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Exhibit 13.1
financial highlights
Dollars in thousands except per share amounts
FISCAL YEAR 2002 2001 % CHANGE
- ----------- ---- ---- --------
Net sales $5,975,076 $5,634,130 6.1
Earnings before income taxes and
cumulative effect of accounting change 195,624 204,488 (4.3)
Earnings before cumulative effect of accounting change 103,583 124,688 (16.9)
Net earnings 90,224 124,688 (27.6)
Basic earnings per share .67 .93 (28.0)
Diluted earnings per share .66 .93 (29.0)
Cash dividends paid per share .38 .36 5.6
COMP-STORE SALES % CHANGE
[LINE CHART]
92 1.4%
93 2.7%
94 4.4%
95 -0.7%
96 0.6%
97 4.0%
98 -2.7%
99 -1.1%
00 0.3%
01 -2.9%
02 1.4%
SALES PER SQUARE FOOT
[LINE CHART]
92 $381
93 $383
94 $395
95 $382
96 $377
97 $384
98 $362
99 $350
00 $342
01 $321
02 $319
GROSS PROFIT % OF SALES
[LINE CHART]
92 31.6%
93 31.2%
94 33.3%
95 31.9%
96 30.9%
97 32.2%
98 33.8%
99 34.8%
00 34.0%
01 33.2%
02 33.5%
SG&A AS A % OF SALES
[LINE CHART]
92 26.4%
93 26.2%
94 26.4%
95 27.6%
96 27.7%
97 27.5%
98 28.3%
99 29.6%
00 31.6%
01 30.6%
02 30.3%
TABLE OF CONTENTS
12 MANAGEMENT'S DISCUSSION AND ANALYSIS
21 INDEPENDENT AUDITORS' AND MANAGEMENT REPORTS
22 CONSOLIDATED STATEMENTS OF EARNINGS
23 CONSOLIDATED BALANCE SHEETS
24 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
25 CONSOLIDATED STATEMENTS OF CASH FLOWS
26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
44 ELEVEN-YEAR STATISTICAL SUMMARY
46 RETAIL STORE FACILITIES
48 OFFICERS OF THE CORPORATION AND EXECUTIVE TEAM
49 BOARD OF DIRECTORS
49 SHAREHOLDER INFORMATION
VIEW THIS ENTIRE REPORT ONLINE. PLEASE VISIT WWW.NORDSTROM.COM TO SEE THIS
REPORT AND OBTAIN THE LATEST AVAILABLE INFORMATION.
management's discussion
and analysis
OVERVIEW
Nordstrom is a fashion specialty retailer offering a wide selection of
high-quality apparel, shoes and accessories for men, women and children. We
believe that we offer our customers an exceptional shopping experience by
providing superior service and distinctive merchandise with an emphasis on
quality and value. We also offer our products through multiple retail channels
including our full-line stores, Nordstrom Rack stores, our catalogs and on the
Internet.
Our financial performance is driven largely by our ability to generate positive
comparable store sales, successfully execute store openings, manage inventory
and control expenses. To that end, our goals for 2002 were to drive top-line
growth, implement our new perpetual inventory system and continue lowering
expense levels as a percent of sales.
During 2002, we were able to generate comparable store sales gains of 1.4%. We
are encouraged by these gains in this challenging retail and economic
environment. In recent years, our sales per square foot have declined as we have
ventured into new markets and opened new stores. This year our sales per square
foot decline slowed. In 2002, sales per square foot declined from $321 to $319,
in spite of an 8% expansion in our retail square footage.
We substantially completed the implementation of our perpetual inventory system,
which allows us to more effectively manage inventory. Additionally, we are
implementing a new replenishment system, which is scheduled for completion in
the first quarter of 2003.
Progress was made on controlling expenses in the current year. In 2002, selling,
general and administrative expenses as a percent of sales were down 0.3% to
30.3%. This decrease is in addition to the 1.0% decrease we achieved in 2001.
While we have made progress in this area, we are still focused on reaching our
goal of 28.5% to 29.0% of sales in the next few years.
Our focus for 2003 is to increase top line growth through positive comparable
store sales and store openings, improve gross margin performance through better
inventory control, and further reduce our expenses as a percent of sales.
PERCENTAGE OF 2002 SALES BY MERCHANDISE CATEGORY
[PIE CHART]
Women's Apparel 35%
Women's Accessories 22%
Shoes 19%
Men's Apparel and Furnishings 17%
Children's Apparel and Accessories 4%
Other 3%
RESULTS OF OPERATIONS:
Segment results are discussed in each of the following sections as applicable.
NET SALES (IN MILLIONS)
[LINE CHART]
98 $5,049
99 $5,149
00 $5,529
01 $5,634
02 $5,975
Sales increases and comparable store sales are shown in the table below.
Comparable stores are stores open at least one full fiscal year at the beginning
of the fiscal year.
FISCAL YEAR 2000 2001 2002
------ ------ ------
Net sales increase 7.4% 1.9% 6.1%
Comparable store sales:
Full-line stores 0.2% (2.6%) 0.7%
Nordstrom Rack & other 1.2% (5.9%) 7.4%
Total 0.3% (2.9%) 1.4%
12 NORDSTROM INC. AND SUBSIDIARIES
management's discussion
and analysis
In 2002, net sales increased 6.1% over the prior year. This growth was primarily
due to store openings. During 2002, we opened eight full-line stores, four
Nordstrom Rack stores and one Faconnable boutique. We also closed one Nordstrom
Rack location. The net impact was an increase to our retail square footage of
8%. Comparable store sales increased 1.4% due to increases at both full-line
stores and Nordstrom Rack stores. Sales at Nordstrom Direct (formerly known as
Nordstrom.com) declined slightly with a planned reduction in catalog sales
partially offset by an increase in Internet sales.
Merchandise division sales were led by Women's Designer, Cosmetics and
Accessories. Men's Apparel and Shoes experienced small sales declines. The
Women's Designer division benefited from the addition of new vendors, close
scrutiny of developing trends and a targeted marketing plan. The increase in
Cosmetics was primarily due to the addition of product lines. Accessories
improved by differentiating its product and offering attractive values.
In 2001, net sales increased 1.9% due to store openings. During 2001, we opened
four full-line stores, eight Nordstrom Rack stores and three Faconnable
boutiques. We also closed one Nordstrom Rack store and one full-line store. The
net impact was an increase to our retail square footage of 6%. New store sales
were partially offset by negative comparable store sales and a decline in sales
at Nordstrom Direct. The most significant sales declines were in Men's Apparel
and Shoes while Women's Apparel was essentially flat.
In 2003, we plan to open four full-line stores and two Nordstrom Rack stores,
increasing retail square footage by approximately 4%. Because of the continued
challenging retail environment, comparable store sales are expected to be flat
to slightly positive.
GROSS PROFIT
FISCAL YEAR 2000 2001 2002
---- ---- ----
Gross profit as a percent of net sales 34.0% 33.2% 33.5%
Gross profit as a percentage of net sales improved in 2002 due to better
inventory management. In our merchandising divisions, improvement in gross
profit rate offset lower sales in certain categories. Merchandise division gross
profit was led by both Women's and Men's Apparel. Additionally, costs related to
our private label operations improved. Total inventory increased as we added new
stores, however, inventory per square foot declined due to improved performance
at full-line stores partially offset by inventory increases at our Nordstrom
Rack division. Total shrinkage as a percentage of sales was even with the
previous year.
Gross profit as a percentage of net sales declined in 2001 due to increased
markdowns and new store occupancy expenses. The markdowns were taken to drive
sales and to liquidate excess inventory caused by the decrease in comparable
store sales. Inventory declines at comparable stores were partially offset by
the addition of new stores. The comparable stores inventory decrease was due to
a concerted effort to reduce inventory levels during the year resulting in lower
inventory per square foot. Total shrinkage as a percentage of sales was even
with the previous year.
In 2003, we anticipate continuing progress in our ability to improve gross
profit performance through better inventory management.
SELLING, GENERAL AND ADMINISTRATIVE
FISCAL YEAR 2000 2001 2002
---- ---- ----
Selling, general and administrative
expense as a percent of net sales 31.6% 30.6% 30.3%
In 2002, we recognized a charge of $15.6 million to write-down an investment in
a supply chain tool intended to support our private label division. Due to
changes in business strategy, we determined that this asset was impaired. This
charge reduced this asset to its estimated market value.
Excluding the effect of the write-down, selling, general and administrative
expenses as a percentage of net sales decreased in 2002 to 30.1% from 30.6% in
the prior year. This decrease is the result of improvements in bad debt and
selling expense and reductions in sales promotion. These costs were partially
offset by higher distribution costs and higher information systems expense. Bad
debt expense decreased as both delinquency and write-off trends stabilized.
Selling expense decreased primarily due to continued efficiencies in shipping
costs at Nordstrom Direct. Sales promotion decreased as Nordstrom Direct
executed planned reductions in catalog size and number of mailings consistent
with sales trends. Distribution costs increased primarily due to higher
merchandise volumes and temporary inefficiencies caused by the implementation of
our perpetual inventory system. The information
NORDSTROM INC. AND SUBSIDIARIES 13
management's discussion
and analysis
systems expense increase resulted from depreciation and rollout costs of our new
perpetual inventory system.
In 2000, we recognized a charge of $13.0 million for certain severance and other
costs related to a change in management. Also in 2000, we recorded an impairment
charge of $10.2 million. Due to changes in business strategy, we determined that
several software projects under development were either impaired or obsolete.
Excluding the effect of the severance and impairment charge, selling, general
and administrative expenses as a percentage of net sales decreased in 2001 to
30.6% versus 31.2% in the prior year. This improvement in selling, general and
administrative expenses as a percentage of net sales is due to reductions in
sales promotion and improvements in selling expenses. Sales promotion expenses
decreased due to the discontinuation of a company-wide brand advertising
program. Selling expenses decreased as Nordstrom Direct improved the efficiency
of their shipping and call center activities. These improvements were partially
offset by an increase in bad debt on our credit cards due to increased
delinquencies and write-offs.
In 2003, selling, general and administrative expenses as a percent of net sales
are expected to improve slightly as we continue our focus on expense management.
INTEREST EXPENSE, NET
Interest expense, net increased 9.2% in 2002 primarily due to lower capitalized
interest. Capitalized interest decreased due to lower average balances during
the year for construction and software in progress.
Interest expense, net increased 19.7% in 2001 due to higher average borrowings,
partially offset by a decrease in interest rates.
Interest expense, net for 2003 is expected to be flat with 2002.
WRITE-DOWN OF STREAMLINE.COM, INC.
We held an investment in Streamline.com, Inc., an Internet grocery
and consumer goods delivery company. Streamline ceased its
operations effective November 2000. During 2000 we wrote off our
entire investment in Streamline, for a total expense of $32.9 million.
MINORITY INTEREST PURCHASE AND REINTEGRATION COSTS
During 2002, we purchased the outstanding shares of Nordstrom.com, Inc. series C
preferred stock for $70.0 million. The excess of the purchase price over the
fair market value of the preferred stock and professional fees resulted in a
one-time charge of $42.7 million. No tax benefit was recognized on the share
purchase, as we do not believe it is probable that this benefit will be
realized. The impact of not recognizing this income tax benefit increased our
effective tax rate to 47% before the cumulative effect of accounting change.
Also in 2002, $10.4 million of expense was recognized related to the purchase of
the outstanding Nordstrom.com options and warrants.
SERVICE CHARGE INCOME AND OTHER, NET (IN MILLIONS)
[LINE CHART]
98 $110
99 $117
00 $131
01 $134
02 $141
Service charge income and other, net increased in 2002 primarily due to gains
recorded from our VISA securitization. Securitization gains increased this year
as credit spreads improved, the cost of funds decreased and bad debt write-offs
stabilized. This increase was partially offset by a decline in service charge
and late fee income resulting from a decline in our private label accounts
receivable.
Service charge income declined slightly in 2001 due to lower interest rates,
flat credit sales and a steady number of credit accounts.
In 2003, service charge income is expected to be higher due to a small increase
in credit sales and credit accounts, and adjustments to interest rates charged.
14 NORDSTROM INC. AND SUBSIDIARIES
management's discussion
and analysis
DILUTED EARNINGS PER SHARE
[LINE CHART]
98 $1.41
99 $1.46
00 $0.78
01 $0.93
02 $0.66
Earnings per share decreased in 2002 due to the write down of the supply chain
tool, the minority interest purchase and reintegration costs and the cumulative
effect of accounting change. Excluding the impact of these charges, earnings per
share would have been $1.19, an increase from the prior year of 28.0%. This
increase was primarily driven by an increase in comparable store sales, an
improvement in gross profit percent and a decrease in selling, general and
administrative expenses as a percent of sales.
Earnings per share for 2001 were 19.2% higher than 2000 due to charges
recognized in 2000, which include the write-down of Streamline, the management
severance and the asset impairments. Excluding the impact of these charges, 2000
earnings per share would have been $1.04 resulting in a 2001 earnings per share
decrease of 10.6%. This decrease is primarily due to a decline in comparable
store sales and a decline in gross profit percent offset by decreases in
selling, general and administrative expenses as a percent of sales.
FOURTH QUARTER RESULTS
Fourth quarter 2002 earnings per share were $0.44 compared with $0.38 in 2001.
Total sales for the quarter increased by 7.3% versus the same quarter in the
prior year and comparable store sales increased by 1.9%. The increase in sales
was primarily due to the opening of eight full-line stores and four Nordstrom
Rack stores during the year. Gross profit as a percentage of sales was flat with
the same quarter in the prior year.
Selling, general and administrative expenses as a percent of sales decreased in
the quarter compared to the prior year primarily due to improved selling costs
and reduced sales promotion offset by higher distribution costs and information
systems expense.
LIQUIDITY AND CAPITAL RESOURCES
We finance our working capital needs, capital expenditures, acquisitions and
share repurchase activity with a combination of cash flows from operations and
borrowings.
We believe that our operating cash flows, existing cash and available credit
facilities are sufficient to finance our operations and planned growth for the
foreseeable future.
OPERATING ACTIVITIES
Our operations are seasonal in nature. The second quarter, which includes our
Anniversary Sale, accounts for approximately 28% of net sales, while the fourth
quarter, which includes the holiday season, accounts for about 29% of net sales.
Cash requirements are highest in the third quarter as we build our inventory for
the holiday season.
The decrease in net cash provided by operating activities between 2002 and 2001
was primarily due to increases in inventories and accounts receivable partially
offset by an increase in net earnings before noncash items and an increase in
our accrual for income taxes. Inventory grew as we added stores during the year.
Accounts receivable increased as Nordstrom VISA credit sales improved. The
increased income tax accrual resulted from the timing of payments.
