UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 4, 20192, 2020
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to___________
Commission File Number: 001-15059
NORDSTROM, INC.
(Exact name of registrant as specified in its charter) |
| | |
| Washington | | 91-0515058 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1617 Sixth Avenue, Seattle, Washington98101
(Address of principal executive offices)
206-628-2111
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: |
| | |
1617 Sixth Avenue, Seattle, WashingtonTitle of each class | Trading Symbol | 98101Name of each exchange on which registered |
(Address of principal executive offices)Common stock, without par value | JWN | (Zip Code)New York Stock Exchange |
206-628-2111
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO ¨Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES þ NO ¨Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. |
| | | |
| ☑ | Large accelerated filer þ Accelerated Filer | ☐ | Accelerated filer¨ |
| ☐ | Non-accelerated filer¨ | ☐ | Smaller reporting company¨ |
| | | ☐ | Emerging growth company¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO þ
Securities registered pursuant to Section 12(b) of the Act: |
| | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common stock, without par value | JWN | New York Stock Exchange |
Yes ☐No ☑Common stock outstanding as of May 30, 2019: 154,651,7592020: 157,032,858 shares
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” “pursue,” “going forward,” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, our anticipated financial outlook for the fiscal year ending February 1, 2020, our anticipated annual total sales rates, our anticipated new store openings in existing, new and international markets, our anticipated Adjusted Return on Invested Capital,January 30, 2021, trends in our operations and the following:
Strategic and Operational
timelythe impacts of the recent novel coronavirus (“COVID-19”) global pandemic and effective implementation of evolvingthe significant civil unrest, looting and rioting in several urban centers on our business model and results, which effects may include the exacerbation of any of the risks discussed below,
successful execution of our customer strategy to provide a differentiatedthe best possible service, product and seamless experience, across all Nordstrom channels,both in stores and online,
our ability to executetimely and manage the costseffective implementation and execution of our evolving business model, including the executionincluding:
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| ◦ | scaling our market strategy, which consists of the integration of our physical and digital assets, development of new supply chain capabilities and timely delivery of products, |
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| ◦ | our merchandise strategy, including our ability to offer compelling assortments, |
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| ◦ | enhancing our platforms and processes to allow for more flexible inventory management, |
our ability to effectively allocate and enhancement of existing ones, development of applications for electronic devices, improvement of customer-facing technologies, timely delivery of products purchased digitally, enhancement of inventory management systems, more fluid inventory availabilityscale our marketing strategies and resources between our digital channelsThe Nordy Club, advertising and retail stores through our local market strategy, and greater consistency in marketing strategies,promotional campaigns,
our ability to respond to the business andevolving retail environment as well asand our development of new market strategies and customer offerings, which result from new fashion trends, environmental considerations and consumer preferences, includingour customers’ changing expectations of service and experience in stores and online,
our ability to properly balance our investments in existing and new store locations, technology and supply chain facilities, especiallyincluding the expansion of our investments in our Nordstrom NYC and our Los Angeles market integration,strategy,
successful execution of our information technology strategy, including engagement with third-party service providers,
our ability to effectively utilize internal and third-party data in strategic planning and decision making,
our ability to maintain or expand our presence, including timely completion of construction associated with new, relocated and remodeled stores and Supply Chain Network facilities, as well as, any potential store closures, all of which may be impacted by third parties, consumer demand and other natural or man-made disruptions,
efficient and proper allocation of our capital resources,
effective inventory management processes and systems, fulfillment and supply chain processes and systems, our ability to prevent or mitigate disruptions in our supply chain and our ability to control costs,
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,
our ability to safeguard our reputation and maintain relationships with our vendors, and third-party service providers and landlords
our ability to maintain relationships with and motivate our employees and to effectively attract, develop and retain our top talent and future leaders,
our ability to realize the expected benefits, respond to potential risks and appropriately manage costs associated with our credit card revenue sharing program, agreement with TD Bank, N.A. (“TD”),
the effectiveness of our loyalty program, including the implementation of any changes in our program, planned advertising, marketing and promotional campaigns in the highly competitive and promotional retail industry,
market fluctuations, increases in operating costs, exit costs and overall liabilities and losses associated with owning and leasing real estate,
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 or our strategic direction changes,
compliance with debt and operating covenants, availability and cost of credit, changes in our credit rating and changes in interest rates, and our ability to maintain an investment grade credit rating,
the actual timing, price, manner and amounts of future share repurchases, by us,dividend payments, or share issuances, if any, or any share issuances by us,
Economic and External
the length and severity of epidemics or pandemics, such as the COVID-19 pandemic, or other catastrophic events, and the related impact on customer behavior, store and online operations and supply chain functions, as well as our future consolidated financial position, results of operations and cash flows,
the impact of the seasonal nature of our business and cyclical customer spending,
the impact of economic and market conditions and the resultant impact on consumer spending and credit patterns,
the impact of economic, environmental or political conditions in the U.S. and Canada and countries where our third-party vendors operate,
weather conditions, natural disasters, health hazards,epidemics, national security or other market and supply chain disruptions, includingor the effects of tariffs, 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 employment and tax, information security and privacy, consumer credit and the outcome of any claims and litigation and resolution of such matters,
the impact of the current regulatory environment and financial system, health care and tax reforms,
the impact of changes in accounting rules and regulations, changes in our interpretation of the rules or regulations, or changes in underlying assumptions, estimates or judgments,
the impact of claims, litigation and regulatory investigations, including those related to information security, privacy and consumer credit.
These and other factors, including those factors we discussed in our Form 8-K filed with the SEC on April 8, 2020, could affect our financial results and cause our actual results to differ materially from any forward-looking information we may provide. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. All references to “Nordstrom,” “we,” “us,” “our,” or the “Company” mean Nordstrom, Inc. and its subsidiaries.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
DEFINITIONS
The following table includes definitions of Nordstrom commonly used terms: |
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| Term | Definition |
20182019 Plan | 2019 Equity Incentive Plan |
| 2019 Annual Report | Annual Report on Form 10-K filed on March 18, 201920, 2020 |
| Adjusted EBITDA | Adjusted earnings before interest, income taxes, depreciation and amortization (a non-GAAP financial measure) |
| Adjusted EBITDAR | Adjusted earnings before interest, income taxes, depreciation, amortization and rent, as defined by our Revolver covenant (a non-GAAP financial measure) |
| Adjusted ROIC | Adjusted return on invested capital (a non-GAAP financial measure) |
| ASC | Accounting Standards Codification |
| ASU | Accounting Standards Update |
BOPUSCARES Act | Buy Online, Pickup in StoreCoronavirus Aid, Relief and Economic Security Act |
| CODM | Chief operating decision maker |
Estimated Non-recurring ChargeCOVID-19 | Estimated non-recurring credit-related charge recognized during the third quarter of 2018Novel coronavirus |
| Digital sales | Online sales and digitally assisteddigitally-assisted store sales, which include BOPUS,Online Order Pickup, Ship to Store and Style Board, a digital selling tool |
| EBIT | Earnings (Loss) before interest and income taxes |
| EPS | Earnings per share |
| ESPP | Employee Stock Purchase Plan |
| Exchange Act | Securities Exchange Act of 1934, as amended |
| Express Services | Full-Price order pickups and returns offered at certain Nordstrom Rack stores |
| FASB | Financial Accounting Standards Board |
| First quarter of 2020 | 13 fiscal weeks ending May 2, 2020 |
| First quarter of 2019 | 13 fiscal weeks ending May 4, 2019 |
First quarter of 2018Fiscal year 2020 | 1352 fiscal weeks ending May 5, 2018January 30, 2021 |
| Fiscal year 2019 | 52 fiscal weeks ending February 1, 2020 |
Fiscal year 2018 | 52 fiscal weeks ending February 2, 2019 |
| FLS | Full-line stores |
| Full-Price | Nordstrom U.S. FLS,full-line stores, Nordstrom.com, Canada, Trunk Club, Jeffrey and Nordstrom Local |
| GAAP | Generally accepted accounting principles |
| Generational Investments | NRHL, Canada, Trunk Club and Nordstrom NYC |
| Gross profit | Net sales less cost of sales and related buying and occupancy costs |
| Inventory turnover rate | Trailing 4-quarter cost of sales and related buying and occupancy costs divided by the trailing 4-quarter average inventory |
IRS | Internal Revenue Service |
| Lease Standard | ASU No. 2016-02, Leases, and all related amendments (ASC 842) |
LIBORLeverage Ratio | London Inter-bank Offered RateRatio of adjusted debt to earnings before interest, income taxes, depreciation, amortization and rent (a non-GAAP financial measure) |
| MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| Nordstrom Local | Nordstrom Local neighborhoodservice hubs, which offer Full-Price order pickups, returns, alterations and other services |
| Nordstrom NYC | Our Manhattan, New York City flagship FLS, store, including the existing Men’s store and the Women’s store (upon opening in October 2019)location |
| The Nordy Club | Our evolved customer loyalty program launchedenhanced in October 2018 |
| NRHL | Nordstromrack.com/HauteLook |
| NYSE | New York Stock Exchange |
| Off-Price | Nordstrom U.S. Rack stores, NRHLNordstromrack.com/HauteLook and Last Chance clearance stores |
| Operating Lease Cost | Fixed rent expense, including fixed common area maintenance expense, net of developer reimbursement amortization |
| PCAOB | Public Company Accounting Oversight Board (United States) |
| Property incentives | Developer and vendor reimbursements |
| PSU | Performance share unitsunit |
| Revolver | Senior unsecured revolving credit facility |
| ROU asset | Operating lease right-of-use asset |
| RSU | Restricted stock unitsunit |
| SEC | Securities and Exchange Commission |
Securities Act | Securities Act of 1933, as amended |
| SERP | Unfunded defined benefit Supplemental Executive Retirement Plan |
| Secured Notes | 8.750% senior secured notes due May 2025 |
| SG&A | Selling, general and administrative |
| Supply Chain Network | Consists of fulfillmentFulfillment centers that primarily process and ship orders to our customers, distribution centers that primarily process and ship merchandise to our stores and other facilities and Omni-channelomni-channel centers that both fulfill customer orders and ship merchandise to our stores |
| TD | TDToronto-Dominion Bank, N.A. |
XBRL | eXtensible Business Reporting Language |
2010 Plan | 2010 Equity Incentive Plan |
