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Form 10-Q NORDSTROM INC For: Oct 29

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November 29, 2016 4:49 PM EST

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 October 29, 2016
or
¨
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 ¨
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 ¨
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 the 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 ¨
 
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO þ
Common stock outstanding as of November 23, 2016: 173,342,135 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.
 
 
 
 

2 of 29




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
 
Nine Months Ended
 
October 29, 2016

 
October 31, 2015

 
October 29, 2016

 
October 31, 2015

Net sales

$3,472

 

$3,239

 

$10,255

 

$9,953

Credit card revenues, net
70

 
89

 
186

 
291

Total revenues
3,542

 
3,328

 
10,441

 
10,244

Cost of sales and related buying and occupancy costs
(2,261
)
 
(2,142
)
 
(6,720
)
 
(6,468
)
Selling, general and administrative expenses
(1,029
)
 
(1,031
)
 
(3,143
)
 
(2,999
)
Goodwill impairment
(197
)
 
—

 
(197
)
 
—

Earnings before interest and income taxes
55

 
155

 
381

 
777

Interest expense, net
(30
)
 
(30
)
 
(90
)
 
(94
)
Earnings before income taxes
25

 
125

 
291

 
683

Income tax expense
(35
)
 
(44
)
 
(138
)
 
(263
)
Net (loss) earnings

($10
)
 

$81

 

$153

 

$420

 
 
 
 
 
 
 
 
(Loss) Earnings per share:
 
 
 
 
 
 
 
Basic

($0.06
)
 

$0.43

 

$0.88

 

$2.22

Diluted

($0.06
)
 

$0.42

 

$0.87

 

$2.17

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
173.4

 
187.2

 
173.3

 
189.1

Diluted
173.4

 
191.3

 
175.6

 
193.2

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
 
Nine Months Ended
 
October 29, 2016

 
October 31, 2015

 
October 29, 2016

 
October 31, 2015

Net (loss) earnings

($10
)
 

$81

 

$153

 

$420

Postretirement plan adjustments, net of tax
—

 
2

 
1

 
5

Foreign currency translation adjustment
(9
)
 
—

 
8

 
(5
)
Comprehensive net (loss) earnings

($19
)
 

$83

 

$162

 

$420

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

3 of 29




NORDSTROM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
(Unaudited)
 
October 29, 2016

 
January 30, 2016

 
October 31, 2015

Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents

$531

 

$595

 

$821

Accounts receivable, net
216

 
196

 
215

Merchandise inventories
2,411

 
1,945

 
2,402

Current deferred tax assets, net
—

 
—

 
247

Prepaid expenses and other
227

 
278

 
202

Total current assets
3,385

 
3,014

 
3,887

 
 
 
 
 
 
Land, property and equipment (net of accumulated depreciation of $5,462, $5,108 and $5,020)
3,865

 
3,735

 
3,742

Goodwill
238

 
435

 
447

Other assets
478

 
514

 
510

Total assets

$7,966

 

$7,698

 

$8,586

 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable

$1,653

 

$1,324

 

$1,688

Accrued salaries, wages and related benefits
391

 
416

 
417

Other current liabilities
1,186

 
1,161

 
1,075

Current portion of long-term debt
11

 
10

 
9

Total current liabilities
3,241

 
2,911

 
3,189

 
 
 
 
 
 
Long-term debt, net
2,767

 
2,795

 
2,800

Deferred property incentives, net
532

 
540

 
568

Other liabilities
566

 
581

 
621

 
 
 
 
 
 
Commitments and contingencies (Note 5)

 

 

 
 
 
 
 
 
Shareholders’ equity:
 
 
 
 
 
Common stock, no par value: 1,000 shares authorized; 173.2, 173.5 and 185.4 shares issued and outstanding
2,651

 
2,539

 
2,519

Accumulated deficit
(1,742
)
 
(1,610
)
 
(1,047
)
Accumulated other comprehensive loss
(49
)
 
(58
)
 
(64
)
Total shareholders’ equity
860

 
871

 
1,408

Total liabilities and shareholders’ equity

$7,966

 

$7,698

 

$8,586

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

4 of 29




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

 
 
 
 
 
 
 
 
 
Other

 
 
 
Common Stock
 
Accumulated

 
Comprehensive

 
 
 
Shares

 
Amount

 
Deficit

 
Loss

 
Total

Balance at January 30, 2016
173.5

 

$2,539

 

($1,610
)
 

($58
)
 

$871

Net earnings
—

 
—

 
153

 
—

 
153

Other comprehensive earnings
—

 
—

 
—

 
9

 
9

Dividends ($1.11 per share)
—

 
—

 
(192
)
 
—

 
(192
)
Issuance of common stock under stock compensation plans
1.4

 
50

 
—

 
—

 
50

Stock-based compensation
0.2

 
62

 
—

 
—

 
62

Repurchase of common stock
(1.9
)
 
—

 
(93
)
 
—

 
(93
)
Balance at October 29, 2016
173.2

 

$2,651

 

($1,742
)
 

($49
)
 

$860

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retained

 
Accumulated

 
 
 
 
 
 
 
Earnings

 
Other

 
 
 
Common Stock
 
(Accumulated

 
Comprehensive

 
 
 
Shares

 
Amount

 
Deficit)

 
Loss

 
Total

Balance at January 31, 2015
190.1

 

$2,338

 

$166

 

($64
)
 

$2,440

Net earnings
—

 
—

 
420

 
—

 
420

Other comprehensive earnings
—

 
—

 
—

 
—

 
—

Dividends ($1.11 per share)
—

 
—

 
(211
)
 
—

 
(211
)
Special dividend related to the sale of credit card receivables ($4.85 per share)
—

 
—

 
(905
)
 
—

 
(905
)
Issuance of common stock for Trunk Club acquisition
0.3

 
23

 
—

 
—

 
23

Issuance of common stock under stock compensation plans
1.9

 
104

 
—

 
—

 
104

Stock-based compensation
0.1

 
54

 
—

 
—

 
54

Repurchase of common stock
(7.0
)
 
—

 
(517
)
 
—

 
(517
)
Balance at October 31, 2015
185.4

 

$2,519

 

($1,047
)
 

($64
)
 

$1,408

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

5 of 29




NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
 
Nine Months Ended
 
October 29, 2016

 
October 31, 2015

Operating Activities
 
 
 
Net earnings

$153

 

$420

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization expenses
480

 
424

Goodwill impairment
197

 
—

Amortization of deferred property incentives and other, net
(57
)
 
(107
)
Deferred income taxes, net
(14
)
 
(78
)
Stock-based compensation expense
68

 
57

Tax (deficiency) benefit from stock-based compensation
(2
)
 
14

Excess tax benefit from stock-based compensation
(2
)
 
(14
)
Bad debt expense
—

 
26

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(20
)
 
(73
)
Proceeds from sale of credit card receivables originated at Nordstrom
—

 
1,297

Merchandise inventories
(393
)
 
(607
)
Prepaid expenses and other assets
25

 
(36
)
Accounts payable
360

 
326

Accrued salaries, wages and related benefits
(30
)
 
(2
)
Other current liabilities
33

 
(34
)
Deferred property incentives
54

 
128

Other liabilities
20

 
4

Net cash provided by operating activities
872

 
1,745

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(625
)
 