Net cash provided by operating activities increased approximately $235 million
in 2001 compared to 2000 primarily due to decreases in inventories and accounts
receivable. The inventories decreased as a result of improved inventory
management, while accounts receivable declined due to lower credit sales.
In 2003, cash flows provided by operating activities are expected to remain
fairly consistent with 2002. Inventory increases from store openings are
expected to slow, offset by slower increases in accounts payable. Accounts
receivable should increase modestly as credit sales grow.
INVESTING ACTIVITIES
For the last three years, investing activities have primarily consisted of
capital expenditures, the minority interest purchase of Nordstrom.com and the
acquisition of Faconnable.
NORDSTROM INC. AND SUBSIDIARIES 15
management's discussion
and analysis
CAPITAL EXPENDITURES
Our capital expenditures over the last three years totaled approximately $738
million, net of developer reimbursements, principally to add stores, improve
existing facilities and purchase or develop new information systems. More than
3.9 million square feet of retail store space has been added during this period,
representing an increase of 27% since January 31, 2000.
We plan to spend approximately $700-$750 million, net of developer
reimbursements, on capital projects during the next three years. Compared to the
previous three years, we plan to open fewer stores, slow spending on information
systems and increase our spending on the improvement of existing facilities. In
the information systems area, we are in the process of replacing our point of
sale system, which we expect to be substantially completed by 2004.
At January 31, 2003, approximately $227 million has been contractually committed
primarily for the construction of new stores or remodeling of existing stores.
Although we have made commitments for stores opening in 2003 and beyond, it is
possible that some stores may not be opened as scheduled because of delays in
the development process, or because of the termination of store site
negotiations.
TOTAL SQUARE FOOTAGE (IN THOUSANDS)
[LINE CHART]
98 13,593
99 14,487
00 16,056
01 17,048
02 18,428
ACQUISITION
In 2000, we acquired Faconnable, S.A.S. in exchange for $88 million of cash and
5,074,000 shares of our common stock, for a total consideration of $169 million.
The purchase provides for a contingent payment to a former owner that may be
paid after five years from the acquisition date. If the former owner continues
to have involvement in the business and performance targets are met, the
contingent payment could approximate $12 million. The contingent payment will be
expensed when it becomes probable that the targets will be met.
FINANCING ACTIVITIES
Financing activities primarily consist of share repurchases, dividend payments,
as well as proceeds and payments on debt.
SHARE REPURCHASE
In May 1995, the Board of Directors authorized $1.1 billion of share
repurchases. As of January 31, 2003, we have purchased 39 million shares of our
common stock for $1 billion, with remaining share repurchase authority of $82
million. The share repurchase represents 24% of the shares outstanding as of May
1995 after adjusting for the 1998 stock split, at an average price per share of
$25.93.
DIVIDENDS
In 2002, we paid $.38 per share in common stock dividends, the sixth consecutive
annual dividend increase. We paid $.36 and $.35 per share of common stock in
fiscal 2001 and 2000.
DEBT TO CAPITAL RATIO
By the end of 2001, our debt to capital ratio had increased to 52.1% as a result
of retail expansion, share repurchases and an acquisition. By the end of 2002,
this ratio had decreased to 49.6%. Our near-term goal is to reduce this ratio to
be in the range of 40% to 45%.
DEBT
In May 2002, we replaced the $200 million variable funding note backed by
Nordstrom VISA credit card receivables with 5-year term notes also backed by the
VISA credit card receivables. Class A and B notes with a combined face value of
$200 million were issued to third party investors. We used the proceeds to
retire the $200 million outstanding on the variable funding note. Based on SFAS
No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" this debt and the related assets are not
reflected in our consolidated balance sheets.
16 NORDSTROM INC. AND SUBSIDIARIES
management's discussion
and analysis
In November 2001, we issued $300 million of Class A notes backed by Nordstrom
private label receivables. These notes bear a fixed interest rate of 4.82% and
have a maturity of five years. Both the debt and related assets are included in
our consolidated balance sheets. A portion of the proceeds was used to pay-down
approximately $77 million in medium-term notes and the purchase of
Nordstrom.com, Inc.'s preferred stock for $70 million. The remaining proceeds
will be used for general corporate purposes and capital expansion.
In October 2000, we issued $300 million of 8.95% senior notes due in 2005. These
proceeds were used to reduce short-term indebtedness, to fund the acquisition of
Faconnable, and for general corporate purposes.
INTEREST RATE SWAPS
We entered into a variable interest rate swap agreement in the fourth quarter of
2002. The swap had a $250 million notional amount and a six-year term. Under the
agreement, we received a fixed rate of 5.63% and paid a variable rate based on
LIBOR plus a margin of 1.31% set at six-month intervals (3.25% at January 31,
2003). The swap agreement qualified as a fair value hedge and was recorded at
fair value in other assets at January 31, 2003. Subsequent to January 31, 2003,
we sold the interest rate swap and received cash of $2.3 million, which will be
recognized as interest income evenly over the remaining life of the related
debt.
In the third quarter of 2002, we sold the interest rate swap that converted our
$300 million, 8.95% fixed-rate debt to variable rate. We received cash of $4.9
million, which will be recognized as interest income evenly over the remaining
life of the related debt.
NONCASH FINANCING
We own 49% of a limited partnership which constructed a new corporate office
building in which we are the primary occupant. During the first quarter of 2002,
the limited partnership refinanced its construction loan obligation with an $85
million mortgage secured by the property, of which $79 million was included in
our balance sheet at January 31, 2003. The obligation has a fixed interest rate
of 7.68% and a term of 18 years.
AVAILABLE CREDIT
In November 2001, we entered into a $300 million unsecured revolving credit
facility that expires in November 2004. As of January 31, 2003, no borrowings
have been made against this revolving credit facility.
Also in November 2001, we issued a variable funding note backed by Nordstrom
private label receivables with a $200 million capacity. As of January 31, 2003,
no borrowings were outstanding against this note.
Additionally, we have universal shelf registrations on file with the Securities
and Exchange Commission that permit us to offer an additional $450 million of
securities to the public. These registration statements allow us to issue
various types of securities, including debt, common stock, warrants to purchase
common stock, warrants to purchase debt securities and warrants to purchase or
sell foreign currency.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations and the expected
effect on liquidity and cash flows.
LESS THAN 1-3 4-5 OVER 5
FISCAL YEAR TOTAL 1 YEAR YEARS YEARS YEARS
----- ------ ----- ----- -----
Long-term Debt $1,338.4 $ 5.2 $ 407.9 $ 307.1 $ 618.2
Capital Leases 16.0 1.1 2.2 2.2 10.5
Operating Leases 780.4 73.2 141.3 123.9 442.0
Construction
Commitments 227.3 165.2 62.1 -- --
-------- -------- -------- -------- --------
TOTAL $2,362.1 $ 244.7 $ 613.5 $ 433.2 $1,070.7
-------- -------- -------- -------- --------
NORDSTROM INC. AND SUBSIDIARIES 17
management's discussion
and analysis
DEBT RATINGS
The following table shows our credit ratings at the date of this report.
Standard
CREDIT RATINGS Moody's* and Poor's*
-------- -----------
Senior unsecured debt Baa1 A-
Commercial paper P-2 A-2
* negative outlook
These ratings could change depending on our performance and other factors. A
significant ratings drop could result in the termination of the $200 million
Nordstrom private label receivables variable funding note and a change in
interest rates on the $300 million 8.95% senior notes and the $300 million
revolving credit facility. The remainder of our outstanding debt is not subject
to termination or interest rate adjustments based on changes in credit ratings.
CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements requires that we make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities. We regularly
evaluate our estimates including those related to doubtful accounts, inventory
valuation, intangible assets, income taxes, self-insurance liabilities,
post-retirement benefits, contingent liabilities and litigation. We base our
estimates on historical experience and on other assumptions that we believe to
be reasonable under the circumstances. Actual results may differ from these
estimates. The following discussion highlights the policies we feel are
critical.
REVENUE RECOGNITION
We recognize revenues net of estimated returns and exclude sales tax. Retail
stores record revenue at the point of sale. Catalog and Internet sales include
shipping revenue and are recorded upon delivery to the customer. Our sales
return liability is estimated based on historical return levels.
INVENTORY
Our inventory is stated at the lower of cost or market using the retail
inventory method (first-in, first-out basis). Under the retail method, inventory
is valued by applying a cost-to-retail ratio to the ending retail value of
inventory. As our inventory retail value is adjusted regularly to reflect market
conditions, our inventory method approximates the lower of cost or market.
Factors considered in determining markdowns include current and anticipated
demand, customer preferences, age of the merchandise and fashion trends. We also
reserve for obsolescence based on historical trends and specific identification.
Shrinkage is estimated as a percentage of sales for the period from the last
inventory date, based on historical shrinkage losses.
VENDOR ALLOWANCES
We receive allowances from merchandise vendors for purchase price adjustments,
cooperative advertising programs and cosmetic selling expenses. Purchase price
adjustments are recorded as a reduction of cost of sales at the point they have
been earned and the related merchandise has been sold. Allowances for
cooperative advertising programs and cosmetic selling expenses are recorded as a
reduction of selling, general and administrative expense when the advertising or
selling expense is incurred.
SELF INSURANCE
We are self insured for certain losses related to health and welfare, workers'
compensation and general liability. We record estimates of the total cost of
claims incurred as of the balance sheet date. These estimates are based on
analysis of historical data and actuarial estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We evaluate the collectibility of our customer accounts receivable based on
several factors, including historical trends, aging of accounts, write-off
experience and expectations of future performance. Delinquent accounts are
usually written off after the passage of 151 days without receiving a full
scheduled monthly payment. Accounts are written off sooner in the event of
customer bankruptcy or other circumstances that make further collection
unlikely.
OFF-BALANCE SHEET FINANCING
We have $200 million in outstanding term notes backed by our Nordstrom VISA
credit card receivables. On an ongoing basis, our Nordstrom VISA receivables are
transferred to a master note trust which has issued Class A and B notes to third
party investors. We hold securities that represent our retained interests in the
trust.
18 NORDSTROM INC. AND SUBSIDIARIES
management's discussion
and analysis
We recognize gains or losses on the sale of Nordstrom VISA receivables to the
trust based on the difference between the face value of the receivables sold and
the fair value of the assets created during the securitization process. The fair
value of the assets is calculated as the present value of their expected cash
flows. The discount rates used to calculate present value represent the
volatility and risk of the assets. Significant assumptions and judgments are
made to estimate the present value of expected cash flows and to determine the
fair value of our retained interest. We have no other off-balance sheet
transactions.
REALIZATION OF DEFERRED TAX ASSETS
In January 2003, we sold our Denver Credit facility generating a capital gain
for tax purposes of $15.4 million, which was used to offset a portion of our
existing capital loss carryforwards. Capital loss carryforwards of $19.0 million
remain available to offset capital gain income in the next three years. No
valuation allowance reserve has been provided because we believe it is probable
that the full benefit of these carryforwards will be realized.
Our purchase of the outstanding shares of Nordstrom.com, Inc. series C preferred
stock resulted in an expense of $40.4 million which we believe will not be
deductible for tax purposes. As a result, we have established a valuation
allowance reserve of $16.5 million to offset the deferred tax asset related to
this purchase.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 141 "Business Combinations" - SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, and establishes specific criteria for the recognition of goodwill
separate from other intangible assets. Adoption of SFAS No. 141 did not have a
material impact on our financial statements.
SFAS No. 142 "Goodwill and Other Intangible Assets" - Under SFAS No. 142,
goodwill and intangible assets having indefinite lives will no longer be
amortized but will be subject to annual impairment tests. Other intangible
assets will continue to be amortized over their estimated useful lives. Adoption
of SFAS No. 142 resulted in an impairment charge and a reduction in amortization
expense, which is detailed in Note 2 of the Notes to Consolidated Financial
Statements.
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" -
SFAS No. 144 retains the fundamental provisions of SFAS No. 121, but establishes
new criteria for asset classification and broadens the scope of qualifying
discontinued operations. The adoption of this statement did not have a material
impact on our financial statements.
We adopted SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" in the second
quarter of 2002. SFAS No. 145 updates, clarifies and simplifies existing
accounting pronouncements related to extinguishments of debt, provisions of the
Motor Carrier Act of 1980 and lease transactions. The adoption of this statement
did not have a material impact on our financial statements.
SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities"
was also adopted by us in the second quarter of 2002. SFAS No. 146 nullifies
EITF 94-3 "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" by requiring that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred versus when an
entity is committed to an exit plan. The adoption of this statement did not have
a material impact on our financial statements.
We adopted SFAS No. 148 "Accounting for Stock-Based Compensation" in the fourth
quarter of 2002. SFAS No. 148 amends SFAS No. 123 of the same name and provides
alternative transition methods for a voluntary change to fair value based
accounting for stock-based employee compensation. SFAS No. 148 also requires
more prominent and frequent disclosures about the effects of stock-based
compensation. Adoption of SFAS No. 148 did not have a material impact on our
financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus on certain
issues discussed in EITF 02-16, "Accounting by a Reseller for Cash Consideration
Received from a Vendor." This pronouncement addresses the timing and
classification of cash payments received by a reseller from a vendor. Adoption
of EITF 02-16 did not have a material impact on our financial statements.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including
NORDSTROM INC. AND SUBSIDIARIES 19
management's discussion
and analysis
Indirect Guarantees of the Indebtedness of Others." FIN 45 elaborates on the
disclosures made by a guarantor and also clarifies that a guarantor is required
to recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. Adoption of FIN 45 in the
fourth quarter of 2002 did not have a material impact on our financial
statements.
CAUTIONARY STATEMENT
The preceding disclosures included forward-looking statements regarding our
performance, liquidity and adequacy of capital resources. These statements are
based on our current assumptions and expectations and are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. Forward-looking statements are qualified by the risks and
challenges posed by increased competition, shifting consumer demand, changing
consumer credit markets, changing capital markets, changing interest rates and
general economic conditions, hiring and retaining effective team members,
sourcing merchandise from domestic and international vendors, investing in new
business strategies, achieving our growth objectives and the impact of economic
and competitive market forces, including the impact of terrorist activity or the
impact of war. As a result, while we believe there is a reasonable basis for the
forward-looking statements, you should not place undue reliance on those
statements. This discussion and analysis should be read in conjunction with the
consolidated financial statements and the Eleven-Year Statistical Summary.
20 NORDSTROM INC. AND SUBSIDIARIES
independent auditors'
and management reports
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Nordstrom, Inc.
and subsidiaries (the "Company") as of January 31, 2003 and 2002, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the three years in the period ended January 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of Nordstrom, Inc. and
subsidiaries as of January 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2003, in conformity with accounting principles generally accepted in
the United States of America.