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in millions except per share amounts)
(Unaudited)
| | | | Quarter Ended | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
| May 2, 2020 |
| | May 4, 2019 |
|
| Net sales |
| $3,349 |
| |
| $3,469 |
|
| $2,026 |
| |
| $3,349 |
|
| Credit card revenues, net | 94 |
| | 92 |
| 93 |
| | 94 |
|
| Total revenues | 3,443 |
| | 3,561 |
| 2,119 |
| | 3,443 |
|
| Cost of sales and related buying and occupancy costs | (2,228 | ) | | (2,288 | ) | (1,810 | ) | | (2,228 | ) |
| Selling, general and administrative expenses | (1,138 | ) | | (1,120 | ) | (1,122 | ) | | (1,138 | ) |
| Earnings before interest and income taxes | 77 |
|
| 153 |
| |
| (Loss) earnings before interest and income taxes | | (813 | ) |
| 77 |
|
| Interest expense, net | (24 | ) |
| (28 | ) | (34 | ) | | (24 | ) |
| Earnings before income taxes | 53 |
| | 125 |
| |
| Income tax expense | (16 | ) | | (38 | ) | |
| Net earnings |
| $37 |
| |
| $87 |
| |
| (Loss) earnings before income taxes | | (847 | ) | | 53 |
|
| Income tax benefit (expense) | | 326 |
| | (16 | ) |
| Net (loss) earnings | |
| ($521 | ) | |
| $37 |
|
| | | | | | | |
| Earnings per share: | | | | |
| (Loss) earnings per share: | | | | |
| Basic |
| $0.24 |
| |
| $0.52 |
|
| ($3.33 | ) | |
| $0.24 |
|
| Diluted |
| $0.23 |
| |
| $0.51 |
|
| ($3.33 | ) | |
| $0.23 |
|
| | | | | | | |
| Weighted-average shares outstanding: | | | | | | |
| Basic | 155.0 |
| | 167.8 |
| 156.4 |
| | 155.0 |
|
| Diluted | 156.2 |
| | 170.2 |
| 156.4 |
| | 156.2 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Amounts in millions)
(Unaudited)
| | | | Quarter Ended | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
| May 2, 2020 |
| | May 4, 2019 |
|
| Net earnings |
| $37 |
| |
| $87 |
| |
| Net (loss) earnings | |
| ($521 | ) | |
| $37 |
|
| Foreign currency translation adjustment | (9 | ) | | (11 | ) | (24 | ) | | (9 | ) |
| Post retirement plan adjustments, net of tax | — |
| | 1 |
| 2 |
| | — |
|
| Comprehensive net earnings |
| $28 |
| |
| $77 |
| |
| Comprehensive net (loss) earnings | |
| ($543 | ) | |
| $28 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
NORDSTROM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
| | | | May 4, 2019 |
| | February 2, 2019 |
| | May 5, 2018 |
| May 2, 2020 |
| | February 1, 2020 |
| | May 4, 2019 |
|
| Assets | | | | | | | | | | |
| Current assets: | | | | | | | | | | |
| Cash and cash equivalents |
| $448 |
| |
| $957 |
| |
| $966 |
|
| $1,355 |
| |
| $853 |
| |
| $448 |
|
| Accounts receivable, net | 233 |
| | 148 |
| | 186 |
| 154 |
| | 179 |
| | 233 |
|
| Merchandise inventories | 2,006 |
| | 1,978 |
| | 2,120 |
| 1,489 |
| | 1,920 |
| | 2,006 |
|
| Prepaid expenses and other | 271 |
| | 291 |
| | 291 |
| 669 |
| | 278 |
| | 271 |
|
| Total current assets | 2,958 |
| | 3,374 |
| | 3,563 |
| 3,667 |
| | 3,230 |
| | 2,958 |
|
| | | | | | | | | | | |
| Land, property and equipment (net of accumulated depreciation of $6,678, $6,647 and $6,227) | 3,963 |
| | 3,921 |
| | 3,887 |
| |
| Land, property and equipment (net of accumulated depreciation of $6,683, $6,995 and $6,678) | | 3,974 |
| | 4,179 |
| | 3,963 |
|
| Operating lease right-of-use assets | 1,833 |
| | — |
| | — |
| 1,722 |
| | 1,774 |
| | 1,833 |
|
| Goodwill | 249 |
| | 249 |
| | 249 |
| 249 |
| | 249 |
| | 249 |
|
| Other assets | 335 |
| | 342 |
| | 317 |
| 357 |
| | 305 |
| | 335 |
|
| Total assets |
| $9,338 |
| |
| $7,886 |
| |
| $8,016 |
|
| $9,969 |
| |
| $9,737 |
| |
| $9,338 |
|
| | | | | | | | | | | |
| Liabilities and Shareholders’ Equity | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | |
| Borrowings under revolving line of credit | |
| $800 |
| |
| $— |
| |
| $— |
|
| Accounts payable |
| $1,619 |
| |
| $1,469 |
| |
| $1,575 |
| 1,125 |
| | 1,576 |
| | 1,619 |
|
| Accrued salaries, wages and related benefits | 315 |
| | 580 |
| | 317 |
| 280 |
| | 510 |
| | 315 |
|
| Current portion of operating lease liabilities | 237 |
| | — |
| | — |
| 243 |
| | 244 |
| | 237 |
|
| Other current liabilities | 1,222 |
| | 1,324 |
| | 1,307 |
| 1,351 |
| | 1,190 |
| | 1,222 |
|
| Current portion of long-term debt | 499 |
| | 8 |
| | 56 |
| — |
| | — |
| | 499 |
|
| Total current liabilities | 3,892 |
| | 3,381 |
| | 3,255 |
| 3,799 |
| | 3,520 |
| | 3,892 |
|
| | | | | | | | | | | |
| Long-term debt, net | 2,177 |
| | 2,677 |
| | 2,680 |
| 3,264 |
| | 2,676 |
| | 2,177 |
|
| Deferred property incentives, net | 6 |
| | 457 |
| | 495 |
| |
| Non-current operating lease liabilities | 1,951 |
| | — |
| | — |
| 1,836 |
| | 1,875 |
| | 1,951 |
|
| Other liabilities | 661 |
| | 498 |
| | 516 |
| 673 |
| | 687 |
| | 667 |
|
| | | | | | | | | | | |
| Commitments and contingencies (Note 7) |
| |
| |
| |
| Commitments and contingencies (Note 5) | |
| |
| |
|
| | | | | | | | | | | |
| Shareholders’ equity: | | | | | | | | | | |
| Common stock, no par value: 1,000 shares authorized; 154.6, 157.6 and 167.8 shares issued and outstanding | 3,067 |
| | 3,048 |
| | 2,852 |
| |
| Common stock, no par value: 1,000 shares authorized; 157.0, 155.6 and 154.6 shares issued and outstanding | | 3,148 |
| | 3,129 |
| | 3,067 |
|
| Accumulated deficit | (2,370 | ) | | (2,138 | ) | | (1,738 | ) | (2,661 | ) | | (2,082 | ) | | (2,370 | ) |
| Accumulated other comprehensive loss | (46 | ) | | (37 | ) | | (44 | ) | (90 | ) | | (68 | ) | | (46 | ) |
| Total shareholders’ equity | 651 |
| | 873 |
| | 1,070 |
| 397 |
| | 979 |
| | 651 |
|
| Total liabilities and shareholders’ equity |
| $9,338 |
| |
| $7,886 |
| |
| $8,016 |
|
| $9,969 |
| |
| $9,737 |
| |
| $9,338 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts in millions except per share amounts)
(Unaudited)
| | | | | | | | | | Accumulated |
| | | Quarter Ended |
| | | | | | | | Other |
| | | May 2, 2020 |
| | May 4, 2019 |
|
| | Common Stock | | Accumulated |
| | Comprehensive |
| | | |
| | Shares |
| | Amount |
| | Deficit |
| | Loss |
| | Total |
| |
| Balance at February 2, 2019 | 157.6 |
| |
| $3,048 |
| |
| ($2,138 | ) | |
| ($37 | ) | |
| $873 |
| |
| Cumulative effect of adopted accounting standard | — |
| | — |
| | (25 | ) | | — |
| | (25 | ) | |
| Net earnings | — |
| | — |
| | 37 |
| | — |
| | 37 |
| |
| Other comprehensive loss | — |
| | — |
| | — |
| | (9 | ) | | (9 | ) | |
| Dividends ($0.37 per share) | — |
| | — |
| | (58 | ) | | — |
| | (58 | ) | |
| Common stock | | | | |
| Balance, beginning of period | |
| $3,129 |
| |
| $3,048 |
|
| Issuance of common stock under stock compensation plans | 0.3 |
| | 10 |
| | — |
| | — |
| | 10 |
| 11 |
| | 10 |
|
| Stock-based compensation | 0.8 |
| | 9 |
| | — |
| | — |
| | 9 |
| 8 |
| | 9 |
|
| Balance, end of period | |
| $3,148 |
| |
| $3,067 |
|
| | | | | |
| Accumulated deficit | | | | |
| Balance, beginning of period | |
| ($2,082 | ) | |
| ($2,138 | ) |
| Cumulative effect of adopted accounting standards | | — |
| | (25 | ) |
| Net (loss) earnings | | (521 | ) | | 37 |
|
| Dividends | | (58 | ) | | (58 | ) |
| Repurchase of common stock | (4.1 | ) | | — |
| | (186 | ) | | — |
| | (186 | ) | — |
| | (186 | ) |
| Balance at May 4, 2019 | 154.6 |
| |
| $3,067 |
| |
| ($2,370 | ) | |
| ($46 | ) | |
| $651 |
| |
| Balance, end of period | |
| ($2,661 | ) | |
| ($2,370 | ) |
| | | | | | | | | | | | | |
| Accumulated other comprehensive loss | | | | |
| Balance, beginning of period | |
| ($68 | ) | |
| ($37 | ) |
| Other comprehensive loss | | (22 | ) | | (9 | ) |
| Balance, end of period | |
| ($90 | ) | |
| ($46 | ) |
| | | | | | | | | | | | | |
| Total | |
| $397 |
| |
| $651 |
|
| | | | | | | | Accumulated |
| | | | | |
| | | | | | | | Other |
| | | |
| | Common Stock | | Accumulated |
| | Comprehensive |
| | | |
| | Shares |
| | Amount |
| | Deficit |
| | Loss |
| | Total |
| |
| Balance at February 3, 2018 | 167.0 |
| |
| $2,816 |
| |
| ($1,810 | ) | |
| ($29 | ) | |
| $977 |
| |
| Cumulative effect of adopted accounting standards | — |
| | — |
| | 60 |
| | (5 | ) | | 55 |
| |
| Net earnings | — |
| | — |
| | 87 |
| | — |
| | 87 |
| |
| Other comprehensive loss | — |
| | — |
| | — |
| | (10 | ) | | (10 | ) | |
| Dividends ($0.37 per share) | — |
| | — |
| | (62 | ) | | — |
| | (62 | ) | |
| Issuance of common stock under stock compensation plans | 0.6 |
| | 24 |
| | — |
| | — |
| | 24 |
| |
| Stock-based compensation | 0.5 |
| | 12 |
| | — |
| | — |
| | 12 |
| |
| Repurchase of common stock | (0.3 | ) | | — |
| | (13 | ) | | — |
| | (13 | ) | |
| Balance at May 5, 2018 | 167.8 |
| |
| $2,852 |
| |
| ($1,738 | ) | |
| ($44 | ) | |
| $1,070 |
| |
| Dividends per share | |
| $0.37 |
| |
| $0.37 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
| | | | Quarter Ended | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
| May 2, 2020 |
| | May 4, 2019 |
|
| Operating Activities | | | | | | |
| Net earnings |
| $37 |
| |
| $87 |
| |
| Adjustments to reconcile net earnings to net cash used in operating activities: | | | | |
| Net (loss) earnings | |
| ($521 | ) | |
| $37 |
|
| Adjustments to reconcile net (loss) earnings to net cash used in operating activities: | | | | |
| Depreciation and amortization expenses and other, net | 165 |
| | 169 |
| 178 |
| | 165 |
|
| Amortization of deferred property incentives | — |
| | (18 | ) | |
| Non-cash lease expense (including developer reimbursement amortization of $19) | 43 |
| | — |
| |
| Asset impairment | | 117 |
| | — |
|
| Right-of-use asset amortization | | 44 |
| | 43 |
|
| Deferred income taxes, net | 18 |
| | 6 |
| (54 | ) | | 18 |
|
| Stock-based compensation expense | 20 |
| | 23 |
| 13 |
| | 20 |
|
| Change in operating assets and liabilities: |
| | |
| | |
| Accounts receivable | (2 | ) | | (42 | ) | 25 |
| | (2 | ) |
| Merchandise inventories | (89 | ) | | (201 | ) | 228 |
| | (89 | ) |
| Prepaid expenses and other assets | (12 | ) | | (2 | ) | (393 | ) | | (12 | ) |
| Accounts payable | 181 |
| | 212 |
| (292 | ) | | 181 |
|
| Accrued salaries, wages and related benefits | (266 | ) | | (259 | ) | (227 | ) | | (266 | ) |
| Other current liabilities | (74 | ) | | (24 | ) | 167 |
| | (74 | ) |
| Deferred property incentives | 3 |
| | 24 |
| |
| Lease liabilities (including operating lease interest of $23) | (59 | ) | | — |
| |
| Lease liabilities | | (65 | ) | | (59 | ) |
| Other liabilities | 4 |
| | (3 | ) | 2 |
| | 7 |
|
| Net cash used in operating activities | (31 | ) |
| (28 | ) | (778 | ) |
| (31 | ) |
| | | | | | | |
| Investing Activities | | | | | | |
| Capital expenditures | (249 | ) | | (129 | ) | (131 | ) | | (249 | ) |
| Other, net | 1 |
| | (20 | ) | 5 |
| | 1 |
|
| Net cash used in investing activities | (248 | ) | | (149 | ) | (126 | ) | | (248 | ) |
| | | | | | | |
| Financing Activities | | | | | | |
| Principal payments on long-term borrowings | — |
| | (3 | ) | |
| Proceeds from revolving line of credit | | 800 |
|
| — |
|
| Proceeds from long-term borrowings | | 600 |
| | — |
|
| Increase in cash book overdrafts | 40 |
| | 27 |
| 83 |
| | 40 |
|
| Cash dividends paid | (58 | ) | | (62 | ) | (58 | ) | | (58 | ) |
| Payments for repurchase of common stock | (210 | ) | | (13 | ) | — |
| | (210 | ) |
| Proceeds from issuances under stock compensation plans | 10 |
| | 24 |
| 11 |
| | 10 |
|
| Tax withholding on share-based awards | (12 | ) | | (11 | ) | (8 | ) | | (12 | ) |
| Net cash used in financing activities | (230 | ) | | (38 | ) | |
| Other, net | | (11 | ) | | — |
|
| Net cash provided by (used in) financing activities | | 1,417 |
| | (230 | ) |
| | | | | | | |
| Net decrease in cash and cash equivalents | (509 | ) | | (215 | ) | |
| Effect of exchange rate changes on cash and cash equivalents | | (11 | ) | | — |
|
| Net increase (decrease) in cash and cash equivalents | | 502 |
| | (509 | ) |
| Cash and cash equivalents at beginning of period | 957 |
| | 1,181 |
| 853 |
| | 957 |
|
| Cash and cash equivalents at end of period |
| $448 |
| |
| $966 |
|
| $1,355 |
| |
| $448 |
|
| | | | | | | |
| Supplemental Cash Flow Information | | | | | | |
| Cash paid during the period for: | | | | | | |
| Income taxes, net |
| $8 |
| |
| $8 |
|
| $— |
| |
| $8 |
|
| Interest, net of capitalized interest | 31 |
| | 35 |
| 34 |
| | 31 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and per unit amounts)
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements include the balances of Nordstrom, Inc. and its subsidiaries. All intercompany transactions and balances are eliminated in consolidation. The interim Condensed Consolidated Financial Statements have been prepared on a basis consistent in all material respects with the accounting policies described and applied in our 20182019 Annual Report except as described in Note 2: Leases, and reflect all adjustments of a normal recurring nature that are, in management’s opinion, necessary for the fair presentation of the results of operations, financial position and cash flows for the periods presented.
