Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except percentages and per share amounts, except where noted otherwise)
The following discussion and analysis of our financial condition and results of operations contains forward-looking statements and should be read in conjunction with
Item 1A: Risk Factors
,
Item 6: Selected Financial Data
, our Consolidated Financial Statements and related Notes thereto, as well as other cautionary statements and risks described elsewhere in this Annual Report on Form 10-K, before deciding to purchase, hold or sell shares of our common stock.
OVERVIEW
Nordstrom is a leading fashion retailer offering an extensive selection of high-quality brand-name and private label apparel, shoes, cosmetics and accessories for women, men, young adults and children. We serve customers through two businesses — Full-Price and Off-Price. With customers increasingly engaging with Nordstrom in multiple ways, we focus on providing a seamless experience across stores and online. Our operations currently consist of our Nordstrom U.S. and Canada full-line stores, U.S. and Canada Nordstrom Rack stores, Jeffrey boutiques, Last Chance clearance stores, Trunk Club clubhouses and Nordstrom Local. Additionally, customers are served online through Nordstrom.com, Nordstromrack.com, HauteLook and TrunkClub.com.
Our unique business model is a key point of difference in serving customers in multiple ways — through stores, online, Full-Price and Off-Price — with meaningful synergies across Nordstrom. We are focused on leveraging our digital and physical assets to provide customers with a best-in-class experience.
In 2018, net earnings were
$564
, or $3.32 per diluted share, which included a $0.05 favorable income tax benefit related to prior periods and an estimated non-recurring credit-related charge of $0.28 (see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
). Our net sales grew 2.3%, or approximately 3.8% excluding approximately $220 related to the 53rd week in 2017. We maintained a strong financial position, generating annual operating cash flow of more than $1 billion for the 10th consecutive year and returning nearly $1 billion to shareholders in 2018.
In 2018, we achieved the following milestones in executing our customer strategy through our three strategic pillars: providing a compelling product offering, delivering exceptional services and experiences and leveraging the strength of the Nordstrom brand:
|
|
•
|
We continue to see positive customer trends. We had over 35 million customers, an increase of 6% from last year. One-third of our customers shopped across our multiple channels, resulting in incremental customer spend.
|
|
|
•
|
Our early investments to build a robust digital business gives us a competitive advantage. Digital sales increased
16%
and made up
30%
of net sales. Additionally, Nordstrom.com has achieved scale, with the profitability of Full-Price digital sales at parity with store sales.
|
|
|
•
|
Generational investments continued to scale, contributing approximately $2 billion in sales and improvement in profitability. Nordstromrack.com/HauteLook became our fastest business to reach $1 billion in sales. Trunk Club delivered sales growth of 35%. We opened our Men’s Store in New York City and furthered our expansion into Canada with the introduction of six Nordstrom Rack stores.
|
In 2019, we have two key priorities to drive sales and market share gains. The first key priority is our local market strategy, which launched in 2018 and drove outsized market share gains in Los Angeles. We are focused on scaling in this top market by giving customers greater access to merchandise selection and faster delivery. In addition, we are implementing aspects of our local market strategy in other markets. We will further leverage inventory through our supply chain investments. This includes an Omni-channel Hub in the Los Angeles area to accelerate inventory efficiencies, as well as a one-million square foot Omni-channel center in Riverside, California that will enable faster delivery to the West Coast, which represents 40% of our customer base, at a lower cost to us. While we’re launching this local market strategy in Los Angeles first, we anticipate expanding it to our top markets in the future. We expect to expand our presence in New York City with the planned opening of our Nordstrom NYC women’s store in October. We expect that our NYC flagship, coupled with our digital presence, will contribute a meaningful sales lift in that market.
Our second key priority to drive sales and market share gains is our loyalty program. In 2018, our loyalty customers grew 16% to 11 million and contributed 56% of our sales. In October 2018, we launched our enhanced program, The Nordy Club. Cardmembers now earn three points for every dollar spent, up from two points. In addition, we added experiential elements, such as exclusive access to services and experiences. Going forward, we plan to pursue additional opportunities to further personalize the customer experience and drive increased spend.
We remain focused on driving higher shareholder returns through three key deliverables: growing market share, improving profitability and shareholder returns and continuing our disciplined capital allocation approach. We are well-positioned to execute against our long-term plans and deliver a differentiated customer experience.
RESULTS OF OPERATIONS
In our ongoing effort to enhance the customer experience, we are focused on providing customers with a seamless experience across our channels. We invested early in our omni-channel capabilities, integrating our operations, merchandising and technology across our stores and online, in both our Full-Price and Off-Price businesses. While our customers may engage with us through multiple channels, we know they value the overall Nordstrom brand experience and view us simply as Nordstrom, which is ultimately how we view our business. We have one reportable segment in 2018, Retail, and analyze our results on a total Company basis.
Similar to other retailers, Nordstrom follows the retail 4-5-4 reporting calendar, which included an extra week in the fourth quarter of
2017
(the “53rd week”). References to 2018 and all years except 2017 within this document are based on a 52-week fiscal year, while 2017 is based on a 53-week fiscal year. However, the 53rd week is not included in the comparable sales calculations.
We may not calculate certain metrics used to evaluate our business in a consistent manner among industry peers. Provided below are definitions of metrics we present within our analysis:
|
|
•
|
Comparable Sales
–
sales from stores that have been open at least one full year at the beginning of the year. In 2019, we expect net sales growth to approximate comparable sales. As a result, we will only report net sales growth
|
|
|
•
|
Comparable sales include digital sales and actual returns. Our estimate for sales return allowance is not included in the comparable sales calculations.
|
|
|
•
|
Due to the 53rd week in 2017, our 2018 comparable sales are reported on a like-for-like basis with no impact from calendar shifts or the new Revenue Standard (see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
in
Item 8
).
|
|
|
•
|
Digital Sales –
online sales and digitally assisted store sales which include Buy Online, Pick Up in Store (“BOPUS”), Ship to Store, Reserve Online, Try in Store (Store Reserve) and Style Board, a digital selling tool
|
|
|
•
|
Gross Profit – net sales less cost of sales and related buying and occupancy costs
|
|
|
•
|
Inventory Turnover Rate – trailing 4-quarter cost of sales and related buying and occupancy costs divided by the trailing 4-quarter average inventory
|
Net Sales
During the first quarter of 2018, we adopted the new Revenue Standard using the modified retrospective adoption method (see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
in
Item 8
). Results beginning in the first quarter of 2018 are presented under the new Revenue Standard, while prior period amounts are not adjusted. Also beginning in 2018, we aligned our sales presentation with how we view the results of our operations internally and how our customers shop with us, by our Full-Price and Off-Price businesses. In 2018, we allocated our sales return allowance and loyalty related adjustments to Full-Price and Off-Price. For 2017 and 2016, Other primarily included unallocated sales return, in-transit and loyalty related adjustments necessary to reconcile sales by business to total net sales.
|
|
•
|
Full-Price –
Nordstrom U.S. full-line stores, Nordstrom.com, Canada, Trunk Club, Jeffrey and Nordstrom Local
|
|
|
•
|
Off-Price –
Nordstrom U.S. Rack stores, Nordstromrack.com/HauteLook and Last Chance clearance stores
|
The following table summarizes net sales and comparable sales by business:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net sales by business:
|
|
|
|
|
|
Full-Price
|
10,299
|
|
|
10,452
|
|
|
10,259
|
|
Off-Price
|
5,181
|
|
|
4,956
|
|
|
4,509
|
|
Other
|
—
|
|
|
(271
|
)
|
|
(270
|
)
|
Total net sales
|
|
$15,480
|
|
|
|
$15,137
|
|
|
|
$14,498
|
|
|
|
|
|
|
|
Net sales increase
|
2.3
|
%
|
|
4.4
|
%
|
|
2.9
|
%
|
|
|
|
|
|
|
Comparable sales increase (decrease) by business:
|
|
|
|
|
|
Full-Price
|
0.9
|
%
|
|
0.1
|
%
|
|
(2.2
|
%)
|
Off-Price
|
3.5
|
%
|
|
2.5
|
%
|
|
4.5
|
%
|
Total Company
|
1.7
|
%
|
|
0.8
|
%
|
|
(0.4
|
%)
|
|
|
|
|
|
|
Digital sales as % of total net sales
|
30
|
%
|
|
27
|
%
|
|
24
|
%
|
Nordstrom, Inc. and subsidiaries
21
Net Sales (
2018
vs.
2017
)
In
2018
, total Company net sales
increased
2.3%
, compared with
2017
. This included a decrease of approximately 150 basis points due to the 53rd week, which contributed approximately
$220
in additional net sales in
2017
. Digital sales increased
16%
compared with
2017
. During the year, we opened our Nordstrom Men’s Store NYC,
six
Nordstrom Rack stores in Canada and
six
in the U.S., one Jeffrey boutique and two Nordstrom Locals. We closed two full-line stores and one Trunk Club clubhouse.
Full-Price net sales
decreased
1.5%
, compared with
2017
. This included a decrease of approximately 300 basis points primarily due to loyalty related adjustments and the 53rd week. Full-Price sales reflected an increase in the average selling price per item sold, partially offset by a decrease in the number of items sold. Kids’ was the top-performing merchandise category.
Off-Price net sales
increased
4.5%
, compared with
2017
. This included a decrease of approximately 250 basis points primarily due to the 53rd week and loyalty related adjustments. Off-Price sales reflected an increase in the number of items sold, partially offset by a decrease in the average selling price per item sold. The top-performing merchandise category was Shoes.
Net Sales (
2017
vs.
2016
)
In
2017
, total Company net sales
increased
4.4%
, compared with
2016
. Digital sales increased
16%
compared with
2016
. During the year, we opened two full-line stores, including one in Canada, and 17 Nordstrom Rack stores. The 53rd week contributed approximately
$220
in additional net sales.
Full-Price net sales
increased
1.9%
compared with
2016
. Full-Price sales reflected an increase in the average selling price per item sold and an increase in the number of items sold. Kids’ was the top-performing merchandise category.
Off-Price net sales
increased
9.9%
compared with
2016
. Off-Price sales reflected an increase in the number of items sold, partially offset by a decrease in average selling price per item sold. Beauty was the top-performing merchandise category.
Credit Card Revenues, Net
Credit Card Revenues, net include our portion of the ongoing credit card revenue, net of credit losses, pursuant to our program agreement with TD
whereby TD is the exclusive issuer of our consumer credit cards and we perform account servicing functions.
In 2017 and 2016, we also recorded asset amortization and deferred revenue recognition associated with the assets and liabilities recorded as part of the initial transaction to sell our U.S. Visa and private label credit card portfolio to TD.
Upon adoption of the new Revenue Standard in 2018, the remaining unamortized balances of the investment in contract asset and deferred revenue associated with the sale of the credit card receivables were eliminated as part of a cumulative-effect adjustment, reducing the opening balance of accumulated deficit for 2018. As a result, the asset amortization and deferred revenue recognition are no longer recorded in credit card revenues, net (see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
in
Item 8
).
Credit Card Revenues, Net (
2018
vs.
2017
)
Credit Card Revenues,
net
increased
$39
in
2018
reflecting our strategic partnership with TD to responsibly grow our receivables and associated revenues as well as efforts to drive new account growth. The 53rd week contributed
$10
in additional revenue in
2017
.
Credit Card Revenues, Net (
2017
vs.
2016
)
Credit Card Revenues, net
increased
$82
in
2017
due to the growth of our program and associated revenues as well as a reduction in amortization expense related to the sale of the credit card portfolio. The 53rd week contributed
$10
in additional revenue in
2017
.
Gross Profit
The following table summarizes gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Gross profit
|
|
$5,325
|
|
|
|
$5,247
|
|
|
|
$5,058
|
|
Gross profit as a % of net sales
|
34.4
|
%
|
|
34.7
|
%
|
|
34.9
|
%
|
Inventory turnover rate
|
4.70
|
|
|
4.67
|
|
|
4.53
|
|
Gross Profit (
2018
vs.
2017
)
Our gross profit rate
decreased
26
basis points in
2018
when compared with
2017
, largely
due to higher Full-Price markdowns in the fourth quarter of 2018
. Overall, c
ontinued focus on inventory execution led to improvements in inventory turnover rate in
2018
.
Gross Profit (
2017
vs.
2016
)
Our gross profit rate
decreased
23
basis points in 2017 when compared with
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 inventory turnover rate in
2017
.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Selling, general and administrative expenses
|
|
$4,868
|
|
|
|
$4,662
|
|
|
|
$4,315
|
|
Selling, general and administrative expenses as a % of net sales
|
31.5
|
%
|
|
30.8
|
%
|
|
29.8
|
%
|
Selling, General and Administrative Expenses (
2018
vs.
2017
)
Our SG&A rate
increased
65
basis points and
increased
$206
in
2018
compared with
2017
. The basis point increase was primarily due to the Estimated Non-recurring Charge of $72 in 2018 (see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
in
Item 8
). The dollar increase was primarily due to planned increases in supply chain and marketing costs and the Estimated Non-recurring Charge.
Selling, General and Administrative Expenses (
2017
vs.
2016
)
Our SG&A rate
increased
104
basis points and
increased
$347
in
2017
compared with
2016
primarily due to planned technology and performance related expenses.
Goodwill Impairment
We recognized a goodwill impairment charge of
$197
in
2016
related to Trunk Club (see
Note 9: Fair Value Measurements
in
Item 8
).
Earnings Before Interest and Income Taxes
Earnings before interest and income taxes (“EBIT”) are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Earnings before interest and income taxes
|
|
$837
|
|
|
|
$926
|
|
|
|
$805
|
|
Earnings before interest and income taxes as a % of net sales
|
5.4
|
%
|
|
6.1
|
%
|
|
5.6
|
%
|
Earnings Before Interest and Income Taxes (
2018
vs.
2017
)
EBIT
decreased
$89
and
71
basis points in
2018
compared with
2017
primarily due to the Estimated Non-recurring Charge of
$72
(see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
in
Item 8
).
Earnings Before Interest and Income Taxes (
2017
vs.
2016
)
EBIT
increased
$121
and
56
basis points in
2017
compared with
2016
primarily due to a goodwill impairment charge of
$197
in
2016
related to Trunk Club.
Interest Expense, Net
Interest expense, net is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Interest on long-term debt and short-term borrowings
|
|
$146
|
|
|
|
$168
|
|
|
|
$147
|
|
Less:
|
|
|
|
|
|
Interest income
|
(15
|
)
|
|
(5
|
)
|
|
(1
|
)
|
Capitalized interest
|
(27
|
)
|
|
(27
|
)
|
|
(25
|
)
|
Interest expense, net
|
|
$104
|
|
|
|
$136
|
|
|
|
$121
|
|
Interest Expense, Net (
2018
vs.
2017
)
Interest expense, net
decreased
$32
in
2018
compared with
2017
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 8: Debt and Credit Facilities
in
Item 8
) and an increase in interest income resulting from higher average cash balances and short-term interest rates.
Interest Expense, Net (
2017
vs.
2016
)
Interest expense, net
increased
$15
in
2017
compared with
2016
primarily due to a net interest expense charge of
$18
related to the $650 debt refinancing completed in the first quarter of 2017.
Nordstrom, Inc. and subsidiaries
23
Income Tax Expense
Income tax expense is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Income tax expense
|
|
$169
|
|
|
|
$353
|
|
|
|
$330
|
|
Effective tax rate
|
23.1
|
%
|
|
44.7
|
%
|
|
48.2
|
%
|
In December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law.
Among numerous other provisions, the Tax Act significantly revised the U.S. federal corporate income tax by reducing the statutory rate from
35%
to
21%
.
In accordance with SEC Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
, we made a reasonable estimate of the Tax Act’s impact and provisionally recorded this estimate in our 2017 results. As of February 2, 2019, we completed our accounting for the impacts of the Tax Act, resulting in no material changes to previously recorded provisional amounts.
The following table illustrates the components of our effective tax rate:
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Statutory rate
1
|
21.0
|
%
|
|
33.7
|
%
|
|
35.0
|
%
|
Tax Act impact
|
(0.1
|
%)
|
|
6.1
|
%
|
|
—
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
10.1
|
%
|
State and local income taxes, net of federal income taxes
|
5.8
|
%
|
|
4.5
|
%
|
|
5.1
|
%
|
Federal credits
|
(1.5
|
%)
|
|
(0.7
|
%)
|
|
(0.6
|
%)
|
Valuation allowance release
|
(1.2
|
%)
|
|
—
|
|
|
—
|
|
Other, net
|
(0.9
|
%)
|
|
1.1
|
%
|
|
(1.4
|
%)
|
Effective tax rate
|
23.1
|
%
|
|
44.7
|
%
|
|
48.2
|
%
|
1
The statutory rate in 2018 and 2017 is reduced due to the Tax Act.
Income Tax Expense (
2018
vs.
