JWN-Q1 2015-10Q
Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 2015
or
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to___________
Commission File Number: 001-15059
NORDSTROM, INC.
(Exact name of registrant as specified in its charter)
 
Washington
 
91-0515058
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1617 Sixth Avenue, Seattle, Washington
 
98101
(Address of principal executive offices)
 
(Zip Code)
206-628-2111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o  (Do not check if a smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
Common stock outstanding as of May 27, 2015: 190,533,690 shares
 
 

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NORDSTROM, INC.
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 

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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in millions except per share amounts)
(Unaudited)
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
Net sales
$
3,115

 
$
2,837

Credit card revenues
100

 
94

Total revenues
3,215

 
2,931

Cost of sales and related buying and occupancy costs
(1,999
)
 
(1,822
)
Selling, general and administrative expenses
(971
)
 
(844
)
Earnings before interest and income taxes
245

 
265

Interest expense, net
(33
)
 
(35
)
Earnings before income taxes
212

 
230

Income tax expense
(84
)
 
(90
)
Net earnings
$
128

 
$
140

 
 
 
 
Earnings per share:
 
 
 
Basic
$
0.67

 
$
0.74

Diluted
$
0.66

 
$
0.72

 
 
 
 
Weighted-average shares outstanding:
 
 
 
Basic
190.6

 
189.8

Diluted
194.9

 
192.7

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Amounts in millions)
(Unaudited)
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
Net earnings
$
128

 
$
140

Postretirement plan adjustments, net of tax
2

 
1

Foreign currency translation adjustment
5

 
1

Comprehensive net earnings
$
135

 
$
142

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.


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NORDSTROM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
(Unaudited)
 
May 2, 2015
 
January 31, 2015
 
May 3, 2014
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
769

 
$
827

 
$
1,015

Accounts receivable, net
2,266

 
2,306

 
2,167

Merchandise inventories
2,017

 
1,733

 
1,698

Current deferred tax assets, net
256

 
256

 
238

Prepaid expenses and other
110

 
102

 
89

Total current assets
5,418

 
5,224

 
5,207

 
 
 
 
 
 
Land, property and equipment (net of accumulated depreciation of $4,793, $4,698 and $4,502)
3,445

 
3,340

 
3,011

Goodwill
447

 
435

 
175

Other assets
252

 
246

 
240

Total assets
$
9,562

 
$
9,245

 
$
8,633

 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
1,573

 
$
1,328

 
$
1,347

Accrued salaries, wages and related benefits
312

 
416

 
295

Other current liabilities
1,057

 
1,048

 
982

Current portion of long-term debt
8

 
8

 
7

Total current liabilities
2,950

 
2,800

 
2,631

 
 
 
 
 
 
Long-term debt, net
3,138

 
3,123

 
3,110

Deferred property incentives, net
540

 
510

 
499

Other liabilities
379

 
372

 
357

 
 
 
 
 
 
Commitments and contingencies (Note 6)

 

 

 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
Common stock, no par value: 1,000 shares authorized; 191.0, 190.1 and 189.3 shares issued and outstanding
2,422

 
2,338

 
1,896

Retained earnings
190

 
166

 
177

Accumulated other comprehensive loss
(57
)
 
(64
)
 
(37
)
Total shareholders' equity
2,555

 
2,440

 
2,036

Total liabilities and shareholders' equity
$
9,562

 
$
9,245

 
$
8,633

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in millions except per share amounts)
(Unaudited)
 
 
 
 
 
 
 
Accumulated 

 
 
 
 
 
 
 
 
 
Other

 
 
 
Common Stock
 
Retained

 
Comprehensive

 
 
 
Shares
 
Amount
 
Earnings

 
Loss

 
Total

Balance at January 31, 2015
190.1

 
$
2,338

 
$
166

 
$
(64
)
 
$
2,440

Net earnings

 

 
128

 

 
128

Other comprehensive earnings

 

 

 
7

 
7

Dividends ($0.37 per share)

 

 
(71
)
 

 
(71
)
Issuance of common stock under stock compensation plans
1.2

 
67

 

 

 
67

Stock-based compensation
0.1

 
17

 

 

 
17

Repurchase of common stock
(0.4
)
 

 
(33
)
 

 
(33
)
Balance at May 2, 2015
191.0

 
$
2,422

 
$
190

 
$
(57
)
 
$
2,555

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated

 
 
 
 
 
 
 
 
 
Other

 
 
 
Common Stock
 
Retained

 
Comprehensive

 
 
 
Shares
 
Amount
 
Earnings

 
Loss

 
Total

Balance at February 1, 2014
191.2

 
$
1,827

 
$
292

 
$
(39
)
 
$
2,080

Net earnings

 

 
140

 

 
140

Other comprehensive earnings

 

 

 
2

 
2

Dividends ($0.33 per share)

 

 
(63
)
 

 
(63
)
Issuance of common stock under stock compensation plans
1.3

 
54

 

 

 
54

Stock-based compensation

 
15

 

 

 
15

Repurchase of common stock
(3.2
)
 

 
(192
)
 

 
(192
)
Balance at May 3, 2014
189.3

 
$
1,896

 
$
177

 
$
(37
)
 
$
2,036

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
Operating Activities
 
 
 
Net earnings
$
128

 
$
140

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization expenses
137

 
118

Amortization of deferred property incentives and other, net
(22
)
 
(18
)
Deferred income taxes, net
(10
)
 
(16
)
Stock-based compensation expense
19

 
13

Tax benefit from stock-based compensation
10

 
4

Excess tax benefit from stock-based compensation
(10
)
 
(5
)
Bad debt expense
10

 
15

Change in operating assets and liabilities:
 
 
 
Accounts receivable
16

 
(16
)
Merchandise inventories
(248
)
 
(184
)
Prepaid expenses and other assets
(11
)
 
(2
)
Accounts payable
239

 
131

Accrued salaries, wages and related benefits
(106
)
 
(98
)
Other current liabilities
1

 
105

Deferred property incentives
50

 
22

Other liabilities
5

 
8

Net cash provided by operating activities
208

 
217

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(259
)
 
(174
)
Change in credit card receivables originated at third parties
16

 
12

Other, net
4

 
(3
)
Net cash used in investing activities
(239
)
 
(165
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from long-term borrowings, net of discounts
16

 
8

Principal payments on long-term borrowings
(2
)
 
(2
)
Decrease in cash book overdrafts
(10
)
 
(21
)
Cash dividends paid
(71
)
 
(63
)
Payments for repurchase of common stock
(28
)
 
(207
)
Proceeds from issuances under stock compensation plans
58

 
50

Excess tax benefit from stock-based compensation
10

 
5

Other, net

 
(1
)
Net cash used in financing activities
(27
)
 
(231
)
 
 
 
 
Net decrease in cash and cash equivalents
(58
)
 
(179
)
Cash and cash equivalents at beginning of period
827

 
1,194

Cash and cash equivalents at end of period
$
769

 
$
1,015

 
 
 
 
Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net of refunds
$
57

 
$
5

Interest, net of capitalized interest
30

 
33

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and per unit amounts)
(Unaudited)


