Nordstrom 2007 Annual Report Download

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A N N U A L R E P O R T 2 0 0 7
Nordstrom, Inc. Annual Report
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Table of contents

  • Page 1
    ANNUAL REPORT 2007 Nordstrom, Inc. Annual Report 07 20

  • Page 2

  • Page 3
    ... comparable store growth of 7.5%. Around mid-year, the market slowed dramatically and our comparable store sales growth was only 0.5%. While we managed our operating expenses well throughout the year, inventories increased in the third and fourth quarters, at about the same time the economy...

  • Page 4
    ... our Nordstrom Rack stores. The division had another successful year with an 8.7% comparable sales increase in 2007, on top of a double-digit increase in the prior year. Every decision made and dollar spent by our company revolves around the customer. One long-term initiative that began in response...

  • Page 5
    ... Design in New York, Otis College of Art and Design in Los Angeles and the Academy of Art University in San Francisco - to create opportunities for promising young designers in our product development area. While there may be current economic issues faced by the industry and our customers, we feel...

  • Page 6
    ... growth have come changes in operations, technology and merchandise strategies. Yet, as processes and tools evolve to become more sophisticated, the essence that makes Nordstrom unique - its focus on serving the customer - remains constant. As a long-time Nordstrom customer, I've seen up close the...

  • Page 7

  • Page 8
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  • Page 9
    ...) Washington (State or other jurisdiction of incorporation or organization) 1617 Sixth Avenue, Seattle, Washington (Address of principal executive offices) 91-0515058 (IRS employer Identification No.) 98101 (Zip code) Registrant's telephone number, including area code: 206-628-2111 Securities...

  • Page 10
    [This page intentionally left blank.] 2

  • Page 11
    ..., Related Shareholder Matters and Issuer Purchases of Equity Securities. Selected Financial Data. Management's Discussion and Analysis of Financial Condition and Results of Operations. Quantitative and Qualitative Disclosures About Market Risk. Financial Statements and Supplementary Data. Changes in...

  • Page 12
    ... are primarily shipped via third-party carriers from our fulfillment center in Cedar Rapids, Iowa. Through our wholly owned federal savings bank, Nordstrom fsb, we offer a private label card, two co-branded Nordstrom VISA credit cards and a debit card for Nordstrom purchases. The credit and debit...

  • Page 13
    ... high level of ethical standards. In addition, as required by the listing standards of the New York Stock Exchange ("NYSE") and the rules of the SEC, we have adopted Codes of Business Conduct and Ethics for our employees, officers and directors ("Codes of Ethics") and Corporate Governance Guidelines...

  • Page 14
    ... plans, our business may suffer. MULTI-CHANNEL STRATEGY EXECUTION In 2005, we started to make changes in our Direct business that better align our online shopping environment and catalog with the customer experience in our full-line stores. These changes included: aligning our Direct merchandise...

  • Page 15
    ... sales, increased employment costs, low employee morale and attendant harm to our business and results of operations. TECHNOLOGY We make investments in information technology to sustain our competitive position. We expect our combined capitalized and expense spend to be approximately $180 each year...

  • Page 16
    ...Ontario, California; Newark, California; Upper Marlboro, Maryland; and Gainesville, Florida, which are utilized by the Retail Stores segment. The Direct segment utilizes one fulfillment center in Cedar Rapids, Iowa, which is owned on leased land. Our administrative offices in Seattle, Washington are...

  • Page 17
    [This page intentionally left blank.] Nordstrom, Inc. and subsidiaries 9

  • Page 18
    ... MISSOURI Des Peres NEVADA Las Vegas NEW JERSEY Edison Freehold Paramus Short Hills NEW YORK Garden City White Plains NORTH CAROLINA Charlotte Durham OHIO Beachwood Columbus Oak Park Mall 219,000 1998 Annapolis Mall Montgomery Mall The Mall in Columbia Towson Town Center 162,000 225,000...

  • Page 19
    ... Plaza Rack Downtown Seattle Rack NorthTown Mall Rack Southcenter Square Rack Square Footage Year Store Opened King of Prussia 238,000 1996 Providence Place 206,000 1999 Barton Creek Square Galleria Dallas NorthPark Center Stonebriar Centre Houston Galleria North East Mall The Shops at La...

