stores Operations Internet and Other Eliminations Total - --------------------------------------------------------------------------------------------------- Revenues from external customers $2,779,258 - $122,031 - - $2,901,289 Service charge income - $62,462 - - - 62,462 Intersegment revenues 13,239 16,108 - - $(29,347) - Interest expense, net 1 11,913 337 $27,403 - 39,654 Earnings before taxes and cumulative effect of accounting change 214,399 13,468 (16,023) (144,854) - 66,990 Net earnings (loss) 117,444 8,217 (9,775) (104,123) - 11,763 Assets 2,756,360 759,929 76,183 647,947 - 4,240,419 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 7 - Nordstrom.com (Cont.) Also in 2002, $10,432 of expense was recognized related to the purchase of the outstanding Nordstrom.com options and warrants. The following table presents the charges resulting from the minority interest purchase and reintegration of Nordstrom.com. Note 8 - Litigation 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 have now been consolidated in Marin County state 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" 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 period four years prior to the filing of the amended complaint. Defendants, including us, have answered the amended complaint denying the allegations. The defendants have produced documents and responded to plaintiffs' other discovery requests, including providing witnesses for depositions. We entered into a settlement agreement with the plaintiffs and the other defendants on July 16, 2003. In connection with the settlement, the case is being refiled in the United States District Court for the Northern District of California. The settlement requires Court approval and, if approved by the Court, will result in the plaintiffs' claims being dismissed, with prejudice, in their entirety. In connection with the settlement agreement, the defendants will provide consumers with certain free products and pay the plaintiffs' attorneys' fees. Our share of the cost of the settlement will not have a material adverse effect on our financial condition. We have entered into the settlement agreement solely to avoid protracted and costly litigation. There has been no finding or admission of any wrongdoing by us in this lawsuit. 10 of 20
July 31, 2002 --------------------------- Three Months Six Months Ended Ended ------------ ----------- Excess of the purchase price over the fair market value of the preferred stock $ (659) $40,389 Nordstrom.com option/warrant buyback expense 10,432 10,432 Professional fees incurred 1,348 2,347 ------------ ----------- $11,121 $53,168 ============ =========== NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 8 - Litigation (Cont.) Other - ----- We are subject to routine litigation incidental to our business. No material liability is expected. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Dollars in Thousands The following discussion should be read in conjunction with the Management's Discussion and Analysis section of the 2002 Annual Report. RESULTS OF OPERATIONS: - ---------------------- Overview - -------- Earnings for the second quarter of 2003 increased to $65,871 or $0.48 per diluted share from $36,335 or $0.27 per diluted share for the same period in 2002. The 81% increase was partially due to two charges taken in 2002 to write-off an IT investment and acquire and reintegrate the minority interest of Nordstrom.com. Earnings for the year to date period ended August 2, 2003 increased to $93,026 or $0.68 per diluted share from $11,763 or $0.09 per diluted share for the same period in 2002. The increase for the year to date period was primarily attributable to three charges taken in 2002 to write-off an IT investment, acquire and reintegrate the minority interest of Nordstrom.com and to adopt a new accounting pronouncement. Excluding these nonrecurring and impairment charges, earnings increased $13,511 for the quarter and $10,221 year to date when compared to the same periods last year. This increase was the result of better than expected same store sales, expense leverage and overall expense control. 11 of 20 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Year-over-year net income before and after nonrecurring and impairment charges are as follows: Sales - ----- Total sales for the quarter and year to date on a 4-5-4 comparable basis increased 7.9% and 6.0% due to same store sales increases and store openings. Same store sales on a 4-5-4 comparable basis increased 3.9% for the quarter and 1.6% year to date due to several factors, including better merchandising, strong sales events and an improving retail climate. In addition, for the twelve months ended August 2, 2003, we have opened six full-line stores and one Nordstrom Rack store. Our strongest performing merchandise divisions for the quarter were cosmetics, accessories, men's wear and women's designer apparel, followed by shoes, women's bridge, women's better, women's active wear, junior women's, and intimate apparel. Our weakest divisions were women's special sizes and children's apparel. 12 of 20
