Nordstrom 2014 Annual Report Download - page 35

Table of Contents
Nordstrom, Inc. and subsidiaries 35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Dollars in millions
INTEREST RATE RISK
We are exposed to interest rate risk primarily from changes in short-term interest rates. As of January 31, 2015, we had cash and cash
equivalents of $827, which generate interest income at variable rates, and gross credit card receivables of $2,284, which generate finance
charge income at a combination of fixed and variable rates. Interest rate fluctuations can affect our interest income, credit card revenues and
interest expense. See Note 3: Accounts Receivable in Item 8: Financial Statements and Supplementary Data for additional information.
We use sensitivity analyses to measure and assess our interest rate risk exposure. For purposes of presenting the potential earnings effect
of a reasonably possible hypothetical change in interest rates from our reporting date, we utilized two sensitivity scenarios: (i) linear growth of
approximately 225 basis points over the year and (ii) linear decline of approximately 15 basis points over the year, due to the fact that current
interest rates are near historically low levels. Other key parameters and assumptions in our sensitivity analyses include the average cash and
cash equivalents balance, average credit card receivables balance and no new floating rate debt. The first hypothetical scenario would result
in an approximate $15 increase in future earnings, while the second hypothetical scenario would not have a material effect on future
earnings.
For our long-term fixed-rate debt of $3,131, our exposure to interest rate risk is limited to changes in the fair value of our debt. As our debt is
primarily fixed-rate, changes in interest rates do not impact our cash flows. However, changes in interest rates increase or decrease the fair
value of our debt, depending on whether market rates are lower or higher than our fixed-rates. As of January 31, 2015, the fair value of our
fixed-rate debt was $3,693. See Note 8: Debt and Credit Facilities and Note 9: Fair Value Measurements in Item 8: Financial Statements and
Supplementary Data for additional information.
FOREIGN CURRENCY EXCHANGE RISK
The majority of our revenues, expenses and capital expenditures are transacted in U.S. Dollars. Our U.S. operation periodically enters into
merchandise purchase orders denominated in British Pounds or Euros. From time to time, we may use forward contracts to hedge against
fluctuations in foreign currency prices. As of January 31, 2015, our outstanding forward contracts did not have a material impact on our
consolidated financial statements.
As of January 31, 2015, we have opened one full-line store in Canada and have announced plans to open five additional full-line stores in
Canada over the next few years. The functional currency of our Canadian operations is the Canadian Dollar. We translate assets and
liabilities into U.S. Dollars using the exchange rate in effect at the balance sheet date, while we translate revenues and expenses using a
weighted-average exchange rate for the period. We record these translation adjustments as a component of accumulated other
comprehensive loss on the Consolidated Balance Sheets in Item 8: Financial Statements and Supplementary Data. Our Canadian operations
enter into merchandise purchase orders denominated in U.S. Dollars for approximately half of its inventory. As sales in Canada are
denominated in the Canadian Dollar, gross profit for our Canadian operations can be impacted by foreign currency fluctuations.
In addition, our U.S. operations incurred certain expenditures denominated in Canadian Dollars and our Canadian operations incurred certain
expenditures denominated in U.S. Dollars. This activity results in transaction gains and losses that arise from exchange rate fluctuations and
are recorded as gains or losses in the Consolidated Statements of Earnings in Item 8: Financial Statements and Supplementary Data. As of
January 31, 2015, activities associated with foreign currency exchange risk have not had a material impact on our consolidated financial
statements.