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EX-10.1 - EX-10.1 - NORDSTROM INCjwn-q22015xex101.htm
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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 1, 2015
or
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to___________
Commission File Number: 001-15059
NORDSTROM, INC.
(Exact name of registrant as specified in its charter)
 
Washington
 
91-0515058
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1617 Sixth Avenue, Seattle, Washington
 
98101
(Address of principal executive offices)
 
(Zip Code)
206-628-2111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o  (Do not check if a smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
Common stock outstanding as of August 26, 2015: 188,234,418 shares
 
 

1 of 34




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

2 of 34




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 1, 2015
 
August 2, 2014
 
August 1, 2015
 
August 2, 2014
Net sales
$
3,598

 
$
3,296

 
$
6,714

 
$
6,133

Credit card revenues
103

 
96

 
202

 
190

Total revenues
3,701

 
3,392

 
6,916

 
6,323

Cost of sales and related buying and occupancy costs
(2,327
)
 
(2,130
)
 
(4,326
)
 
(3,951
)
Selling, general and administrative expenses
(1,048
)
 
(931
)
 
(2,019
)
 
(1,776
)
Credit transaction and other, net
51

 

 
51

 

Earnings before interest and income taxes
377

 
331

 
622

 
596

Interest expense, net
(32
)
 
(35
)
 
(65
)
 
(70
)
Earnings before income taxes
345

 
296

 
557

 
526

Income tax expense
(134
)
 
(113
)
 
(218
)
 
(203
)
Net earnings
$
211

 
$
183

 
$
339

 
$
323

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.11

 
$
0.97

 
$
1.78

 
$
1.70

Diluted
$
1.09

 
$
0.95

 
$
1.74

 
$
1.68

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
189.4

 
189.6

 
190.0

 
189.7

Diluted
193.5

 
192.7

 
194.2

 
192.7

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Amounts in millions)
(Unaudited)
 
Quarter Ended
 
Six Months Ended
 
August 1, 2015
 
August 2, 2014
 
August 1, 2015
 
August 2, 2014
Net earnings
$
211

 
$
183

 
$
339

 
$
323

Postretirement plan adjustments, net of tax
1

 
1

 
3

 
2

Foreign currency translation adjustment
(10
)
 

 
(5
)
 
1

Comprehensive net earnings
$
202

 
$
184

 
$
337

 
$
326

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


3 of 34




NORDSTROM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
(Unaudited)
 
August 1, 2015
 
January 31, 2015
 
August 2, 2014
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
423

 
$
827

 
$
772

Accounts receivable held for sale
2,391

 

 

Accounts receivable, net
241

 
2,306

 
2,454

Merchandise inventories
2,004

 
1,733

 
1,805

Current deferred tax assets, net
256

 
256

 
260

Prepaid expenses and other
117

 
102

 
96

Total current assets
5,432

 
5,224

 
5,387

 
 
 
 
 
 
Land, property and equipment (net of accumulated depreciation of $4,912, $4,698 and $4,587)
3,570

 
3,340

 
3,096

Goodwill
447

 
435

 
175

Other assets
251

 
246

 
248

Total assets
$
9,700

 
$
9,245

 
$
8,906

 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
1,589

 
$
1,328

 
$
1,529

Accrued salaries, wages and related benefits
389

 
416

 
358

Other current liabilities
1,145

 
1,048

 
944

Current portion of long-term debt
333

 
8

 
7

Total current liabilities
3,456

 
2,800

 
2,838

 
 
 
 
 
 
Long-term debt, net
2,808

 
3,123

 
3,111

Deferred property incentives, net
560

 
510

 
498

Other liabilities
385

 
372

 
358

 
 
 
 
 
 
Commitments and contingencies (Note 7)

 

 

 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
Common stock, no par value: 1,000 shares authorized; 188.2, 190.1 and 188.6 shares issued and outstanding
2,460

 
2,338

 
1,958

Retained earnings
97

 
166

 
179

Accumulated other comprehensive loss
(66
)
 
(64
)
 
(36
)
Total shareholders' equity
2,491

 
2,440

 
2,101

Total liabilities and shareholders' equity
$
9,700

 
$
9,245

 
$
8,906

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

4 of 34




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

 
 
 
 
 
 
 
 
 
Other

 
 
 
Common Stock
 
Retained

 
Comprehensive

 
 
