<page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 29, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 001-15059
Nordstrom, Inc.
______________________________________________________
(Exact name of Registrant as specified in its charter)
Washington 91-0515058
_______________________________ ___________________
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1617 Sixth Avenue, Seattle, Washington 98101
____________________________________________________
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (206) 628-2111
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
_____ _____
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and larger accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer X Accelerated filer Non-accelerated filer
______ ____ ____
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES NO X
_____ _____
Common stock outstanding as of May 23, 2006: 265,865 shares of common stock
(in thousands).
1 of 27
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<table>
<caption>
NORDSTROM, INC. AND SUBSIDIARIES
--------------------------------
INDEX
-----
<s> <c>
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Earnings
Quarter ended April 29, 2006 and April 30, 2005 3
Condensed Consolidated Balance Sheets
April 29, 2006, January 28, 2006 and April 30, 2005 4
Condensed Consolidated Statements of Shareholders' Equity
Year to Date ended April 29, 2006 and April 30, 2005 5
Condensed Consolidated Statements of Cash Flows
Year to Date ended April 29, 2006 and April 30, 2005 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 25
Item 6. Exhibits 25
SIGNATURES 26
INDEX TO EXHIBITS 27
</table>
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<table>
<caption>
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(amounts in thousands except per share amounts and percentages)
(unaudited)
<s> <c> <c>
Quarter Ended
----------------------
April 29, April 30,
2006 2005
---------- ----------
Net sales $1,787,223 $1,654,474
Cost of sales and related
buying and occupancy costs (1,123,003) (1,046,165)
---------- ----------
Gross profit 664,220 608,309
Selling, general and
administrative expenses (494,220) (465,422)
---------- ----------
Operating income 170,000 142,887
Interest expense, net (10,751) (12,639)
Other income including finance
charges, net 53,838 42,732
--------- --------
Earnings before income tax expense 213,087 172,980
Income tax expense (81,856) (68,442)
--------- --------
Net earnings $ 131,231 $ 104,538
========= ==========
Basic earnings per share $ 0.49 $ 0.38
Diluted earnings per share $ 0.48 $ 0.38
Basic shares 267,490 273,070
Diluted shares 272,831 278,395
Quarter Ended
----------------------
April 29, April 30,
(% of Net sales) 2006 2005
---------- ----------
Net sales 100.0% 100.0%
Cost of sales and related
buying and occupancy costs (62.8%) (63.2%)
---------- ----------
Gross profit 37.2% 36.8%
Selling, general and
administrative expenses (27.7%) (28.1%)
---------- ----------
Operating income 9.5% 8.6%
Interest expense, net (0.6%) (0.8%)
Other income including finance
charges, net 3.0% 2.6%
---------- ----------
Earnings before income tax expense 11.9% 10.5%
Income tax expense (as a % of earnings
before income tax expense) (38.4%) (39.6%)
---------- ----------
Net earnings 7.3% 6.3%
========== ==========
</table>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
3 of 27
<page>
<table>
<caption>
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(unaudited)
<s> <c> <c> <c>
April 29, January 28, April 30,
2006 2006 2005
---------- ---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 261,326 $ 462,656 $ 315,695
Short-term investments 30,000 54,000 53,750
Accounts receivable, net 619,095 639,558 629,788
Investment in asset backed securities 565,854 561,136 427,302
Merchandise inventories 1,078,750 955,978 1,016,640
Current deferred tax assets 161,001 145,470 114,127
Prepaid expenses and other 56,982 55,359 53,934
---------- ---------- ----------
Total current assets 2,773,008 2,874,157 2,611,236
Land, buildings and equipment (net of
accumulated depreciation of $2,615,512,
$2,549,559 and $2,383,289) 1,748,399 1,773,871 1,763,766
Goodwill 51,714 51,714 51,714
Acquired tradename 84,000 84,000 84,000
Other assets 129,518 137,607 108,891
---------- ---------- ----------
TOTAL ASSETS $4,786,639 $4,921,349 $4,619,607
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 638,983 $ 540,019 $ 582,381
Accrued salaries, wages
and related benefits 174,300 285,982 172,167
Other current liabilities 372,446 409,076 336,246
Income taxes payable 59,978 81,617 45,181
Current portion of long-term debt 306,636 306,618 100,458
---------- ---------- ----------
Total current liabilities 1,552,343 1,623,312 1,236,433
Long-term debt, net 624,949 627,776 928,175
Deferred property incentives, net 361,446 364,382 357,694
Other liabilities 219,477 213,198 204,353
Shareholders' Equity:
Common stock, no par:
1,000,000 shares authorized;
265,741, 269,549 and 273,265 shares
issued and outstanding 733,663 685,934 619,640
Unearned stock compensation - (327) (593)
Retained earnings 1,294,351 1,404,366 1,266,337
Accumulated other comprehensive
earnings 410 2,708 7,568
---------- ---------- ----------
Total shareholders' equity 2,028,424 2,092,681 1,892,952
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,786,639 $4,921,349 $4,619,607
========== ========== ==========
</table>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
4 of 27
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<table>
<caption>
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(amounts in thousands except per share amounts)
(unaudited)
<s> <c> <c> <c> <c> <c> <c>
Common Stock Accumulated Other
--------------------- Unearned Retained Comprehensive
Shares Amount Compensation Earnings Earnings Total
-----------------------------------------------------------------------
Balance at
January 28, 2006 269,549 $685,934 $(327) $1,404,366 $2,708 $2,092,681
Net earnings - - - 131,231 - 131,231
Other comprehensive earnings:
Foreign currency
translation adjustment - - - - 911 911
Fair value adjustment to
investment in asset backed
securities, net of tax
of $1,956 - - - - (3,209) (3,209)
--------
Comprehensive net earnings - - - - - 128,933
Cash dividends paid
($0.105 per share) - - - (28,326) - (28,326)
Issuance of common stock for:
Stock option plans 1,369 32,067 - - - 32,067
Employee stock purchase
plan 237 8,499 - - - 8,499
Other 9 (1) 327 - - 326
Stock-based compensation - 7,164 - - - 7,164
Repurchase of common
stock (5,423) - - (212,920) - (212,920)
---------------------------------------------------------------------
Balance at
April 29, 2006 265,741 $733,663 - $1,294,351 $410 $2,028,424
=====================================================================
Common Stock Accumulated Other
--------------------- Unearned Retained Comprehensive
Shares Amount Compensation Earnings Earnings Total
-----------------------------------------------------------------------