(857
)
Change in credit card receivables originated at third parties
—

 
33

Proceeds from sale of credit card receivables originated at third parties
—

 
890

Other, net
47

 
3

Net cash (used in) provided by investing activities
(578
)
 
69

 
 
 
 
Financing Activities
 
 
 
Proceeds from long-term borrowings, net of discounts
—

 
13

Principal payments on long-term borrowings
(7
)
 
(6
)
Defeasance of long-term debt
—

 
(339
)
(Decrease) increase in cash book overdrafts
(127
)
 
7

Cash dividends paid
(192
)
 
(1,116
)
Payments for repurchase of common stock
(91
)
 
(517
)
Proceeds from issuances under stock compensation plans
51

 
90

Excess tax benefit from stock-based compensation
2

 
14

Other, net
6

 
34

Net cash used in financing activities
(358
)
 
(1,820
)
 
 
 
 
Net decrease in cash and cash equivalents
(64
)
 
(6
)
Cash and cash equivalents at beginning of period
595

 
827

Cash and cash equivalents at end of period

$531

 

$821

 
 
 
 
Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net

$99

 

$383

Interest, net of capitalized interest
83

 
86

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Beneficial interest asset acquired from the sale of credit card receivables
—

 
62

Issuance of common stock for Trunk Club acquisition
—

 
23

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

6 of 29



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 2015 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 October 29, 2016 and October 31, 2015 are unaudited. The Condensed Consolidated Balance Sheet as of January 30, 2016 has been derived from the audited Consolidated Financial Statements included in our 2015 Annual Report. The interim Condensed Consolidated Financial Statements should be read together with the Consolidated Financial Statements and related footnote disclosures contained in our 2015 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. In 2016, the Anniversary Sale event started one week later in July relative to last year, shifting one week of the event into the third quarter. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.
Loyalty Program
Prior to the second quarter of 2016, customers who used Nordstrom Visa or Nordstrom credit or debit cards were able to participate in the Nordstrom Rewards program. During the second quarter of 2016, the Nordstrom Rewards program was expanded to enable all customers to earn benefits regardless of how they choose to pay. Customers accumulate points based on their level of spending. Upon reaching a certain points threshold, customers receive Nordstrom Notes, which can be redeemed for any goods or services offered at Nordstrom full-line stores, Nordstrom.com, Nordstrom Rack and Nordstromrack.com/HauteLook. Customers who use Nordstrom private label credit or debit cards or Nordstrom Visa credit cards receive additional benefits, including reimbursements for alterations, shopping and fashion events and early access to the Anniversary Sale.
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, as well as reimbursed alterations, are recorded in cost of sales as we provide customers with products and services for these rewards. Other benefits of the loyalty program, including shopping and fashion events, are recorded in selling, general and administrative expenses.
Reclassification
Reclassifications were made to our fiscal 2015 Condensed Consolidated Statements of Earnings and Condensed Consolidated Statement of Cash Flows to conform with current period presentation.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which was subsequently modified in August 2015 by ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date. The core principle of ASU No. 2014-09 is that companies should recognize revenue when the transfer of promised goods or services to customers occurs in an amount that reflects what the company expects to receive. It requires additional disclosures to describe the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. In 2016, the FASB issued additional ASUs which clarify the implementation guidance on principal versus agent considerations, on identifying performance obligations and licensing and on the revenue recognition criteria. This guidance is effective for us beginning in the first quarter of 2018. We are currently evaluating the impact these provisions will have on our Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases. This ASU increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as lease assets and lease liabilities. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification dictates whether lease expense is to be recognized based on an effective interest method or on a straight-line basis over the term of the lease. This ASU is effective for us beginning in the first quarter of 2019. Though we are currently evaluating the impact of these provisions, we expect they will have a material impact on our Consolidated Financial Statements.

7 of 29



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


In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation — Improvements to Employee Share-Based Payment Accounting. This ASU impacts several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This ASU is effective for us beginning in the first quarter of 2017. We have evaluated this ASU and believe the impact to our Consolidated Financial Statements upon adoption will be nominal, however, actual results will be dependent on unpredictable events, including the future price of our common stock, option exercise activity and forfeitures.
NOTE 2: CREDIT CARD RECEIVABLE TRANSACTION
On October 1, 2015, we completed the sale of a substantial majority of our U.S. Visa and private label credit card portfolio to TD Bank, N.A. (“TD”) and we entered into a long-term program agreement under which TD is the exclusive issuer of our U.S. consumer credit cards.
In connection with the close of the credit card receivable transaction, we completed the defeasance of our $325 Series 2011-1 Class A Notes in order to provide the credit card receivables to TD free and clear. At close, we received $2.2 billion in cash consideration reflecting the par value of the receivables sold and incurred $32 in transaction-related expenses during the third quarter of 2015. Pursuant to the agreement, we are obligated to offer and administer our loyalty program and perform other account servicing functions. In return, we receive a portion of the ongoing credit card revenue, net of credit losses, from both the sold and newly generated credit card receivables.
We recorded certain assets and liabilities associated with the arrangement. The beneficial interest asset is carried at fair value (see Note 4: Fair Value Measurements) and is amortized over approximately four years based primarily on the payment rate of the associated receivables. The deferred revenue and investment in contract asset are recognized/amortized over seven years on a straight line basis, following the delivery of the contract obligations and expected life of the agreement. We record each of these items in credit card revenue, net in our Condensed Consolidated Statements of Earnings.
NOTE 3: DEBT AND CREDIT FACILITIES
Debt
A summary of our long-term debt, including capital leases, is as follows:
 
October 29, 2016


January 30, 2016


October 31, 2015

Secured
 
 
 
 
 
Mortgage payable, 7.68%, due April 2020

$26

 

$30

 

$32

Other
3

 
5

 
5

Total secured debt
29

 
35

 
37

 
 
 
 
 
 
Unsecured
 
 
 
 
 
Net of unamortized discount:
 
 
 
 
 
Senior notes, 6.25%, due January 2018
650

 
649

 
649

Senior notes, 4.75%, due May 2020
499

 
499

 
499

Senior notes, 4.00%, due October 2021
500

 
500

 
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
602

 
600

 
600

Other
52

 
76

 
79

Total unsecured debt
2,749

 
2,770

 
2,772

 
 
 
 
 
 
Total long-term debt
2,778

 
2,805

 
2,809

Less: current portion
(11
)
 
(10
)
 
(9
)
Total due beyond one year

$2,767

 

$2,795

 

$2,800


8 of 29



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


Credit Facilities
As of October 29, 2016, we had total short-term borrowing capacity of $800 under our senior unsecured revolving credit facility (“revolver”) that expires in April 2020, with an option to extend for an additional year. Under the terms of our revolver, we pay a variable rate of interest and a commitment fee based on our debt rating. The revolver is available for working capital, capital expenditures and general corporate purposes. We have the option to increase the revolving commitment by up to $200, to a total of $1,000, provided that we obtain written consent from the lenders. As of October 29, 2016, we had no issuances outstanding under our commercial paper program and no borrowings outstanding under our revolver.
The 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 October 29, 2016, we were in compliance with this covenant.
NOTE 4: 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
Financial Instruments Measured at Fair Value on a Recurring Basis
We recorded a beneficial interest asset when we completed the sale of a substantial majority of our U.S. Visa and private label credit card portfolio (see Note 2: Credit Card Receivable Transaction). We determined the fair value of the beneficial interest asset based on a discounted cash flow model using Level 3 inputs of the fair value hierarchy. Inputs and assumptions include the discount rate, payment rate, credit loss rate and revenues and expenses associated with the program agreement. Given our review of market participant capital structures in the banking and credit card industries and our historical and expected portfolio performance, we used the following ranges of input assumptions to determine the fair value as of October 29, 2016 and October 31, 2015:
 