 
Shares
 
Amount
 
Earnings

 
Loss

 
Total

Balance at January 31, 2015
190.1

 
$
2,338

 
$
166

 
$
(64
)
 
$
2,440

Net earnings

 

 
339

 

 
339

Other comprehensive earnings

 

 

 
(2
)
 
(2
)
Dividends ($0.74 per share)

 

 
(142
)
 

 
(142
)
Issuance of common stock under stock compensation plans
1.5

 
84

 

 

 
84

Stock-based compensation
0.1

 
38

 

 

 
38

Repurchase of common stock
(3.5
)
 

 
(266
)
 

 
(266
)
Balance at August 1, 2015
188.2

 
$
2,460

 
$
97

 
$
(66
)
 
$
2,491

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

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

5 of 34




NORDSTROM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
 
Six Months Ended
 
August 1, 2015
 
August 2, 2014
Operating Activities
 
 
 
Net earnings
$
339

 
$
323

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization expenses
277

 
244

Amortization of deferred property incentives and other, net
(41
)
 
(40
)
Deferred income taxes, net
(24
)
 
(43
)
Stock-based compensation expense
41

 
31

Tax benefit from stock-based compensation
13

 
10

Excess tax benefit from stock-based compensation
(13
)
 
(11
)
Bad debt expense
20

 
22

Credit transaction and other, net
(54
)
 

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(216
)
 
(221
)
Merchandise inventories
(280
)
 
(263
)
Prepaid expenses and other assets
(19
)
 
(11
)
Accounts payable
240

 
241

Accrued salaries, wages and related benefits
(30
)
 
(35
)
Other current liabilities
56

 
68

Deferred property incentives
97

 
48

Other liabilities
9

 
6

Net cash provided by operating activities
415

 
369

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(521
)
 
(376
)
Change in credit card receivables originated at third parties
(64
)
 
(77
)
Other, net
4

 
(9
)
Net cash used in investing activities
(581
)
 
(462
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from long-term borrowings, net of discounts
16

 
13

Principal payments on long-term borrowings
(4
)
 
(4
)
Increase in cash book overdrafts
49

 
15

Cash dividends paid
(142
)
 
(125
)
Payments for repurchase of common stock
(267
)
 
(326
)
Proceeds from issuances under stock compensation plans
71

 
91

Excess tax benefit from stock-based compensation
13

 
11

Other, net
26

 
(4
)
Net cash used in financing activities
(238
)
 
(329
)
 
 
 
 
Net decrease in cash and cash equivalents
(404
)
 
(422
)
Cash and cash equivalents at beginning of period
827

 
1,194

Cash and cash equivalents at end of period
$
423

 
$
772

 
 
 
 
Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net of refunds
$
209

 
$
219

Interest, net of capitalized interest
70

 
78

 
 
 
 
Non-cash activities:
 
 
 
Accounts receivable reclassified from held for investment to held for sale
2,391

 

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

6 of 34



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


NOTE 1: BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the balances of Nordstrom, Inc. and its subsidiaries (the "Company"). All intercompany transactions and balances are eliminated in consolidation. The interim condensed consolidated financial statements have been prepared on a basis consistent in all material respects with the accounting policies described and applied in our 2014 Annual Report on Form 10-K ("Annual Report"), and reflect all adjustments of a normal recurring nature that are, in management's opinion, necessary for the fair presentation of the results of operations, financial position and cash flows for the periods presented.
The condensed consolidated financial statements as of and for the periods ended August 1, 2015 and August 2, 2014 are unaudited. The condensed consolidated balance sheet as of January 31, 2015 has been derived from the audited consolidated financial statements included in our 2014 Annual Report. The interim condensed consolidated financial statements should be read together with the consolidated financial statements and related footnote disclosures contained in our 2014 Annual Report.
The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates and assumptions.
Our business, like that of other retailers, is subject to seasonal fluctuations. Due to our Anniversary Sale in July and the holidays in the fourth quarter, our sales are typically higher in the second and fourth quarters than in the first and third quarters of the fiscal year. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.
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 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 now effective for us beginning in the first quarter of 2018, rather than the first quarter of 2017. We are currently evaluating the impact the provisions of this ASU would have on our consolidated financial statements.
NOTE 2: CREDIT CARD RECEIVABLE TRANSACTION
On May 25, 2015, we entered into an agreement with TD Bank, N.A. ("TD") to sell substantially all of our U.S. Visa and private label credit card portfolio for an amount equal to the gross value of the outstanding receivables ("par"). In addition, we have entered into a long-term program agreement under which TD will become the exclusive issuer of our U.S. Nordstrom-branded Visa and private label consumer credit card portfolio. We will continue to perform account servicing functions, maintaining the current deep integration between our credit and retail operations.
Our credit card receivables have historically been "held for investment" and recorded at par value less an allowance for credit losses. During the second quarter of 2015, in accordance with generally accepted accounting principles ("GAAP"), we reclassified these receivables as "held for sale" and, as such, the receivables are now recorded at the lower of cost (par) or fair value (see Note 6: Fair Value Measurements). The reclassification of these receivables resulted in the reversal of the allowance for credit losses of $64 and is recorded in Credit transaction and other, net on the Condensed Consolidated Statements of Earnings.
Upon closing, we expect to receive approximately $1.8 billion, net of transaction costs and $325 in debt reduction. Under the program agreement, we will be entitled to receive a substantial portion of revenue generated by the credit card portfolio. The transaction is subject to regulatory approvals and other customary conditions, and is expected to close by the end of the year.