Balance at
January 29, 2005 271,331 $552,655 $(299) $1,227,303 $9,335 $1,788,994
Net earnings - - - 104,538 - 104,538
Other comprehensive earnings:
Foreign currency
translation adjustment - - - - 147 147
Fair value adjustment to
investment in asset backed
securities, net of tax
of $1,224 - - - - (1,914) (1,914)
--------
Comprehensive net earnings - - - - - 102,771
Cash dividends paid
($0.065 per share) - - - (17,758) - (17,758)
Issuance of common stock for:
Stock option plans 3,065 55,556 - - - 55,556
Employee stock purchase
plan 532 8,768 - - - 8,768
Other 111 2,661 (294) - - 2,367
Repurchase of common
stock (1,774) - - (47,746) - (47,746)
---------------------------------------------------------------------
Balance at
April 30, 2005 273,265 $619,640 $(593) $1,266,337 $7,568 $1,892,952
=====================================================================
</table>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
5 of 27
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<table>
<caption>
NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
<s> <c> <c>
Quarter Ended
-------------------------
April 29, April 30,
2006 2005
---------- ----------
OPERATING ACTIVITIES:
Net earnings $131,231 $104,538
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization of
buildings and equipment 70,425 69,204
Amortization of deferred property incentives
and other, net (8,677) (6,903)
Stock-based compensation expense 7,336 1,428
Deferred income taxes, net (7,395) 19,610
Tax benefit from stock-based payments 13,538 16,546
Excess tax benefit from stock-based payments (11,617) -
Provision for bad debt expense 2,650 5,118
Change in operating assets and liabilities:
Accounts receivable 17,834 10,578
Investment in asset backed securities (7,927) (9,210)
Merchandise inventories (109,648) (99,065)
Prepaid expenses (1,410) 666
Other assets (572) 409
Accounts payable 91,905 97,507
Accrued salaries, wages and related benefits (111,343) (118,548)
Other current liabilities (34,126) (20,781)
Income taxes payable (21,639) (46,971)
Property incentives 3,826 9,839
Other liabilities 4,360 7,237
---------- ----------
Net cash provided by operating activities 28,751 41,202
---------- ----------
INVESTING ACTIVITIES:
Capital expenditures (47,513) (53,021)
Proceeds from sale of assets 18 -
Purchases of short-term investments (100,000) (165,500)
Sales of short-term investments 124,000 153,575
Other, net (1,941) (691)
---------- ----------
Net cash used in investing activities (25,436) (65,637)
---------- ----------
FINANCING ACTIVITIES:
Principal payments on long-term debt (1,124) (1,021)
Decrease in cash book overdrafts (1,807) (3,756)
Proceeds from exercise of stock options 18,657 39,139
Proceeds from employee stock purchase plan 8,370 8,640
Excess tax benefit from stock-based payments 11,617 -
Cash dividends paid (28,326) (17,758)
Repurchase of common stock (212,920) (47,746)
Other, net 888 2,009
---------- ----------
Net cash used in financing activities (204,645) (20,493)
---------- ----------
Net decrease in cash and cash equivalents (201,330) (44,928)
Cash and cash equivalents at beginning of period 462,656 360,623
---------- ----------
Cash and cash equivalents at end of period $261,326 $315,695
========== ==========
</table>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
6 of 27
<page>
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollar and share amounts in thousands except per share and per option amounts
(unaudited)
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
- ---------------------
The accompanying condensed consolidated financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements contained in
our 2005 Annual Report on Form 10-K. The same accounting policies are
followed for preparing quarterly and annual financial information. All
adjustments necessary for the fair presentation of the results of operations,
financial position and cash flows have been included and are of a normal,
recurring nature.
Our business, like that of other retailers, is subject to seasonal
fluctuations. Our Anniversary Sale in July and the holidays in December
typically result in higher sales in the second and fourth quarters of our
fiscal years. Accordingly, results for any quarter are not necessarily
indicative of the results that may be achieved for a full fiscal year.
Accounting Policies
- -------------------
The preparation of our financial statements requires that we make estimates
and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and disclosure of contingent assets and liabilities.
We 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. With the exception of our adoption of SFAS No. 123(R)
"Share-Based Payment" in the beginning of the first quarter of 2006, our
accounting policies and methodologies in 2006 are consistent with those
discussed in our 2005 Annual Report.
Stock-Based Compensation
- ------------------------
Prior to the adoption of SFAS No. 123(R), we applied APB No. 25 "Accounting
for Stock Issued to Employees," to measure compensation costs for our stock-
based compensation programs. Under APB No. 25, we recorded no compensation
expense for stock options granted to employees and directors because the
options' strike price was equal to the closing market price of our common
stock on the grant date. Also, through 2005 we recorded no compensation
expense in connection with our Employee Stock Purchase Plan (ESPP). Through
2005, we presented the effect on net earnings and earnings per share of the
fair value provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" in the Notes to Condensed Consolidated Financial Statements.
Effective January 29, 2006, we adopted SFAS No. 123(R), which requires us to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. The costs
are recognized over the period during which an employee is required to provide
services in exchange for the award.
7 of 27
<page>
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollar and share amounts in thousands except per share and per option amounts
(unaudited)
Note 1 - Summary of Significant Accounting Policies (Cont.)
We recognized stock-based compensation expense on a straight-line basis over
the requisite service period. The following table summarizes our stock-based
compensation expense:
<table>
<caption>
<s> <c> <c>
Quarter Ended
-----------------------
April 29, April 30,
2006 2005
----------- ----------
Stock options $6,640 -
Employee Stock Purchase Plan 488 -
Performance share units 114 $1,043
Other 94 385
----------- ----------
Total stock-based compensation expense before
income tax benefit 7,336 1,428
Income tax benefit (2,639) (555)
----------- ----------
Total stock-based compensation expense, net of tax $4,697 $873
=========== ==========
</table
The stock-based compensation expense before income tax is recorded in cost of
sales and related buying and occupancy costs ($2,722 in 2006; $0 in 2005) and
in selling, general and administrative expense ($4,614 in 2006; $1,428 in
2005).