NOTE 1: BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the balances of Nordstrom, Inc. and its subsidiaries (the "Company"). All intercompany transactions and balances are eliminated in consolidation. The interim condensed consolidated financial statements have been prepared on a basis consistent in all material respects with the accounting policies described and applied in our 2014 Annual Report on Form 10-K ("Annual Report"), and reflect all adjustments of a normal recurring nature that are, in management's opinion, necessary for the fair presentation of the results of operations, financial position and cash flows for the periods presented.
The condensed consolidated financial statements as of and for the periods ended May 2, 2015 and May 3, 2014 are unaudited. The condensed consolidated balance sheet as of January 31, 2015 has been derived from the audited consolidated financial statements included in our 2014 Annual Report. The interim condensed consolidated financial statements should be read together with the consolidated financial statements and related footnote disclosures contained in our 2014 Annual Report.
The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates and assumptions.
Our business, like that of other retailers, is subject to seasonal fluctuations. Due to our Anniversary Sale in July and the holidays in the fourth quarter, our sales are typically higher in the second and fourth quarters than in the first and third quarters of the fiscal year. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.
NOTE 2: TRUNK CLUB ACQUISITION
On August 22, 2014, we acquired 100% of the outstanding equity of Trunk Club, a personalized clothing service for men. The purchase price of $357 was partially offset by $46 attributable to Trunk Club employee stock awards that are subject to ongoing vesting requirements and are recorded as compensation expense. Of the purchase price consideration, $35 represents an indemnity holdback that will be settled primarily in Nordstrom stock, most of which we expect to settle in the third quarter of fiscal 2015, upon satisfaction of the representations, warranties and covenants subject to the indemnities. We allocated the net purchase price of $311 to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated net purchase price recorded as goodwill. On the acquisition date, we recorded current assets of $21, intangible assets of $59, goodwill of $261, and other non-current assets of $2, offset by net liabilities of $32.
NOTE 3: ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows: 
 
May 2, 2015
 
January 31, 2015
 
May 3, 2014
Credit card receivables:
 
 
 
 
 
Nordstrom Visa credit card receivables
$
1,273

 
$
1,310

 
$
1,301

Nordstrom private label credit card receivables
954

 
974

 
839

Total credit card receivables
2,227

 
2,284

 
2,140

Allowance for credit losses
(70
)
 
(75
)
 
(80
)
Credit card receivables, net
2,157

 
2,209

 
2,060

Other accounts receivable1
109

 
97

 
107

Accounts receivable, net
$
2,266

 
$
2,306

 
$
2,167

1 Other accounts receivable consist primarily of debit card receivables and third-party receivables.

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NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and per unit amounts)
(Unaudited)


Activity in the allowance for credit losses is as follows:
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
Allowance at beginning of period
$
75

 
$
80

Bad debt expense
10

 
15

Write-offs
(19
)
 
(19
)
Recoveries
4

 
4

Allowance at end of period
$
70

 
$
80


Under certain circumstances, we may make modifications to payment terms for a customer experiencing financial difficulties in an effort to help the customer avoid a charge-off or bankruptcy and to maximize our recovery of the outstanding balance. These modifications, which meet the accounting definition of troubled debt restructurings ("TDRs"), include reduced or waived fees and finance charges, and/or reduced minimum payments. Receivables classified as TDRs are as follows:
 
May 2, 2015
 
January 31, 2015
 
May 3, 2014
Credit card receivables classified as TDRs
$
32

 
$
34

 
$
40

Percent of total credit card receivables classified as TDRs
1.4
%
 
1.5
%
 
1.9
%
Credit Quality
The primary indicators of the credit quality of our credit card receivables are aging and delinquency, particularly the levels of account balances delinquent 30 days or more, as these are the accounts most likely to be written off. The following table illustrates the aging and delinquency status of our credit card receivables: 
 
May 2, 2015
 
January 31, 2015
 
May 3, 2014
 
Balance
 
% of total
 
Balance
 
% of total
 
Balance
 
% of total
Current
$
2,108

 
94.6
%
 
$
2,134

 
93.4
%
 
$
2,036

 
95.1
%
1 – 29 days delinquent
80

 
3.6
%
 
103

 
4.5
%
 
70

 
3.3
%
30 days or more delinquent:
 
 
 
 
 
 
 
 
 
 
 
30 – 59 days delinquent
11

 
0.5
%
 
16

 
0.7
%
 
12

 
0.6
%
60 – 89 days delinquent
8

 
0.4
%
 
10

 
0.5
%
 
9

 
0.4
%
90 days or more delinquent
20

 
0.9
%
 
21

 
0.9
%
 
13

 
0.6
%
Total 30 days or more delinquent
39

 
1.8
%
 
47

 
2.1
%
 
34

 
1.6
%
Total credit card receivables
$
2,227

 
100.0
%
 
$
2,284

 
100.0
%
 
$
2,140

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Receivables not accruing finance charges
$
11

 
 
 
$
13

 
 
 
$
11

 
 
Receivables 90 days or more delinquent and still accruing finance charges
13

 
 
 
13

 
 
 
7

 
 
We also evaluate credit quality using FICO credit scores. The following table illustrates the distribution of our credit card receivables across FICO score ranges: 
 
May 2, 2015
 
January 31, 2015
 
May 3, 2014
FICO Score Range1
Balance
 
% of total
 
Balance
 
% of total
 
Balance
 
% of total
801+
$
366

 
16.4
%
 
$
369

 
16.2
%
 
$
366

 
17.1
%
660 – 800
1,375

 
61.8
%
 
1,435

 
62.8
%
 
1,326

 
62.0
%
001 – 659
392

 
17.6
%
 
392

 
17.1
%
 
358

 
16.8
%
Other2
94

 
4.2
%
 
88

 
3.9
%
 
90

 
4.1
%
Total credit card receivables
$
2,227

 
100.0
%
 
$
2,284

 
100.0
%
 
$
2,140

 
100.0
%
1 Credit scores for our credit cardholders are updated at least every 90 days. Amounts listed in the table reflect the most recently obtained credit scores as of the dates indicated.
2 Other consists of amounts not yet posted to customers' accounts and receivables from customers for whom FICO scores are temporarily unavailable.

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NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and per unit amounts)
(Unaudited)


NOTE 4: DEBT AND CREDIT FACILITIES
Debt
A summary of our long-term debt is as follows:
 
May 2, 2015

January 31, 2015

May 3, 2014
Secured
 
 
 
 
 
Series 2011-1 Class A Notes, 2.28%, due October 2016
$
325

 
$
325

 
$
325

Mortgage payable, 7.68%, due April 2020
35

 
36

 
40

Other
9

 
7

 
8

Total secured debt
369

 
368

 
373

 
 
 
 
 
 
Unsecured
 
 
 
 
 
Net of unamortized discount:
 
 
 
 
 
Senior notes, 6.25%, due January 2018
649

 
649

 
649

Senior notes, 4.75%, due May 2020
499

 
499

 
499

Senior notes, 4.00%, due October 2021
499

 
499

 
499

Senior debentures, 6.95%, due March 2028
300

 
300

 
300

Senior notes, 7.00%, due January 2038
146

 
146

 
146

Senior notes, 5.00%, due January 2044
598

 
598

 
596

Other
86

 
72

 
55

Total unsecured debt
2,777

 
2,763

 
2,744

 
 
 
 
 
 
Total long-term debt
3,146

 
3,131

 
3,117

Less: current portion
(8
)
 