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


NOTE 3: TRUNK CLUB ACQUISITION
On August 22, 2014, we acquired 100% of the outstanding equity of Trunk Club, a personalized clothing service for men. The purchase price of $357 was partially offset by $46 attributable to Trunk Club employee stock awards that are subject to ongoing vesting requirements and are recorded as compensation expense. Of the purchase price consideration, $35 represents an indemnity holdback that will be settled primarily in Nordstrom stock, most of which we expect to settle in the third quarter of fiscal 2015, upon satisfaction of the representations, warranties and covenants subject to the indemnities. We allocated the net purchase price of $311 to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated net purchase price recorded as goodwill. On the acquisition date, we recorded current assets of $21, intangible assets of $59, goodwill of $261, and other non-current assets of $2, offset by net liabilities of $32.
NOTE 4: ACCOUNTS RECEIVABLE
We entered into an agreement in May 2015 to sell substantially all of our U.S. Visa and private label credit card portfolio. These receivables are now classified as "held for sale" and recorded at the lower of cost (par) or fair value. Our receivables are held at cost as of August 1, 2015 (see Note 2: Credit Card Receivable Transaction and Note 6: Fair Value Measurements). The components of accounts receivable are as follows: 
 
August 1, 2015
 
January 31, 2015
 
August 2, 2014
Credit card receivables held for investment
$
120

 
$
2,284

 
$
2,420

Allowance for credit losses
(1
)
 
(75
)
 
(80
)
Other accounts receivable1
122

 
97

 
114

Accounts receivable, net
$
241

 
$
2,306

 
$
2,454

 
 
 
 
 
 
Accounts receivable held for sale
$
2,391

 
$

 
$

1 Other accounts receivable consist primarily of debit card receivables and third-party receivables.
As our U.S. Visa and private label receivables have been reclassified as "held for sale," the allowance for credit losses on these receivables has been reversed as of August 1, 2015. Activity in the allowance for credit losses is as follows:
 
Quarter Ended
 
Six Months Ended
 
August 1, 2015
 
August 2, 2014
 
August 1, 2015
 
August 2, 2014
Allowance at beginning of period
$
70

 
$
80

 
$
75

 
$
80

Bad debt expense
10

 
7

 
20

 
22

Write-offs
(18
)
 
(19
)
 
(38
)
 
(38
)
Recoveries
3

 
12

 
8

 
16

Reversal of allowance on receivables held for sale
(64
)
 

 
(64
)
 

Allowance at end of period
$
1

 
$
80

 
$
1

 
$
80


Under certain circumstances, we may make modifications to payment terms for a customer experiencing financial difficulties in an effort to help the customer avoid a charge-off or bankruptcy and to maximize our recovery of the outstanding balance. These modifications, which meet the accounting definition of troubled debt restructurings ("TDRs"), include reduced or waived fees and finance charges, and/or reduced minimum payments. Receivables classified as TDRs are as follows:
 
August 1, 2015
 
January 31, 2015
 
August 2, 2014
Credit card receivables classified as TDRs
$
30

 
$
34

 
$
38

Percent of total credit card receivables classified as TDRs
1.2
%
 
1.5
%
 
1.6
%

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


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 "held for sale" and "held for investment": 
 