  • Page 20
    ... employee shareholders in the Nordstrom 401(k) Plan and Profit Sharing Plan. The high and low sales prices of our common stock and dividends declared for each quarter of 2007 and 2006 are presented in the table below: Common Stock Price 2007 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year...

  • Page 21
    ... quarter is as follows: Total Number of Shares (or Units) Purchased 5.4 5.9 11.3 Average Price Paid Per Share (or Unit) $35.97 $32.91 $34.38 Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs 5.4 5.9 11.3 Maximum Number (or Approximate Dollar Value) of Shares...

  • Page 22
    ...share Dividends per share Return on average shareholders' equity Sales per square foot Financial Position (at year end) Customer accounts receivable, net Investment in asset backed securities Merchandise inventories Current assets Current liabilities Land, buildings and equipment, net Long-term debt...

  • Page 23
    ...profit rate. Our selling, general and administrative rate improved 9 basis points primarily from lower incentives tied to company performance, partially offset by higher bad debt expense. Full year net earnings increased 5.5% as a result of same-store sales increases, the openings of three full-line...

  • Page 24
    ... available-for-sale securities to receivables. Based on past payment patterns, our receivable portfolio was repaid within approximately eight months. During that time, we transitioned the co-branded Nordstrom VISA credit card receivable portfolio to historical cost, net of bad debt allowances, on...

  • Page 25
    ... significant rate expansion in the second half of the year due to strategy changes that brought a sharper focus to our merchandise offering, resulting in more regular price selling and fewer markdowns. For the first time, in 2006 our buying and occupancy costs included expenses related to stock...

  • Page 26
    .... Non-selling labor dollars increased over the prior year, but at a lower rate than our sales growth. Additionally, stock option expense was included in our consolidated statement of earnings for the first time in 2006 as a result of adopting Statement of Financial Accounting Standards 123(R), Share...

  • Page 27
    ... diluted share increased 12.9% as a result of same-store sales increases, the three full-line stores opened since February 2007 and lower incentive costs tied to company performance. These increases were offset by increased markdowns at our full-line stores and higher bad debt expense. Additionally...

  • Page 28
    ...Primary Fashion Rewards Benefits ƒ 2 rewards points per dollar spent at Nordstrom ƒ 1 rewards point per dollar spent outside Nordstrom where Visa cards are accepted ƒ $20 Nordstrom Notes certificate per 2,000 points earned Level 1 benefits plus...ƒ Complimentary in-store/online standard shipping...

  • Page 29
    ... quarter of 2005 which was the result of a change in federal bankruptcy laws. The allowance as a percent of on-balance sheet accounts receivable decreased in 2006, reflecting lower current and expected write-offs. Bad debt expense can be summarized as follows: Fiscal year Private label bad debt...

  • Page 30
    ... of Fashion Rewards in 2007. Without these expenses, operational and marketing expenses as a percent of Credit volume would have decreased. The following table summarizes our accounts receivable and related metrics for the last three fiscal years: Accounts receivable on-balance sheet Accounts...

  • Page 31
    ... 12-month average for accounts payable, accrued salaries, wages and related benefits, other current liabilities and income taxes payable. 4 Based upon the trailing 12-month average of the monthly asset base which is calculated as the trailing 12 months rent expense multiplied by 8. 2 Nordstrom, Inc...

  • Page 32
    ... three full-line stores at Natick Collection in Natick, Massachusetts; Twelve Oaks Mall in Novi, Michigan; and Cherry Creek Shopping Center in Denver, Colorado. We also opened one Rack store at Southcenter Square in Tukwila, Washington. Together these openings increased our gross square footage...

  • Page 33
    ... market conditions and the softer retail environment. We used the note proceeds to pay down our short-term borrowings and repurchase shares. We have the capacity to issue commercial paper under our new dealer agreement that is supported by our unsecured line of credit. During the third quarter...

  • Page 34
    ... 2007, our Board of Directors authorized a $1,500 share repurchase program. In November 2007, our Board of Directors authorized an increase of $1,000 to the share repurchase program. During the second half of 2007, we purchased 28 shares for $1,137 at an average price of $41.05, using the remaining...