(8
)
 
(7
)
Total due beyond one year
$
3,138

 
$
3,123

 
$
3,110

Credit Facilities
As of May 2, 2015, we had total short-term borrowing capacity available for general corporate purposes of $800. In April 2015, we terminated our $800 senior unsecured revolving credit facility that was scheduled to expire in March 2018. We replaced this with a new five-year $800 senior unsecured revolving credit facility ("revolver") that expires in April 2020, with an option to extend for an additional two years. Under the terms of our new revolver, we pay a variable rate of interest and a commitment fee based on our debt rating. The new revolver is available for working capital, capital expenditures and other general corporate purposes. During the first quarter ended 2015, we had no issuances under our commercial paper program and no borrowings under our revolver.
The new revolver requires that we maintain an adjusted debt to earnings before interest, income taxes, depreciation, amortization and rent ("EBITDAR") leverage ratio of less than four times. As of May 2, 2015 and May 3, 2014, we were in compliance with this covenant.
If our U.S. Visa and private label credit card portfolio transaction is consummated, we will be required to pay off the $325 secured Series 2011-1 Class A Notes to provide the receivables free and clear. See Note 11: Subsequent Event for an update with regard to this transaction.



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NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and per unit amounts)
(Unaudited)


NOTE 5: FAIR VALUE MEASUREMENTS
We disclose our financial assets and liabilities that are measured at fair value in our Condensed Consolidated Balance Sheets by level within the fair value hierarchy as defined by applicable accounting standards:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Other observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that cannot be corroborated by market data that reflect the reporting entity's own
assumptions
We did not have any financial assets or liabilities that were measured at fair value on a recurring basis as of May 2, 2015, January 31, 2015 or May 3, 2014.
Financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable and accounts payable and approximate fair value due to their short-term nature. We estimate the fair value of our long-term debt using quoted market prices of the same or similar issues and, as such, this is considered a Level 2 fair value measurement. The following table summarizes the carrying value and fair value estimate of our long-term debt, including current maturities:
 
May 2, 2015
 
January 31, 2015
 
May 3, 2014
Carrying value of long-term debt1
$
3,146

 
$
3,131

 
$
3,117

Fair value of long-term debt
3,606

 
3,693

 
3,547

1 The carrying value of long-term debt includes the remaining unamortized adjustment from our previous effective fair value hedge.
We also measure certain non-financial assets at fair value on a nonrecurring basis, primarily goodwill and long-lived tangible and intangible assets, in connection with periodic evaluations for potential impairment. We recorded no material impairment charges for these assets for the quarters ended May 2, 2015 and May 3, 2014. We estimate the fair value of goodwill and long-lived tangible and intangible assets using primarily unobservable inputs and, as such, these are considered Level 3 fair value measurements.
NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES
Plans for our Manhattan full-line store, which we currently expect to open in late 2018 to 2019, ultimately include owning a condominium interest in a mixed-use tower and leasing certain nearby properties. As of May 2, 2015, we had approximately $125 of fee interest in land, which is expected to convert to the condominium interest once the store is constructed. We have committed to make future installment payments based on the developer meeting pre-established construction and development milestones. In the unlikely event that this project is not completed, the opening may be delayed and we may potentially be subject to future losses or capital commitments in order to complete construction or to monetize our investment in the land.
NOTE 7: SHAREHOLDERS' EQUITY
In February 2013, our Board of Directors authorized a program to repurchase up to $800 of our outstanding common stock, through March 1, 2015. There was $73 of unused capacity upon program expiration. In September 2014, our Board of Directors authorized a new program to repurchase up to $1,000 of our outstanding common stock, through March 1, 2016. During the first quarter ended May 2, 2015, we repurchased 0.4 shares of our common stock for an aggregate purchase price of $33 and had $969 remaining in share repurchase capacity as of May 2, 2015. The actual number and timing of future share repurchases, if any, will be subject to market and economic conditions and applicable Securities and Exchange Commission ("Commission") rules.
Subsequent to quarter end, in May 2015, we declared a quarterly dividend of $0.37 per share, payable in June 2015.

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NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and per unit amounts)
(Unaudited)


NOTE 8: STOCK-BASED COMPENSATION
The following table summarizes our stock-based compensation expense:
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
Stock options
$
9

 
$
10

Acquisition-related stock compensation
5

 
1

Restricted stock units
4

 
2

Performance share units

 
(1
)
Other
1

 
1

Total stock-based compensation expense, before income tax benefit
19

 
13

Income tax benefit
(6
)
 
(4
)
Total stock-based compensation expense, net of income tax benefit
$
13

 
$
9

The following table summarizes our grants:
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
 
Granted
 
Weighted-average grant-date fair value per unit
 
Granted
 
Weighted-average grant-date fair value per unit
Stock options
1.7


$
21

 
1.9

 
$
16

Restricted stock units
0.4

 
78

 
0.4

 
61

NOTE 9: EARNINGS PER SHARE
The computation of earnings per share is as follows:
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
Net earnings
$
128

 
$
140

 
 
 
 
Basic shares
190.6

 
189.8

Dilutive effect of stock options and other
4.3

 
2.9

Diluted shares
194.9

 
192.7

 
 
 
 
Earnings per basic share
$
0.67

 
$
0.74

Earnings per diluted share
$
0.66

 
$
0.72

 
 
 
 
Anti-dilutive stock options and other
1.7

 
4.9


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NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and per unit amounts)
(Unaudited)


NOTE 10: SEGMENT REPORTING
The following tables set forth information for our reportable segments: 
 
 
Retail
 
Corporate/Other
 
Total
Retail
Business1
 
Credit
 
Total
Quarter Ended May 2, 2015
 
 
 
 
 
 
 
 
 

Net sales
 
$
3,191

 
$
(76
)
 
$
3,115

 
$

 
$
3,115

Credit card revenues
 

 

 

 
100

 
100

Earnings (loss) before interest and income taxes
 
286

 
(89
)
 
197

 
48

 
245

Interest expense, net
 

 
(28
)
 
(28
)
 
(5
)
 
(33
)
Earnings (loss) before income taxes
 
286

 
(117
)
 
169

 
43

 
212

Goodwill
 
447



 
447

 

 
447

Assets2
 
5,414


1,746

 
7,160

 
2,402

 
9,562

 
 
 
 
 
 

 
 
 

Quarter Ended May 3, 2014
 
 
 
 
 

 
 
 

Net sales
 
$
2,910

 
$
(73
)
 
$
2,837

 
$

 
$
2,837

Credit card revenues
 

 

 

 
94

 
94

Earnings (loss) before interest and income taxes
 
310

 
(86
)
 
224

 
41

 
265

Interest expense, net
 

 
(31
)
 
(31
)
 
(4
)
 
(35
)
Earnings (loss) before income taxes
 
310

 
(117
)
 
193

 
37

 
230

Goodwill
 
175



 
175

 

 
175

Assets2
 
4,624


1,789

 
6,413

 
2,220

 
8,633

1 Total Retail Business is not a reportable segment, but represents a subtotal of the Retail segment and Corporate/Other, and is consistent with our presentation in Management's Discussion and Analysis of Financial Condition and Results of Operations.
2 Assets in Corporate/Other include unallocated assets in corporate headquarters, consisting primarily of cash, land, property and equipment and deferred tax assets.
The following table summarizes net sales within our reportable segments:
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
Nordstrom full-line stores - U.S.
$
1,699