August 1, 2015
 
January 31, 2015
 
August 2, 2014
 
Balance
 
% of total
 
Balance
 
% of total
 
Balance
 
% of total
Current
$
2,377

 
94.7
%
 
$
2,134

 
93.4
%
 
$
2,301

 
95.1
%
1 – 29 days delinquent
91

 
3.6
%
 
103

 
4.5
%
 
82

 
3.4
%
30 days or more delinquent:
 
 
 
 
 
 
 
 
 
 
 
30 – 59 days delinquent
15

 
0.6
%
 
16

 
0.7
%
 
15

 
0.6
%
60 – 89 days delinquent
10

 
0.4
%
 
10

 
0.5
%
 
9

 
0.4
%
90 days or more delinquent
18

 
0.7
%
 
21

 
0.9
%
 
13

 
0.5
%
Total 30 days or more delinquent
43

 
1.7
%
 
47

 
2.1
%
 
37

 
1.5
%
Total credit card receivables
$
2,511

 
100.0
%
 
$
2,284

 
100.0
%
 
$
2,420

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Receivables not accruing finance charges
$
10

 
 
 
$
13

 
 
 
$
11

 
 
Receivables 90 days or more delinquent and still accruing finance charges
12

 
 
 
13

 
 
 
7

 
 
We also evaluate credit quality using FICO credit scores. The following table illustrates the distribution of our credit card receivables "held for sale" and "held for investment" across FICO score ranges: 
 
August 1, 2015
 
January 31, 2015
 
August 2, 2014
FICO Score Range1
Balance
 
% of total
 
Balance
 
% of total
 
Balance
 
% of total
801+
$
497

 
19.8
%
 
$
369

 
16.2
%
 
$
481

 
19.8
%
660 – 800
1,513

 
60.3
%
 
1,435

 
62.8
%
 
1,478

 
61.1
%
001 – 659
395

 
15.7
%
 
392

 
17.1
%
 
365

 
15.1
%
Other2
106

 
4.2
%
 
88

 
3.9
%
 
96

 
4.0
%
Total credit card receivables
$
2,511

 
100.0
%
 
$
2,284

 
100.0
%
 
$
2,420

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

9 of 34



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


NOTE 5: DEBT AND CREDIT FACILITIES
Debt
A summary of our long-term debt is as follows:
 
August 1, 2015

January 31, 2015

August 2, 2014
Secured
 
 
 
 
 
Series 2011-1 Class A Notes, 2.28%, due October 2016
$
325

 
$
325

 
$
325

Mortgage payable, 7.68%, due April 2020
33

 
36

 
39

Other
9

 
7

 
8

Total secured debt
367

 
368

 
372

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

 
649

 
649

Senior notes, 4.75%, due May 2020
499

 
499

 
499

Senior notes, 4.00%, due October 2021
499

 
499

 
499

Senior debentures, 6.95%, due March 2028
300

 
300

 
300

Senior notes, 7.00%, due January 2038
146

 
146

 
146

Senior notes, 5.00%, due January 2044
599

 
598

 
596

Other
82

 
72

 
57

Total unsecured debt
2,774

 
2,763

 
2,746

 
 
 
 
 
 
Total long-term debt
3,141

 
3,131

 
3,118

Less: current portion
(333
)
 
(8
)
 
(7
)
Total due beyond one year
$
2,808

 
$
3,123

 
$
3,111

Credit Facilities
As of August 1, 2015, we had total short-term borrowing capacity available for general corporate purposes of $800. In April 2015, we terminated our $800 senior unsecured revolving credit facility that was scheduled to expire in March 2018. We replaced this with a five-year $800 senior unsecured revolving credit facility ("revolver") that expires in April 2020, with an option to extend for an additional two years. Under the terms of our 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 other general corporate purposes. As of August 1, 2015, 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 August 1, 2015, we were in compliance with this covenant.
As a condition of the pending credit card portfolio transaction (see Note 2: Credit Card Receivable Transaction), we are required to defease the $325 secured Series 2011-1 Class A Notes to provide the receivables free and clear. The $325 has been reclassified from long-term debt to current portion of long-term debt during the second quarter of 2015, as we expect to defease the debt by the end of the year.



