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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 August 2, 2014
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 August 27, 2014: 192,611,151 shares
 
 

1 of 33


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

2 of 33


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
 
Six Months Ended
 
August 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
Net sales
$
3,296

 
$
3,104

 
$
6,133

 
$
5,761

Credit card revenues
96

 
92

 
190

 
184

Total revenues
3,392

 
3,196

 
6,323

 
5,945

Cost of sales and related buying and occupancy costs
(2,130
)
 
(2,004
)
 
(3,951
)
 
(3,677
)
Selling, general and administrative expenses
(931
)
 
(857
)
 
(1,776
)
 
(1,658
)
Earnings before interest and income taxes
331

 
335

 
596

 
610

Interest expense, net
(35
)
 
(37
)
 
(70
)
 
(76
)
Earnings before income taxes
296

 
298

 
526

 
534

Income tax expense
(113
)
 
(114
)
 
(203
)
 
(205
)
Net earnings
$
183

 
$
184

 
$
323

 
$
329

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.97

 
$
0.94

 
$
1.70

 
$
1.68

Diluted
$
0.95

 
$
0.93

 
$
1.68

 
$
1.66

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
189.6

 
195.5

 
189.7

 
195.5

Diluted
192.7

 
198.8

 
192.7

 
198.9

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
 
Six Months Ended
 
August 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
Net earnings
$
183

 
$
184

 
$
323

 
$
329

Postretirement plan adjustments, net of tax
1

 
1

 
2

 
3

Foreign currency translation adjustment

 

 
1

 

Comprehensive net earnings
$
184

 
$
185

 
$
326

 
$
332

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


3 of 33


NORDSTROM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
(Unaudited)
 
August 2, 2014
 
February 1, 2014
 
August 3, 2013
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
772

 
$
1,194

 
$
1,128

Accounts receivable, net
2,454

 
2,177

 
2,369

Merchandise inventories
1,805

 
1,531

 
1,464

Current deferred tax assets, net
260

 
239

 
244

Prepaid expenses and other
96

 
87

 
89

Total current assets
5,387

 
5,228

 
5,294

 
 
 
 
 
 
Land, buildings and equipment (net of accumulated depreciation of $4,587, $4,395 and $4,270)
3,096

 
2,949

 
2,810

Goodwill
175

 
175

 
175

Other assets
248

 
222

 
269

Total assets
$
8,906

 
$
8,574

 
$
8,548

 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
1,529

 
$
1,263

 
$
1,395

Accrued salaries, wages and related benefits
358

 
395

 
322

Other current liabilities
944

 
876

 
837

Current portion of long-term debt
7

 
7

 
407

Total current liabilities
2,838

 
2,541

 
2,961

 
 
 
 
 
 
Long-term debt, net
3,111

 
3,106

 
2,715

Deferred property incentives, net
498

 
498

 
490

Other liabilities
358

 
349

 
351

 
 
 
 
 
 
Commitments and contingencies

 

 

 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
Common stock, no par value: 1,000 shares authorized; 188.6, 191.2 and 195.5 shares issued and outstanding
1,958

 
1,827

 
1,762

Retained earnings
179

 
292

 
313

Accumulated other comprehensive loss
(36
)
 
(39
)
 
(44
)
Total shareholders' equity
2,101

 
2,080

 
2,031

Total liabilities and shareholders' equity
$
8,906

 
$
8,574

 
$
8,548

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

4 of 33


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 February 1, 2014
191.2

 
$
1,827

 
$
292

 
$
(39
)
 
$
2,080

Net earnings

 

 
323

 

 
323

Other comprehensive earnings

 

 

 
3

 
3

Dividends ($0.66 per share)

 

 
(125
)
 

 
(125
)
Issuance of common stock under stock compensation plans
2.3

 
101

 

 

 
101

Stock-based compensation

 
30

 

 

 
30

Repurchase of common stock
(4.9
)
 

 
(311
)
 

 
(311
)
Balance at August 2, 2014
188.6

 
$
1,958

 
$
179

 
$
(36
)
 
$
2,101

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Other
 
 
 
Common Stock
 
Retained
 
Comprehensive
 
 
 
Shares
 
Amount
 
Earnings
 
Loss
 
Total
Balance at February 2, 2013
197.0

 
$
1,645

 
$
315

 
$
(47
)
 
$
1,913

Net earnings

 

 
329

 

 
329

Other comprehensive earnings

 

 

 
3

 
3

Dividends ($0.60 per share)