 
$
1,683

Nordstrom.com
480

 
401

Nordstrom
2,179

 
2,084

Nordstrom Rack
831

 
741

Nordstromrack.com/HauteLook
117

 
78

Other retail1
64

 
7

Total Retail segment
3,191

 
2,910

Corporate/Other
(76
)
 
(73
)
Total net sales
$
3,115

 
$
2,837

1 Other retail includes Trunk Club, our Nordstrom Canada full-line stores and Jeffrey boutiques.


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Table of Contents
NORDSTROM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and per unit amounts)
(Unaudited)


NOTE 11: SUBSEQUENT EVENT
On May 25, 2015, the Company entered into an agreement with TD Bank USA, N.A. ("TD"), who will acquire substantially all of our U.S. Visa and private label credit card portfolio, which totals approximately $2.2 billion. In addition, the two companies have entered into a long-term agreement under which TD will become the exclusive issuer of Nordstrom-branded Visa and private label consumer credit cards to our U.S. customers.
Under the agreement, we will sell our credit card receivables to TD at the time of closing. We will continue to perform account servicing functions, maintaining the current deep integration between our credit and retail operations. We will continue to fund and manage the Nordstrom Rewards loyalty program, Nordstrom debit cards and Nordstrom employee accounts. Under the terms of the program agreement, we will be entitled to receive a substantial portion of net revenue generated by the credit card accounts.
This transaction is subject to regulatory approvals and other customary conditions and is expected to close in the second half of 2015. Upon finalization of the transaction, we may classify the relevant credit card receivables as held for sale, which would result in a gain or loss upon reclassification. Additionally, if a transaction is consummated, we will be required to pay off the $325 secured Series 2011-1 Class A Notes to provide the receivables free and clear.

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except per share and per square foot amounts)

CAUTIONARY STATEMENT
Certain statements in this Quarterly Report on Form 10-Q contain or may suggest "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties, including, but not limited to, anticipated financial outlook for the fiscal year ending January 30, 2016, anticipated annual total and comparable sales rates, anticipated new store openings in existing, new and international markets, anticipated Return on Invested Capital and trends in our operations. Such statements are based upon the current beliefs and expectations of the company's management and are subject to significant risks and uncertainties. Actual future results may differ materially from historical results or current expectations depending upon factors including, but not limited to:
successful execution of our customer strategy, including expansion into new domestic and international markets, acquisitions, investments in our stores and online, our ability to realize the anticipated benefits from growth initiatives and our ability to provide a seamless experience across all channels,
timely completion of construction associated with newly planned stores, relocations and remodels, all of which may be impacted by the financial health of third parties,
our ability to manage the investment opportunities in our online business and our ability to manage related organizational changes,
our ability to maintain relationships with our employees and to effectively attract, develop and retain our future leaders,
effective inventory management, disruptions in our supply chain and our ability to control costs,
the impact of any systems failures, cybersecurity and/or security breaches, including any security breach of our systems or those of a third-party provider that results in the theft, transfer or unauthorized disclosure of customer, employee or company information or compliance with information security and privacy laws and regulations in the event of such an incident,
successful execution of our information technology strategy,
our ability to effectively utilize data in strategic planning and decision making,
efficient and proper allocation of our capital resources,
our ability to successfully close the U.S. Visa and private label credit card portfolio transaction,
our ability to safeguard our reputation and maintain our vendor relationships,
the impact of economic and market conditions and the resultant impact on consumer spending patterns,
our ability to respond to the business environment, fashion trends and consumer preferences, including changing expectations of service and experience in stores and online,
the effectiveness of planned advertising, marketing and promotional campaigns in the highly competitive retail industry,
weather conditions, natural disasters, health hazards, national security or other market disruptions, or the prospects of these events and the resulting impact on consumer spending patterns,
our compliance with applicable banking-related laws and regulations impacting our ability to extend credit to our customers, employment laws and regulations, certain international laws and regulations, other laws and regulations applicable to us, including the outcome of claims and litigation and resolution of tax matters, and ethical standards,
impact of the current regulatory environment and financial system and health care reforms,
compliance with debt covenants, availability and cost of credit, changes in interest rates, debt repayment patterns, personal bankruptcies and bad debt write-offs, and
the timing and amounts of share repurchases by the company, if any, or any share issuances by the company, including issuances associated with option exercises or other matters.
These and other factors, including those factors described in Part I, "Item 1A. Risk Factors" in our 2014 Annual Report on Form 10-K could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances.

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

OVERVIEW
We continue to grow and enhance our retail channels, to provide a best-in-class customer experience focused on speed, convenience and personalization. Because the customer views us simply as Nordstrom, we believe there is tremendous value in building our platform to create a seamless experience that encompasses full-price, off-price, stores and online. While each channel represents a substantial growth opportunity, there are significant synergies to leverage across channels.
Our first quarter performance reflects continued execution of this strategy, achieving sales growth of 9.8% and a comparable sales increase of 4.4%. Key contributors to this growth include:
Expansion into new markets with 5 full-line store openings, including our openings in San Juan, Puerto Rico and in Ottawa, Ontario, Canada in the first quarter of 2015
Continued Nordstrom Rack expansion with 27 openings, including 10 openings in the first quarter of 2015
Outsized growth in our online channels driven by the launch of Nordstromrack.com and expanded merchandise selection at Nordstrom.com
Investments in expanded service and convenience, including our Trunk Club acquisition, enhancements in mobile technologies and expansion of our loyalty program

The growth drivers above, in combination with our expense and inventory discipline, helped us deliver a successful quarter, in-line with our expectations.
We are encouraged with our ongoing roll-out into Canada, which over time represents over a $1 billion sales opportunity. In March, we opened our second Canadian store, in Ottawa, Ontario. This fall, we will open our flagship store in Vancouver, British Columbia, which we expect to be one of our largest volume stores. This effort will also strengthen our capabilities leading to our upcoming flagship stores in Toronto and Manhattan. In addition to six full-line stores announced in Canada, we also look forward to introducing Nordstrom Rack stores in the fall of 2017.
We are excited about our new product offerings, responding to our customers' desire for fresh, relevant brands with the introduction of Charlotte Tilbury, Madewell, Brandy Melville and several others brands offered in our curated pop-in shops. We've experienced outsized growth in our BP, Topshop and Savvy departments, particularly where we've created strong adjacencies in our stores. Topshop continues to be a terrific partnership for us, attracting new and existing customers with on-trend fashion at accessible prices. Based on strong sales performance and customer demand, we plan to expand to roughly 90 doors by the end of the year, from 15 doors three years ago.
Our personalization efforts are another way we elevate the customer experience, making shopping easier and more convenient. We've increased personalization through mobile enhancements, including location-based features and integration of our Nordstrom Rewards loyalty program. Our Rewards program continues to contribute to overall results with 285,000 new accounts in the first quarter and an 11% increase in sales from members.
We are confident in our ability to execute our customer strategy and continue to leverage capabilities across channels to serve customers on their terms. To enhance the customer experience, we continue to make investments in our stores, in our ecommerce and fulfillment capabilities and in technology to support growth. We believe these investments in our customer strategy will help us deliver mid-teens total shareholder returns through high single-digit total sales growth and mid-teens Return on Invested Capital.