The Condensed Consolidated Financial Statements as of and for the periods ended May 4, 20192, 2020 and May 5, 20184, 2019 are unaudited. The Condensed Consolidated Balance Sheet as of February 2, 20191, 2020 has been derived from the audited Consolidated Financial Statements included in our 20182019 Annual Report. The interim Condensed Consolidated Financial Statements should be read together with the Consolidated Financial Statements and related footnote disclosures contained in our 20182019 Annual Report.
The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates and assumptions.
Our business, like that of other retailers, is subject to seasonal fluctuations. Our sales are typically higher during our Anniversary Sale in July and the holidays in the fourth quarter. As a result of COVID-19, the Anniversary Sale has moved to August in 2020. Results for any one quarter aremay not be indicative of the results that may be achieved for a full fiscal year.
Recent Accounting PronouncementsUse of Estimates
In March 2019,The preparation of financial statements in conformity with GAAP in the SEC adoptedU.S. requires management to make estimates and assumptions that affect the final rule under SEC Release No. 33-10618, FAST Act Modernizationreported amounts of assets, liabilities, revenues and Simplificationexpenses, and disclosure of Regulation S-K. The amendment aims to modernizecontingent assets and simplify certainliabilities during the reporting requirementsperiod. Uncertainties regarding such estimates and improve readabilityassumptions are inherent in the preparation of financial statements and navigability between disclosures. This final rule was effective for the first quarteractual results may differ from these estimates and assumptions. Our most significant accounting judgments and estimates include leases, revenue recognition, inventory valuation, long-lived asset recoverability, goodwill impairment and income taxes, all of 2019. Our adoption of this final rule did not have a material effect on our Consolidated Financial Statements.
NOTE 2: LEASES
During the first quarter of fiscal 2019, we adopted the Lease Standard using the transition method provided in ASU 2018-11.which involve assumptions about future events. As a result reporting periods beginningof COVID-19, we may be unable to accurately predict the impact of the pandemic going forward and as a result our estimates may change in the first quarternear term. See below for areas that required more judgments and estimates as a result of 2019 are presented underCOVID-19.
Revenue Recognition
We reduce sales and cost of sales by an estimate of our future customer merchandise returns, which is calculated based on historical return patterns, and record a sales return allowance and an estimated return asset. We record the Lease Standard while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 840 — Leases.
Adoptionimpact of the Lease Standard didsales return allowance in our separate Full-Price, Off-Price and digital sales metrics. The majority of our returns from both digital and physical sales come through our stores. With the temporary closure of our stores beginning March 17, 2020, customers are generally not haveable to return goods in our stores, impacting the expected timing of returns. As a materialresult, our estimates of future returns require more judgment and estimates and actual returns may differ from our historical return rates.
Merchandise Inventory
Under our retail method of inventory accounting, we adjust our inventory and costs of sales for retail inventory markdowns taken on the selling price. Our estimated markdown reserves increased approximately $75 as of May 2, 2020, compared to the prior year, as a result of the temporary closure of our stores beginning on March 17, 2020, and the impact on demand from COVID-19. Markdown estimates may be more volatile as we consider current and anticipated demand, customer preferences, age of merchandise, fashion trends and the current promotional environment.
Long-Lived Assets
As we optimize our mix of physical and digital assets to align with longer-term customer trends, we permanently closed 16 FLS. As part of the closures, and when facts and circumstances indicate that the carrying values of buildings, equipment and ROU assets may be impaired, we compare the carrying value to the related projected future cash flows, among other quantitative and qualitative analysis. These projections are inherently subject to uncertainties and while we believe the inputs and assumptions utilized in our future cash flows are reasonable, our estimates may change in the near term based on our future performance.
We incurred non-cash impairment charges on long-lived tangible and ROU assets, primarily associated with the FLS closures, to adjust the carrying value to its estimated fair value. The following table provides details related to asset impairment charges as a result of COVID-19: |
| | | |
| May 2, 2020 |
|
Long-lived asset impairment1 |
| $94 |
|
Operating lease ROU asset impairment1 | 23 |
|
| Total asset impairment |
| $117 |
|
1 As of May 2, 2020, the carrying value of the applicable long-lived and operating lease ROU assets after impairment was $15 and $6.
These charges are included in our Retail segment SG&A expense on the Condensed Consolidated Statement of Earnings, Condensed Consolidated Statement of Comprehensive Earnings, Condensed Consolidated Statement of Cash Flows or Condensed Consolidated Statement of Shareholders’ Equity. The impact of adopting the Lease Standard resulted in the following on February 3, 2019:Earnings.
Increase in total assets and total liabilities of $1,849 primarily due to recognizing ROU assets and operating lease liabilities for most leases previously classified as operating leases.
Reclassification of deferred property incentives, net of $568 to ROU assets on the Condensed Consolidated Balance Sheet.
Reclassification of deferred property incentives, net of $339 from ROU assets to other current liabilities and other liabilities on the Condensed Consolidated Balance Sheet for property incentives that exceed the associated ROU asset. Property incentives that exceed the associated ROU asset are primarily due to leases with low fixed lease costs that may also have variable lease costs that are excluded from the ROU asset.
Increase in beginning accumulated deficit of $25 primarily due to the net impact of removing a building and associated financial obligation from land, property and equipment and long-term debt, net on the Condensed Consolidated Balance Sheet related to a failed sale-leaseback transaction.
Upon adoption of the Lease Standard, we record leases, which consist primarily of operating leases, on the Condensed Consolidated Balance Sheet as operating lease ROU assets, current portion of operating lease liabilities and non-current operating lease liabilities. Operating lease liabilities are initially recognized based on the net present value of the fixed portion of our lease and common area maintenance payments from lease commencement through the lease term. To calculate the net present value, we apply an incremental borrowing rate. The incremental borrowing rate is determined using a portfolio approach based on the rate of interest that we would pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. We use quoted interest rates obtained from financial institutions as an input to derive our incremental borrowing rate as the discount rate for the lease. We recognize ROU assets based on operating lease liabilities reduced by property incentives. ROU assets are tested for impairment in the same manner as long-lived assets.
NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and per unit amounts)
(Unaudited)
Goodwill Impairment
We electedreview our goodwill annually in the following practical expedients permitted underfourth quarter or when circumstances indicate that the Lease Standard:
Upon adoption,carrying value may exceed fair value. Our most recently completed goodwill impairment analyses in the fourth quarter of 2019 indicated significant excess fair values over carrying values. After performing both qualitative and quantitative analyses, including review of future long-term revenue and cash flow assumptions, we concluded a triggering event requiring us to accelerate our annual goodwill impairment analysis did not occur, as we still expect any potential change in fair value to exceed carrying value. As a result, we did not reassessrecord a goodwill impairment charge in the first quarter of 2020.
CARES Act
On March 27, 2020 the CARES Act was signed into law, providing payroll tax credits for employee retention, deferral of payroll taxes, and several income tax provisions including modifications to the net interest deduction limitation, changes to certain property depreciation and allows for carryback of certain operating losses.
We have estimated the impacts of the CARES Act in accordance with our prior conclusions about lease identification, lease classification or initial directoverall approach for determining our income tax provision that uses an estimated annual effective tax rate based on our best estimates and adjusts for discrete taxable events that occur during the quarter. As a result, we will carryback our 2020 US Federal operating loss and recover taxes previously paid at the applicable 35% tax rate rather than the current rate of 21%. Our estimated annual effective tax rate reflects this benefit and is the primary driver for the rate increase when compared to the same period in 2019. As a result, we recorded $275 in taxes receivable, which is classified in prepaid expenses and other on the Condensed Consolidated Balance Sheet.
In addition, for the quarter ended May 2, 2020, we recognized $34 in employee retention payroll tax credits and elected to defer payment of the employer portion of social security taxes.
Severance
In the first quarter of 2020, we recorded $88 of restructuring costs in connection with our regional and corporate reorganization, including $25 in cost of sales and related buying and occupancy costs and we did not use hindsight for leases existing at adoption date.$63 in SG&A on the Condensed Consolidated Statement of Earnings. We expect payments to occur by the end of the second quarter of 2020.
Leases
We do not record leases with an initial term of 12 months or less on the balance sheet but continue to expense them on a straight-line basis over theincurred operating lease term.
We combine lease and non-lease components.
We lease the land, buildings, or land and buildings for many of our stores, office facilities and Supply Chain Network facilities. We also lease equipment and have service contracts including transportation agreements and warehouse agreements where we control identified assets such as vehicles, warehouse space and equipment and therefore represent embedded leases under the Lease Standard.
The majority of our fixed, non-cancellable lease terms are 15 to 30 years for Nordstrom FLS, 10 to 15 years for Nordstrom Rack stores and 5 to 20 years for office facilities and Supply Chain Network facilities. Many of our leases include options that allow us to extend the lease term beyond the initial commitment period up to 15 years for Nordstrom FLS and 10 years for Nordstrom Rack stores. Atliabilities arising from the commencement of a lease, we generally include only the initial lease term as we have determined that options to extend are not reasonably certain to occur. The exercise of lease renewal options is generally at our sole discretion. At the renewal of an expiring lease, we reassess our options in the agreement and include all reasonably certain extensions in the measurement of our lease term.
Most of our leases also provide for payment of operating expenses, such as common area maintenance charges, real estate taxes and other executory costs, the fixed portion of which is included in Operating Lease Cost. We recognize Operating Lease Cost on a straight-line basis over the lease term. Variable lease cost includes payments for variable common area maintenance charges and additional payments based on a percentage of sales, which are recognized when probable. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The following table summarizesof $37 for the components of lease costquarter ended May 2, 2020 and $24 for 2019: |
| | | |
| Quarter Ended |
|
| May 4, 2019 |
|
Operating Lease Cost | |
Store locations (net of developer reimbursement amortization of $19) |
| $55 |
|
Other1
| 15 |
|
Variable lease cost2
| 12 |
|
Sublease income | (2 | ) |
Total lease cost |
| $80 |
|
1 Other includes Supply Chain Network facilities, office facilities and equipment.
2 Variable lease cost includes short-term lease cost, which was immaterial forthe quarter ended May 4, 2019.
Subsequent Events
The following table summarizes future lease paymentsIn May 2020, we began reopening stores by applying a phased market-by-market approach, where allowed by state and local governments, when we are prepared with the right safety measures and protocols, and when we believe we can provide for the safety and wellbeing of our employees and customers.