2017
)
The
decrease
in the effective tax rate for
2018
compared with
2017
was primarily due to the lower statutory tax rate enacted under the Tax Act, the benefit of certain current year foreign losses and the release of a foreign valuation allowance (see
Note 14: Income Taxes
in
Item 8
).
Income Tax Expense (
2017
vs.
2016
)
The
decrease
in the effective tax rate for
2017
compared with
2016
was primarily due to the non-deductible goodwill impairment charge of
$197
related to Trunk Club in the third quarter of 2016 (see
Note 9: Fair Value Measurements
in
Item 8
). Excluding the impact of the Trunk Club goodwill impairment, our effective tax rate for
2017
would have increased approximately
700
basis points compared with 2016 primarily as a result of the Tax Act. Net earnings in 2017 included
$42
related to the Tax Act, which includes a provisional, one-time tax charge of $51 related to the revaluation of net deferred tax assets, partially offset by cash savings from a lower federal tax rate.
Earnings Per Share
Earnings per share (“EPS”) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Basic
|
|
$3.37
|
|
|
|
$2.62
|
|
|
|
$2.05
|
|
Diluted
|
|
$3.32
|
|
|
|
$2.59
|
|
|
|
$2.02
|
|
Earnings Per Share (
2018
vs.
2017
)
The
increase
in diluted EPS of
$0.73
was primarily due to a lower tax rate, partially offset by the Estimated Non-recurring Charge of
$0.28
(see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
in
Item 8
).
Earnings Per Share (
2017
vs.
2016
)
For
2017
, diluted EPS of
$2.59
included impacts associated with the Tax Act consisting of a $0.25 per share reduction related to our income tax provision and a $0.06 per share decrease for a one-time investment in our employees. The impact of the Trunk Club goodwill impairment charge of $197 in
2016
was approximately $1.12 per share. Excluding the impact of these items, diluted EPS decreased in
2017
compared with
2016
due to planned increases in supply chain and technology costs associated with our growth initiatives, partially offset by an increase in net sales.
Fiscal Year
2019
Outlook
We are committed to achieving long-term financial targets, which support three strategic objectives in driving shareholder returns: continuing market share gains, improving profitability and returns, and maintaining disciplined capital allocation. Our expectations for fiscal
2019
are as follows:
|
|
|
Net sales growth
|
1 percent to 2 percent
|
Credit card revenues, net
|
Mid to high single-digit growth
|
EBIT
|
$915 to $970 million
|
EBIT margin
|
5.9 percent to 6.1 percent
|
Earnings per diluted share (excluding the impact of any potential future share repurchase)
|
$3.65 to $3.90
|
Our guidance also incorporates the following assumptions:
|
|
•
|
We measure our performance through market share, customers and net sales metrics. As comparable sales growth is expected to approximate net sales growth in 2019, we will only report net sales growth.
|
|
|
•
|
The effective tax rate is expected to be approximately 26%.
|
|
|
•
|
Estimated outstanding shares are expected to be approximately 162, which excludes the impact of any potential future share repurchases.
|
Nordstrom, Inc. and subsidiaries
25
Adjusted ROIC (Non-GAAP financial measure)
We believe that Adjusted ROIC is a useful financial measure for investors in evaluating the efficiency and effectiveness of the capital we have invested in our business to generate returns. Adjusted ROIC adjusts our operating leases as if they met the criteria for capital leases or we had purchased the properties. This provides additional supplemental information that reflects the investment in our off-balance sheet operating leases, controls for differences in capital structure between us and our competitors and provides investors and credit agencies with another way to comparably evaluate the efficiency and effectiveness of our capital investments over time. In addition, we incorporate Adjusted ROIC into our executive incentive measures and it is an important indicator of shareholders’ return over the long term.
We define Adjusted ROIC
as our adjusted net operating profit after tax divided by our average invested capital using the trailing 12-month average.
Adjusted ROIC is not a measure of financial performance under generally accepted accounting principles (“GAAP”) and should be considered in addition to, and not as a substitute for, return on assets, net earnings, total assets or other financial measures prepared in accordance with GAAP.
Our method of determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies. Estimated depreciation on capitalized operating leases and average estimated asset base of capitalized operating leases are not calculated in accordance with, or an alternative for, GAAP and should not be considered in isolation or as a substitution of our results as reported under GAAP.
The financial measure calculated under GAAP which is most directly comparable to Adjusted ROIC is return on assets. The following is a reconciliation of the components of Adjusted ROIC and return on assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Fiscal Months Ended
|
|
February 2, 2019
|
|
|
February 3, 2018
|
|
|
January 28, 2017
|
|
|
January 30, 2016
|
|
|
January 31, 2015
|
|
Net earnings
|
|
$564
|
|
|
|
$437
|
|
|
|
$354
|
|
|
|
$600
|
|
|
|
$720
|
|
Add: income tax expense
|
169
|
|
|
353
|
|
|
330
|
|
|
376
|
|
|
465
|
|
Add: interest expense
|
119
|
|
|
141
|
|
|
122
|
|
|
125
|
|
|
139
|
|
Earnings before interest and income tax expense
|
852
|
|
|
931
|
|
|
806
|
|
|
1,101
|
|
|
1,324
|
|
|
|
|
|
|
|
|
|
|
|
Add: rent expense
|
251
|
|
|
250
|
|
|
202
|
|
|
176
|
|
|
137
|
|
Less: estimated depreciation on capitalized operating leases
1
|
(134
|
)
|
|
(133
|
)
|
|
(108
|
)
|
|
(94
|
)
|
|
(74
|
)
|
Adjusted net operating profit
|
969
|
|
|
1,048
|
|
|
900
|
|
|
1,183
|
|
|
1,387
|
|
|
|
|
|
|
|
|
|
|
|
Less: estimated income tax expense
|
(223
|
)
|
|
(468
|
)
|
|
(416
|
)
|
|
(456
|
)
|
|
(544
|
)
|
Adjusted net operating profit after tax
|
|
$746
|
|
|
|
$580
|
|
|
|
$484
|
|
|
|
$727
|
|
|
|
$843
|
|
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$8,282
|
|
|
|
$8,055
|
|
|
|
$7,917
|
|
|
|
$9,076
|
|
|
|
$8,860
|
|
Less: average non-interest-bearing current liabilities
2
|
(3,479
|
)
|
|
(3,261
|
)
|
|
(3,012
|
)
|
|
(2,993
|
)
|
|
(2,730
|
)
|
Less: average deferred property incentives and deferred rent liability
2
|
(616
|
)
|
|
(644
|
)
|
|
(644
|
)
|
|
(548
|
)
|
|
(502
|
)
|
Add: average estimated asset base of capitalized operating leases
1
|
2,018
|
|
|
1,805
|
|
|
1,512
|
|
|
1,236
|
|
|
1,058
|
|
Average invested capital
|
|
$6,205
|
|
|
|
$5,955
|
|
|
|
$5,773
|
|
|
|
$6,771
|
|
|
|
$6,686
|
|
|
|
|
|
|
|
|
|
|
|
Return on assets
3
|
6.8
|
%
|
|
5.4
|
%
|
|
4.5
|
%
|
|
6.6
|
%
|
|
8.1
|
%
|
Adjusted ROIC
3
|
12.0
|
%
|
|
9.7
|
%
|
|
8.4
|
%
|
|
10.7
|
%
|
|
12.6
|
%
|
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. The asset base is calculated based upon the trailing 12-month average of the monthly asset base. The asset base for each month is calculated as the trailing 12 months of rent expense multiplied by eight. The multiple of eight times rent expense is a commonly used method of estimating the asset base we would record for our capitalized operating leases
. We do not expect the adoption of the new Lease Standard to have a material impact on our Adjusted ROIC (see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
in
Item 8
).
2
Balances associated with our deferred rent liability have been classified as long-term liabilities as of January 28, 2017.
3
Results for the 12 fiscal months ended
February 2, 2019
include lower income tax expense primarily associated with the Tax Act and a
$72
unfavorable impact related to the Estimated Non-recurring Charge (see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
in
Item 8
). Results for the 12 fiscal months ended
February 3, 2018
include a
$42
unfavorable impact related to the Tax Act.
Results for the 12 fiscal months ended
January 28, 2017
include a $197 unfavorable impact of the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016.
LIQUIDITY AND CAPITAL RESOURCES
We strive to maintain a level of liquidity sufficient to allow us to cover our seasonal cash needs and to maintain appropriate levels of short-term borrowings. We believe that our operating cash flows, available credit facility and potential future borrowings are sufficient to meet our cash requirements for the next 12 months and beyond.
Over the long term, we manage our cash and capital structure to maximize shareholder return, maintain our financial position, manage refinancing risk and allow flexibility for strategic initiatives. We regularly assess our debt and leverage levels, capital expenditure requirements, debt service payments, dividend payouts, potential share repurchases and other future investments. We believe that as of
February 2, 2019
, our existing cash and cash equivalents on-hand of
$957
, available credit facility of
$800
and potential future operating cash flows and borrowings will be sufficient to fund these scheduled future payments and potential long-term initiatives.
The following is a summary of our cash flows by activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$1,296
|
|
|
|
$1,400
|
|
|
|
$1,658
|
|
Net cash used in investing activities
|
(653
|
)
|
|
(684
|
)
|
|
(791
|
)
|
Net cash used in financing activities
|
(867
|
)
|
|
(542
|
)
|
|
(455
|
)
|
Operating Activities
The majority of our operating cash inflows are derived from sales. We also receive cash payments for property incentives from developers. Our operating cash outflows generally consist of payments to our merchandise vendors (net of vendor allowances), payments to our employees for wages, salaries and other employee benefits and payments to our landlords for rent. Operating cash outflows also include payments for income taxes and interest payments on our short-term and long-term borrowings.
Net cash provided by operating activities
decreased
by
$104
between
2018
and
2017
primarily due to the timing of payroll and increased incentive compensation payouts, which included $16 for our one-time investment in employees in response to the Tax Act, paid in 2018.
Net cash provided by operating activities
decreased
by
$258
between
2017
and
2016
primarily due to the timing of tax refunds and payments.
Investing Activities
Our investing cash inflows are generally from proceeds from sales of property and equipment. Our investing cash outflows include payments for capital expenditures, including stores, supply chain improvements and technology costs. In addition, other investing includes payments for investments in other companies, as well as proceeds from distributions or sales of these investments.
Net cash used in investing activities
decreased
by
$31
between
2018
and
2017
and
$107
between
2017
and
2016
primarily due to decreases in capital expenditures, partially offset by the acquisitions of two retail technology companies in 2018, which were classified in other investing activities, net (see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
in
Item 8
).
Capital Expenditures
Our capital expenditures, net are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Capital expenditures
|
|
$654
|
|
|
|
$731
|
|
|
|
$846
|
|
Less: deferred property incentives
1
|
(53
|
)
|
|
(64
|
)
|
|
(65
|
)
|
Capital expenditures, net
|
|
$601
|
|
|
|
$667
|
|
|
|
$781
|
|
|
|
|
|
|
|
Capital expenditures % of net sales
|
4.2
|
%
|
|
4.8
|
%
|
|
5.8
|
%
|
|
|
|
|
|
|
Capital expenditures, net category allocation:
|
|
|
|
|
|
Technology
|
30
|
%
|
|
28
|
%
|
|
26
|
%
|
Supply chain
|
18
|
%
|
|
4
|
%
|
|
4
|
%
|
Generational investments
2
|
30
|
%
|
|
24
|
%
|
|
32
|
%
|
New stores, relocations, remodels and other
|
22
|
%
|
|
44
|
%
|
|
38
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
1
Deferred property incentives are included in our cash provided by operations in our Consolidated Statements of Cash Flows in
Item 8
. We operationally view the property incentives we receive from our developers as an offset to our capital expenditures.
2
Generational investments include Nordstromrack.com/HauteLook, Canada, Trunk Club and Nordstrom NYC.
Nordstrom, Inc. and subsidiaries
27
Capital expenditures, net
decreased
$66
in
2018
compared with
2017
primarily due to fewer new Nordstrom Rack store openings and U.S. full-line relocations, partially offset by increased supply chain investments. Capital expenditures, net
decreased
$114
in
2017
compared with
2016
primarily due to fewer Canada full-line store openings.
Our capital expenditures, net were
$3,726
, or
5%
of net sales, over the last five years. We estimate our spending as a percent of sales in
2019
to increase to 6%, as we shifted approximately $100 in projects from 2018, and will consist primarily of investments in our Supply Chain Network and Nordstrom NYC. As we near the end of our generational investments cycle, we expect capital expenditure levels to moderate in 2020.
Financing Activities
The majority of our financing activities include common stock repurchases, long-term debt proceeds or payments and dividend payments.
Net cash used in financing activities
increased
$325
between
2018
and
2017
primarily due to increased share repurchase activity, partially offset by increased proceeds from stock option exercises, driven by a higher stock price.
Net cash used in financing activities
increased
$87
between
2017
and
2016
primarily due to a decrease in cash book overdrafts as a result of payment timing differences.
Share Repurchases
In February 2017, our Board of Directors authorized a new program to repurchase up to
$500
of our outstanding common stock, through August 31, 2018. There was
$319
of unused capacity upon this program’s expiration. In August 2018, our Board of Directors authorized a new program to repurchase up to $
1,500
of our outstanding common stock, with no expiration date.
Under the February 2017 program until it expired and then under the August 2018 program, we repurchased
14.3
shares of our common stock for an aggregate purchase price of
$702
during
2018
. We had
$893
remaining in share repurchase capacity as of
February 2, 2019
. The actual
timing, price, manner and amounts
of future share repurchases, if any, will be subject to market and economic conditions and applicable SEC rules.
Borrowing Activity
During 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 Consolidated Statements of Cash Flows. With the proceeds of these new notes, we retired our
$650
senior unsecured notes that were due January 2018 (see
Note 8: Debt and Credit Facilities
in
Item 8
).
Additionally, in 2018, we fully repaid
$47
outstanding on our wholly owned subsidiary Puerto Rico’s unsecured borrowing facility (see
Note 8: Debt and Credit Facilities
in
Item 8
).
Dividends
In
2018
, we paid dividends of
$250
, or
$1.48
per share, compared with
$247
, or
$1.48
per share, in
2017
and
$256
, or
$1.48
per share, in
2016
. In determining the dividends to pay, we analyze our dividend payout ratio and dividend yield, while taking into consideration our current and projected operating performance and liquidity. Our dividend payout ratio target range is
30% to 40%
of the prior year’s net earnings.
In
February 2019
, subsequent to year end, we declared a quarterly dividend of
$0.37
per share, which will be paid on
March 26, 2019
to holders of record as of March 11, 2019.
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.
Beginning in the first quarter of fiscal 2018, we no longer adjust free cash flow for cash dividends paid. We believe this presentation is more reflective of our operating performance and more consistent with the way we manage our business, how our peers calculate free cash flows and prevailing industry practice. Prior period Free Cash Flow financial measures have been recast to conform with current period presentation.
Free Cash Flow is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, operating cash flows or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to Free Cash Flow is net cash provided by operating activities. The following is a reconciliation of net cash provided by operating activities to Free Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$1,296
|
|
|
|
$1,400
|
|
|
|
$1,658
|
|
Less: capital expenditures
|
(654
|
)
|
|
(731
|
)
|
|
(846
|
)
|
Add: proceeds from sale of credit card receivables originated at third parties
|
—
|
|
|
16
|
|
|
—
|
|
(Less) Add:
change in cash book overdrafts
|
—
|
|
|
(55
|
)
|
|
4
|
|
Free Cash Flow
|
|
$642
|
|
|
|
$630
|
|
|
|
$816
|
|
Adjusted EBITDA (Non-GAAP financial measure)
Adjusted earnings before interest, income taxes, depreciation and amortization (“EBITDA”) is our key financial metric to reflect our view of cash flow from net earnings. Adjusted EBITDA excludes significant items which are non-operating in nature in order to evaluate our core operating performance against prior periods. The financial measure calculated under GAAP which is most directly comparable to Adjusted EBITDA is net earnings.
Adjusted EBITDA is not a measure
of financial performance under
GAAP
and should be considered in addition to, and not as a substitute for
net earnings, overall change in cash or liquidity of the business as a whole. Our method of determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies. The following is a reconciliation of net earnings to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net earnings
|
|
$564
|
|
|
|
$437
|
|
|
|
$354
|
|
Add: income tax expense
|
169
|
|
|
353
|
|
|
330
|
|
Add: interest expense, net
|
104
|
|
|
136
|
|
|
121
|
|
Earnings before interest and income taxes
|
837
|
|
|
926
|
|
|
805
|
|
|
|
|
|
|
|
Add: depreciation and amortization expenses
|
669
|
|
|
666
|
|
|
645
|
|
Less: amortization of deferred property incentives
|
(79
|
)
|
|
(79
|
)
|
|
(80
|
)
|
Adjusted EBITDA
|
|
$1,427
|
|
|
|
$1,513
|
|
|
|
$1,370
|
|
Nordstrom, Inc. and subsidiaries
29
Credit Capacity and Commitments
As of
February 2, 2019
, we had total short-term borrowing capacity of
$800
. In September 2018, we renewed our existing
$800
senior unsecured revolving credit facility (“revolver”), extending the expiration from
April 2020
to
September 2023
. Our revolver contains customary representations, warranties, covenants and terms, which are substantially similar to our 2015 revolver. 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. Provided that we obtain written consent from our lenders, we have the option to increase the revolving commitment by up to $
200
, to a total of $
1,000
, and
two
options to extend the revolving commitment by one year.