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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

RESULTS OF OPERATIONS
Our reportable segments are Retail and Credit. Our Retail segment includes our Nordstrom branded full-line stores and online store, Nordstrom Rack stores, Nordstromrack.com/HauteLook, Trunk Club, Jeffrey and our Last Chance clearance store. For purposes of discussion and analysis of our results of operations of our Retail Business, we combine our Retail segment results with revenues and expenses in the "Corporate/Other" column of Note 10: Segment Reporting in the Notes to Condensed Consolidated Financial Statements (collectively, the "Retail Business"). We analyze our results of operations through earnings before interest and income taxes for our Retail Business and Credit, while interest expense and income taxes are discussed on a total company basis.
Retail Business
Summary
The following table summarizes the results of our Retail Business: 
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
 
Amount
 
% of net sales1
 
Amount
 
% of net sales1
Net sales
$
3,115

 
100.0
%
 
$
2,837

 
100.0
%
Cost of sales and related buying and occupancy costs
(1,997
)
 
(64.1
%)
 
(1,820
)
 
(64.2
%)
Gross profit
1,118

 
35.9
%
 
1,017

 
35.8
%
Selling, general and administrative expenses
(921
)
 
(29.6
%)
 
(793
)
 
(28.0
%)
Earnings before interest and income taxes
$
197

 
6.3
%
 
$
224

 
7.9
%
1 Subtotals and totals may not foot due to rounding.

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

Retail Business Net Sales
In our ongoing effort to enhance the customer experience, we are focused on providing customers with a seamless experience across our channels. While our customers may engage with us through multiple channels, we know they value the overall Nordstrom brand experience and view us simply as Nordstrom, which is ultimately how we view our business. To provide additional transparency into our net sales by channel, we present the following summary of our Retail Business:
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
Net sales by channel:
 
 
 
Nordstrom full-line stores - U.S.
$
1,699

 
$
1,683

Nordstrom.com
480

 
401

Nordstrom
2,179

 
2,084

Nordstrom Rack
831

 
741

Nordstromrack.com/HauteLook
117

 
78

Other retail1
64

 
7

Total Retail segment
3,191

 
2,910

Corporate/Other
(76
)
 
(73
)
Total net sales
$
3,115

 
$
2,837

 
 
 
 
Net sales increase
9.8
%
 
6.8
%
 
 
 
 
Comparable sales increase (decrease) by channel:2
 
 
 
Nordstrom full-line stores - U.S.
0.5
%
 
(1.9
%)
Nordstrom.com
19.8
%
 
33.0
%
Nordstrom
4.2
%
 
3.3
%
Nordstrom Rack
(0.2
%)
 
6.4
%
Nordstromrack.com/HauteLook
51.2
%
 
10.3
%
Total company
4.4
%
 
3.9
%
 
 
 
 
Sales per square foot:3
 
 
 
Total sales per square foot
$
115

 
$
109

4-wall sales per square foot
94

 
93

Full-line sales per square foot - U.S.
83

 
81

Nordstrom Rack sales per square foot
130

 
136

1 Other retail includes Trunk Club, our Nordstrom Canada full-line stores and Jeffrey boutiques.
2 Comparable sales include sales from stores that have been open at least one full year at the beginning of the year. We also include sales from our online channels (Nordstrom.com, Nordstromrack.com/HauteLook) in comparable sales because of the integration with our stores.
3 Sales per square foot is calculated as net sales divided by weighted-average square footage. Weighted-average square footage includes a percentage of year-end square footage for new stores equal to the percentage of the year during which they were open. 4-wall sales per square foot is calculated as sales for our Nordstrom U.S. full-line stores, Nordstrom Rack stores, Jeffrey boutiques, Nordstrom Canada full-line stores, Last Chance and Trunk Club clubhouses divided by their weighted-average square footage.
Total company net sales increased 9.8% for the first quarter ended 2015, compared with the same period in 2014. During the quarter, we opened two full-line stores and 10 Nordstrom Rack stores. Overall comparable sales increased 4.4% for the first quarter ended 2015, driven by growth in our online channels.
Nordstrom net sales, which consist of the U.S. full-line and Nordstrom.com channels, were $2,179 for the first quarter of 2015, an increase of 4.6% compared with the same period in 2014. This increase reflected continued momentum in Nordstrom.com and improvements in our full-line stores. Both the number of items sold and the average selling price increased on a comparable basis for the first quarter of 2015. Top-performing merchandise categories included Women's and Men's Apparel.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

U.S. full-line stores' comparable sales increased 0.5% for the first quarter ended May 2, 2015, compared with the same period in 2014. The top-performing geographic regions for full-line stores for the quarter ended May 2, 2015 were the Northwest and Southeast.
Our online channels continued to experience outsized growth, driven by increased merchandise selection. In the first quarter of 2015, net sales increased 20% at Nordstrom.com and 51% at Nordstromrack.com/HauteLook, compared with the same period in 2014.
Nordstrom Rack net sales increased $90, or 12%, for the first quarter ended May 2, 2015, compared with the same period in 2014, due to the impact of 27 store openings since the first quarter of fiscal 2014. Nordstrom Rack comparable sales decreased 0.2% in the first quarter of 2015. The average selling price increased on a comparable basis, while the number of items sold decreased for the first quarter of 2015. Top-performing merchandise categories included Cosmetics and Shoes. Nordstrom Rack sales per square foot decreased 4.6% due primarily to new store openings.
Retail Business Gross Profit
The following table summarizes the Retail Business gross profit:
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
Retail gross profit1
$
1,118


$
1,017

Retail gross profit as a % of net sales
35.9
%

35.8
%
Ending inventory per square foot
$
73.28

 
$
64.29

Inventory turnover rate2
4.53

 
4.95

1 Retailers do not uniformly record the costs of buying and occupancy and supply chain operations (freight, purchasing, receiving, distribution, fulfillment, etc.) between gross profit and selling, general and administrative expense. As such, our gross profit and selling, general and administrative expenses and rates may not be comparable to other retailers' expenses and rates.
2 Inventory turnover rate is calculated as the trailing 12-months' cost of sales and related buying and occupancy costs (for all segments) divided by the trailing 4-quarter average inventory. Retailers do not uniformly calculate inventory turnover as buying and occupancy costs may be included in selling, general and administrative expenses. As such, our inventory turnover rates may not be comparable to other retailers.
Our Retail gross profit rate increased 10 basis points for the quarter ended May 2, 2015, compared with the quarter ended May 3, 2014. Our Retail gross profit increased $101 for the first quarter of 2015 due primarily to increased sales, partially offset by Nordstrom Rack's accelerated store expansion.
Our inventory turnover rate decreased to 4.53 times for the trailing 12-months ended May 2, 2015, from 4.95 times for the same period in 2014 due to inventory growth. The increase in ending inventory per square foot was due to planned growth across all channels, led by Nordstromrack.com/HauteLook and Nordstrom Rack. Ending inventory includes pack and hold inventory of $201 and $169 on May 2, 2015 and May 3, 2014, which represents strategic purchases of merchandise for upcoming selling seasons. As we continue to grow our online channels, we expect increases in inventory without corresponding increases in square footage.
Retail Business Selling, General and Administrative Expenses 
Retail Business selling, general and administrative expenses ("Retail SG&A") are summarized in the following table:
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
Selling, general and administrative expenses
$
921

 
$
793

Selling, general and administrative expense as a % of net sales
29.6
%
 
28.0
%
Our Retail SG&A rate increased 159 basis points for the quarter ended May 2, 2015 reflecting planned growth initiatives related to Trunk Club, Canada and continuing fulfillment and technology investments. Retail SG&A increased $128 for the quarter ended May 2, 2015 primarily due to an increase in sales and planned expenses related to Trunk Club and Canada.