The Company changed its method of accounting for goodwill and other intangible
assets upon adoption of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, for the year ended January 31, 2003, as
discussed in Note 2 to the consolidated financial statements.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
March 28, 2003
MANAGEMENT REPORT
We are responsible for preparing our financial statements and the other
information that appears in the annual report. The financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America and include estimates based on our best judgment.
We maintain a comprehensive system of internal controls and procedures designed
to provide reasonable assurance that assets are safeguarded and transactions are
executed in accordance with established procedures. The concept of reasonable
assurance is based on the recognition that the cost of maintaining the system of
internal accounting controls should not exceed the benefit derived from the
system.
Deloitte and Touche LLP audits our financial statements in accordance with
auditing standards generally accepted in the United States of America and
provides an objective, independent review of our internal controls and the
fairness of our reported financial condition and results of operations.
The Audit Committee, which is comprised of six independent directors, meets
periodically with our management and the independent auditors to ensure that
each is properly fulfilling its responsibilities. The Committee oversees our
systems of internal control, accounting practices, financial reporting and
audits to ensure their quality, integrity and objectivity are sufficient to
protect shareholders' investments.
/s/ Michael G. Koppel
Michael G. Koppel
Executive Vice President and Chief Financial Officer
NORDSTROM INC. AND SUBSIDIARIES 21
consolidated statements of earnings
Dollars in thousands except per share amounts
% OF % OF % OF
YEAR ENDED JANUARY 31, 2003 SALES 2002 SALES 2001 SALES
----------- ------- ----------- ------- ----------- -------
Net sales $ 5,975,076 100.0 $ 5,634,130 100.0 $ 5,528,537 100.0
Cost of sales and related
buying and occupancy (3,971,372) (66.5) (3,765,859) (66.8) (3,649,516) (66.0)
----------- ------- ----------- ------- ----------- -------
Gross profit 2,003,704 33.5 1,868,271 33.2 1,879,021 34.0
Selling, general and administrative (1,813,968) (30.3) (1,722,635) (30.6) (1,747,048) (31.6)
----------- ------- ----------- ------- ----------- -------
Operating income 189,736 3.2 145,636 2.6 131,973 2.4
Interest expense, net (81,921) (1.4) (75,038) (1.4) (62,698) (1.1)
Write-down of investment -- -- -- -- (32,857) (0.6)
Minority interest purchase and reintegration costs (53,168) (0.9) -- -- -- --
Service charge income and other, net 140,977 2.4 133,890 2.4 130,600 2.3
----------- ------- ----------- ------- ----------- -------
Earnings before income taxes and cumulative
effect of accounting change 195,624 3.3 204,488 3.6 167,018 3.0
Income taxes (92,041) (1.6) (79,800) (1.4) (65,100) (1.2)
----------- ------- ----------- ------- ----------- -------
Earnings before cumulative effect of
accounting change 103,583 1.7 124,688 2.2 101,918 1.8
Cumulative effect of accounting change
(net of tax) (13,359) (0.2) -- -- -- --
------------ -------- ----------- ------- ----------- -------
NET EARNINGS $ 90,224 1.5 $ 124,688 2.2 $ 101,918 1.8
----------- ------- ----------- ------- ----------- -------
Basic earnings per share $ 0.67 $ 0.93 $ 0.78
----------- ----------- -----------
Diluted earnings per share $ 0.66 $ 0.93 $ 0.78
----------- ----------- -----------
Cash dividends paid per share $ 0.38 $ 0.36 $ 0.35
----------- ----------- -----------
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
22 NORDSTROM INC. AND SUBSIDIARIES
consolidated balance sheets
Dollars in thousands
JANUARY 31, 2003 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 208,329 $ 331,327
Accounts receivable, net 759,262 698,475
Merchandise inventories 953,112 888,172
Prepaid expenses 40,261 36,888
Other current assets 111,654 102,249
----------- -----------
Total current assets 2,072,618 2,057,111
Land, buildings and equipment, net 1,761,544 1,761,082
Goodwill, net 40,355 38,198
Tradename, net 100,133 100,133
Other assets 121,726 94,655
----------- -----------
TOTAL ASSETS $ 4,096,376 $ 4,051,179
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 244 $ 148
Accounts payable 414,754 490,988
Accrued salaries, wages and related benefits 260,562 236,373
Income taxes and other accruals 188,986 144,402
Current portion of long-term debt 5,545 78,227
----------- -----------
Total current liabilities 870,091 950,138
Long-term debt 1,341,826 1,351,044
Deferred lease credits 383,100 342,046
Other liabilities 129,302 93,463
Shareholders' equity:
Common stock, no par:
500,000,000 shares authorized;
135,444,041 and 134,468,608
shares issued and outstanding 358,069 341,316
Unearned stock compensation (2,010) (2,680)
Retained earnings 1,014,105 975,203
Accumulated other comprehensive earnings 1,893 649
----------- -----------
Total shareholders' equity 1,372,057 1,314,488
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,096,376 $ 4,051,179
----------- -----------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
NORDSTROM INC. AND SUBSIDIARIES 23
consolidated statements
of shareholders' equity
Dollars in thousands except per share amounts
Accum. Other
Common Stock Unearned Stock Retained Comprehensive
Shares Amount Compensation Earnings Earnings Total
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT FEBRUARY 1, 2000 132,279,988 $ 247,559 $ (8,593) $ 929,616 $ 17,032 $ 1,185,614
Net earnings -- -- -- 101,918 -- 101,918
Other comprehensive earnings:
Unrealized loss on investment
during period, net of tax -- -- -- -- (23,461) (23,461)
Reclassification of realized loss,
net of tax -- -- -- -- 6,429 6,429
Foreign currency translation
adjustment -- -- -- -- 2,824 2,824
------------
Comprehensive net earnings: -- -- -- -- -- 87,710
Cash dividends paid
($.35 per share) -- -- -- (45,935) -- (45,935)
Issuance of common stock for:
Stock option plans 181,910 4,039 -- -- -- 4,039
Employee stock purchase plan 165,842 2,211 -- -- -- 2,211
Business acquisition 5,074,000 77,696 -- -- -- 77,696
Stock compensation (14,075) (1,111) 4,853 -- -- 3,742
Purchase and retirement
of common stock (3,889,908) -- -- (85,509) -- (85,509)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT JANUARY 31, 2001 133,797,757 330,394 (3,740) 900,090 2,824 1,229,568
Net earnings -- -- -- 124,688 -- 124,688
Other comprehensive earnings:
Foreign currency translation
adjustment -- -- -- -- (2,175) (2,175)
-------------
Comprehensive net earnings: -- -- -- -- -- 122,513
Cash dividends paid
($.36 per share) -- -- -- (48,265) -- (48,265)
Issuance of common stock for:
Stock option plans 186,165 3,788 -- -- -- 3,788
Employee stock purchase plan 541,677 6,754 -- -- -- 6,754
Stock compensation 19,009 380 1,060 -- -- 1,440
Purchase and retirement
of common stock (76,000) -- -- (1,310) -- (1,310)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT JANUARY 31, 2002 134,468,608 341,316 (2,680) 975,203 649 1,314,488
Net earnings -- -- -- 90,224 -- 90,224
Other comprehensive earnings:
Foreign currency translation
adjustment -- -- -- -- 7,755 7,755(1)
SERP adjustment, net of tax -- -- -- -- (6,511) (6,511)(1)
-------------
Comprehensive net earnings: -- -- -- -- -- 91,468
Cash dividends paid
($.38 per share) -- -- -- (51,322) -- (51,322)
Issuance of common stock for:
Stock option plans 350,004 7,959 -- -- -- 7,959
Employee stock purchase plan 596,351 8,062 -- -- -- 8,062
Stock compensation 29,078 732 670 -- -- 1,402
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT JANUARY 31, 2003 135,444,041 $ 358,069 $ (2,010) $ 1,014,105 $ 1,893 $ 1,372,057
------------ ------------ ------------ ------------ ------------ ------------
(1) The ending balance of the foreign currency translation adjustment and SERP
adjustment, net of tax was $8,404 and $(6,511) as of January 31, 2003.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
24 NORDSTROM INC. AND SUBSIDIARIES
consolidated statements
of cash flows
Dollars in thousands
YEAR ENDED JANUARY 31, 2003 2002 2001
--------- --------- ---------
OPERATING ACTIVITIES
Net earnings $ 90,224 $ 124,688 $ 101,918
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization of buildings and equipment 233,931 213,089 203,048
Amortization of intangible assets -- 4,630 1,251
Amortization of deferred lease credits and other, net (22,179) (8,886) (12,761)
Stock-based compensation expense 1,130 3,414 6,480
Deferred income taxes, net 6,190 16,114 (3,234)
Cumulative effect of accounting change, net of tax 13,359 -- --
Write-down of investment -- -- 32,857
Impairment of IT investment 15,570 -- 10,227
Minority interest purchase expense 40,389 -- --
Change in operating assets and liabilities, net of effects from
acquisition of business:
Accounts receivable, net (58,397) 22,556 (102,945)
Merchandise inventories (117,379) 80,246 (120,729)
Prepaid expenses 521 (2,438) (1,191)
Other assets 3,378 (16,770) (3,821)
Accounts payable (9,826) (18,241) 58,212
Accrued salaries, wages and related benefits 23,763 (203) 17,850
Income tax liabilities and other accruals 43,771 (10,413) 5,309
Other liabilities 14,227 12,088 (7,184)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 278,672 419,874 185,287
--------- --------- ---------
INVESTING ACTIVITIES
Capital expenditures (328,166) (396,048) (330,347)
Additions to deferred lease credits 97,673 126,383 92,361
Proceeds from sale-leaseback of Denver Credit facility 20,000 -- --
Minority interest purchase (70,000) -- --
Payment for acquisition, net of cash acquired -- -- (83,828)
Other, net (3,513) (3,104) (1,781)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (284,006) (272,769) (323,595)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds (payments) from notes payable 96 (82,912) 12,126
Proceeds from issuance of long-term debt 1,665 300,000 308,266
Principal payments on long-term debt (87,697) (18,640) (58,191)
Proceeds from sale of interest rate swap 4,931 -- --
Proceeds from issuance of common stock 14,663 10,090 5,768
Cash dividends paid (51,322) (48,265) (45,935)
Purchase and retirement of common stock -- (1,310) (85,509)
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (117,664) 158,963 136,525
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (122,998) 306,068 (1,783)
Cash and cash equivalents at beginning of year 331,327 25,259 27,042
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 208,329 $ 331,327 $ 25,259
--------- --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
NORDSTROM INC. AND SUBSIDIARIES 25
notes to consolidated
financial statements
Dollars in thousands except per share amounts
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY: We are a fashion specialty retailer offering high-quality apparel,
shoes and accessories for women, men and children with 142 U.S. stores located
in 27 states.
We also operate 23 Faconnable boutiques located primarily in Europe.
Additionally, we generate catalog and Internet sales through Nordstrom Direct
(formerly known as Nordstrom.com) and service charge income through Nordstrom
Credit, Inc.
CHANGE IN FISCAL YEAR: Beginning February 1, 2003, our fiscal year end will
change from January 31 to the Saturday closest to January 31. Each fiscal year
will consist of four 13 week quarters, with an extra week added onto the fourth
quarter every five to six years. This fiscal calendar is widely used in the
retail industry.
BASIS OF PRESENTATION: The consolidated financial statements include the
balances of Nordstrom, Inc. and its subsidiaries for the entire fiscal year. All
significant intercompany transactions and balances are eliminated in
consolidation.
USE OF ESTIMATES: We make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.
RECLASSIFICATIONS: Certain reclassifications of prior year balances have been
made for consistent presentation with the current year.
REVENUE RECOGNITION: We record revenues net of estimated returns and exclude
sales tax. Retail stores record revenue at the point of sale. Catalog and
Internet sales include shipping revenue and are recorded upon delivery to the
customer.
BUYING AND OCCUPANCY COSTS: Buying costs consist primarily of salaries and
expenses incurred by our merchandise managers, buyers and private label product
development group. Occupancy costs include rent, depreciation, property taxes
and operating costs of our retail and distribution facilities.
SHIPPING AND HANDLING COSTS: Our shipping and handling costs include payments to
third-party shippers and costs to store, move and prepare merchandise for
shipment. Shipping and handling costs of $42,506, $30,868 and $38,062 in 2002,
2001 and 2000 were included in selling, general and administrative expenses.
ADVERTISING: Costs for newspaper, television, radio and other media are
generally expensed as they occur. Direct response advertising costs, such as
catalog book production and printing costs, are expensed over the life of the
catalog, not to exceed six months. Total advertising expenses were $144,482,
$145,341 and $190,991 in 2002, 2001 and 2000.
STORE PREOPENING COSTS: Store opening and preopening costs are expensed as they
occur.
STOCK COMPENSATION: We apply APB No. 25, "Accounting for Stock Issued to
Employees," in measuring compensation costs under our stock-based compensation
programs, which are described more fully in Note 17.
If we had elected to recognize compensation cost based on the fair value of the
options and shares at grant date, net earnings and earnings per share would have
been as follows:
YEAR ENDED JANUARY 31, 2003 2002 2001
----------- ----------- -----------
Net earnings, as reported $ 90,224 $ 124,688 $ 101,918
Incremental stock-based
compensation expense
under fair value, net of tax (19,674) (17,252) (13,458)
----------- ----------- -----------
Pro forma net earnings $ 70,550 $ 107,436 $ 88,460
----------- ----------- -----------
Earnings per share:
Basic--as reported $ 0.67 $ 0.93 $ 0.78
Basic--pro forma $ 0.52 $ 0.80 $ 0.68
Diluted--as reported $ 0.66 $ 0.93 $ 0.78
Diluted--pro forma $ 0.52 $ 0.80 $ 0.67
----------- ----------- -----------
CASH EQUIVALENTS: Cash equivalents are short-term investments with a maturity of
three months or less from the date of purchase.
CASH MANAGEMENT: Our cash management system provides for the reimbursement of
all major bank disbursement accounts on a daily basis. Accounts payable at
January 31, 2002 includes $31,817 of checks not yet presented for payment drawn
in excess of cash balances.
26 NORDSTROM INC. AND SUBSIDIARIES
notes to consolidated
financial statements
CUSTOMER ACCOUNTS RECEIVABLE: Based on industry practices, installments maturing
in more than one year or deferred payment accounts receivable are included in
current assets.
MERCHANDISE INVENTORIES: Merchandise inventories are valued at the lower of cost
or market, using the retail method (first-in, first-out basis).