 

 
(117
)
 

 
(117
)
Issuance of common stock under stock compensation plans
2.3

 
84

 

 

 
84

Stock-based compensation

 
33

 

 

 
33

Repurchase of common stock
(3.8
)
 

 
(214
)
 

 
(214
)
Balance at August 3, 2013
195.5

 
$
1,762

 
$
313

 
$
(44
)
 
$
2,031

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

5 of 33


NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
 
Six Months Ended
 
August 2, 2014
 
August 3, 2013
Operating Activities
 
 
 
Net earnings
$
323

 
$
329

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization expenses
244

 
220

Amortization of deferred property incentives and other, net
(40
)
 
(32
)
Deferred income taxes, net
(43
)
 
(35
)
Stock-based compensation expense
31

 
34

Tax benefit from stock-based compensation
10

 
16

Excess tax benefit from stock-based compensation
(11
)
 
(17
)
Bad debt expense
22

 
30

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(221
)
 
(199
)
Merchandise inventories
(263
)
 
(119
)
Prepaid expenses and other assets
(11
)
 
(9
)
Accounts payable
241

 
328

Accrued salaries, wages and related benefits
(35
)
 
(82
)
Other current liabilities
68

 
30

Deferred property incentives
48

 
42

Other liabilities
6

 
11

Net cash provided by operating activities
369

 
547

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(376
)
 
(427
)
Change in credit card receivables originated at third parties
(77
)
 
(70
)
Other, net
(9
)
 
(7
)
Net cash used in investing activities
(462
)
 
(504
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from long-term borrowings
13

 

Principal payments on long-term borrowings
(4
)
 
(3
)
Increase in cash book overdrafts
15

 
56

Cash dividends paid
(125
)
 
(117
)
Payments for repurchase of common stock
(326
)
 
(219
)
Proceeds from issuances under stock compensation plans
91

 
68

Excess tax benefit from stock-based compensation
11

 
17

Other, net
(4
)
 
(2
)
Net cash used in financing activities
(329
)
 
(200
)
 
 
 
 
Net decrease in cash and cash equivalents
(422
)
 
(157
)
Cash and cash equivalents at beginning of period
1,194

 
1,285

Cash and cash equivalents at end of period
$
772

 
$
1,128

 
 
 
 
Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Interest (net of capitalized interest)
$
78

 
$
81

Income taxes (net of refunds)
219

 
235

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

6 of 33

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


NOTE 1: BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the balances of Nordstrom, Inc. and its subsidiaries. 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 2013 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 August 2, 2014 and August 3, 2013 are unaudited. The condensed consolidated balance sheet as of February 1, 2014 has been derived from the audited consolidated financial statements included in our 2013 Annual Report. The interim condensed consolidated financial statements should be read together with the consolidated financial statements and related footnote disclosures contained in our 2013 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, the holidays in December and the half-yearly sales that normally occur in our second and fourth quarters, our sales are typically higher in the second and fourth quarters of the fiscal year than in the first and third quarters. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.
Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU raises the threshold for a disposal to qualify as discontinued operations and requires new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. Under the new guidance, companies report discontinued operations when they have a disposal that represents a strategic shift that has or will have a major impact on operations or financial results. We are currently evaluating the impact, if any, the provisions of this ASU would have on our consolidated financial statements. If applicable, this ASU would be effective for us beginning in the first quarter of 2015.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The core principle of this ASU 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. This ASU is effective for us beginning with the first quarter of 2017. We are currently evaluating the impact the provisions of this ASU would have on our consolidated financial statements.


7 of 33

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


NOTE 2: ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows: 
 
August 2, 2014
 
February 1, 2014
 
August 3, 2013
Credit card receivables:
 
 
 
 
 
Nordstrom VISA credit card receivables
$
1,410

 
$
1,316

 
$
1,419

Nordstrom private label card receivables
1,010

 
868

 
932

Total credit card receivables
2,420

 
2,184

 
2,351

Allowance for credit losses
(80
)
 
(80
)
 
(85
)
Credit card receivables, net
2,340

 
2,104

 
2,266

Other accounts receivable1
114

 
73

 
103

Accounts receivable, net
$
2,454

 
$
2,177

 
$
2,369

1 Other accounts receivable consist primarily of third-party credit and debit card receivables.
Activity in the allowance for credit losses is as follows:
 
Quarter Ended
 
Six Months Ended
 
August 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
Allowance at beginning of period
$
80

