We disclose our financial assets and liabilities that are measured at fair value in our Condensed Consolidated Balance Sheets by level within the fair value hierarchy as defined by applicable accounting standards:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Other observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that cannot be corroborated by market data that reflect the reporting entity’s own assumptions
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.NOTE 9: SEGMENT REPORTING
(Dollar and share amounts in millions except per share and per square foot amounts)The following table sets forth information for our reportable segment:
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | Six Months Ended |
| July 29, 2023 | July 30, 2022 | | July 29, 2023 | July 30, 2022 |
Retail segment EBIT | $246 | | $265 | | | $386 | | $352 | |
Corporate/Other EBIT | (54) | | (63) | | | (453) | | (77) | |
Interest expense, net | (26) | | (34) | | | (54) | | (69) | |
Earnings (loss) before income taxes | $166 | | $168 | | | ($121) | | $206 | |
For information about disaggregated revenues, see Note 3: Revenue.
CAUTIONARY STATEMENT
Certain statements in this Quarterly Report on Form 10-Q contain or may suggest “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties including, but not limited to, our anticipated financial outlook for the fiscal year ending February 3, 2018, our anticipated annual total and comparable sales rates, our anticipated new store openings in existing, new and international markets, our anticipated Return on Invested Capital and trends in our operations. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Our actual future results may differ materially from historical results or current expectations depending upon factors including, but not limited to:
Strategic and Operational
successful execution of our customer strategy, including expansion into new domestic and international markets, acquisitions, investments in our stores and online, as well as investments in technology, our ability to realize the anticipated benefits from growth initiatives and our ability to provide a seamless experience across all channels,
our ability to respond to the business and retail environment, fashion trends and consumer preferences, including changing expectations of service and experience in stores and online, and evolve our business model,
timely and effective execution of our ecommerce initiatives and ability to manage the costs and organizational changes associated with this evolving business model,
successful execution of our information technology strategy,
our ability to effectively utilize data in strategic planning and decision making,
timely completion of construction associated with newly planned stores, relocations and remodels, all of which may be impacted by the financial health of third parties,
efficient and proper allocation of our capital resources,
the impact of any systems or network failures, cybersecurity and/or security breaches, including any security breach of our systems or those of a third party provider that results in the theft, transfer or unauthorized disclosure of customer, employee or Company information or compliance with information security and privacy laws and regulations in the event of such an incident,
effective inventory management processes and systems, fulfillment processes and systems, disruptions in our supply chain and our ability to control costs,
the effect of the announcement by the members of the Nordstrom family relating to the exploration of a possible “going private transaction” on our relationships with our customers, employees, suppliers and partners, operating results and business generally,
our ability to safeguard our reputation and maintain our vendor relationships,
our ability to maintain relationships with and motivate our employees and to effectively attract, develop and retain our future leaders, which could be impacted by the uncertainty about the possibility of a “going private transaction,”
our ability to realize the expected benefits, respond to potential risks and appropriately manage costs associated with our program agreement with TD Bank USA, N.A. (“TD”),
the effectiveness of planned advertising, marketing and promotional campaigns in the highly competitive and promotional retail industry,
potential goodwill impairment charges, future impairment charges and fluctuations in the fair values of reporting units or of assets in the event projected financial results are not achieved within expected time frames,
the timing, price, manner and amounts of future share repurchases by the Company, if any, or any share issuances by the Company, including issuances associated with option exercises or other matters,
Economic and External
the impact of economic and market conditions and the resultant impact on consumer spending patterns,
the impact of economic or political conditions in the U.S. and countries where our third party vendors operate,
weather conditions, natural disasters, health hazards, national security or other market disruptions, or the prospects of these events and the resulting impact on consumer spending patterns or information technology systems and communications,
Legal and Regulatory
our compliance with applicable domestic and international laws, regulations and ethical standards, including those related to banking, employment and tax and the outcome of claims and litigation and resolution of such matters,
the impact of the current regulatory environment and financial system and health care reforms, and
compliance with debt covenants, availability and cost of credit, changes in our credit rating, changes in interest rates, debt repayment patterns and personal bankruptcies.
These and other factors, including those factors described in Part I, “Item 1A. Risk Factors” in our 2016 Annual Report on Form 10-K and Part II, “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances, except as may be required by law.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)
OVERVIEW
Our third quarter net earnings were $114, or $0.67 per diluted share. The estimated reduction in earnings from three hurricanes affecting our business in Puerto Rico, Florida, and Texas in the quarter was approximately $0.04 per diluted share.
Our net sales increased 2.0%, and comparable sales decreased 0.9% during the quarter. The estimated lost sales impact from the hurricanes was approximately $20, or 60 basis points. When adjusted for this impact, our overall sales performance was generally in-line with our expectations. This reflected consistent trends in our full-price business while we experienced softer sales in our off-price business. Our merchandise margins continued to be relatively stable, reflecting our ongoing progress in supporting a healthy regular-price selling business. For the third quarter and the balance of the year, our inventory plans are aligned with our current sales trends.
Core to our strategy, we are focused on providing a differentiated selection of the best products, coupled with a high level of service and experience. We are continually testing and learning from new concepts to deliver experiences that improve speed, convenience, and personalization for our customers:
Our most recent example is Nordstrom Local, a test retail concept in West Hollywood, California focused on services. This location allows customers more convenient access to personal stylists, alterations and online order pickups and returns.
We recently expanded Reserve Online and Try-In Store to more than 50 stores across the country. This service is a convenient way for customers to shop and it frees up their time. If they use that time to do additional shopping in our stores, it may result in a lift in their spend. Another way we are connecting the digital and in-store experience is through Style Boards. This digital selling tool leverages the expertise of our salespeople and enables customers to receive personalized product recommendations on their mobile phones.
Collaborating with popular fashion influencer Something Navy, we launched an exclusive capsule collection with our in-house Treasure & Bond brand. This launch was our largest ever, generating $2 in demand on the first day. We continue to grow limited distribution products and our private label brands continue to outperform the company average.
Looking ahead to the remainder of the year, we are focused on making Nordstrom a convenient place for customers to do their holiday shopping.
We have invested in key categories and brands that resonate most with our customers. To support peak volumes we expect during the holidays, we are expanding our online selection.
To make shopping faster and easier, we offer:
| |
◦ | Buy Online Pick up In-Store with an option for curbside service in our full-line stores. In major markets, including Seattle, Chicago, Dallas and San Diego, 24-hour curbside pickup will be available for the holidays. |
| |
◦ | Reserve Online and Try In-Store in more than 50 of our full-line stores |
| |
◦ | Same-day delivery services in several markets |
The combination of our physical and digital assets represents a competitive advantage. Our omni-channel business model provides for favorable economics related to driving customer spend, reducing the cost of serving customers, and elevating the Nordstrom and Nordstrom Rack brands. We are well-positioned to execute on our customer strategy and remain focused on delivering a differentiated customer experience.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)
RESULTS OF OPERATIONS
Our reportable segments are Retail and Credit. We analyze our results of operations through earnings before interest and income taxes for our Retail Business and Credit, while interest expense, income taxes and earnings per share are discussed on a total Company basis.
Retail Business
Our Retail Business includes our Nordstrom U.S. and Canada full-line stores (including Nordstrom Local), Nordstrom.com, Nordstrom Rack stores, Nordstromrack.com/HauteLook, Trunk Club, Jeffrey boutiques and Last Chance clearance stores. For purposes of discussion and analysis of our results of operations of our Retail Business, we combine our Retail segment results with revenues and expenses in the “Corporate/Other” column of Note 8: Segment Reporting in Item 1 (collectively, the “Retail Business”).