10 of 34



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 6: 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 1, 2015, January 31, 2015 and August 2, 2014.
Financial Instruments Not Measured at Fair Value
Financial instruments not measured at fair value include cash and cash equivalents, accounts payable and long-term debt. Cash and cash equivalents and accounts payable 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 1, 2015
 
January 31, 2015
 
August 2, 2014
Carrying value of long-term debt1
$
3,141

 
$
3,131

 
$
3,118

Fair value of long-term debt
3,526

 
3,693

 
3,551

1 The carrying value of long-term debt includes the remaining unamortized adjustment from our previous effective fair value hedge.
Financial Instruments Measured at Fair Value on a Nonrecurring Basis
Our U.S. Visa and private label credit card receivables are "held for sale" and are recorded at the lower of cost (par) or fair value (see Note 2: Credit Card Receivable Transaction). We estimate the fair value of our credit card receivables "held for sale" based on a discounted cash flow model using estimates and assumptions regarding future credit card portfolio performance. This fair value estimate is primarily based on Level 3 inputs in the fair value hierarchy, including the discount rate, payment rate, credit losses, revenues and expenses. Based on comparable market participant capital structures in the banking and credit card industries, we used a 12.0% discount rate. Based on historical and expected portfolio performance, we used a monthly payment rate ranging from 6.4% to 32.6%, an annual credit loss rate ranging from 1.2% to 3.9%, annual revenues ranging from 6.0% to 16.9% of credit card receivables and annual expenses ranging from 2.3% to 10.0% of credit card receivables.
The estimated fair value of our credit card receivables "held for sale" was approximately 3% above par. This premium is solely associated with our credit card receivables "held for sale," does not encompass other terms and elements within our contract with TD and may not be representative of a gain or loss upon consummation of the transaction.
Non-financial Assets Measured at Fair Value on a Nonrecurring Basis
We 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. There were no material impairment charges for these assets for the six months ended August 1, 2015 and August 2, 2014. We estimate the fair value of goodwill and long-lived tangible and intangible assets using primarily unobservable inputs and, as such, these are considered Level 3 fair value measurements.
NOTE 7: COMMITMENTS AND CONTINGENT LIABILITIES
Plans for our Manhattan full-line store ultimately include owning a condominium interest in a mixed-use tower and leasing certain nearby properties. As of August 1, 2015, we had approximately $125 of fee interest in land, which is expected to convert to the condominium interest once the store is constructed. We have committed to make future installment payments based on the developer meeting pre-established construction and development milestones. In the unlikely event that this project is not completed, the opening may be delayed and we may potentially be subject to future losses or capital commitments in order to complete construction or to monetize our investment in the land.

11 of 34



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


NOTE 8: SHAREHOLDERS' EQUITY
In February 2013, our Board of Directors authorized a program to repurchase up to $800 of our outstanding common stock, through March 1, 2015. There was $73 of unused capacity upon program expiration. In September 2014, our Board of Directors authorized a program to repurchase up to $1,000 of our outstanding common stock, through March 1, 2016. During the six months ended August 1, 2015, we repurchased 3.5 shares of our common stock for an aggregate purchase price of $266 and had $736 remaining in share repurchase capacity as of August 1, 2015. 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 ("Commission") rules.
In August 2015, subsequent to quarter end, we declared a quarterly dividend of $0.37 per share, payable in September 2015.
NOTE 9: STOCK-BASED COMPENSATION
The following table summarizes our stock-based compensation expense:
 
Quarter Ended
 
Six Months Ended
 
August 1, 2015
 
August 2, 2014
 
August 1, 2015
 
August 2, 2014
Stock options
$
10

 
$
11

 
$
19

 
$
21

Acquisition-related stock compensation
4

 

 
9

 
1

Restricted stock units
6

 
4

 
10

 
6

Performance share units

 
1

 

 

Other
2

 
2

 
3

 
3

Total stock-based compensation expense, before income tax benefit
22

 
18

 
41

 
31

Income tax benefit
(7
)
 
(7
)
 
(13
)
 
(11
)
Total stock-based compensation expense, net of income tax benefit
$
15

 
$
11

 
$
28

 
$
20

The following table summarizes our grants:
 