 
$
85

 
$
80

 
$
85

Bad debt expense
7

 
16

 
22

 
30

Write-offs
(19
)
 
(21
)
 
(38
)
 
(42
)
Recoveries
12

 
5

 
16

 
12

Allowance at end of period
$
80

 
$
85

 
$
80

 
$
85

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:
 
August 2, 2014
 
February 1, 2014
 
August 3, 2013
Credit card receivables classified as TDRs
$
38

 
$
43

 
$
45

Percent of total credit card receivables classified as TDRs
1.6
%
 
2.0
%
 
1.9
%


8 of 33

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


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: 
 
August 2, 2014
 
February 1, 2014
 
August 3, 2013
 
Balance
 
% of total
 
Balance
 
% of total
 
Balance
 
% of total
Current
$
2,301

 
95.1
%
 
$
2,046

 
93.7
%
 
$
2,241

 
95.3
%
1 – 29 days delinquent
82

 
3.4
%
 
99

 
4.5
%
 
74

 
3.2
%
30 days or more delinquent:
 
 
 
 
 
 
 
 
 
 
 
30 – 59 days delinquent
15

 
0.6
%
 
16

 
0.7
%
 
14

 
0.6
%
60 – 89 days delinquent
9

 
0.4
%
 
9

 
0.4
%
 
9

 
0.4
%
90 days or more delinquent
13

 
0.5
%
 
14

 
0.7
%
 
13

 
0.5
%
Total 30 days or more delinquent
37

 
1.5
%
 
39

 
1.8
%
 
36

 
1.5
%
Total credit card receivables
$
2,420

 
100.0
%
 
$
2,184

 
100.0
%
 
$
2,351

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Receivables not accruing finance charges
$
11

 
 
 
$
13

 
 
 
$
10

 
 
Receivables 90 days or more delinquent and still accruing finance charges
7

 
 
 
8

 
 
 
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: 
 
August 2, 2014
 
February 1, 2014
 
August 3, 2013
FICO Score Range1
Balance
 
% of total
 
Balance
 
% of total
 
Balance
 
% of total
801+
$
481

 
19.8
%
 
$
313

 
14.3
%
 
$
430

 
18.3
%
660 – 800
1,478

 
61.1
%
 
1,393

 
63.8
%
 
1,455

 
61.9
%
001 – 659
365

 
15.1
%
 
379

 
17.4
%
 
367

 
15.6
%
Other2
96

 
4.0
%
 
99

 
4.5
%
 
99

 
4.2
%
Total credit card receivables
$
2,420

 
100.0
%
 
$
2,184

 
100.0
%
 
$
2,351

 
100.0
%
1 Credit scores for our credit cardholders are updated at least every 60 days for active accounts and every 90 days for inactive accounts. 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.

9 of 33

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


NOTE 3: DEBT AND CREDIT FACILITIES
Debt
A summary of our long-term debt is as follows:
 
August 2, 2014

February 1, 2014

August 3, 2013
Secured
 
 
 
 
 
Series 2011-1 Class A Notes, 2.28%, due October 2016
$
325

 
$
325

 
$
325

Mortgage payable, 7.68%, due April 2020
39

 
42

 
44

Other
8

 
9

 
9

Total secured debt
372

 
376

 
378

 
 
 
 
 
 
Unsecured
 
 
 
 
 
Net of unamortized discount:
 
 
 
 
 
Senior notes, 6.75%, due June 2014

 

 
400

Senior notes, 6.25%, due January 2018
649

 
648

 
648

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

 
344

Senior notes, 5.00%, due January 2044
596

 
595

 

Unamortized fair value hedge and other
57

 
50

 
54

Total unsecured debt
2,746

 
2,737

 
2,744

 
 
 
 
 
 
Total long-term debt
3,118

 
3,113

 
3,122

Less: current portion
(7
)
 
(7
)
 
(407
)
Total due beyond one year
$
3,111

 
$
3,106

 
$
2,715

Credit Facilities
As of August 2, 2014, we had total short-term borrowing capacity available for general corporate purposes of $800, which is composed of our $800 senior unsecured revolving credit facility ("revolver") that expires in March 2018. 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 and backs our commercial paper program. During the six months ended August 2, 2014, we had no issuances under our commercial paper program and no borrowings 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 August 2, 2014, we were in compliance with this covenant.

In November 2013, our wholly owned subsidiary in Puerto Rico entered into a $52 unsecured borrowing facility to support our expansion into that market. The facility expires in November 2018 and borrowings on this facility incur interest based upon the one-month LIBOR plus 1.275% per annum. As of August 2, 2014, we had $15 outstanding on this facility.