LAND, BUILDINGS AND EQUIPMENT: Depreciation is computed using a combination of
accelerated and straight-line methods. Estimated useful lives by major asset
category are as follows:
ASSET LIFE (IN YEARS)
-----------------
Buildings 5-40
Store fixtures and equipment 3-15
Leasehold improvements SHORTER OF LIFE OF LEASE OR ASSET LIFE
Software 3-7
ASSET IMPAIRMENT: We review our intangibles and other long-lived assets annually
for impairment or when circumstances indicate the carrying value of these assets
may not be recoverable.
DEFERRED LEASE CREDITS: We receive developer reimbursements as incentives to
construct stores in certain developments. We capitalize the property, plant and
equipment for these stores during the construction period. At the end of the
construction period, developer reimbursements in excess of construction costs
are recorded as deferred lease credits and amortized as a reduction to rent
expense, on a straight-line basis over the life of the applicable lease or
operating covenant. Construction costs in excess of developer reimbursements are
recorded as prepaid rent and amortized as rent expense on a straight-line basis
over the life of the applicable lease or operating covenant.
FOREIGN CURRENCY TRANSLATION: The assets and liabilities of our foreign
subsidiary have been translated to U.S. dollars using the exchange rates
effective on the balance sheet date, while income and expense accounts are
translated at the average rates in effect during the year. Resulting translation
adjustments are recorded as other comprehensive earnings.
INCOME TAXES: We use the asset and liability method of accounting for income
taxes. Using this method, deferred tax assets and liabilities are recorded based
on differences between financial reporting and tax basis of assets and
liabilities. The deferred tax assets and liabilities are calculated using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
LOYALTY PROGRAMS: We have customer loyalty programs in which customers receive
points for qualifying purchases. Upon the accumulation of a certain number of
points, customers receive a merchandise certificate. We accrue the cost of
anticipated merchandise certificate redemptions upon issuance of the certificate
to the customer. The related expense is recorded in selling, general and
administrative expense.
VENDOR ALLOWANCES: We receive allowances from merchandise vendors for purchase
price adjustments, cooperative advertising programs and cosmetic selling
expenses. Purchase price adjustments are recorded as a reduction of cost of
sales at the point they have been earned and the related merchandise has been
sold. Allowances for cooperative advertising programs and cosmetic selling
expenses are recorded as a reduction of selling, general and administrative
expense when the advertising or selling expense is incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash equivalents
and notes payable approximate fair value. The fair value of long-term debt,
including current maturities, using quoted market prices of the same or similar
issues, was approximately $1,443,000 and $1,378,000 at January 31, 2003 and
2002.
DERIVATIVES POLICY: We limit our use of derivative financial instruments to the
management of foreign currency and interest rate risks. The effect of these
activities is not material to our financial condition or results of operations.
We have no material off-balance sheet credit risk, and the fair value of
derivative financial instruments at January 31, 2003 and 2002 was not material.
RECENT ACCOUNTING PRONOUNCEMENTS: In February 2002, we adopted
the following three pronouncements:
SFAS No. 141 "Business Combinations" - SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, and establishes specific criteria for the recognition of goodwill
separate from other intangible assets. Adoption of SFAS No. 141 did not have a
material impact on our financial statements.
NORDSTROM INC. AND SUBSIDIARIES 27
notes to consolidated
financial statements
SFAS No. 142 "Goodwill and Other Intangible Assets" - Under SFAS No. 142,
goodwill and intangible assets having indefinite lives will no longer be
amortized but will be subject to annual impairment tests. Other intangible
assets will continue to be amortized over their estimated useful lives. Adoption
of SFAS No. 142 resulted in an impairment charge and a reduction in amortization
expense, which is detailed in Note 2.
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" -
SFAS No. 144 retains the fundamental provisions of SFAS No. 121, but establishes
new criteria for asset classification and broadens the scope of qualifying
discontinued operations. The adoption of this statement did not have a material
impact on our financial statements.
We adopted SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" in the second
quarter of 2002. SFAS No. 145 updates, clarifies and simplifies existing
accounting pronouncements related to extinguishments of debt, provisions of the
Motor Carrier Act of 1980 and lease transactions. The adoption of this statement
did not have a material impact on our financial statements.
SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities"
was also adopted by us in the second quarter of 2002. SFAS No. 146 nullifies
EITF 94-3 "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" by requiring that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred versus when an
entity is committed to an exit plan. The adoption of this statement did not have
a material impact on our financial statements.
We adopted SFAS No. 148 "Accounting for Stock-Based Compensation" in the fourth
quarter of 2002. SFAS No. 148 amends SFAS No. 123 of the same name and provides
alternative transition methods for a voluntary change to fair value based
accounting for employee stock compensation. SFAS No. 148 also requires more
prominent and frequent disclosures about the effects of stock-based
compensation. Adoption of SFAS No. 148 did not have a material impact on our
financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus on certain
issues discussed in EITF 02-16, "Accounting by a Reseller for Cash Consideration
Received from a Vendor." This pronouncement addresses the timing and
classification of cash payments received by a reseller from a vendor. Adoption
of EITF 02-16 did not have a material impact on our financial statements.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness
of Others." FIN 45 elaborates on the disclosures made by a guarantor and also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. Adoption of FIN 45 in the fourth quarter of 2002 did not
have a material impact on our financial statements.
NOTE 2: CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Effective February 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," which establishes new accounting and reporting requirements for
goodwill and other intangible assets. Under SFAS No. 142, goodwill and
intangible assets having indefinite lives will no longer be amortized but will
be subject to annual impairment tests.
In connection with the adoption of SFAS No. 142, we reviewed the classification
and useful lives of our intangible assets. Our intangible assets were determined
to be either goodwill or indefinite lived tradename.
As required by SFAS No. 142, we defined our reporting unit as the Faconnable
Business Unit, one level below our reportable Retail Stores segment. We then
tested our intangible assets for impairment by comparing the fair value of the
reporting unit with its carrying value. Fair value was determined using a
discounted cash flow methodology. SFAS No. 142 requires us to perform these
impairment tests at adoption and at least annually thereafter. We expect to
perform our impairment test annually during our first quarter or when
circumstances indicate we should do so. Our initial impairment test resulted in
an impairment charge to goodwill of $21,900 in the first quarter of 2002, while
the tradename was determined not to be impaired. The goodwill impairment
resulted from a reduction in management's estimate of future growth for this
reporting unit. The impairment charge is reflected as a cumulative effect of
accounting change.
28 NORDSTROM INC. AND SUBSIDIARIES
notes to consolidated
financial statements
The changes in the carrying amount of our intangible assets for the year ended
January 31, 2003, are as follows:
Catalog/
Retail Stores Internet
Segment Segment
Goodwill Tradename Goodwill Total
--------- --------- --------- ---------
FEBRUARY 1, 2002 $ 38,198 $ 100,133 $ -- $ 138,331
Goodwill impairment (21,900) -- -- (21,900)
Goodwill acquired
through purchase of
minority interest
(see Note 21) -- -- 24,057 24,057
--------- --------- --------- ---------
JANUARY 31, 2003 $ 16,298 $ 100,133 $ 24,057 $ 140,488
--------- --------- --------- ---------
The following table shows the actual results of operations as well as pro-forma
results adjusted to exclude intangible amortization and the cumulative effect of
accounting change.
YEAR ENDED JANUARY 31, 2003 2002 2001
-------- -------- --------
Reported net earnings $ 90,224 $124,688 $101,918
Intangible amortization,
net of tax -- 2,824 763
Cumulative effect of
accounting change,
net of tax 13,359 -- --
-------- -------- --------
ADJUSTED NET EARNINGS $103,583 $127,512 $102,681
-------- -------- --------
Basic and diluted earnings per share:
YEAR ENDED JANUARY 31, 2003 2002 2001
---------------- ------ ------
Earnings per share: BASIC DILUTED BASIC AND DILUTED
----- ------- -----------------
Reported net earnings $0.67 $0.66 $0.93 $0.78
Intangible amortization,
net of tax -- -- 0.02 --
Cumulative effect of
accounting change,
net of tax 0.10 0.10 -- --
----- ----- ----- -----
ADJUSTED NET EARNINGS $0.77 $0.76 $0.95 $0.78
----- ----- ----- -----
Before adoption of SFAS No. 142, we amortized our intangible
assets over their estimated useful lives on a straight-line basis
ranging from 10 to 35 years. Accumulated amortization of
intangible assets was $5,881 as of January 31, 2003 and 2002.
NOTE 3: ACQUISITION
In 2000, we acquired Faconnable, S.A.S., of Nice, France, a designer, wholesaler
and retailer of high quality men's and women's apparel and accessories. We paid
$87,685 in cash and issued 5,074,000 shares of our common stock for a total
consideration of $168,868. The purchase provides for a contingent payment to a
former owner that may be paid after five years from the acquisition date. If the
former owner continues to have involvement in the business and performance
targets are met, the contingent payment could approximate $12,000. The
contingent payment will be expensed when it becomes probable that the targets
will be met.
NOTE 4: EMPLOYEE BENEFITS
We provide a profit sharing plan and 401(k) plan for our employees. The profit
sharing plan is non-contributory and is fully funded by us. The Board of
Directors establishes our contribution to the profit sharing plan each year. The
401(k) plan is funded by voluntary employee contributions. In addition, we
provide matching contributions up to a stipulated percentage of employee
contributions. Our contributions to the profit sharing plan and matching
contributions to the 401(k) plan totaled $35,162, $28,525 and $29,113 in 2002,
2001 and 2000.
NORDSTROM INC. AND SUBSIDIARIES 29
notes to consolidated
financial statements
NOTE 5: POSTRETIREMENT BENEFITS
We have an unfunded Supplemental Executive Retirement Plan ("SERP"), which
provides retirement benefits to certain officers and select employees. Effective
February 2003, the SERP was amended to change the target benefit, eliminate the
offset of our contributions to the 401k and profit sharing plans and make
additional participants eligible. Certain grandfathered participants will remain
under the previous plan provisions.
The following provides a reconciliation of benefit obligations and funded status
of the SERP:
JANUARY 31, 2003 2002
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 34,411 $ 23,543
Service cost 1,447 1,092
Interest cost 3,537 2,668
Amortization of adjustments 2,941 1,821
Change in additional minimum liability 7,760 7,308
Distributions (2,523) (2,021)
-------- --------
Benefit obligations at end of year $ 47,573 $ 34,411
-------- --------
Funded status of plan:
Under funded status $(50,125) $(39,547)
Unrecognized transitional obligation -- 324
Unrecognized prior service cost 3,805 6,396
Unrecognized loss 15,074 6,983
-------- --------
Accrued pension cost $(31,246) $(25,844)
-------- --------
Balance sheet amounts:
Additional minimum liability $(16,327) $ (8,567)
Intangible asset 3,805 6,720
-------- --------
The components of SERP expense and a summary of significant assumptions are as
follows:
YEAR ENDED JANUARY 31, 2003 2002 2001
------ ------ ------
Service cost $1,447 $1,092 $ 630
Interest cost 3,537 2,668 2,044
Amortization of adjustments 2,941 1,821 688
------ ------ ------
Total SERP expense $7,925 $5,581 $3,362
------ ------ ------
Assumption percentages:
Discount rate 7.00% 7.25% 7.50%
Rate of compensation increase 4.00% 5.00% 5.00%
------ ------ ------
NOTE 6: INTEREST EXPENSE, NET
The components of interest expense, net are as follows:
YEAR ENDED JANUARY 31, 2003 2002 2001
-------- -------- --------
Short-term debt $ 677 $ 3,741 $ 12,682
Long-term debt 89,850 83,225 58,988
-------- -------- --------
Total interest expense 90,527 86,966 71,670
-------- -------- --------
Less:
Interest income (4,254) (1,545) (1,330)
Capitalized interest (4,352) (10,383) (7,642)
-------- -------- --------
INTEREST EXPENSE, NET $ 81,921 $ 75,038 $ 62,698
-------- -------- --------
NOTE 7: INVESTMENT
In September 1998, we made an investment in Streamline.com, Inc., an Internet
grocery and consumer goods delivery company. Streamline ceased its operations
effective November 2000, after failing to obtain additional capital to fund its
operations. During 2000, we wrote-off our entire investment in Streamline, for a
total pre-tax loss on the investment of $32,857.
30 NORDSTROM INC. AND SUBSIDIARIES
notes to consolidated
financial statements
NOTE 8: INCOME TAXES
Income tax expense consists of the following:
YEAR ENDED JANUARY 31, 2003 2002 2001
-------- -------- --------
Current income taxes:
Federal $ 76,901 $ 58,122 $ 79,778
State and local 10,633 6,142 11,591
-------- -------- --------
Total current
income taxes 87,534 64,264 91,369
Deferred income taxes:
Current (4,225) (7,217) (11,215)
Non-current 8,732 22,753 (15,054)
-------- -------- --------
Total deferred
income taxes 4,507 15,536 (26,269)
-------- -------- --------
Total before cumulative effect
of accounting change 92,041 79,800 65,100
-------- -------- --------
Deferred income taxes on
cumulative effect of
accounting change (8,541) -- --
-------- -------- --------
TOTAL TAX EXPENSE $ 83,500 $ 79,800 $ 65,100
-------- -------- --------
A reconciliation of the statutory Federal income tax rate to the effective tax
rate on earnings before the cumulative effect of accounting change is as
follows:
YEAR ENDED JANUARY 31, 2003 2002 2001
----- ----- -----
Statutory rate 35.00% 35.00% 35.00%
State and local
income taxes, net of
Federal income taxes 3.78 3.93 3.93
Change in valuation allowance 8.45 -- --
Other, net (0.18) .09 .05
----- ----- -----
EFFECTIVE TAX RATE 47.05% 39.02% 38.98%
----- ----- -----
Deferred income taxes reflect the net tax effect of temporary differences
between amounts recorded for financial reporting purposes and amounts used for
tax purposes. The major components of deferred tax assets and liabilities are as
follows:
JANUARY 31, 2003 2002
--------- ---------
Accrued expenses $ 35,480 $ 33,896
Compensation and
benefits accruals 52,969 48,584
Merchandise inventories 25,831 24,643
Capital loss carryforwards 7,406 13,399
Loss on minority interest purchase 16,532 --
Other 28,835 21,123
--------- ---------
Total deferred tax assets 167,053 141,645
Land, buildings and
equipment basis and
depreciation differences (50,401) (49,978)
Employee benefits (9,657) (9,771)
Other (3,891) (3,195)
--------- ---------
Total deferred tax liabilities (63,949) (62,944)
--------- ---------
Valuation allowance (16,532) --
--------- ---------
NET DEFERRED TAX ASSETS $ 86,572 $ 78,701
--------- ---------
In January 2003 we sold our Denver Credit facility, generating a capital gain
for tax purposes of $15,367 which was used to offset a portion of our existing
capital loss carryforwards. Capital loss carryforwards of $18,990 remain
available to offset capital gain income in the next three years. No valuation
allowance has been provided because we believe it is probable that the full
benefit of these carryforwards will be realized.