Also in May 2020, significant civil unrest, looting and rioting in several urban centers impacted 27 stores with varying degrees of damage, including recently reopened stores as
well as those only supporting web fulfill. As a result, we temporarily closed these stores in order to assess the damage and make repairs, as well as surrounding stores in affected areas to ensure the safety of
May 4, 2019:our customers and employees. We maintain business interruption and property insurance coverage, which covers inventory at the selling price and property and equipment at replacement costs, less a deductible. We are currently assessing the degree of the damage and the extent to which insurance may be available to cover the costs associated with these events. However, we do not expect losses after insurance recoveries to be material to our Condensed Consolidated Financial Statements. We currently have more than 60% of our stores open, including stores that were damaged from the civil unrest, and we offer contactless curbside pickup service in most full-line stores. |
| | | |
| Fiscal year | Operating Leases |
|
| 2019 (excluding the three months ended May 4, 2019) |
| $249 |
|
| 2020 | 353 |
|
| 2021 | 335 |
|
| 2022 | 310 |
|
| 2023 | 283 |
|
| 2024 | 238 |
|
| Thereafter | 1,040 |
|
| Total lease payments | 2,808 |
|
| | |
| Less: amount representing interest | (620 | ) |
Present value of net lease payments1 |
| $2,188 |
|
1 Total lease payments exclude $5 of lease payments for an operating lease that was signed but has not yet commenced.
NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and per unit amounts)
(Unaudited)
NOTE 2: REVENUE
Contract Liabilities
Contract liabilities represent our obligation to transfer goods or services to customers and include deferred revenue for The following table includes supplemental information: Nordy Club (including points and Nordstrom Notes) and gift cards. Our contract liabilities are classified as current on the Condensed Consolidated Balance Sheet and are as follows: |
| | | |
| | Quarter EndedContract Liabilities |
|
| Balance as of February 2, 2019 |
| $548 |
|
| Balance as of May 4, 2019 |
|
Cash paid related to operating lease liabilities504 |
| $86 |
|
Operating lease liabilities arising from obtaining ROU assets | 2,248 |
|
Cash received from developer reimbursements | 26 |
|
| | |
Weighted-average remaining lease termBalance as of February 1, 2020 | 10 years576 |
|
Weighted-average discount rateBalance as of May 2, 2020 | 4.7489 | %
|
Previous Lease Standard Disclosures
Before fiscal year 2019, weRevenues recognized minimum rent expense, netfrom our beginning contract liability balance were $130 for the quarter ended May 2, 2020 and $148 for the quarter ended May 4, 2019.
Disaggregation of developer reimbursements, on a straight-line basis over the minimum lease term from the time we controlled the leased property. For scheduled rent escalation clauses during the lease terms, we recorded minimum rent expense on a straight-line basis over the terms of the leases, with the adjustments accrued as current and non-current deferred rent and included in other current liabilities and other liabilities on our Condensed Consolidated Balance Sheet. Contingent rental payments, typically based on a percentage of sales, were recognized in rent expense when payment of the contingent rent was probable.Revenue
The following table summarizes rent expense for the first quarter of 2018, before adoption of the Lease Standard:our disaggregated net sales: |
| | | |
| Quarter Ended |
|
| May 5, 2018 |
|
Minimum rent: | |
Store locations |
| $70 |
|
Other1
| 11 |
|
Percentage rent | 2 |
|
Property incentives | (21 | ) |
Total rent expense |
| $62 |
|
|
| | | | | | | |
| | Quarter Ended |
| | May 2, 2020 |
| | May 4, 2019 |
|
| Full-Price |
| $1,357 |
| |
| $2,127 |
|
| Off-Price | 669 |
| | 1,222 |
|
| Total net sales |
| $2,026 |
| |
| $3,349 |
|
| | | | |
| Digital sales as a % of total net sales | 54 | % | | 31 | % |
1 Other includes Supply Chain Network facilities, office facilities and equipment.
The rent expense above does not include common area maintenance charges, real estate taxes and other executory costs, which were $37 for the first quarter of 2018.
The following table summarizes future minimum lease payments asthe percent of February 2, 2019, before adoption of the Lease Standard:net sales by merchandise category: |
| | | | | |
| | Quarter Ended |
| | May 2, 2020 |
| | May 4, 2019 |
|
| Women’s Apparel | 33 | % | | 33 | % |
| Shoes | 24 | % | | 24 | % |
| Men’s Apparel | 12 | % | | 15 | % |
| Women’s Accessories | 12 | % | | 11 | % |
| Beauty | 12 | % | | 10 | % |
| Kids’ Apparel | 4 | % | | 4 | % |
| Other | 3 | % | | 3 | % |
| Total net sales | 100 | % | | 100 | % |
|
| | | | |
| Fiscal year | | Operating Leases |
|
| 2019 | |
| $322 |
|
| 2020 | | 313 |
|
| 2021 | | 294 |
|
| 2022 | | 271 |
|
| 2023 | | 249 |
|
| Thereafter | | 1,160 |
|
| Total minimum lease payments | |
| $2,609 |
|
NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and per unit amounts)
(Unaudited)
NOTE 3: REVENUEDEBT AND CREDIT FACILITIES
Contract LiabilitiesDebt
Contract liabilities representDuring the first quarter of 2020, we issued $600 aggregate principal amount of 8.750% Senior Secured Notes due May 2025. These notes are guaranteed by certain subsidiaries and secured by various store, distribution center and corporate properties. The Secured Notes contain covenants that include limitations on indebtedness, liens, mergers, acquisitions, asset sales, investments, dividend payments and equity distributions, in addition to certain change of control triggering events and provisions for events of default. We will be permitted to prepay our obligationSecured Notes at a premium beginning in 2022.
Credit Facilities
During the first quarter of 2020, we amended our existing Revolver and borrowed $800. Under the terms of the amendment, if our Leverage Ratio is greater than 4 or our unsecured debt is rated below BBB- with a stable outlook at Standard & Poor’s and Baa3 with a stable outlook at Moody’s, any borrowings under our Revolver will be secured by substantially all our personal property and we will be subject to transfer goods or servicesasset coverage and minimum liquidity covenants, as well as a fixed charge coverage covenant beginning in the third quarter of 2020. If our Leverage Ratio is below 4 and our unsecured debt is rated above BBB- with a stable outlook at Standard & Poor’s and Baa3 with a stable outlook at Moody’s, any borrowings under our Revolver will be unsecured, we will not be subject to customersthe above covenants and include deferred revenue for The Nordy Club (including loyalty pointsthe restrictions on dividend payments and Nordstrom Notes) and gift cards. Our contract liabilities areshare repurchases will be removed. As of May 2, 2020, our borrowings under the Revolver were classified as secured as our Leverage Ratio exceeded 4. We met our asset coverage and minimum liquidity covenants.
The Revolver expires in September 2023 and is classified in total current
liabilities on the Condensed Consolidated Balance
SheetSheet. The Revolver contains customary representations, warranties, covenants and
are as follows:terms, including paying a variable rate of interest and a commitment fee based on our debt rating. The Revolver is available for working capital, capital expenditures and general corporate purposes. Provided that we obtain written consent from the lenders, we have the option to increase the Revolver by up to $200, to a total of $1,000, and 2 options to extend the Revolver by one year. |
| | | |
| Contract Liabilities |
|
Opening balance as of February 4, 2018 |
| $498 |
|
Balance as of May 5, 2018 | 460 |
|
| |
Balance as of February 2, 2019 | 548 |
|
Balance as of May 4, 2019 | 504 |
|
As a result of our borrowings under the Revolver, our $800 commercial paper program is not available for borrowing at this time. When available, the program allows us to use the proceeds to fund operating cash requirements. Under the terms of the commercial paper agreement, we pay a rate of interest based on, among other factors, the maturity of the issuance and market conditions. The issuance of commercial paper has the effect of reducing available liquidity under the Revolver by an amount equal to the principal amount of revenue recognized fromcommercial paper outstanding. As of May 2, 2020, we had 0 issuances outstanding under our beginning contract liability balance was $148 in the first quarter of 2019 and $150 in the first quarter of 2018.commercial paper program.
Disaggregation of Revenue
The following table summarizes our disaggregated net sales: |
| | | | | | | |
| | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
|
| Full-Price |
| $2,127 |
| |
| $2,240 |
|
| Off-Price | 1,222 |
| | 1,229 |
|
| Total net sales |
| $3,349 |
| |
| $3,469 |
|
| | | | |
| Digital sales as a % of total net sales | 31 | % | | 28 | % |
| Digital sales increase | 7 | % | | 21 | % |
The following table summarizes the percent of net sales by merchandise category: |
| | | | | |
| | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
|
| Women’s Apparel | 33 | % | | 33 | % |
| Shoes | 24 | % | | 24 | % |
| Men’s Apparel | 15 | % | | 15 | % |
| Women’s Accessories | 11 | % | | 11 | % |
| Beauty | 10 | % | | 11 | % |
| Kids’ Apparel | 4 | % | | 3 | % |
| Other | 3 | % | | 3 | % |
| Total net sales | 100 | % | | 100 | % |
NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and per unit amounts)
(Unaudited)
NOTE 4: SEGMENT REPORTING
The following table sets forth information for our reportable segment: |
| | | | | | | |
| | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
|
Retail segment EBIT1 |
| $142 |
| |
| $207 |
|
Corporate/Other loss before interest and income taxes1 | (65 | ) | | (54 | ) |
| Interest expense, net | (24 | ) | | (28 | ) |
| Earnings before income taxes |
| $53 |
| |
| $125 |
|
1 Certain reclassifications were made to fiscal 2018 amounts to conform with current period presentation, which is in the way that management views our results internally.
For information about disaggregated revenues, see Note 3: Revenue.
NOTE 5: DEBT AND CREDIT FACILITIES
Debt
A summary of our long-term debt is as follows: |
| | | | | | | | | | | |
| | May 4, 2019 |
|
| February 2, 2019 |
|
| May 5, 2018 |
|
| Long-term debt, net of unamortized discount: | | | | | |
| Senior notes, 4.75%, due May 2020 |
| $500 |
| |
| $500 |
| |
| $500 |
|
| Senior notes, 4.00%, due October 2021 | 500 |
| | 500 |
| | 500 |
|
| Senior notes, 4.00%, due March 2027 | 349 |
| | 349 |
| | 349 |
|
| Senior debentures, 6.95%, due March 2028 | 300 |
| | 300 |
| | 300 |
|
| Senior notes, 7.00%, due January 2038 | 146 |
| | 146 |
| | 146 |
|
| Senior notes, 5.00%, due January 2044 | 895 |
| | 895 |
| | 892 |
|
Other1 | (14 | ) | | (5 | ) | | 49 |
|
| Total long-term debt | 2,676 |
| | 2,685 |
| | 2,736 |
|
| | | | | | |
| Less: current portion | (499 | ) | | (8 | ) | | (56 | ) |
| Total due beyond one year |
| $2,177 |
| |
| $2,677 |
| |
| $2,680 |
|
1 Other long-term debt includes our deferred bond issue costs as of May 4, 2019. As of February 2, 2019 and May 5, 2018, Other included our secured mortgage payable and Puerto Rico unsecured borrowing facility, partially offset by deferred bond issue costs.
Credit Facilities
As of May 4, 2019, we had total short-term borrowing capacity of $800 under the revolver that expires in September 2023. The revolver contains customary representations, warranties, covenants and terms, including paying a variable rate of interest and a commitment fee based on our debt rating. The revolver is available for working capital, capital expenditures and general corporate purposes. Provided that we obtain written consent from the lenders, we have the option to increase the revolver by up to $200, to a total of $1,000, and two options to extend the revolver by one year.
The revolver requires that we maintain an adjusted debt to EBITDAR leverage ratio of no more than four times. As of May 4, 2019, we were in compliance with this covenant.