10 of 33

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


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
We did not have any financial assets or liabilities that were measured at fair value on a recurring basis as of August 2, 2014, February 1, 2014 or August 3, 2013.
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:
 
August 2, 2014
 
February 1, 2014
 
August 3, 2013
Carrying value of long-term debt1
$
3,118

 
$
3,113

 
$
3,122

Fair value of long-term debt
3,551

 
3,511

 
3,471

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 six months ended August 2, 2014 and August 3, 2013. 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 5: COMMITMENTS AND CONTINGENT LIABILITIES
As of August 2, 2014, we had approximately $126 of fee interest in our Manhattan full-line store subject to lien. We have committed to make future installment payments based on the developer of the property meeting construction and development milestones. Our fee interest in the property is subject to lien until project completion or fulfillment of our existing installment payment commitment.
NOTE 6: 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. During the six months ended August 2, 2014, we repurchased 4.9 shares of our common stock for an aggregate purchase price of $311 and had $359 in remaining share repurchase capacity as of August 2, 2014. 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 August 2014, we declared a quarterly dividend of $0.33 per share, payable in September 2014.


11 of 33

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


NOTE 7: STOCK-BASED COMPENSATION
The following table summarizes our stock-based compensation expense:
 
Quarter Ended
 
Six Months Ended
 
August 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
Stock options
$
11

 
$
13

 
$
21

 
$
26

Restricted stock units
4

 

 
6

 

Employee stock purchase plan

 

 
1

 
1

Other
3

 
4

 
3

 
7

Total stock-based compensation expense, before income tax benefit
18

 
17

 
31

 
34

Income tax benefit
(7
)
 
(5
)
 
(11
)
 
(11
)
Total stock-based compensation expense, net of income tax benefit
$
11

 
$
12

 
$
20

 
$
23

Beginning in the quarter ended May 3, 2014, we now grant our employees a combination of options and restricted stock units. The following table summarizes our grants:
 
Six Months Ended
 
August 2, 2014
 
August 3, 2013
 
Units granted
 
Weighted-average grant-date fair value per unit
 
Units granted
 
Weighted-average grant-date fair value per unit
Stock options
1.9


$
16

 
3.7

 
$
14

Restricted stock units
0.5

 
62

 

 

NOTE 8: EARNINGS PER SHARE
The computation of earnings per share is as follows:
 
Quarter Ended
 
Six Months Ended
 
August 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
Net earnings
$
183

 
$
184

 
$
323

 
$
329

 
 
 
 
 
 
 
 
Basic shares
189.6

 
195.5

 
189.7

 
195.5

Dilutive effect of stock options and other
3.1

 
3.3

 
3.0

 
3.4

Diluted shares
192.7

 
198.8

 
192.7

 
198.9

 
 
 
 
 
 
 
 
Earnings per basic share
$
0.97

 
$
0.94

 
$
1.70

 
$
1.68

Earnings per diluted share
$
0.95

 
$
0.93

 
$
1.68

 
$
1.66

 
 
 
 
 
 
 
 
Anti-dilutive stock options and other
1.8

 
3.4

 
3.4

 
4.6



12 of 33

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


NOTE 9: SEGMENT REPORTING
The following tables set forth information for our reportable segments: 
 
 
Retail
 
Corporate/Other
 
Total
Retail
Business1
 
Credit
 
Total
Quarter Ended August 2, 2014
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
3,438

 
$
(142
)
 
$
3,296

 
$

 
$
3,296

Credit card revenues
 

 

 

 
96

 
96

Earnings (loss) before interest and income taxes
 
367

 
(89
)
 
278

 
53

 
331

Interest expense, net
 

 
(30
)
 
(30
)
 
(5
)
 
(35
)
Earnings (loss) before income taxes
 
367

 
(119
)
 
248

 
48

 
296

 
 
 
 
 
 
 
 
 
 
 
Quarter Ended August 3, 2013
 
 
 
 
 
 
 
 
 

Net sales
 
$
3,245

 
$
(141
)
 
$
3,104

 
$

 
$
3,104

Credit card revenues
 

 

 

 
92

 
92

Earnings (loss) before interest and income taxes
 
375

 
(80
)
 
295

 
40

 
335

Interest expense, net
 

 
(31
)
 
(31
)
 
(6
)
 
(37
)
Earnings (loss) before income taxes
 
375

 
(111
)
 