Six Months Ended
 
August 1, 2015
 
August 2, 2014
 
Granted
 
Weighted-average grant-date fair value per unit
 
Granted
 
Weighted-average grant-date fair value per unit
Stock options
1.7


$
21

 
1.9

 
$
16

Restricted stock units
0.4

 
78

 
0.5

 
62


12 of 34



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


NOTE 10: EARNINGS PER SHARE
The computation of earnings per share is as follows:
 
Quarter Ended
 
Six Months Ended
 
August 1, 2015
 
August 2, 2014
 
August 1, 2015
 
August 2, 2014
Net earnings
$
211

 
$
183

 
$
339

 
$
323

 
 
 
 
 
 
 
 
Basic shares
189.4

 
189.6

 
190.0

 
189.7

Dilutive effect of stock options and other
4.1

 
3.1

 
4.2

 
3.0

Diluted shares
193.5

 
192.7

 
194.2

 
192.7

 
 
 
 
 
 
 
 
Earnings per basic share
$
1.11

 
$
0.97

 
$
1.78

 
$
1.70

Earnings per diluted share
$
1.09

 
$
0.95

 
$
1.74

 
$
1.68

 
 
 
 
 
 
 
 
Anti-dilutive stock options and other
1.7

 
1.8

 
1.7

 
3.4


13 of 34



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


NOTE 11: SEGMENT REPORTING
The following tables set forth information for our reportable segments: 
 
 
Retail
 
Corporate/Other
 
Retail
Business1
 
Credit
 
Total
Quarter Ended August 1, 2015
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
3,775

 
$
(177
)
 
$
3,598

 
$

 
$
3,598

Credit card revenues
 

 

 

 
103

 
103

Earnings (loss) before interest and income taxes
 
384

 
(121
)
 
263

 
114

 
377

Interest expense, net
 

 
(27
)
 
(27
)
 
(5
)
 
(32
)
Earnings (loss) before income taxes
 
384

 
(148
)
 
236

 
109

 
345

Goodwill
 
447

 

 
447

 

 
447

Assets2
 
5,369

 
1,529

 
6,898

 
2,802

 
9,700

 
 
 
 
 
 
 
 
 
 
 
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

Goodwill
 
175

 

 
175

 

 
175

Assets2
 
4,480

 
1,901

 
6,381

 
2,525

 
8,906

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended August 1, 2015
 
 
 
 
 
 
 
 
 

Net sales
 
$
6,966

 
$
(252
)
 
$
6,714

 
$

 
$
6,714

Credit card revenues
 

 

 

 
202

 
202

Earnings (loss) before interest and income taxes
 
670

 
(209
)
 
461

 
161

 
622

Interest expense, net
 

 
(55
)
 
(55
)
 
(10
)
 
(65
)
Earnings (loss) before income taxes
 
670

 
(264
)
 
406

 
151

 
557

Goodwill
 
447



 
447

 

 
447

Assets2
 
5,369


1,529

 
6,898

 
2,802

 
9,700

 
 
 
 
 
 

 
 
 

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

Goodwill
 
175



 
175

 

 
175

Assets2
 
4,480


1,901

 
6,381

 
2,525

 
8,906

1 Retail Business is not a reportable segment, but represents a subtotal of the Retail segment and Corporate/Other, and is consistent with our presentation in Management's Discussion and Analysis of Financial Condition and Results of Operations.
2 Assets in Corporate/Other include unallocated assets in corporate headquarters, consisting primarily of cash, land, property and equipment and deferred tax assets.







14 of 34



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
 
Six Months Ended
 
August 1, 2015
 
August 2, 2014
 
August 1, 2015
 
August 2, 2014
Nordstrom full-line stores - U.S.
$
2,097

 
$
2,074

 
$
3,796

 
$
3,757

Nordstrom.com
625

 
519

 
1,105

 
920

Nordstrom
2,722

 
2,593

 
4,901

 
4,677

Nordstrom Rack
857

 
759

 
1,688

 
1,500

Nordstromrack.com/HauteLook
117

 
78

 
234

 
155

Other retail1
79

 
8

 
143

 
16

Total Retail segment
3,775

 
3,438

 
6,966

 
6,348

Corporate/Other
(177
)
 
(142
)
 
(252
)
 