Certain metrics we use to evaluate the Retail Business may not be calculated in a consistent manner among industry peers. Provided below are definitions of metrics we present within our analysis of the Retail Business:
Comparable Sales – includes sales from stores that have been open at least one full year at the beginning of the year
Total Company comparable sales includes sales from our online channels
Gross Profit – net sales less cost of sales and related buying and occupancy costs
Inventory Turnover Rate – trailing 12-months cost of sales and related buying and occupancy costs (for all segments) divided by the trailing 4-quarter average inventory
Total Sales Per Square Foot – net sales divided by weighted-average square footage
4-wall Sales Per Square Foot – sales for Nordstrom U.S. and Canada full-line stores, Nordstrom Rack stores, Trunk Club clubhouses, Jeffrey boutiques and Last Chance clearance stores divided by their weighted-average square footage
Summary
The following table summarizes the results of our Retail Business:
|
| | | | | | | | | | | | | |
| Quarter Ended |
| October 28, 2017 | | October 29, 2016 |
| Amount |
| | % of net sales1 |
| | Amount |
| | % of net sales1 |
|
Net sales |
| $3,541 |
| | 100.0 | % | |
| $3,472 |
| | 100.0 | % |
Cost of sales and related buying and occupancy costs | (2,311 | ) | | (65.3 | %) | | (2,262 | ) | | (65.2 | %) |
Gross profit | 1,230 |
| | 34.7 | % | | 1,210 |
| | 34.8 | % |
Selling, general and administrative expenses | (1,070 | ) | | (30.2 | %) | | (990 | ) | | (28.5 | %) |
Goodwill impairment | — |
| | — |
| | (197 | ) | | (5.7 | %) |
Earnings before interest and income taxes |
| $160 |
| | 4.5 | % | |
| $23 |
| | 0.6 | % |
|
| Nine Months Ended |
| October 28, 2017 | | October 29, 2016 |
| Amount |
| | % of net sales1 |
| | Amount |
| | % of net sales1 |
|
Net sales |
| $10,537 |
| | 100.0 | % | |
| $10,255 |
| | 100.0 | % |
Cost of sales and related buying and occupancy costs | (6,914 | ) | | (65.6 | %) | | (6,718 | ) | | (65.5 | %) |
Gross profit | 3,623 |
| | 34.4 | % | | 3,537 |
| | 34.5 | % |
Selling, general and administrative expenses | (3,172 | ) | | (30.1 | %) | | (3,024 | ) | | (29.5 | %) |
Goodwill impairment | — |
| | — |
| | (197 | ) | | (1.9 | %) |
Earnings before interest and income taxes |
| $451 |
| | 4.3 | % | |
| $316 |
| | 3.1 | % |
1 Subtotals and totals may not foot due to rounding.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)
Retail Business Net Sales
In our ongoing effort to enhance the customer experience, we are focused on providing customers with a seamless experience across our channels. While our customers may engage with us through multiple channels, we know they value the overall Nordstrom brand experience and view us simply as Nordstrom, which is ultimately how we view our business. The following is a summary of our net sales by channel for our Retail Business: |
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| October 28, 2017 |
| | October 29, 2016 |
| | October 28, 2017 |
| | October 29, 2016 |
|
Net sales by channel: | | | | | | | |
Nordstrom full-line stores - U.S.1 |
| $1,488 |
| |
| $1,568 |
| |
| $4,858 |
| |
| $5,128 |
|
Nordstrom.com | 534 |
| | 497 |
| | 1,901 |
| | 1,675 |
|
Full-price | 2,022 |
| | 2,065 |
| | 6,759 |
| | 6,803 |
|
| | | | | | | |
Nordstrom Rack | 966 |
| | 958 |
| | 2,910 |
| | 2,777 |
|
Nordstromrack.com/HauteLook | 212 |
| | 159 |
| | 609 |
| | 482 |
|
Off-price | 1,178 |
| | 1,117 |
| | 3,519 |
| | 3,259 |
|
| | | | | | | |
Other retail2 | 151 |
| | 135 |
| | 420 |
| | 384 |
|
Retail segment | 3,351 |
| | 3,317 |
| | 10,698 |
| | 10,446 |
|
Corporate/Other | 190 |
| | 155 |
| | (161 | ) | | (191 | ) |
Total net sales |
| $3,541 |
| |
| $3,472 |
| |
| $10,537 |
| |
| $10,255 |
|
| | | | | | | |
Net sales increase | 2.0 | % | | 7.2 | % | | 2.7 | % | | 3.0 | % |
| | | | | | | |
Comparable sales increase (decrease) by channel: | | | | | | | |
Nordstrom full-line stores - U.S. | (4.9 | %) | | (4.5 | %) | | (5.2 | %) | | (6.3 | %) |
Nordstrom.com | 7.5 | % | | 20.1 | % | | 13.5 | % | | 10.3 | % |
Full-price | (1.9 | %) | | 0.5 | % | | (0.5 | %) | | (2.6 | %) |
Nordstrom Rack | (5.0 | %) | | 0.9 | % | | (2.3 | %) | | 0.4 | % |
Nordstromrack.com/HauteLook | 33.6 | % | | 23.2 | % | | 26.3 | % | | 32.9 | % |
Off-price | 0.8 | % | | 3.9 | % | | 2.0 | % | | 4.6 | % |
Total Company | (0.9 | %) | | 2.4 | % | | 0.1 | % | | (0.2 | %) |
| | | | | | | |
Sales per square foot: | | | | | | | |
Total sales per square foot |
| $118 |
| |
| $119 |
| |
| $353 |
| |
| $355 |
|
4-wall sales per square foot | 86 |
| | 90 |
| | 271 |
| | 283 |
|
Full-line sales per square foot - U.S. | 72 |
| | 76 |
| | 235 |
| | 247 |
|
Nordstrom Rack sales per square foot | 118 |
| | 127 |
| | 361 |
| | 376 |
|
1 Nordstrom full-line stores - U.S. includes Nordstrom Local.
2 Other retail includes Nordstrom Canada full-line stores, Trunk Club and Jeffrey boutiques.
Total Company net sales increased 2.0% for the third quarter and 2.7% for the nine months ended October 28, 2017, compared with the same periods in 2016, while comparable sales decreased 0.9% for the third quarter and increased 0.1% for the nine months ended October 28, 2017. The estimated lost sales impact from the hurricanes impacting Puerto Rico, Florida and Texas was approximately $20, or 60 basis points for the third quarter and 20 basis points for the nine months ended October 28, 2017. To date in fiscal 2017, we opened 17 Nordstrom Rack stores, one Canada full-line store and one Nordstrom Local store, relocated two U.S. full-line stores and one Nordstrom Rack store and closed two U.S. full-line stores.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)
Full-price net sales, which consists of U.S. full-line and Nordstrom.com channels, decreased 2.1% for the third quarter and 0.7% for the nine months ended October 28, 2017, compared with the same periods in 2016, while comparable sales decreased 1.9% for the third quarter and 0.5% for the nine months ended October 28, 2017. Also on a comparable basis for the third quarter and the nine months ended October 28, 2017, full-price experienced a decrease in the total number of items sold, partially offset by an increase in the average selling price per item sold. The top-performing merchandise category was Men’s Apparel for the third quarter and Women’s Apparel for the nine months ended October 28, 2017. The West was the top-performing U.S. geographic region for the third quarter and the nine months ended October 28, 2017.
Off-price net sales, which consists of Nordstrom Rack and Nordstromrack.com/HauteLook channels, increased 5.5% for the third quarter and 8.0% for the nine months ended October 28, 2017, compared with the same periods in 2016, while comparable sales increased 0.8% and 2.0% for the third quarter and nine months ended October 28, 2017. For the quarter and year-to-date period ended October 28, 2017, Nordstrom Rack experienced a decrease in the average selling price per item sold and in the total number of items sold on a comparable basis. The top-performing Nordstrom Rack merchandise category was Cosmetics for the third quarter and the nine months ended October 28, 2017. The West was the top-performing geographic region for the third quarter and the nine months ended October 28, 2017.
Other retail net sales increased for the third quarter and nine months ended October 28, 2017, compared with the same periods in 2016 due to increases in Canada sales, partially offset by lower sales in Trunk Club.
Retail Business Gross Profit
The following table summarizes the Retail Business gross profit (“Retail GP”): |
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| October 28, 2017 |
| | October 29, 2016 |
| | October 28, 2017 |
| | October 29, 2016 |
|
Retail gross profit |
| $1,230 |
|
|
| $1,210 |
|
|
| $3,623 |
|
|
| $3,537 |
|
Retail gross profit as a % of net sales | 34.7 | % |
| 34.8 | % |
| 34.4 | % |
| 34.5 | % |
| | | | | | | |
| | | | | October 28, 2017 |
| | October 29, 2016 |
|
Ending inventory per square foot | | | | |
| $80.54 |
| |
| $80.94 |
|
Inventory turnover rate | | | | | 4.39 |
| | 4.31 |
|
Retail GP decreased 12 basis points for the third quarter and 11 basis points for the nine months ended October 28, 2017, compared with the same periods in 2016, primarily due to higher planned occupancy expenses related to new store growth for Nordstrom Rack and Canada. Continued focus on inventory execution led to improvements in both ending inventory per square foot and the inventory turnover rate as of October 28, 2017.
Retail Business Selling, General and Administrative Expenses
Retail Business selling, general and administrative expenses (“Retail SG&A”) are summarized in the following table: |
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| October 28, 2017 |
| | October 29, 2016 |
| | October 28, 2017 |
| | October 29, 2016 |
|
Retail selling, general and administrative expenses |
| $1,070 |
| |
| $990 |
| |
| $3,172 |
| |
| $3,024 |
|
Retail selling, general and administrative expenses as a % of net sales | 30.2 | % | | 28.5 | % | | 30.1 | % | | 29.5 | % |
Retail SG&A increased $80 and 168 basis points for the third quarter and increased $148 and 61 basis points for the nine months ended October 28, 2017, primarily due to planned increases in technology and supply chain expenses associated with our growth initiatives.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)
Credit Segment
The Nordstrom credit and debit card products are designed to strengthen customer relationships and grow retail sales by providing loyalty benefits, valuable services and payment products. We believe our credit business allows us to build deeper relationships with our customers by fully integrating the Nordstrom Rewards program with our retail business and provide better service, which in turn fosters greater customer loyalty. Nordstrom cardholders tend to visit our stores more frequently and spend more than non-cardholders. Nordstrom private label credit and debit cards can be used at all of our U.S. retail channels, while Nordstrom Visa credit cards may also be used for purchases outside of Nordstrom (“outside volume”).