Our
$800
commercial paper program allows us to use the proceeds to fund operating cash requirements. Under the terms of the commercial paper agreement, we pay a rate of interest based on, among other factors, the maturity of the issuance and market conditions. The issuance of commercial paper has the effect, while it is outstanding, of reducing available liquidity under the revolver by an amount equal to the principal amount of commercial paper.
As of
February 2, 2019
, we had no issuances outstanding under our commercial paper program and no borrowings outstanding under our revolver.
Our wholly owned subsidiary in Puerto Rico maintained a
$52
unsecured borrowing facility to support our expansion into that market. Borrowings on this facility incurred interest at an annual rate based upon
LIBOR plus 1.275%
and also incurred a fee based on any unused commitment. In 2018, we fully repaid
$47
outstanding on this facility, which was included in the current portion of long-term debt. This facility expired in the fourth quarter of 2018.
We maintain trade and standby letters of credit to facilitate our international payments. As of
February 2, 2019
, we have
$8
available and
none
outstanding under the trade letter of credit and
$15
available and
$2
outstanding under the standby letter of credit.
Plans for our Nordstrom NYC store, which we currently expect to open in October 2019, ultimately include owning a condominium interest in a mixed-use tower and leasing certain nearby properties. As of
February 2, 2019
, we had approximately
$302
of fee interest in land, which is expected to convert to the condominium interest once the store is constructed. We have committed to make future installment payments based on the developer meeting pre-established construction and development milestones. In the event that this project is not completed, the opening may be delayed and we may be subject to future losses or capital commitments in order to complete construction or to monetize our investment.
Impact of Credit Ratings
Under the terms of our revolver, any borrowings we may enter into will accrue interest for Euro-Dollar Rate Loans at a floating base rate tied to LIBOR, for Canadian Dealer Offer Rate Loans at a floating rate tied to CDOR, and for Base Rate Loans at the highest of: (i) the Euro-Dollar rate plus 100 basis points, (ii) the federal funds rate plus 50 basis points and (iii) the prime rate.
The rate depends upon the type of borrowing incurred, plus in each case an applicable margin. This applicable margin varies depending upon the credit ratings assigned to our long-term unsecured debt. At the time of this report, our long-term unsecured debt ratings, outlook and resulting applicable margin were as follows:
|
|
|
|
|
|
|
Credit Ratings
|
|
Outlook
|
|
Moody’s
|
Baa1
|
|
Stable
|
|
Standard & Poor’s
|
BBB+
|
|
Stable
|
|
|
|
|
|
|
Base Interest Rate
|
|
Applicable Margin
|
|
Euro-Dollar Rate Loan
|
LIBOR
|
|
1.03
|
%
|
Canadian Dealer Offer Rate Loan
|
CDOR
|
|
1.03
|
%
|
Base Rate Loan
|
various
|
|
0.03
|
%
|
Should the ratings assigned to our long-term unsecured debt improve, the applicable margin associated with any such borrowings may decrease, resulting in a lower borrowing cost under this facility. Should the ratings assigned to our long-term unsecured debt worsen, the applicable margin associated with our borrowings may increase, resulting in a higher borrowing cost under this facility.
Debt Covenants
The revolver requires that we maintain an adjusted debt to earnings before interest, income taxes, depreciation, amortization and rent (“EBITDAR”) leverage ratio of no more than
four
times. As of
February 2, 2019
, we were in compliance with this covenant.
Adjusted Debt to EBITDAR (Non-GAAP financial measure)
Adjusted Debt to EBITDAR is one of our key financial metrics, and we believe that our debt levels are best analyzed using this measure. Our goal is to manage debt levels to maintain an investment-grade credit rating and operate with an efficient capital structure. In evaluating our debt levels, this measure provides a reflection of our credit worthiness that could impact our credit rating and borrowing costs. We also have a debt covenant that requires an adjusted debt to EBITDAR leverage ratio of no more than
four
times.
Adjusted Debt to EBITDAR is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, debt to net earnings, net earnings, debt or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies. Estimated capitalized operating lease liability is not calculated in accordance with, or an alternative for, GAAP and should not be considered in isolation or as a substitution of our results as reported under GAAP. The financial measure calculated under GAAP which is most directly comparable to Adjusted Debt to EBITDAR is debt to net earnings. The following is a reconciliation of the components of Adjusted Debt to EBITDAR and debt to net earnings:
|
|
|
|
|
|
|
|
|
|
2018
1
|
|
|
2017
1
|
|
Debt
|
|
$2,685
|
|
|
|
$2,737
|
|
Add: estimated capitalized operating lease liability
2
|
2,009
|
|
|
2,001
|
|
Adjusted Debt
|
|
$4,694
|
|
|
|
$4,738
|
|
|
|
|
|
Net earnings
|
564
|
|
|
437
|
|
Add: income tax expense
|
169
|
|
|
353
|
|
Add: interest expense, net
|
104
|
|
|
136
|
|
Earnings before interest and income taxes
|
837
|
|
|
926
|
|
|
|
|
|
Add: depreciation and amortization expenses
|
669
|
|
|
666
|
|
Add: rent expense, net
|
251
|
|
|
250
|
|
Add: non-cash acquisition-related charges
|
—
|
|
|
1
|
|
Adjusted EBITDAR
|
|
$1,757
|
|
|
|
$1,843
|
|
|
|
|
|
Debt to Net Earnings
3
|
4.8
|
|
|
6.3
|
|
Adjusted Debt to EBITDAR
3
|
2.7
|
|
|
2.6
|
|
1
The components of Adjusted Debt are as of
February 2, 2019
and
February 3, 2018
, while the components of Adjusted EBITDAR are for the 12 months ended
February 2, 2019
and
February 3, 2018
.
2
Based upon the estimated lease liability as of the end of the period, calculated as the trailing 12 months of rent expense multiplied by eight. The multiple of eight times rent expense is a commonly used method of estimating the debt we would record for our leases that are classified as operating if they had met the criteria for a capital lease or we had purchased the property. We do not expect the adoption of the new Lease Standard to have a material impact on our Adjusted Debt to EBITDAR (see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
in
Item 8
).
3
Results for the 12 fiscal months ended
February 2, 2019
include lower income tax expense primarily associated with the Tax Act and a
$72
unfavorable impact related to the Estimated Non-recurring Charge (see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
in
Item 8
). Results for the 12 fiscal months ended
February 3, 2018
include a
$42
unfavorable impact related to the Tax Act.
Nordstrom, Inc. and subsidiaries
31
Contractual Obligations
The following table summarizes our contractual obligations and the expected effect on our liquidity and cash flows as of
February 2, 2019
. We expect to fund these commitments primarily with operating cash flows generated in the normal course of business and credit available to us under existing and potential future facilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1 – 3 years
|
|
|
3 – 5 years
|
|
|
More than
5 years
|
|
Long-term debt
|
|
$4,596
|
|
|
|
$147
|
|
|
|
$1,243
|
|
|
|
$188
|
|
|
|
$3,018
|
|
Operating leases
|
2,609
|
|
|
322
|
|
|
607
|
|
|
520
|
|
|
1,160
|
|
Purchase obligations
|
1,865
|
|
|
1,733
|
|
|
123
|
|
|
9
|
|
|
—
|
|
Other long-term liabilities
|
363
|
|
|
59
|
|
|
60
|
|
|
43
|
|
|
201
|
|
Total
|
|
$9,433
|
|
|
|
$2,261
|
|
|
|
$2,033
|
|
|
|
$760
|
|
|
|
$4,379
|
|
Included in the required debt repayments disclosed above are estimated total interest payments of
$1,822
as of
February 2, 2019
, payable over the remaining life of the debt.
The operating lease obligations in the table above do not include payments for operating expenses that are required by most of our lease agreements. Such expenses, which include common area charges, real estate taxes and other executory costs, totaled
$138
in
2018
,
$121
in
2017
and
$112
in
2016
. In addition, some of our leases require additional rental payments based on a percentage of our sales, referred to as “percentage rent.” Percentage rent, which is also excluded from the obligations in the table above, was
$9
in
2018
,
$11
in
2017
and
$12
in
2016
.
Purchase obligations primarily consist of inventory purchase orders and capital expenditure commitments. Capital expenditure commitments include Nordstrom NYC.
Other long-term liabilities consist of workers’ compensation and other liability insurance reserves and postretirement benefits. The payment amounts presented above were estimated based on historical payment trends. Other long-term liabilities not requiring cash payments, such as deferred property incentives and deferred revenue, were excluded from the table above. Also excluded from the table above are unrecognized tax benefits of
$33
, as we are unable to reasonably estimate the timing of future cash payments, if any, for these liabilities.
Off-Balance Sheet Arrangements
Pursuant to the program agreement with TD, we offer and administer a loyalty program and perform other account servicing functions (see
Note 3: Credit Card Receivable Transaction
in
Item 8
). Credit card receivables serviced under this contract are
$3,651
as of
February 2, 2019
.
Other than items noted in the paragraph above, in addition to operating leases entered into in the normal course of business and the development of our
Nordstrom Men’s Store NYC and Nordstrom NYC
, we had no material off-balance sheet arrangements during
2018
.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The following discussion highlights the estimates we believe are critical and should be read in conjunction with the Notes to Consolidated Financial Statements in
Item 8
. Our management has discussed the development and selection of these critical accounting estimates with the Audit & Finance Committee of our Board of Directors, and the Audit & Finance Committee has reviewed our disclosures that follow.
Revenue Recognition
During the first quarter of 2018, we adopted the new Revenue Standard using the modified retrospective adoption method (see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
in
Item 8
). Results beginning in the first quarter of 2018 are presented under the new Revenue Standard, while prior period amounts are not adjusted.
We recognize sales revenue net of estimated returns and excluding sales taxes. Revenue from sales to customers shipped from our Supply Chain Network facilities, stores and directly from our vendors (“shipped revenues”), which includes shipping revenue when applicable, is recognized at shipping point, the point in time where control has transferred to the customer. Costs to ship orders to customers are expensed as a fulfillment activity at shipping point, commissions from sales at our Full-Price stores are expensed at the point of sale and both are recorded in selling, general and administrative expenses. Prior to 2018, shipped revenues were recognized upon estimated receipt by the customer and we recorded an estimated in-transit allowance for orders shipped prior to a period’s end, but not yet received by the customer.
We reduce sales and cost of sales by an estimate of customer merchandise returns, which is calculated based on historical return patterns, and record a sales return allowance and an estimated returns asset. Our sales return allowance is classified in other current liabilities and our estimated returns asset, calculated based on the cost of merchandise sold, is classified in prepaid expenses and other on the Consolidated Balance Sheet. Due to the seasonality of our business, these balances typically increase with higher sales occurring in the last month of a period, such as the Anniversary Sale typically at the end of the second quarter, and decrease in the following period. Prior to 2018, the estimated cost of merchandise returned was netted with our sales return allowance in other current liabilities.
Although we believe we have sufficient current and historical knowledge to record reasonable estimates of sales returns, actual returns could differ from recorded amounts. In the past three years, there were no significant changes in customer return behavior and we have made no material changes to our estimates included in the calculations of our sales return allowance. A
10%
change in the sales return allowance net of the estimated returns asset would have had a
$15
impact on our net earnings for the year ended
February 2, 2019
.
As our customers earn points and Notes in The Nordy Club, a portion of underlying sales revenue is deferred based on an estimated stand-alone selling price of points, Notes and other loyalty benefits, such as alterations. We recognize the revenue and related cost of sale when the Notes are ultimately redeemed and reduce our contract liability. We include the deferred revenue in other current liabilities on the Consolidated Balance Sheet. We record breakage revenue of unused points and unredeemed Notes based on expected customer redemption. We estimate, based on historical usage, that
6%
of Notes will be unredeemed and recognized as revenue. Other benefits of the loyalty program, including shopping and fashion events, are recorded in selling, general and administrative expenses as these are not a material right of the program.
Merchandise Inventories
Merchandise inventories are generally stated at the lower of cost or market value using the retail inventory method. Under the retail method, the valuation of inventories is determined by applying a calculated cost-to-retail ratio to the retail value of ending inventory. The value of our inventory on the balance sheet is then reduced by a charge to cost of sales for retail inventory markdowns taken on the selling price. To determine if the retail value of our inventory should be marked down, we consider current and anticipated demand, customer preferences, age of the merchandise and fashion trends.
Inherent in the retail inventory method are certain management judgments that may affect the ending inventory valuation as well as gross profit.
We take physical inventory counts and adjust our records accordingly. Following each physical inventory cycle, we adjust shrink to actual results and an estimate is recorded for shrink from the count date to year end. We evaluate and determine our estimated shrinkage rate, which is based on a percentage of sales, using the most recent physical inventory and historical results.
Impairment of Long-Lived Assets
When facts and circumstances indicate that the carrying values of long-lived assets, including buildings, equipment and amortizable intangible assets, may be impaired, we perform an evaluation of recoverability by comparing the carrying values of the net assets to their related projected undiscounted future cash flows, in addition to other quantitative and qualitative analyses.
Land, property and equipment are grouped at the lowest level at which there are identifiable cash flows when assessing impairment. Cash flows for our retail store assets are identified at the individual store level, while our intangible assets associated with HauteLook and Trunk Club are identified at their respective reporting unit levels.
Our estimates are subject to uncertainties and may be impacted by various external factors such as economic conditions and market competition. While we believe the inputs and assumptions utilized in our analyses of future cash flows are reasonable, events or circumstances may change, which could cause us to revise these estimates.
Income Taxes
We use the asset and liability method of accounting for income taxes. Using this method, deferred tax assets and liabilities are recorded based on differences between the financial reporting and tax basis of assets and liabilities and for operating loss and tax credit carryforwards. The deferred tax assets and liabilities are calculated using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, it is determined that some portion of the tax benefit will not be realized.
We regularly evaluate the likelihood of realizing the benefit for income tax positions we have taken in various federal, state and foreign filings by considering all relevant facts, circumstances and information available. If we believe it is more likely than not that our position will be sustained, we recognize a benefit at the largest amount that we believe is cumulatively greater than 50% likely to be realized.
Our unrecognized tax benefit was
$30
as of
February 2, 2019
, and
$31
as of
February 3, 2018
.
Interest and penalties related to income tax matters are classified as a component of income tax expense.
Nordstrom, Inc. and subsidiaries
33
Income taxes require significant management judgment regarding applicable statutes and their related interpretation, the status of various income tax audits and our particular facts and circumstances. Also, as audits are completed or statutes of limitations lapse, it may be necessary to record adjustments to our taxes payable, deferred taxes, tax reserves or income tax expense. Such adjustments did not materially impact our effective income tax rate in
2018
,
2017
or
2016
.
In December 2017, the Tax Act was signed into law.
In accordance with SEC Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
, we made a reasonable estimate of the Tax Act’s impact and provisionally recorded this estimate in our 2017 results. As of
February 2, 2019
, we have completed our accounting for the impacts of the Tax Act, resulting in no material changes to previously recorded provisional amounts (see
Note 14: Income Taxes
in Item 8).
RECENT ACCOUNTING PRONOUNCEMENTS
See
Note 1: Nature of Operations and Summary of Significant Accounting Policies
in
Item 8
for a discussion of recent accounting pronouncements and the impact these standards are anticipated to have on our results of operations, liquidity or capital resources.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
(Dollars in millions)
INTEREST RATE RISK
For our long-term debt of $
2,685
, our exposure to interest rate risk is primarily limited to changes in fair value. As our debt is primarily fixed-rate, changes in interest rates do not significantly impact our cash flows. However, changes in interest rates increase or decrease the fair value of our debt, depending on whether market rates are lower or higher than our fixed rates. In addition, our
$500
term loan will mature in 2020, and if we refinance this debt, we are at risk of interest rate changes with respect to any difference between the existing interest rate and the interest rate on its replacement. As of
February 2, 2019
, the fair value of our long-term debt was
$2,692
(see
Note 8: Debt and Credit Facilities
and
Note 9: Fair Value Measurements
in
Item 8
).
We are exposed to interest rate risk primarily from changes in short-term interest rates. Interest rate fluctuations can affect our interest income and interest expense. As of
February 2, 2019
, we had cash and cash equivalents of
$957
which generate interest income at variable rates.