(215
)
Total net sales
$
3,598

 
$
3,296

 
$
6,714

 
$
6,133

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


15 of 34



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

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

16 of 34



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
With our customer at the center of our strategy, we're focused on delivering a seamless customer experience by linking our businesses through service and experience, product and capabilities. This is important because we know when customers engage with us across multiple touch points, their lifetime value and spend increase significantly.
Our second quarter performance reflected continued execution of our strategy. We achieved 9.2% sales growth, marking the fourth consecutive quarter of high single-digit increases. Our top-line strength combined with expense and inventory discipline helped us deliver a successful quarter. Key contributors to our growth in the second quarter include:
The Anniversary Sale, which is our largest event of the year, contributed to our top-line strength and achieved our expectations.
Our growth investments, including our entry into Canada, the acquisition of Trunk Club and the Nordstromrack.com launch, collectively added over $100 to our top line, driving over one-third of our net sales growth.
Nordstrom Rack generated a net sales increase of 13%, which represented the 26th consecutive quarter of double-digit growth.
Our combined full-line and Nordstrom.com business delivered a 4.8% comparable sales increase, reflecting ongoing strength in our existing business and continued trends over the past year.
We consider full-line stores to be the core of our brand, providing our customers with the high level of service they expect. In the third quarter, we plan to open a flagship store in Vancouver, B.C., which is expected to be one of our largest volume stores. In the U.S., we will open two full-line stores (Minneapolis and Milwaukee) and relocate a store in Los Angeles.
Growth of Nordstrom Rack is a key element of our strategy, representing our biggest source of new customers and an entry point to the Nordstrom brand. We are on track with our accelerated store growth, with 16 openings planned in the third quarter, for a total of 194 stores by the end of the year.
Roughly a year ago, we acquired Trunk Club, a personalized clothing service for men. Trunk Club stylists have collaborated with our buying teams to pilot Trunk Club's service to women, with a full launch expected in September. We're excited about the shared synergies, similar to our experience with the launch of Nordstromrack.com last spring, when we combined HauteLook's e-commerce talent with Nordstrom Rack's merchant expertise.
Mobile is an important enabler of convenience for our customers. To evolve with our customers' rapidly changing expectations, we're rolling out new features at a rate three times faster than last year. In addition to our ongoing mobile enhancements, we launched a unique text-to-buy feature for our salespeople, enabling customers to buy product via text.
We are creating excitement and attracting new customers through our differentiated merchandise offerings. In particular, we're having success in our younger customer-focused departments, which are now among our fastest growing categories. As recent examples, we are expanding Topshop, Madewell and Brandy Melville to more doors this year.
We are confident in our ability to execute our customer strategy and continue to leverage capabilities across channels to serve customers on their terms. We believe our investments in our customer strategy will help us deliver top-tier total shareholder returns through high single-digit total sales growth and mid-teens Return on Invested Capital.



17 of 34



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

RESULTS OF OPERATIONS
Our reportable segments are Retail and Credit. Our Retail segment includes our Nordstrom branded full-line stores and online store, Nordstrom Rack stores, Nordstromrack.com/HauteLook, Trunk Club, Jeffrey and our Last Chance clearance store. For purposes of discussion and analysis of our results of operations of our Retail Business, we combine our Retail segment results with revenues and expenses in the "Corporate/Other" column of Note 11: Segment Reporting (collectively, the "Retail Business"). We analyze our results of operations through earnings before interest and income taxes for our Retail Business and Credit, while interest expense and income taxes are discussed on a total company basis.
Retail Business
Summary
The following table summarizes the results of our Retail Business: 
 
Quarter Ended
 
August 1, 2015
 
August 2, 2014
 
Amount
 
% of net sales1
 
Amount
 
% of net sales1
Net sales
$
3,598

 
100.0
%
 
$
3,296

 
100.0
%
Cost of sales and related buying and occupancy costs
(2,326
)
 
(64.6
%)
 
(2,129
)
 
(64.6
%)
Gross profit
1,272

 
35.4
%
 
1,167

 
35.4
%
Selling, general and administrative expenses
(999
)
 
(27.8
%)
 
(889
)
 
(27.0
%)
Other loss
(10
)
 
(0.3
%)
 

 

Earnings before interest and income taxes
$
263

 
7.3
%
 
$
278

 
8.5
%
 
 
Six Months Ended
 
August 1, 2015
 
August 2, 2014
 
Amount
 
% of net sales1
 
Amount
 
% of net sales1
Net sales
$
6,714

 
100.0
%
 
$
6,133

 
100.0
%
Cost of sales and related buying and occupancy costs
(4,323
)
 
(64.4
%)
 
(3,949
)
 
(64.4
%)
Gross profit
2,391

 
35.6
%
 
2,184

 
35.6
%
Selling, general and administrative expenses
(1,920
)
 
(28.6
%)
 
(1,682
)
 
(27.4
%)
Other loss
(10
)
 
(0.1
%)
 

 

Earnings before interest and income taxes
$
461

 
6.9
%
 
$
502

 
8.2
%
1 Subtotals and totals may not foot due to rounding.