Summary
The table below provides a detailed view of the operational results of our Credit segment, consistent with Note 8: Segment Reporting in Item 1: |
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| October 28, 2017 |
| | October 29, 2016 |
| | October 28, 2017 |
| | October 29, 2016 |
|
Credit card revenues, net |
| $88 |
| |
| $70 |
| |
| $239 |
| |
| $186 |
|
Credit expenses | (40 | ) | | (38 | ) | | (115 | ) | | (121 | ) |
Earnings before interest and income taxes |
| $48 |
| |
| $32 |
| | 124 |
| | 65 |
|
| | | | | | | |
Credit and debit card volume1: | | | | | | | |
Inside |
| $1,205 |
| |
| $1,239 |
| |
| $4,202 |
| |
| $4,215 |
|
Outside | 1,084 |
| | 1,023 |
| | 3,146 |
| | 3,106 |
|
Total volume |
| $2,289 |
| |
| $2,262 |
| |
| $7,348 |
| |
| $7,321 |
|
1 Credit and debit card volume represents sales on the total portfolio plus applicable sales taxes.
Credit Card Revenues, net
The following is a summary of our credit card revenues, net: |
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| October 28, 2017 |
| | October 29, 2016 |
| | October 28, 2017 |
| | October 29, 2016 |
|
Credit program revenues, net |
| $85 |
| |
| $67 |
| |
| $229 |
| |
| $176 |
|
Other | 3 |
| | 3 |
| | 10 |
| | 10 |
|
Total credit card revenues, net |
| $88 |
| |
| $70 |
| |
| $239 |
| |
| $186 |
|
Pursuant to our program agreement with TD, we receive our portion of the ongoing credit card revenue, net of credit losses, from both sold and newly generated credit card receivables, which is recorded in credit program revenues, net. Asset amortization and deferred revenue recognition associated with the assets and liabilities recorded as part of the transaction are also recognized in credit program revenues, net. Revenue earned under the program agreement is impacted by the credit quality of receivables, both owned and serviced, and factors such as deteriorating economic conditions, declining creditworthiness of cardholders and the execution of account management and collection activities may heighten the risk of credit losses. Other credit card revenues include finance charge revenue, interchange fees and late fees on our accounts receivable retained (including debit and employee receivables). Subsequent to quarter end, on November 1, 2017, we completed the sale of our employee credit card receivables to TD (see Note 1: Basis of Presentation in Item 1).
Credit card revenues, net increased $18 for the third quarter and $53 for the nine months ended October 28, 2017, compared with the same periods in 2016, reflecting our strategic partnership with TD to responsibly grow our receivables and associated revenues. There was also a reduction in amortization expense related to the sale of the credit card portfolio.
Credit Expenses
Total credit expenses were relatively flat for the third quarter, compared with the same period in 2016, and decreased $6 for the nine months ended October 28, 2017, primarily due to lower processing costs driven by operational efficiencies.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)
Total Company Results
Interest Expense, net
Interest expense, net was $28 for the third quarter, compared with $30 for the same period in 2016, and $104 for the nine months ended October 28, 2017, compared with $90 for the same period in 2016. The increase for the nine months ended October 28, 2017 was primarily due to a net interest expense charge of $18 related to the $650 debt refinancing completed in the first quarter of 2017 (see Note 2: Debt and Credit Facilities in Item 1).
Income Tax Expense
Income tax expense is summarized in the following table: |
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| October 28, 2017 |
| | October 29, 2016 |
| | October 28, 2017 |
| | October 29, 2016 |
|
Income tax expense |
| $66 |
| |
| $35 |
| |
| $185 |
| |
| $138 |
|
Effective tax rate | 36.7 | % | | 140.3 | % | | 39.2 | % | | 47.4 | % |
The effective tax rate decreased for the third quarter and nine months ended October 28, 2017, compared with the same periods in 2016, primarily due to the non-deductible goodwill impairment charge of $197 related to Trunk Club in the third quarter of 2016. Excluding the impact of the Trunk Club impairment, our effective tax rate for both the third quarter and nine months ended October 28, 2017 increased approximately 300 basis points primarily due to changes in tax reserves and an increase in the valuation allowance for foreign net operating losses.
Earnings (Loss) Per Share
Earnings (Loss) per share is as follows: |
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| October 28, 2017 |
| | October 29, 2016 |
| | October 28, 2017 |
| | October 29, 2016 |
|
Basic |
| $0.68 |
| |
| ($0.06 | ) | |
| $1.72 |
| |
| $0.88 |
|
Diluted |
| $0.67 |
| |
| ($0.06 | ) | |
| $1.70 |
| |
| $0.87 |
|
Earnings per diluted share increased for the third quarter and nine months ended October 28, 2017 primarily due to the Trunk Club goodwill impairment charge of $197 in 2016, which had an impact of approximately $0.90 per share for both the quarter and nine months ended October 29, 2016. Excluding the impact of the impairment, earnings per diluted share decreased for the quarter and nine months ended October 28, 2017 primarily due to planned increases in technology and supply chain expenses associated with our growth initiatives. Additionally, the estimated reduction in earnings from three hurricanes affecting stores in Puerto Rico, Florida and Texas in the quarter was approximately $0.04 per share.
2017 Outlook
We updated our annual earnings per diluted share expectations to incorporate our third quarter results and the estimated impacts of the three hurricanes. Nordstrom’s expectations for fiscal 2017, which include the impact of the 53rd week, are as follows:
|
| |
| Current Outlook |
Net sales (percent) | Approximately 4 |
Comparable sales (percent) | Approximately flat |
Retail EBIT | $755 to $785 |
Credit EBIT | Approximately $165 |
Earnings per diluted share (excluding the impact of any future share repurchases) | $2.85 to $2.95 |
The income tax rate is estimated to be approximately in line with the rate for the nine months ended October 28, 2017. The 53rd week is expected to add approximately $200 to net sales and approximately $0.02 to $0.03 to earnings per diluted share. The 53rd week is not included in comparable sales calculations. The full-year impact from three hurricanes that occurred in the third quarter is estimated to impact sales by $26, EBIT by $17 and EPS by $0.06 per share. The damage in Puerto Rico was extensive, requiring us to close the store as we continue our repair efforts.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)
Return on Invested Capital (“ROIC”) (Non-GAAP financial measure)
We believe ROIC is a useful financial measure for investors in evaluating the efficiency and effectiveness of our use of capital and believe ROIC is an important component of shareholders’ return over the long term. In addition, we incorporate ROIC in our executive incentive compensation measures. For the 12 fiscal months ended October 28, 2017, our ROIC increased to 10.7% compared with 7.2% for the 12 fiscal months ended October 29, 2016. Results for the prior period were negatively impacted by approximately 340 basis points due to the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016.
We define ROIC as our net operating profit after tax divided by our average invested capital using the trailing 12-month average. ROIC is not a measure of financial performance under generally accepted accounting principles (“GAAP”) and should be considered in addition to, and not as a substitute for, return on assets, net earnings, total assets or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to ROIC is return on assets. The following is a reconciliation of the components of ROIC and return on assets:
|
| | | | | | | |
| 12 Fiscal Months Ended |
| October 28, 2017 |
| | October 29, 2016 |
|
Net earnings |
| $488 |
| |
| $333 |
|
Add: income tax expense | 376 |
| | 252 |
|
Add: interest expense | 139 |
| | 121 |
|
Earnings before interest and income tax expense | 1,003 |
| | 706 |
|
| | | |
Add: rent expense | 237 |
| | 195 |
|
Less: estimated depreciation on capitalized operating leases1 | (126 | ) | | (103 | ) |
Net operating profit | 1,114 |
| | 798 |
|
| | | |
Less: estimated income tax expense | (486 | ) | | (383 | ) |
Net operating profit after tax |
| $628 |
| |
| $415 |
|
| | | |
Average total assets |
| $8,009 |
| |
| $7,987 |
|
Less: average non-interest-bearing current liabilities2 | (3,211 | ) | | (3,105 | ) |
Less: average deferred property incentives and deferred rent liability2 | (646 | ) | | (541 | ) |
Add: average estimated asset base of capitalized operating leases3 | 1,718 |
| | 1,452 |
|
Average invested capital |
| $5,870 |
| |
| $5,793 |
|
| | | |
Return on assets4 | 6.1 | % | | 4.2 | % |
ROIC4 | 10.7 | % | | 7.2 | % |
1 Capitalized operating leases is our best estimate of the asset base we would record for our leases that are classified as operating if they had met the criteria for a capital lease or we had purchased the property. Asset base is calculated as described in footnote 3 below.
2 Balances associated with our deferred rent liability have been classified as long-term liabilities in the current period.
3 Based upon the trailing 12-month average of the monthly asset base. The asset base for each month is calculated as the trailing 12 months of rent expense multiplied by eight. The multiple of eight times rent expense is a commonly used method of estimating the asset base we would record for our capitalized operating leases described in footnote 1.
4 Results for the 12 fiscal months ended October 29, 2016 include the $197 impact of the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016, which negatively impacted the prior period return on assets by approximately 250 basis points and ROIC by 340 basis points.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)
LIQUIDITY AND CAPITAL RESOURCES
We strive to maintain a level of liquidity sufficient to allow us to cover our seasonal cash needs and to maintain appropriate levels of short-term borrowings. We believe that our operating cash flows, available credit facilities and potential future borrowings are sufficient to finance our cash requirements for the next 12 months and beyond.
Over the long term, we manage our cash and capital structure to maximize shareholder return, maintain our financial position, manage refinancing risk and allow flexibility for strategic initiatives. We regularly assess our debt and leverage levels, capital expenditure requirements, debt service payments, dividend payouts, potential share repurchases and other future investments. We believe that as of October 28, 2017, our existing cash and cash equivalents on-hand of $672, available credit facilities of $800 and potential future operating cash flows and borrowings will be sufficient to fund these scheduled future payments and potential long-term initiatives.
Operating Activities
Net cash provided by operating activities decreased $281 for the nine months ended October 28, 2017, compared with the same period in 2016, primarily due to the timing of a tax refund received in 2016 and tax payments in 2017.
Investing Activities
Net cash used in investing activities decreased $71 for the nine months ended October 28, 2017, compared with the same period in 2016, primarily due to a planned reduction in capital expenditures associated with fewer Canadian store openings.