  • Page 35
    ... levels of debt is best measured by Adjusted Debt to EBITDAR. Our goal is to manage debt levels at approximately 2.0 times Adjusted Debt to EBITDAR. For 2007, our Adjusted Debt to EBITDAR was 1.8 compared to 1.1 at the end of 2006. The increase was the result of the $988, net of discount, of notes...

  • Page 36
    ... owned federal savings bank, Nordstrom fsb, we offered a private label card and two co-branded Nordstrom VISA credit cards. The private label card receivables were held in a trust, which could issue third-party debt that was secured by the private label receivables; the private label program was...

  • Page 37
    ... time not to exceed $500. This agreement allows us to use the proceeds to fund share repurchases as well as operating cash requirements. Under the terms of the commercial paper agreement, we pay a rate of interest based on, among other factors, the maturity of the issuance and market conditions...

  • Page 38
    ... require management to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. Management does not believe that the assumptions used in these estimates will change significantly...

  • Page 39
    ...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. Management believes the allowance for doubtful accounts is adequate to cover anticipated losses in our credit...

  • Page 40
    ... expense. We manage our net interest rate exposure through our mix of fixed and variable rate borrowings. A portion of our credit card receivables maintains a fixed interest rate. Additionally, a portion of this portfolio is used as convenience by our customers and revolves monthly. The annualized...

  • Page 41
    ... audits conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States). The Audit Committee, which is comprised of five independent directors, meets regularly with our management, our internal auditors and the independent registered public accounting firm...

  • Page 42
    ... Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan...

  • Page 43
    ... changed its method of accounting for stockbased compensation upon adoption of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal...

  • Page 44
    Nordstrom, Inc. Consolidated Statements of Earnings In millions except per share amounts and percentages Fiscal year Net sales Cost of sales and related buying and occupancy costs Gross profit Selling, general and administrative expenses Finance charges and other, net Gain on sale of Façonnable ...

  • Page 45
    ... related benefits Other current liabilities Income taxes payable Current portion of long-term debt Total current liabilities Long-term debt, net Deferred property incentives, net Other liabilities Commitments and contingent liabilities Shareholders' equity: Common stock, no par value: 1,000 shares...

  • Page 46
    ... of tax benefit of $5 Fair value adjustment to investment in asset backed securities, net of tax of $(2) Comprehensive net earnings Cash dividends paid ($0.32 per share) Issuance of common stock for: Stock option plans Employee stock purchase plan Other Repurchase of common stock Balance at January...

  • Page 47
    ... Principal payments on long-term borrowings Increase (decrease) in cash book overdrafts Proceeds from exercise of stock options Proceeds from employee stock purchase plan Excess tax benefit from stock-based payments Cash dividends paid Repurchase of common stock Other, net Net cash provided by (used...

  • Page 48
    ... Financial Statements Dollar and share amounts in millions except per share and per option amounts NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Founded in 1901 as a shoe store in Seattle, today Nordstrom is a fashion specialty retailer that offers customers...

  • Page 49
    ... owned federal savings bank, Nordstrom fsb, we offered a private label card and two co-branded Nordstrom VISA credit cards. The private label card receivables were held in a trust, which could issue third-party debt that was secured by the private label receivables; the private label program was...

  • Page 50
    ..., Inc. Notes to Consolidated Financial Statements Dollar and share amounts in millions except per share and per option amounts On May 1, 2007, we converted the Nordstrom private label cards and co-branded Nordstrom VISA credit card programs into one securitization program, which is accounted for as...

  • Page 51
    ...Program Customers who reach a cumulative purchase threshold when using our Nordstrom private label cards or our co-branded Nordstrom VISA credit cards receive Nordstrom Notes®. These Nordstrom Notes can be redeemed for goods or services in our stores. We estimate the net cost of the Nordstrom Notes...

  • Page 52
    ... use derivative financial instruments to manage our interest rate risks. See Note 8: Long-term debt for a further description of our interest rate swap. Recent Accounting Pronouncements In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements...