Our $800 commercial paper program allows us to use the proceeds to fund operating cash requirements. Under the terms of the commercial paper agreement, we pay a rate of interest based on, among other factors, the maturity of the issuance and market conditions. The issuance of commercial paper has the effect, while it is outstanding, of reducing available liquidity under the revolver by an amount equal to the principal amount of commercial paper.
As of May 4, 2019, we had no issuances outstanding under our commercial paper program and no borrowings outstanding under our revolver.
NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and per unit amounts)
(Unaudited)
Our wholly owned subsidiary in Puerto Rico maintained a $52 unsecured borrowing facility to support our expansion into that market. Borrowings on this facility incurred interest at an annual rate based upon LIBOR plus 1.275% and also incurred a fee based on any unused commitment. In September 2018, we fully repaid $47 outstanding on this facility and did not renew the facility upon expiration in the fourth quarter of 2018.
NOTE 6:4: FAIR VALUE MEASUREMENTS
We disclose our financial assets and liabilities that are measured at fair value in our Condensed Consolidated Balance Sheets by level within the fair value hierarchy as defined by applicable accounting standards:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Other observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that cannot be corroborated by market data that reflect the reporting entity’s own assumptions
Financial Instruments Not Measured at FairCarrying Value
Financial instruments not measured at faircarrying value on a recurring basis include cash and cash equivalents, accounts receivable, and accounts payable and our Revolver, which approximate fair value due to their short-term nature, and long-term debt.nature.
Long-term debt is recorded at carrying value. If our long-term debt was measured at fair value, on the Condensed Consolidated Balance Sheets, we would use quoted market prices of the same or similar issues, which is considered a Level 2 fair value measurement. The following table summarizes the carrying value and fair value estimate of our long-term debt, including current maturities: |
| | | | | | | | | | | |
| | May 2, 2020 |
| | February 1, 2020 |
| | May 4, 2019 |
|
| Carrying value of long-term debt |
| $3,264 |
| |
| $2,676 |
| |
| $2,676 |
|
| Fair value of long-term debt | 2,804 |
| | 2,905 |
| | 2,741 |
|
|
| | | | | | | | | | | |
| | May 4, 2019 |
| | February 2, 2019 |
| | May 5, 2018 |
|
| Carrying value of long-term debt |
| $2,676 |
| |
| $2,685 |
| |
| $2,736 |
|
| Fair value of long-term debt | 2,741 |
| | 2,692 |
| | 2,772 |
|
Non-financial Assets Measured at Fair Value on a Nonrecurring Basis
We also measure certain non-financial assets at fair value on a nonrecurring basis, primarily goodwill, and long-lived tangible and intangibleROU assets, in connection with periodic evaluations for potential impairment. We estimate the fair value of these assets using primarily unobservable inputs and, as such, these are considered Level 3 fair value measurements. For more information regarding long-lived tangible and ROU asset impairment charges for the quarter ended May 2, 2020, see Note 1: Basis of Presentation. There were no0 material impairment charges for these assets for the quarter ended May 4, 2019 and May 5, 2018.2019.
NOTE 5: COMMITMENTS AND CONTINGENCIES
Our NYC flagship store opened in October 2019 and the related building and equipment assets were placed into service at the end of the third quarter of 2019, while construction continues in the residential condominium units above the store. As of May 2, 2020, we have a fee interest in the retail condominium unit. We are committed to make 1 remaining installment payment based on the developer meeting final pre-established construction and development milestones. Precautions related to the COVID-19 pandemic have caused delays in meeting these milestones and the timing of the remaining payment.
Our estimated total purchase obligations decreased by approximately 40% as of May 2, 2020, compared with our balance as of February 2, 2020. This decrease was primarily from a reduction in inventory purchase orders.
NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and per unit amounts)
(Unaudited)
NOTE 7: COMMITMENTS AND CONTINGENCIES
Plans for our Nordstrom NYC store, which we expect to open in October 2019, ultimately include owning a condominium interest in a mixed-use tower and leasing certain nearby properties. As of May 4, 2019, we had approximately $302 of fee interest in land, which is expected to convert to the condominium interest once the store is constructed. We have committed to make future installment payments based on the developer meeting pre-established construction and development milestones. In the event that this project is not completed, the opening may be delayed and we may be subject to future losses or capital commitments in order to complete construction or to monetize our investment.
NOTE 8:6: SHAREHOLDERS’ EQUITY
In August 2018, our Board of Directors authorized a program to repurchase up to $1,500 of our outstanding common stock, with no expiration date. UnderOn March 23, 2020, in response to uncertainty from the August 2018 program,COVID-19 pandemic, we repurchased 4.1 sharesannounced suspension of our common stock for an aggregate purchase pricequarterly dividend payments beginning in the second quarter of $186 during2020 and the quarter ended May 4, 2019. immediate suspension of our share repurchase program. We remain committed to these programs over the long-term and intend to resume dividend payments and share repurchases when appropriate.
The following is a summary of share repurchase activity: |
| | | |
| Quarter Ended |
|
| May 4, 2019 |
|
| 2018 Program | |
| Shares of common stock repurchased | 4.1 |
|
| Aggregate amount of common stock repurchased |
| $186 |
|
We had $707 remaining in share repurchase capacity as of May 4, 2019.2, 2020. The actual timing, price, manner and amounts of future share repurchases, if any, will be subject to market and economic conditions, certain financial covenants and applicable SEC rules.
InThe amendment to our Revolver contains negative covenants with respect to the payment of dividends and share repurchases when either our Leverage Ratio is above 4 or our unsecured debt is rated below BBB- with a stable outlook at Standard & Poor’s and Baa3 with a stable outlook at Moody’s. As of May 2019, subsequent to2, 2020, our Leverage Ratio exceeded 4 and we did not meet our credit rating covenant, preventing us from paying dividends or repurchasing shares.
NOTE 7: STOCK-BASED COMPENSATION
The following table summarizes our stock-based compensation expense: |
| | | | | | | |
| | Quarter Ended |
| | May 2, 2020 |
| | May 4, 2019 |
|
| RSUs |
| $13 |
| |
| $14 |
|
| Stock options | 2 |
| | 4 |
|
Other1 | (2 | ) | | 2 |
|
| Total stock-based compensation expense, before income tax benefit | 13 |
| | 20 |
|
| Income tax benefit | (5 | ) | | (5 | ) |
| Total stock-based compensation expense, net of income tax benefit |
| $8 |
| |
| $15 |
|
1 Other stock-based compensation expense includes PSUs, ESPP and nonemployee director stock awards.
The following table summarizes our grant allocations: |
| | | | | | | | | | | | | |
| | Quarter Ended |
| | May 2, 2020 | | May 4, 2019 |
| | Granted |
| | Weighted-average grant-date fair value per unit |
| | Granted |
| | Weighted-average grant-date fair value per unit |
|
| RSUs | 2.2 |
| |
| $23 |
| | 1.1 |
| |
| $41 |
|
| Stock options | 0.3 |
|
|
| $7 |
| | 1.0 |
| |
| $15 |
|
| PSUs | 0.4 |
| |
| $24 |
| | 0.3 |
| |
| $42 |
|
Under our deferred and stock-based compensation plan arrangements, we issued 1.5 shares of common stock during the first quarter end, we declared a quarterly dividend of $0.37 per share, which will be paid on June 18, 2019 to holders2020 and 1.1 shares during the first quarter of record as of June 3, 2019.
NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and per unit amounts)
(Unaudited)
NOTE 9: STOCK-BASED COMPENSATION
The following table summarizes our stock-based compensation expense: |
| | | | | | | |
| | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
|
| RSUs |
| $14 |
| |
| $18 |
|
| Stock options | 4 |
| | 3 |
|
Other1 | 2 |
| | 2 |
|
| Total stock-based compensation expense, before income tax benefit | 20 |
| | 23 |
|
| Income tax benefit | (5 | ) | | (6 | ) |
| Total stock-based compensation expense, net of income tax benefit |
| $15 |
| |
| $17 |
|
1 Other stock-based compensation expense includes PSUs, ESPP and nonemployee director stock awards.
The following table summarizes our grant allocations: |
| | | | | | | | | | | | | |
| | Quarter Ended |
| | May 4, 2019 | | May 5, 2018 |
| | Granted |
| | Weighted-average grant-date fair value per unit |
| | Granted |
| | Weighted-average grant-date fair value per unit |
|
| RSUs | 1.1 |
| |
| $41 |
| | 2.1 |
| |
| $49 |
|
| Stock options | 1.0 |
|
|
| $15 |
| | — |
| |
| $— |
|
| PSUs | 0.3 |
| |
| $42 |
| | — |
| |
| $— |
|
NOTE 10:8: EARNINGS PER SHARE
The computation of EPS is as follows: |
| | | | | | | |
| | Quarter Ended |
| | May 2, 2020 |
| | May 4, 2019 |
|
| Net (loss) earnings |
| ($521 | ) | |
| $37 |
|
| | | | |
| Basic shares | 156.4 |
| | 155.0 |
|
| Dilutive effect of common stock equivalents | — |
| | 1.2 |
|
| Diluted shares | 156.4 |
| | 156.2 |
|
| | | | |
| (Loss) earnings per basic share |
| ($3.33 | ) | |
| $0.24 |
|
| (Loss) earnings per diluted share |
| ($3.33 | ) | |
| $0.23 |
|
| | | | |
| Anti-dilutive common stock equivalents | 13.1 |
| | 9.3 |
|
|
| | | | | | | |
| | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
|
| Net earnings |
| $37 |
| |
| $87 |
|
| | | | |
| Basic shares | 155.0 |
| | 167.8 |
|
| Dilutive effect of common stock equivalents | 1.2 |
| | 2.4 |
|
| Diluted shares | 156.2 |
| | 170.2 |
|
| | | | |
| Earnings per basic share |
| $0.24 |
| |
| $0.52 |
|
| Earnings per diluted share |
| $0.23 |
| |
| $0.51 |
|
| | | | |
| Anti-dilutive common stock equivalents | 9.3 |
| | 9.6 |
|
NOTE 9: SEGMENT REPORTING
The following table sets forth information for our reportable segment: |
| | | | | | | |
| | Quarter Ended |
| | May 2, 2020 |
| | May 4, 2019 |
|
| Retail segment EBIT |
| ($711 | ) | |
| $142 |
|
| Corporate/Other loss before interest and income taxes | (102 | ) | | (65 | ) |
| Interest expense, net | (34 | ) | | (24 | ) |
| (Loss) earnings before income taxes |
| ($847 | ) | |
| $53 |
|
For information about disaggregated revenues, see Note 2: Revenue.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except per share amounts)
OVERVIEW
WhileIn March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19 including restrictions on business operations, public gatherings and travel, as well as stay-at-home orders, social distancing, and quarantines.
With health and safety as our priority, we believetemporarily closed our customer strategy and business model position us for long-term success,stores beginning March 17, 2020 to do our first quarter top-linepart to limit the spread of the virus. The temporary store closures had a meaningful impact on our financial results were below our expectations.as stores made up two-thirds of sales in 2019. For the first quarter, our net loss per share of 2019, total$3.33 and EBIT loss of $813 included net charges related to COVID-19 of $280 before taxes. These charges included non-cash asset impairments primarily related to our permanent store closures as well as premium pay and benefits and restructuring charges, slightly offset by payroll tax credits from the CARES Act.
Total net sales decreased 3.5% and net earnings were $37, or $0.23 per diluted share.
Although we planned fordeclined 40% as a continuationresult of soft sales trends from the fourth quarter of 2018,our temporary store closures, while we saw further decelerationonline demand, which is an indicator of underlying trends, grow by 9% in the first quarter, consistent with the second half of 2019. In our e-commerce business, sales grew 5% and we saw more than 50% growth in customers who are new to Nordstrom.
Liquidity and Results
We ended the quarter with inventoriesfinished 2019 in solid shape, and oura strong financial position, remains strong. The strength of our inventory and expense execution helped mitigate ourwith momentum from accelerated sales miss. We continue to bend the expense curve, tracking ahead of our expense savings plan of $150 to $200 through our various efficiency initiatives this year.
During the quarter, we had executional misses with the customer experience that had an impact on sales across Full-Price and Off-Price, both in stores and online. We identified three factors that contributed to our sales shortfall, all within our control to turn around:
Loyalty — We have a well-established program with nearly 12 million active customers contributing more than 60% of sales in the first quarter. However, we had executional issues associated with the launch of The Nordy Club last fall. We are resolving these issues, with initial results showing improving trends for engagement, traffic and spend from our loyalty customers.