We adopted SFAS No. 123(R) using the modified prospective method. Under this
transition method, the stock-based compensation expense recognized in the
current period includes the estimated expense for stock options granted after
January 29, 2006. The stock-based compensation expense also includes the
estimated expense for options granted prior to, but not vested as of January
29, 2006 based on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123. In addition, we recognized stock-based
compensation expense related to our ESPP, as our 10% purchase discount
exceeded the amount allowed under SFAS No. 123(R) for non-compensatory
treatment. As provided for under the modified prospective method, we have not
restated our results for prior periods. The incremental stock-based
compensation expense upon adoption of SFAS No. 123(R) in the first quarter of
2006 was $7,128 ($4,570 net of tax), or $0.02 per basic and diluted earnings
per share. We expect to record $27,798 in incremental stock-based
compensation expense for the year ended February 3, 2007, representing
approximately $0.06 per diluted share.
Prior to the adoption of SFAS No. 123(R), we presented all tax benefits
resulting from the exercise of stock options and ESPP as operating cash
inflows. SFAS No. 123(R) requires the benefits of tax deductions in excess of
the compensation cost recognized for those awards to be classified as
financing cash inflows rather than operating cash inflows, on a prospective
basis. This amount is shown as "Excess tax benefit from stock-based payments"
in the condensed consolidated statement of cash flows and was $11,617 for the
quarter ended April 29, 2006.
8 of 27
<page>
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollar and share amounts in thousands except per share and per option amounts
(unaudited)
Note 1 - Summary of Significant Accounting Policies (Cont.)
The following table illustrates the effect on net earnings and earnings per
share if we had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" in the first quarter of 2005:
<table>
<caption>
<s> <c>
Quarter Ended
April 30,
2005
--------------
Net earnings, as reported $104,538
Add: stock-based compensation expense included in
reported net earnings, net of tax 871
Deduct: stock-based compensation expense determined
under fair value, net of tax (5,717)
--------------
Pro forma net earnings $99,692
==============
Earnings per share:
Basic - as reported $0.38
Diluted - as reported $0.38
Basic - pro forma $0.37
Diluted - pro forma $0.36
</table>
In 2005, we used the Black-Scholes option valuation model to estimate the fair
value of the stock options under SFAS No. 123. When we adopted SFAS No.
123(R), we elected to use the Binomial Lattice option valuation model. We
believe that this model provides a better estimate of fair value than the
Black-Scholes option valuation model, as it can accommodate variability in
assumptions for expected volatility, dividends and risk-free interest rates.
We used the following weighted average assumptions to estimate the fair value
for stock options granted in the quarters listed below:
<table>
<caption>
<s> <c> <c>
Quarter Ended
------------------------
April 29, April 30,
2006 2005
----------- -----------
Risk-free interest rate 4.9% - 5.1% 3.9%
Expected volatility 37.0% 44.3%
Expected dividend yield 1.0% 1.7%
Expected life in years 5.4 5.0
</table>
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<page>
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollar and share amounts in thousands except per share and per option amounts
(unaudited)
Note 1 - Summary of Significant Accounting Policies (Cont.)
The weighted average fair value per option at the grant date was $16 and $10
in the first quarter of 2006 and 2005. The following describes the
significant assumptions used to estimate the fair value of options granted:
- Risk-free interest rate: For 2006, the rate represents the yield on U.S.
Treasury zero-coupon securities that mature over the 10-year life of the
stock options. For 2005, the rate was the yield on the U.S. Treasury
zero-coupon securities which matured near the end of the expected life of
the stock options.
- Expected volatility: For 2006, this was based on a combination of the
historical volatility of our common stock and the implied volatility of
exchange traded options for our common stock. In 2005, the expected
volatility was estimated using the historical volatility of our common
stock.
- Expected dividend yield: For 2006, this was our forecasted dividend
yield for the next ten years. In 2005, the expected dividend yield was
based on our historical dividend yield.
- Expected life in years: The expected life represents the estimated
period of time until option exercise. In 2006, based on our historical
exercise behavior and taking into consideration the contractual term of
the option and our employees' expected exercise and post-vesting
employment termination behavior, the expected term of options granted was
derived from the output of the Binomial Lattice option valuation model.
In 2005, the expected life was determined based on our historical
exercise behavior.
Note 2 - Post-retirement Benefits
The expense components of our Supplemental Executive Retirement Plan, which
provides retirement benefits to certain officers and select employees, are as
follows:
<table>
<caption>
<s> <c> <c>
Quarter Ended
------------------------
April 29, April 30,
2006 2005
----------- -----------
Participant service cost $ 557 $ 413
Interest cost 1,308 1,018
Amortization of net loss 724 414
Amortization of prior
service cost 257 240
----------- -----------
Total expense $2,846 $2,085
=========== ===========
</table>
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<page>
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollar and share amounts in thousands except per share and per option amounts
(unaudited)
Note 3 - Earnings Per Share
<table>
<caption>
<s> <c> <c>
Quarter Ended
------------------------
April 29, April 30,
2006 2005
----------- -----------
Net earnings $131,231 $104,538
=========== ===========
Basic shares 267,490 273,070
Dilutive effect of
stock options and
performance share units 5,341 5,325
----------- -----------
Diluted shares 272,831 278,395
=========== ===========
Basic earnings per share $0.49 $0.38
Diluted earnings per share $0.48 $0.38
Antidilutive stock options
and other 1,896 -
</table>
Note 4 - Accounts Receivable
The components of accounts receivable are as follows:
<table>
<caption>
<s> <c> <c> <c>
April 29, January 28, April 30,
2006 2006 2005
----------- ----------- -----------
Trade receivables:
Unrestricted $ 35,554 $ 32,070 $ 36,936
Restricted 520,440 552,671 533,977
Allowance for doubtful accounts (16,056) (17,926) (18,495)
----------- ----------- -----------
Trade receivables, net 539,938 566,815 552,418
Other 79,157 72,743 77,370
----------- ----------- -----------
Accounts receivable, net $619,095 $639,558 $629,788
=========== =========== ===========
</table>
Our restricted trade receivables relate to our Nordstrom private label card,
which back the $300,000 Class A notes and the $150,000 variable funding note.
The unrestricted trade receivables consist primarily of our Faconnable trade
receivables and accrued finance charges not yet allocated to customer
accounts.
Other accounts receivable consist primarily of credit card receivables due
from third-party financial institutions and vendor rebates, which are believed
to be fully realizable as they are collected soon after they are earned.