Financing Activities
Net cash used in financing activities increased $61 for the nine months ended October 28, 2017, compared with the same period in 2016, primarily due to increased share repurchase activity, which occurred in the first quarter of 2017.
Short-term and Long-term Borrowing Activity
During the first quarter of 2017, we issued $350 aggregate principal amount of 4.00% senior unsecured notes due March 2027 and $300 aggregate principal amount of 5.00% senior unsecured notes due January 2044. We recorded debt issuance costs incurred as a result of the issuance in other financing activities, net in the Condensed Consolidated Statements of Cash Flows in Item 1. With the proceeds of these new notes, we retired our $650 senior unsecured notes that were due January 2018. See Note 2: Debt and Credit Facilities in Item 1 for additional information.
Free Cash Flow (Non-GAAP financial measure)
Free Cash Flow is one of our key liquidity measures, and when used in conjunction with GAAP measures, provides investors with a meaningful analysis of our ability to generate cash from our business. For the nine months ended October 28, 2017, we had Free Cash Flow of ($127) compared with ($66) for the nine months ended October 29, 2016.
Free Cash Flow is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, operating cash flows or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to Free Cash Flow is net cash provided by operating activities. The following is a reconciliation of net cash provided by operating activities to Free Cash Flow:
|
| | | | | | | |
| Nine Months Ended |
| October 28, 2017 |
| | October 29, 2016 |
|
Net cash provided by operating activities |
| $597 |
| |
| $878 |
|
Less: capital expenditures | (536 | ) | | (625 | ) |
Less: cash dividends paid | (185 | ) | | (192 | ) |
Less: change in cash book overdrafts | (3 | ) | | (127 | ) |
Free Cash Flow |
| ($127 | ) | |
| ($66 | ) |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)
Credit Capacity and Commitments
As of October 28, 2017, we had total short-term borrowing capacity of $800 under our senior unsecured revolving credit facility (“revolver”) that expires in April 2020. Under the terms of our revolver, we pay a variable rate of interest and a commitment fee based on our debt rating. The revolver is available for working capital, capital expenditures and general corporate purposes. We have the option to increase the revolving commitment by up to $200, to a total of $1,000, provided that we obtain written consent from the lenders. From time to time we utilize our commercial paper program to fund working capital needs, which has the effect of reducing our available liquidity under the revolver until repaid.
As of October 28, 2017, we had no issuances outstanding under our commercial paper program and no borrowings outstanding under our revolver.
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+ | | Negative |
|
| | | | |
| Base Interest
Rate
| | Applicable
Margin
|
|
Euro-Dollar Rate Loan | LIBOR | | 1.02 | % |
Canadian Dealer Offer Rate Loan | CDOR | | 1.02 | % |
Base Rate Loan | various | | — |
|
Should the ratings assigned to our long-term unsecured debt improve, the applicable margin associated with any such borrowings may decrease, resulting in a lower borrowing cost under this facility. Should the ratings assigned to our long-term unsecured debt worsen, the applicable margin associated with our borrowings may increase, resulting in a higher borrowing cost under this facility.
Debt Covenants
The revolver requires that we maintain an adjusted debt to earnings before interest, income taxes, depreciation, amortization and rent (“EBITDAR”) leverage ratio of no more than four times (see the following additional discussion of Adjusted Debt to EBITDAR). As of October 28, 2017, we were in compliance with this covenant.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)
Adjusted Debt to EBITDAR (Non-GAAP financial measure)
Adjusted Debt to EBITDAR is one of our key financial metrics, and we believe that our debt levels are best analyzed using this measure. Our goal is to manage debt levels to maintain an investment-grade credit rating and operate with an efficient capital structure. In evaluating our debt levels, this measure provides a reflection of our credit worthiness that could impact our credit rating and borrowing costs. We also have a debt covenant that requires an adjusted debt to EBITDAR leverage ratio of no more than four times. As of October 28, 2017 and October 29, 2016, our Adjusted Debt to EBITDAR was 2.5.
Adjusted Debt to EBITDAR is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, debt to net earnings, net earnings, debt or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to Adjusted Debt to EBITDAR is debt to net earnings. The following is a reconciliation of the components of Adjusted Debt to EBITDAR and debt to net earnings:
|
| | | | | | | |
| 20171 |
| | 20161 |
|
Debt |
| $2,738 |
| |
| $2,778 |
|
Add: estimated capitalized operating lease liability2 | 1,896 |
| | 1,561 |
|
Less: fair value hedge adjustment included in long-term debt | — |
| | (14 | ) |
Adjusted Debt |
| $4,634 |
| |
| $4,325 |
|
| | | |
Net earnings |
| $488 |
| |
| $333 |
|
Add: income tax expense | 376 |
| | 252 |
|
Add: interest expense, net | 135 |
| | 121 |
|
Earnings before interest and income taxes | 999 |
| | 706 |
|
| | | |
Add: depreciation and amortization expenses | 644 |
| | 631 |
|
Add: rent expense | 237 |
| | 195 |
|
Add: non-cash acquisition-related charges3 | 10 |
| | 197 |
|
EBITDAR |
| $1,890 |
| |
| $1,729 |
|
| | | |
Debt to Net Earnings4 | 5.6 |
| | 8.3 |
|
Adjusted Debt to EBITDAR | 2.5 |
| | 2.5 |
|
1 The components of Adjusted Debt are as of October 28, 2017 and October 29, 2016, while the components of EBITDAR are for the 12 months ended October 28, 2017 and October 29, 2016.
2 Based upon the estimated lease liability as of the end of the period, calculated as the trailing 12 months of rent expense multiplied by eight. The multiple of eight times rent expense is a commonly used method of estimating the debt we would record for our leases that are classified as operating if they had met the criteria for a capital lease or we had purchased the property.
3 Non-cash acquisition-related charges for the 12 months ended October 29, 2016 include the goodwill impairment charge of $197 related to Trunk Club.
4 Results for the period ended October 29, 2016 include the $197 impact of the Trunk Club goodwill impairment charge, which approximates 310 basis points.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except per share amounts and where noted otherwise)
The following MD&A provides a narrative of our financial performance and is intended to promote understanding of our results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, Item 1. Financial Statements (Unaudited) and generally discusses the results of operations for the quarter and six months ended July 29, 2023 compared with the quarter and six months ended July 30, 2022. The following discussion and analysis contains forward-looking statements and should also be read in conjunction with cautionary statements and risks described elsewhere in this Form 10-Q before deciding to purchase, hold or sell shares of our common stock. | | | | | |
Overview | |
Results of Operations | |
| |
Liquidity | |
Capital Resources | |
Critical Accounting Estimates | |
Recent Accounting Pronouncements | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except per share amounts and where noted otherwise)
OVERVIEW
Second quarter results reflected continued progress on our 2023 key priorities of improving Nordstrom Rack performance, increasing our inventory productivity and optimizing our supply chain capabilities. We reported net earnings of $137, or $0.84 per diluted share. Earnings before interest and income taxes was $192 and 5.3% as a rate of sales in the second quarter of 2023, compared with EBIT of $202 and 5.1% as a rate of sales during the same period in 2022.
Total Company net sales decreased 8.3% compared with the second quarter of 2022 and included negative impacts of 275 basis points from the wind-down of Canadian operations and approximately 200 basis points from one week of the Anniversary Sale shifting into the third quarter of 2023. We had sequential improvement in sales trends at both Nordstrom and Nordstrom Rack from the first quarter of 2023, and most categories also improved sequentially from the first quarter of 2023, when compared with the same period in 2022.
Our Anniversary Sale is a unique event that rewards and engages our loyal customers with brand new products from the best brands at reduced prices for a limited time. Total Anniversary event sales, including the eight days that fall into the fiscal third quarter of 2023, were 5% lower compared with Anniversary event sales in 2022. Our Anniversary Sale had very strong inventory sell-through, with a 15% increase over last year’s event, helping to put us in a better inventory position as we enter the second half of the year.
We are encouraged by the progress we are making as a result of our focus on our key priorities. We are committed to delivering profitable growth while improving the customer experience through our key priorities.
Nordstrom Rack – Consistent with our customer promise to deliver great brands at great prices, we continued to increase the penetration of our top performing strategic brands. We expanded our reach and convenience for customers by opening eight new stores and relocating one store year to date through September 1, 2023. We believe that Rack stores are a great investment, with returns that exceed our cost of capital and have a short payback period, and they are also our largest source of new customer acquisition. We are excited to roll out to more markets and increase our Rack footprint and have announced plans to open 23 more stores, including 11 later this year.
Inventory Productivity – We are focused on better inventory discipline to provide customers with relevant and new assortments and improve our earnings and returns on invested capital. We continue to manage with leaner inventories, with overall inventory levels 18% lower than the second quarter of 2022. We also improved sell-through and had faster turns across most of our categories. In the second quarter, we made progress on reducing our Designer inventory and we will continue to right size to the shift in consumer demand in this category.
Supply Chain Optimization – We continue to make significant progress on our supply chain initiatives, which drive improvements in customer experience and profitability. We delivered a better experience to our customers through faster delivery, especially during our Anniversary Sale. We continue to increase productivity throughout our network and reduce transportation costs. For the fourth consecutive quarter, variable supply chain costs fell by over 100 basis points compared with the prior year, helping to mitigate overall SG&A deleverage on lower sales. Supply chain is the largest component of our SG&A expenses, and we believe there is more opportunity to improve our efficiency and help drive overall expense leverage as sales improve.