Digital marketing — With the rollout of The Nordy Club, we deliberately reduced our digital marketing as we shifted resources to loyalty. This resulted in incremental traffic declines in our business. We have since increased our investments in digital marketing to help drive incremental traffic and sales.
Merchandise — The breadth of our offering, across brands, price points and styles, is a key differentiator in the way we serve customers. We have opportunities to rebalance our assortment mix to better resonate with customers in Full-Price and Off-Price. We have started this process and expect improvement in the second half of last year continuing in February. As the year.impact of COVID-19 began to unfold in March, we took immediate steps to increase liquidity, reduce inventory and minimize cash burn in order to strengthen our financial flexibility, including the following:
Reduced inventory by more than 25% from last year, allowing us to bring in new product in June
Executing on our planned expense savings of $200 to $250 and further net cash savings of more than $500 in operating expenses, capital expenditures, and working capital
Suspended quarterly cash dividends beginning in the second quarter of 2020 and share repurchases
Drew down $800 on our Revolver and issued $600 in secured debt financing
Based on our actions we increased our cash from $853 at the beginning of the year to $1,355 by the end of the first quarter. We reduced cash burn by more than 40% from March into April and currently expect to reach break-even on our cash burn by the end of the second quarter.
Strategy
The impact of COVID-19 is only accelerating the changes that were already well underway with our customers, including how they want to engage with digital and physical experiences. The flexibility of our business model allows us to stay ahead of these changes as we serve customers through two distinctive brands — Nordstrom and Nordstrom Rack — across stores and online.
We took action during the quarterbelieve that our unique mix of assets is a competitive advantage. In 2019, Off-Price and e-commerce accounted for nearly 60% of sales, and our U.S. mall-based full-line stores accounted for 38% while contributing positive cash flows. As we anticipate an acceleration of these longer-term customer trends, we are taking furtherproactive steps to drive top-line growth,move faster in executing our strategic plans, including optimizing the mix of our digital and physical assets, and as well as executea result we permanently closed 16 FLS and three Jeffrey specialty boutiques.
Our market strategy remains a priority for us to gain market share and increase inventory efficiencies in our key strategies:top markets. We are bringing greater merchandise selection and faster delivery to customers while increasing engagement through our services. Having a mix of full-line stores, Racks, and Nordstrom Locals and connecting these physical assets seamlessly with an online experience gives us a distinct advantage in serving customers on their terms.
We are scalingalso creating a leaner and more flexible organization by combining our Full-Price and Off-Price teams, reducing the size of our corporate teams, and investing in critical capabilities across technology, data analytics, and supply chain.
Store Reopenings
In May 2020, we began reopening stores by applying a phased market-by-market approach, where allowed by state and local market strategygovernments, when we are prepared with the right safety measures and protocols, and when we believe we can provide for the safety and wellbeing of our employees and customers. We currently have more than 60% of our stores open, including stores that were damaged from the civil unrest, and we offer contactless curbside pickup service in Los Angeles by providing customers with greater access to merchandise selection, with faster delivery and at a lower cost to us. In the first quarter, we delivered outsized growth in digital sales and store traffic in this market.most full-line stores.
Summary
We will expandhave accelerated our presence in New York City,long-term strategic plans by adjusting the mix of our largestphysical and digital assets and increasing our agility through a leaner organization. As we emerge from this crisis, our focus remains on gaining market for online sales. We are on track to open our flagship store on October 24th and two Nordstrom Locals this fall. These physical assets are expected to drive engagement with customers across multiple touch points and contribute to a meaningful sales lift for this market.
Finally, we are focused on improving the customer experience during our two key events, our Anniversary Sale and the holidays. Our Anniversary Sale is a unique event, offering new arrivals at reduced prices for a limited time. We are curating our assortment to reflect our customers’ favorite brands and extending the pre-shop period for our top loyalty customers. For the holidays, we are amplifying our gifting assortment across categories, with more accessible price points.
As always, our customers are at the center of everything we do, and through that lens, we are focused on better serving them on their terms. We are confident in our ability to driveshare while driving top-line growth and achieve long-term profitable growth.improving profitability. Our financial flexibility, coupled with our business model to serve customers on their terms, positions us for success over the medium and long-term.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share amounts)
RESULTS OF OPERATIONS
In our ongoing effort to enhance the customer experience, we are focused on providing customers with a seamless experience across our channels.businesses. We invested early in our Omni-channelomni-channel capabilities, integrating our operations, merchandising and technology across our stores and online, in both our Full-Price and Off-Price businesses. While our customers may engage with us through multiple channels,businesses, we know they value the overall Nordstrom brand experience and view us simply as Nordstrom, which is ultimately how we view our business.company. We have one Retail reportable segment and analyze our results on a total company basis.
We measure our performance throughbasis, using customer, market share, customersoperational and net sales metrics. As comparable sales growth is expected to approximate net sales growth in 2019, we only report changes in net sales.
Net Sales
The following table summarizes net sales by business: | | | | Quarter Ended | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
| May 2, 2020 |
| | May 4, 2019 |
|
| Net sales by business: | | | | | | |
| Full-Price |
| $2,127 |
| |
| $2,240 |
|
| $1,357 |
| |
| $2,127 |
|
| Off-Price | 1,222 |
| | 1,229 |
| 669 |
| | 1,222 |
|
| Total net sales |
| $3,349 |
| |
| $3,469 |
|
| $2,026 |
| |
| $3,349 |
|
| | | | | | | |
| Net sales increase (decrease) by business: | | | | |
| Net sales decrease by business: | | | | |
| Full-Price | (5.1 | %) | | 3.9 | % | (36.2 | %) | | (5.1 | %) |
| Off-Price | (0.6 | %) | | 6.7 | % | (45.2 | %) | | (0.6 | %) |
| Total Company | (3.5 | %) | | 5.8 | % | (39.5 | %) | | (3.5 | %) |
| | | | | | | |
| Digital sales as a % of total net sales | 31 | % | | 28 | % | 54 | % | | 31 | % |
| Digital sales increase | 7 | % | | 21 | % | 5 | % | | 7 | % |
Total companyCompany net sales decreased 3.5%40% for the first quarter of 2019,2020, compared with the same period in 2018. Digitalfiscal 2019, driven by temporary store closures beginning on March 17, 2020 related to COVID-19. Total Company digital sales increased 7%5% in the first quarter of 2019,2020, compared with the same period in 2018. To date in fiscal 2019, driven by increased marketing and promotional activity to stimulate demand and clear excess inventory. During the quarter ended May 2, 2020, we opened threeclosed one Nordstrom Rack stores and closed two FLS locations. While we expected softer trends from the fourth quarter to continueintegrated a Dallas Clubhouse location into the first quarter, we experienced furtherNorthPark Center FLS in Dallas.
Total Company, Full-Price, Off-Price and Digital sales deceleration. Our results were impacted by three areas: loyalty, digital marketing and merchandise, across Full-Price and Off-Price, in both stores and online. We took action duringinclude the quarter and are taking further steps to address executional issues associated with the launch of our enhanced loyalty program, further investing in our digital marketing and re-balancing our merchandise offering to improve sales trends over the remainderimpact of the year.
Full-Price net sales decreased 5.1%return reserve. The sales return reserve for all channels increased in the first quarter of 2019,2020, compared with the same period in 2018. Full-Price sales reflectedfiscal 2019, as a decreaseresult of the temporary closure of our stores beginning on March 17, 2020 (see Note 1: Basis of Presentation in the number of items sold, partially offset by an increase in average selling price per item sold. Shoes was the top-performing merchandise category.Item 1).
Off-PriceFull-Price net sales decreased 0.6%36% percent for the first quarter of 2019,2020, compared with the same period in 2018. Off-Price sales reflected a decrease in the average selling price per item sold, partially offset by an increase in the number of items sold. Women’s, Active and Coats were2019. These declines resulted from temporary store closures beginning March 17, 2020. Kids’ was the top-performing merchandise categories.category in Full-Price.
Off-Price net sales decreased 45% percent for the first quarter of 2020, compared with the same period in 2019. These declines resulted from temporary store closures beginning March 17, 2020. Accessories was the top-performing merchandise category in Off-Price.
Credit Card Revenues, Net
TD is the exclusive issuer of our consumer credit cards and we perform account servicing functions. Credit card revenues, net include our portion of the ongoing credit card revenue, net of credit losses, pursuant to our program agreement with TD. TD is the exclusive issuer of our consumer credit cards and we perform the account servicing functions. Credit card revenue,revenues, net was $94$93 for the quarter ended May 4, 2019,2, 2020, which was relatively flat when compared with $92 forto the same period in 2018.2019.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share amounts)
Gross Profit
The following table summarizes gross profit: | | | | Quarter Ended | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
| May 2, 2020 |
| | May 4, 2019 |
|
| Gross profit |
| $1,121 |
| |
| $1,181 |
|
| $216 |
| |
| $1,121 |
|
| Gross profit as a % of net sales | 33.5 | % | | 34.1 | % | 10.7 | % | | 33.5 | % |
| Inventory turnover rate | 4.68 |
| | 4.63 |
| 4.81 |
| | 4.68 |
|
Our grossGross profit rate decreased 60 basis points for$905 and 23%, as a percentage of net sales, during the first quarter of 2019,2020, compared with the same period in 2018, due to plannedfiscal 2019. These decreases were driven by $75 of incremental markdowns to realignclear excess inventory to sales trends and deleverage from lower sales volume. Gross profit also included approximately $30 of occupancy expenses on lower sales. ContinuedCOVID-19 related restructuring charges, premium pay and benefits, partially offset by payroll tax credits from the CARES Act.
Ending inventory execution led to improvements in inventory turnover rate as of May 4, 2019.2, 2020 decreased 26% compared with the prior year, primarily due to our aggressive actions to reduce receipts and clear inventory through increased marketing and promotional activities and store fulfillment capabilities.
Selling, General and Administrative Expenses
SG&A is summarized in the following table: | | | | Quarter Ended | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
| May 2, 2020 |
| | May 4, 2019 |
|
| SG&A expenses |
| $1,138 |
| |
| $1,120 |
|
| $1,122 |
| |
| $1,138 |
|
| SG&A expenses as a % of net sales | 34.0 | % | | 32.3 | % | 55.4 | % | | 34.0 | % |
ForSG&A decreased $16 during the first quarter of 2019,2020, compared with the same period in fiscal 2019. Excluding approximately $250 of COVID-19 charges related to asset impairment from the store closures, premium pay and benefits, restructuring charges and partially offset by payroll tax credits from the CARES Act, SG&A expenses increased $18decreased $266 primarily due to higher marketing costs and planned supply chain investments. Our SG&A rate increased 168 basis points primarily due to fixed expense deleverage on lower sales volume.volume in addition to reduced overhead labor costs in response to temporary store closures.
(Loss) Earnings Before Interest and Income Taxes
EBIT is summarized in the following table: | | | | Quarter Ended | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
| May 2, 2020 |
| | May 4, 2019 |
|
| EBIT |
| $77 |
| |
| $153 |
|
| ($813 | ) | |
| $77 |
|
| EBIT as a % of net sales | 2.3 | % | | 4.4 | % | (40.1 | %) | | 2.3 | % |
ForEBIT decreased $890 during the first quarter of 2019, EBIT decreased $76 and EBIT rate decreased 212 basis points due primarily to lower sales volume.
Interest Expense, Net
Interest expense, net was $24 for the first quarter of 2019, compared with $28 for the same period in 2018. The decrease was primarily due to higher capitalized interest in 2019 associated with investments in our Supply Chain Network.
Income Tax Expense
Income tax expense is summarized in the following table: |
| | | | | | | |
| | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
|
| Income tax expense |
| $16 |
| |
| $38 |
|
| Effective tax rate | 31.0 | % | | 30.4 | % |
The effective tax rate increased for the first quarter of 2019,2020, compared with the same period in 2018,fiscal 2019. The decrease was due to lower sales volume from temporary store closures beginning on March 17, 2020, increased markdowns and net charges of $280 related to the unfavorable impact of stock compensation, partially offset by the reduced impact of the mix of income between the U.S. and Canada.COVID-19.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share amounts)
Interest Expense, Net
Interest expense, net was $34 for the first quarter of 2020, compared with $24 for the same period in 2019. The increase was primarily due to lower capitalized interest in 2020 as well as additional interest related to the Revolver drawdown and the new Senior Secured Note in the first quarter of 2020.