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

Credit Segment
Summary
The table below provides a detailed view of the operational results of our Credit segment, consistent with Note 10: Segment Reporting in the Notes to Condensed Consolidated Financial Statements. See Note 11: Subsequent Event in the Notes to the Condensed Consolidated Financial Statements for an update with regard to the sale of our U.S. Visa and private label credit card portfolio. In order to better reflect the economic contribution of our credit and debit card program, intercompany merchant fees are also included in the table below, which represent the estimated costs that would be incurred if our cardholders used third-party cards instead of ours.
Interest expense at the Credit segment is equal to the amount of interest related to securitized debt plus an amount assigned to the Credit segment in proportion to the estimated debt and equity needed to fund our credit card receivables. Based on our research, debt as a percentage of credit card receivables for other credit card companies ranges from 70% to 90%. As such, we believe a mix of 80% debt and 20% equity is appropriate, and therefore assign interest expense to the Credit segment as if it carried debt of up to 80% of the credit card receivables.
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
 
Amount
 
Annualized % of average credit card receivables1
 
Amount
 
Annualized % of average credit card receivables1
Credit card revenues
$
100

 
18.7
%
 
$
94

 
18.4
%
Credit expenses
(52
)
 
(9.7
%)
 
(53
)
 
(10.3
%)
Earnings before interest and income taxes2
48

 
9.0
%
 
41

 
8.1
%
Interest expense
(5
)
 
(0.9
%)
 
(4
)
 
(0.9
%)
Intercompany merchant fees
25

 
4.7
%
 
23

 
4.4
%
Credit segment contribution, before income taxes
$
68

 
12.8
%
 
$
60

 
11.7
%
 
 
 
 
 
 
 
 
Credit and debit card volume3:
 
 
 
 
 
 
 
Outside
$
1,053

 
 
 
$
1,051

 
 
Inside
1,269

 
 
 
1,148

 
 
Total volume
$
2,322

 
 
 
$
2,199

 
 
 
 
 
 
 
 
 
 
Average credit card receivables
$
2,134

 
 
 
$
2,044

 
 
1 Subtotals and totals may not foot due to rounding.
2 As presented in Note 10: Segment Reporting in the Notes to Condensed Consolidated Financial Statements.
3 Volume represents sales plus applicable taxes.
Credit Card Revenues
The following is a summary of our Credit card revenues:
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
Finance charge revenue
$
64

 
$
61

Interchange – third-party
22

 
22

Late fees and other revenue
14

 
11

Total Credit card revenues
$
100

 
$
94

Credit card revenues include finance charges, interchange fees, late fees and other revenue. Finance charges represent interest earned on unpaid balances while interchange fees are earned from the use of Nordstrom Visa credit cards at merchants outside of Nordstrom. Late fees are assessed when a credit card account becomes past due. Credit card revenues are recorded net of estimated uncollectible finance charges and fees.
Credit card revenues increased $6 for the quarter ended May 2, 2015, compared with the same period in the prior year, primarily due to a 5.6% increase in total quarterly volume.

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

Credit Expenses
Credit expenses are summarized in the following table:
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
Operational expenses
$
40

 
$
37

Bad debt expense
10

 
15

Occupancy expenses
2

 
1

Total Credit expenses
$
52

 
$
53

Total Credit expenses decreased $1 for the quarter ended May 2, 2015, compared with the same period in the prior year, primarily due to lower bad debt expense resulting from the reduction of our allowance for credit losses by $5 during the first quarter of 2015, partially offset by higher operational costs related to increased credit volume.
Allowance for Credit Losses and Credit Trends
We consider a credit card account delinquent if the minimum payment is not received by the payment due date. Our aging method is based on the number of completed billing cycles during which the customer has failed to make a minimum payment. During the third quarter of 2014, we modified our write-off policy from 150 days past due to 180 days past due to better align with industry practice.
The following table illustrates activity in the allowance for credit losses:
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
Allowance at beginning of period
$
75

 
$
80

Bad debt expense
10

 
15

Write-offs
(19
)
 
(19
)
Recoveries
4

 
4

Allowance at end of period
$
70

 
$
80

 
 
 
 
Annualized net write-offs as a % of average credit card receivables
2.6
%
 
2.9
%
30 days or more delinquent as a % of ending credit card receivables
1.8
%
 
1.6
%
Allowance as a % of ending credit card receivables
3.1
%
 
3.7
%
Intercompany Merchant Fees
Intercompany merchant fees represent the estimated costs that would be incurred if our cardholders used third-party cards in our Nordstrom stores and online. For the quarter ended May 2, 2015, this estimate increased to $25 from $23 for the same period in 2014. This was primarily driven by the increased use of our credit and debit cards in store and online, as reflected by an increase in inside volume as a percent of total volume from 52% in the first quarter of 2014 to 55% in the first quarter of 2015.


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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

Total Company Results
Interest Expense, Net
Interest expense, net of $33 for the first quarter of 2015 remained flat compared with the first quarter of 2014.
Income Tax Expense
Income tax expense is summarized in the following table:
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
Income tax expense
$
84

 
$
90

Effective tax rate
39.8
%
 
39.2
%
The effective tax rate for the quarter ended May 2, 2015 increased compared with the same period in 2014, primarily due to changes in our estimated state tax reserves and non-deductible acquisition related expenses in 2015.
Fiscal Year 2015 Outlook
The Company's annual earnings per diluted share expectations are unchanged, incorporating first quarter results and the impact of share repurchases in the first quarter. Our expectations for fiscal 2015 are as follows:
Net sales
 
7 to 9 percent increase
Comparable sales
 
2 to 4 percent increase
Gross profit1 as a % of net sales
 
5 to 15 basis point decrease
Selling, general and administrative expenses as a % of net sales
 
55 to 65 basis point increase
Earnings per diluted share2
 
$3.65 to $3.80
1 Gross profit is calculated as net sales less cost of sales and related buying and occupancy costs (for all segments).
2 This outlook does not include the impact of any future share repurchases.
Earnings per diluted share growth in the second quarter is expected to be below the full-year outlook range of a 2 percent decrease to a 2 percent increase, primarily due to the ongoing entry into Canada and the acquisition of Trunk Club in the third quarter of 2014.