  • Page 53
    ... trade receivables also included receivables related to the Façonnable business. Other accounts receivable consist primarily of credit card receivables due from third-party financial institutions and vendor rebates. NOTE 4: INVESTMENT IN ASSET BACKED SECURITIES - CO-BRANDED NORDSTROM VISA CREDIT...

  • Page 54
    ... and 2006 was recorded in depreciation expense. NOTE 6: EMPLOYEE BENEFITS We provide a 401(k) and profit sharing plan for our employees. Our Board of Directors establishes our profit sharing contribution each year. The 401(k) component is funded by voluntary employee contributions and our matching...

  • Page 55
    ... to tax positions in prior periods Gross increase to tax positions in current period Lapse of statute Settlements Balance at February 2, 2008 $21 5 (1) 3 (1) $27 Unrecognized tax benefits related to federal, state and foreign tax positions may decrease by $1 by January 31, 2009, if years close and...

  • Page 56
    ... as follows: Compensation and benefits accruals Accrued expenses Merchandise inventories Securitization Land, buildings and equipment basis and depreciation differences Gift cards and gift certificates Loyalty reward certificates Allowance on accounts receivables Federal benefit of state taxes Other...

  • Page 57
    ...including current maturities, using quoted market prices of the same or similar issues, was $2,514 and $667 at the end of 2007 and 2006. Required principal payments on long-term debt, excluding capital lease obligations and the fair market value of the interest rate swap, are as follows: Fiscal year...

  • Page 58
    ..."), which provides retirement benefits to certain officers and select employees. This plan is non-qualified and does not have a minimum funding requirement. Effective February 3, 2007, we adopted Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension...

  • Page 59
    ... at beginning of year Participant service cost Interest cost Benefits paid Actuarial (gain)/loss Benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Employer contribution Distributions Fair value of plan assets at end of year Underfunded status $98...

  • Page 60
    Nordstrom, Inc. Notes to Consolidated Financial Statements Dollar and share amounts in millions except per share and per option amounts Weighted-average assumptions used to determine benefit obligation and net periodic benefit cost are as follows: Fiscal year Assumption percentages used to determine...

  • Page 61
    ...year Cost of sales and related buying and occupancy costs Selling, general and administrative expenses Total stock-based compensation expense before income tax benefit 2007 $10 16 $26 2006 $12 25 $37 2005 $13 $13 Prior to the adoption of Financial Accounting Standard No. 123(R), Share-Based Payment...

  • Page 62
    ... 2005: Fiscal year Net earnings, as reported Add: stock-based compensation expense included in reported net earnings, net of tax Deduct: stock-based compensation expense determined under fair value, net of tax Pro forma net earnings Earnings per share: Basic-as reported Diluted-as reported Basic-pro...

  • Page 63
    ... 2006 and following, we use the 30-day average closing market price of our common stock leading up to the current period-end date. The price used to issue stock or cash for the performance share units upon vesting is the closing market price of our common stock on the vest date. Nordstrom, Inc. and...

  • Page 64
    ... Purchase Plan ("ESPP") as a benefit to our employees. Employees may make payroll deductions of up to ten percent of their base and bonus compensation. At the end of each six-month offering period, participants may purchase shares of our common stock at 90% of the fair market value on the last day...

  • Page 65
    ...of 64 shares during the three fiscal years ended February 2, 2008. NOTE 16: SEGMENT REPORTING We offer three channels through which our customers can shop: full-line and Rack retail stores and Nordstrom Direct (online and catalog). Our goal is to create an integrated, consistent merchandise offering...

  • Page 66
    Nordstrom, Inc. Notes to Consolidated Financial Statements Dollar and share amounts in millions except per share and per option amounts The following table summarizes net sales by merchandise category: Fiscal year Women's apparel Shoes Men's apparel Cosmetics Women's accessories Children's apparel ...

  • Page 67
    Nordstrom, Inc. Notes to Consolidated Financial Statements Dollar and share amounts in millions except per share and per option amounts The following tables set forth the information for our reportable segments and a reconciliation to the consolidated totals: Fiscal year 2007 Net sales (a) Net sales...