We made solid progress against each of our priorities, which we believe will help us expand market share and improve profitability. We believe continued focus and execution will help us navigate through the near-term uncertain environment and drive incremental improvement over the remainder of the year, and position us well to build capabilities to better serve our customers, drive profitable growth and increase shareholder value.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except per share amounts and where noted otherwise)
RESULTS OF OPERATIONS
In our ongoing effort to enhance the customer experience, we are focused on providing a seamless retail experience across our Company. We invested early in integrating our operations, merchandising and technology across our stores and online in both our Nordstrom and Nordstrom Rack banners. By connecting our digital and physical assets across Nordstrom and Nordstrom Rack, we are able to better serve customers when, where and how they want to shop. We have one Retail reportable segment and analyze our results on a total Company basis, using customer, market share, operational and net sales metrics.
Our Anniversary Sale, historically the largest event of the year, typically falls in the second quarter. One week of our Anniversary Sale shifted from the second quarter in 2022 to the third quarter in 2023.
We monitor a number of key operating metrics to evaluate our Company’s performance. In addition to net sales, net earnings (loss) and other results under GAAP, two other key operating metrics we use are GMV and inventory turnover rate. Beginning in the first quarter of 2023, we made changes to how we calculate these metrics to more closely align with how our business is operated. Changes in the methodologies are discussed below and prior periods have been adjusted to reflect a comparable presentation.
•GMV: calculated as the total dollar value of merchandise sold through our digital platforms and stores. GMV includes net merchandise sales from inventory we own, as well as the retail value of merchandise sold under our unowned inventory models with our vendors. We use GMV as an indicator of the scale and growth of our operations and the impact of our unowned inventory models. Prior to the first quarter of 2023, we also included non-merchandise sales in our GMV calculation.
•Inventory Turnover Rate: calculated as the trailing 4-quarter merchandise cost of sales divided by the trailing 13-month average inventory. Inventory turnover rate is an indicator of our success in optimizing inventory volumes in accordance with customer demand. Prior to the first quarter of 2023, we calculated inventory turnover rate as the trailing 4-quarter cost of sales and related buying and occupancy costs divided by the trailing 4-quarter average inventory.
Net Sales
The following table summarizes net sales:
| | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Six Months Ended |
| July 29, 2023 | July 30, 2022 | | | | July 29, 2023 | July 30, 2022 | | |
Net sales: | | | | | | | | | |
Nordstrom | $2,491 | | $2,771 | | | | | $4,518 | | $5,060 | | | |
Nordstrom Rack | 1,171 | | 1,220 | | | | | 2,208 | | 2,398 | | | |
Total net sales | $3,662 | | $3,991 | | | | | $6,726 | | $7,458 | | | |
| | | | | | | | | |
Net sales (decrease) increase: | | | | | | | | | |
Nordstrom | (10.1 | %) | 14.7 | % | | | | (10.7 | %) | 18.5 | % | | |
Nordstrom Rack | (4.1 | %) | 6.3 | % | | | | (7.9 | %) | 8.2 | % | | |
Total Company | (8.3 | %) | 12.0 | % | | | | (9.8 | %) | 15.0 | % | | |
| | | | | | | | | |
Digital sales as a % of total net sales | 36 | % | 38 | % | | | | 36 | % | 38 | % | | |
Digital sales (decrease) increase | (13 | %) | 6 | % | | | | (15 | %) | 3 | % | | |
| | | | | | | | | |
Nordstrom GMV (decrease) increase | (10.4 | %) | 14.3 | % | | | | (11.0 | %) | 18.5 | % | | |
Total Company GMV (decrease) increase | (8.5 | %) | 11.6 | % | | | | (10.1 | %) | 15.0 | % | | |
| | | | | | | | | |
Total Company net sales and GMV decreased for the quarter and six months ended July 29, 2023, compared with the same periods in 2022. For the second quarter of 2023, 275 basis points of the decrease was due to the deconsolidation of our Canadian operations as of March 2, 2023 (see Note 2: Canada Wind-down). Approximately 200 basis points of the decrease in the second quarter of 2023 was due to the timing shift of the Anniversary Sale, with one week shifting from the second quarter in 2022 to the third quarter in 2023. Total Company net sales for the six months ended July 29, 2023, compared with the same period in 2022, were negatively impacted 230 basis points from the wind-down of Canadian operations and approximately 100 basis points due to the timing shift of the Anniversary Sale. For the second quarter and six months ended July 29, 2023, active and beauty were the strongest categories compared with the same periods in 2022.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except per share amounts and where noted otherwise)
Nordstrom net sales and GMV decreased for the second quarter and six months ended July 29, 2023, compared with the same periods in 2022. Nordstrom net sales for the second quarter of 2023, compared with the second quarter of 2022, were negatively impacted by 400 basis points from the wind-down of Canadian operations and approximately 300 basis points due to the timing shift of the Anniversary Sale. Nordstrom net sales for the six months ended July 29, 2023, compared with the same period in 2022, were negatively impacted 340 basis points from the wind-down of Canadian operations and approximately 100 basis points due to the timing shift of the Anniversary Sale. For both the quarter and six months ended July 29, 2023, Nordstrom net sales reflected a decrease in the number of items sold, partially offset by an increase in the average selling price per item sold.
Nordstrom Rack net sales decreased for the second quarter and six months ended July 29, 2023, compared with the same periods in 2022, which reflected a decrease in the number of items sold, partially offset by an increase in the average selling price per item sold. Eliminating store fulfillment for Nordstrom Rack digital orders during the third quarter of 2022 negatively impacted Nordstrom Rack sales by approximately 500 basis points for both the second quarter and six months ended July 29, 2023, compared with the same periods in 2022.
Total Company digital sales decreased for the second quarter and six months ended July 29, 2023, compared with the same periods in 2022. Eliminating store fulfillment for Nordstrom Rack digital orders during the third quarter of 2022 and sunsetting Trunk Club in the second quarter of 2022 negatively impacted digital sales by approximately 500 basis points for the second quarter of 2023 and approximately 650 basis points for the six months ended July 29, 2023. The timing of the Anniversary Sale had a negative impact on digital sales of approximately 300 basis points for the second quarter of 2023 and approximately 200 basis points for the six months ended July 29, 2023, compared with the same periods in 2022.
During the six months ended July 29, 2023, we opened seven Nordstrom Rack stores, relocated one Nordstrom Rack store and closed one Nordstrom Rack store. We deconsolidated six Nordstrom and seven Nordstrom Rack stores in Canada as of March 2, 2023 (see Note 2: Canada Wind-down in Item 1). Subsequent to the end of the second quarter of 2023, we opened one Nordstrom Rack store and closed one Nordstrom store.
Credit Card Revenues, Net
Credit card revenues, net increased $6 and $20 for the second quarter and six months ended July 29, 2023, compared with the same periods in 2022. The increases were due to higher revenue recognized in connection with our 2022 TD program agreement amendment and higher finance charges from both higher rates and outstanding balances. The increases were partially offset by increased credit losses.
Fiscal Year 2023 Total Revenue Outlook
In fiscal 2023, which includes a 53rd week, we expect total revenue, including retail sales and credit card revenues, to decline 4 to 6 percent compared with fiscal 2022. Our outlook includes approximately 250 basis points of negative impact from the wind-down of business operations in Canada (see Note 2: Canada Wind-down) and approximately 130 basis points of positive impact from the 53rd week.
Gross Profit
The following table summarizes gross profit:
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | Six Months Ended |
| July 29, 2023 | July 30, 2022 | | July 29, 2023 | July 30, 2022 |
Gross profit | $1,282 | $1,405 | | $2,319 | $2,541 |
Gross profit as a % of net sales | 35.0% | 35.2% | | 34.5% | 34.1% |
| | | | | |
| | | | July 29, 2023 | July 30, 2022 |
Inventory turnover rate | | | | 3.44 | 3.38 |
Gross profit decreased $123 and $222 for the quarter and six months ended July 29, 2023, compared with the same periods in 2022, primarily due to lower sales, partially offset by lower buying and occupancy costs. For the second quarter of 2023, gross profit as a rate of net sales decreased 20 basis points, compared with the same period in 2022, primarily due to deleverage on lower sales, partially offset by lower buying and occupancy costs. For the six months ended July 29, 2023, gross profit as a rate of net sales increased 40 basis points, compared with the same period in 2022, due to lower buying and occupancy costs and increased inventory productivity, partially offset by deleverage on lower sales.
Ending inventory as of July 29, 2023 decreased 17.5%, compared with the same period in 2022, versus an 8.3% decrease in sales for the second quarter of 2023, reflecting continued strong inventory discipline.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except per share amounts and where noted otherwise)
Selling, General and Administrative Expenses
SG&A is summarized in the following table:
| | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Six Months Ended |
| July 29, 2023 | July 30, 2022 | | | July 29, 2023 | July 30, 2022 | |
SG&A expenses | $1,200 | $1,307 | | | $2,304 | $2,473 | |
SG&A expenses as a % of net sales | 32.8% | 32.8% | | | 34.3% | 33.2% | |
SG&A decreased $107 and $169 for the second quarter and six months ended July 29, 2023, compared with the same periods in 2022, primarily due to lower variable costs on lower sales, supply chain cost improvements from efficiency initiatives and more favorable carrier rates than expected, as well as a gain on the sale of a real estate asset. These were partially offset by higher labor costs. SG&A as a percent of net sales was flat for the second quarter of 2023, compared with the same period in 2022, as the improvements in variable costs were offset by higher labor costs and deleverage from lower sales. SG&A as a percent of net sales increased 110 basis points for the six months ended July 29, 2023, compared with the same period in 2022, primarily due to deleverage on lower sales volume and higher labor costs, partially offset by improvements in variable costs.