October 29, 2016
 
October 31, 2015
 
Minimum

 
Maximum

 
Minimum

 
Maximum

Discount rate
12
%
 
12
%
 
12
%
 
12
%
Monthly payment rate
6
%
 
11
%
 
6
%
 
33
%
Annual credit loss rate
3
%
 
4
%
 
1
%
 
4
%
Annual revenues as a percent to credit card receivables
14
%
 
18
%
 
6
%
 
18
%
Annual expenses as a percent to credit card receivables
5
%
 
9
%
 
2
%
 
9
%
We recognized $5 and $22 of amortization expense for the quarter and nine months ended October 29, 2016 on the beneficial interest asset, which had a fair value of $15 and $37 as of October 29, 2016 and January 30, 2016. Amortization primarily reflects payments received on the receivables sold and is recorded in credit card revenues, net.
Financial Instruments Not Measured at Fair Value
Financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable and certificates of deposit, which approximate fair value due to their short-term nature, and long-term debt.
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:
 
October 29, 2016

 
January 30, 2016

 
October 31, 2015

Carrying value of long-term debt

$2,778

 

$2,805

 

$2,809

Fair value of long-term debt
3,064

 
3,077

 
3,177


9 of 29



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


Non-financial Assets Measured at Fair Value on a Nonrecurring Basis
We also measure certain non-financial assets at fair value on a nonrecurring basis, primarily goodwill, investment in contract asset and long-lived tangible and intangible assets, in connection with periodic evaluations for potential impairment. We estimate the fair value of these assets using primarily unobservable inputs and, as such, these are considered Level 3 fair value measurements.
During the quarter, the long-term operating plan for Trunk Club was updated to reflect current expectations for future growth and profitability which were lower than previous expectations. Due to lowered expectations, we tested Trunk Club goodwill for impairment in the third quarter, one quarter prior to the annual evaluation. Step 1 test results indicated that the estimated fair value of the reporting unit was less than the carrying value.
In our Step 2 analysis, we used a combination of the expected present value of future cash flows (income approach) and comparable public companies (market approach) to determine the fair value of the reporting unit. These approaches use primarily unobservable inputs, including discount, sales growth and profit margin rates, which are considered Level 3 fair value measurements. The fair value analysis took into account recent and expected operating performance as well as the overall decline in the retail industry. Within our Retail Segment, we recognized a goodwill impairment charge of $197, reducing Trunk Club goodwill to $64 as of October 29, 2016 from $261 as of January 30, 2016.
There were no material impairment charges for the nine months ended October 31, 2015.
NOTE 5: COMMITMENTS AND CONTINGENCIES
Plans for our Manhattan full-line store, which we currently expect to open in 2019, ultimately include owning a condominium interest in a mixed-use tower and leasing certain nearby properties. As of October 29, 2016, we had approximately $201 of fee interest in land, which is expected to convert to a 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 event that this project is not completed, the opening may be delayed and we may be subject to future losses or capital commitments in order to complete construction or to monetize our investment in the land.
NOTE 6: SHAREHOLDERS’ EQUITY
On October 1, 2015, our Board of Directors authorized a program to repurchase up to $1,000 of our outstanding common stock through March 1, 2017. During the nine months ended October 29, 2016, we repurchased 1.9 shares of our common stock for an aggregate purchase price of $93 and had $718 remaining in share repurchase capacity as of October 29, 2016. The actual number, price, manner and timing of future share repurchases, if any, will be subject to market and economic conditions and applicable Securities and Exchange Commission (“SEC”) rules.
In November 2016, subsequent to quarter end, we declared a quarterly dividend of $0.37 per share, which will be paid on December 13, 2016.

10 of 29



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 7: STOCK-BASED COMPENSATION
The following table summarizes our stock-based compensation expense:
 
Quarter Ended
 
Nine Months Ended
 
October 29, 2016

 
October 31, 2015

 
October 29, 2016

 
October 31, 2015

Stock options

$9

 

$7

 

$28

 

$26

Restricted stock units
10

 
4

 
25

 
14

Acquisition-related stock compensation
2

 
5

 
10

 
14

Performance share units
—

 
(1
)
 
1

 
(1
)
Other
—

 
1

 
4

 
4

Total stock-based compensation expense, before income tax benefit
21

 
16

 
68

 
57

Income tax benefit
(7
)
 
(5
)
 
(22
)
 
(18
)
Total stock-based compensation expense, net of income tax benefit

$14

 

$11

 

$46

 

$39

The following table summarizes our grants:
 
Nine Months Ended
 
October 29, 2016
 
October 31, 2015
 
Granted

 
Weighted-average grant-date fair value per unit

 
Granted

 
Weighted-average grant-date fair value per unit

Stock options
2.9



$15

 
1.8

 

$21

Stock options special dividend adjustment
—

 
N/A

 
0.9

 
N/A

Restricted stock units
1.9

 

$44

 
0.5

 

$77

Restricted stock units special dividend adjustment
—

 
N/A

 
0.1

 
N/A

Performance share units1
0.1

 

$44

 
0.1

 
N/A

1 Performance share units granted in 2015 were liability-based awards, therefore the weighted-average grant-date fair value is not meaningful.
NOTE 8: (LOSS) EARNINGS PER SHARE
The computation of (loss) earnings per share is as follows:
 
Quarter Ended
 
Nine Months Ended
 
October 29, 2016

 
October 31, 2015

 
October 29, 2016

 
October 31, 2015

Net (loss) earnings

($10
)
 

$81

 

$153

 

$420

 
 
 
 
 
 
 
 
Basic shares
173.4

 
187.2

 
173.3

 
189.1

Dilutive effect of stock options and other1
—

 
4.1

 
2.3

 
4.1

Diluted shares
173.4

 
191.3

 
175.6

 
193.2

 
 
 
 
 
 
 
 
(Loss) Earnings per basic share

($0.06
)
 

$0.43

 

$0.88

 

$2.22

(Loss) Earnings per diluted share

($0.06
)
 

$0.42

 

$0.87

 

$2.17

 
 
 
 
 
 
 
 
Anti-dilutive stock options and other
6.5

 
1.9

 
9.0

 
1.8

1 Due to the anti-dilutive effect resulting from the reported net loss for the quarter ended October 29, 2016, the impact of potentially dilutive securities on the weighted-average shares outstanding has been omitted from the quarterly calculation of loss per diluted share. The impact of these potentially dilutive securities has been included in the calculation of weighted-average shares for the nine months ended October 29, 2016.