Our purchase of the outstanding shares of Nordstrom.com, Inc. series C preferred
stock resulted in an expense of $40,389 which we believe will not be deductible
for tax purposes. As a result, we have established a valuation allowance of
$16,532 to offset the deferred tax asset related to this purchase.
NORDSTROM INC. AND SUBSIDIARIES 31
notes to consolidated
financial statements
NOTE 9: EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the year. Diluted earnings per share uses the weighted
average number of common shares outstanding during the year plus dilutive common
stock equivalents, primarily stock options and performance share units.
Options with an exercise price greater than the average market price were not
included in diluted earnings per share. These options totaled 7,259,273,
8,563,996 and 7,409,387 shares in 2002, 2001 and 2000.
YEAR ENDED JANUARY 31, 2003 2002 2001
------------ ------------ ------------
Net earnings $ 90,224 $ 124,688 $ 101,918
------------ ------------ ------------
Basic shares 135,106,772 134,104,582 131,012,412
------------ ------------ ------------
Basic earnings per share $ 0.67 $ 0.93 $ 0.78
------------ ------------ ------------
Dilutive effect of stock
options and performance
share units 617,468 234,587 100,673
------------ ------------ ------------
Diluted shares 135,724,240 134,339,169 131,113,085
------------ ------------ ------------
Diluted earnings per share $ 0.66 $ 0.93 $ 0.78
------------ ------------ ------------
NOTE 10: ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows:
JANUARY 31, 2003 2002
--------- ---------
Private label trade receivables:
Unrestricted $ 15,599 $ 16,242
Restricted 613,647 628,271
Allowance for doubtful accounts (22,385) (23,022)
--------- ---------
Private label trade receivables, net 606,861 621,491
VISA securitization master trust certificates 123,220 55,659
Other 29,181 21,325
--------- ---------
ACCOUNTS RECEIVABLE, NET $ 759,262 $ 698,475
--------- ---------
The restricted private label receivables back the $300 million of Class A notes
and the $200 million variable funding note issued by us in November 2001. Other
accounts receivable consist primarily of vendor receivables and cosmetic rebates
receivable.
Bad debt expense totaled $29,080, $34,750 and $20,368 in 2002, 2001 and 2000.
NOTE 11: OFF-BALANCE SHEET FINANCING
In May 2002, we replaced our $200 million variable funding note backed by VISA
credit card receivables ("VISA VFN") with 5-year term notes also backed by the
VISA credit card receivables. Class A and B notes with a combined face value of
$200 million were issued to third party investors. These proceeds were used to
retire the $200 million outstanding on the VISA VFN. We hold securities that
represent our retained interests in a master note trust. The carrying amounts of
the retained interests approximate fair value and are included in accounts
receivable.
In accordance with SFAS No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," our consolidated balance
sheets do not include this debt and the related receivables. These related VISA
credit card receivables are sold to the trust on an ongoing basis.
We recognize gains or losses on the sale of VISA receivables to the trust based
on the difference between the face value of the receivables sold and the fair
value of the assets created in the securitization process. The receivables sold
to the trust are then allocated between the various interests in the trust based
on those interests' relative fair market values. The fair values of the assets
are calculated as the present value of their expected future cash flows. The
following table summarizes the estimated fair values of our retained interests
as well as the assumptions used:
JANUARY 31, 2003
-----------
Fair value of retained interests: $ 124,791
Assumptions:
Weighted average remaining life (in months) 2.8
Average credit losses 6.38%
Average gross yield 17.81%
Average interest expense on issued securities 1.70%
Average payment rate 20.94%
Discount rates of retained interests:
Class C Certificate 16.79%
Seller Retained Interest 10.51%
Interest Only Strip 19.92%
-----------
These discount rates represent the volatility and risk of the assets and are
calculated using an established formula that considers both the current interest
rate environment and credit spreads.
32 NORDSTROM INC. AND SUBSIDIARIES
notes to consolidated
financial statements
The following table illustrates the sensitivity in the fair market value
estimates of the retained interests given independent changes in assumptions as
of January 31, 2003:
+10% +20% -10% -20%
------- ------- ------- -------
Gross Yield $ 1,207 $ 2,414 $(1,207) $(2,414)
Interest Expense
on Issued Classes (76) (152) 76 152
Card Holders Payment Rate (99) (296) 207 384
Charge Offs (531) (1,059) 533 1,069
Discount Rate (337) (673) 339 680
------- ------- ------- -------
The following table summarizes certain income, expenses and cash flows received
from and paid to the master note trust.
YEAR ENDED JANUARY 31, 2003 2002 2001
-------- -------- --------
Principal collections reinvested
in new receivables $824,715 $669,582 $485,422
Gains on sales of receivables 8,290 3,147 5,356
Income earned on
retained interests 10,786 6,711 9,035
Cash flows from retained assets:
Retained interests 28,100 11,916 10,050
Servicing fees 5,407 8,440 8,121
-------- -------- --------
Interest income earned on the retained interests is included in service charge
income and other on the consolidated statements of earnings.
The total principal balance of the VISA receivables was $323,101 and $258,075 as
of January 31, 2003 and 2002. Gross credit losses were $18,580 and $17,050 for
the years ended January 31, 2003 and 2002, and receivables past due for more
than 30 days were $8,519 and $8,170 at January 31, 2003 and 2002.
The following table illustrates default projections using net credit losses as a
percentage of average outstanding receivables in comparison to actual
performance:
YEAR ENDED JANUARY 31, 2004 2003 2002
---- ---- ----
Original projection 6.16% 7.66% 5.99%
Actual N/A 6.59% 6.62%
---- ---- ----
Under the terms of the trust agreement, we may be required to fund certain
amounts upon the occurrence of specific events. The securitization agreements
set a maximum percentage of receivables that can be associated with employee
accounts. As of January 31, 2003, this maximum was exceeded by $1,500. It is
possible that we may be required to repurchase these receivables. Aside from
this instance, we do not believe any additional funding will be required.
Our continued involvement in the securitization of VISA receivables will include
recording gains/losses on sales in accordance with SFAS No. 140 and recognizing
income on retained assets as prescribed by EITF 99-20 "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets," holding subordinated, non-subordinated and
residual interests in the trust, and servicing the portfolio.
NOTE 12: RECEIVABLE-BACKED SECURITIES
In 2001, we issued $300 million of receivable-backed securities supported by
substantially all of our private label credit card receivables. This transaction
is accounted for as a secured financing.
Total principal receivables of the securitized portfolio at January 31, 2003 and
2002 were approximately $609,784 and $625,516, and receivables more than 30 days
past due were approximately $16,973 and $19,301. Net charged off receivables for
the years ending January 31, 2003 and 2002 were $29,555 and $28,134. The private
label receivables also serve as collateral for a variable funding facility with
a limit of $200,000. Interest on the facility varies based on the actual cost of
commercial paper plus specified fees. Nothing was outstanding on this facility
at January 31, 2003 or 2002.
NORDSTROM INC. AND SUBSIDIARIES 33
notes to consolidated
financial statements
Our continuing involvement in the securitization of private label receivables
will include pledging new receivables to the master note trust, accounting for
the transaction as a secured financing and servicing the portfolio.
NOTE 13: LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment consist of the following:
JANUARY 31, 2003 2002
----------- -----------
Land and land improvements $ 60,692 $ 59,141
Buildings 829,885 683,926
Leasehold improvements 943,555 910,291
Capitalized software 150,655 46,603
Store fixtures and equipment 1,222,842 1,142,169
Construction in progress 436,891 582,361
----------- -----------
3,644,520 3,424,491
Less accumulated depreciation
and amortization (1,882,976) (1,663,409)
----------- -----------
LAND, BUILDINGS AND EQUIPMENT, NET $ 1,761,544 $ 1,761,082
----------- -----------
Capitalized software includes external direct costs, internal direct labor and
employee benefits, as well as interest associated with the development of the
computer software. Depreciation begins in the period in which the software is
ready for its intended use. Construction in progress includes $61,384 and
$127,847 of software in progress at January 31, 2003 and 2002.
The total cost of capitalized leased buildings was $13,884 at January 31, 2003
and 2002, with related accumulated amortization of $9,261 and $8,854. The
amortization of capitalized leased buildings was recorded in depreciation
expense.
In January 2003, we sold our Denver Credit facility for $20,000 and subsequently
leased it back. A gain of $103 was recorded at the time of the sale, while the
remaining gain of $15,919 will be recognized as a reduction to rent expense
evenly over the 15 year life of the lease.
At January 31, 2003, we have contractual commitments of approximately $227,340
primarily for the construction of new stores or remodeling of existing stores.
NOTE 14: NOTES PAYABLE
A summary of notes payable is as follows:
YEAR ENDED JANUARY 31, 2003 2002 2001
-------- -------- ----------
Average daily short-
term borrowings $ 370 $ 81,647 $ 192,392
Maximum amount
outstanding 15,000 177,100 360,480
Weighted average interest rate:
During the year 2.0% 4.6% 6.6%
At year-end -- -- 6.4%
-------- -------- ----------
Short-term borrowings during the year represent amounts drawn on our variable
funding note, which is described in Note 12.
We have an unsecured line of credit totaling $300,000, which is available as
liquidity support for our commercial paper program, and expires in November
2004. The line of credit agreement contains restrictive covenants, which include
maintaining certain financial ratios. We pay a commitment fee for the line based
on our debt rating. At January 31, 2003 and 2002, there were no borrowings on
the line of credit.
Additionally, in connection with the purchase of foreign merchandise, we have
outstanding import letters of credit totaling $58,059 and standby letters of
credit totaling $20,649 at January 31, 2003.
34 NORDSTROM INC. AND SUBSIDIARIES
notes to consolidated
financial statements
NOTE 15: LONG-TERM DEBT
A summary of long-term debt is as follows:
JANUARY 31, 2003 2002
----------- -----------
Receivable-backed PL Term, 4.82%,
due 2006 $ 300,000 $ 300,000
Senior debentures, 6.95%,
due 2028 300,000 300,000
Senior notes, 5.625%, due 2009 250,000 250,000
Senior notes, 8.95%, due 2005 300,000 300,000
Medium-term notes, 7.25%, due 2002 -- 76,750
Notes payable, 6.7%, due 2005 100,000 100,000
Other 97,371 102,521
----------- -----------
Total long-term debt 1,347,371 1,429,271
Less current portion (5,545) (78,227)
----------- -----------
TOTAL DUE BEYOND ONE YEAR $ 1,341,826 $ 1,351,044
----------- -----------
In the third quarter of 2002, we sold the interest rate swap that converted our
$300,000, 8.95% fixed-rate debt to variable rate. We received cash of $4,931,
which will be recognized as interest income evenly over the remaining life of
the related debt.
We entered into a variable interest rate swap agreement effective in the fourth
quarter of 2002. The swap had a $250 million notional amount and a six-year
term. Under the agreement, we received a fixed rate of 5.63% and paid a variable
rate based on LIBOR plus a margin of 1.31% set at six-month intervals (3.25% at
January 31, 2003). The swap agreement qualified as a fair value hedge and was
recorded at fair value in other assets at January 31, 2003. Subsequent to
January 31, 2003, we sold the interest rate swap and received cash of $2,341,
which will be recognized as interest income evenly over the remaining life of
the related debt.
We own a 49% interest in a limited partnership which constructed a new corporate
office building in which we are the primary occupant. During the first quarter
of 2002, the limited partnership refinanced its construction loan obligation
with an $85,000 mortgage secured by the property, of which $79,319 was included
on our balance sheet at January 31, 2003. This financial obligation will be
amortized as we make rental payments to the limited partnership over the 18 year
life of the permanent financing. The obligation has a fixed interest rate of
7.68% and a term of 18 years.
Required principal payments on long-term debt, excluding capital lease
obligations, are as follows:
YEAR ENDED JANUARY 31,
2004 $ 5,226
2005 4,683
2006 403,171
2007 303,538
2008 3,584
THEREAFTER 618,232
--------
NORDSTROM INC. AND SUBSIDIARIES 35
notes to consolidated
financial statements
NOTE 16: LEASES
We lease land, buildings and equipment under noncancelable lease agreements with
expiration dates ranging from 2003 to 2080. Certain leases include renewal
provisions at our option. Most of the leases provide for additional rent
payments based upon specific percentages of sales and require us to pay for
certain common area maintenance and other costs.
YEAR ENDED JANUARY 31, 2003 2002 2001
------- ------- -------
Minimum rent:
Store locations $23,511 $26,951 $16,907
Offices, warehouses
and equipment 25,851 20,144 21,070
Percentage rent:
Store locations 7,776 8,047 9,241
------- ------- -------
TOTAL RENT EXPENSE $57,138 $55,142 $47,218
------- ------- -------
Future minimum lease payments as of January 31, 2003 are as follows:
CAPITAL OPERATING
YEAR ENDED JANUARY 31, LEASES LEASES
-------- ---------
2004 $ 1,120 $ 73,158
2005 1,120 73,053
2006 1,120 68,271
2007 1,120 63,796
2008 1,120 60,088
Thereafter 10,350 442,015
-------- ---------
Total minimum lease payments 15,950 $ 780,381
-------- ---------
Less amount representing interest 7,013
--------
Present value of net minimum
lease payments $ 8,937
--------
NOTE 17: STOCK-BASED COMPENSATION
STOCK OPTION PLAN: We have a stock option plan (the "Nordstrom, Inc. Plan")
under which stock options, performance share units and restricted stock may be
granted to key employees. Options vest over periods ranging from four to eight
years, and expire ten years after the date of grant.
PERFORMANCE SHARE UNITS: In 2002, 2001 and 2000 we granted 190,396, 273,864 and
355,072 performance share units which will vest over three years if certain
financial goals are met. Employees may elect to receive common stock or cash
upon vesting of these performance shares. At January 31, 2003 and 2002, $4,441
and $4,713 was recorded in accrued salaries, wages and related benefits for
these performance shares. Employees who receive performance share units pay no
monetary consideration. No amounts have been paid and no common stock has been
issued in connection with this program. As of January 31, 2003 and 2002, 415,640
and 518,189 units were outstanding.