Canada Wind-down Costs
We recognized charges associated with the wind-down of Nordstrom Canada of $309 in the six months ended July 29, 2023 (see Note 2: Canada Wind-down in Item 1).
Earnings Before Interest and Income Taxes
EBIT is summarized in the following table:
| | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Six Months Ended |
| July 29, 2023 | July 30, 2022 | | | July 29, 2023 | July 30, 2022 | |
EBIT | $192 | $202 | | | ($67) | $275 | |
EBIT as a % of net sales | 5.3% | 5.1% | | | (1.0%) | 3.7% | |
EBIT decreased $10 for the second quarter of 2023, compared with the same period in 2022, primarily due to lower volume and higher labor costs, partially offset by supply chain efficiencies. EBIT as a rate of net sales increased 20 basis points for the second quarter of 2023 due to supply chain efficiencies and lower buying and occupancy costs, partially offset by deleverage on lower sales and higher labor costs. EBIT decreased $342 and 470 basis points as a rate of net sales for the six months ended July 29, 2023, compared with the same period in 2022, primarily due to $309 of expenses associated with the wind-down of Canadian operations and lower sales, partially offset by supply chain efficiencies. The six months ended July 30, 2022 also included a $51 gain on sale of our interest in a corporate office building and an $18 impairment charge related to costs associated with the wind-down of Trunk Club.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except per share amounts and where noted otherwise)
Interest Expense, Net
Interest expense, net was $26 for the second quarter of 2023, compared with $34 for the same period in 2022, and $54 for the six months ended July 29, 2023, compared with $69 for the same period in 2022. The decreases in interest expense, net were primarily due to an increase in interest income from higher prevailing rates.
Income Tax
Income tax expense is summarized in the following table: | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Six Months Ended |
| July 29, 2023 | July 30, 2022 | | July 29, 2023 | July 30, 2022 |
Income tax expense (benefit) | $29 | | $42 | | | ($54) | | $60 | |
Effective tax rate | 17.2 | % | 25.2 | % | | 44.3 | % | 29.3 | % |
The effective tax rate decreased in the second quarter of 2023, compared with the same period in 2022, primarily due to the favorable resolution of certain tax matters. The effective tax rate increased for the six months ended July 29, 2023, compared with the same period in 2022, primarily due to the favorable resolution of certain tax matters and net tax benefits of $93 related to the wind-down of Canadian operations recorded in the first quarter of 2023.
Earnings Per Share
EPS is as follows: | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Six Months Ended |
| July 29, 2023 | July 30, 2022 | | July 29, 2023 | July 30, 2022 |
Basic | $0.85 | | $0.78 | | | ($0.42) | | $0.91 | |
Diluted | $0.84 | | $0.77 | | | ($0.42) | | $0.90 | |
Diluted EPS improved $0.07 for the second quarter of 2023 primarily due to improvements in variable costs from supply chain efficiency initiatives, partially offset by lower sales. For the six months ended July 29, 2023, diluted EPS decreased $1.32 primarily due to charges related to the wind-down of Canadian operations that decreased diluted EPS by $1.33 per share and lower sales, partially offset by improvements in variable costs from supply chain efficiency initiatives. The six months ended July 30, 2022 includes a net favorable impact of $0.15 per diluted share due to the gain on sale of our interest in a corporate office building, partially offset by an impairment charge related to costs associated with the wind-down of Trunk Club.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except per share amounts and where noted otherwise)
Adjusted EBIT, Adjusted EBITDA, Adjusted EBIT margin and Adjusted EPS (Non-GAAP financial measures)
The following are key financial metrics and, when used in conjunction with GAAP measures, we believe they provide useful information for evaluating our core business performance, enable comparison of financial results across periods and allow for greater transparency with respect to key metrics used by management for financial and operational decision-making. Adjusted EBIT, Adjusted EBITDA, Adjusted EBIT margin and Adjusted EPS exclude certain items that we do not consider representative of our core operating performance. The financial measure calculated under GAAP which is most directly comparable to Adjusted EBIT and Adjusted EBITDA is net earnings (loss). The financial measure calculated under GAAP which is most directly comparable to Adjusted EBIT margin is net earnings as a percent of net sales. The financial measure calculated under GAAP which is most directly comparable to Adjusted EPS is diluted EPS.
Adjusted EBIT, Adjusted EBITDA, Adjusted EBIT margin and Adjusted EPS are not measures of financial performance under GAAP and should be considered in addition to, and not as a substitute for, net earnings, net earnings as a percent of net sales, operating cash flows, earnings per share, earnings per diluted share or other financial measures performed in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies’ financial measures and therefore may not be comparable to methods used by other companies.
The following is a reconciliation of net earnings (loss) to Adjusted EBIT and Adjusted EBITDA and net earnings as a percent of net sales to Adjusted EBIT margin: | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Six Months Ended |
| July 29, 2023 | July 30, 2022 | | July 29, 2023 | July 30, 2022 |
Net earnings (loss) | $137 | | $126 | | | ($67) | | $146 | |
Income tax expense (benefit) | 29 | | 42 | | | (54) | | 60 | |
Interest expense, net | 26 | | 34 | | | 54 | | 69 | |
Earnings (loss) before interest and income taxes | 192 | | 202 | | | (67) | | 275 | |
| | | | | |
| | | | | |
Canada wind-down costs | — | | — | | | 309 | | — | |
Trunk Club wind-down costs | — | | 8 | | | — | | 18 | |
Gain on sale of interest in a corporate office building | — | | — | | | — | | (51) | |
Adjusted EBIT | 192 | | 210 | | | 242 | | 242 | |
| | | | | |
Depreciation and amortization expenses | 141 | | 149 | | | 285 | | 301 | |
Amortization of developer reimbursements | (17) | | (18) | | | (35) | | (37) | |
| | | | | |
Adjusted EBITDA | $316 | | $341 | | | $492 | | $506 | |
| | | | | |
Net sales | $3,662 | | $3,991 | | | $6,726 | | $7,458 | |
Net earnings (loss) as a % of net sales | 3.8 | % | 3.1 | % | | (1.0 | %) | 2.0 | % |
EBIT margin % | 5.3 | % | 5.1 | % | | (1.0 | %) | 3.7 | % |
Adjusted EBIT margin % | 5.3 | % | 5.3 | % | | 3.6 | % | 3.2 | % |
The following is a reconciliation of diluted EPS to Adjusted EPS: | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Six Months Ended |
| July 29, 2023 | July 30, 2022 | | July 29, 2023 | July 30, 2022 |
Diluted EPS | $0.84 | | $0.77 | | | ($0.42) | | $0.90 | |
| | | | | |
Canada wind-down costs | — | | — | | | 1.91 | | — | |
Trunk Club wind-down costs | — | | 0.05 | | | — | | 0.11 | |
Gain on sale of interest in a corporate office building | — | | — | | | — | | (0.31) | |
Income tax impact on adjustments1 | — | | (0.01) | | | (0.58) | | 0.05 | |
Adjusted EPS | $0.84 | | $0.81 | | | $0.91 | | $0.75 | |
| | | | | |
| | | | | |
| | | | | |
1 The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate for the respective non-GAAP adjustment.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except per share amounts and where noted otherwise)
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 over time. In addition, we have incorporated it in our executive incentive measures and we believe it is an important indicator of shareholders’ return over the long term.
Beginning in the second quarter of 2023, the Adjusted ROIC calculation was updated to exclude certain items that we do not consider representative of our core operating performance. Refer to non-operating related adjustments included within adjusted net operating profit after tax and adjusted average invested capital. Prior periods have been modified to conform with current period presentation.
Adjusted ROIC is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, return on assets, net earnings, total assets or other GAAP financial measures. Our method of calculating a non-GAAP financial measure may differ from other companies’ methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to Adjusted ROIC is return on assets. The following shows the components to reconcile the return on assets calculation to Adjusted ROIC: | | | | | | | | |
| Four Quarters Ended |
| July 29, 2023 | July 30, 2022 |
Net earnings | $32 | | $410 | |
Income tax (benefit) expense | (22) | | 153 | |
Interest expense | 137 | | 140 | |
Earnings before interest and income tax expense | 147 | | 703 | |
| | |
Operating lease interest1 | 85 | | 84 | |
Non-operating related adjustments2 | 380 | | (32) | |
Adjusted net operating profit | 612 | | 755 | |
| | |
Adjusted estimated income tax expense3 | (141) | | (206) | |
Adjusted net operating profit after tax | $471 | | $549 | |
| | |
Average total assets | $8,986 | | $9,194 | |
Average deferred property incentives in excess of ROU assets4 | (177) | | (214) | |
Average non-interest bearing current liabilities | (3,149) | | (3,396) | |
Non-operating related adjustments5 | 184 | | (15) | |
Adjusted average invested capital | $5,844 | | $5,569 | |
| | |
Return on assets | 0.4 | % | 4.5 | % |
Adjusted ROIC | 8.1 | % | 9.9 | % |
1 Operating lease interest is a component of operating lease cost recorded in occupancy costs. We add back operating lease interest for purposes of calculating adjusted net operating profit for consistency with the treatment of interest expense on our debt.
2 Non-operating related adjustments primarily relate to the wind-down of our Canadian operations and a supply chain impairment charge for the four quarters ended July 29, 2023 and the gain on sale of our interest in a corporate office building for the four quarters ended July 30, 2022. See the Adjusted EBIT and Adjusted EBITDA section, as well as our 2022 Annual Report, for detailed information on certain non-operating related adjustments.