11 of 29



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 9: SEGMENT REPORTING
The following table sets forth information for our reportable segments: 
 
 
Retail

 
Corporate/Other

 
Retail
Business

 
Credit

 
Total

Quarter Ended October 29, 2016
 
 
 
 
 
 
 
 
 
 
Net sales
 

$3,317

 

$155

 

$3,472

 

$—

 

$3,472

Credit card revenues, net
 
—

 
—

 
—

 
70

 
70

Earnings before interest and income taxes
 
18

 
5

 
23

 
32

 
55

Interest expense, net
 
—

 
(30
)
 
(30
)
 
—

 
(30
)
Earnings (loss) before income taxes
 
18

 
(25
)
 
(7
)
 
32

 
25

Assets1
 
5,760

 
1,759

 
7,519

 
447

 
7,966

 
 
 
 
 
 
 
 
 
 
 
Quarter Ended October 31, 2015
 
 
 
 
 
 
 
 
 

Net sales
 

$3,169

 

$70

 

$3,239

 

$—

 

$3,239

Credit card revenues, net
 
—

 
—

 
—

 
89

 
89

Earnings (loss) before interest and income taxes
 
178

 
(30
)
 
148

 
7

 
155

Interest expense, net
 
—

 
(27
)
 
(27
)
 
(3
)
 
(30
)
Earnings (loss) before income taxes
 
178

 
(57
)
 
121

 
4

 
125

Assets1
 
6,140

 
1,869

 
8,009

 
577

 
8,586

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended October 29, 2016
 
 
 
 
 
 
 
 
 

Net sales
 

$10,446

 

($191
)
 

$10,255

 

$—

 

$10,255

Credit card revenues, net
 
—

 
—

 
—

 
186

 
186

Earnings (loss) before interest and income taxes
 
590

 
(274
)
 
316

 
65

 
381

Interest expense, net
 
—

 
(90
)
 
(90
)
 
—

 
(90
)
Earnings (loss) before income taxes
 
590

 
(364
)
 
226

 
65

 
291

Assets1
 
5,760


1,759

 
7,519

 
447

 
7,966

 
 
 
 
 
 

 
 
 

Nine Months Ended October 31, 2015
 
 
 
 
 

 
 
 

Net sales
 

$10,135

 

($182
)
 

$9,953

 

$—

 

$9,953

Credit card revenues, net
 
—

 
—

 
—

 
291

 
291

Earnings (loss) before interest and income taxes
 
836

 
(227
)
 
609

 
168

 
777

Interest expense, net
 
—

 
(82
)
 
(82
)
 
(12
)
 
(94
)
Earnings (loss) before income taxes
 
836

 
(309
)
 
527

 
156

 
683

Assets1
 
6,140


1,869

 
8,009

 
577

 
8,586

1 Assets in Corporate/Other include unallocated assets in corporate headquarters, consisting primarily of cash, land, property and equipment and deferred tax assets.

12 of 29



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


The following table summarizes net sales within our reportable segments:
 
Quarter Ended
 
Nine Months Ended
 
October 29, 2016

 
October 31, 2015

 
October 29, 2016

 
October 31, 2015

Nordstrom full-line stores - U.S.

$1,568

 

$1,634

 

$5,128

 

$5,431

Nordstrom.com
497

 
414

 
1,675

 
1,518

Nordstrom
2,065

 
2,048

 
6,803

 
6,949

 
 
 
 
 
 
 
 
Nordstrom Rack
958

 
885

 
2,777

 
2,573

Nordstromrack.com/HauteLook
159

 
129

 
482

 
363

Off-price
1,117

 
1,014

 
3,259

 
2,936

 
 
 
 
 
 
 
 
Other retail1
135

 
107

 
384

 
250

Total Retail segment
3,317

 
3,169

 
10,446

 
10,135

Corporate/Other
155

 
70

 
(191
)
 
(182
)
Total net sales

$3,472

 

$3,239

 

$10,255

 

$9,953

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

13 of 29



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 28, 2017, 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:
Strategic and Operational
•
successful execution of our customer strategy, including expansion into new domestic and international markets, acquisitions, investments in our stores and online as well as investments in technology, our ability to realize the anticipated benefits from growth initiatives and our ability to provide a seamless experience across all channels,
•
timely and effective execution of our ecommerce initiatives and ability to manage the costs and organizational changes associated with this evolving business model,
•
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 maintain relationships with our employees and to effectively attract, develop and retain our future leaders,
•
effective inventory management processes and systems, fulfillment processes and systems, 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 realize the expected benefits, respond to potential risks and appropriately manage costs associated with our program agreement with TD,
•
our ability to safeguard our reputation and maintain our vendor relationships,
•
our ability to respond to the business environment, fashion trends and consumer preferences, including changing expectations of service and experience in stores and online, and evolve our business model,
•
the effectiveness of planned advertising, marketing and promotional campaigns in the highly competitive retail industry,
•
the timing, price, manner 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,
Economic and External
•
the impact of economic and market conditions and the resultant impact on consumer spending patterns,
•
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,
Legal and Regulatory
•
our compliance with applicable domestic and international laws, regulations and ethical standards, including those related to banking, employment and tax and the outcome of claims and litigation and resolution of such matters,
•
the impact of the current regulatory environment and financial system and health care reforms, and
•
compliance with debt covenants, availability and cost of credit, changes in our credit rating, changes in interest rates, debt repayment patterns and personal bankruptcies.
These and other factors, including those factors described in Part I, “Item 1A. Risk Factors” in our 2015 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.

14 of 29



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
Our third quarter results reflected our team’s substantial progress to align to current business trends and make longer-term changes to our business model. The changes we’ve made in the way we operate to enhance the customer experience and increase our productivity contributed to our strong operating performance. In addition, continued focus on inventory led to a positive spread between sales and inventory growth for the quarter.
Our third quarter net loss of $10 included a non-cash goodwill impairment charge of $197 related to Trunk Club, which we acquired in August 2014. While this business continues to deliver outsized top-line growth, current expectations for future growth and profitability are lower than initial estimates. To better position Trunk Club’s business, we are making a number of operational changes to improve the customer experience and improve operating results.
Total net sales in the quarter grew 7.2% and we had positive comparable sales for both full-price and off-price. Total Company comparable sales for the quarter increased 2.4%, which included one week of our Anniversary Sale shifting into the quarter. The combined second and third quarter comparable sales, which removes the impact of the event shift, increased 0.4%, which was generally consistent with our trends over the past year.
Our strategy is squarely focused on serving customers on their terms with the high-quality product and service they expect from us. We continue to make progress in the areas of supply chain, marketing and technology that enhance the customer experience and improve our operating performance. This quarter, we have executed on a number of initiatives to better serve customers and drive top-line growth.
•
In our Nordstrom brand, we achieved another milestone related to our Canada expansion with two successful store openings in Toronto, at Eaton Centre and Yorkdale Centre. With Toronto being the fourth largest market in North America, we believe these stores will be among our top volume stores. In the U.S., we had a successful opening of our second store in Austin, Texas, at The Domain.
•
Our Rack business serves as a great way of attracting new customers to Nordstrom. We expanded our reach with 15 new store openings this fall for a total of 215 Racks. These stores are complemented by our online offering at Nordstromrack.com/HauteLook, which is expected to reach over $700 in sales this year.
•
A curated product assortment is an integral element of our customer strategy and led to the launch of new collaborations with J. Crew and denim brand Good American. Through these and other partnerships, we are able to give our customers compelling product that has limited distribution.
•
Our website platform has been upgraded enabling us to accelerate the continuous delivery of new customer-facing features. From a productivity standpoint, we’ve prioritized our investments toward modernizing our infrastructure and implementing the highest value customer experiences.
•
In May, we expanded the Nordstrom Rewards loyalty program to enable all customers to earn benefits regardless of how they choose to pay. This represents a meaningful opportunity to directly engage with customers and drives incremental trips and sales. We now have more than 7 million customers in our overall program, up over 40% from a year ago.
As customer expectations continue to evolve, it’s even more important for us to focus on how best to serve our customers. This guides us on how we set priorities, allocate resources and accelerate the speed of our execution to ensure that we provide a relevant, best-in-class experience for our customers. We have strong momentum in place and remain committed to continuing our progress to ensure we’re best positioned to achieve profitable growth.