FOREIGN CURRENCY EXCHANGE RISK
The majority of our revenues, expenses and capital expenditures are transacted in U.S. Dollars. Our U.S. operation periodically enters into merchandise purchase orders denominated in British Pounds or Euros. From time to time, we may use forward contracts to hedge against fluctuations in foreign currency prices. As of
February 2, 2019
, our outstanding forward contracts did not have a material impact on our Consolidated Financial Statements.
We have
six
full-line stores and
six
Nordstrom Rack stores in Canada.
The functional currency of our Canadian operation is the Canadian Dollar. We translate assets and liabilities into U.S. Dollars using the exchange rate in effect at the balance sheet date, while we translate revenues and expenses using a weighted-average exchange rate for the period. We record these translation adjustments as a component of accumulated other comprehensive loss on the Consolidated Balance Sheets
in
Item 8
. Our Canadian operation enters into merchandise purchase orders denominated in U.S. Dollars for some portion of its inventory. As sales in Canada are denominated in the Canadian Dollar, gross profit for our Canadian operation can be impacted by foreign currency fluctuations.
In addition, our U.S. operation incurs certain expenditures denominated in Canadian Dollars and our Canadian operation incurs certain expenditures denominated in U.S. Dollars. This activity results in transaction gains and losses that arise from exchange rate fluctuations, which are recorded as gains or losses in the Consolidated Statements of Earnings
in
Item 8
. As of
February 2, 2019
,
activities associated with foreign currency exchange risk have not had a material impact on our Consolidated Financial Statements.
Item 8: Financial Statements and Supplementary Data
.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Nordstrom, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Nordstrom, Inc. and subsidiaries (the “Company”) as of
February 2, 2019
and
February 3, 2018
, and the related consolidated statements of earnings, comprehensive earnings, shareholders’ equity, and cash flows for each of the three years in the period ended
February 2, 2019
, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
February 2, 2019
and
February 3, 2018
, and the results of its operations and its cash flows for each of the three years in the period ended
February 2, 2019
, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of
February 2, 2019
, based on the criteria established in
Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 18, 2019
, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company
’
s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Seattle, Washington
March 18, 2019
We have served as the Company
’
s auditor since 1970
Nordstrom, Inc. and subsidiaries
35
Nordstrom, Inc.
Consolidated Statements of Earnings
(In millions except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net sales
|
$15,480
|
|
|
|
$15,137
|
|
|
|
$14,498
|
|
Credit card revenues, net
|
380
|
|
|
341
|
|
|
259
|
|
Total revenues
|
15,860
|
|
|
15,478
|
|
|
14,757
|
|
Cost of sales and related buying and occupancy costs
|
(10,155
|
)
|
|
(9,890
|
)
|
|
(9,440
|
)
|
Selling, general and administrative expenses
|
(4,868
|
)
|
|
(4,662
|
)
|
|
(4,315
|
)
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
(197
|
)
|
Earnings before interest and income taxes
|
837
|
|
|
926
|
|
|
805
|
|
Interest expense, net
|
(104
|
)
|
|
(136
|
)
|
|
(121
|
)
|
Earnings before income taxes
|
733
|
|
|
790
|
|
|
684
|
|
Income tax expense
|
(169
|
)
|
|
(353
|
)
|
|
(330
|
)
|
Net earnings
|
|
$564
|
|
|
|
$437
|
|
|
|
$354
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
Basic
|
$3.37
|
|
|
|
$2.62
|
|
|
|
$2.05
|
|
Diluted
|
$3.32
|
|
|
|
$2.59
|
|
|
|
$2.02
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
Basic
|
167.3
|
|
|
166.8
|
|
|
173.2
|
|
Diluted
|
170.0
|
|
|
168.9
|
|
|
175.6
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
Nordstrom, Inc.
Consolidated Statements of Comprehensive Earnings
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net earnings
|
|
$564
|
|
|
|
$437
|
|
|
|
$354
|
|
Postretirement plan adjustments, net of tax of ($5), $2 and ($1)
|
14
|
|
|
(6
|
)
|
|
1
|
|
Foreign currency translation adjustment
|
(17
|
)
|
|
20
|
|
|
14
|
|
Comprehensive net earnings
|
|
$561
|
|
|
|
$451
|
|
|
|
$369
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
Nordstrom, Inc.
Consolidated Balance Sheets
(In millions)
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
|
February 3, 2018
|
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
|
$957
|
|
|
|
$1,181
|
|
Accounts receivable, net
|
148
|
|
|
145
|
|
Merchandise inventories
|
1,978
|
|
|
2,027
|
|
Prepaid expenses and other
|
291
|
|
|
150
|
|
Total current assets
|
3,374
|
|
|
3,503
|
|
|
|
|
|
Land, property and equipment, net
|
3,921
|
|
|
3,939
|
|
Goodwill
|
249
|
|
|
238
|
|
Other assets
|
342
|
|
|
435
|
|
Total assets
|
|
$7,886
|
|
|
|
$8,115
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
|
$1,469
|
|
|
|
$1,409
|
|
Accrued salaries, wages and related benefits
|
580
|
|
|
578
|
|
Other current liabilities
|
1,324
|
|
|
1,246
|
|
Current portion of long-term debt
|
8
|
|
|
56
|
|
Total current liabilities
|
3,381
|
|
|
3,289
|
|
|
|
|
|
Long-term debt, net
|
2,677
|
|
|
2,681
|
|
Deferred property incentives, net
|
457
|
|
|
495
|
|
Other liabilities
|
498
|
|
|
673
|
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
Common stock, no par value: 1,000 shares authorized; 157.6 and 167.0 shares issued and outstanding
|
3,048
|
|
|
2,816
|
|
Accumulated deficit
|
(2,138
|
)
|
|
(1,810
|
)
|
Accumulated other comprehensive loss
|
(37
|
)
|
|
(29
|
)
|
Total shareholders’ equity
|
873
|
|
|
977
|
|
Total liabilities and shareholders’ equity
|
|
$7,886
|
|
|
|
$8,115
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
Nordstrom, Inc. and subsidiaries
37
Nordstrom, Inc.
Consolidated Statements of Shareholders’ Equity
(In millions except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
—
|
|
|
—
|
|
|
354
|
|
|
—
|
|
|
354
|
|
Other comprehensive earnings
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
15
|
|
Dividends ($1.48 per share)
|
|
—
|
|
|
—
|
|
|
(256
|
)
|
|
—
|
|
|
(256
|
)
|
Issuance of common stock under stock compensation plans
|
|
2.1
|
|
|
83
|
|
|
—
|
|
|
—
|
|
|
83
|
|
Stock-based compensation
|
|
0.3
|
|
|
85
|
|
|
—
|
|
|
—
|
|
|
85
|
|
Repurchase of common stock
|
|
(5.9
|
)
|
|
—
|
|
|
(282
|
)
|
|
—
|
|
|
(282
|
)
|
Balance at January 28, 2017
|
|
170.0
|
|
|
2,707
|
|
|
(1,794
|
)
|
|
(43
|
)
|
|
870
|
|
Net earnings
|
|
—
|
|
|
—
|
|
|
437
|
|
|
—
|
|
|
437
|
|
Other comprehensive earnings
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
14
|
|
Dividends ($1.48 per share)
|
|
—
|
|
|
—
|
|
|
(247
|
)
|
|
—
|
|
|
(247
|
)
|
Issuance of common stock under stock compensation plans
|
|
1.1
|
|
|
39
|
|
|
—
|
|
|
—
|
|
|
39
|
|
Stock-based compensation
|
|
0.5
|
|
|
70
|
|
|
—
|
|
|
—
|
|
|
70
|
|
Repurchase of common stock
|
|
(4.6
|
)
|
|
—
|
|
|
(206
|
)
|
|
—
|
|
|
(206
|
)
|
Balance at February 3, 2018
|
|
167.0
|
|
|
2,816
|
|
|
(1,810
|
)
|
|
(29
|
)
|
|
977
|
|
Cumulative effect of adopted accounting standards
|
|
—
|
|
|
—
|
|
|
60
|
|
|
(5
|
)
|
|
55
|
|
Net earnings
|
|
—
|
|
|
—
|
|
|
564
|
|
|
—
|
|
|
564
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
Dividends ($1.48 per share)
|
|
—
|
|
|
—
|
|
|
(250
|
)
|
|
—
|
|
|
(250
|
)
|
Issuance of common stock under stock compensation plans
|
|
4.0
|
|
|
163
|
|
|
—
|
|
|
—
|
|
|
163
|
|
Stock-based compensation
|
|
0.9
|
|
|
69
|
|
|
—
|
|
|
—
|
|
|
69
|
|
Repurchase of common stock
|
|
(14.3
|
)
|
|
—
|
|
|
(702
|
)
|
|
—
|
|
|
(702
|
)
|
Balance at February 2, 2019
|
|
157.6
|
|
|
|
$3,048
|
|
|
|
($2,138
|
)
|
|
|
($37
|
)
|
|
|
$873
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
Nordstrom, Inc.
Consolidated Statements of Cash Flows
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Operating Activities
|
|
|
|
|
|
Net earnings
|
|
$564
|
|
|
|
$437
|
|
|
|
$354
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization expenses
|
669
|
|
|
666
|
|
|
645
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
197
|
|
Amortization of deferred property incentives and other, net
|
(75
|
)
|
|
(82
|
)
|
|
(76
|
)
|
Deferred income taxes, net
|
(34
|
)
|
|
11
|
|
|
(15
|
)
|
Stock-based compensation expense
|
90
|
|
|
77
|
|
|
91
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
(4
|
)
|
|
1
|
|
|
(3
|
)
|
Proceeds from sale of credit card receivables originated at Nordstrom
|
—
|
|
|
39
|
|
|
—
|
|
Merchandise inventories
|
15
|
|
|
(62
|
)
|
|
31
|
|
Prepaid expenses and other assets
|
(8
|
)
|
|
(21
|
)
|
|
100
|
|
Accounts payable
|
12
|
|
|
77
|
|
|
16
|
|
Accrued salaries, wages and related benefits
|
1
|
|
|
121
|
|
|
38
|
|
Other current liabilities
|
15
|
|
|
48
|
|
|
181
|
|
Deferred property incentives
|
53
|
|
|
64
|
|
|
65
|
|
Other liabilities
|
(2
|
)
|
|
24
|
|
|
34
|
|
Net cash provided by operating activities
|
1,296
|
|
|
1,400
|
|
|
1,658
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
Capital expenditures
|
(654
|
)
|
|
(731
|
)
|
|
(846
|
)
|
Proceeds from sale of credit card receivables originated at third parties
|
—
|
|
|
16
|
|
|
—
|
|
Other, net
|
1
|
|
|
31
|
|
|
55
|
|
Net cash used in investing activities
|
(653
|
)
|
|
(684
|
)
|
|
(791
|
)
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
Proceeds from long-term borrowings, net of discounts
|
—
|
|
|
635
|
|
|
—
|
|
Principal payments on long-term borrowings
|
(56
|
)
|
|
(661
|
)
|
|
(10
|
)
|
(Decrease) increase in cash book overdrafts
|
—
|
|
|
(55
|
)
|
|
4
|
|
Cash dividends paid
|
(250
|
)
|
|
(247
|
)
|
|
(256
|
)
|
Payments for repurchase of common stock
|
(678
|
)
|
|
(211
|
)
|
|
(277
|
)
|
Proceeds from issuances under stock compensation plans
|
163
|
|
|
39
|
|
|
83
|
|
Tax withholding on share-based awards
|
(20
|
)
|
|
(7
|
)
|
|
(5
|
)
|
Other, net
|
(26
|
)
|
|
(35
|
)
|
|
6
|
|
Net cash used in financing activities
|
(867
|
)
|
|
(542
|
)
|
|
(455
|
)
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
(224
|
)
|
|
174
|
|
|
412
|
|
Cash and cash equivalents at beginning of year
|
1,181
|
|
|
1,007
|
|
|
595
|
|
Cash and cash equivalents at end of year
|
|
$957
|
|
|
|
$1,181
|
|
|
|
$1,007
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
Income taxes, net of refunds
|
$280
|
|
|
|
$363
|
|
|
|
$112
|
|
Interest, net of capitalized interest
|
118
|
|
|
143
|
|
|
134
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
Nordstrom, Inc. and subsidiaries
39
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Founded in
1901
as a retail shoe business in Seattle, Washington, Nordstrom, Inc. is now a leading fashion retailer that offers customers an extensive selection of high-quality fashion brands focused on apparel, shoes, cosmetics and accessories for women, men, young adults and children. This breadth of merchandise allows us to serve a wide range of customers who appreciate quality fashion and a superior shopping experience. We offer brand-name and private label merchandise through multiple retail channels, including
115
Nordstrom U.S. full-line stores and Nordstrom.com,
six
Canada full-line stores,
244
U.S. and Canadian Nordstrom Rack stores, Nordstromrack.com/HauteLook,
three
Jeffrey boutiques,
two
Last Chance clearance stores,
six
Trunk Club clubhouses and TrunkClub.com, and
three
Nordstrom Locals. Our stores are located in
40
states in the U.S.,
three
provinces in Canada and Puerto Rico.
Fiscal Year
We operate on a 52/53-week fiscal year ending on the Saturday closest to January 31st.
References to 2018 and all years except 2017 within this document are based on a 52-week fiscal year, while 2017 is based on a 53-week fiscal year.
Principles of Consolidation
The Consolidated Financial Statements include the balances of Nordstrom, Inc. and its subsidiaries. All intercompany transactions and balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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 during the reporting period. Uncertainties regarding such estimates and assumptions are inherent in the preparation of financial statements and actual results may differ from these estimates and assumptions. Our most significant accounting judgments and estimates include revenue recognition, inventory valuation, long-lived asset recoverability and income taxes.
Revenue
During the first quarter of fiscal 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers,
and all related amendments (“Revenue Standard”),
using the modified retrospective adoption method. Results for reporting periods beginning in the first quarter of 2018 are presented under the new Revenue Standard while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Accounting Standards Codification 605 —
Revenue Recognition
. Upon adoption, we recorded a net cumulative effect adjustment of
$55
which decreased beginning accumulated deficit.
Net Sales
We recognize sales revenue net of estimated returns and excluding sales taxes. Revenue from sales to customers shipped from our Supply Chain Network facilities, stores and directly from our vendors (“shipped revenues”), which includes shipping revenue when applicable, is recognized at shipping point, the point in time where control has transferred to the customer. Costs to ship orders to customers are expensed as a fulfillment activity at shipping point, commissions from sales at our Full-Price stores are expensed at the point of sale and both are recorded in selling, general and administrative expenses. Prior to 2018, shipped revenues were recognized upon estimated receipt by the customer and we recorded an estimated in-transit allowance for orders shipped prior to a period’s end, but not yet received by the customer.
We reduce sales and cost of sales by an estimate of customer merchandise returns, which is calculated based on historical return patterns, and record a sales return allowance and an estimated returns asset. Our sales return allowance is classified in other current liabilities and our estimated returns asset, calculated based on the cost of merchandise sold, is classified in prepaid expenses and other on the Consolidated Balance Sheet. Due to the seasonality of our business, these balances typically increase with higher sales occurring in the last month of a period, such as the Anniversary Sale typically at the end of the second quarter, and decrease in the following period. Prior to 2018, the estimated cost of merchandise returned was netted with our sales return allowance in other current liabilities.
Loyalty Program
We evolved our customer loyalty program with the launch of The Nordy Club in October 2018, which incorporates a traditional point system and the favorite benefits of our previous program, while providing customers exclusive access to products and events, enhanced services, personalized experiences and more convenient ways to shop. Customers accumulate points based on their level of spending and type of participation. Upon reaching certain point thresholds, customers receive Nordstrom Notes (“Notes”), which can be redeemed for goods or services offered at Nordstrom full-line stores, Nordstrom.com, Nordstrom Rack and Nordstromrack.com/HauteLook. Nordstrom cardmembers can also earn rewards at Trunk Club. The Nordy Club member benefits will vary based on the level of customer spend, and include Bonus Points days and shopping and fashion events.
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
We offer customers access to a variety of payment products and services, including a selection of Nordstrom-branded Visa® credit cards in the U.S. and Canada, as well as a Nordstrom-branded private label credit card for Nordstrom purchases. When customers use a Nordstrom-branded credit or debit card, they also participate in The Nordy Club and receive additional benefits, which can vary depending on the level of spend, including early access to the Anniversary Sale, Nordstrom to You (an in-home stylist) and incremental accumulation of points toward Notes.
