Nordstrom 2010 Annual Report Download - page 52

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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 property 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 2010 and 2009, the deferred credit balance was
$553 and $518.
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
Advertising production costs for Internet, magazines, store events and other media are expensed the first time the advertisement is run.
Total advertising expenses, net of vendor allowances, of $114, $85 and $98 in 2010, 2009 and 2008 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 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 2010 2009 2008
Cosmetic selling expenses $118 $106 $112
Purchase price adjustments 96 91 96
Cooperative advertising and promotion 67 63 65
Other 2 2 3
Total vendor allowances $283 $262 $276
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
$133, $103 and $106 in 2010, 2009 and 2008 were included in selling, general and administrative expenses.
Loyalty Program
Customers who use our Nordstrom private label credit or debit card or our Nordstrom VISA credit cards can participate in the Nordstrom Fashion
Rewards® program through which customers accumulate points based on their level of spending. Upon reaching a certain threshold, customers
receive Nordstrom Notes®, which can be redeemed for goods or services in our stores and online. As cardholders increase their level of spending,
they also receive benefits such as free shipping and fashion events. We estimate the net cost of Nordstrom Notes that will be issued and redeemed,
and record this cost as rewards points are accumulated. These costs are recorded in cost of sales given that we provide customers with products
and 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 based on estimates of benefits expected to be accumulated and redeemed.
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.
New Store Opening Costs
Non-capital expenditures associated with opening new stores, including marketing expenses, relocation expenses and temporary occupancy costs,
are charged to expense as incurred. These costs are included in both buying and occupancy costs and selling, general and administrative expenses
according to their nature as disclosed above.