RESTRICTED STOCK: We also granted 30,069 and 180,000 shares of restricted stock
in 1999 and 1998, with a weighted average fair value of $32.09 and $27.75. In
September 2000, we accelerated the vesting of 144,000 shares of restricted stock
resulting in compensation expense of $3,039, and cancelled 14,175 shares of
restricted stock. In January 2002, we accelerated 9,536 unvested shares of
restricted stock, resulting in compensation expense of $193. The remaining
shares vested normally. As of January 31, 2003 and 2002, there were no shares of
unvested restricted stock.
At January 31, 2003, approximately 6,391,703 shares are reserved for future
stock option grants pursuant to the Plan.
We apply APB No. 25, "Accounting for Stock Issued to Employees," in measuring
compensation costs under our stock-based compensation programs. Stock options
are issued at the fair market value of the stock at the date of grant.
Accordingly, we recognized no compensation cost for stock options issued under
the plan. For performance share units, we record compensation expense over the
performance period at the fair value of the stock on the date when it is
probable that the employees will earn the units. Restricted stock compensation
expense is based on the market price on the date of grant and is recorded over
the vesting period. Stock-based compensation expense for 2002, 2001 and 2000 was
$1,130, $3,414 and $6,480.
36 NORDSTROM INC. AND SUBSIDIARIES
notes to consolidated
financial statements
Stock option activity for the Nordstrom, Inc. Plan was as follows:
YEAR ENDED JANUARY 31, 2003 2002 2001
------------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- -------- ---------- ---------
Outstanding, beginning of year 10,763,893 $24 8,873,342 $27 8,135,301 $28
Granted 2,423,966 25 3,288,826 19 2,470,169 21
Exercised (350,004) 19 (186,165) 18 (181,910) 20
Cancelled (951,510) 26 (1,212,110) 25 (1,550,218) 28
---------- ----- ---------- ----- ---------- -----
Outstanding, end of year 11,886,345 $25 10,763,893 $24 8,873,342 $27
---------- ----- ---------- ----- ---------- -----
Options exercisable at end of year 5,724,629 $26 4,533,281 $27 3,833,379 $26
---------- ----- ---------- ----- ---------- -----
The following table summarizes information about stock options outstanding for
the Nordstrom, Inc. Plan as of January 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life (Years) Price Shares Price
- --------------- ---------- ------------ --------- --------- ----------
$13 - $22 5,499,006 7 $ 19 2,557,503 $ 20
$23 - $32 4,503,716 7 $ 26 1,716,077 $ 27
$33 - $40 1,883,623 6 $ 36 1,451,049 $ 35
--------- ---------- --- ---- --------- ----
11,886,345 7 $ 25 5,724,629 $ 26
---------- --- ---- --------- ----
Stock option activity for the Nordstrom.com 1999 and 2000 Plans was as follows:
YEAR ENDED JANUARY 31, 2003 2002 2001
------------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- -------- ---------- ---------
Outstanding, beginning of year 3,524,808 $1.73 4,174,950 $1.72 1,373,950 $1.67
Granted 112,500 1.92 41,500 1.92 3,794,931 1.73
Exercised -- -- -- -- (135,000) 1.67
Cancelled (3,637,308) 1.73 (691,642) 1.68 (858,931) 1.68
---------- ----- ---------- ----- ---------- -----
Outstanding, end of year -- $-- 3,524,808 $1.73 4,174,950 $1.72
---------- ----- ---------- ----- ---------- -----
Options exercisable at end of year -- $-- 1,241,104 $1.68 703,750 $1.67
---------- ----- ---------- ----- ---------- -----
NORDSTROM INC. AND SUBSIDIARIES 37
notes to consolidated
financial statements
NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN
In May 2002, our shareholders approved the 2002 Nonemployee Director Stock
Incentive Plan under which we reserved 450,000 shares of our common stock for
issuance to nonemployee directors. The plan authorizes the grant of awards in
the form of restricted shares, stock units, nonqualified stock options or stock
appreciation rights, or any combination of these forms. As of January 31, 2003,
we issued 18,981 shares of common stock for a total expense of $405 and had
431,019 remaining shares available for issuance.
NORDSTROM.COM
Nordstrom.com had two stock option plans, the "1999 Plan" and the "2000 Plan,"
as well as warrants issued to vendors in exchange for services. In the third
quarter of 2002, we purchased 3,608,322 options and 470,000 warrants in
connection with the purchase of the minority interest in Nordstrom.com (see Note
21) for a total cash payment of $11,802. At January 31, 2003, there are no
outstanding options or warrants for Nordstrom.com.
EMPLOYEE STOCK PURCHASE PLAN
We offer an Employee Stock Purchase Plan ("ESPP") as a benefit to our employees.
Employees participate through payroll deductions in amounts related to their
base compensation. At the end of each offering period, the participants purchase
shares at 85% of the lower of the fair market value at the beginning or the end
of the offering period, usually six months. Under the ESPP, we issued 596,351,
541,677 and 165,842 shares in 2002, 2001 and 2000. As of January 31, 2003 and
2002, we had payroll deductions totaling $3,000 and $2,641 for the purchase of
shares. We have 2,196,130 shares available for issuance at January 31, 2003.
PACESETTER STOCK PLAN
We granted 10,653, 6,687 and 100 shares of common stock to key employees under
the Pacesetters stock plan in 2002, 2001 and 2000. The Pacesetter stock plan was
established in 1997 to provide additional incentive to employees, officers,
consultants or advisors to promote the success of the business. The related
expense of $240, $130 and $2 was recorded in 2002, 2001 and 2000. As of January
31, 2003, we have 11,055 shares available for issuance.
GRANTS TO EXECUTIVE OFFICERS
Options and performance share units granted to our president and four other most
highly compensated individuals were 8.3%, 7.9% and 3.4% as a percent of total
options and performance share units granted in 2002, 2001 and 2000.
SFAS NO. 123
If we had elected to recognize compensation cost based on the fair value of the
options and shares at grant date as prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation," net earnings and earnings per share would have been
the pro forma amounts shown below:
YEAR ENDED JANUARY 31, 2003 2002 2001
-------- --------- ---------
Net earnings, as reported $ 90,224 $ 124,688 $ 101,918
Incremental stock-based
compensation expense under
fair value, net of tax (19,674) (17,252) (13,458)
-------- --------- ---------
Pro forma net earnings $ 70,550 $ 107,436 $ 88,460
-------- --------- ---------
Earnings per share:
Basic--as reported $ 0.67 $ 0.93 $ 0.78
Basic--pro forma $ 0.52 $ 0.80 $ 0.68
Diluted--as reported $ 0.66 $ 0.93 $ 0.78
Diluted--pro forma $ 0.52 $ 0.80 $ 0.67
-------- --------- ---------
The Black-Scholes method was used to estimate the fair value of the options at
grant date based on the following factors:
YEAR ENDED JANUARY 31, 2003 2002 2001
------ ------ ------
Stock Options:
Risk-free interest rate 4.3% 4.8% 6.4%
Volatility 69.0% 68.0% 65.0%
Dividend yield 1.5% 1.3% 1.0%
Expected life in years 5.0 5.0 5.0
------ ------ ------
Weighted-average fair value
at grant date $ 14 $ 10 $ 12
------ ------ ------
ESPP:
Risk-free interest rate 1.9% 4.3% 6.0%
Volatility 69.0% 68.0% 65.0%
Dividend yield 1.5% 1.3% 1.0%
Expected life in years 0.5 0.5 0.5
------ ------ ------
Weighted-average fair value
at grant date $ 7 $ 5 $ 6
------ ------ ------
38 NORDSTROM INC. AND SUBSIDIARIES
notes to consolidated
financial statements
For Nordstrom.com, we used the following weighted-average assumptions:
YEAR ENDED JANUARY 31, 2003 2002 2001
----- -------- ---------
Risk-free interest rate -- 4.5% 6.2%
Volatility -- 127.0% 121.0%
Dividend yield -- 0.0% 0.0%
Expected life in years -- 4.0 4.0
----- -------- ---------
Weighted-average fair value
at grant date -- $ 1.56 $ 1.39
----- -------- ---------
NOTE 18: SUPPLEMENTARY CASH FLOW INFORMATION
We capitalize certain property, plant and equipment during the construction
period of commercial buildings which is subsequently derecognized and reclassed
to prepaid rent or deferred lease credits. We also had noncash activity related
to the construction of our corporate office building. The noncash activity is as
follows:
YEAR ENDED JANUARY 31, 2003 2002 2001
-------- -------- ----
Noncash activity:
Reclassification
of new stores $ 61,792 $ 75,555 --
Corporate office construction (3,951) 36,120 --
-------- -------- ----
Supplementary cash flow information includes the following:
YEAR ENDED JANUARY 31, 2003 2002 2001
------- ------- -------
Cash paid during the year for:
Interest (net of
capitalized interest) $84,898 $77,025 $58,190
Income taxes 48,386 80,689 88,911
------- ------- -------
NOTE 19: SEGMENT REPORTING
We have four segments: Retail Stores, Credit Operations, Catalog/Internet, and
Corporate and Other.
The Retail Stores segment derives its revenues from sales of high-quality
apparel, shoes and accessories. It includes our full-line, Nordstrom Rack and
Faconnable stores as well as our product development group, which coordinates
the design and production of private label merchandise sold in our retail
stores.
The Credit Operations segment revenues consist primarily of finance charges
earned through issuance of the Nordstrom private label and VISA credit cards.
The Catalog/Internet segment generates revenues from direct mail catalogs and
the Nordstrom.com website.
We use the same measurements to compute net earnings for reportable segments as
we do for the consolidated company. The accounting policies of the operating
segments are the same as those described in the summary of significant
accounting policies in Note 1.
NORDSTROM INC. AND SUBSIDIARIES 39
notes to consolidated
financial statements
The following tables set forth the information for our reportable segments and a
reconciliation to the consolidated totals:
Retail Credit Catalog/ Corporate
YEAR ENDED JANUARY 31, 2003 Stores Operations Internet and Other Eliminations TOTAL
---------- ---------- ---------- ---------- ------------ ----------
Revenues from external
customers (b) $5,704,795 -- $ 270,281 -- -- $5,975,076
Service charge income -- $ 133,587 -- -- -- 133,587
Intersegment revenues 29,737 32,783 -- -- $ (62,520) --
Interest expense, net 191 23,582 972 $ 57,176 -- 81,921
Depreciation and amortization 201,861 3,212 4,977 23,881 -- 233,931
Earnings before taxes and cumulative
effect of accounting change 442,115 21,194 (13,565) (254,120) -- 195,624
Net earnings (loss) 256,339 12,929 (8,275) (170,769) -- 90,224
Assets (a)(b) 2,677,790 750,510 97,853 570,223 -- 4,096,376
Capital expenditures 230,864 2,058 4,507 90,737 -- 328,166
---------- ---------- ---------- ---------- ---------- ----------
Retail Credit Catalog/ Corporate
YEAR ENDED JANUARY 31, 2002 Stores Operations Internet and Other Eliminations TOTAL
---------- ---------- ---------- ---------- ------------ ----------
Revenues from external
customers (b) $5,356,875 -- $ 277,255 -- -- $5,634,130
Service charge income -- $ 131,267 -- -- -- 131,267
Intersegment revenues 20,192 25,514 -- -- $ (45,706) --
Interest expense, net 994 25,013 77 $ 48,954 -- 75,038
Depreciation and amortization 182,960 2,253 5,498 22,378 -- 213,089
Amortization of intangible assets 4,630 -- -- -- -- 4,630
Earnings before taxes 402,299 10,652 (8,139) (200,324) -- 204,488
Net earnings (loss) 245,305 6,495 (4,963) (122,149) -- 124,688
Assets (a)(b) 2,570,375 699,454 69,457 711,893 -- 4,051,179
Capital expenditures 379,819 2,054 2,554 11,621 -- 396,048
---------- ---------- ---------- ---------- ---------- ----------
Retail Credit Catalog/ Corporate
YEAR ENDED JANUARY 31, 2001 Stores Operations Internet and Other Eliminations TOTAL
---------- ---------- ---------- ---------- ------------ ----------
Revenues from external
customers (b) $5,217,889 -- $ 310,648 -- -- $5,528,537
Service charge income -- $ 135,337 -- -- -- 135,337
Intersegment revenues 30,294 12,440 -- -- $ (42,734) --
Interest expense, net 795 29,267 (604) $ 33,240 -- 62,698
Depreciation and amortization 176,758 1,786 7,552 16,952 -- 203,048
Amortization of intangible assets 1,251 -- -- -- -- 1,251
Earnings before taxes 440,212 18,851 (29,367) (262,678) -- 167,018
Net earnings (loss) 268,627 11,503 (17,920) (160,292) -- 101,918
Assets (a)(b) 2,557,616 703,077 68,010 279,800 -- 3,608,503
Intangible assets 143,473 -- -- -- -- 143,473
Capital expenditures 295,834 3,095 5,187 26,231 -- 330,347
---------- ---------- ---------- ---------- ---------- ----------
(a) Segment assets in Corporate and Other include unallocated assets in
corporate headquarters, consisting primarily of land, buildings and equipment,
and deferred tax assets.
(b) Includes sales of foreign operations of $75,645 and $68,487 for the years
ended January 31, 2003 and 2002, and $12,318 for the period from October 24,
2000, the date of acquisition, to January 31, 2001, and assets of $219,861,
$198,689 and $206,601 as of January 31, 2003, 2002 and 2001.
40 NORDSTROM INC. AND SUBSIDIARIES
notes to consolidated
financial statements
NOTE 20: RESTRUCTURINGS, IMPAIRMENTS AND OTHER ONE-TIME CHARGES
The following table provides a summary of restructuring, impairments and other
charges:
YEAR ENDED JANUARY 31, 2003 2002 2001
------- ------- -------
Restructuring - employee
severance $ -- $ 1,791 $ --
Management severance -- -- 13,000
Asset impairment 15,570 -- 10,227
------- ------- -------
TOTAL CHARGES $15,570 $ 1,791 $23,227
------- ------- -------
In July 2002, we recognized a charge of $15,570 to write-down an IT investment
in a supply chain tool intended to support our manufacturing division. Due to
changes in business strategy, we determined that this asset was impaired. This
charge to the Retail Stores segment reduced this asset to its estimated market
value. The charge was recorded in selling, general and administrative expense.
During the year ended January 31, 2002, we streamlined our operations through a
reduction in workforce of approximately 2,600 employees. As a result, we
recorded a restructuring charge of $1,791 in selling, general and administrative
expenses relating to severance for approximately 195 employees. Personnel
affected were primarily located in the corporate center and in full-line stores.
During the year ended January 31, 2001, we recorded an impairment charge of
$10,227, consisting of $9,627 recorded in selling, general and administrative
expenses and $600 in interest expense. Due to changes in business strategy, we
determined that several software projects under development were either impaired
or obsolete. The charges consisted of $6,542 primarily related to the
disposition of transportation management software. Additionally, merchandise
software was written down $3,685 to its estimated fair value. We also accrued
$13,000 for certain severance and other costs related to a change in management.