3 Adjusted estimated income tax expense is calculated by multiplying the adjusted net operating profit by the adjusted effective tax rate (which removes the impact of non-operating related adjustments) for the trailing twelve-month periods ended July 29, 2023 and July 30, 2022. The adjusted effective tax rate is calculated by dividing adjusted income tax by adjusted earnings before income taxes for the same trailing twelve-month periods.
4 For leases with property incentives that exceed the ROU assets, we reclassify the amount from assets to other current liabilities and other liabilities on the Condensed Consolidated Balance Sheets. The current and noncurrent amounts are used to reduce average total assets above, as this better reflects how we manage our business.
5 Non-operating related adjustments primarily relate to the wind-down of our Canadian operations for the trailing twelve-month period ended July 29, 2023 and the gain on sale of our interest in a corporate office building for the trailing twelve-month period ended July 30, 2022.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except per share amounts and where noted otherwise)
LIQUIDITY
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. In the short term, our ongoing working capital and capital expenditure requirements, and any dividend payments or share repurchases, are generally funded through cash flows generated from operations. In addition, we have access to the commercial paper market and can draw on our Revolver for working capital, capital expenditures and general corporate purposes. 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, share repurchases and other future investments.
We ended the second quarter of 2023 with $885 in cash and cash equivalents and $800 of additional liquidity available on our Revolver. Cash and cash equivalents in the second quarter of 2023 increased from $494 in the second quarter of 2022, driven by cash flow from earnings, partially offset by capital expenditures and dividends. We believe that our operating cash flows are sufficient to meet our cash requirements for the next 12 months and beyond. Our cash requirements are subject to change as business conditions warrant and opportunities arise and we may elect to raise additional funds in the future through the issuance of either debt or equity.
The following is a summary of our cash flows by activity:
| | | | | | | | |
| Six Months Ended |
| July 29, 2023 | July 30, 2022 |
Net cash provided by operating activities | $465 | | $373 | |
Net cash used in investing activities | (229) | | (133) | |
Net cash used in financing activities | (38) | | (68) | |
Operating Activities
Net cash provided by operating activities increased $92 for the six months ended July 29, 2023 due to lower compensation payments in 2023 compared with 2022, partially offset by the timing of purchases and payments for inventory.
Investing Activities
Net cash used in investing activities increased $96 for the six months ended July 29, 2023, compared with the same period in 2022, primarily due to the sale of our interest in a corporate office building in 2022 and the decrease in cash and cash equivalents resulting from the deconsolidation of Canada in 2023 (see Note 1: Basis of Presentation and Note 2: Canada Wind-down in Item 1).
Capital Expenditures
Our capital expenditures, net are summarized as follows:
| | | | | | | | |
| Six Months Ended |
| July 29, 2023 | July 30, 2022 |
Capital expenditures | $225 | | $215 | |
Deferred property incentives1 | (15) | | (7) | |
Capital expenditures, net | $210 | | $208 | |
| | |
Capital expenditures as a % of net sales | 3.3 | % | 2.9 | % |
1 Deferred property incentives are included in our cash provided by operations in our Condensed Consolidated Statements of Cash Flows in Item 1. We operationally view the property incentives we receive from our developers and vendors as an offset to our capital expenditures.
Financing Activities
Net cash used in financing activities decreased $30 for the six months ended July 29, 2023, compared with the same period in 2022, primarily due to decreased share repurchases.
Share Repurchases
We repurchased $1 for the six months ended July 29, 2023, compared with $35 in the six months ended July 30, 2022.
Dividends
We paid dividends of $61 and $60 for the six months ended July 29, 2023 and July 30, 2022, or $0.38 per share for each year-to-date period.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except per share amounts and where noted otherwise)
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, we believe it provides investors with a meaningful analysis of our ability to generate cash from our business.
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 calculating a non-GAAP financial measure may differ from other companies’ methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to Free Cash Flow is net cash provided by operating activities. The following is a reconciliation of net cash provided by operating activities to Free Cash Flow:
| | | | | | | | |
| Six Months Ended |
| July 29, 2023 | July 30, 2022 |
Net cash provided by operating activities | $465 | | $373 | |
Capital expenditures | (225) | | (215) | |
Change in cash book overdrafts | 18 | | 36 | |
Free Cash Flow | $258 | | $194 | |
| | |
| | |
| | |
CAPITAL RESOURCES
Borrowing Capacity and Activity
As of July 29, 2023, we had total short-term borrowing capacity of $800 under the Revolver that expires in May 2027. As of July 29, 2023, we had no borrowings outstanding under our Revolver and no issuances outstanding under our commercial paper program. For more information about our credit facilities, see Note 4: Debt and Credit Facilities in Item 1.
Impact of Credit Ratings and Revolver Covenants
Changes in our credit ratings may impact our costs to borrow, whether our personal property secures our Revolver and whether and to what extent we are permitted to pay dividends or conduct share repurchases.
For our Revolver, the interest rate applicable to any borrowings we may enter into depends upon the type of borrowing incurred plus an applicable margin, which is determined based on our credit ratings. At the time of this report, our credit ratings and outlook were as follows:
| | | | | | | | |
| Credit Ratings | Outlook |
Moody’s | Ba1 | Negative |
S&P Global Ratings | BB+ | Negative |
Fitch | BB+ | Stable |
Should the ratings assigned to our long-term debt improve, the applicable margin associated with any borrowings under the Revolver may decrease, resulting in a lower borrowing cost under this facility. Conversely, should the ratings assigned to our long-term debt worsen, the applicable margin associated with any borrowings under the Revolver may increase, resulting in a higher borrowing cost under this facility.
As of July 29, 2023, we were in compliance with all covenants. We have certain limitations with respect to the payment of dividends and share repurchases under our Revolver agreement. For more information about our Revolver covenants, see Note 4: Debt and Credit Facilities in Item 1.
On March 1, 2023, we amended our Revolver agreement. See Note 2: Canada Wind-down in Item 1.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except per share amounts and where noted otherwise)
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, as it provides a reflection of our creditworthiness which could impact our credit ratings and borrowing costs. This metric is calculated in accordance with the updates in our Revolver covenant and is a key component in assessing whether our revolving credit facility is secured or unsecured, as well as our ability to make dividend payments and share repurchases. Our goal is to manage debt levels to achieve and maintain investment-grade credit ratings while operating with an efficient capital structure. For more information regarding our Revolver, see Note 4: Debt and Credit Facilities in Item 1.
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 GAAP financial measures. Our method of calculating a non-GAAP financial measure may differ from other companies’ methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to Adjusted debt to EBITDAR is debt to net earnings. The following shows the components to reconcile the debt to net earnings calculation to Adjusted debt to EBITDAR:
| | | | | |
| July 29, 2023 |
Debt | $2,858 | |
| |
| |
Operating lease liabilities | 1,616 | |
Adjusted debt | $4,474 | |
| |
Four Quarters Ended July 29, 2023 |
Net earnings | $32 | |
Income tax benefit | (22) | |
Interest expense, net | 114 | |
| |
Earnings before interest and income taxes | 124 | |
| |
Depreciation and amortization expenses | 588 | |
Operating Lease Cost | 272 | |
Amortization of developer reimbursements1 | 70 | |
Canada wind-down costs | 309 | |
Other Revolver covenant adjustments2 | 108 | |
Adjusted EBITDAR | $1,471 | |
| |
Debt to Net Earnings | 88.8 | |
Adjusted debt to EBITDAR | 3.0 | |
1 Amortization of developer reimbursements is a non-cash reduction of Operating Lease Cost and is therefore added back to Operating Lease Cost for purposes of our Revolver covenant calculation.
2 Other adjusting items to reconcile net earnings to Adjusted EBITDAR as defined by our Revolver covenant include interest income, certain non-cash charges and other gains and losses where relevant. For the four quarters ended July 29, 2023, other Revolver covenant adjustments primarily include a supply chain impairment charge. See our 2022 Annual Report for detailed information on certain non-operating related adjustments.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except per share amounts and where noted otherwise)
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in conformity with GAAP requires that we make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities.
We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We believe that the estimates, assumptions and judgments involved in the accounting policies referred to in our 2022 Annual Report have the greatest potential effect on our financial statements, so we consider these to be our critical accounting policies and estimates. Our management has discussed the development and selection of these critical accounting estimates with the Audit & Finance Committee of our Board of Directors. There have been no material changes to our significant accounting policies or critical accounting estimates as described in our 2022 Annual Report, except as noted below, and the following should be read in conjunction with Note 2: Canada Wind-down in Item 1. Canada Wind-down
To assess the estimated fair value of our Nordstrom Canada investment and our related-party receivables, we estimated the assets available for distribution in relation to expected claims. At the time of filing, the estimated amount of Nordstrom Canada’s liabilities exceeded the estimated fair value of assets available for distribution to creditors, and in relation to the receivables, we may not recover any proceeds. As a result, our fair value was recorded as zero in our Condensed Consolidated Balance Sheets as of April 29, 2023. As of July 29, 2023, based on currently available information, there have been no significant changes in our estimates.
In the six months ended July 29, 2023, we recognized a liability for certain Nordstrom, Inc. guarantees related to a portion of Nordstrom Canada leases. The estimated liability is our current best estimate and is based on expectations that claims will be asserted against us and negotiated settlements will be reached, and not on any determination that it is probable that we would be found liable were these claims to be litigated and for how much.