As our customers earn points and Notes in The Nordy Club, a portion of underlying sales revenue is deferred based on an estimated stand-alone selling price of points, Notes and other loyalty benefits, such as alterations. We recognize the revenue and related cost of sale when the Notes are ultimately redeemed and reduce our contract liability. We include the deferred revenue in other current liabilities on the Consolidated Balance Sheet. We record breakage revenue of unused points and unredeemed Notes based on expected customer redemption. We estimate, based on historical usage, that
6%
of Notes will be unredeemed and recognized as revenue. Other benefits of the loyalty program, including shopping and fashion events, are recorded in selling, general and administrative expenses as these are not a material right of the program.
As of
February 2, 2019
, our outstanding performance obligation for The Nordy Club, which consists primarily of unredeemed points and Notes at retail value under the new Revenue Standard was
$159
. Almost all Notes are redeemed within approximately
six months
of issuance. Prior to 2018, we estimated the net cost of Notes to be issued and redeemed and recorded this cost as rewards points were accumulated. This cost, as well as reimbursed alterations, was recorded in cost of sales as we provided customers with products and services for these rewards. Our outstanding loyalty program liabilities as of
February 3, 2018
were
$69
, recorded at cost before adoption of the new Revenue Standard.
Credit Card Revenues, net
Although the primary purpose of offering our credit cards is to foster greater customer loyalty and drive more sales, we also receive credit card revenue through our program agreement with TD,
whereby TD is the exclusive issuer of our consumer credit cards and we perform account servicing functions.
We completed the sale of a substantial majority of our U.S. Visa and private label credit card portfolio to TD in 2015, and in November 2017, we sold the remaining balances to TD, which consisted of employee credit card receivables for the U.S. Visa and Nordstrom private label credit cards (see
Note 3: Credit Card Receivable Transaction
). Credit card revenues, net include our portion of the ongoing credit card revenue, net of credit losses, pursuant to our program agreement with TD. In 2017 and 2016, we also recorded asset amortization and deferred revenue recognition associated with the assets and liabilities recorded as part of the initial transaction to sell our U.S. Visa and private label credit card portfolio to TD.
Upon adoption of the new Revenue Standard, the remaining unamortized balances of the investment in contract asset and deferred revenue associated with the sale of the credit card receivables were eliminated as part of a cumulative-effect adjustment, reducing the opening balance of accumulated deficit for 2018. As a result, the asset amortization and deferred revenue recognition are no longer recorded in credit card revenues, net. Prior to 2018, the investment in contract asset was classified in prepaid expenses and other and other assets, while the deferred revenue was classified in other current liabilities and other liabilities on the Consolidated Balance Sheet.
Gift Cards
We record deferred revenue from the sale of gift cards at the time of purchase. As gift cards are redeemed, we recognize revenue and reduce our contract liability. Although our gift cards do not have an expiration date, we include this deferred revenue in other current liabilities on the Consolidated Balance Sheet as customers can redeem gift cards at any time.
As of
February 2, 2019
, our outstanding performance obligation for unredeemed gift cards was
$389
. Almost all gift cards are redeemed within
two years
of issuance. We record breakage revenue on unused gift cards based on expected customer redemption. We estimate, based on historical usage, that
2%
will be unredeemed and recognized as revenue. Breakage income was
$14
in
2018
. Prior to 2018, gift card breakage was recorded in selling, general and administrative expenses and was estimated based on when redemption was considered remote. Breakage income was
$16
and
$12
in
2017
and
2016
. Outstanding gift card liabilities was
$425
as of
February 3, 2018
.
Cost of Sales
Cost of sales primarily includes the purchase cost of inventory sold (net of vendor allowances) and in-bound freight expense.
Buying and Occupancy Costs
Buying costs consist primarily of compensation and other costs incurred by our merchandising and product development groups. Occupancy costs include rent, depreciation, property taxes and facility operating costs of our retail, corporate center and Supply Chain Network facilities.
Nordstrom, Inc. and subsidiaries
41
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
Rent
We recognize minimum rent expense, net of developer reimbursements, on a straight-line basis over the minimum lease term from the time that we control the leased property. For scheduled rent escalation clauses during the lease terms, we record minimum rent expense on a straight-line basis over the terms of the leases, with the adjustments accrued as current and noncurrent deferred rent and included in other current liabilities and other liabilities on our Consolidated Balance Sheet. Contingent rental payments, typically based on a percentage of sales, are recognized in rent expense when payment of the contingent rent is probable.
We receive incentives from developers to construct stores in certain developments. At the end of
2018
and
2017
, liabilities of
$452
and
$485
were recorded within deferred property incentives, net on the Consolidated Balance Sheets and were recognized as a reduction of rent expense on a straight-line basis over the lease terms.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of compensation and benefit costs, marketing, supply chain and technology.
Estimated Non-recurring Charge
We recognized an estimated non-recurring credit-related charge (“Estimated Non-recurring Charge”) of
$72
, or
$49
net of tax, during the third quarter of 2018, resulting from some delinquent Nordstrom credit card accounts being charged higher interest in error. We estimate that less than
4%
of Nordstrom cardmembers will receive a cash refund or credit to outstanding balances, with most receiving less than
one hundred
dollars.
We have taken action, including the appropriate steps to address this issue and recorded an estimated charge representing our costs through 2018, which are comprised primarily of amounts we intend to refund to impacted cardmembers. The Estimated Non-recurring Charge increased our selling, general and administrative expenses on our Consolidated Statement of Earnings and other current liabilities on our Consolidated Balance Sheet. Of the
$72
Estimated Non-recurring Charge, approximately
$16
is a prior period misstatement recognized in the third quarter of 2018. As this out of period adjustment is not material to previously reported amounts in any prior periods, we recorded it all in the third quarter of 2018 instead of revising prior periods presented.
Advertising
Advertising production costs for internet, magazines, store events and other media are expensed the first time the advertisement is run. Online marketing costs are expensed when incurred. Total advertising expenses, net of vendor allowances, of
$246
,
$261
and
$241
in
2018
,
2017
and
2016
were included in selling, general and administrative expenses.
Vendor Allowances
We receive allowances from merchandise vendors for cosmetic expenses, purchase price adjustments, cooperative advertising programs and various other expenses. Allowances for cosmetic expenses are recorded in selling, general and administrative expenses as a reduction of the related costs when incurred. Purchase price adjustments are recorded as a reduction of cost of sales at the point they have been earned and the related merchandise has been marked down or sold. Allowances for cooperative advertising programs and other expenses are recorded in selling, general and administrative expenses as a reduction of the related costs when incurred. Vendor allowances earned are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Cosmetic expenses
|
|
$149
|
|
|
|
$159
|
|
|
|
$166
|
|
Purchase price adjustments
|
180
|
|
|
184
|
|
|
179
|
|
Cooperative advertising
|
115
|
|
|
107
|
|
|
114
|
|
Other
|
6
|
|
|
7
|
|
|
6
|
|
Total vendor allowances
|
|
$450
|
|
|
|
$457
|
|
|
|
$465
|
|
Shipping and Handling Costs
Our shipping and handling costs include payments to third-party shippers and costs to hold, move and prepare merchandise for shipment. These costs do not include in-bound freight to our Supply Chain Network facilities, which we include in the cost of our inventory. Shipping and handling costs of
$589
,
$523
and
$453
in
2018
,
2017
and
2016
were included in selling, general and administrative expenses.
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
Stock-Based Compensation
We grant stock-based awards under our 2010 Equity Incentive Plan (“2010 Plan”) and 2002 Nonemployee Director Stock Incentive Plan (“2002 Plan”), and employees may purchase our stock at a discount under our Employee Stock Purchase Plan (“ESPP”). We predominantly recognize stock-based compensation expense related to stock-based awards at their estimated grant date fair value, recorded on a straight-line basis over the requisite service period. Compensation expense for certain award holders is accelerated based upon age and years of service. The total compensation expense is reduced by actual forfeitures as they occur over the vesting period of the awards.
We estimate the grant date fair value of stock options using the Binomial Lattice option valuation model. The fair value of restricted stock is determined based on the number of shares granted and the quoted price of our common stock on the date of grant, less the estimated present value of dividends over the vesting period. Performance share units granted are classified as equity and the fair value is determined using the Monte-Carlo valuation model.
New Store Opening Costs
Non-capital expenditures associated with opening new stores, including marketing expenses, relocation expenses and occupancy costs, are charged to expense as incurred. These costs are included in both buying and occupancy costs and selling, general and administrative expenses, according to their nature as disclosed above.
Income Taxes
We use the asset and liability method of accounting for income taxes. Using this method, deferred tax assets and liabilities are recorded based on differences between the financial reporting and tax basis of assets and liabilities and for operating loss and tax credit carryforwards. The deferred tax assets and liabilities are calculated using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, it is determined that some portion of the tax benefit will not be realized.
We regularly evaluate the likelihood of realizing the benefit for income tax positions we have taken in various federal, state and foreign filings by considering all relevant facts, circumstances and information available. If we believe it is more likely than not that our position will be sustained, we recognize a benefit at the largest amount that we believe is cumulatively greater than 50% likely to be realized.
Interest and penalties related to income tax matters are classified as a component of income tax expense.
Income taxes require significant management judgment regarding applicable statutes and their related interpretation, the status of various income tax audits and our particular facts and circumstances. Also, as audits are completed or statutes of limitations lapse, it may be necessary to record adjustments to our taxes payable, deferred taxes, tax reserves or income tax expense.
In December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law.
Among numerous other provisions, the Tax Act significantly revised the U.S. federal corporate income tax by reducing the statutory rate from
35%
to
21%
.
In accordance with SEC Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
, we made a reasonable estimate of the Tax Act’s impact and provisionally recorded this estimate in our 2017 results. As of February 2, 2019, we completed our accounting for the impacts of the Tax Act, resulting in no material changes to previously recorded provisional amounts.
Comprehensive Net Earnings
Comprehensive net earnings consist of net earnings and other gains and losses affecting equity that are excluded from net earnings. These consist of postretirement plan adjustments, net of related income tax effects, and foreign currency translation adjustments.
Cash Equivalents
Cash equivalents are short-term investments with a maturity of three months or less from the date of purchase and are carried at cost, which approximates fair value. At the end of
2018
and
2017
, checks not yet presented for payment drawn in excess of our bank deposit balances were
$102
and
$101
and included within accounts payable on our Consolidated Balance Sheets.
Accounts Receivable
Accounts receivable, net includes receivables from non-Nordstrom-branded credit and debit cards.
Nordstrom, Inc. and subsidiaries
43
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
Merchandise Inventories
Merchandise inventories are generally stated at the lower of cost or market value using the retail inventory method. Under the retail method, the valuation of inventories is determined by applying a calculated cost-to-retail ratio to the retail value of ending inventory. The value of our inventory on the balance sheet is then reduced by a charge to cost of sales for retail inventory markdowns taken on the selling price. To determine if the retail value of our inventory should be marked down, we consider current and anticipated demand, customer preferences, age of the merchandise and fashion trends.
We record obsolescence based on historical trends and specific identification.
We take physical inventory counts and adjust our records accordingly. Following each physical inventory cycle, we adjust shrink to actual results and an estimate is recorded for shrink from the count date to year end. We evaluate and determine our estimated shrinkage rate, which is based on a percentage of sales, using the most recent physical inventory and historical results.
Land, Property and Equipment
Land is recorded at historical cost, while property and equipment are recorded at cost less accumulated depreciation and amortization. Capitalized software includes the costs of developing or obtaining internal-use software, including external direct costs of materials and services and internal payroll costs related to the software project.
We capitalize interest on construction in progress and software projects during the period in which expenditures have been made, activities are in progress to prepare the asset for its intended use and actual interest costs are being incurred.
Depreciation and amortization are computed using the straight-line method over the asset’s estimated useful life, which is determined by asset category as follows:
|
|
|
Asset
|
Life (in years)
|
Buildings and improvements
|
5 – 40
|
Store fixtures and equipment
|
3 – 15
|
Leasehold improvements
|
5 – 40
|
Capitalized software
|
3 – 7
|
Leasehold improvements and leased property and equipment that are purchased at the inception of the lease, or during the lease term, are amortized over the shorter of the lease term or the asset life. Lease terms include the fixed, non-cancellable term of a lease, plus any renewal periods determined to be reasonably assured.
We receive contributions from vendors for the construction of certain fixtures in our stores. These contributions offset the related capital expenditures.
Goodwill
Goodwill represents the excess of acquisition cost over the fair value of the related net assets acquired and is not subject to amortization.
We review our goodwill annually for impairment or when circumstances indicate that the carrying value may exceed the fair value. We perform this evaluation at the reporting unit level, comprised of the principal business units within our Retail segment, through the application of a two-step fair value test. The first step compares the carrying value of the reporting unit to its estimated fair value, which is based on the expected present value of future cash flows (income approach), comparable public companies and acquisitions (market approach), or a combination of both. If fair value is lower than the carrying value, then a second step is performed to quantify the amount of the impairment.
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
The following summarizes our goodwill activity for the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trunk Club
|
|
|
HauteLook
|
|
|
Other
1
|
|
|
Total
|
|
Balance at January 30, 2016
|
|
$261
|
|
|
|
$121
|
|
|
|
$53
|
|
|
|
$435
|
|
Impairment
|
(197
|
)
|
|
—
|
|
|
—
|
|
|
(197
|
)
|
Balance at January 28, 2017
|
64
|
|
|
121
|
|
|
53
|
|
|
238
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at February 3, 2018
|
64
|
|
|
121
|
|
|
53
|
|
|
238
|
|
Additions
|
—
|
|
|
—
|
|
|
11
|
|
|
11
|
|
Balance at February 2, 2019
|
|
$64
|
|
|
|
$121
|
|
|
|
$64
|
|
|
|
$249
|
|
1
Other includes goodwill for Nordstrom.com, Jeffrey and
two
retail technology companies.
We continue to make investments in evolving the customer experience, with a strong emphasis on integrating technology across our business. To support these efforts, we acquired
two
retail technology companies during 2018 and recorded
$11
of goodwill from these acquisitions. We have allocated this goodwill to our Full-Price business as the investments will primarily benefit our Nordstrom full-line stores and Nordstrom.com.
The goodwill impairment charge of
$197
for the year ended January 28, 2017 related to Trunk Club resulted from changes to the long-term operating plan that reflected lower expectations for growth and profitability than previous expectations
(see
Note 9: Fair Value Measurements
).
Long-Lived Assets
When facts and circumstances indicate that the carrying values of long-lived assets, including buildings, equipment and amortizable intangible assets, may be impaired, we perform an evaluation of recoverability by comparing the carrying values of the net assets to their related projected undiscounted future cash flows, in addition to other quantitative and qualitative analyses.
Land, property and equipment are grouped at the lowest level at which there are identifiable cash flows when assessing impairment. Cash flows for our retail store assets are identified at the individual store level, while our intangible assets associated with HauteLook and Trunk Club are identified at their respective reporting unit levels.
We did not record any material impairment losses for long-lived tangible or amortizable intangible assets in
2018
,
2017
or
2016
.
Amortization expense for acquired intangibles was
$11
,
$11
and
$14
in
2018
,
2017
and
2016
. Future amortization expense of acquired intangible assets as of
February 2, 2019
, is expected to be
$12
in
2019
,
$12
in
2020
and
$4
in
2021
.
Self-Insurance
We retain a portion of the risk for certain losses related to employee health and welfare, workers’ compensation and other liability claims. Liabilities associated with these losses include undiscounted estimates of both losses reported and losses incurred but not yet reported. We estimate our ultimate cost using an actuarially-based analysis of claims experience, regulatory changes and other relevant factors.
Foreign Currency
We have
six
full-line stores in Canada and
six
Nordstrom Rack stores in Canada.
The functional currency of our Canadian operation is the Canadian Dollar. We translate assets and liabilities into U.S. Dollars using the exchange rate in effect at the balance sheet date, while we translate revenues and expenses using a weighted-average exchange rate for the period. We record these translation adjustments as a component of accumulated other comprehensive loss on the Consolidated Balance Sheets
.
In addition, our U.S. operation incurs certain expenditures denominated in Canadian Dollars and our Canadian operation incurs certain expenditures denominated in U.S. Dollars. This activity results in transaction gains and losses that arise from exchange rate fluctuations, which are recorded as gains or losses in the Consolidated Statements of Earnings
. As of
February 2, 2019
,
activities associated with foreign currency exchange risk have not had a material impact on our Consolidated Financial Statements.
Nordstrom, Inc. and subsidiaries
45
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02,
Leases
, which was subsequently amended in July 2018 by ASU No. 2018-10,
Codification Improvements to Topic 842, Leases
and ASU No. 2018-11,
Leases (Topic 842): Targeted Improvements
(“ASU 2018-11”) (“Lease Standard”). This ASU increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as right-of-use assets and lease liabilities. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification dictates whether lease expense is to be recognized based on an effective interest method or on a straight-line basis over the term of the lease. Additional qualitative and quantitative disclosures will be required to give financial statement users information on the amount, timing and judgments related to a reporting entity’s cash flows arising from leases.