During the year ended January 31, 2000, we recorded a $10,000 charge in selling,
general and administrative expenses primarily associated with the restructuring
of our information technology services area. The charge consisted of $4,053 in
the disposition of several software projects under development, $2,685 in
employee severance and $1,206 in other miscellaneous costs. Additionally, we
recorded $2,056 related to settlement costs for two lawsuits. The restructuring
included the termination of 50 employees in the information technology
department. At January 31, 2000, $1,452 of the charge remained unpaid.
The following table presents the activity and balances of the reserves
established in connection with the restructuring charges:
YEAR ENDED JANUARY 31, 2003 2002 2001
---- ------- -------
Beginning balance $-- $ 178 $ 1,452
Additions -- 1,791 --
Payments -- (1,890) (1,220)
Adjustments -- (79) (54)
---- ------- -------
ENDING BALANCE $-- $ -- $ 178
---- ------- -------
NOTE 21: NORDSTROM.COM
In May 2002, we paid $70,000 for the outstanding shares of Nordstrom.com, Inc.
series C preferred stock in fulfillment of our put agreement with the minority
interest holders of Nordstrom.com LLC. The excess of the purchase price over the
fair market value of the preferred stock and professional fees resulted in a
one-time charge of $42,736. No tax benefit was recognized, as we do not believe
it is probable that this benefit will be realized. Purchase of the minority
interest of Nordstrom.com also resulted in additional goodwill of $24,057.
In July 2002, we purchased 3,608,322 Nordstrom.com options and 470,000 warrants
for $11,802. We recognized $10,432 of expense related to the purchase of these
options and warrants.
The following table presents the charges associated with the minority interest
purchase and reintegration costs.
YEAR ENDED JANUARY 31, 2003
-------
Excess of the purchase price over the fair market
value of the preferred stock $40,389
Nordstrom.com option/warrant buyback expense 10,432
Professional fees incurred 2,347
-------
TOTAL $53,168
-------
NORDSTROM INC. AND SUBSIDIARIES 41
notes to consolidated
financial statements
NOTE 22: VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
Approximately 30% of our retail square footage is located in the state of
California. At January 31, 2003, the net book value of property located in
California was approximately $263,000. We carry earthquake insurance in all
states with a $50,000 deductible and a $50,000 payout limit per occurrence.
At January 31, 2003 and 2002, approximately 38% and 40% of our receivables were
obligations of customers residing in California. Concentration of the remaining
receivables is considered to be limited due to their geographical dispersion.
NOTE 23: CONTINGENT LIABILITIES
We have been named in various lawsuits and intend to vigorously defend ourself.
While we cannot predict the outcome of these lawsuits, we believe these matters
will not have a material adverse effect on our financial position, results of
operations or cash flows.
COSMETICS. Nordstrom was originally named as a defendant along with other
department store and specialty retailers in nine separate but virtually
identical class action lawsuits filed in various Superior Courts of the State of
California in May, June and July 1998 that have now been consolidated in Marin
County state court. In May 2000, plaintiffs filed an amended complaint naming a
number of manufacturers of cosmetics and fragrances and two other retailers as
additional defendants. Plaintiffs' amended complaint alleges that the retail
price of the "prestige" cosmetics sold in department and specialty stores was
collusively controlled by the retailer and manufacturer defendants in violation
of the Cartwright Act and the California Unfair Competition Act.
Plaintiffs seek treble damages and restitution in an unspecified amount,
attorneys' fees and prejudgment interest, on behalf of a class of all California
residents who purchased cosmetics and fragrances for personal use from any of
the defendants during the period four years prior to the filing of the amended
complaint. Defendants, including us, have answered the amended complaint denying
the allegations. The defendants have produced documents and responded to
plaintiffs' other discovery requests, including providing witnesses for
depositions. Plaintiffs have not yet moved for class certification. Pursuant to
an order of the court, plaintiffs and defendants have participated in mediation
sessions. The California state court has set a status conference for June 2003.
WASHINGTON PUBLIC TRUST ADVOCATES. In early 2002, we were named as one of 30
defendants in Washington Public Trust Advocates, ex rel., et al. v. City of
Spokane, et al., filed in the Spokane County Superior Court, State of
Washington. Plaintiff is a not-for-profit corporation bringing claims on behalf
of the City of Spokane and the Spokane Parking Public Development Authority. The
claims relate to the River Park Square Mall and Garage Project in Spokane,
Washington (the "Project"), which includes a Nordstrom store. The portion of the
complaint applicable to us seeks to recover from us the amount of a Department
of Housing and Urban Development loan made to the developer of the Project.
Damages are sought in the amount of $22.75 million, or a lesser amount to the
extent that the HUD loan proceeds were used for the construction of the store
and not as tenant improvements. Other portions of the complaint seek to
invalidate bonds issued to finance the public parking garage serving the
Project, terminate the lease of the parking garage by the City of Spokane, and
rescind other agreements between the City of Spokane and the developer of the
Project, as well as damages from the developer of the Project in unspecified
amounts. The Complaint also alleges breach of fiduciary duties by various
defendants, including us, to the people of the City of Spokane regarding lack of
disclosures concerning the developer and the Project. By order dated August 9,
2002, the court granted our motion to dismiss us from that lawsuit. Plaintiff
attempted to obtain direct review by the Washington Supreme Court which declined
to hear the case and referred it to the Washington Court of Appeals. The
Washington Court of Appeals has scheduled a hearing on the appeal for April 25,
2003.
OTHER. We are subject to routine litigation incidental to our business. No
material liability is expected.
42 NORDSTROM INC. AND SUBSIDIARIES
notes to consolidated
financial statements
NOTE 24: SELECTED QUARTERLY DATA (UNAUDITED)
YEAR ENDED JANUARY 31, 2003 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
----------- ------------- ------------- ------------- -----------
Net sales $ 1,245,761 $ 1,655,528 $ 1,323,201 $ 1,750,586 $ 5,975,076
Gross profit 421,464 551,263 449,354 581,623 2,003,704
Minority interest purchase
and reintegration costs (42,047) (11,121) -- -- (53,168)
(Loss)/earnings before cumulative
effect of accounting change (11,213) 36,335 18,427 60,034 103,583
Cumulative effect of accounting
change (net of tax) (13,359) -- -- -- (13,359)
Net (loss)/earnings (24,572) 36,335 18,427 60,034 90,224
Basic (loss)/earnings per share (.18) .27 .14 .44 .67
Diluted (loss)/earnings per share (.18) .27 .14 .44 .66
Dividends per share .09 .09 .10 .10 .38
Common stock price
High 26.29 26.87 21.93 22.39 26.87
Low 22.15 16.58 15.06 17.87 15.06
----------- ------------- ------------- ------------- -----------
The per share amounts for the (loss)/earnings before cumulative effect of
accounting change were $(0.08) for basic and diluted in the first quarter, and
$0.77 and $0.76 for basic and diluted for the total year.
YEAR ENDED JANUARY 31, 2002 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
------------- ------------- ------------- ------------- -------------
Net sales $ 1,218,040 $ 1,545,759 $ 1,239,241 $ 1,631,090 $ 5,634,130
Gross profit 419,610 504,851 402,280 541,530 1,868,271
Earnings before income taxes 40,555 63,499 17,095 83,339 204,488
Net earnings 24,755 38,699 10,495 50,739 124,688
Basic earnings per share .18 .29 .08 .38 .93
Diluted earnings per share .18 .29 .08 .38 .93
Dividends per share .09 .09 .09 .09 .36
Common stock price
High 21.17 22.75 22.97 25.50 25.50
Low 15.60 17.00 13.80 14.25 13.80
------------- ------------- ------------- ------------- -------------
Nordstrom, Inc. common stock is traded on the New York Stock Exchange, NYSE
Symbol JWN.
NORDSTROM INC. AND SUBSIDIARIES 43
eleven-year statistical summary
Dollars in thousands except square footage and per share amounts
YEAR ENDED JANUARY 31, 2003 2002 2001 2000
------------- ---------------- ------------- -------------
FINANCIAL POSITION
Customer accounts receivable, net $ 730,081 $ 677,150 $ 699,687 $ 596,020
Merchandise inventories 953,112 888,172 945,687 797,845
Current assets 2,072,618 2,057,111 1,812,982 1,564,648
Current liabilities 870,091 950,138 950,568 866,509
Working capital 1,202,527 1,106,973 862,414 698,139
Working capital ratio 2.38 2.17 1.91 1.81
Land, buildings and equipment, net 1,761,544 1,761,082 1,599,938 1,429,492
Long-term debt, including current portion 1,347,371 1,429,271 1,112,296 804,982
Debt/capital ratio .4955 .5209 .4929 .4249
Shareholders' equity 1,372,057 1,314,488 1,229,568 1,185,614
Shares outstanding 135,444,041 134,468,608 133,797,757 132,279,988
Book value per share 10.13 9.78 9.19 8.96
Total assets 4,096,376 4,051,179 3,608,503 3,062,081
OPERATIONS
Net sales 5,975,076 5,634,130 5,528,537 5,149,266
Gross profit 2,003,704 1,868,271 1,879,021 1,789,506
Selling, general and administrative (1,813,968) (1,722,635) (1,747,048) (1,523,836)
Operating income 189,736 145,636 131,973 265,670
Interest expense, net (81,921) (75,038) (62,698) (50,396)
Write-down of investment -- -- (32,857) --
Minority interest purchase and reintegration costs (53,168) -- -- --
Service charge income and other, net 140,977 133,890 130,600 116,783
Earnings before income taxes and cumulative
effect of accounting change 195,624 204,488 167,018 332,057
Income taxes (92,041) (79,800) (65,100) (129,500)
Earnings before cumulative effect of accounting change 103,583 124,688 101,918 202,557
Cumulative effect of accounting change (net of tax) (13,359) -- -- --
Net earnings 90,224 124,688 101,918 202,557
Basic earnings per share .67 .93 .78 1.47
Diluted earnings per share .66 .93 .78 1.46
Dividends per share .38 .36 .35 .32
Comparable store sales percentage increase (decrease) 1.4% (2.9%) .3% (1.1%)
Net earnings as a percent of net sales 1.51% 2.21% 1.84% 3.93%
Return on average shareholders' equity 6.72% 9.80% 8.44% 16.29%
Sales per square foot for Company-operated stores 319 321 342 350
STORES 166 156 140 104
TOTAL SQUARE FOOTAGE 18,428,000 17,048,000 16,056,000 14,487,000
44 NORDSTROM INC. AND SUBSIDIARIES
1999 1998 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 567,661 $ 641,862 $ 693,123 $ 874,103 $ 655,715 $ 565,151 $ 584,379
750,269 826,045 719,919 626,303 627,930 585,602 536,739
1,668,689 1,613,492 1,549,819 1,612,776 1,397,713 1,314,914 1,219,844
794,490 979,031 795,321 833,443 693,015 631,064 516,397
874,199 634,461 754,498 779,333 704,698 683,850 703,447
2.10 1.65 1.95 1.94 2.02 2.08 2.36
1,378,006 1,252,513 1,152,454 1,103,298 984,195 845,596 824,142
868,234 420,865 380,632 439,943 373,910 438,574 481,945
.4214 .3194 .2720 .3232 .2575 .2934 .3337
1,300,545 1,458,950 1,457,084 1,408,053 1,330,437 1,153,594 1,038,649
142,114,167 152,518,104 159,269,954 162,226,288 164,488,196 164,118,256 163,949,594
9.15 9.57 9.15 8.68 8.09 7.03 6.34
3,103,689 2,890,664 2,726,495 2,732,619 2,396,783 2,177,481 2,053,170
5,049,182 4,864,604 4,457,931 4,113,717 3,895,642 3,591,228 3,415,613
1,704,237 1,568,791 1,378,472 1,310,931 1,297,018 1,121,539 1,079,608
(1,429,837) (1,338,235) (1,232,860) (1,136,069) (1,029,856) (940,708) (901,446)
274,400 230,556 145,612 174,862 267,162 180,831 178,162
(47,091) (34,250) (39,400) (39,295) (30,664) (37,646) (44,810)
-- -- -- -- -- -- --
-- -- -- -- -- -- --
110,414 110,907 135,331 134,179 98,311 88,509 86,140
337,723 307,213 241,543 269,746 334,809 231,694 219,492
(131,000) (121,000) (95,227) (106,190) (132,304) (90,804) (84,489)
206,723 186,213 146,316 163,556 202,505 140,890 135,003
-- -- -- -- -- -- --
206,723 186,213 146,316 163,556 202,505 140,890 135,003
1.41 1.20 .90 1.00 1.23 .86 .82
1.41 1.20 .90 1.00 1.23 .86 .82
.30 .265 .25 .25 .1925 .17 .16
(2.7%) 4.0% 0.6% (0.7%) 4.4% 2.7% 1.4%
4.09% 3.83% 3.28% 3.98% 5.20% 3.92% 3.95%
14.98% 12.77% 10.21% 11.94% 16.30% 12.85% 13.73%
