Nordstrom 2009 Annual Report Download - page 49

Nordstrom, Inc. and subsidiaries 41
Nordstrom, Inc.
Notes to Consolidated Financial Statements
Dollar and share amounts in millions except per share, per option and unit amounts
Rent
We recognize minimum rent expense, net of landlord reimbursements, on a straight-line basis over the minimum lease term from the time that we
control the leased property. For leases that contain predetermined, fixed escalations of the minimum rent, we recognize the rent expense on a
straight-line basis and record the difference between the rent expense and the rent payable as a liability. Contingent rental payments, typically
based on a percentage of sales, are recognized in rent expense when payment of the contingent rent is probable.
We receive incentives from landlords to construct stores in certain developments. These incentives are recorded as a deferred credit and recognized as
a reduction of rent expense on a straight-line basis over the lease term. At the end of 2009 and 2008, the deferred credit balance was $518 and $478.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of compensation and benefits costs (other than those included in buying and
occupancy costs), advertising, shipping and handling costs, bad debt expense related to our credit card operations, and other
miscellaneous expenses.
Advertising
Production costs for newspaper, radio and other media are expensed the first time the advertisement is run. Total advertising expenses, net of vendor
allowances, of $85, $98 and $101 in 2009, 2008 and 2007, respectively, were included in selling, general and administrative expenses.
Vendor Allowances
We receive allowances from merchandise vendors for cosmetic selling expenses, purchase price adjustments, cooperative advertising programs and
various other expenses. Allowances for cosmetic selling expenses are recorded in selling, general and administrative expenses as a reduction of the
related costs when incurred. 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 and promotion programs and other expenses are recorded in cost of
sales and related buying and occupancy costs and selling, general and administrative expenses as a reduction of the related costs when incurred.
Any allowances in excess of actual costs incurred that are included in selling, general and administrative expenses are recorded as a reduction of
cost of sales. The following table shows vendor allowances earned during the year:
Fiscal year 2009 2008 2007
Cosmetic selling expenses $106 $112 $120
Purchase price adjustments 91 96 86
Cooperative advertising and promotion 63 65 61
Other 2 3 2
Total vendor allowances $262 $276 $269
Shipping and Handling Costs
Our shipping and handling costs include payments to third-party shippers and costs to hold, move and prepare merchandise for shipment.
These costs do not include inbound freight to our distribution centers, which we include in the cost of our inventory. Shipping and handling costs of
$103, $106 and $87 in 2009, 2008 and 2007, respectively, were included in selling, general and administrative expenses.
Loyalty Program
Customers who spend a certain amount with us using our Nordstrom private label cards or our Nordstrom VISA credit cards receive Nordstrom
Notes®, which can be redeemed for goods or services in our stores. We estimate the net cost of the Nordstrom Notes that will be issued and
redeemed and record this cost as rewards points are accumulated. In addition to this long-standing benefit, in 2007 we launched an enhanced
loyalty program, Fashion Rewards®. Under this program, Nordstrom customers receive benefits such as free alterations based on their annual levels
of spending. We record the cost of the loyalty program benefits for Nordstrom Notes and alterations in cost of sales given that we provide
customers with products or services for these rewards. Other costs of the loyalty program, which primarily include shipping and fashion events, are
recorded in selling, general and administrative expenses. These expenses are recorded based on estimates of benefits expected to be accumulated
and redeemed in relation to sales.
Stock-Based Compensation
We recognize stock-based compensation expense related to stock options at their estimated grant-date fair value, recorded on a straight-line basis over
the requisite service period. The total compensation expense is reduced by estimated forfeitures expected to occur over the vesting period of the award.
We estimate the fair value of stock options granted using the Binomial Lattice option valuation model. Stock-based compensation expense also includes
amounts related to performance share units and our Employee Stock Purchase Plan, based on their fair values as of the end of each reporting period.