11 of 27
<page>
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollar and share amounts in thousands except per share and per option amounts
(unaudited)
Note 5 - Investment in Asset Backed Securities
Our investment in asset backed securities and the off-balance sheet financing
are described in Note 8 of our 2005 Annual Report on Form 10-K. The following
table presents the co-branded Nordstrom VISA credit card balances and the
estimated fair value of our investment in asset backed securities:
<table>
<caption>
<s> <c> <c> <c>
April 29, January 28, April 30,
2006 2006 2005
----------- ---------- -----------
Total face value of co-branded Nordstrom
VISA credit card principal receivables $749,322 $738,947 $619,556
=========== ========== ===========
Securities issued by the VISA Trust:
Off-balance sheet (sold to third parties):
2002 Class A & B Notes at par value $200,000 $200,000 $200,000
=========== ========== ===========
Amounts recorded on balance sheet:
Investment in asset backed
securities at fair value $565,854 $561,136 $427,302
=========== ========== ===========
</table>
The following table presents the key assumptions we use to value the
investment in asset backed securities:
<table>
<caption>
<s> <c> <c> <c>
April 29, January 28, April 30,
2006 2006 2005
------------ ------------ ------------
Weighted average remaining life
(in months) 7.6 7.6 7.7
Average annual credit losses 5.2% 4.7% 7.1%
Average gross yield 17.3% 17.1% 15.9%
Weighted average coupon on issued
securities 5.5% 5.2% 4.3%
Average monthly payment rates 7.6% 8.2% 7.7%
Discount rate on investment in
asset backed securities 6.2% to 11.4% 5.9% to 11.1% 5.4% to 6.7%
</table>
The following table summarizes the income earned by the investment in asset
backed securities that is included in other income including finance charges,
net on the condensed consolidated statements of earnings:
<table>
<caption>
<s> <c> <c>
Quarter Ended
------------------------
April 29, April 30,
2006 2005
----------- -----------
Interest income $18,926 $10,482
Gains on sales of
receivables and
other income 8,395 9,589
----------- -----------
$27,321 $20,071
=========== ===========
</table>
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<page>
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollar and share amounts in thousands except per share and per option amounts
(unaudited)
Note 6 - Debt
To manage our interest rate risk, we have an interest rate swap outstanding
recorded in other liabilities. Our swap has a $250,000 notional amount,
expires in January 2009 and is designated as a fully effective fair value
hedge. Under the agreement, we receive a fixed rate of 5.63% and pay a
variable rate based on LIBOR plus a margin of 2.3% set at six-month intervals
(7.52% at April 29, 2006.) The fair value of our interest rate swap is as
follows:
<table>
<caption>
<s> <c> <c> <c>
April 29, January 28, April 30,
2006 2006 2005
----------- ----------- -----------
Interest rate swap fair value $(12,847) $(11,050) $(9,549)
</table>
Note 7 - Stock-based Compensation
In 2004, our shareholders approved the 2004 Equity Incentive Plan. We
currently grant stock options, performance share units and common shares under
this plan.
STOCK OPTIONS
- -------------
As of April 29, 2006, we have options outstanding under three stock option
plans (collectively, the "Nordstrom, Inc. Plans"). Options vest over periods
ranging from four to eight years, and expire ten years after the date of
grant. A summary of stock option activity under the Nordstrom, Inc. Plans
during the quarter ended April 29, 2006 is presented below:
<table>
<caption>
<s> <c> <c> <c> <c>
For the first quarter
-----------------------------------------
2006 2005
----------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
Outstanding, beginning of year 14,344 $15 18,320 $13
Granted 1,939 40 2,564 26
Exercised (1,369) 14 (3,066) 13
Cancelled (251) 24 (393) 15
------ -------- ------ --------
Outstanding, end of period 14,663 $19 17,425 $15
====== ======== ====== ========
</table>
Annual stock option awards to employees, which are approved by the
Compensation Committee of the Company's Board of Directors in February each
year, provide our leaders with the opportunity for financial rewards when the
Company's stock price increases. The awards are determined based upon a
percentage of the leaders' base salary and the fair value of the stock
options, which is estimated using an option pricing model. The fair value per
stock option was $16 in 2006 (using a Binomial Lattice option valuation model)
and $10 in 2005 (using the Black-Scholes option valuation model.) We awarded
stock options to 1,235 employees in the first quarter of 2006 and 1,207
employees in the first quarter of 2005.
13 of 27
<page>
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollar and share amounts in thousands except per share and per option amounts
(unaudited)
Note 7 - Stock-based Compensation (Cont.)
The total intrinsic value of options exercised during the quarters ended April
29, 2006 and April 30, 2005 was $33,801 and $38,720. The total fair value of
stock options vested during the quarters ended April 29, 2006 and April 30,
2005 was $29,860 and $26,608. As of April 29, 2006, the total unrecognized
stock-based compensation expense related to nonvested stock options was
$60,073, which is expected to be recognized over a weighted average period of
approximately 33 months. The aggregate intrinsic value of options outstanding
as of April 29, 2006 was $290,198.
The following table summarizes information about stock options outstanding for
the Nordstrom, Inc. Plans as of April 29, 2006:
<table>
<caption>
<s> <c> <c> <c> <c> <c>
Options Outstanding Options Exercisable
- --------- --------------------------------------- ----------------------
Weighted- Weighted- Weighted-
Range of Average Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life (Years) Price Shares Price
- --------- ------ ----------------- -------- ------ ----------
$8.03-$8.99 3,525 6 $9 2,473 $9
$9.00-$12.99 3,355 5 12 3,307 12
$13.00-$19.99 3,673 6 18 2,148 18
$20.00-$40.27 4,110 9 33 509 26
------ ----------------- -------- ------ ----------
14,663 7 $19 8,437 $13
====== ================= ======== ====== ==========
</table>
PERFORMANCE SHARE UNITS
- -----------------------
We grant performance share units to align the performance of our senior
management with our shareholder returns. These units vest at the end of a
three year period. Employees do not pay any monetary consideration and may
elect to exchange each unit earned for one share of stock or the cash
equivalent. As a result, these units are classified as a liability award.
The number of units earned is determined by the performance of our stock price
and dividend payments relative to a pre-defined group of retail peers over the
three-year period and can be adjusted from 0% to 125% of the number of units
granted. As of April 29, 2006, the unvested performance share units granted
in 2004 and 2005 have been adjusted to 125% of the units granted, while the
units granted in 2006 are adjusted to 0%. At the beginning of the quarter
ended April 29, 2006, 413 units were unvested. During the first quarter of
2006, 63 units were granted and 217 units vested, resulting in an ending
balance of 259 units as of April 29, 2006.