Our estimates are dependent on the outcome of the Nordstrom Canada wind-down process, including the amount of third-party and Nordstrom claims asserted and recognized in the claims process, the amount of assets available for distribution, the negotiation of a CCAA plan of arrangement approved by the creditors and the Ontario Superior Court of Justice and the outcome of negotiations regarding the leases. We continue to work through the wind-down process and our estimates of losses are based on currently available information and our assessment of the validity of certain expected claims. These estimates may change as new information becomes available and it is reasonably possible that they may materially change from the estimated amounts. Increases in estimated costs to settle claims and decreases in estimated assets available for distribution may result in additional material charges. At the same time, any future decreases in estimated costs to settle claims or increases in estimated assets available for distribution may result in a gain, which would reduce our estimated charges. See Note 2: Canada Wind-down for additional information.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2022, the SEC adopted the final rule under SEC Release No. 33-11138, Insider Trading Arrangements and Related Disclosures, which creates new disclosure requirements regarding our insider trading policies and procedures and equity compensation awards made close in time to disclosure of material nonpublic information. Quarterly disclosure requirements under this final rule became effective for us in the second quarter of 2023 and annual disclosure requirements will be effective for us in the fourth quarter of 2023. The adoption of this final rule is not anticipated to have a material impact on our results of operations, liquidity or capital resources.
In May 2023, the SEC adopted the final rule under SEC Release No. 34-97424, Share Repurchase Disclosure Modernization, requiring disclosures related to issuers’ share repurchases that will provide investors with enhanced information to assess the purposes and effects of the repurchases.Disclosure requirements under this rule will be effective for us in the fourth quarter of 2023. The adoption of this final rule is not anticipated to have a material impact on our results of operations, liquidity or capital resources.
In July 2023, the SEC adopted the final rule under SEC Release No. 33-11216, Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, requiring disclosure of material cybersecurity incidents on Form 8-K and periodic disclosure of a registrant’s cybersecurity risk management, strategy and governance in annual reports. Regulation S-K Item 6 disclosure requirements under this rule will be effective for us in the fourth quarter of 2023. Incident disclosure requirements in Form 8-K will be effective for us on December 18, 2023. The adoption of this final rule is not anticipated to have a material impact on our results of operations, liquidity or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
DISCLOSURE CONTROLS AND PROCEDURES
AsOn May 29, 2023, Cathy R. Smith was appointed Chief Financial Officer, and the Company’s principal financial officer and principal accounting officer. In the second quarter of 2023, Michael W. Maher, who was an officer, employee and had been serving as the Company’s interim principal financial officer for the purposes of the endExchange Act since the third quarter of 2022, departed the Company. We do not believe that Mr. Maher’s resignation has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our Chief Executive Officer, Erik B. Nordstrom, serves as our principal executive officer for the purposes of the period covered by this Quarterly Report on Form 10-Q, the Company performed an evaluation underExchange Act.
Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we have performed an evaluation of the design and effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) underas of the Exchange Act). last day of the period covered by this report.
Based upon that evaluation, our principal executive officer and principal financial officer concluded that as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effectiveeffective. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) under the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed in the timelyreports that we file or submit under the Exchange Act is recorded, processed, summarized and accurate recording, processing, summarizing and reporting of material financial and non-financial informationreported within the time periods specified within the SEC’s rules and forms. Our principal executive officer and principal financial officer also concluded that our disclosureDisclosure controls and procedures were effectiveinclude, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject from time to time to various claims and lawsuits arising in the ordinary course of business, including lawsuits alleging violations of state and/or federal wage and hour and other employment laws, privacy and other consumer-based claims. Some of these lawsuits may include certified classes of litigants, or purport or may be determined to be class or collective actions and seek substantial damages or injunctive relief, or both, and some may remain unresolved for several years. We believe the recorded reservesaccruals in our Condensed Consolidated Financial Statements are adequate in light of the probable and estimable liabilities.
On March 2, 2023, Nordstrom Canada commenced a wind-down of its business operations. Nordstrom Canada entities obtained an Initial Order from the Ontario Superior Court of Justice under the CCAA to facilitate the wind-down in an orderly fashion. See Note 2: Canada Wind-down in Part I for more information.
As of the date of this report, we do not believe any other currently identified claim, proceeding or litigation, either alone or in the aggregate, will have a material impact on our results of operations, financial position or cash flows. Since these matters are subject to inherent uncertainties, our view of them may change in the future.
Item 1A. Risk Factors.
The exploration of a possible “going private transaction” by the Nordstrom family could impact our relationships with our customers, employees, suppliers and partners, operating results and business.
In June 2017, members of the Nordstrom family formed a group (the “Group”) to explore the possibility of pursuing a “going private transaction” involving the acquisition by the Group of 100% of our outstanding shares of common stock (a “Going Private Transaction”). Our Board of Directors also formed a special committee (the “Special Committee”) comprised of independent directors to act on our behalf in connection with such exploration by the Group and any possible transaction. As of October 2017, the Group has suspended active exploration of a Going Private Transaction for the balance of the year, with the intent to resume such exploration after the conclusion of the holiday season. The Group has not made a proposal to us regarding any such Going Private Transaction and may never make such a proposal. We do not plan to disclose developments or provide updates on the progress or status of any potential Going Private Transaction until the Special Committee deems further disclosure is appropriate or required. Accordingly, speculation regarding any developments related to the review of a Going Private Transaction and perceived uncertainties related to our future could cause our stock price to fluctuate significantly.
The exploration of a potential Going Private Transaction or alternative may expose us and our operations to a number of risks and uncertainties, including the potential failure to retain, attract or strengthen our relationships with key personnel, current and potential customers, suppliers, and partners which may cause them to terminate, or not to renew or enter into, arrangements with us; the potential incurrence of expenses associated with the retention of legal, financial and other advisors regardless of whether any transaction is consummated; distractions and disruptions in our business; and exposure to potential litigation in connection with this process and effecting any transaction, any of which could adversely affect our business, financial condition and results of operations as well as the market price of our common stock.
If we do not effectively design and implement our strategic and business planning processes to attract, retain, train and develop talent and future leaders, our business may suffer.
We rely on the experience of our senior management, who have specific knowledge relating to us and our industry that is difficult to replace, and the talents of our workforce to execute our business strategies and objectives. If unexpected turnover occurs without adequate succession plans, the loss of the services of any of these individuals, or any resulting negative perceptions of our business, could damage our reputation and our business. Additionally, our ability to maintain relationships with and motivate our employees and to effectively attract, develop and retain our future leaders, could be impacted by the uncertainty about the possibility of a Going Private Transaction.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) SHARE REPURCHASES
(Dollar and share amounts in millions, except per share amounts)
In February 2017, our BoardWe repurchased no shares of Directors authorized a program to repurchase up to $500 of our outstanding common stock through August 31, 2018.Duringduring the thirdsecond quarter of 2017,2023 and we did not repurchase any shares of our common stock and do not plan to do so while the Group explores the possibility of a “going private transaction.” We had $414$438 remaining in share repurchase capacity as of October 28, 2017. The actual timing, price, manner and amounts of futureJuly 29, 2023. See Note 7: Shareholders’ Equity in Item 1 for more information about our May 2022 share repurchases, if any, will be subject to market and economic conditions and applicable SEC rules.repurchase program.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibits are(a) The information required under this item is incorporated herein by reference or are filed or furnished withas part of this report at:All other exhibits are omitted because they are not applicable, not required or because the information required has been given as set forth in the Exhibit Index on page 30 hereof.
part of this report.
NORDSTROM, INC.
Exhibit Index
| | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference |
Exhibit | Form | Exhibit | Filing Date |
| | | | | | |
4.1 | | | | 8-K | 4.1 | 8/21/2023 |
| | | | | | |
10.1 | * | | | DEF 14A | Appendix C | 4/28/2023 |
| | | | | | |
31.1 | † | | | | | |
| | | | | | |
31.2 | † | | | | | |
| | | | | | |
32.1 | ‡ | | | | | |
| | | | | | |
101.INS | † | | Inline XBRL Instance Document | | | |
| | | | | | |
101.SCH | † | | Inline XBRL Taxonomy Extension Schema Document | | | |
| | | | | | |
101.CAL | † | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | |
| | | | | | |
101.LAB | † | | Inline XBRL Taxonomy Extension Labels Linkbase Document | | | |
| | | | | | |
101.PRE | † | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | |
| | | | | | |
101.DEF | † | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | |
| | | | | | |
104 | † | | Cover Page Interactive Data File (Inline XBRL) | | | |
| | | | | | |
|
* Management contract, compensatory plan or arrangement |
† Filed herewith electronically |
‡ Furnished herewith electronically |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| |
NORDSTROM, INC. |
(Registrant) |
| |
/s/ Anne L. Bramman |
Anne L. Bramman |
Chief Financial Officer |
(Principal Financial Officer) |
| |
Date: | November 28, 2017 |
NORDSTROM, INC.
Exhibit Index
|
| | | | |
Exhibit | | Method of FilingNORDSTROM, INC. |
| | | | Filed herewith electronically(Registrant) |
| | | | |
/s/ Cathy R. Smith |
Cathy R. Smith |
| | Filed herewith electronically |
| | | | (Principal Financial Officer and Principal Accounting Officer) |
| | | | Furnished herewith electronically |
Date: | | | | |
101.INS | | XBRL Instance Document | | Filed herewith electronically |
| | | | |
101.SCH | | XBRL Taxonomy Extension Schema Document | | Filed herewith electronically |
| | | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith electronically |
| | | | |
101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document | | Filed herewith electronically |
| | | | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith electronically |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith electronically |
| | | | September 1, 2023 |