  • Page 68
    Nordstrom, Inc. Notes to Consolidated Financial Statements Dollar and share amounts in millions except per share and per option amounts NOTE 17: SELECTED QUARTERLY DATA (UNAUDITED) Fiscal year 2007 Net sales Same-store sales percentage change Gross profit Earnings before income taxes Net earnings ...

  • Page 69
    ...of this report: Management Responsibility for Financial Information Management's Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Page 33 33 34 Item 9B. Other Information. None. PART III Item 10. Directors, Executive Officers and Corporate...

  • Page 70
    ... year: Security Ownership of Certain Beneficial Owners and Management Equity Compensation Plans Item 13. Certain Relationships and Related Transactions. The information required under this item is included in the following sections of our Proxy Statement for our 2008 Annual Meeting of Shareholders...

  • Page 71
    ... of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Principal Financial Officer: /s/ Principal Executive Officer: Blake W. Nordstrom Blake W. Nordstrom President /s/ Michael...

  • Page 72
    ... change in accounting for stock-based compensation upon adoption of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment), and our report dated March 20, 2008, relating to the effectiveness of Nordstrom, Inc.'s internal control over financial reporting appearing in this Annual...

  • Page 73
    ...ACCOUNTS (Dollars in millions) Column A Column B Balance at beginning of period Description Deducted from related consolidated balance sheet account Allowance for doubtful accounts: Year ended: February 2, 2008 February 3, 2007 January 28, 2006 Reserves Allowance for sales return, net: Year ended...

  • Page 74
    ... between Nordstrom Credit Card Master Note Trust II and Wells Fargo Bank, National Association, as indenture trustee Note purchase agreement, dated as of May 2, 2007, by and between Nordstrom Credit Card Receivables II LLC, Nordstrom fsb, Nordstrom Credit, Inc., Falcon Asset Securitization Company...

  • Page 75
    ...-2 to the Nordstrom 401(k) Plan & Profit Sharing dated January 1, 2004 Commercial Paper Dealer Agreement dated October 2, 1997 between Registrant and Bancamerica Securities, Inc. Commercial Paper Agreement dated October 2, 1997 between Registrant and Credit Suisse First Boston Corporation 10.5 10...

  • Page 76
    ...Press release dated November 19, 2007 announcing that its Board of Directors authorized a $1.0 billion share repurchase program 10.23 Director Compensation Summary 10.24 Nordstrom, Inc. Employee Stock Purchase Plan (2006 Restatement) Incorporated by reference from the Registrant's Form 8-K filed on...

  • Page 77
    ... 30, 1991 between Registrant and Nordstrom National Credit Bank, dated May 1, 2007 Filed herewith electronically 10.38 Forms of Notice of 1999 Stock Option Grant and Stock Option Agreements under Filed herewith electronically the Nordstrom, Inc. 1997 Equity Incentive Plan 10.39 Form of Notice of...

  • Page 78
    ..., dated as of May 1, 2007, by and between Nordstrom Credit Card Master Note Trust II, as issuer, and Nordstrom fsb, as administrator 10.55 Form of 2005 Performance Share Unit Notice and Performance Share Unit Award Agreement 10.56 Amendment 2006-1 to the Nordstrom, Inc. Leadership Separation Plan 21...

  • Page 79
    Executive Officers Laurie M. Black, 49 Executive Vice President, General Merchandise Manager, Cosmetics Division Paul F. Favaro, 50 Executive Vice President, Strategy and Development Linda Toschi Finn, 60 Executive Vice President, Marketing James A. Howell, 42 Vice President, Finance Lisa G. ...

  • Page 80
    Board of Directors and Committees Board of Directors Phyllis J. Campbell, 56 President and CEO, The Seattle Foundation Seattle, Washington Enrique Hernandez, Jr., 52 Nordstrom, Inc. Chairman of the Board President and CEO, Inter-Con Security Systems, Inc. Pasadena, California Jeanne P. Jackson, 56 ...

  • Page 81
    ... Company's annual report on Form 10-K for the year ended February 2, 2008 will be provided to shareholders upon request to: Nordstrom, Inc. Investor Relations P. O. Box 2737 Seattle, Washington 98111 (206) 303-3200 [email protected] Shareholder Information Additional shareholder information...

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