264

 
34

 
298

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended August 2, 2014
 
 
 
 
 
 
 
 
 

Net sales
 
$
6,348

 
$
(215
)
 
$
6,133

 
$

 
$
6,133

Credit card revenues
 

 

 

 
190

 
190

Earnings (loss) before interest and income taxes
 
677

 
(175
)
 
502

 
94

 
596

Interest expense, net
 

 
(61
)
 
(61
)
 
(9
)
 
(70
)
Earnings (loss) before income taxes
 
677

 
(236
)
 
441

 
85

 
526

 
 
 
 
 
 

 
 
 

Six Months Ended August 3, 2013
 
 
 
 
 

 
 
 

Net sales
 
$
5,958

 
$
(197
)
 
$
5,761

 
$

 
$
5,761

Credit card revenues
 

 

 

 
184

 
184

Earnings (loss) before interest and income taxes
 
675

 
(149
)
 
526

 
84

 
610

Interest expense, net
 

 
(64
)
 
(64
)
 
(12
)
 
(76
)
Earnings (loss) before income taxes
 
675

 
(213
)
 
462

 
72

 
534

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.
The following table summarizes net sales within our reportable segments:
 
Quarter Ended
 
Six Months Ended
 
August 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
Nordstrom full-line stores
$
2,074

 
$
2,098

 
$
3,757

 
$
3,815

Direct
519

 
425

 
920

 
726

Nordstrom
2,593

 
2,523

 
4,677


4,541

Nordstrom Rack
759

 
645

 
1,500

 
1,261

HauteLook, Nordstromrack.com and Jeffrey
86

 
77

 
171

 
156

Total Retail segment
3,438

 
3,245

 
6,348

 
5,958

Corporate/Other
(142
)
 
(141
)
 
(215
)
 
(197
)
Total net sales
$
3,296

 
$
3,104

 
$
6,133

 
$
5,761


13 of 33

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


NOTE 10: SUBSEQUENT EVENT
In August 2014, we acquired Trunk Club, Inc., a personalized online clothing service for men. Founded in 2009, Trunk Club delivers a stylist service that combines the convenience of online with a high-touch, personalized shopping experience. We believe this acquisition represents a natural extension of our core business, aligns with our strategic priorities around a relevant customer experience and accelerates entry into this fast-growing market.
All of the issued and outstanding shares of Trunk Club were converted into $350 of Nordstrom stock.
This acquisition recently closed on August 22, 2014 and due to the limited time since closing, we have not yet completed the initial accounting for this transaction. We expect to disclose additional information once the initial accounting is completed in the third quarter of 2014. Additionally, we will include the financial results of Trunk Club in our consolidated financial statements from the date of acquisition forward.

14 of 33

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 31, 2015, anticipated annual total sales rate, 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 markets, acquisitions, investments in our stores and online, our ability to realize the anticipated benefits from growth initiatives, and the 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 transformation of our business/financial model as we increase our investments in growth opportunities, including 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,
reviewing of options and structure for a financial partner in regards to a potential transaction related to our credit card receivables,
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 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, and trends in 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 2013 Annual Report on Form 10-K and in Part II, "Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q, 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.