Income Tax Expense
Income tax expense is summarized in the following table: |
| | | | | | | |
| | Quarter Ended |
| | May 2, 2020 |
| | May 4, 2019 |
|
| Income tax (benefit) expense |
| ($326 | ) | |
| $16 |
|
| Effective tax rate | 38.4 | % | | 31.0 | % |
The effective tax rate increased in the first quarter of 2020, compared with the same period in 2019, primarily due to the CARES Act that allows us to carry back expected 2020 losses at the higher tax rate in previous years. The increase was partially offset by reduced federal credits and increased nondeductible stock compensation.
Earnings Per Share
| | | | Quarter Ended | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
| May 2, 2020 |
| | May 4, 2019 |
|
| Basic |
| $0.24 |
| |
| $0.52 |
|
| ($3.33 | ) | |
| $0.24 |
|
| Diluted |
| $0.23 |
| |
| $0.51 |
|
| ($3.33 | ) | |
| $0.23 |
|
Earnings per diluted share decreased $0.28$3.56 for the first quarter of 2019,2020, compared with the same period in 2018,2019, primarily due to lower sales.sales as a result of COVID-19.
Fiscal Year 2019 Outlook
We remain focused on three strategic objectives in driving shareholder returns: gaining market share, improving profitability and returns and maintaining disciplined capital allocation. We revised our annual outlook to reflect current trends:
|
| | |
| Prior Outlook | Current Outlook |
Net sales | 1 to 2 percent increase | 2 percent decrease to flat |
Credit card revenues, net | Mid to high single-digit growth | Low to mid single-digit growth |
EBIT | $915 to $970 million | $805 to $890 million |
EBIT margin | 5.9 to 6.1 percent | 5.3 to 5.8 percent |
Earnings per diluted share (excluding the impact of any potential future share repurchases) | $3.65 to $3.90 | $3.25 to $3.65 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share amounts)
Adjusted ROIC (Non-GAAP financial measure)
We believe that Adjusted ROIC is a useful financial measure for investors and credit agencies 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.
For 2019, income statement activity for adjusted net operating profit and balance sheet amounts for average invested capital are comprised of one quarter of activity under the Lease Standard for 2019, and the last three quarters of 2018 under the previous lease standard. Under the previous lease standard, we estimated the value of our operating leases as if they met the criteria for capital leases or we had purchased the properties. This provided additional supplemental information that estimated the investment in our operating leases. Estimated depreciation on capitalized operating leases and average estimated asset base of capitalized operating leases are not calculated in accordance with, nor an alternative for, GAAP and should not be considered in isolation or as a substitution offor our results as reported under GAAP.
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 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 ROIC is return on assets.
The following is a reconciliation of the components of Adjusted ROIC and return on assets:assets to Adjusted ROIC: | | | | Four Quarters Ended | Four Quarters Ended |
| | May 4, 2019 |
|
| May 5, 2018 |
| May 2, 2020 |
|
| May 4, 2019 |
|
| Net earnings |
| $513 |
| |
| $461 |
| |
| Add: income tax expense | 147 |
| | 351 |
| |
| Net (loss) earnings | |
| ($62 | ) | |
| $513 |
|
| Add: income tax (benefit) expense | | (156 | ) | | 147 |
|
| Add: interest expense | 115 |
| | 123 |
| 121 |
| | 115 |
|
| Earnings before interest and income tax expense | 775 |
| | 935 |
| |
| (Loss) earnings before interest and income tax expense | | (97 | ) | | 775 |
|
| | | | | | | |
Add: operating lease interest1 | 23 |
| | — |
| 102 |
| | 23 |
|
| Add: rent expense, net | 189 |
| | 254 |
| — |
| | 189 |
|
Less: estimated depreciation on capitalized operating leases2 | (101 | ) | | (135 | ) | — |
| | (101 | ) |
| Adjusted net operating profit | 886 |
| | 1,054 |
| 5 |
| | 886 |
|
| | | | | | | |
| Less: estimated income tax expense | (198 | ) | | (456 | ) | (4 | ) | | (198 | ) |
| Adjusted net operating profit after tax |
| $688 |
| |
| $598 |
|
| $1 |
| |
| $688 |
|
| | | | | | | |
| Average total assets |
| $8,591 |
| |
| $8,067 |
|
| $9,811 |
| |
| $8,591 |
|
| Less: average non-interest-bearing current liabilities | (3,438 | ) | | (3,306 | ) | |
Less: average deferred property incentives in excess of ROU assets3 | (77 | ) | | — |
| |
Add: average estimated asset base of capitalized operating leases2 | 1,508 |
| | 1,893 |
| — |
| | 1,508 |
|
| Less: average deferred property incentives and deferred rent liability | (459 | ) | | (642 | ) | — |
| | (459 | ) |
Less: average deferred property incentives in excess of ROU assets3 | | (303 | ) | | (77 | ) |
| Less: average non-interest-bearing current liabilities | | (3,324 | ) | | (3,438 | ) |
| Average invested capital |
| $6,125 |
| |
| $6,012 |
|
| $6,184 |
| |
| $6,125 |
|
| | | | | | | |
Return on assets4 | 6.0 | % | | 5.7 | % | (0.6 | %) | | 6.0 | % |
Adjusted ROIC4 | 11.3 | % | | 9.9 | % | — | % | | 11.3 | % |
1 As a result of the adoption of the Lease Standard, we add back the operating lease interest to reflect how we manage our business. Operating lease interest is a component of operating lease cost recorded in occupancy costs and is calculated in accordance with the Lease Standard.
2 Capitalized operating leases is our best estimate of the asset base we would record for our leases that are classified as operating under the previous lease standard if they had met the criteria for a finance lease or we had purchased the property. The asset base for each quarter is calculated as the trailing four quarters of rent expense multiplied by eight, a commonly used method to estimate the asset base we would record for our capitalized operating leases.
3 For leases with property incentives that exceed the ROU assets, we reclassify the amount from assets to other current liabilities and other liabilities. As a result of the adoption of the Lease Standard, we reduce average total assets, as this better reflects how we manage our business.
4 Results for the four quarters ended May 4, 2019 included the $72 impact related to the Estimated Non-recurring Charge, which negatively impacted return on assets by approximately 60 basis points and Adjusted ROIC by approximately 70 basis points. In addition,Integration charges, primarily related to Trunk Club, of $32 in the impactfourth quarter of the Lease Standard2019, were primarily non-cash related and negatively impacted return on assets by approximately 30 basis points and Adjusted ROIC by approximately 20 basis points for the four quarters ended May 2, 2020. COVID-19 related charges in the first quarter of 2020 negatively impacted return on assets by approximately 180 basis points and Adjusted ROIC by approximately 130 basis points.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share amounts)
LIQUIDITY AND CAPITAL RESOURCES
In response to the uncertainty related to the COVID-19 pandemic, we have taken action to provide further liquidity and flexibility during these unprecedented times. We temporarily closed all of our stores beginning on March 17, 2020. We will assess the situation market by market for reopenings and have currently opened more than 60% of our stores. We continue to review state and local legal requirements and conditions and may need to close some or all of the stores currently open as COVID-19 and other uncertainties, including the civil unrest, continue to unfold. We remain open and ready to serve our customers through our apps and online at Nordstrom.com, Nordstrom.ca, Nordstromrack.com, HauteLook.com and TrunkClub.com, including digital styling, online order pickup and curbside services at certain FLS. Our business model serves us well as we fulfill digital orders through our FLS and we recently enabled Off-Price digital sales to be fulfilled by our Nordstrom Rack stores. We have taken the following actions to date to increase our cash position and preserve financial flexibility:
Drew down $800 on our Revolver and issued $600 in secured debt financing, ending the quarter with $1,355 in cash and cash equivalents on-hand
Suspended quarterly cash dividends beginning in the second quarter of 2020 and share repurchases
Planned expense savings of $200 to $250 and further net cash savings of more than $500 in operating expenses, capital expenditures and working capital in fiscal year 2020
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. WeWhile this is a time of great uncertainty, we believe that our operating cash flows available credit facility and potential future borrowings are sufficient to meet our cash requirements for the next 12 months and beyond.beyond, even excluding the impacts of any potential future borrowings.
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 May 4, 2019, our existing cash and cash equivalents on-hand of $448, available credit facility of $800 and potential future operating cash flows and borrowings will be sufficient to fund these scheduled future payments and potential long-term initiatives.
The following is a summary of our cash flows by activity: | | | | Quarter Ended | Quarter Ended |
| Fiscal year | May 4, 2019 |
| | May 5, 2018 |
| |
| | May 2, 2020 |
| | May 4, 2019 |
|
| Net cash used in operating activities |
| ($31 | ) | |
| ($28 | ) |
| ($778 | ) | |
| ($31 | ) |
| Net cash used in investing activities | (248 | ) | | (149 | ) | (126 | ) | | (248 | ) |
| Net cash used in financing activities | (230 | ) | | (38 | ) | |
| Net cash provided by (used in) financing activities | | 1,417 |
| | (230 | ) |
Operating Activities
Net cash used in operating activities increased $3$747 for the periodquarter ended May 4, 2019,2, 2020, compared with the same period in 2018,2019, primarily due to a decreasereduction in sales, partially offset by less inventory purchased.net earnings as a result of temporary store closures and the charges associated with the impacts of COVID-19.
Investing Activities
Net cash used in investing activities increased $99decreased $122 for the periodquarter ended May 4, 2019,2, 2020, compared with the same period in 2018,2019, primarily due to an increasea decrease in capital expenditures, relatedas we prioritized investments in supply chain and technology, while reducing non-critical spend on store remodels.
Capital Expenditures
Our capital expenditures, net are summarized as follows: |
| | | | | | | |
| | Quarter Ended |
| Fiscal year | May 2, 2020 |
| | May 4, 2019 |
|
| Capital expenditures |
| $131 |
| |
| $249 |
|
Less: deferred property incentives1 | (8 | ) | | (29 | ) |
| Capital expenditures, net |
| $123 |
| |
| $220 |
|
| | | | |
| Capital expenditures % of net sales | 6.4 | % | | 7.4 | % |
1 Deferred property incentives are included in our cash provided by operations in our 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 Supply Chain Network, including our Omni-channel center in Riverside, California opening in late 2019.capital expenditures.
Financing Activities
Net cash usedThe change in financing activities increased $192 for the periodquarter ended May 4, 2019,2, 2020, compared with the same period in 2018,2019, was $1,647, primarily due to increasedthe proceeds from the Revolver and Secured Notes and decreased share repurchase activity.repurchases, which were paused beginning in the second quarter of 2019.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share amounts)
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 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 used in operating activities. The following is a reconciliation of net cash used in operating activities to Free Cash Flow:
| | | | Quarter Ended | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
| May 2, 2020 |
| | May 4, 2019 |
|
| Net cash used in operating activities |
| ($31 | ) | |
| ($28 | ) |
| ($778 | ) | |
| ($31 | ) |
| Less: capital expenditures | (249 | ) | | (129 | ) | (131 | ) | | (249 | ) |
| Add: change in cash book overdrafts | 40 |
| | 27 |
| 83 |
| | 40 |
|
| Free Cash Flow |
| ($240 | ) |
|
| ($130 | ) |
| ($826 | ) |
|
| ($240 | ) |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share amounts)
Adjusted EBITDA and Adjusted EBITDAR (Non-GAAP financial measure)measures)
Adjusted EBITDA is one of our key financial metricmetrics to reflect our view of cash flow from net earnings. Adjusted EBITDA excludes significant items which are non-operating in nature in order to evaluate our core operating performance against prior periods. The financial measure calculated under GAAP which is most directly comparable to Adjusted EBITDA is net earnings.
Adjusted EBITDAR is also one of our key financial metrics as it will be used to measure compliance with one of our Revolver covenants beginning in the third quarter of 2020. Adjusted EBITDAR reflects the items in Adjusted EBITDA, excludes rent expense as defined by the Revolver agreement, and captures other differences between the contractual requirements in the Revolver agreement and Adjusted EBITDA, including the inclusion or exclusion of certain non-cash charges. The financial measure calculated under GAAP which is most directly comparable to Adjusted EBITDAR is net earnings.