Quarter Ended ------------------------------------------- August 2, 2003 July 31, 2002 -------------------- -------------------- Diluted Diluted Dollars EPS Dollars EPS --------- --------- --------- --------- Reported net income $65,871 $0.48 $36,335 $0.27 Nonrecurring and impairment charges, net of tax: Minority interest purchase and reintegration costs - - 6,527 0.05 Write-off of IT investment - - 9,498 0.07 --------- --------- --------- --------- Net income before nonrecurring and impairment charges $65,871 $0.48 $52,360 $0.39 ========= ========= ========= ========= Year to Date Ended ------------------------------------------- August 2, 2003 July 31, 2002 -------------------- -------------------- Diluted Diluted Dollars EPS Dollars EPS --------- --------- --------- --------- Reported net income $93,026 $0.68 $11,763 $0.09 Nonrecurring and impairment charges, net of tax: Minority interest purchase and reintegration costs - - 48,185 0.35 Cumulative effect of accounting change - - 13,359 0.10 Write-off of IT investment - - 9,498 0.07 --------- --------- --------- --------- Net income before nonrecurring and impairment charges $93,026 $0.68 $82,805 $0.61 ========= ========= ========= ========= Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Gross Profit - ------------ Gross profit as a percentage of sales improved 27 basis points for the quarter and 13 basis points for the year to date period ended August 2, 2003, compared to the same periods last year primarily due to better than expected same store sales which allowed us to leverage buying and occupancy expenses. For the quarter, markdowns as a percent of sales were flat with last year. On a year to date basis, markdowns were higher than the prior year due to slow sales in the first quarter. Higher than expected sales volume and overall inventory control in the second quarter resulted in an 8% decrease in our inventory per square foot. Selling, General and Administrative - -----------------------------------
QTD 2003 QTD 2002 YTD 2003 YTD 2002 -------- -------- -------- -------- Gross profit as a percent of sales 33.6% 33.3% 33.7% 33.6% For the second quarter of 2002, selling, general and administrative expense includes an impairment charge of $15,570 related to the write-down of an information technology investment in a supply chain tool at our manufacturing division. Excluding this charge, selling, general and administrative expenses as a percentage of sales for the quarter decreased to 28.1% from 29.1% in the prior year. Excluding this charge on a year to date basis, selling, general and administrative expenses decreased to 29.6% from 29.9% in the prior year. These decreases resulted from leverage on better than expected same store sales and overall expense control. We saw the most significant improvements in direct selling labor, information technology expenses and distribution costs. Interest Expense - ---------------- Interest expense, net increased for the quarter and year to date periods ended August 2, 2003 when compared to the same periods in 2002 due to approximately $6,423 in additional expense resulting from the repurchase of $43,325 in debt. Service Charge Income and Other - ------------------------------- Service charge income and other, net increased for the quarter and year to date periods ended August 2, 2003 primarily due to gains recorded from our VISA securitization. Securitization gains continued as increased sales on our VISA cards have led to higher receivable balances and related revenues, while the cost of funds declined and bad debt write-offs stabilized. 13 of 20
QTD 2003 QTD 2002 YTD 2003 YTD 2002 -------- -------- -------- -------- Selling, general and administrative expense as a percent of sales 28.1% 30.0% 29.6% 30.5% Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Minority Interest Purchase and Reintegration Costs - -------------------------------------------------- During 2002, we purchased the outstanding shares of Nordstrom.com, Inc. series C preferred stock for $70,000. The excess of the purchase price over the fair market value of the preferred stock and professional fees resulted in a one- time charge of $42,736. No tax benefit was recognized on the share purchase, as we do not believe it is probable that this benefit will be realized. The impact of not recognizing this income tax benefit increased our prior year to date effective tax rate to 62.5% before the cumulative effect of accounting change. Also in 2002, $10,432 of expense was recognized related to the purchase of the outstanding Nordstrom.com options and warrants. The following table presents the charges resulting from the minority interest purchase and reintegration of Nordstrom.com: Cumulative Effect of Accounting Change - -------------------------------------- During the first quarter of 2002, we completed the initial review required by SFAS No. 142 "Goodwill and Other Intangible Assets." As a result of our review, we recorded a cumulative effect of accounting change of $13,359, net of tax, or $0.10 per share on a diluted basis. Seasonality - ------------ Our business, like that of other retailers, is subject to seasonal fluctuations. Our anniversary sale in July and the holidays in December result in higher sales in the second and fourth quarters of the fiscal year. Accordingly, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. GAAP Sales Reconciliation (Dollars in millions) - ----------------------------------------------- We converted to a 4-5-4 Retail Calendar at the beginning of 2003. This change in our fiscal calendar has resulted in one less day of sales being included in our second quarter versus the same period in the prior year and two additional days of sales for the current year to date versus the same period last year. Sales performance numbers included in this document have been calculated on a comparative 4-5-4 basis. We believe that adjusting for the difference in days provides a more comparable basis (4-5-4 vs 4-5-4) from which to evaluate sales performance. The following reconciliation bridges the reported GAAP sales to the 4-5-4 comparable sales. 14 of 20