15 of 33

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 second quarter performance was in line with our expectations, with a total net sales increase of 6.2% and comparable sales increase of 3.3%. Our Anniversary Sale, which historically is our largest sale event of the year, generated a comparable sales increase of 3.6% in the full-price business, which was consistent with recent trends.
During the quarter, we continued to demonstrate our focus on executing our strategy, both in-store and online, and with our full-price and off-price offerings. In today's rapidly changing environment, we strive to position ourselves to serve customers through these multiple touchpoints. In August 2014, we completed the acquisition of Trunk Club, a leading personalized clothing service for men. The men's market is one of the fastest-growing and most rapidly changing segments in retail, and Trunk Club has created a unique approach to capture the imagination of an under-served customer. Founded in 2009, Trunk Club delivers a stylist service that combines the convenience of online with a high-touch, personalized shopping experience. We believe this acquisition represents a natural extension of our core business, aligns with our strategic priorities around a relevant customer experience and accelerates entry into this fast-growing market.
Trunk Club is a high-growth company and expects to achieve operational profitability and more than double its annual sales to over $100 million in 2014, a portion of which will be included in our financial results subsequent to the acquisition. Trunk Club will continue to operate independently and focus on its core business while leveraging our capabilities and resources to scale its business. It will be managed by its current leadership team and remain headquartered in Chicago.
The Nordstrom Rewards program contributes significantly to our overall results, with members shopping more frequently and spending more on average than non-members. We now have 4.1 million active members, a 14% increase over last year. The Company opened nearly 650,000 new accounts so far this year, an increase of 20% compared with the same period last year. Our overall credit portfolio remains healthy, with delinquency and write-off trends remaining around a five-year low, which positions us well as we explore potential partners for the sale of our credit card receivables. As we noted in the first quarter, we are still in the early stages of the process of finding a partner for this potential transaction and we estimate that this will take a total of 12 to 18 months. We will provide an update once the process is complete.
We are making ongoing progress in reaching new customers through our store expansion. This fall, we plan to open our first store in Canada, in Calgary, as well as two full-line stores in The Woodlands (Houston), Texas and in Jacksonville, Florida. To date, we have opened 11 Nordstrom Rack stores and plan to open 16 additional stores during the remainder of the year. Nordstrom Rack delivered a second quarter net sales increase of 18% over the same period last year.
We continue to support our customer strategy with the investments we are making in our stores, online and in our fulfillment capabilities. We aim to deliver a superior and integrated customer experience across all channels and we think we are well-positioned to continue our growth. Over the long term, we continue to believe our customer strategy and investments will generate top-quartile shareholder returns through high single-digit sales growth and mid-teens Return on Invested Capital.

16 of 33

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, Last Chance clearance store and other retail channels, including HauteLook, Nordstromrack.com and Jeffrey stores. For purposes of discussion and analysis of our results of operations, we combine our Retail segment results with revenues and expenses in the "Corporate/Other" column of Note 9: Segment Reporting in the Notes to Condensed Consolidated Financial Statements, which also includes our Canadian operations (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 for the quarter and six months ended August 2, 2014, compared with the quarter and six months ended August 3, 2013: 
 
Quarter Ended
 
August 2, 2014
 
August 3, 2013
 
Amount
 
% of net sales1
 
Amount
 
% of net sales1
Net sales
$
3,296

 
100.0
%
 
$
3,104

 
100.0
%
Cost of sales and related buying and occupancy costs
(2,129
)
 
(64.6
%)
 
(2,002
)
 
(64.5
%)
Gross profit
1,167

 
35.4
%
 
1,102

 
35.5
%
Selling, general and administrative expenses
(889
)
 
(27.0
%)
 
(807
)
 
(26.0
%)
Earnings before interest and income taxes
$
278

 
8.5
%
 
$
295

 
9.5
%
 
 
Six Months Ended
 
August 2, 2014
 
August 3, 2013
 
Amount
 
% of net sales1
 
Amount
 
% of net sales1
Net sales
$
6,133

 
100.0
%
 
$
5,761

 
100.0
%
Cost of sales and related buying and occupancy costs
(3,949
)
 
(64.4
%)
 
(3,674
)
 
(63.8
%)
Gross profit
2,184

 
35.6
%
 
2,087

 
36.2
%
Selling, general and administrative expenses
(1,682
)
 
(27.4
%)
 
(1,561
)
 
(27.1
%)
Earnings before interest and income taxes
$
502

 
8.2
%
 
$
526

 
9.1
%
1 Subtotals and totals may not foot due to rounding.

17 of 33

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
 
Quarter Ended
 
Six Months Ended
 
August 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
Net sales by channel:
 
 
 
 
 
 
 
Nordstrom full-line stores
$
2,074

 
$
2,098

 
$
3,757

 
$
3,815

Direct
519

 
425

 
920

 
726

Nordstrom
2,593

 
2,523

 
4,677

 
4,541

Nordstrom Rack
759

 
645

 
1,500

 
1,261

HauteLook, Nordstromrack.com and Jeffrey
86

 
77

 
171

 
156

Total Retail segment
3,438

 
3,245

 
6,348

 
5,958

Corporate/Other
(142
)
 
(141
)
 
(215
)
 
(197
)
Total net sales
$
3,296

 
$
3,104

 
$
6,133


$
5,761

 
 
 
 
 
 
 
 
Net sales increase
6.2
%
 
6.4
%
 
6.4
%
 
5.6
%
 
 
 
 
 
 
 
 
Comparable sales increase (decrease) by channel:1
 
 
 
 
 
 
 
Nordstrom full-line stores
(1.2
%)
 
(0.7
%)
 
(1.5
%)
 