15 of 29



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. We analyze our results of operations through earnings before interest and income taxes for our Retail Business and Credit, while interest expense, income taxes and earnings per share are discussed on a total Company basis.
Retail Business
Our Retail Business includes our Nordstrom U.S. and Canada full-line stores, Nordstrom.com, Nordstrom Rack stores, Nordstromrack.com/HauteLook, Trunk Club, Jeffrey and our Last Chance clearance stores. 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 9: Segment Reporting in Item 1 (collectively, the “Retail Business”).
Certain metrics we use to evaluate the Retail Business may not be calculated in a consistent manner among industry peers. Provided below are definitions of metrics we present within our analysis of the Retail Business:
•
Comparable Sales – sales from stores that have been open at least one full year at the beginning of the year. Total Company comparable sales include sales from our online channels.
•
Gross Profit – net sales less cost of sales and related buying and occupancy costs.
•
Inventory Turnover Rate – annual cost of sales and related buying and occupancy costs (for all segments) divided by the trailing 4-quarter average inventory.
•
Total Sales Per Square Foot – net sales divided by weighted-average square footage.
•
4-wall Sales Per Square Foot – sales for Nordstrom U.S. and Canada full-line stores, Nordstrom Rack stores, Trunk Club clubhouses, Jeffrey boutiques and our Last Chance clearance stores divided by their weighted-average square footage.
Summary
The following table summarizes the results of our Retail Business: 
 
Quarter Ended
 
October 29, 2016
 
October 31, 2015
 
Amount

 
% of net sales1

 
Amount

 
% of net sales1

Net sales

$3,472

 
100.0
%
 

$3,239

 
100.0
%
Cost of sales and related buying and occupancy costs
(2,262
)
 
(65.2
%)
 
(2,140
)
 
(66.1
%)
Gross profit
1,210

 
34.8
%
 
1,099

 
33.9
%
Selling, general and administrative expenses
(990
)
 
(28.5
%)
 
(951
)
 
(29.3
%)
Goodwill impairment
(197
)
 
(5.7
%)
 
—

 
—

Earnings before interest and income taxes

$23

 
0.6
%
 

$148

 
4.6
%
 
 
Nine Months Ended
 
October 29, 2016
 
October 31, 2015
 
Amount

 
% of net sales1

 
Amount

 
% of net sales1

Net sales

$10,255

 
100.0
%
 

$9,953

 
100.0
%
Cost of sales and related buying and occupancy costs
(6,718
)
 
(65.5
%)
 
(6,463
)
 
(64.9
%)
Gross profit
3,537

 
34.5
%
 
3,490

 
35.1
%
Selling, general and administrative expenses
(3,024
)
 
(29.5
%)
 
(2,881
)
 
(28.9
%)
Goodwill impairment
(197
)
 
(1.9
%)
 
—

 
—

Earnings before interest and income taxes

$316

 
3.1
%
 

$609

 
6.1
%
1 Subtotals and totals may not foot due to rounding.

16 of 29



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
 
Nine Months Ended
 
October 29, 2016

 
October 31, 2015

 
October 29, 2016

 
October 31, 2015

Net sales by channel:
 
 
 
 
 
 
 
Nordstrom full-line stores - U.S.

$1,568

 

$1,634

 

$5,128

 

$5,431

Nordstrom.com
497

 
414

 
1,675

 
1,518

Full-price
2,065

 
2,048

 
6,803

 
6,949

 
 
 
 
 
 
 
 
Nordstrom Rack
958

 
885

 
2,777

 
2,573

Nordstromrack.com/HauteLook
159

 
129

 
482

 
363

Off-price
1,117

 
1,014

 
3,259

 
2,936

 
 
 
 
 


 
 
Other retail1
135

 
107

 
384

 
250

Retail segment
3,317

 
3,169


10,446


10,135

Corporate/Other
155

 
70

 
(191
)
 
(182
)
Total net sales

$3,472

 

$3,239

 

$10,255

 

$9,953

 
 
 
 
 
 
 
 
Net sales increase
7.2
%
 
6.6
%
 
3.0
%
 
8.5
%
 
 
 
 
 
 
 
 
Comparable sales increase (decrease) by channel:
 
 
 
 
 
 
 
Nordstrom full-line stores - U.S.
(4.5
%)
 
(2.2
%)
 
(6.3
%)
 
(0.2
%)
Nordstrom.com
20.1
%
 
11.4
%
 
10.3
%
 
17.6
%
Full-price
0.5
%
 
0.3
%
 
(2.6
%)
 
3.2
%
Nordstrom Rack
0.9
%
 
(2.2
%)
 
0.4
%
 
(0.2
%)
Nordstromrack.com/HauteLook
23.2
%
 
38.8
%
 
32.9
%
 
46.1
%
Off-price
3.9
%
 
2.4
%
 
4.6
%
 
4.6
%
Total Company
2.4
%
 
0.9
%
 
(0.2
%)
 
3.5
%
 
 
 
 
 
 
 
 
Sales per square foot:
 
 
 
 
 
 
 
Total sales per square foot

$119

 

$116

 

$355

 

$361

4-wall sales per square foot
90

 
93

 
283

 
296

Full-line sales per square foot - U.S.
76

 
79

 
247

 
264

Nordstrom Rack sales per square foot
127

 
130

 
376

 
389

1 Other retail includes Nordstrom Canada full-line stores, Trunk Club and Jeffrey boutiques.
Total Company net sales increased 7.2% for the quarter and 3.0% for the nine months ended October 29, 2016, compared with the same periods in 2015, while comparable sales increased 2.4% for the quarter and decreased 0.2% for the nine months ended October 29, 2016. Current period results include a favorable comparison resulting from one week of the Anniversary Sale, historically the Company's largest event of the year, shifting into the third quarter. Combined second and third quarter comparable sales, which removes the impact of the event shift, increased 0.4% compared with the same period last year.
Total sales per square foot improved for the quarter ended October 29, 2016, compared with the same period in 2015, due to an increase in sales from our online channels as well as the shift in the Anniversary Sale. Total sales per square foot decreased for the nine months ended October 29, 2016 compared with the same period in 2015, due to store expansion. To date in fiscal 2016, we opened 26 stores, relocated three stores and closed one store.