July 31, 2002 --------------------------- Three Months Six Months Ended Ended ------------ ----------- Excess of the purchase price over the fair market value of the preferred stock $ (659) $40,389 Nordstrom.com option/warrant buyback expense 10,432 10,432 Professional fees incurred 1,348 2,347 ------------ ----------- $11,121 $53,168 ============ =========== Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) LIQUIDITY AND CAPITAL RESOURCES: - -------------------------------- We finance our working capital needs and capital expenditures with cash provided by operations and borrowings. Cash Flow from Operations - ------------------------- Net cash provided by operating activities for the year to date period ended August 2, 2003 increased compared to the same period last year. This increase was primarily a result of a decrease in inventory from better than expected same store sales and overall inventory control, partially offset by an increase in the retained interest of our VISA securitization and a reduction in our accounts payable balance. The increase in the retained interest was a result of increased sales on our VISA card while the change in accounts payable resulted from timing differences. Capital Expenditures - -------------------- For the year to date period ended August 2, 2003, net cash used in investing activities decreased primarily due to the $70,000 payment for the acquisition of the outstanding shares of Nordstrom.com, Inc. series C preferred stock in 2002. In addition, net capital expenditures decreased from a planned reduction in new store openings. 15 of 20
% Change % Change Dollar Total Comp Sales Reconciliation ($M) QTD 2003 QTD 2002 Increase Sales Sales - ---------------------------- --------- --------- -------- --------- -------- Number of Days Reported GAAP 91 92 Reported GAAP Sales $1,795.0 $1,655.6 $139.4 8.4% 4.5% Less May 1-4, 2002 sales - ($65.2) Plus August 1-3, 2002 sales - $73.0 --------- --------- Reported 4-5-4 sales $1,795.0 $1,663.4 $131.6 7.9% 3.9% --------- --------- 4-5-4 Adjusted Days 91 91 % Change % Change Dollar Total Comp Sales Reconciliation ($M) YTD 2003 YTD 2002 Increase Sales Sales - ---------------------------- --------- --------- -------- --------- -------- Number of Days Reported GAAP 183 181 Reported GAAP Sales $3,138.5 $2,901.3 $237.2 8.2% 3.1% Less Feb. 1, 2003 ($18.2) - Less Feb. 1-2, 2002 sales - ($30.4) Plus August 1-3, 2002 sales - $73.0 --------- --------- Reported 4-5-4 sales $3,120.3 $2,943.9 $176.4 6.0% 1.6% --------- --------- 4-5-4 Adjusted Days 182 182 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) We opened one full-line store in Houston, TX during the first quarter of 2003. In August 2003, we also opened a full-line store in Austin, TX and two Nordstrom Rack stores in Chicago, IL and Sunrise, FL. Throughout the remainder of the year, we expect to open two full-line stores in Richmond, VA and Wellington Green, FL and relocate our Lynnwood, WA full-line store. Gross square footage for the year is expected to increase approximately 4% from 18,428,000 to 19,109,000. Financing - --------- For the year to date period ended August 2, 2003, cash used by financing activities decreased primarily due to the scheduled retirement of $76,750 in medium-term notes in the prior year partially offset by our current year debt buyback of $43,325. Debt Buyback - ------------ In the second quarter, we purchased $40,825 of our 8.95% senior notes and $2,500 of our 6.7% medium-term notes for a total cash payment of $50,054. Approximately $6,423 of expense was recognized in the second quarter of 2003 related to this purchase. In August 2003, we purchased an additional $14,500 of our 8.95% senior notes for a total cash payment of $16,397. Approximately $1,800 of expense will be recognized in the third quarter of 2003 related to this purchase. 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 doubtful accounts, inventory valuation, intangible assets, sales return, income taxes, self-insurance liabilities, 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. No changes to our methodologies have occurred since our disclosures in the 2002 Annual Report. Recent Accounting Pronouncements - -------------------------------- In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" for certain decisions made by the FASB as part of the Derivatives Implementation Group process. SFAS No. 149 also amends SFAS No. 133 to incorporate clarifications of the definition of a derivative. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively. Adoption of SFAS No. 149 did not have an impact on our earnings or financial position. 16 of 20 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT: - ------------------------------------------------- The preceding disclosures included forward-looking statements regarding our performance, liquidity 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 increased competition, shifting consumer demand, changing consumer credit markets, changing capital markets, changing interest rates and general economic conditions, hiring and retaining effective team members, sourcing merchandise from domestic and international vendors, investing in new business strategies, achieving our growth objectives and the impact of economic and competitive market forces, including the impact of terrorist activity or the impact of war. 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. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We entered into a variable interest rate swap agreement in the second quarter of 2003. The swap has a $250,000 notional amount and a 5.5-year term. 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 (3.55% at August 2, 2003). The swap agreement qualifies as a fair value hedge and is recorded at its market value of ($15,283) in other liabilities. 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, the President and the Chief Financial Officer concluded that our disclosure controls and procedures are effective in the timely recording, processing, summarizing and reporting of material financial and non-financial information. There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings - ------------------------- The information required under this item is included in the following section of Part I, Item 1 of this report: Note 8 in Notes to Condensed Consolidated Financial Statements 17 of 20 Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- We held our Annual Shareholders Meeting on May 20, 2003, at which time the shareholders voted on the following proposals: (1) Election of nine directors for a one-year term each. Name of Candidate For Withheld ---------------------- ----------- ----------- D. Wayne Gittinger 107,940,890 5,459,227 Enrique Hernandez, Jr. 110,233,575 3,166,542 Jeanne P. Jackson 111,808,631 1,591,486 John A. McMillan 112,242,469 1,157,648 Bruce A. Nordstrom 111,808,900 1,591,217 John N. Nordstrom 111,808,220 1,591,897 Alfred E. Osborne, Jr. 105,941,325 7,458,792 William D. Ruckelshaus 105,888,526 7,511,591 Stephanie M. Shern 111,804,582 1,595,535 Alison A. Winter 111,801,990 1,598,127 There were no abstentions and no broker non-votes. (2) Ratification of the appointment of Deloitte and Touche LLP as auditors. The vote was 109,915,286 for, 2,761,957 against, and there were 722,874 abstentions. There were no broker non-votes. (3) Shareholder proposal regarding expensing stock options The vote was 41,181,941 for, 57,215,120 against, and there were 1,957,745 abstentions and 13,045,311 broker non-votes. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits -------- 10.1 1997 Stock Option Plan, amended and restated as of February 16, 2000. 10.2 Nordstrom Executive Deferred Compensation Plan (2003 Restatement). 31.1 Certification of Chief Executive Officer required by Section 302(a) of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer required by Section 302(a) of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer regarding periodic report containing financial statements as required by Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer regarding periodic report containing financial statements as required by Section 906 of the Sarbanes-Oxley Act of 2002. 18 of 20 Item 6. Exhibits and Reports on Form 8-K (Cont.) - ------------------------------------------------- (b) Reports on Form 8-K ------------------- We filed a Form 8-K on May 7, 2003 attaching a press release to announce our preliminary April 2003 sales results and earnings guidance for the first quarter of 2003. We filed a Form 8-K on May 19, 2003 attaching a press release to announce our results of operations for the quarter ending May 3, 2003. We filed a Form 8-K on June 5, 2003 attaching a press release to announce our preliminary May 2003 sales results. We filed a Form 8-K on July 10, 2003 attaching a press release to announce our preliminary June 2003 sales results. 19 of 20 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 Accounting and Financial Officer) Date: September 9, 2003 ------------------ 20 of 20 NORDSTROM INC. AND SUBSIDIARIES Exhibit Index
Exhibit Method of Filing - ------- ---------------- 10.1 1997 Stock Option Plan, amended Filed herewith electronically and restated as of February 16, 2000 10.2 Nordstrom Executive Deferred Filed herewith electronically Compensation Plan (2003 Restatement) 31.1 Certification of Chief Executive Filed herewith electronically Officer 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 Chief Executive Filed herewith electronically Officer regarding periodic report containing financial statements as required by Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Filed herewith electronically Officer regarding periodic report containing financial statements as required by Section 906 of the Sarbanes-Oxley Act of 2002