(0.4
%)
Direct
22.0
%
 
37.2
%
 
26.6
%
 
31.7
%
Nordstrom
2.7
%
 
4.2
%
 
3.0
%
 
3.7
%
Nordstrom Rack
4.0
%
 
2.4
%
 
5.2
%
 
1.6
%
HauteLook and Nordstromrack.com
14.9
%
 
23.1
%
 
12.6
%
 
28.6
%
Total
3.3
%
 
4.4
%
 
3.6
%
 
3.6
%
 
 
 
 
 
 
 
 
Sales per square foot2
$
125

 
$
121

 
$
233

 
$
226

4-wall sales per square foot2
107

 
108

 
201

 
200

Full-line sales per square foot2
100

 
101

 
182

 
184

Nordstrom Rack sales per square foot2
133

 
134

 
269

 
267

1 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 Nordstrom online store in comparable sales because of the integration of our Nordstrom full-line stores and online store as well as HauteLook and Nordstromrack.com.
2 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 Nordstrom full-line, Nordstrom Rack and Jeffrey stores divided by their weighted-average square footage.
Total company net sales increased 6.2% for the quarter and 6.4% for the six months ended August 2, 2014, compared with the same periods in 2013. Overall comparable sales increased 3.3% for the quarter and 3.6% for the six months ended August 2, 2014, led by the growth at Direct. Anniversary Sale comparable sales, which is the Company's largest sale event of the year, increased 3.6%.
Nordstrom net sales, which consists of the full-line and Direct businesses, were $2,593 for the second quarter of 2014, an increase of 2.7% compared with the same period in 2013, while net sales were $4,677 for the six months ended August 2, 2014, an increase of 3.0% compared with the same period in 2013. Strong growth in our Direct channel was partially offset by softer sales at our full-line stores. Both the average selling price and the number of items sold increased on a comparable basis for the quarter and six months ended August 2, 2014. Category highlights for the quarter ended August 2, 2014 included Cosmetics, Accessories and Men's Apparel, while category highlights for the six months ended August 2, 2014 included Accessories, Cosmetics and Women's Apparel. Sales per square foot increased 2.7% for the second quarter of 2014, while it increased 3.1% for the six months ended August 2, 2014, compared with the same periods in 2013.

18 of 33

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-line comparable sales decreased 1.2% for the quarter and 1.5% for the six months ended August 2, 2014, compared with the same periods in 2013. The top-performing geographic regions for full-line stores for the quarter and six months ended August 2, 2014 were the Southeast and Southwest. Full-line sales per square foot decreased 1.2% in the second quarter of 2014 and 1.5% for the six months ended August 2, 2014, when compared with the same periods in 2013. The Direct channel continued to experience outsized sales growth with an increase of 22% in the second quarter of 2014 and 27% for the six months ended August 2, 2014, driven by expanded merchandise selection.
Nordstrom Rack net sales increased $114, or 18%, for the quarter and $239, or 19%, for the six months ended August 2, 2014, compared with the same periods in 2013, reflecting incremental volume from existing stores and the impact of 25 store openings since the second quarter of fiscal 2013. Nordstrom Rack comparable sales increased 4.0% for the quarter and 5.2% for the six months ended August 2, 2014. Both the average selling price and the number of items sold increased on a comparable basis for the quarter and six months ended August 2, 2014. Category highlights for the second quarter of 2014 and the six months ended August 2, 2014 included Shoes and Accessories.
Retail Business Gross Profit
 
Quarter Ended
 
Six Months Ended
 
August 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
Gross profit1
$
1,167


$
1,102


$
2,184


$
2,087

Gross profit as a % of net sales
35.4
%

35.5
%

35.6
%

36.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
August 2, 2014
 
August 3, 2013
Ending inventory per square foot
 
 
 
 
$
68.27

 
$
57.26

Inventory turnover rate2
 
 
 