We record compensation expense over the performance period at the fair value
of the stock at the end of each reporting period based on the vesting
percentages on those dates. Total stock-based compensation expense related to
performance share units for the quarters ended April 29, 2006 and April 30,
2005 was $114 and $1,043. At the end of April 29, 2006 and April 30, 2005,
our liabilities included $5,732 and $6,298 for the unvested units. As of
April 29, 2006, the total unrecognized stock-based compensation expense
related to nonvested performance share units was $3,612, which is expected to
be recognized over a weighted average period of 16 months.
14 of 27
<page>
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollar and share amounts in thousands except per share and per option amounts
(unaudited)
Note 7 - Stock-based Compensation (Cont.)
The following table summarizes the information for performance share units
that vested during the period:
<table>
<caption>
<s> <c> <c>
Quarter Ended
------------------------
April 29, April 30,
2006 2005
----------- -----------
Number of performance share units vested 217 337
Total fair value of performance share units vested $11,310 $10,159
Total amount of performance share units settled for
cash $5,982 $1,836
</table>
NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN
- -----------------------------------------
The Nonemployee Director Stock Incentive Plan authorizes the grant of stock
awards to nonemployee directors. These awards may be deferred or issued in
the form of restricted or unrestricted stock, nonqualified stock options or
stock appreciation rights. No significant awards were granted in the first
quarter of 2006 under this plan.
EMPLOYEE STOCK PURCHASE PLAN
- ----------------------------
We offer an Employee Stock Purchase Plan as a benefit to our employees.
Employees may make payroll deductions of up to ten percent of their base and
bonus compensation. At the end of each six-month offering period,
participants may purchase shares of our common stock at 90% of the fair market
value on the last day of each offer period. Beginning in 2006, we recognize
stock-based compensation expense related to the ESPP, as our purchase discount
exceeded the amount allowed under SFAS No. 123(R) for non-compensatory
treatment. We record compensation expense over the purchase period at the
fair value of the ESPP at the end of each reporting period.
We issued 237 shares under this plan in the first quarter of 2006. As of
April 29, 2006 and April 30, 2005, we had current liabilities of $1,587 and
$1,352 for the purchase of shares in the future.
15 of 27
<page>
NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollar and share amounts in thousands except per share and per option amounts
(unaudited)
Note 8 - Segment Reporting
The following tables set forth the information for our reportable segments and
a reconciliation to the consolidated totals:
<table>
<caption>
<s> <c> <c> <c> <c> <c> <c>
Quarter ended Retail
April 29, 2006 Stores Credit Direct Other Eliminations Total
- ------------------------------------------------------------------------------------------------
Net sales $1,654,424 - $109,602 $23,197 - $1,787,223
Intersegment revenues - $8,333 - - $(8,333) -
Interest expense, net - (6,582) - (4,169) - (10,751)
Other income including
finance charges, net (1,793) 57,557 (149) (1,777) - 53,838
Earnings before tax
expense 237,057 17,687 25,221 (66,878) - 213,087
Total assets 2,378,500 1,140,221 90,574 1,177,344 - 4,786,639
Quarter ended Retail
April 30, 2005 Stores Credit Direct Other Eliminations Total
- -------------------------------------------------------------------------------------------------
Net sales $1,526,586 - $104,412 $23,476 - $1,654,474
Intersegment revenues - $7,894 - - $(7,894) -
Interest expense, net - (6,237) - (6,402) - (12,639)
Other income including
finance charges, net (1,841) 50,029 (19) (5,437) - 42,732
Earnings before tax
Expense 207,767 11,593 17,797 (64,177) - 172,980
Total assets 2,413,636 1,021,194 110,760 1,074,017 - 4,619,607
</table>
As of April 29, 2006, January 28, 2006, and April 30, 2005, Retail Stores
assets included $8,462 of goodwill, Direct assets included $15,716 of goodwill
and Other assets included $27,536 of goodwill and $84,000 of tradename.
The segment information for 2005 has been adjusted from our previous
disclosures as we now reflect Faconnable, Nordstrom Product Group and the
distribution network in "Other"; also, beginning in September 2005, we changed
our internal method for recognizing returns of Direct sales at Retail Stores.
Previously, these returns were recognized in the Direct segment and now they
are recognized in the Retail Store segment.
Note 9 - Supplementary Cash Flow Information
<table>
<caption>
<s> <c> <c>
Quarter Ended
------------------------
April 29, April 30,
2006 2005
----------- -----------
Cash paid during the quarter for:
Interest (net of capitalized interest) $ 15,527 $ 15,519
Income taxes 95,141 80,498
</table>
Note 10 - Litigation
We are involved in routine claims, proceedings, and litigation arising from
the normal course of our business. We do not believe any such claim,
proceeding or litigation, either alone or in aggregate, will have a material
impact on our results of operations, financial position, or liquidity.
Note 11 - Subsequent Event
In May 2006, our Board of Directors authorized a $1,000,000 share repurchase
program. The shares are expected to be acquired through open market
transactions during the next 18 to 36 months. The actual number and timing of
share repurchases will be subject to market conditions and applicable SEC
rules. The prior $500,000 repurchase program, which was started in February
2005, was completed during the first quarter of 2006.
16 of 27
<page>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Dollar amounts in millions except per share
amounts)
The following discussion should be read in conjunction with the Management's
Discussion and Analysis section of our 2005 Annual Report.
RESULTS OF OPERATIONS
- ---------------------
<table>
<caption>
<s> <c> <c>
Overview
- --------
First Quarter
-------------------
2006 2005
-------- --------
Net earnings $131.2 $104.5
Net earnings as a percentage of net sales 7.3% 6.3%
Diluted earnings per share $0.48 $0.38
</table>
Continued sales growth, stable gross margin and selling cost rates, and
leverage of fixed costs delivered net earnings growth of 25.5% in the first
quarter of 2006 compared to the same period in 2005. Key highlights include:
- - Same-store sales increased 5.4 percent for the quarter. Sales momentum
continued across all of our retail sales channels. Merchandise divisions
with sales performance above the Company's average were accessories,
cosmetics and men's apparel.
- - Gross profit as a percentage of net sales (gross profit rate), increased
40 basis points. Better than plan sales resulted in incremental leverage on
buying and occupancy expenses, while overall merchandise margin remained
flat versus last year.
- - For the quarter, variable expenses moved in-line with our sales growth,
while we leveraged our fixed costs, delivering a 48 basis point reduction in
selling, general and administrative expenses as a percentage of net sales
(SG&A rate). This is the third consecutive year that our SG&A rate
decreased in the first quarter.