17 of 29



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)


Full-price net sales, which consists of U.S. full-line and Nordstrom.com channels, increased 0.8% for the quarter and decreased 2.1% for the nine months ended October 29, 2016, compared with the same periods in 2015, while on a comparable basis, sales increased 0.5% in the third quarter and decreased 2.6% for the nine months ended October 29, 2016. Also on a comparable basis for the quarter, full-price experienced an increase in the number of items sold, partially offset by a decrease in the average selling price per item sold. For the nine months ended October 29, 2016, there was a decrease in the number of items sold, partially offset by an increase in the average selling price per item sold.
Full-price top-performing merchandise categories for the third quarter were Women's Apparel and Men's Apparel. The top-performing merchandise category for the nine months ended October 29, 2016 was Beauty. The West was the top-performing geographic region for the quarter and nine months ended October 29, 2016.
Off-price net sales, which consists of Nordstrom Rack and Nordstromrack.com/HauteLook channels, increased 10.1% for the quarter and 11.0% for the nine months ended October 29, 2016, compared with the same periods in 2015, while on a comparable basis, sales increased 3.9% in the third quarter and 4.6% for the nine months ended October 29, 2016. Nordstrom Rack net sales increased 8.2% and 7.9% for the quarter and nine months ended October 29, 2016, compared with the same periods in 2015, attributable to 21 new store openings since the end of the third quarter of 2015. On a comparable basis for the quarter and nine months ended October 29, 2016, the number of items sold increased at Nordstrom Rack, partially offset by a decrease in the average selling price per item sold. Kids was the top-performing merchandise category for the quarter and nine months ended October 29, 2016. The East was the top-performing geographic region for both the quarter and nine months ended October 29, 2016.
Retail Business Gross Profit
The following table summarizes the Retail Business gross profit (“Retail GP”):
 
Quarter Ended
 
Nine Months Ended
 
October 29, 2016

 
October 31, 2015

 
October 29, 2016

 
October 31, 2015

Retail gross profit

$1,210



$1,099



$3,537



$3,490

Retail gross profit as a % of net sales
34.8
%

33.9
%

34.5
%

35.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
October 29, 2016

 
October 31, 2015

Ending inventory per square foot
 
 
 
 

$80.94

 

$83.98

Inventory turnover rate
 
 
 
 
4.31

 
4.32

Our Retail GP rate increased 93 basis points for the quarter ended October 29, 2016, compared with the same period in 2015, reflecting strong inventory execution in addition to leverage of buying and occupancy costs. Our strong inventory execution also led to improvements in ending inventory per square foot as of October 29, 2016. Our Retail GP decreased 57 basis points for the nine months ended October 29, 2016 primarily due to higher markdowns in the first half of 2016.
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
 
Nine Months Ended
 
October 29, 2016

 
October 31, 2015

 
October 29, 2016

 
October 31, 2015

Retail selling, general and administrative expenses

$990

 

$951

 

$3,024

 

$2,881

Retail selling, general and administrative expenses as a % of net sales
28.5
%
 
29.3
%
 
29.5
%
 
28.9
%
For the quarter ended October 29, 2016, our Retail SG&A rate decreased 82 basis points primarily due to a shift in sales volume from the Anniversary Sale resulting in expense leverage, while Retail SG&A expenses increased $39 primarily due to increased fulfillment expenses. For the nine months ended October 29, 2016, our Retail SG&A increased 55 basis points and $143 primarily due to increased fulfillment expenses and technology investments.
Retail Business Goodwill Impairment
We recognized a goodwill impairment charge of $197 for the quarter and nine months ended October 29, 2016 related to Trunk Club (see Note 4: Fair Value Measurements in Item 1).

18 of 29



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
As we completed the sale of a substantial majority of our U.S. Visa and private label credit card portfolio to TD on October 1, 2015, and entered into a long-term program agreement under which TD is the exclusive issuer of our U.S. consumer credit cards, our Credit Segment business has changed. With these changes, although we receive a smaller share of available profits under the program agreement, we no longer fund this portfolio alleviating significant working capital requirements (see Note 2: Credit Card Receivable Transaction in Item 1).
Summary
The table below provides a detailed view of the operational results of our Credit segment, consistent with Note 9: Segment Reporting in Item 1:
 
Quarter Ended
 
Nine Months Ended
 
October 29, 2016

 
October 31, 2015

 
October 29, 2016

 
October 31, 2015

Credit card revenues, net

$70

 

$89

 

$186

 

$291

Credit expenses
(38
)
 
(50
)
 
(121
)
 
(152
)
Credit transaction, net
—

 
(32
)
 
—

 
29

Earnings before interest and income taxes
32

 
7

 
65

 
168

Interest expense1
—

 
(3
)
 
—

 
(12
)
Earnings before income taxes

$32

 

$4

 

$65

 

$156

 
 
 
 
 
 
 
 
Credit and debit card volume2:
 
 
 
 
 
 
 
Outside

$1,023

 

$1,059

 

$3,106

 

$3,209

Inside
1,239

 
1,243

 
4,215

 
4,242

Total volume

$2,262

 

$2,302

 

$7,321

 

$7,451

1 Prior to the credit card receivable transaction, interest expense was allocated to the Credit segment as if it carried debt of up to 80% of the credit card receivables.
2 Volume represents sales on the total portfolio plus applicable taxes.
Credit Card Revenues, net
The following is a summary of our credit card revenues, net:
 
Quarter Ended
 
Nine Months Ended
 
October 29, 2016

 
October 31, 2015

 
October 29, 2016

 
October 31, 2015

Finance charge revenue

$2

 

$45

 

$5

 

$173

Interchange fees
1

 
15

 
4

 
60

Late fees and other
—

 
14

 
1

 
43

Credit program revenues, net
67

 
15

 
176

 
15

Total credit card revenues, net

$70

 

$89

 

$186

 

$291

Prior to the close of the credit card receivable transaction on October 1, 2015, credit card revenues included finance charges, interchange fees, late fees and other revenue, recorded net of estimated uncollectible finance charges and fees. 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. We continue to recognize revenue in this manner for the credit card receivables retained subsequent to the close of the credit card receivable transaction.
Following the close of the transaction and pursuant to the program agreement with TD, we receive our portion of the ongoing credit card revenue, net of credit losses, from both the sold and newly generated credit card receivables, which is recorded in credit program revenues, net. Revenue earned under the program agreement is impacted by the credit quality of receivables and factors such as deteriorating economic conditions, declining creditworthiness of cardholders and the execution of account management and collection activities may heighten the risk of credit losses. Asset amortization and deferred revenue recognition associated with the assets and liabilities recorded as part of the transaction are also recognized in credit program revenues, net.
Credit card revenues, net decreased $19 and $105 for the quarter and nine months ended October 29, 2016, compared with the same periods in 2015, primarily due to the impact of the program agreement with TD and the amortization of our beneficial interest asset.