We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. In addition, we elected the hindsight practical expedient approach to determine the lease term for existing leases. The guidance also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This allows us to not record leases with an initial term of 12 months or less on the balance sheet but continue to expense on a straight-line basis over the lease term.
On February 3, 2019, we adopted this ASU using the transition method provided in ASU 2018-11, which allows for the application of the guidance at the beginning of the period in which it is adopted by recognizing a cumulative-effect adjustment to the opening balance of retained earnings. In our ongoing evaluation of these ASU’s, we expect the impact of adoption will result in the following:
|
|
•
|
Recognition of additional net assets and liabilities of approximately
$1,500
to
$2,000
as of February 3, 2019.
|
|
|
•
|
We do not expect the provisions of this ASU to have a material impact on our Consolidated Statement of Earnings, Consolidated Statement of Cash Flows or Consolidated Statement of Shareholders’ Equity.
|
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment
, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. Under this new guidance, if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment charge shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. This guidance is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests. We do not expect adoption of this guidance to be material to our Consolidated Financial Statements.
In February 2018, the FASB issued ASU No. 2018-02,
Income Statement — Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
This new guidance allows a reclassification from accumulated other comprehensive loss to accumulated deficit for certain tax effects resulting from the Tax Act, which could not be recorded under prior guidance. We elected to early adopt this standard in the first quarter of 2018 and reclassified $
5
of tax impacts resulting from the change in the federal corporate tax rate, decreasing the beginning accumulated deficit for the year ended
February 2, 2019
.
In August 2018, the Securities and Exchange Commission (“SEC”) adopted the final rule under SEC Release No. 33-10532,
Disclosure Update and Simplification
, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the Consolidated Statements of Shareholders’ Equity for interim financial statements. Under the amendments, a summary of changes in each caption of shareholders’ equity presented in the Consolidated Balance Sheets must be provided in a note or separate statement. The Consolidated Statements of Shareholders’ Equity should present a reconciliation of the beginning balance to the ending balance of each period for which the Consolidated Statement of Comprehensive Earnings is required to be filed. This final rule was effective for us in the fourth quarter of 2018. With respect to the Consolidated Statements of Shareholders’ Equity, the SEC provided relief on the effective date until the first quarter of 2019. The adoption of this final rule will not have a material effect on our Consolidated Financial Statements.
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
NOTE 2: REVENUE
During the first quarter of fiscal 2018, we adopted the Revenue Standard using the modified retrospective adoption method. Results beginning in the first quarter of 2018 are presented under the new Revenue Standard, while prior period amounts are not adjusted. The impact of adopting the new Revenue Standard was not material to our Consolidated Statement of Earnings for the year ended
February 2, 2019
. The impact of adoption on our Consolidated Balance Sheet as of
February 2, 2019
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
As Reported
|
|
|
Revenue Standard Adjustment
|
|
|
Excluding Impact of Revenue Standard
|
|
Assets
|
|
|
|
|
|
Merchandise inventories
|
|
$1,978
|
|
|
|
$40
|
|
|
|
$2,018
|
|
Prepaid expenses and other
|
291
|
|
|
(128
|
)
|
|
163
|
|
Other assets
|
342
|
|
|
75
|
|
|
417
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
Other current liabilities
|
1,324
|
|
|
(53
|
)
|
|
1,271
|
|
Other liabilities
|
498
|
|
|
99
|
|
|
597
|
|
Accumulated deficit
|
(2,138
|
)
|
|
(59
|
)
|
|
(2,197
|
)
|
Contract Liabilities
Under the new Revenue Standard, contract liabilities represent our obligation to transfer goods or services to customers and include deferred revenue for The Nordy Club (including points and Notes) and gift cards. Our contract liabilities are classified as current on the Consolidated Balance Sheet and are as follows:
|
|
|
|
|
|
Contract Liabilities
|
|
Opening balance as of February 4, 2018
|
|
$498
|
|
Ending balance as of February 2, 2019
|
548
|
|
The amount of revenue recognized from our beginning contract liability balance was
$307
for the year ended
February 2, 2019
.
Disaggregation of Revenue
The following table summarizes our disaggregated net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net sales by business
1,2
:
|
|
|
|
|
|
Full-Price
|
10,299
|
|
|
10,452
|
|
|
10,259
|
|
Off-Price
|
5,181
|
|
|
4,956
|
|
|
4,509
|
|
Other
|
—
|
|
|
(271
|
)
|
|
(270
|
)
|
Total net sales
|
|
$15,480
|
|
|
|
$15,137
|
|
|
|
$14,498
|
|
|
|
|
|
|
|
Digital sales as % of net sales
3
|
30
|
%
|
|
27
|
%
|
|
24
|
%
|
1
We present our sales in the way that management views our results internally, including presenting 2018 under the new Revenue Standard while prior period amounts are not adjusted and allocating our sales return allowance and loyalty related adjustments to Full-Price and Off-Price. For 2017 and 2016, Other primarily included unallocated sales return, in-transit and loyalty related adjustments necessary to reconcile sales by business to total net sales. If we applied the sales return allowance allocation and the loyalty related adjustments to
2017
and
2016
, Full-Price net sales would decrease
$211
and
$214
, Off-Price net sales would decrease
$60
and
$56
and Other net sales would increase
$271
and
$270
.
2
For definitions of Full-Price and Off-Price, see
Note 16: Segment Reporting
.
3
Digital sales are
online sales and digitally assisted store sales which include Buy Online, Pick Up in Store (“BOPUS”), Ship to Store, Reserve Online, Try in Store (Store Reserve) and Style Board, a digital selling tool
.
Nordstrom, Inc. and subsidiaries
47
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
The following table summarizes the percent of net sales by merchandise category:
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Women’s Apparel
|
32
|
%
|
|
32
|
%
|
|
32
|
%
|
Shoes
|
24
|
%
|
|
23
|
%
|
|
23
|
%
|
Men’s Apparel
|
16
|
%
|
|
16
|
%
|
|
17
|
%
|
Women’s Accessories
|
11
|
%
|
|
11
|
%
|
|
11
|
%
|
Beauty
|
11
|
%
|
|
11
|
%
|
|
11
|
%
|
Kids’ Apparel
|
4
|
%
|
|
4
|
%
|
|
3
|
%
|
Other
|
2
|
%
|
|
3
|
%
|
|
3
|
%
|
Total net sales
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
NOTE 3: CREDIT CARD RECEIVABLE TRANSACTION
In October 2015, we completed the sale of a substantial majority of our U.S. Visa and private label credit card portfolio to TD. In November 2017, we sold the remaining balances, which consisted of employee credit card receivables for the U.S. Visa and Nordstrom private label credit cards to TD, for an amount equal to the gross value of the outstanding receivables. Additionally, we entered into an amended long-term program agreement
whereby TD is the exclusive issuer of our consumer credit cards and we perform account servicing functions.
At close of the November 2017 transaction, we received
$55
in cash consideration reflecting the par value of the employee receivables sold.
Pursuant to the agreement, we are obligated to offer and administer a loyalty program and perform other account servicing functions. In return, we receive a portion of the ongoing credit card revenue, net of credit losses, from both the sold and newly generated credit card receivables.
In October 2015, we recorded certain assets and liabilities associated with the arrangement. The beneficial interest asset is amortized over approximately
four years
based primarily on the payment rate of the associated receivables. We record this asset amortization in credit card revenues, net in our Consolidated Statements of Earnings. The deferred revenue and investment in contract asset were being recognized/amortized over
seven years
on a straight-line basis, following the delivery of the contract obligations and expected life of the agreement. Upon adoption of the new Revenue Standard, the remaining unamortized balances of the deferred revenue and investment in contract asset were eliminated as a part of a cumulative effect adjustment (see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
).
Cash Flows Presentation
Nordstrom private label credit and debit cards can be used at a majority of our U.S. retail businesses, while Nordstrom Visa credit cards also may be used for purchases outside of Nordstrom. Prior to the completion of the credit card receivable transactions in October 2015 and November 2017, cash flows from the use of both the private label and Nordstrom Visa credit cards for sales originating at our stores and our digital channels were treated as an operating activity within the Consolidated Statements of Cash Flows, as they related to sales at Nordstrom. Additionally, cash flows arising from the use of Nordstrom Visa credit cards outside of our stores were treated as an investing activity within the Consolidated Statements of Cash Flows, as they represented loans made to our customers for purchases at third parties.
Nordstrom, Inc. and subsidiaries
48
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
NOTE 4: LAND, PROPERTY AND EQUIPMENT
Land, property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
|
February 3, 2018
|
|
Land and land improvements
|
|
$111
|
|
|
|
$111
|
|
Buildings and building improvements
|
1,240
|
|
|
1,246
|
|
Leasehold improvements
|
3,152
|
|
|
3,099
|
|
Store fixtures and equipment
|
3,832
|
|
|
3,724
|
|
Capitalized software
|
1,492
|
|
|
1,280
|
|
Construction in progress
|
741
|
|
|
584
|
|
Land, property and equipment
|
10,568
|
|
|
10,044
|
|
Less: accumulated depreciation and amortization
|
(6,647
|
)
|
|
(6,105
|
)
|
Land, property and equipment, net
|
|
$3,921
|
|
|
|
$3,939
|
|
The total cost of property and equipment held under capital lease obligations was
$26
at the end of
2018
and
2017
, with related accumulated amortization of
$26
and
$25
in
2018
and
2017
. Depreciation and amortization expense was
$661
,
$655
and
$631
in
2018
,
2017
and
2016
.
NOTE 5: SELF-INSURANCE
Our self-insurance reserves are summarized as follows:
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
|
February 3, 2018
|
|
Workers’ compensation
|
$77
|
|
|
|
$71
|
|
Employee health and welfare
|
25
|
|
|
26
|
|
Other liability
|
15
|
|
|
18
|
|
Total self-insurance reserve
|
|
$117
|
|
|
|
$115
|
|
Our workers’ compensation policies have a retention per claim of
$1
or less and
no
policy limits.
We are self-insured for the majority of our employee health and welfare coverage and we do not use stop-loss coverage. Participants contribute to the cost of their coverage through premiums and out-of-pocket expenses for deductibles, co-pays and co-insurance.
Our liability policies, encompassing an employment practices liability, with a policy limit up to
$30
, and a commercial general liability, with a policy limit up to
$151
, have a retention per claim of
$3
or less.
NOTE 6: 401(K) PLAN
We provide a 401(k) plan for our employees that allows for employee elective contributions and discretionary Company contributions. Employee elective contributions are funded through voluntary payroll deductions. Our discretionary Company contribution is funded in an amount determined by our Board of Directors each year. Total expenses related to Company contributions of
$102
,
$110
and
$92
in
2018
,
2017
and
2016
were included in both buying and occupancy costs and selling, general and administrative expenses on our Consolidated Statements of Earnings. The
$110
in 2017 included
$94
of matching contributions and
$16
for a one-time discretionary profit-sharing contribution.
Nordstrom, Inc. and subsidiaries
49
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
NOTE 7: POSTRETIREMENT BENEFITS
During the fourth quarter of fiscal 2018, we early adopted ASU No. 2018-14,
Compensation — Retirement Benefits — Defined Benefit Plans — General: Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans.
This ASU removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements.
We have an unfunded defined benefit Supplemental Executive Retirement Plan (“SERP”), which provides retirement benefits to certain officers and select employees. The SERP has different benefit levels depending on the participant’s role in the Company. At the end of
2018
, we had
57
participants in the plan, including
13
officers and select employees eligible for SERP benefits,
42
retirees and
two
beneficiaries. This plan is non-qualified and does not have a minimum funding requirement.
Benefit Obligations and Funded Status
Our benefit obligation and funded status is as follows:
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
|
February 3, 2018
|
|
Change in benefit obligation:
|
|
|
|
Benefit obligation at beginning of year
|
|
$200
|
|
|
|
$188
|
|
Participant service cost
|
2
|
|
|
3
|
|
Interest cost
|
7
|
|
|
7
|
|
Benefits paid
|
(9
|
)
|
|
(8
|
)
|
Actuarial (gain) loss
|
(10
|
)
|
|
10
|
|
Benefit obligation at end of year
|
190
|
|
|
200
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
—
|
|
|
—
|
|
Employer contribution
|
9
|
|
|
8
|
|
Benefits paid
|
(9
|
)
|
|
(8
|
)
|
Fair value of plan assets at end of year
|
—
|
|
|
—
|
|
Underfunded status at end of year
|
|
($190
|
)
|
|
|
($200
|
)
|
The accumulated benefit obligation, which is the present value of benefits, assuming no future compensation changes, was
$188
and
$197
at the end of
2018
and
2017
.
Amounts recognized as liabilities in the Consolidated Balance Sheets consist of the following:
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
|
February 3, 2018
|
|
Accrued salaries, wages and related benefits
|
|
$10
|
|
|
|
$9
|
|
Other liabilities (noncurrent)
|
180
|
|
|
191
|
|
Net amount recognized
|
|
$190
|
|
|
|
$200
|
|
Components of SERP Expense
The components of SERP expense recognized in the Consolidated Statements of Earnings are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Participant service cost
|
|
$2
|
|
|
|
$3
|
|
|
|
$3
|
|
Interest cost
|
7
|
|
|
7
|
|
|
7
|
|
Amortization of net loss and other
|
5
|
|
|
3
|
|
|
3
|
|
Total SERP expense
|
|
$14
|
|
|
|
$13
|
|
|
|
$13
|
|
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
Amounts not yet reflected in SERP expense and included in accumulated other comprehensive loss (pre-tax) consist of the following:
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
|
February 3, 2018
|
|
Accumulated loss
|
|
($30
|
)
|
|
|
($46
|
)
|
Prior service credit
|
1
|
|
|
2
|
|
Total accumulated other comprehensive loss
|
|
($29
|
)
|
|
|
($44
|
)
|
Assumptions
Weighted-average assumptions used to determine our benefit obligation and SERP expense are as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Assumptions used to determine benefit obligation:
|
|
|
|
|
|
Discount rate
|
4.27
|
%
|
|
3.95
|
%
|
|
4.31
|
%
|
Rate of compensation increase
|
2.50
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
Assumptions used to determine SERP expense:
|
|
|
|
|
|
Discount rate
|
3.95
|
%
|
|
4.31
|
%
|
|
4.55
|
%
|
Rate of compensation increase
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
Future Benefit Payments and Contributions
As of
February 2, 2019
, the expected future benefit payments based upon the assumptions described above and including benefits attributable to estimated future employee service are as follows:
|
|
|
|
|
Fiscal year
|
|
2019
|
|
$10
|
|
2020
|
11
|
|
2021
|
11
|
|
2022
|
11
|
|
2023
|
12
|
|
2024 – 2028
|
61
|
|
Nordstrom, Inc. and subsidiaries
51
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
NOTE 8: DEBT AND CREDIT FACILITIES
Debt
A summary of our long-term debt, including capital leases, is as follows:
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
|
February 3, 2018
|
|
Secured
|
|
|
|
Mortgage payable, 7.68%, due April 2020
|
|
$10
|
|
|
|
$17
|
|
Other
|
—
|
|
|
1
|
|
Total secured debt
|
10
|
|
|
18
|
|
Unsecured
|
|
|
|
Net of unamortized discount:
|
|
|
|
Senior notes, 4.75%, due May 2020
|
500
|
|
|
500
|
|
Senior notes, 4.00%, due October 2021
|
500
|
|
|
500
|
|
Senior notes, 4.00%, due March 2027
|
349
|
|
|
349
|
|
Senior debentures, 6.95%, due March 2028
|
300
|
|
|
300
|
|
Senior notes, 7.00%, due January 2038
|
146
|
|
|
146
|
|
Senior notes, 5.00%, due January 2044
|
895
|
|
|
892
|
|
Other
1
|
(15
|
)
|
|
32
|
|
Total unsecured debt
|
2,675
|
|
|
2,719
|
|
|
|
|
|
Total long-term debt
|
2,685
|
|
|
2,737
|
|
Less: current portion
|
(8
|
)
|
|
(56
|
)
|
Total due beyond one year
|
|
$2,677
|
|
|
|
$2,681
|
|
1
Other unsecured debt includes deferred bond issue costs as of February 2, 2019. As of February 3, 2018, Other included our Puerto Rico unsecured borrowing facility partially offset by deferred bond issue costs.
Our mortgage payable is secured by an office building that had a net book value of
$53
at the end of
2018
.
Required principal payments on long-term debt, excluding capital lease obligations, are as follows:
|
|
|
|
|
Fiscal year
|
|
2019
|
|
$8
|
|
2020
|
502
|
|
2021
|
500
|
|
2022
|
—
|
|
2023
|
—
|
|
Thereafter
|
1,764
|
|
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 the expected coupon payments had the notes been outstanding through the original maturity date.