- - We adopted SFAS No. 123(R) "Share-Based Payment," and as a result we
recorded compensation expense of $2.7 in buying and occupancy costs, and
$4.4 in selling, general and administrative expenses.
<table>
<caption>
<s> <c> <c>
Net Sales
- ---------
First Quarter
-------------------
2006 2005
-------- --------
Net sales $1,787.2 $1,654.5
Net sales increase 8.0% 7.7%
Same-store sale increase 5.4% 6.2%
</table>
Total net sales increased 8.0% for the quarter over the same period in the
prior year, primarily due to same-store sales increases. Same-store sales
increased 5.4% for the quarter over the same period in the prior year. For
the quarter, sales momentum continued across all of our retail sales channels.
In our Full-Line stores, our accessories, cosmetics and men's apparel
merchandise categories experienced the largest same-store sales increases.
Our women's apparel merchandise category had same-store sales decreases.
17 of 27
<page>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.) (Dollar amounts in millions except per
share amounts)
In addition, total net sales benefited from the four Full-Line stores opened
since the first quarter of 2005. These four stores increased our retail
square footage by 3% compared to last year.
<table>
<caption>
<s> <c> <c>
Gross Profit
- ------------
First Quarter
-------------------
2006 2005
-------- --------
Gross profit $664.2 $608.3
Gross profit rate 37.2% 36.8%
Average inventory per square foot $52.45 $53.43
Inventory turnover 4.77 4.48
</table>
Compared to the same period last year, our gross profit rate improved 40 basis
points for the quarter ended April 29, 2006. This performance was due to
leverage on buying and occupancy expenses from better than planned sales. Our
merchandise margin was flat compared to the prior year. Our buying expense
this quarter included $2.7 of costs for stock options awarded primarily to our
merchants; these costs had a 15 basis point impact on our gross profit rate.
Our inventory levels increased in-line with our sales performance. Our
rolling four quarter average inventory turnover rate improved to 4.77 at April
2006 from 4.48 at April 2005, indicating that our merchandising processes have
continued to improve.
<table>
<caption>
<s> <c> <c>
Selling, General and Administrative Expenses
- --------------------------------------------
First Quarter
-------------------
2006 2005
-------- --------
Selling, general and administrative expenses $494.2 $465.4
SG&A rate 27.7% 28.1%
</table>
Compared to the same period last year, our SG&A rate improved 48 basis points
for the quarter ended April 29, 2006. The quarter to date performance
resulted primarily from leverage on better than plan sales. We continued to
control and leverage our general and administrative expenses, especially non-
selling labor. Our selling, general and administrative expense this quarter
included $4.4 of costs for stock options awarded to our store operations,
business unit and corporate service center leaders; these costs had a 25 basis
point impact on our SG&A rate.
Interest Expense, net
- ---------------------
Interest expense, net decreased by $1.9 to $10.8 for the quarter ended April
29, 2006 compared to the same period in 2005. The decrease is primarily due
to increased interest income from higher cash balances.
18 of 27
<page>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.) (Dollar amounts in millions except per
share amounts)
<table>
<caption>
<s> <c> <c>
Other Income Including Finance Charges, net
- -------------------------------------------
First Quarter
-------------------
2006 2005
-------- --------
Other income including finance charges, net $53.8 $42.7
Other income including finance charges, net as a
Percentage of net sales 3.0% 2.6%
</table>
Other income including finance charges, net increased by $11.1 to $53.8 for
the quarter ended April 29, 2005. The increase is primarily due to growth in
our co-branded Nordstrom VISA credit card program.
Seasonality
- ------------
Our business, like that of other retailers, is subject to seasonal
fluctuations. Our Anniversary Sale in July and the holidays in December
typically result in higher sales in the second and fourth quarters of our
fiscal years. Accordingly, results for any quarter are not necessarily
indicative of the results that may be achieved for a full fiscal year.
Return on Invested Capital (ROIC) (Non-GAAP financial measure)
- --------------------------------------------------------------
In the past two years, we have incorporated Return on Invested Capital (ROIC)
into our key financial metrics, and since 2005 used it as an executive bonus
measure. Overall performance as measured by ROIC correlates directly to
shareholders' return over the long-term. For the last 12 months ended April
29, 2006, we improved our ROIC to 17.5% compared to 13.7% for the 12 months
ended April 30, 2005. Our ROIC improved primarily from increased earnings
before interest and taxes. See our GAAP ROIC reconciliation on page 20. The
closest GAAP measure is return on assets, which improved to 11.9% from 9.2%
for the last 12 months ended April 29, 2006 compared to the 12 months ended
April 30, 2005.
We define ROIC as follows:
Net Operating Profit after Taxes (NOPAT)
ROIC = ----------------------------------------
Average Invested Capital
<table>
<caption>
<s> <c>
Numerator = NOPAT Denominator = Average Invested Capital
Net earnings Average total assets
+ Income tax expense - Average non-interest-bearing current
+ Interest expense, net liabilities
- ----------------------------- - Average deferred property
= EBIT incentives
+ Average estimated asset base of
+ Rent expense capitalized operating leases
- - Estimated depreciation on -------------------------------------
capitalized operating leases = Average invested capital
- ----------------------------- ======================================
= Net operating profit
- - Estimated income tax expense
- -----------------------------
= NOPAT
=============================
</table>
19 of 27
<page>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.) (Dollar amounts in millions except per
share amounts)
A reconciliation of our return on assets to ROIC is as follows:
<table>
<caption>
<s> <c> <c>
12 months ended
--------------------
April 29, April 30,
2006 2005
-------- --------
Net earnings $578.0 $429.3
Add: income tax expense 347.3 278.4
Add: interest expense, net 43.4 53.4
-------- --------
Earnings before interest and taxes 968.7 761.1
Add: rent expense 44.3 52.6
Less: estimated depreciation on
capitalized operating leases(1) (23.6) (28.1)
-------- --------
Net operating profit 989.4 785.6
Estimated income tax expense (371.7) (307.5)
-------- --------
Net operating profit after tax $617.7 $478.1
======== ========
Average total assets(2) $4,841.2 $4,687.3
Less: average non-interest-bearing
current liabilities(3) (1,331.6) (1,259.4)
Less: average deferred property incentives(2) (363.9) (384.5)
Add: average estimated asset base of
capitalized operating leases(4) 379.0 442.1
-------- --------
Average invested capital $3,524.7 $3,485.5
======== ========
Return on Assets 11.9% 9.2%
ROIC 17.5% 13.7%
</table>
(1) Depreciation based upon estimated asset base of capitalized operating
leases as described in Note 4 below.