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

Return on Invested Capital ("ROIC") (Non-GAAP financial measure)
We believe ROIC is a useful financial measure for investors in evaluating the efficiency and effectiveness of our use of capital and believe ROIC is an important component of shareholders' return over the long term. In addition, we incorporate ROIC in our executive incentive compensation measures. For the 12 fiscal months ended May 2, 2015, our ROIC decreased to 12.2% compared with 13.3% for the 12 fiscal months ended May 3, 2014, primarily due to ongoing store expansion and increased technology investments in addition to the acquisition of Trunk Club.
ROIC is not a measure of financial performance under generally accepted accounting principles ("GAAP") and should be considered in addition to, and not as a substitute for, return on assets, net earnings, total assets or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies' methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to ROIC is return on assets. The following is a reconciliation of the components of ROIC and return on assets:
 
12 Fiscal months ended
 
May 2, 2015
 
May 3, 2014
Net earnings
$
709

 
$
728

Add: income tax expense
459

 
454

Add: interest expense
136

 
158

Earnings before interest and income tax expense
1,304

 
1,340

 
 
 
 
Add: rent expense
143

 
131

Less: estimated depreciation on capitalized operating leases1
(76
)
 
(70
)
Net operating profit
1,371

 
1,401

 
 
 
 
Less: estimated income tax expense2
(539
)
 
(538
)
Net operating profit after tax
$
832

 
$
863

 
 
 
 
Average total assets3
$
9,069

 
$
8,490

Less: average non-interest-bearing current liabilities4
(2,806
)
 
(2,492
)
Less: average deferred property incentives3
(510
)
 
(492
)
Add: average estimated asset base of capitalized operating leases5
1,085

 
969

Average invested capital
$
6,838

 
$
6,475

 
 
 
 
Return on assets
7.8
%
 
8.6
%
ROIC
12.2
%
 
13.3
%
1 Capitalized operating leases is our best estimate of the asset base we would record for our leases that are classified as operating if they had met the criteria for a capital lease or we had purchased the property. Asset base is calculated as described in footnote 5 below.
2 Based upon our effective tax rate multiplied by the net operating profit for the 12 fiscal months ended May 2, 2015 and May 3, 2014.
3 Based upon the trailing 12-month average.
4 Based upon the trailing 12-month average for accounts payable, accrued salaries, wages and related benefits and other current liabilities.
5 Based upon the trailing 12-month average of the monthly asset base. The asset base for each month is calculated as the trailing 12 months of rent expense multiplied by eight. The multiple of eight times rent expense is a commonly used method of estimating the asset base we would record for our capitalized operating leases described in footnote 1.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

LIQUIDITY AND CAPITAL RESOURCES
We strive to maintain a level of liquidity sufficient to allow us to cover our seasonal cash needs and to maintain appropriate levels of short-term borrowings. We believe that our operating cash flows, available credit facilities and potential future borrowings are sufficient to finance our cash requirements for the next 12 months and beyond.
Over the long term, we manage our cash and capital structure to maximize shareholder return, maintain our financial position, manage refinancing risk and allow flexibility for strategic initiatives. We regularly assess our debt and leverage levels, capital expenditure requirements, debt service payments, dividend payouts, potential share repurchases and other future investments. We believe that as of May 2, 2015, our existing cash and cash equivalents on-hand of $769, available credit facilities of $800 and potential future operating cash flows and borrowings will be sufficient to fund these scheduled future payments and potential long-term initiatives. Additionally, if a transaction is consummated in regards to our credit card receivables, it will result in additional cash flows. We are currently assessing plans for the use of proceeds in a manner that aligns with our capital allocation approach of returning shareholder value.
For the first quarter ended May 2, 2015, cash and cash equivalents decreased by $58 to $769, primarily due to payments for capital expenditures of $259, partially offset by cash provided by operations of $208.
Operating Activities
Net cash provided by operating activities decreased $9 for the first quarter ended May 2, 2015, compared with the same period in 2014, primarily due to a decrease in net earnings and timing of tax payments.
Investing Activities
Net cash used in investing activities was $239 for the first quarter ended May 2, 2015, compared with net cash used of $165 for the same period in 2014. The increase relates to capital expenditures made to support our customer strategy, including investments in technology, remodels and new stores.
Financing Activities
Net cash used in financing activities was $27 for the first quarter ended May 2, 2015, compared with $231 for the same period in 2014, primarily due to decreased share repurchase activity in the current year. During the first quarter ended May 2, 2015, we made payments of $28 for repurchases of common stock, compared with $207 for the same period in 2014.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

Free Cash Flow (Non-GAAP financial measure)
Free Cash Flow is one of our key liquidity measures, and when used in conjunction with GAAP measures, provides investors with a meaningful analysis of our ability to generate cash from our business. For the first quarter ended 2015, Free Cash Flow decreased to $(116) compared with $(29) for the first quarter ended 2014, primarily due to increased capital expenditures related to new store openings and increased investments in technology.
Free Cash Flow is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, operating cash flows or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies' methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to Free Cash Flow is net cash provided by operating activities. The following is a reconciliation of net cash provided by operating activities to Free Cash Flow:
 
Quarter Ended
 
May 2, 2015
 
May 3, 2014
Net cash provided by operating activities
$
208

 
$
217

Less: capital expenditures
(259
)
 
(174
)
Less: cash dividends paid
(71
)
 
(63
)
Add: change in credit card receivables originated at third parties
16

 
12

Less: change in cash book overdrafts
(10
)
 
(21
)
Free Cash Flow
$
(116
)
 
$
(29
)
 
 
 
 
Net cash used in investing activities
$
(239
)
 
$
(165
)
Net cash used in financing activities
(27
)
 
(231
)

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

Credit Capacity and Commitments
As of May 2, 2015, we had total short-term borrowing capacity available for general corporate purposes of $800. In April 2015, we terminated our $800 senior unsecured revolving credit facility that was scheduled to expire in March 2018. We replaced this with a new five-year $800 senior unsecured revolving credit facility ("revolver") that expires in April 2020, with an option to extend for an additional two years. Under the terms of our new revolver, we pay a variable rate of interest and a commitment fee based on our debt rating. The new revolver is available for working capital, capital expenditures and other general corporate purposes. During the first quarter ended 2015, we had no issuances under our commercial paper program and no borrowings under our revolver.
If our U.S. Visa and private label credit card portfolio transaction is consummated, we will be required to pay off the $325 secured Series 2011-1 Class A Notes to provide the receivables free and clear. See Note 11: Subsequent Event for an update with regard to this transaction.
Impact of Credit Ratings
Under the terms of our revolver, any borrowings we may enter into will accrue interest for Euro-Dollar Rate Loans at a floating base rate tied to LIBOR, for Canadian Dealer Offer Rate Loans at a floating rate tied to CDOR, and for Base Rate Loans at the highest of: (i) the Euro-Dollar rate plus 100 basis points, (ii) the federal funds rate plus 50 basis points and (iii) the prime rate.
The rate depends upon the type of borrowing incurred, plus in each case an applicable margin. This applicable margin varies depending upon the credit ratings assigned to our long-term unsecured debt. At the time of this report, our long-term unsecured debt ratings, outlook and resulting applicable margin were as follows:
 