362 384 377 382 395 383 381
97 92 83 78 76 74 72
13,593,000 12,614,000 11,754,000 10,713,000 9,998,000 9,282,000 9,224,000
NORDSTROM INC. AND SUBSIDIARIES 45
retail store facilities open
at January 31, 2003
YEAR
SQUARE STORE
LOCATION STORE NAME FOOTAGE OPENED
SOUTHWEST GROUP
ARIZONA
Chandler Chandler Fashion Center 149,000 2001
Scottsdale Scottsdale Fashion Square 235,000 1998
CALIFORNIA
Arcadia Santa Anita 151,000 1994
Brea Brea Mall 195,000 1989
Canoga Park Topanga 154,000 1984
Cerritos Los Cerritos Center 122,000 1981
Corte Madera The Village at Corte Madera 116,000 1985
Costa Mesa South Coast Plaza 235,000 1986
Escondido North County 156,000 1986
Glendale Glendale Galleria 147,000 1983
Los Angeles The Grove 120,000 2002
Los Angeles Westside Pavilion 150,000 1985
Mission Viejo The Shops at Mission Viejo 172,000 1999
Montclair Montclair Plaza 134,000 1986
Palo Alto Stanford Shopping Center 187,000 1984
Pleasanton Stoneridge Mall in Pleasanton 173,000 1990
Redondo Beach The Galleria at South Bay 161,000 1985
Riverside The Galleria at Tyler in Riverside 164,000 1991
Roseville Galleria at Roseville 149,000 2000
Sacramento Arden Fair 190,000 1989
San Diego Fashion Valley 220,000 1981
San Diego Horton Plaza 151,000 1985
San Diego University Towne Centre 130,000 1984
San Francisco San Francisco Shopping Centre 350,000 1988
San Francisco Stonestown Galleria 174,000 1988
San Jose Valley Fair 232,000 2001
San Mateo Hillsdale Shopping Center 149,000 1982
Santa Ana MainPlace/Santa Ana 169,000 1987
Santa Barbara Paseo Nuevo in Santa Barbara 186,000 1990
Walnut Creek Broadway Plaza in Walnut Creek 193,000 1984
NEVADA
Las Vegas Fashion Show 207,000 2002
EAST COAST GROUP
CONNECTICUT
Farmington Westfarms 189,000 1997
FLORIDA
Boca Raton Town Center at Boca Raton 193,000 2000
Coral Gables Village of Merrick Park 212,000 2002
Orlando The Florida Mall 174,000 2002
Tampa International Plaza 172,000 2001
GEORGIA
Atlanta Perimeter Mall 243,000 1998
Buford Mall of Georgia 172,000 2000
YEAR
SQUARE STORE
LOCATION STORE NAME FOOTAGE OPENED
MARYLAND
Annapolis Annapolis Mall 162,000 1994
Bethesda Montgomery Mall 225,000 1991
Columbia The Mall in Columbia 173,000 1999
Towson Towson Town Center 205,000 1992
NEW JERSEY
Edison Menlo Park 204,000 1991
Freehold Freehold Raceway Mall 174,000 1992
Paramus Garden State Plaza 282,000 1990
Short Hills The Mall at Short Hills 188,000 1995
NEW YORK
Garden City Roosevelt Field 241,000 1997
White Plains The Westchester 219,000 1995
NORTH CAROLINA
Durham The Streets at Southpoint 149,000 2002
PENNSYLVANIA
King of Prussia The Plaza at King of Prussia 238,000 1996
RHODE ISLAND
Providence Providence Place 206,000 1999
VIRGINA
Arlington The Fashion Centre 241,000 1989
at Pentagon City
Dulles Dulles Town Center 148,000 2002
McLean Tysons Corner Center 253,000 1988
Norfolk MacArthur Center 166,000 1999
CENTRAL STATES
ILLINOIS
Chicago Michigan Avenue 271,000 2000
Oak Brook Oakbrook Center 249,000 1991
Schaumburg Woodfield Shopping Center 215,000 1995
Skokie Old Orchard Center 209,000 1994
INDIANA
Indianapolis Circle Centre 216,000 1995
KANSAS
Overland Park Oak Park Mall 219,000 1998
MICHIGAN
Troy Somerset Collection 258,000 1996
MINNESOTA
Bloomington Mall of America 240,000 1992
MISSOURI
Des Peres West County 193,000 2002
OHIO
Beachwood Beachwood Place 231,000 1997
Columbus Easton Town Center 174,000 2001
TEXAS
Dallas Dallas Galleria 249,000 1996
Frisco Stonebriar Centre 149,000 2000
Hurst North East Mall 149,000 2001
46 NORDSTROM INC. AND SUBSIDIARIES
YEAR
SQUARE STORE
LOCATION STORE NAME FOOTAGE OPENED
NORTHWEST GROUP
ALASKA
Anchorage Anchorage 97,000 1975
COLORADO
Broomfield FlatIron Crossing 172,000 2000
Littleton Park Meadows 245,000 1996
OREGON
Portland Clackamas Town Center 121,000 1981
Portland Downtown Portland 174,000 1977
Portland Lloyd Center 150,000 1990
Salem Salem Center 71,000 1980
Tigard Washington Square 189,000 1994
UTAH
Murray Fashion Place 110,000 1981
Orem University Mall 122,000 2002
Salt Lake City Crossroads Plaza 140,000 1980
WASHINGTON
Bellevue Bellevue Square 285,000 1982
Lynnwood Alderwood Mall 127,000 1979
Seattle Downtown Seattle 383,000 1998
Seattle Northgate 122,000 1965
Spokane Spokane 137,000 1999
Tacoma Tacoma Mall 134,000 1966
Tukwila Southcenter 170,000 1968
Vancouver Vancouver 71,000 1977
OTHER
Honolulu, HI Ward Centre Shoes 16,000 2002
Faconnable U.S. (5 boutiques) 46,000
Faconnable International (23 boutiques) 77,000
NORDSTROM RACK GROUP
Chandler, AZ Chandler Festival Rack 37,000 2000
Phoenix, AZ Last Chance 48,000 1995
Scottsdale, AZ Scottsdale Promenade Rack 38,000 2000
Brea, CA Brea Union Plaza Rack 45,000 1999
Chino, CA Chino Spectrum Towne 38,000 2002
Center Rack
Colma, CA Colma Rack 31,000 1987
Costa Mesa, CA Metro Pointe at South 50,000 1997
Coast Rack
Fresno, CA Villaggio Retail Center Rack 32,000 2002
Glendale, CA Glendale Fashion Center Rack 36,000 2000
Long Beach, CA Long Beach CityPlace Rack 33,000 2002
Los Angeles, CA The Promenade at Howard 41,000 2001
Hughes Center Rack
Ontario, CA Ontario Mills Mall Rack 40,000 2002
YEAR
SQUARE STORE
LOCATION STORE NAME FOOTAGE OPENED
Oxnard, CA Esplanade Shopping Center Rack 38,000 2001
Roseville, CA Creekside Town Center Rack 36,000 2001
Sacramento, CA Howe `Bout Arden Center Rack 54,000 1999
San Diego, CA Mission Valley Rack 57,000 1997
San Francisco, CA 555 Ninth Street Retail 43,000 2001
Center Rack
San Jose, CA Westgate Mall Rack 48,000 1998
San Leandro, CA San Leandro Rack 44,000 1990
Woodland Hills, CA Topanga Rack 64,000 1984
Littleton, CO Meadows Marketplace Rack 34,000 1998
Broomfield, CO Flatiron Marketplace Rack 36,000 2001
Buford, GA Mall of Georgia Crossing Rack 44,000 2000
Honolulu, HI Victoria Ward Center Rack 34,000 2000
Northbrook, IL Northbrook Rack 40,000 1996
Oak Brook, IL The Shops at Oak Brook 42,000 2000
Place Rack
Schaumburg, IL Woodfield Rack 45,000 1994
Gaithersburg, MD Gaithersburg Rack 49,000 1999
Towson, MD Towson Rack 31,000 1992
Grand Rapids, MI Centerpointe Mall Rack 40,000 2001
Troy, MI Troy Marketplace Rack 40,000 2000
Bloomington, MN Mall of America Rack 41,000 1998
Las Vegas, NV Silverado Ranch Plaza Rack 33,000 2001
Westbury, NY The Mall at the Source Rack 48,000 1997
Beaverton, OR Tanasbourne Town Center Rack 53,000 1998
Clackamas, OR Clackamas Promenade Rack 28,000 1988
Portland, OR Downtown Portland Rack 19,000 1986
King of Prussia, PA The Overlook at 45,000 2002
King of Prussia Rack
Philadelphia, PA Franklin Mills Mall Rack (1) 43,000 1993
Hurst, TX The Shops at North 40,000 2000
East Mall Rack
Plano, TX Preston Shepard Place Rack 39,000 2000
Salt Lake City, UT Sugarhouse Rack 31,000 1991
Dulles, VA Dulles Town Crossing Rack 41,000 2001
Woodbridge, VA Potomac Mills Rack 46,000 1990
Auburn, WA SuperMall of the Great 48,000 1995
Northwest Rack
Bellevue, WA Factoria Mall Rack 46,000 1997
Lynnwood, WA Golde Creek Plaza Rack 38,000 1999
Seattle, WA Downtown Seattle Rack 42,000 1987
Spokane, WA NorthTown Mall Rack 28,000 2000
(1) Store closed January 26, 2003, however it has been treated as open for the
full year.
NORDSTROM INC. AND SUBSIDIARIES 47
OFFICERS OF THE CORPORATION
AND EXECUTIVE TEAM
Jammie Baugh, 50
Executive Vice President,
Human Resources, Full-line Stores
Laurie M. Black, 44
Executive Vice President
and President, Nordstrom Rack
MEMBER OF EXECUTIVE TEAM
Mark S. Brashear, 41
Executive Vice President
and President, Faconnable
MEMBER OF EXECUTIVE TEAM
James H. Bromley, 39
Executive Vice President and
President, Nordstrom Direct, Inc.
MEMBER OF EXECUTIVE TEAM
Dale Cameron, 54
Executive Vice President,
Corporate Merchandise Manager,
Cosmetics, Full-line Stores
Robert E. Campbell, 47
Vice President, Strategy and Planning,
Treasurer
Linda Toschi Finn, 55
Executive Vice President, Marketing
MEMBER OF EXECUTIVE TEAM
Bonnie M. Junell, 46
Vice President,
Corporate Merchandise Manager,
Point of View and Narrative,
Full-line Stores
Kevin T. Knight, 47
Executive Vice President,
Chairman and Chief Executive
Officer of Nordstrom fsb,
President of Nordstrom Credit, Inc.
MEMBER OF EXECUTIVE TEAM
Michael G. Koppel, 46
Executive Vice President and
Chief Financial Officer
MEMBER OF EXECUTIVE TEAM
Llynn (Len) A. Kuntz, 42
Executive Vice President,
WA/AK Regional Manager,
Full-line Stores
David P. Lindsey, 53
Vice President, Store Planning
David L. Mackie, 54
Vice President, Real Estate,
and Corporate Secretary
Robert J. Middlemas, 46
Executive Vice President,
Central States Regional Manager,
Full-line Stores
Jack H. Minuk, 48
Vice President,
Corporate Merchandise Manager,
Women's Shoes, Full-line Stores
Blake W. Nordstrom, 42
President
MEMBER OF EXECUTIVE TEAM
Bruce A. Nordstrom, 69
Chairman of the Board of Directors
Erik B. Nordstrom, 39
Executive Vice President,
Full-line Stores
MEMBER OF EXECUTIVE TEAM
Peter E. Nordstrom, 41
Executive Vice President and
President, Full-line Stores
MEMBER OF EXECUTIVE TEAM
James R. O'Neal, 44
Executive Vice President
and President,
Nordstrom Product Group
MEMBER OF EXECUTIVE TEAM
Suzanne R. Patneaude, 56
Vice President,
Corporate Merchandise Manager,
Designer/Savvy, Full-line Stores
R. Michael Richardson, 46
Vice President and
Chief Information Officer
Karen Bowman Roesler, 47
Vice President, Marketing
Nordstrom Credit Group
K. C. (Karen) Shaffer, 49
Executive Vice President,
Nordstrom Rack
NW Rack Regional Manager
Joel T. Stinson, 53
Executive Vice President and
Chief Administrative Officer
MEMBER OF EXECUTIVE TEAM
Delena M. Sunday, 42
Executive Vice President,
Human Resources and Diversity Affairs
MEMBER OF EXECUTIVE TEAM
Geevy S. K. Thomas, 38
Executive Vice President,
South Regional Manager,
Full-line Stores
48 NORDSTROM INC. AND SUBSIDIARIES
board of directors
BOARD OF DIRECTORS
D. Wayne Gittinger, 70
Partner,
Lane Powell Spears Lubersky LLP
Seattle, Washington
Enrique Hernandez Jr., 47
President and CEO,
Inter-Con Security Systems, Inc.
Pasadena, California
Jeanne P. Jackson, 51
Founder and General Partner,
MSP Capital
Newport, California
John A. McMillan, 71
Retired Co-Chairman
of the Board of Directors
Seattle, Washington
Bruce A. Nordstrom, 69
Chairman of the Board of Directors
Seattle, Washington
John N. Nordstrom, 66
Retired Co-Chairman
of the Board of Directors
Seattle, Washington
Alfred E. Osborne Jr., 58
Director of the Harold Price Center
for Entrepreneurial Studies and
Associate Professor of
Business Economics,
The Anderson School at UCLA
Los Angeles, California
William D. Ruckelshaus, 70
A Strategic Director,
Madrona Venture Group
Seattle, Washington
Stephanie M. Shern, 55
Former Vice Chairman and Partner,
Ernst & Young LLP
Little Falls, New Jersey
Bruce G. Willison, 54
Dean, The Anderson School at UCLA
Los Angeles, California
Alison A. Winter, 56
President, Northeast Personal
Financial Services,
The Northern Trust Corporation
Chicago, Illinois
AUDIT COMMITTEE
Enrique Hernandez Jr., Chair
Jeanne P. Jackson
Alfred E. Osborne Jr.
William D. Ruckelshaus
Stephanie M. Shern
Alison A. Winter
COMPENSATION AND STOCK
OPTION COMMITTEE
Enrique Hernandez Jr.
Jeanne P. Jackson
Alfred E. Osborne Jr.
William D. Ruckelshaus, Chair
Bruce G. Willison
Alison A. Winter
CORPORATE GOVERNANCE
AND NOMINATING COMMITTEE
D. Wayne Gittinger
Enrique Hernandez Jr.
Alfred E. Osborne Jr., Chair
William D. Ruckelshaus
EXECUTIVE COMMITTEE
John A. McMillan
Bruce A. Nordstrom
John N. Nordstrom
FINANCE COMMITTEE
D. Wayne Gittinger
John A. McMillan
John N. Nordstrom
Alfred E. Osborne Jr.
Bruce G. Willison
Alison A. Winter, Chair
shareholder
information
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Seattle, Washington
COUNSEL
Lane Powell Spears Lubersky LLP
Seattle, Washington
TRANSFER AGENT AND REGISTRAR
Mellon Investor Services LLC
P. O. Box 3315
South Hackensack, New Jersey 07606
Telephone (800) 318-7045
TDD for Hearing Impaired (800) 231-5469
Foreign Shareholders (201) 329-8660
TDD Foreign Shareholders (201) 329-8354
GENERAL OFFICES
1617 Sixth Avenue
Seattle, Washington 98101-1742
Telephone (206) 628-2111
ANNUAL MEETING
May 20, 2003 at 11:00 a.m.
Pacific Daylight Time
Nordstrom Downtown Seattle Store
John W. Nordstrom Room, fifth floor
1617 Sixth Avenue
Seattle, Washington 98101-1742
FORM 10-K
The Company's annual report on Form 10-K for the year ended January 31, 2003
will be provided to shareholders upon request to:
Nordstrom, Inc. Investor Relations
P. O. Box 2737
Seattle, Washington 98111
(206) 303-3200
invrelations@nordstrom.com
SHAREHOLDER INFORMATION
Please visit www.nordstrom.com to obtain shareholder information. In addition,
the Company is always willing to discuss matters of concern to shareholders.