(2) Based upon the trailing 12-month average.
(3) Based upon the trailing 12-month average for accounts payable, accrued
salaries, wages and related benefits, other current liabilities and income
taxes payable.
(4) Based upon the trailing 12-month average of the monthly asset base which
is calculated as the trailing 12 months rent expense multiplied by 8.
20 of 27
<page>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.) (Dollar amounts in millions except per
share amounts)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
We started 2006 with a cash balance above our operating needs due to the
increase in our net earnings in 2005, and in the first quarter we used this
extra cash to repurchase $212.9 of our outstanding common stock. In the first
quarter of 2005, we repurchased $47.7 of our outstanding common stock. The
significant increase in our common stock repurchase caused our cash balance to
decrease in the first quarter of 2006 by $201.3; over the same period in the
prior year, our cash balance decreased $44.9.
Operating Activities
- --------------------
Net cash flow from operating activities decreased by $12.5 to $28.8 in 2006
primarily due to the change in the classification of the reduction in our tax
obligation for stock-based payment arrangements from operating activities to
financing activities as a result of the adoption of SFAS No. 123(R), "Share-
Based Payment."
Investing Activities
- --------------------
We have had two principal types of investing activities in the past two years:
capital expenditures and short-term investments. Our capital expenditures
have decreased slightly in 2006 as a result of the timing of our new store
openings and remodels.
In March 2006, we opened one Full-Line store in Palm Beach Gardens, Florida.
We are scheduled to relocate our Topanga Full-Line store in Canoga Park,
California and open one Nordstrom Rack store in San Marcos, California in the
fall of 2006, increasing our estimated gross square footage 1.0% from
20,070,000 at the beginning of 2006 to 20,298,000 by the end of 2006.
We evaluate a number of short-term investment options, with a variety of
yields and liquidity restrictions. Consistent with our investment policy, we
invest our excess cash in high quality short-term investments. Some of these
investments are classified as cash equivalents while others are classified as
short-term investments; changes in the investment mix, while not significant
to our overall short-term investing activities, can impact our net cash flows
from investing activities.
Financing Activities
- --------------------
Net cash used in financing activities increased to $204.6 in 2006 from $20.5
in 2005, primarily due to increased repurchases of our outstanding common
stock.
In February 2005, our Board of Directors authorized $500.0 of share
repurchases. In the first quarter of 2006, we repurchased 5.3 million shares
for $212.9 at an average price of $40.11 per share. This repurchase utilized
the remaining share authorization.
We entered into an accelerated share repurchase agreement with Goldman, Sachs
& Co. in September 2005 to repurchase shares of our common stock for an
aggregate purchase price of $100.0. In the first quarter of 2006, the
accelerated share repurchase agreement was completed; in total, we purchased
2.7 million shares of our common stock at $37.12 per share under this
agreement.
21 of 27
<page>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.) (Dollar amounts in millions except per
share amounts)
Liquidity
- ---------
We maintain a level of liquidity to allow us to cover our seasonal cash needs
and to minimize our need for short-term borrowings. We believe that our
operating cash flows, existing cash and available credit facilities are
sufficient to finance our cash requirements for the next 12 months. In
October 2006, we will repay our $300.0 of 4.82% Private Label Securitization
debt. In the second quarter of 2006, we will begin to fund this debt
repayment via a sinking fund. We expect to utilize our existing borrowing
capacity and additional borrowing capacity to finance this debt repayment. In
April 2007, the off-balance sheet 2002 Class A & B Notes of $200.0 will be
due; these Notes are secured by the co-branded Nordstrom VISA credit card
balances. We are evaluating alternatives to combine these charge card
securitizations in the first half of 2007.
In May 2006, our Board of Directors authorized a $1,000.0 share repurchase
program. The shares are expected to be acquired through open market
transactions during the next 18 to 36 months.
Over the long term, we manage our cash and capital structure to maximize
shareholder return, strengthen our financial position and maintain flexibility
for future strategic initiatives. We continuously assess our debt and
leverage levels, capital expenditure requirements, principal debt payments,
dividend payouts, potential share repurchases, and future investments or
acquisitions. We believe our operating cash flows, existing cash and
available credit facilities, as well as any potential future borrowing
facilities will be sufficient to fund scheduled future payments and potential
long-term initiatives.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The preparation of our financial statements requires that we make estimates
and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and disclosure of contingent assets and liabilities.
We 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. Our critical accounting policies and methodologies in
2006 are consistent with those discussed in our 2005 Annual Report on Form 10-
K.
22 of 27
<page>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.) (Dollar amounts in millions except per
share amounts)
FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT
- ------------------------------------------------
Certain statements in the preceding disclosures contain "forward-looking"
statements (as defined in the Private Securities Litigation Reform
Act of 1995) that involve risks and uncertainties, including anticipated
financial results, use of cash and liquidity, store openings and trends in our
operations. Actual future results and trends may differ materially from
historical results or current expectations depending upon various factors
including, but not limited to:
- the impact of economic and competitive market forces,
- the impact of terrorist activity or war on our customers and the retail
industry,
- our ability to predict fashion trends,
- consumer apparel buying patterns,
- trends in personal bankruptcies and bad debt write-offs,
- changes in interest rates,
- employee relations,
- our ability to continue and control our expansion, remodel and investment
plans,
- changes in government or regulatory requirements,
- our ability to control costs,
- weather conditions, and
- hazards of nature.
These and other factors could affect our financial results and trends and
cause actual results and trends to differ materially from those contained in
any forward-looking statements we may make. As a result, while we believe
there is a reasonable basis for the forward-looking statements, you should not
place undue reliance on those statements. We undertake no obligation to
update or revise any forward-looking statements to reflect subsequent events,
new information or future circumstances. This discussion and analysis should
be read in conjunction with the Condensed Consolidated Financial Statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We discussed our interest rate risk and our foreign currency exchange risk in
Item 7A of our 2005 Annual Report on Form 10-K. There has been no material
change to these risks since that time.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, we
performed an evaluation under the supervision and with the participation of
management, including our President and Chief Financial Officer, of our
disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)
under the Securities and Exchange Act of 1934 (the "Exchange Act")). Based
upon that evaluation, our President and Chief Financial Officer concluded
that, as of the end of the period covered by this Quarterly Report, our
disclosure controls and procedures are effective in the timely recording,
processing, summarizing and reporting of material financial and non-financial
information.