19 of 29



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
Total credit expenses decreased $12 and $31 for the quarter and nine months ended October 29, 2016, compared with the same periods in 2015 due to a decrease in bad debt expense since the sale of our credit card receivables in the third quarter of 2015.
Credit Transaction, net
Credit transaction, net of $(32) for the quarter ended October 31, 2015 represents transaction costs associated with the sale. Credit transaction, net of $29 for the nine months ended October 31, 2015 was primarily due to the reversal of the allowance for credit losses on accounts receivable that were reclassified to “held for sale” during the second quarter of 2015, partially offset by transaction costs related to the sale.
Total Company Results
Interest Expense, net
Interest expense, net of $30 for the third quarter and $90 for the nine months ended October 29, 2016 was relatively flat compared with the same periods in 2015.
Income Tax Expense
Income tax expense is summarized in the following table:
 
Quarter Ended
 
Nine Months Ended
 
October 29, 2016

 
October 31, 2015

 
October 29, 2016

 
October 31, 2015

Income tax expense

$35

 

$44

 

$138

 

$263

Effective tax rate
140.3
%
 
35.2
%
 
47.4
%
 
38.5
%
The effective tax rate increased for the quarter and nine months ended October 29, 2016, compared with the same periods in 2015, primarily due to the non-deductible goodwill impairment charge of $197 related to Trunk Club (see Note 4: Fair Value Measurements in Item 1). Excluding the impact of the Trunk Club impairment, our effective tax rate for the quarter and nine months ended October 29, 2016 would have decreased approximately 2% compared with prior year primarily due to the favorable resolution of certain federal income tax issues.
(Loss) Earnings Per Share
(Loss) Earnings per share (EPS) is as follows:
 
Quarter Ended
 
Nine Months Ended
 
October 29, 2016

 
October 31, 2015

 
October 29, 2016

 
October 31, 2015

Basic

($0.06
)
 

$0.43

 

$0.88

 

$2.22

Diluted:
 
 
 
 
 
 
 
Actual

($0.06
)
 

$0.42

 

$0.87

 

$2.17

Adjusted1

$0.84

 
N/A

 

$1.77

 
N/A

1 A reconciliation of adjusted earnings per share, a non-GAAP financial measure, to the closest GAAP measure is included below.
(Loss) earnings per diluted share decreased for the quarter and nine months ended October 29, 2016, compared with the same periods in 2015, primarily due to the goodwill impairment charge of $197 related to Trunk Club.
Excluding the goodwill impairment charge, adjusted earnings per diluted share increased for the quarter ended October 29, 2016 compared with diluted EPS for the quarter ended October 31, 2015, primarily due to increased sales and margin and a reduction of credit expenses from 2015 related to the credit transaction. Adjusted earnings per diluted share decreased for the nine months ended October 29, 2016, compared with diluted EPS for the nine months ended October 31, 2015, primarily due to higher fulfillment expenses and planned technology investments supporting our growth initiatives.

20 of 29



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 Earnings and Adjusted Earnings Per Share (Non-GAAP financial measures)
We believe that Adjusted Earnings and Adjusted Earnings Per Share provide useful information to investors in evaluating our business performance for the quarter and nine months ended October 29, 2016. The effect of excluding certain items from net (loss) earnings provides management and shareholders an alternative measure to use in evaluating our business performance period over period.     
Adjusted Earnings and Adjusted Earnings Per Share are not measures of financial performance under generally accepted accounting principles (“GAAP”) and should be considered in addition to, and not as a substitute for, net (loss) earnings, (loss) earnings per share and diluted earnings per share or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies’ financial measures and therefore may not be comparable to methods used by other companies. The financial measures calculated under GAAP which are most directly comparable to Adjusted Earnings and Adjusted Earnings Per Share are net (loss) earnings and diluted earnings per share, which are reconciled below:
 
Quarter Ended October 29, 2016
 
Nine Months Ended October 29, 2016
 
Amount

 
Amount Per Share

 
Amount

 
Amount Per Share

Net (loss) earnings1

($10
)
 

($0.06
)
 

$153

 

$0.87

Trunk Club goodwill impairment
197

 
1.12

 
197

 
1.12

Tax effect of non-deductible charges in interim period2
(39
)
 
(0.22
)
 
(39
)
 
(0.22
)
Adjusted Earnings

$148

 

$0.84

 

$311

 

$1.77

1 Due to the anti-dilutive effect resulting from the reported net loss, the impact of potentially dilutive securities on the per share amounts has been omitted from the quarterly calculation of weighted-average shares for diluted EPS for the quarter ended October 29, 2016. The impact of these potentially dilutive securities has been included in the calculation of weighted-average shares for diluted EPS for the nine months ended October 29, 2016.
2 The effect of taxes on the adjustments used to arrive at Adjusted Earnings is calculated based on applying the estimated annual effective tax rate to Adjusted Earnings plus other tax items for each interim period. The impact of this tax effect will reverse in the fourth quarter of 2016.
2016 Outlook
Excluding the impairment charge, we raised our annual earnings per diluted share expectations to incorporate our third quarter results, which exceeded expectations primarily due to our efforts to realign inventory and improve operational efficiencies. Our expectations for fiscal 2016 are as follows:
 
Prior Outlook
Current Outlook, excluding impairment charge
Current Outlook
Net sales (percent)
2.5 to 4.5 increase
Approximately 3.5 increase
Approximately 3.5 increase
Comparable sales (percent)
1 decrease to 1 increase
Approximately flat
Approximately flat
Retail EBIT (percent)
10 to 15 decrease
5 to 10 decrease
30 to 35 decrease
Credit EBIT
Approximately $80
Approximately $90
Approximately $90
Earnings per diluted share (excluding the impact of any future share repurchases)
$2.60 to $2.75
$2.85 to $2.95
$1.70 to $1.80

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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)


Return on Invested Capital (“ROIC”) and Adjusted ROIC (Non-GAAP financial measures)
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. The effect of excluding certain items from ROIC to arrive at an Adjusted ROIC provides management and shareholders an alternative measure to use in evaluating our results period over period. For the 12 fiscal months ended October 29, 2016, our ROIC and Adjusted ROIC decreased compared with the 12 fiscal months ended October 31, 2015, primarily due to reduced earnings.
We define ROIC as our net operating profit after tax divided by our average invested capital using the trailing 12-month average. ROIC and Adjusted ROIC are not measures of financial performance under 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 and Adjusted ROIC is return on assets. The following is a reconciliation of the components and adjustments to ROIC and return on assets:
 
12 Fiscal Months Ended
 
October 29, 2016
 
October 31, 2015

 
Unadjusted

 
Adjustments1

 
Adjusted

 
Net earnings

$333

 

$197

 

$530

 

$675

Add: income tax expense
252

 
—

 
252

 
438

Add: interest expense
121

 
—

 
121

 
129

Earnings before interest and income tax expense
706

 
197

 
903

 
1,242

 
 
 
 
 
 
 
 
Add: rent expense
195

 
—

 
195

 
165

Less: estimated depreciation on capitalized operating leases2
(103
)
 
—

 
(103
)
 
(88
)
Net operating profit
798

 
197

 
995

 
1,319

 
 
 
 
 
 
 
 
Less: estimated income tax expense
(383
)
 
—

 
(383
)
 
(519
)
Net operating profit after tax

$415

 

$197

 

$612

 

$800

 
 
 
 
 
 
 
 
Average total assets

$7,987

 

$—

 

$7,987

 

$9,362

Less: average non-interest-bearing current liabilities
(3,105
)
 
—

 
(3,105
)
 
(2,965
)
Less: average deferred property incentives
(541
)
 
—

 
(541
)
 
(536
)
Add: average estimated asset base of capitalized operating leases3
1,452

 
—

 
1,452

 
1,171

Average invested capital

$5,793

 

$—

 

$5,793

 

$7,032

 
 
 
 
 
 
 
 
Return on assets
4.2
%
 
 
 


 
7.2
%
ROIC/Adjusted ROIC
7.2
%
 
 
 
10.6
%
 
11.4
%
1 The adjustment for the 12 fiscal months ended October 29, 2016 includes the goodwill impairment charge of $197 related to Trunk Club (see Note 4: Fair Value Measurements in Item 1).
2 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 3 below.
3 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 2.