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
Interest Expense
The components of interest expense, net are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Interest on long-term debt and short-term borrowings
|
|
$146
|
|
|
|
$168
|
|
|
|
$147
|
|
Less:
|
|
|
|
|
|
Interest income
|
(15
|
)
|
|
(5
|
)
|
|
(1
|
)
|
Capitalized interest
|
(27
|
)
|
|
(27
|
)
|
|
(25
|
)
|
Interest expense, net
|
|
$104
|
|
|
|
$136
|
|
|
|
$121
|
|
Credit Facilities
As of
February 2, 2019
, we had total short-term borrowing capacity of
$800
. In September 2018, we renewed our existing
$800
senior unsecured revolving credit facility (“revolver”), extending the expiration from April 2020 to
September 2023
. Our revolver contains customary representations, warranties, covenants and terms, which are substantially similar to our 2015 revolver. 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. Provided that we obtain written consent from our lenders, we have the option to increase the revolving commitment by up to $
200
, to a total of $
1,000
, and
two
options to extend the revolving commitment by one year.
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
February 2, 2019
and
February 3, 2018
, we were in compliance with this covenant.
Our
$800
commercial paper program allows us to use the proceeds to fund operating cash requirements. Under the terms of the commercial paper agreement, we pay a rate of interest based on, among other factors, the maturity of the issuance and market conditions. The issuance of commercial paper has the effect, while it is outstanding, of reducing available liquidity under the revolver by an amount equal to the principal amount of commercial paper.
As of
February 2, 2019
and
February 3, 2018
, we had no issuances outstanding under our commercial paper program and no borrowings outstanding under our revolver.
Our wholly owned subsidiary in Puerto Rico maintained a
$52
unsecured borrowing facility to support our expansion into that market. Borrowings on this facility incurred interest at an annual rate based upon
LIBOR plus 1.275%
and also incurred a fee based on any unused commitment. In 2018, we fully repaid
$47
outstanding on this facility, which was included in the current portion of long-term debt. This facility expired in the fourth quarter of 2018.
NOTE 9: FAIR VALUE MEASUREMENTS
We disclose our financial assets and liabilities that are measured at fair value in our Consolidated Balance Sheets by level within the fair value hierarchy as defined by applicable accounting standards:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Other observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that cannot be corroborated by market data that reflect the reporting entity’s own assumptions
Financial Instruments Not Measured at Fair Value
Financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable and accounts payable, which approximate fair value due to their short-term nature, and long-term debt.
We estimate the fair value of 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:
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
|
February 3, 2018
|
|
Carrying value of long-term debt
|
|
$2,685
|
|
|
|
$2,737
|
|
Fair value of long-term debt
|
2,692
|
|
|
2,827
|
|
Nordstrom, Inc. and subsidiaries
53
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
Non-financial Assets Measured at Fair Value on a Nonrecurring Basis
We also measure certain non-financial assets at fair value on a nonrecurring basis, primarily goodwill and long-lived tangible and intangible assets, in connection with periodic evaluations for potential impairment. We estimate the fair value of these assets using primarily unobservable inputs and, as such, these are considered Level 3 fair value measurements. There were no material impairment charges for these assets for fiscal years
2018
and
2017
.
In 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 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
in 2016, reducing Trunk Club goodwill to
$64
as of January 28, 2017, from
$261
as of January 30, 2016.
For additional information related to goodwill, intangible assets, long-lived assets and impairments, see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
.
NOTE 10: LEASES
We lease the land or the land and buildings at many of our stores. Additionally, we lease office facilities, Supply Chain Network facilities and equipment. Most of these leases are classified as operating leases and they expire at various dates through
2080
. The majority of our fixed, non-cancellable lease terms are
15
to
30
years for Nordstrom full-line stores,
10
to
15
years for Nordstrom Rack stores and
5
to
20
years for other facilities. Many of our leases include options that allow us to extend the lease term beyond the initial commitment period, subject to terms agreed to at lease inception. Most of our leases also provide for payment of operating expenses, such as common area charges, real estate taxes and other executory costs, and some real estate leases require additional payments based on sales, referred to as “percentage rent.”
Future minimum lease payments as of
February 2, 2019
are as follows:
|
|
|
|
|
|
Fiscal year
|
|
Operating leases
|
|
2019
|
|
|
$322
|
|
2020
|
|
313
|
|
2021
|
|
294
|
|
2022
|
|
271
|
|
2023
|
|
249
|
|
Thereafter
|
|
1,160
|
|
Total minimum lease payments
|
|
|
$2,609
|
|
Rent expense for
2018
,
2017
and
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Minimum rent:
|
|
|
|
|
|
Store locations
|
|
$283
|
|
|
|
$274
|
|
|
|
$230
|
|
Other
1
|
38
|
|
|
44
|
|
|
40
|
|
Percentage rent
|
9
|
|
|
11
|
|
|
12
|
|
Property incentives
|
(79
|
)
|
|
(79
|
)
|
|
(80
|
)
|
Total rent expense
|
|
$251
|
|
|
|
$250
|
|
|
|
$202
|
|
1
Other includes Supply Chain Network facilities, Trunk Club clubhouses, Jeffrey boutiques, office facilities and equipment.
The rent expense above does not include common area charges, real estate taxes and other executory costs, which were
$138
in
2018
,
$121
in
2017
and
$112
in
2016
.
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
NOTE 11: COMMITMENTS AND CONTINGENCIES
Our estimated total purchase obligations, which primarily consist of capital expenditure commitments and inventory purchase orders, were
$1,865
as of
February 2, 2019
. In connection with the purchase of foreign merchandise, we have
no
outstanding trade letters of credit as of
February 2, 2019
.
Plans for our Nordstrom NYC store, which we currently expect to open in October 2019, ultimately include owning a condominium interest in a mixed-use tower and leasing certain nearby properties. As of
February 2, 2019
, we had approximately
$302
of fee interest in land, which is expected to convert to the condominium interest once the store is constructed. We have committed to make future installment payments based on the developer meeting pre-established construction and development milestones. In the event that this project is not completed, the opening may be delayed and we may be subject to future losses or capital commitments in order to complete construction or to monetize our investment.
NOTE 12: SHAREHOLDERS’ EQUITY
The following is a summary of the activity related to our share repurchase programs in
2016
,
2017
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Average price
per share
|
|
|
Amount
|
|
Capacity at January 30, 2016
|
|
|
|
|
|
$811
|
|
Shares repurchased
|
5.9
|
|
|
|
$48
|
|
|
(282
|
)
|
Capacity at January 28, 2017
|
|
|
|
|
529
|
|
February 2017 authorization (ended August 31, 2018)
|
|
|
|
|
500
|
|
Shares repurchased
|
4.6
|
|
|
|
$45
|
|
|
(206
|
)
|
Expiration of unused October 2015 authorization capacity in March 2017
|
|
|
|
|
(409
|
)
|
Capacity at February 3, 2018
|
|
|
|
|
414
|
|
August 2018 authorization (no expiration)
|
|
|
|
|
1,500
|
|
Shares repurchased
|
14.3
|
|
|
|
$49
|
|
|
(702
|
)
|
Expiration of unused February 2017 authorization capacity in August 2018
|
|
|
|
|
(319
|
)
|
Capacity at February 2, 2019
|
|
|
|
|
|
$893
|
|
The actual
timing, price, manner and amounts
of future share repurchases, if any, will be subject to market and economic conditions and applicable SEC rules.
We paid dividends of
$1.48
per share in
2018
,
2017
and
2016
. In
February 2019
, subsequent to year end, we declared a quarterly dividend of
$0.37
per share, which will be paid on
March 26, 2019
to holders of record as of March 11, 2019.
NOTE 13: STOCK-BASED COMPENSATION
We currently grant stock-based awards under our 2010 Plan and 2002 Plan, and employees may purchase our stock at a discount under our ESPP.
In 2010, our shareholders approved the adoption of the 2010 Plan, which replaced the 2004 Equity Incentive Plan (“2004 Plan”). The 2010 Plan authorizes the grant of stock options, restricted stock, performance share units, stock appreciation rights and unrestricted shares of common stock to employees. On May 16, 2017, our shareholders approved an amendment to the 2010 Plan. The amendment increased common stock available for issuance by
6.2
. The aggregate number of shares to be issued under the 2010 Plan may not exceed
30.4
plus any shares currently outstanding under the 2004 Plan that are forfeited or expire during the term of the 2010 Plan.
No
future grants will be made under the 2004 Plan. As of
February 2, 2019
, we have
84.1
shares authorized,
59.1
shares issued and outstanding and
12.5
shares remaining available for future grants under the 2010 Plan.
The 2002 Plan authorizes the grant of stock awards to our nonemployee directors. These awards may be deferred or issued in the form of restricted or unrestricted stock, non-qualified stock options or stock appreciation rights. As of
February 2, 2019
, we had
0.9
shares authorized and
0.3
shares available for issuance under this plan. In
2018
, total expense on deferred shares was less than
$1
.
The Trunk Club Value Creation Plan (“VCP”) was a performance-based plan that provided for three payout scenarios based on the results of Trunk Club’s business meeting minimum or exceeding maximum 2018 sales and earnings metrics. As of
February 2, 2019
, we granted
0.5
of the
1.0
units available for grant. As Trunk Club’s business did not meet the minimum performance metrics in 2018, there was
no
unrecognized stock-based compensation expense related to nonvested VCP units and
no
payout occurred.
Nordstrom, Inc. and subsidiaries
55
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
Under the ESPP, employees may make payroll deductions of up to
10%
of their base and bonus compensation for the purchase of Nordstrom common stock. At the end of each
six
-month offering period, participants apply their accumulated payroll deductions toward the purchase of shares of our common stock at
90%
of the fair market value on the last day of the offer period. As of
February 2, 2019
, we had
12.6
shares authorized and
1.8
shares available for issuance under the ESPP. We issued
0.4
shares under the ESPP during
2018
and
2017
. At the end of
2018
and
2017
, we had current liabilities of
$6
for future purchases of shares under the ESPP.
The following table summarizes our stock-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Restricted stock units
|
|
$71
|
|
|
|
$51
|
|
|
|
$34
|
|
Stock options
|
12
|
|
|
18
|
|
|
36
|
|
Acquisition-related stock compensation
|
—
|
|
|
1
|
|
|
15
|
|
Other
1
|
7
|
|
|
7
|
|
|
6
|
|
Total stock-based compensation expense, before income tax benefit
|
90
|
|
|
77
|
|
|
91
|
|
Income tax benefit
|
(23
|
)
|
|
(20
|
)
|
|
(28
|
)
|
Total stock-based compensation expense, net of income tax benefit
|
|
$67
|
|
|
|
$57
|
|
|
|
$63
|
|
1
Other stock-based compensation expense includes performance share units, ESPP and nonemployee director stock awards.
The stock-based compensation expense before income tax benefit was recorded in our Consolidated Statements of Earnings as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Cost of sales and related buying and occupancy costs
|
|
$28
|
|
|
|
$25
|
|
|
|
$25
|
|
Selling, general and administrative expenses
|
62
|
|
|
52
|
|
|
66
|
|
Total stock-based compensation expense, before income tax benefit
|
|
$90
|
|
|
|
$77
|
|
|
|
$91
|
|
Restricted Stock
Our Compensation Committee of our Board of Directors approves grants of restricted stock units to employees. The number of units granted to an individual are determined based upon a percentage of the recipient’s base salary and the fair value of the restricted stock. Restricted stock units typically vest over
four years
.
A summary of restricted stock unit activity for
2018
is presented below:
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
Shares
|
|
|
Weighted-average grant date fair value per unit
|
|
Outstanding, beginning of year
|
3.3
|
|
|
|
$45
|
|
Granted
|
2.2
|
|
|
49
|
|
Vested
|
(1.2
|
)
|
|
46
|
|
Forfeited or cancelled
|
(0.4
|
)
|
|
46
|
|
Outstanding, end of year
|
3.9
|
|
|
|
$47
|
|
The aggregate fair value of restricted stock units vested during
2018
,
2017
and
2016
was
$54
,
$26
and
$17
. As of
February 2, 2019
, the total unrecognized stock-based compensation expense related to nonvested restricted stock units was
$99
, which is expected to be recognized over a weighted-average period of
30 months
.
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
Stock Options
Our Compensation Committee of our Board of Directors approves annual grants of nonqualified stock options to employees. There were
no
stock options granted in
2018
. We used the following assumptions to estimate the fair value for stock options at each grant date (excluding options granted in connection with the Trunk Club acquisition):
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
2017
|
|
|
2016
|
|
Assumptions
|
|
|
|
|
Risk-free interest rate:
Represents the yield on U.S. Treasury zero-coupon securities that mature over the 10-year life of the stock options.
|
1.0% – 2.5%
|
|
|
0.7% – 1.9%
|
|
|
Weighted-average volatility:
Based on a combination of the historical volatility of our common stock and the implied volatility of exchange-traded options for our common stock.
|
40.1
|
%
|
|
36.8
|
%
|
|
Weighted-average expected dividend yield:
Our forecasted dividend yield for the next 10 years.
|
2.4
|
%
|
|
2.2
|
%
|
|
Expected life in years:
Represents the estimated period of time until option exercise. The expected term of options granted was derived from the output of the Binomial Lattice option valuation model and was based on our historical exercise behavior, taking into consideration the contractual term of the option and our employees’ expected exercise and post-vesting employment termination behavior.
|
7.1
|
|
|
6.9
|
|
|
|
|
|
|
Grant Date Information
|
|
|
|
|
Date of grant
|
February 28, 2017
|
|
|
February 29, 2016
|
|
|
Weighted-average fair value per option
|
|
$16
|
|
|
|
$16
|
|
|
Exercise price per option
|
|
$47
|
|
|
|
$51
|
|
Supplemental nonqualified stock options were also granted to certain company leaders on June 7, 2016, at an exercise price per option of
$41
. The assumptions used to estimate the fair value for the supplemental stock options were similar to the 2016 annual grant assumptions. The weighted-average fair value per option at the grant date was
$13
. In 2016, we also granted stock options to certain qualified employees outside of the annual and supplemental grant dates, which were insignificant in aggregate. The number of awards granted to an individual are determined based upon a percentage of the recipient’s base salary and the fair value of the stock options. Options typically vest over
four years
, and expire
10 years
after the date of grant.
A summary of stock option activity for
2018
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
Shares
|
|
|
Weighted-
average
exercise price
|
|
|
Weighted-average
remaining
contractual
life (years)
|
|
|
Aggregate
intrinsic
value
|
|
Outstanding, beginning of year
|
12.3
|
|
|
|
$49
|
|
|
|
|
|
Exercised
|
(3.6
|
)
|
|
40
|
|
|
|
|
|
Forfeited or cancelled
|
(0.3
|
)
|
|
57
|
|
|
|
|
|
Outstanding, end of year
|
8.4
|
|
|
|
$53
|
|
|
5
|
|
|
|
$62
|
|
Vested, end of year
|
6.6
|
|
|
|
$52
|
|
|
4
|
|
|
|
$47
|
|
Vested or expected to vest, end of year
|
8.0
|
|
|
|
$53
|
|
|
5
|
|
|
|
$57
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Aggregate intrinsic value of options exercised
|
|
|
|
$67
|
|
|
|
$13
|
|
|
|
$30
|
|
Fair value of stock options vested
|
|
|
|
$22
|
|
|
|
$34
|
|
|
|
$40
|
|
As of
February 2, 2019
, the total unrecognized stock-based compensation expense related to nonvested stock options was
$7
, which is expected to be recognized over a weighted-average period of
13 months
.
Nordstrom, Inc. and subsidiaries
57
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
NOTE 14: INCOME TAXES
In December 2017, the Tax Act was signed into law.
Among numerous other provisions, the Tax Act significantly revised the U.S. federal corporate income tax by reducing the statutory rate from
35%
to
21%
.
In accordance with SEC Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
, we made a reasonable estimate of the Tax Act’s impact and provisionally recorded this estimate in our 2017 results. As of February 2, 2019, we completed our accounting for the impacts of the Tax Act, resulting in no material changes to previously recorded provisional amounts.