There has been no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most
recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
23 of 27
<page>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
Cosmetics
- ---------
We were originally named as a defendant along with other department store and
specialty retailers in nine separate but virtually identical class action
lawsuits filed in various Superior Courts of the State of California in May,
June and July 1998 that were consolidated in Marin County Superior Court. In
May 2000, plaintiffs filed an amended complaint naming a number of
manufacturers of cosmetics and fragrances and two other retailers as
additional defendants. Plaintiffs' amended complaint alleged that the retail
price of the "prestige" or "Department Store" cosmetics and fragrances sold in
department and specialty stores was collusively controlled by the retailer and
manufacturer defendants in violation of the Cartwright Act and the California
Unfair Competition Act.
Plaintiffs sought treble damages and restitution in an unspecified amount,
attorneys' fees and prejudgment interest, on behalf of a class of all
California residents who purchased cosmetics and fragrances for personal use
from any of the defendants during the four years prior to the filing of the
original complaints.
While we believe that the plaintiffs' claims are without merit, we entered
into a settlement agreement with the plaintiffs and the other defendants on
July 13, 2003 in order to avoid the cost and distraction of protracted
litigation. In furtherance of the settlement agreement, the case was re-filed
in the United States District Court for the Northern District of California on
behalf of a class of all persons who currently reside in the United States and
who purchased "Department Store" cosmetics and fragrances from the defendants
during the period May 29, 1994 through July 16, 2003. The Court gave
preliminary approval to the settlement, and a summary notice of class
certification and the terms of the settlement were disseminated to class
members. On March 30, 2005, the Court entered a final judgment approving the
settlement and dismissing the plaintiffs' claims and the claims of all class
members with prejudice, in their entirety. On April 29, 2005, two class
members who had objected to the settlement filed notices of appeal from the
Court's final judgment to the United States Court of Appeals for the Ninth
Circuit. One of the objectors has since dropped her appeal, but the other
filed her appeal brief on March 20, 2006. Plaintiffs' and defendants' briefs
were filed on May 25, 2006. It is uncertain when the appeals will be
resolved, but the appeal process could take as much as another year or more.
If the Court's final judgment approving the settlement is affirmed on appeal,
or the appeals are dismissed, the defendants will provide class members with
certain free products with an estimated retail value of $175 million and pay
the plaintiffs' attorneys' fees, awarded by the Court, of $24 million. Our
share of the cost of the settlement will not have a material adverse effect on
our financial condition, results of operations or cash flows.
Other
- -----
We are involved in routine claims, proceedings, and litigation arising from
the normal course of our business. We do not believe any such claim,
proceeding or litigation, either alone or in aggregate will have a material
impact on our results of operations, financial position, or liquidity.
24 of 27
<page>
Item 1A. Risk Factors
- ---------------------
In addition to the other information set forth in this quarterly report on
Form 10-Q, you should carefully consider the factors discussed in Part I,
"Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended
January 28, 2006. There have been no material changes in our risk factors
from those disclosed in our Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
- --------------------------------------------------------------------
<table>
<caption>
(c) Repurchases
-----------
(dollars in millions, except per share amounts)
<s> <c> <c> <c> <c>
Total Total Number Maximum Number (or
Number of Average of Shares (or Units) Approximate Dollar Value)
Shares Price Paid Purchased as Part of of Shares (or Units) that
(or Units) Per Share Publicly Announced May Yet Be Purchased Under
Purchased (or Units) Plans or Programs the Plans or Programs (2)
---------- ---------- -------------------- --------------------------
Feb. 2006 25,601 (1) $37.99 25,000 $212.0
(1/29/06 to
2/25/06)
---------- ---------- -------------------- --------------------------
Mar. 2006 5,282,904 $40.12 5,282,904 $ 0.0
(2/26/06 to
4/1/06)
---------- ---------- -------------------- --------------------------
Apr. 2006 - - - $ 0.0
(4/2/06 to
4/29/06)
---------- ---------- -------------------- --------------------------
Total 5,308,505 $40.11 5,307,904 $ 0.0
---------- ---------- -------------------- --------------------------
</table>
(1) Included in this balance are 601 shares that were not redeemed as part of
a publicly announced repurchase plan or program. These shares were tendered
by an employee to Nordstrom for tax withholding purposes.
(2) In February 2005, the Board of Directors authorized $500.0 of share
repurchases. In the first quarter of 2006, we repurchased 5.3 million shares
for $212.9 at an average price of $40.11 per share. This repurchase utilized
the remaining share authorization.
We entered into an accelerated share repurchase agreement with Goldman, Sachs
& Co. in September 2005 to repurchase shares of our common stock for an
aggregate purchase price of $100.0. In the first quarter of 2006, the
accelerated share repurchase agreement was completed; in total, we purchased
2.7 million shares of our common stock at $37.12 per share under this
agreement.
Item 6. Exhibits
- -----------------
Exhibits are incorporated herein by reference or are filed with this report as
set forth in the Index to Exhibits on page 27 hereof.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORDSTROM, INC.
(Registrant)
/s/ Michael G. Koppel
----------------------------------------------------
Michael G. Koppel
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: June 6, 2006
------------
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<page>
<table>
<caption>
NORDSTROM INC. AND SUBSIDIARIES
Exhibit Index
<s> <c>
Exhibit Method of Filing
- ------- ----------------
3.2 Bylaws, as amended and restated on Incorporated by reference from the
May 23, 2006 Registrant's Form 8-K filed on
May 30, 2006, Exhibit 3.1
10.1 Summary of named executive officer Incorporated by reference from the
compensation Registrant's Form 8-K filed on
February 28, 2006
10.2 Form of 2006 Performance Share Unit Incorporated by reference from the
Notice and Performance Share Unit Registrant's Form 8-K filed on
Award Agreement February 28, 2006, Exhibit 10.1
10.3 Summary of named executive officer Incorporated by reference from the
bonus arrangements Registrant's Form 8-K filed on
May 2, 2006
10.4 Nordstrom, Inc. Employee Stock Incorporated by reference from the
Purchase Plan (2006 Restatement) Registrant's definitive proxy
statement on Schedule 14A filed
with the Commission on April
13, 2006
31.1 Certification of President Filed herewith electronically
required by Section 302(a) of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Filed herewith electronically
Officer required by Section 302(a)
of the Sarbanes-Oxley Act of 2002
32.1 Certification of President and Furnished herewith electronically
Chief Financial Officer pursuant
to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
</table>
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