 
Credit
Ratings
 
Outlook
Moody's
Baa1
 
Stable
Standard & Poor's
A-
 
Stable
 
Base Interest
Rate
 
Applicable
Margin
Euro-Dollar Rate Loan
LIBOR
 
0.91%
Canadian Dealer Offer Rate Loan
CDOR
 
0.91%
Base Rate Loan
various
 
Should the ratings assigned to our long-term unsecured debt improve, the applicable margin associated with any such borrowings may decrease, resulting in a slightly lower borrowing cost under this facility. Should the ratings assigned to our long-term unsecured debt worsen, the applicable margin associated with our borrowings may increase, resulting in a slightly higher borrowing cost under this facility.
Debt Covenant
The new revolver requires that we maintain an adjusted debt to earnings before interest, income taxes, depreciation, amortization and rent ("EBITDAR") leverage ratio of less than four times (see the following additional discussion of Adjusted Debt to EBITDAR).
As of May 2, 2015 and May 3, 2014, we were in compliance with this covenant. We will continue to monitor this covenant and believe that we will remain in compliance with this covenant during the remainder of fiscal 2015.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Dollar and share amounts in millions except per share and per square foot amounts)

Adjusted Debt to EBITDAR (Non-GAAP financial measure)
Adjusted Debt to EBITDAR is one of our key financial metrics, and we believe that our debt levels are best analyzed using this measure. Our goal is to manage debt levels to maintain an investment-grade credit rating and operate with an efficient capital structure. In evaluating our debt levels, this measure provides a reflection of our credit worthiness that could impact our credit rating and borrowing costs. We also have a debt covenant that requires an adjusted debt to EBITDAR leverage ratio of less than four times. As of May 2, 2015 and May 3, 2014, our Adjusted Debt to EBITDAR was 2.1.
Adjusted Debt to EBITDAR is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, debt to net earnings, net earnings, debt or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies' methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to Adjusted Debt to EBITDAR is debt to net earnings. The following is a reconciliation of the components of Adjusted Debt to EBITDAR and debt to net earnings:
 
20151
 
20141
Debt
$
3,146

 
$
3,117

Add: estimated capitalized operating lease liability2
1,147

 
1,045

Less: fair value hedge adjustment included in long-term debt
(33
)
 
(45
)
Adjusted Debt
$
4,260

 
$
4,117

 
 
 
 
Net earnings
$
709

 
$
728

Add: income tax expense
459

 
454

Add: interest expense, net
136

 
157

Earnings before interest and income taxes
1,304

 
1,339

 
 
 
 
Add: depreciation and amortization expenses
526

 
464

Add: rent expense
143

 
131

Add: non-cash acquisition-related charges
14

 
7

EBITDAR
$
1,987

 
$
1,941

 
 
 
 
Debt to Net Earnings
4.4

 
4.3

Adjusted Debt to EBITDAR
2.1

 
2.1

1 The components of Adjusted Debt are as of May 2, 2015 and May 3, 2014, while the components of EBITDAR are for the 12 months ended May 2, 2015 and May 3, 2014.
2 Based upon the estimated lease liability as of the end of the period, calculated as the trailing 12 months of rent expense multiplied by eight. The multiple of eight times rent expense is a commonly used method of estimating the debt we would record for our leases that are classified as operating if they had met the criteria for a capital lease or we had purchased the property.






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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We discussed our interest rate risk and our foreign currency exchange risk in Part II, "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in our 2014 Annual Report on Form 10-K filed with the Commission on March 16, 2015. There have been no material changes to these risks since that time.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
On May 4, 2015, the Company filed a Form 8-K announcing the appointment of Blake Nordstrom, Pete Nordstrom and Erik Nordstrom as co-presidents of Nordstrom, Inc. The three executives retained their current roles and responsibilities following that appointment. In light of those individual responsibilities, Blake Nordstrom continues to serve as the Company's principal executive officer for purposes of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company's Executive Vice President and Chief Financial Officer is the Company's principal financial officer for purposes of the Exchange Act.
 
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company performed an evaluation under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the design and effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective in the timely and accurate recording, processing, summarizing and reporting of material financial and non-financial information within the time periods specified within the Commission's rules and forms. Our principal executive officer and principal financial officer also concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject from time to time to various claims and lawsuits arising in the ordinary course of business, including lawsuits alleging violations of state and/or federal wage and hour and other employment laws, privacy and other consumer-based claims. Some of these lawsuits include certified classes of litigants, or purport or may be determined to be class or collective actions and seek substantial damages or injunctive relief, or both, and some may remain unresolved for several years. We believe the recorded reserves in our condensed consolidated financial statements are adequate in light of the probable and estimable liabilities. As of the date of this report, we do not believe any currently identified claim, proceeding or litigation, either alone or in the aggregate, will have a material impact on our results of operations, financial position or cash flows. Since these matters are subject to inherent uncertainties, our view of them may change in the future.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Repurchases
(Dollar and share amounts in millions, except per share amounts)
The following is a summary of our first quarter share repurchases:
 
Total Number
of Shares
Purchased
 
Average
Price Paid
Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value
of Shares that May
Yet Be Purchased Under
the Plans or Programs1
February 2015
(February 1, 2015 to February 28, 2015)

 
$
75.82

 

 
$
1,073

March 2015
(March 1, 2015 to April 4, 2015)
0.1

 
79.71

 
0.1

 
990

April 2015
(April 5, 2015 to May 2, 2015)
0.3

 
77.45

 
0.3

 
969

Total
0.4

 
$
78.05

 
0.4

 
 
1 In February 2013, our Board of Directors authorized a program to repurchase up to $800 of our outstanding common stock, through March 1, 2015. There was $73 of unused capacity upon program expiration. In September 2014, our Board of Directors authorized a new program to repurchase up to $1,000 of our outstanding common stock, through March 1, 2016.

During the first quarter ended May 2, 2015, we repurchased 0.4 shares of our common stock for an aggregate purchase price of $33 and had $969 remaining in share repurchase capacity as of May 2, 2015. The actual number and timing of future share repurchases, if any, will be subject to market and economic conditions and applicable Commission rules.
Item 6. Exhibits.
Exhibits are incorporated herein by reference or are filed or furnished with this report as set forth in the Index to Exhibits on page 30 hereof.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
NORDSTROM, INC.
(Registrant)
 
 
/s/ Michael G. Koppel
Michael G. Koppel
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 
Date:
June 2, 2015
 

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NORDSTROM, INC.
Index to Exhibits
Exhibit
 
Method of Filing
10.1
 
Revolving Credit Agreement dated April 1, 2015, between Registrant and each of the initial lenders named therein as lenders; Bank of America, N.A. as administrative agent; Wells Fargo Bank, National Association and U.S. Bank, National Association as co-syndication agents; and Fifth Third Bank as managing agent.
 
Incorporated by reference from the Registrant's Form 8-K filed on April 6, 2015
 
 
 
 
 
10.2
 
Nordstrom 401(k) Plan & Profit Sharing, amended and restated on August 6, 2014
 
Filed herewith electronically
 
 
 
 
 
31.1
 
Certification of Co-President required by Section 302(a) of the Sarbanes-Oxley Act of 2002
 
Filed herewith electronically
 
 
 
 
 
31.2
 
Certification of Chief Financial Officer required by Section 302(a) of the Sarbanes-Oxley Act of 2002
 
Filed herewith electronically
 
 
 
 
 
32.1
 
Certification of Co-President and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Furnished herewith electronically
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
Filed herewith electronically
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
Filed herewith electronically
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
Filed herewith electronically
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document
 
Filed herewith electronically
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
Filed herewith electronically
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
Filed herewith electronically
 
 
 
 
 

 

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