22 of 29



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 October 29, 2016, our existing cash and cash equivalents on-hand of $531, 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.
Operating Activities
Net cash provided by operating activities decreased $873 for the nine months ended October 29, 2016, compared with the same period in 2015, primarily due to $1,297 of proceeds received in 2015 related to the sale of credit card receivables originated at Nordstrom, partially offset by favorable changes in working capital, which includes our efforts to align inventory levels with sales trends.
Investing Activities
Net cash used in investing activities was $578 for the nine months ended October 29, 2016, compared with net cash provided by investing activities of $69 for the same period in 2015, primarily due to proceeds of $890 received in 2015 related to the sale of the credit card receivables originated at third parties. This was partially offset by a decrease in capital expenditures related to lower spend on full-line store openings and relocations and our East Coast Fulfillment Center, which was completed in the third quarter of 2015.
At the beginning of our second quarter, we completed a review of our five-year capital plan, resulting in reduced spend of approximately $400, or 10%, primarily related to new stores and remodels over the next few years.
Financing Activities
Net cash used in financing activities was $358 for the nine months ended October 29, 2016, compared with $1,820 for the same period in 2015. This decrease was largely attributed to the $1.8 billion we returned to shareholders in 2015 through a special cash dividend and repurchases of common stock as a result of the sale of our credit card receivables.
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 nine months ended October 29, 2016, we had Free Cash Flow of ($72) compared with $702 for the nine months ended October 31, 2015.
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:
 
Nine Months Ended
 
October 29, 2016

 
October 31, 2015

Net cash provided by operating activities

$872

 

$1,745

Less: capital expenditures
(625
)
 
(857
)
Less: cash dividends paid
(192
)
 
(1,116
)
Add: proceeds from sale of accounts receivable originated at third parties
—

 
890

Add: change in credit card receivables originated at third parties
—

 
33

(Less) Add: change in cash book overdrafts
(127
)
 
7

Free Cash Flow

($72
)
 

$702

 
 
 
 
Net cash (used in) provided by investing activities

($578
)
 

$69

Net cash used in financing activities
(358
)
 
(1,820
)

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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 October 29, 2016, we had total short-term borrowing capacity of $800 under our senior unsecured revolving credit facility (“revolver”) that expires in April 2020, with an option to extend for an additional year. Under the terms of our revolver, we pay a variable rate of interest and a commitment fee based on our debt rating. The revolver is available for working capital, capital expenditures and general corporate purposes. We have the option to increase the revolving commitment by up to $200, to a total of $1,000, provided that we obtain written consent from the lenders. From time to time we utilize our commercial paper program to fund working capital needs, which has the effect of reducing our available liquidity under the revolver until repaid.
As of October 29, 2016, we had no issuances outstanding under our commercial paper program and no borrowings outstanding under our revolver.
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
BBB+
 
Negative
 
Base Interest
Rate
 
Applicable
Margin

Euro-Dollar Rate Loan
LIBOR
 
1.02
%
Canadian Dealer Offer Rate Loan
CDOR
 
1.02
%
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 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 higher borrowing cost under this facility.
Debt Covenants
The 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 October 29, 2016, we were in compliance with this covenant.

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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 October 29, 2016, our Adjusted Debt to EBITDAR was 2.5, compared with 2.1 as of October 31, 2015. This increase was primarily driven by reduced earnings.
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:
 
20161

 
20151

Debt

$2,778

 

$2,809

Add: estimated capitalized operating lease liability2
1,561

 
1,320

Less: fair value hedge adjustment included in long-term debt
(14
)
 
(26
)
Adjusted Debt

$4,325

 

$4,103

 
 
 
 
Net earnings

$333

 

$675

Add: income tax expense
252

 
438

Add: interest expense, net
121

 
129

Earnings before interest and income taxes
706

 
1,242

 
 
 
 
Add: depreciation and amortization expenses
631

 
557

Add: rent expense
195

 
165

Add: non-cash acquisition-related charges3
197

 
13

EBITDAR

$1,729

 

$1,977

 
 
 
 
Debt to Net Earnings
8.3

 
4.2

Adjusted Debt to EBITDAR
2.5

 
2.1

1 The components of Adjusted Debt are as of October 29, 2016 and October 31, 2015, while the components of EBITDAR are for the 12 months ended October 29, 2016 and October 31, 2015.
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.
3 Non-cash acquisition-related charges for the 12 months ended October 29, 2016 include the goodwill impairment charge of $197 related to Trunk Club (see Note 4: Fair Value Measurements in Item 1).

25 of 29




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 2015 Annual Report on Form 10-K filed with the SEC on March 14, 2016. There have been no material changes to these risks since that time.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
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 SEC’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.

26 of 29




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 third 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

August 2016
(July 31, 2016 to August 27, 2016)2
—

 

$41.54

 
—

 

$750

September 2016
(August 28, 2016 to October 1, 2016)
0.4

 
50.32

 
0.4

 
730

October 2016
(October 2, 2016 to October 29, 2016)
0.2

 
53.29

 
0.2

 
718

Total
0.6

 

$50.89

 
0.6

 
 
1 On October 1, 2015, our Board of Directors authorized a program to repurchase up to $1,000 of our outstanding common stock through March 1, 2017. The actual number, price, manner and timing of future share repurchases, if any, will be subject to market and economic conditions and applicable SEC rules.
2 In August 2016, the total number of shares repurchased was less than 0.1 shares.
Item 6. Exhibits.
Exhibits are incorporated herein by reference or are filed or furnished with this report as set forth in the Exhibit Index on page 29 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:
November 29, 2016

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NORDSTROM, INC.
Exhibit Index
Exhibit
 
Method of Filing
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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Exhibit 31.1
Certification required by Section 302(a) of the Sarbanes-Oxley Act of 2002
I, Blake W. Nordstrom, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Nordstrom, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
/s/ Blake W. Nordstrom
Blake W. Nordstrom
Co-President of Nordstrom, Inc.
 
 
Date:
November 29, 2016


Exhibit 31.2
Certification required by Section 302(a) of the Sarbanes-Oxley Act of 2002
I, Michael G. Koppel, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Nordstrom, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
/s/ Michael G. Koppel
Michael G. Koppel
Executive Vice President and
Chief Financial Officer of Nordstrom, Inc.
 
 
Date:
November 29, 2016


Exhibit 32.1
NORDSTROM, INC.
1617 SIXTH AVENUE
SEATTLE, WASHINGTON 98101
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Nordstrom, Inc. (the “Company”) on Form 10-Q for the period ended October 29, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Blake W. Nordstrom, Co-President (Principal Executive Officer), and Michael G. Koppel, Executive Vice President and Chief Financial Officer (Principal Financial Officer), of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
•
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
•
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
/s/ Blake W. Nordstrom
Blake W. Nordstrom
Co-President of Nordstrom, Inc.
 
/s/ Michael G. Koppel
Michael G. Koppel
Executive Vice President and
Chief Financial Officer of Nordstrom, Inc.
 
November 29, 2016

A signed original of this written statement required by Section 906 has been provided to Nordstrom, Inc. and will be retained by Nordstrom, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.



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