Adjusted EBITDA and Adjusted EBITDAR are not a measuremeasures of financial performance under GAAP and should be considered in addition to, and not as a substitute for net earnings, overall change in cash or liquidity of the business as a whole. Our method of determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies. The following is a reconciliation of net earnings to Adjusted EBITDA:EBITDA and Adjusted EBITDAR: | | | | Quarter Ended | Quarter Ended |
| | May 4, 2019 |
| | May 5, 2018 |
| May 2, 2020 |
| | May 4, 2019 |
|
| Net earnings |
| $37 |
| |
| $87 |
| |
| Add: income tax expense | 16 |
| | 38 |
| |
| Net (loss) earnings | |
| ($521 | ) | |
| $37 |
|
| Add: income tax (benefit) expense | | (326 | ) | | 16 |
|
| Add: interest expense, net | 24 |
| | 28 |
| 34 |
| | 24 |
|
| Earnings before interest and income taxes | 77 |
| | 153 |
| |
| (Loss) earnings before interest and income taxes | | (813 | ) | | 77 |
|
| | | | | | | |
| Add: depreciation and amortization expenses | 163 |
| | 169 |
| 176 |
| | 163 |
|
| Less: amortization of developer reimbursements | (19 | ) | | (21 | ) | (19 | ) | | (19 | ) |
| Add: asset impairments | | 117 |
| | — |
|
| Adjusted EBITDA |
| $221 |
| |
| $301 |
|
| ($539 | ) | |
| $221 |
|
| | | | | |
Add: rent expense1 | | 61 |
| | 65 |
|
Add: other Revolver covenant adjustments2 | | 2 |
| | 3 |
|
| Adjusted EBITDAR | |
| ($476 | ) | |
| $289 |
|
1 Rent expense, exclusive of amortization of developer reimbursements, is added back for consistency with our debt covenant calculation requirements, and is calculated under the previous lease standard.
2 Other adjusting items to reconcile Adjusted EBITDA to Adjusted EBITDAR as defined by our Revolver covenant includes interest income, and certain non-cash charges where relevant.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share amounts)
Credit Capacity and Commitments
We have total short-term borrowing capacityDuring the first quarter of 2020, we amended our existing Revolver and borrowed $800. As of May 2, 2020, we had $800 outstanding under the revolver that expires September 2023.credit facility. The Revolver contains customary representations, warranties, covenants and terms, including paying a variable rate of interest and a commitment fee based on our debt rating. The Revolver is available for working capital, capital expenditures and general corporate purposes. Provided that we obtain written consent from our lenders, we have the option to increase the revolverRevolver by up to $200, to a total of $1,000, and two options to extend the revolverRevolver by one year. As of May 4, 2019, we had no borrowings outstanding under our revolver. For more information about our credit facilities, see Note 5:3: Debt and Credit Facilities in Item 1.
Impact of Credit Ratings
UnderChanges in our credit ratings may impact our costs to borrow, whether our personal property secures our Revolver and the terms ofdebt covenants we follow.
For our revolver,Revolver, the interest rate applicable to 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 or (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 thewhich is determined based on our credit ratings assigned to our long-term unsecured debt.ratings. At the time of this report, our long-term unsecured debtcredit ratings outlook and resulting applicable marginoutlook were as follows: |
| | | |
| | Credit Ratings | | Outlook |
| Moody’s | Baa1Baa3 | | StableNegative |
| Standard & Poor’s | BBB+BBB- | | Stable |
|
| | | | |
| Base Interest Rate | | Applicable Margin |
|
Euro-Dollar Rate Loan | LIBOR | | 1.03 | % |
Canadian Dealer Offer Rate Loan | CDOR | | 1.03 | % |
Base Rate Loan | various | | 0.03 | %Negative |
Should the ratings assigned to our long-term unsecured debt improve, the applicable margin associated with any such borrowings under the Revolver may decrease, resulting in a lower borrowing cost under this facility. ShouldConversely, should the ratings assigned to our long-term unsecured debt worsen, the applicable margin associated with ourany borrowings under the Revolver may increase, resulting in a higher borrowing cost under this facility.
Debt Covenants
The revolver requires thatAs ofMay 2, 2020, our borrowings under the Revolver were classified as secured as our Leverage Ratio exceeded four, and we maintain an adjustedmet our asset coverage and minimum liquidity covenants. For more information about our debt to EBITDAR leverage ratio of no more than four times. As of May 4, 2019, we werecovenants, see Note 3: Debt and Credit Facilities in compliance with this covenant.Item 1.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share 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, as it provides a reflection of our credit worthiness that could impact our credit rating and borrowing costs. Our goal is to manage debt levels to maintain an investment-grade credit rating and operate with an efficient capital structure. We also have a debt covenant that requires an adjusted debt to EBITDAR leverage ratio of no more than four times.
For 2019, income statement activity for adjusted EBITDAR is comprised of one quarter of activity under the Lease Standard for 2019, and the last three quarters of 2018 under the previous lease standard. Balance sheet amounts are as of the end of the quarter, and under the new Lease Standard for 2019 and the previous lease standard for 2018. Under the previous lease standard, we estimated the value of our operating leases as if they met the criteria for capital leases or we had purchased the properties. This provided additional supplemental information that estimated the investment in our operating leases. Estimated capitalized operating lease liability is not calculated in accordance with, nor an alternative for, GAAP and should not be considered in isolation or as a substitution of our results as reported under GAAP.
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 determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies.
The following is a reconciliation of the components of Adjusted Debt to EBITDAR and debt to net earnings: |
| | | | | | | |
| | 20191 |
| | 20181 |
|
| Debt |
| $2,676 |
| |
| $2,736 |
|
| Add: operating lease liabilities | 2,188 |
| | — |
|
Add: estimated capitalized operating lease liability2 | — |
| | 2,029 |
|
| Adjusted Debt |
| $4,864 |
| |
| $4,765 |
|
| | | | |
| Net earnings |
| $513 |
| |
| $461 |
|
| Add: income tax expense | 147 |
| | 351 |
|
| Add: interest expense, net | 100 |
| | 116 |
|
| Earnings before interest and income taxes | 760 |
| | 928 |
|
| | | | |
| Add: depreciation and amortization expenses | 663 |
| | 674 |
|
Add: operating lease cost3 | 69 |
| | — |
|
| Add: rent expense, net | 189 |
| | 254 |
|
| Add: non-cash acquisition-related charges | — |
| | 1 |
|
| Adjusted EBITDAR |
| $1,681 |
| |
| $1,857 |
|
| | | | |
Debt to Net Earnings4 | 5.2 |
| | 5.9 |
|
Adjusted Debt to EBITDAR4 | 2.9 |
| | 2.6 |
|
1 The components of Adjusted Debt are as of May 4, 2019 and May 5, 2018, while the components of Adjusted EBITDAR are for the four quarters ended May 4, 2019 and May 5, 2018.
2 Based upon the estimated lease liability as of the end of the period, calculated as the trailing four quarters of rent expense multiplied by eight, 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 As a result of the Lease Standard, we add back the operating lease cost to calculate Adjusted EBITDAR.
4 Results for the four quarters ended May 4, 2019 included the $72 impact related to the Estimated Non-recurring Charge, which negatively impacted Debt to Net Earnings by approximately 50 basis points and Adjusted Debt to EBITDAR by approximately 10 basis points. In addition, the impact of the Lease Standard had no impact on Debt to Net Earnings and negatively impacted Adjusted Debt to EBITDAR by approximately 10 basis points.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share amounts)
Off-Balance Sheet ArrangementsContractual Obligations
As of May 4, 20192, 2020, there have been no material changes to our off-balance sheet arrangementscontractual obligations as disclosed in our 20182019 Annual Report except for our operating leases, which are recorded on the balance sheet as a resultdisclosed in Note 3: Debt and Credit Facilities and Note 5: Commitments and Contingencies of adopting the Lease Standard.Item 1.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We believe that the estimates, assumptions and judgments involved in the accounting policies referred to in our 20182019 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.
Except as disclosed in Note 2: Leases1: Basis of Presentation of Item 1, pertaining to our adoptionthe impact of the Lease Standard,COVID-19, there have been no significantmaterial changes to our significant accounting policies or critical accounting estimates as described in our 20182019 Annual Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We discussed our interest rate risk and our foreign currency exchange risk in our 20182019 Annual Report. There have been no material changes to these risks since that time.
Item 4. Controls and Procedures.
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, we performed an evaluation under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the design and effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act). 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 effective in the timely and accurate recording, processing, summarizing and reporting of material financial and non-financial information within the time periods specified within the SEC’s rules and forms. Our principal executive officer and principal financial officer also concluded that our disclosure controls and procedures were effective 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
During the quarter ended May 4, 2019, we adopted the Lease Standard. As a result of our adoption of the Lease Standard,2, 2020, we implemented a new lease accounting informationpayroll system and modified our payroll processes and related internal controls over lease accounting.controls.
There were no other 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 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 accruals in our Condensed Consolidated Financial Statements are adequate in light of the probable and estimable liabilities. As of the date of this report, we do not believe any 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.
There have been no material changes to the risk factors we discussed in our 2018 Annual Report.Form 8-K filed with the SEC on April 8, 2020. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) SHARE REPURCHASES
(Dollar and share amounts in millions, except per share amounts)
The following is a summary of our first quarter share repurchases: |
| | | | | | | | | | | | | |
| | Total Number of Shares Purchased |
| | Average Price Paid per Share |
| | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
| | Approximate Dollar Value of Shares that may yet be Purchased Under the Plans or Programs |
|
February 2019
(February 3, 2019 to March 2, 2019) | 3.5 |
| |
| $45.37 |
| | 3.5 |
| |
| $736 |
|
March 2019
(March 3, 2019 to April 6, 2019) | 0.6 |
| |
| $44.08 |
| | 0.6 |
| |
| $707 |
|
April 2019
(April 7, 2019 to May 4, 2019) | — |
| | — |
| | — |
| |
| $707 |
|
| Total | 4.1 |
| |
| $45.17 |
| | 4.1 |
| | |
In August 2018, our Board of Directors authorized a program to repurchase up to $1,500 of our outstanding common stock, with no expiration date. On March 23, 2020, in response to uncertainty from the COVID-19 pandemic, we announced that we were suspending share repurchases. During the first quarterof2020, we did not repurchase any shares of our common stock and we had $707 remaining in share repurchase capacity as of May 2, 2020. The actual timing, price, manner and amounts of future share repurchases, if any, will be subject to market and economic conditions, certain financial covenants and applicable SEC rules.rules.
Item 6. Exhibits.
Exhibits are incorporated herein by reference or are filed or furnished with this report as set forth in the Exhibit Index on page 27 hereof.
NORDSTROM, INC.
|
| | | | |
| Exhibit | | Method of Filing |
| | | | Incorporated by reference from the Registrant’s Form 8-K filed on May 29, 2019,26, 2020, Exhibit 3.1 |
| | | | | |
| | | | Filed herewith electronically |
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| | | | Incorporated by Section 302(a) ofreference to Appendix B to the Sarbanes-Oxley Act of 2002Registrant’s Form DEF 14A filed on April 7, 2020 |
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| | | | Filed herewith electronically |
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| | | | Filed herewith electronically |
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| | | | Filed herewith electronically |
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| | | | Filed herewith electronically |
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| | | | Filed herewith electronically |
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| | | | Furnished herewith electronically |
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| 101.INS | | Inline XBRL Instance Document | | Filed herewith electronically |
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| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | Filed herewith electronically |
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| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith electronically |
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| 101.LAB | | Inline XBRL Taxonomy Extension Labels Linkbase Document | | Filed herewith electronically |
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| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith electronically |
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| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith electronically |
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| 104 | | Cover Page Interactive Data File (Inline XBRL) | | Filed 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.
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| NORDSTROM, INC. |
| (Registrant) |
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| /s/ Anne L. Bramman |
| Anne L. Bramman |
| Chief Financial Officer |
| (Principal Financial Officer) |
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| Date: | June 5, 201910, 2020 |