U.S. and foreign components of earnings before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
U.S.
|
|
$792
|
|
|
|
$803
|
|
|
|
$687
|
|
Foreign
|
(59
|
)
|
|
(13
|
)
|
|
(3
|
)
|
Earnings before income taxes
|
|
$733
|
|
|
|
$790
|
|
|
|
$684
|
|
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current income taxes:
|
|
|
|
|
|
Federal
|
|
$147
|
|
|
|
$291
|
|
|
|
$290
|
|
State and local
|
56
|
|
|
51
|
|
|
54
|
|
Foreign
|
—
|
|
|
—
|
|
|
1
|
|
Total current income tax expense
|
203
|
|
|
342
|
|
|
345
|
|
Deferred income taxes:
|
|
|
|
|
|
Federal
|
(5
|
)
|
|
10
|
|
|
(17
|
)
|
State and local
|
(3
|
)
|
|
1
|
|
|
(5
|
)
|
Foreign
|
(26
|
)
|
|
—
|
|
|
7
|
|
Total deferred income tax (benefit) expense
|
(34
|
)
|
|
11
|
|
|
(15
|
)
|
Total income tax expense
|
|
$169
|
|
|
|
$353
|
|
|
|
$330
|
|
A reconciliation of the statutory federal income tax rate to the effective tax rate on earnings before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Statutory rate
|
21.0
|
%
|
|
33.7
|
%
|
|
35.0
|
%
|
Tax Act impact
|
(0.1
|
%)
|
|
6.1
|
%
|
|
—
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
10.1
|
%
|
State and local income taxes, net of federal income taxes
|
5.8
|
%
|
|
4.5
|
%
|
|
5.1
|
%
|
Federal credits
|
(1.5
|
%)
|
|
(0.7
|
%)
|
|
(0.6
|
%)
|
Valuation allowance release
|
(1.2
|
%)
|
|
—
|
|
|
—
|
|
Other, net
|
(0.9
|
%)
|
|
1.1
|
%
|
|
(1.4
|
%)
|
Effective tax rate
|
23.1
|
%
|
|
44.7
|
%
|
|
48.2
|
%
|
The decrease in the effective tax rate for 2018 compared with 2017 was primarily due to the lower statutory tax rate enacted under the Tax Act, the benefit of certain current year foreign losses and release of a foreign valuation allowance.
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
The components of deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
|
February 3, 2018
|
|
Deferred tax assets:
|
|
|
|
Compensation and benefits accruals
|
|
$139
|
|
|
|
$148
|
|
Allowance for sales returns
|
52
|
|
|
50
|
|
Credit card receivable transaction
|
(4
|
)
|
|
8
|
|
Accrued expenses
|
28
|
|
|
27
|
|
Merchandise inventories
|
20
|
|
|
12
|
|
Gift cards
|
26
|
|
|
27
|
|
Loyalty program
|
12
|
|
|
—
|
|
Federal benefit of state taxes
|
7
|
|
|
16
|
|
Net operating losses
|
41
|
|
|
22
|
|
Other
|
2
|
|
|
2
|
|
Total deferred tax assets
|
323
|
|
|
312
|
|
Valuation allowance
|
(43
|
)
|
|
(51
|
)
|
Total net deferred tax assets
|
280
|
|
|
261
|
|
Deferred tax liabilities:
|
|
|
|
Land, property and equipment basis and depreciation differences
|
(94
|
)
|
|
(109
|
)
|
Debt exchange premium
|
(13
|
)
|
|
(14
|
)
|
Total deferred tax liabilities
|
(107
|
)
|
|
(123
|
)
|
Net deferred tax assets
|
|
$173
|
|
|
|
$138
|
|
As of
February 2, 2019
, our state and foreign net operating loss carryforwards for income tax purposes were approximately
$12
and
$132
. As of
February 3, 2018
, our state and foreign net operating loss carryforwards for income tax purposes were approximately
$11
and
$64
. The net operating loss carryforwards are subject to certain statutory limitations of applicable state and foreign laws. If not utilized, a portion of our state and foreign net operating loss carryforwards will begin to expire in 2031 and 2033.
As of February 2, 2019, we believe certain foreign net operating loss carryforwards and deferred tax assets will be realized and therefore we released
$9
of related valuation allowance. As of
February 2, 2019
and
February 3, 2018
, we believe there are certain other foreign net operating loss carryforwards and deferred tax assets that will not be realized in the foreseeable future. As such, valuation allowances of
$43
and
$51
have been recorded as of
February 2, 2019
and
February 3, 2018
.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Unrecognized tax benefit at beginning of year
|
|
$31
|
|
|
|
$32
|
|
|
|
$19
|
|
Gross increase to tax positions in prior periods
|
9
|
|
|
2
|
|
|
16
|
|
Gross decrease to tax positions in prior periods
|
(14
|
)
|
|
(7
|
)
|
|
—
|
|
Gross increase to tax positions in current period
|
6
|
|
|
5
|
|
|
2
|
|
Lapses in statute
|
(2
|
)
|
|
(1
|
)
|
|
(5
|
)
|
Unrecognized tax benefit at end of year
|
|
$30
|
|
|
|
$31
|
|
|
|
$32
|
|
At the end of
2018
and
2017
,
$26
and
$18
of the ending gross unrecognized tax benefit related to items which, if recognized, would affect the effective tax rate.
There were no significant changes to expense for interest and penalties in
2018
,
2017
and 2016. At the end of
2018
and
2017
, our liability for interest and penalties was
$3
and
$3
.
We file income tax returns in the U.S. and a limited number of foreign jurisdictions. With few exceptions, we are no longer subject to federal, state and local, or non-U.S. income tax examinations for years before
2013
. Unrecognized tax benefits related to federal, state and local tax positions may decrease by
$14
by
February 1, 2020
, due to the completion of examinations and the expiration of various statutes of limitations.
Nordstrom, Inc. and subsidiaries
59
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
NOTE 15: EARNINGS PER SHARE
Earnings per basic share is computed using the weighted-average number of common shares outstanding during the year. Earnings per diluted share uses the weighted-average number of common shares outstanding during the year plus dilutive common stock equivalents, primarily restricted stock and stock options. Dilutive common stock is calculated using the treasury stock method and includes unvested RSUs and outstanding options that would reduce the amount of earnings for which each share is entitled. Anti-dilutive shares (including stock options and other shares) are excluded from the calculation of diluted shares and earnings per diluted share because their impact could increase earnings per diluted share. The computation of earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net earnings
|
|
$564
|
|
|
|
$437
|
|
|
|
$354
|
|
|
|
|
|
|
|
Basic shares
|
167.3
|
|
|
166.8
|
|
|
173.2
|
|
Dilutive effect of common stock equivalents
|
2.7
|
|
|
2.1
|
|
|
2.4
|
|
Diluted shares
|
170.0
|
|
|
168.9
|
|
|
175.6
|
|
|
|
|
|
|
|
Earnings per basic share
|
|
$3.37
|
|
|
|
$2.62
|
|
|
|
$2.05
|
|
Earnings per diluted share
|
|
$3.32
|
|
|
|
$2.59
|
|
|
|
$2.02
|
|
|
|
|
|
|
|
Anti-dilutive common stock equivalents
|
5.2
|
|
|
10.5
|
|
|
8.0
|
|
Net earnings in 2018 included the Estimated Non-recurring Charge of
$72
, which had an impact of
$0.28
per diluted share (see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
). Net earnings in 2016 included the Trunk Club goodwill impairment charge of
$197
, which had an impact of
$1.12
per diluted share.
NOTE 16: SEGMENT REPORTING
Segments
We continually monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments. In the first quarter of 2018, as a result of the evolution of our operations, our reportable segments have become progressively more integrated such that we have changed to
one
reportable “Retail” segment to align with how management operates and evaluates and views the results of our operations. Our principal executive officer, who is our chief operating decision maker (“CODM”), reviews results on a total company, Full-Price and Off-Price basis and uses earnings before interest and taxes as a measure of profitability. We completed the reporting and budgeting in the first quarter of 2018 to better align with how the CODM allocates resources and assesses business performance. As part of this evolution, we now allocate our previous Credit segment assets, loss before interest and income taxes and loss before income taxes to the Retail segment.
Our Retail reportable segment aggregates our
two
operating segments, Full-Price and Off-Price. Full-Price consists of Nordstrom U.S. Full-Price stores, Nordstrom.com, Canada, Trunk Club, Jeffrey and Nordstrom Local. Off-Price consists of Nordstrom U.S. Rack stores, Nordstromrack.com/HauteLook and Last Chance clearance stores.
Our Full-Price and Off-Price operating segments both generate revenue by offering customers an extensive selection of high-quality, brand-name and private label merchandise, which includes apparel, shoes, cosmetics and accessories for women, men, young adults and children. We continue to focus on omni-channel initiatives by integrating the operations, merchandising and technology necessary to be consistent with our customers’ expectations of a seamless shopping experience regardless of channel or business. Full-Price and Off-Price have historically had similar economic characteristics and are expected to have similar economic characteristics and long-term financial performance in future periods. They also have other similar qualitative characteristics, including suppliers, method of distribution, type of customer and regulatory environment. Due to their similar qualitative and economic characteristics, we have aggregated our Full-Price and Off-Price operating segments into a single reportable segment.
Amounts in the Corporate/Other column include unallocated corporate expenses and assets (including unallocated assets in corporate headquarters, consisting primarily of cash, land, buildings and equipment and deferred tax assets), inter-segment eliminations and other adjustments to segment results necessary for the presentation of consolidated financial results in accordance with generally accepted accounting principles.
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
Accounting Policy
We present our segment results for all years in the way that management views our results internally, including presenting 2018 under the new Revenue Standard while prior period amounts are not adjusted. For 2018, we generally use the same methodology to compute earnings before income taxes for our reportable segment as we do for the consolidated Company. As a result, for our Retail segment in 2018, we defer a portion of underlying sales revenue as customers earn points and Notes in the Nordy Club, based on an estimated stand-alone selling price of primarily points and Notes, and recognize the deferred revenue and related cost of sales when the Notes are ultimately redeemed.
For 2017 and 2016, prior to the adoption of the new Revenue Standard, we estimated the net cost of Notes to be issued and redeemed. We recorded this cost as reward points were accumulated in cost of sales in our total company results. The related Notes expenses were included at face value in the Retail segment. As a result, our Corporate/Other column included an adjustment to reduce the Notes expense from face value to their estimated cost. In addition, the full amount of redemptions of our Notes were included in net sales for our Retail segment. The net sales amount in our Corporate/Other column primarily related to an entry to eliminate these transactions from our consolidated net sales. If we allocated these types of Corporate/Other adjustments in 2017 and 2016, Retail segment earnings before interest and income taxes would increase
$1
and
$8
and Corporate/Other loss before interest and income taxes would increase
$1
and
$8
. Other than as described above, the accounting policies of our reportable segment are the same as those described in
Note 1: Nature of Operations and Summary of Significant Accounting Policies
.
The following table sets forth information for our reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
Corporate/Other
|
|
|
Total
|
|
Fiscal year 2018
|
|
|
|
|
|
Net sales
|
|
$15,480
|
|
|
|
$—
|
|
|
|
$15,480
|
|
Credit card revenues, net
|
—
|
|
|
380
|
|
|
380
|
|
Earnings (loss) before interest and income taxes
|
1,095
|
|
|
(258
|
)
|
|
837
|
|
Interest expense, net
|
—
|
|
|
(104
|
)
|
|
(104
|
)
|
Earnings (loss) before income taxes
|
1,095
|
|
|
(362
|
)
|
|
733
|
|
Capital expenditures
|
415
|
|
|
239
|
|
|
654
|
|
Depreciation and amortization
|
436
|
|
|
233
|
|
|
669
|
|
Assets
|
5,300
|
|
|
2,586
|
|
|
7,886
|
|
|
|
|
|
|
|
Fiscal year 2017
|
|
|
|
|
|
Net sales
1
|
|
$15,408
|
|
|
|
($271
|
)
|
|
|
$15,137
|
|
Credit card revenues, net
|
—
|
|
|
341
|
|
|
341
|
|
Earnings (loss) before interest and income taxes
|
1,111
|
|
|
(185
|
)
|
|
926
|
|
Interest expense, net
|
—
|
|
|
(136
|
)
|
|
(136
|
)
|
Earnings (loss) before income taxes
|
1,111
|
|
|
(321
|
)
|
|
790
|
|
Capital expenditures
|
516
|
|
|
215
|
|
|
731
|
|
Depreciation and amortization
|
445
|
|
|
221
|
|
|
666
|
|
Assets
|
5,477
|
|
|
2,638
|
|
|
8,115
|
|
|
|
|
|
|
|
Fiscal year 2016
|
|
|
|
|
|
Net sales
1
|
|
$14,768
|
|
|
|
($270
|
)
|
|
|
$14,498
|
|
Credit card revenues, net
|
—
|
|
|
259
|
|
|
259
|
|
Earnings (loss) before interest and income taxes
|
917
|
|
|
(112
|
)
|
|
805
|
|
Interest expense, net
|
—
|
|
|
(121
|
)
|
|
(121
|
)
|
Earnings (loss) before income taxes
|
917
|
|
|
(233
|
)
|
|
684
|
|
Capital expenditures
|
593
|
|
|
253
|
|
|
846
|
|
Depreciation and amortization
|
456
|
|
|
189
|
|
|
645
|
|
Assets
|
5,770
|
|
|
2,088
|
|
|
7,858
|
|
1
If we applied the sales return allowance allocation and the loyalty related adjustments in
2017
and
2016
, Retail segment net sales would decrease
$271
and
$270
and Corporate/Other would increase
$271
and
$270
.
For information about disaggregated revenues, see
Note 2: Revenue
.
Nordstrom, Inc. and subsidiaries
61
Nordstrom, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in millions except per share, per option and per unit amounts)
NOTE 17: SELECTED QUARTERLY DATA
1
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
Total
|
|
Fiscal year 2018
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$3,469
|
|
|
|
$3,980
|
|
|
|
$3,648
|
|
|
|
$4,383
|
|
|
|
$15,480
|
|
Comparable sales increase
2
|
0.6
|
%
|
|
4.0
|
%
|
|
2.3
|
%
|
|
0.1
|
%
|
|
1.7
|
%
|
Credit card revenues, net
|
92
|
|
|
87
|
|
|
100
|
|
|
101
|
|
|
380
|
|
Gross profit
|
1,181
|
|
|
1,391
|
|
|
1,213
|
|
|
1,540
|
|
|
5,325
|
|
Selling, general and administrative expenses
3
|
(1,120
|
)
|
|
(1,232
|
)
|
|
(1,208
|
)
|
|
(1,308
|
)
|
|
(4,868
|
)
|
Earnings before interest and income taxes
3
|
153
|
|
|
246
|
|
|
105
|
|
|
333
|
|
|
837
|
|
Net earnings
|
87
|
|
|
162
|
|
|
67
|
|
|
248
|
|
|
564
|
|
Earnings per basic share
3
|
|
$0.52
|
|
|
|
$0.97
|
|
|
|
$0.40
|
|
|
|
$1.50
|
|
|
|
$3.37
|
|
Earnings per diluted share
3
|
|
$0.51
|
|
|
|
$0.95
|
|
|
|
$0.39
|
|
|
|
$1.48
|
|
|
|
$3.32
|
|
Dividends per share
|
|
$0.37
|
|
|
|
$0.37
|
|
|
|
$0.37
|
|
|
|
$0.37
|
|
|
|
$1.48
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2017
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$3,279
|
|
|
|
$3,717
|
|
|
|
$3,541
|
|
|
|
$4,600
|
|
|
|
$15,137
|
|
Comparable sales (decrease) increase
2
|
(0.8
|
%)
|
|
1.7
|
%
|
|
(0.9
|
%)
|
|
2.6
|
%
|
|
0.8
|
%
|
Credit card revenues, net
|
75
|
|
|
76
|
|
|
88
|
|
|
102
|
|
|
341
|
|
Gross profit
|
1,124
|
|
|
1,266
|
|
|
1,226
|
|
|
1,631
|
|
|
5,247
|
|
Selling, general and administrative expenses
|
(1,048
|
)
|
|
(1,125
|
)
|
|
(1,106
|
)
|
|
(1,383
|
)
|
|
(4,662
|
)
|
Earnings before interest and income taxes
|
151
|
|
|
217
|
|
|
208
|
|
|
350
|
|
|
926
|
|
Net earnings
|
63
|
|
|
110
|
|
|
114
|
|
|
151
|
|
|
437
|
|
Earnings per basic share
|
|
$0.38
|
|
|
|
$0.66
|
|
|
|
$0.68
|
|
|
|
$0.90
|
|
|
|
$2.62
|
|
Earnings per diluted share
|
|
$0.37
|
|
|
|
$0.65
|
|
|
|
$0.67
|
|
|
|
$0.89
|
|
|
|
$2.59
|
|
Dividends per share
|
|
$0.37
|
|
|
|
$0.37
|
|
|
|
$0.37
|
|
|
|
$0.37
|
|
|
|
$1.48
|
|
1
Quarterly totals may not foot across due to rounding.
2
Comparable sales are sales from stores that have been open for at least one full year at the beginning of the year. Comparable sales include digital sales and actual returns and exclude our estimate for sales return allowance and the 53rd week (see
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
for more information about the 53rd week). Due to the 53rd week in 2017, our 2018 comparable sales are reported on a like-for-like basis with no impact from calendar shifts or the new Revenue Standard.
3
Results in the third quarter include the Estimated Non-recurring Charge of
$72
, or
$0.28
per diluted share (see
Note 1: Nature of Operations and Summary of Significant Accounting Policies
).