 
4.83

 
5.20

1 Retailers do not uniformly record the costs of buying and occupancy and supply chain operations (freight, purchasing, receiving, distribution, 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.
Our Retail gross profit rate decreased 7 basis points for the quarter ended August 2, 2014 and 61 basis points for the six months ended August 2, 2014, compared with the same periods in the prior year. These decreases were primarily due to planned occupancy costs associated with Nordstrom Rack's accelerated store expansion and in addition, for the six months ended August 2, 2014, increased markdowns in response to the promotional environment. Our Retail gross profit increased $65 for the second quarter of 2014 and $97 for the six months ended August 2, 2014, compared with the same periods in 2013, due primarily to increased sales, partially offset by an increase in occupancy costs driven by investments in new Nordstrom Rack stores.
For the second quarter of 2014, our inventory turnover rate decreased to 4.83 times for the trailing 12-months ended August 2, 2014, from 5.20 times for the same period in 2013. The decrease in our inventory turnover rate was primarily due to our increased investment in pack and hold inventory at Nordstrom Rack. Pack and hold inventory helps us take advantage of strategic buying opportunities to secure top brands and is fueling our Nordstrom Rack new store growth and Nordstromrack.com. Ending inventory per square foot increased 19.2% compared with the same period in fiscal 2013, which outpaced the sales per square foot increase of 2.7%. The difference primarily reflected planned investments to fuel off-price growth, including increased levels of pack and hold inventory at Nordstrom Rack, and planned investments in the full-price business to drive online growth and in well-performing merchandise categories.
Retail Business Selling, General and Administrative Expenses 
 
Quarter Ended
 
Six Months Ended
 
August 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
Selling, general and administrative expenses
$
889

 
$
807

 
$
1,682

 
$
1,561

Selling, general and administrative expense as a % of net sales
27.0
%
 
26.0
%
 
27.4
%
 
27.1
%
Our Retail selling, general and administrative expenses ("Retail SG&A") rate increased 97 basis points and $82 for the quarter ended August 2, 2014, and 33 basis points and $121 for the six months ended August 2, 2014. These increases were primarily due to ongoing investments in fulfillment and technology and the planned entry into Canada.

19 of 33

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 the segment disclosure provided in Note 9: Segment Reporting in the Notes to Condensed Consolidated Financial Statements. 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
 
August 2, 2014
 
August 3, 2013
 
Amount
 
Annualized % of average credit card receivables1
 
Amount
 
Annualized % of average credit card receivables1
Credit card revenues
$
96

 
18.1
%
 
$
92

 
17.6
%
Credit expenses
(43
)
 
(8.3
%)
 
(52
)
 
(9.9
%)
Credit segment earnings before interest and income taxes2
53

 
9.8
%
 
40

 
7.7
%
Interest expense
(5
)
 
(0.9
%)
 
(6
)
 
(1.2
%)
Intercompany merchant fees
31

 
5.8
%
 
28

 
5.5
%
Credit segment contribution, before income taxes
$
79

 
14.8
%
 
$
62

 
12.0
%
 
 
 
 
 
 
 
 
Credit and debit card volume3:
 
 
 
 
 
 
 
Outside
$
1,095

 
 
 
$
1,077

 
 
Inside
1,571

 
 
 
1,426

 
 
Total volume
$
2,666

 
 
 
$
2,503

 
 
 
 
 
 
 
 
 
 
Average credit card receivables
$
2,132

 
 
 
$
2,074

 
 
1 Subtotals and totals may not foot due to rounding.
2 As presented in Note 9: Segment Reporting in the Notes to Condensed Consolidated Financial Statements.
3 Volume represents sales plus applicable taxes.


20 of 33

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)

 
Six Months Ended
 
August 2, 2014
 
August 3, 2013
 
Amount
 
Annualized % of average credit card receivables1
 
Amount
 
Annualized % of average credit card receivables1
Credit card revenues
$
190

 
18.2
%
 
$
184

 
18.0
%
Credit expenses
(96
)
 
(9.3
%)
 
(100
)
 
(9.8
%)
Credit segment earnings before interest and income taxes2
94

 
9.0
%
 
84

 
8.2
%
Interest expense
(9
)
 
(0.9
%)
 
(12
)
 
(1.2
%)
Intercompany merchant fees
54

 
5.2
%
 
48

 
4.7
%
Credit segment contribution, before income taxes
$
139

 
13.3
%
 
$
120

 
11.8
%
 
 
 
 
 
 
 
 
Credit and debit card volume3:
 
 
 
 
 
 
 
Outside
$
2,146

 
 
 
$
2,124

 
 
Inside
2,719

 
 
 
2,444

 
 
Total volume
$
4,865

 
 
 
$
4,568

 
 
 
 
 
 
 
 
 
 
Average credit card receivables
$
2,089

 
 
 
$
2,044

 
 
1 Subtotals and totals may not foot due to rounding.
2 As presented in Note 9: Segment Reporting in the Notes to Condensed Consolidated Financial Statements.
3 Volume represents sales plus applicable taxes.
Credit Card Revenues 
 
Quarter Ended
 
Six Months Ended
 
August 2, 2014