Nordstrom 2003 Annual Report Download - page 16

NORDSTROM, INC. and SUBSIDIARIES
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management’s discussion and analysis
Nordstrom is a fashion specialty retailer offering a wide selection of high-
quality apparel, shoes and accessories for women, men and children.
We offer our products through multiple retail channels including our
full-line stores, Nordstrom Rack stores, our catalogs and on the Internet
at www.nordstrom.com.
STRATEGIC PRIORITIES
We remain committed to increasing our market share while achieving
sustained increases in profitability and return on capital. Our core
initiatives to accomplish these goals are as follows:
CORE INITIATIVES
Drive top-line growth – Our single most important goal is to drive and sustain
positive comparable store sales into the future. We believe our ultimate
success in accomplishing this goal will come from continuing to develop
and maintain strong customer relationships by providing superior service
and distinctive merchandise with an emphasis on quality and value. We
are also working to increase sales volume through a combination of
merchandising and productivity initiatives, such as maximizing system
tools to better tailor our store inventories by market.
Complete systems upgrades – Over the past three years we have made
significant information technology investments. They have included the
implementation of our perpetual inventory system which includes a more
sophisticated replenishment system, a warehouse management system
in our distribution centers and our financial system. We are currently rolling
out our “Point of Sale” registers including new Personal Book technology
and installing a new human resources management system. These
additions have been successfully implemented and have not disrupted our
operations. The systems upgrades that we have undertaken are providing
the necessary tools to help us operate more efficiently and compete
more effectively.
Reduce expenses – We believe we have opportunities to reduce our
expenses and achieve greater operating efficiency. Despite incremental
costs associated with information technology and new store investments,
we have lowered our selling, general and administrative expenses as a
percent of sales in each of the last three years. We are pursuing several
additional selling, general and administrative expense reduction opportunities,
including reduced supply chain costs, information technology and non-
selling costs, which we believe will help us achieve our intermediate-term
goal of 28.0% - 28.5% by 2006. Improved operating efficiencies combined
with solid sales performance will generate improved profitability for the
company and our investors.
OVERVIEW
We are pleased to report a year of strong financial performance. Our results
were driven by strong sales momentum, significant gross profit improvement
and modest selling, general and administrative expense improvement resulting
in diluted earnings per share of $1.76.
During 2003, we generated 4-5-4 comparable store sales gains of 4.3%
and total sales gains of 8.6% (see our GAAP sales reconciliation on page
18). In recent years, our sales per square foot have declined as we have
ventured into new markets and opened new stores. This year we saw a
turnaround in that trend as our sales per square foot increased to $327
from $319 last year, in spite of a 4% expansion in our retail square footage.
Gross profit showed significant improvement, increasing to 35.1%
of sales from 33.6% last year. Strong sales and substantially lower
markdowns were the primary drivers of the improvement with lower
shrinkage and improved buying and occupancy expense as a percent to
sales also contributing.
Our expenses as a percent of sales improved for the third year in a row.
In 2003, selling, general and administrative expenses as a percent of
sales were down 0.4% to 30.0%. This decrease is in addition to the 0.2%
improvement we achieved in 2002. While we continue to make progress
in this area, we are still focused on reaching our goal of 28.0% - 28.5%
of sales by 2006.
Pretax margin increased to 6.1% of sales, a level we had not expected to
achieve until 2005. Return on equity increased to 16.15% from a prior year
return of 6.71%. Both pretax margin and return on equity reached their
highest levels in three years. Overall, our diluted earnings per share
increased to $1.76 from $0.66 last year.
Improved profitability and reduced inventory levels contributed to higher
cash levels in 2003. A portion of these funds were used to retire $105.7
million in debt during 2003 and $196.8 million of debt in the first quarter
of 2004, reducing our debt to capital ratio to approximately 39% by the end
of first quarter 2004.