18 of 34



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
 
Six Months Ended
 
August 1, 2015
 
August 2, 2014
 
August 1, 2015
 
August 2, 2014
Net sales by channel:
 
 
 
 
 
 
 
Nordstrom full-line stores - U.S.
$
2,097

 
$
2,074

 
$
3,796

 
$
3,757

Nordstrom.com
625

 
519

 
1,105

 
920

Nordstrom
2,722

 
2,593

 
4,901

 
4,677

Nordstrom Rack
857

 
759

 
1,688

 
1,500

Nordstromrack.com/HauteLook
117

 
78

 
234

 
155

Other retail1
79

 
8

 
143

 
16

Retail segment
3,775

 
3,438

 
6,966

 
6,348

Corporate/Other
(177
)
 
(142
)
 
(252
)
 
(215
)
Total net sales
$
3,598

 
$
3,296

 
$
6,714

 
$
6,133

 
 
 
 
 
 
 
 
Net sales increase
9.2
%
 
6.2
%
 
9.5
%
 
6.4
%
 
 
 
 
 
 
 
 
Comparable sales increase (decrease) by channel:2
 
 
 
 
 
 
 
Nordstrom full-line stores - U.S.
0.8
%
 
(1.2
%)
 
0.7
%
 
(1.5
%)
Nordstrom.com
20.4
%
 
22.0
%
 
20.1
%
 
26.6
%
Nordstrom
4.8
%
 
2.7
%
 
4.5
%
 
3.0
%
Nordstrom Rack
1.7
%
 
4.0
%
 
0.8
%
 
5.2
%
Nordstromrack.com/HauteLook
49.6
%
 
14.9
%
 
50.4
%
 
12.6
%
Total company
4.9
%
 
3.3
%
 
4.6
%
 
3.6
%
 
 
 
 
 
 
 
 
Sales per square foot:3
 
 
 
 
 
 
 
Total sales per square foot
$
131

 
$
125

 
$
245

 
$
233

4-wall sales per square foot
109

 
107

 
204

 
201

U.S. full-line sales per square foot
102

 
100

 
185

 
182

Nordstrom Rack sales per square foot
129

 
133

 
259

 
269

1 Other retail includes Trunk Club, Nordstrom Canada full-line stores and Jeffrey boutiques.
2 Comparable sales include sales from stores that have been open at least one full year at the beginning of the year. We also include sales from our online channels (Nordstrom.com and Nordstromrack.com/HauteLook) in comparable sales because of the integration with our stores.
3 Sales per square foot is calculated as net sales divided by weighted-average square footage. Weighted-average square footage includes a percentage of year-end square footage for new stores equal to the percentage of the year during which they were open. 4-wall sales per square foot is calculated as sales for our Nordstrom U.S. full-line stores, Nordstrom Rack stores, Jeffrey boutiques, Nordstrom Canada full-line stores, Last Chance and Trunk Club clubhouses divided by their weighted-average square footage.
Total company net sales increased 9.2% for the quarter and 9.5% for the six months ended August 1, 2015, compared with the same periods in 2014. During the six months ended August 1, 2015, we opened two full-line stores and 11 Nordstrom Rack stores, including one Nordstrom Rack in the second quarter of 2015. Overall comparable sales increased 4.9% for the quarter and 4.6% for the six months ended August 1, 2015, driven by growth in our Nordstrom business.


19 of 34



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)

Nordstrom net sales, which consists of U.S. full-line and Nordstrom.com businesses, increased to $2,722, or 5.0%, for the second quarter of 2015 and to $4,901, or 4.8%, for the six months ended August 1, 2015, compared with the same periods in 2014. These increases reflected continued momentum in Nordstrom.com and ongoing improvement in sales trends at our full-line stores. Both the number of items sold and the average selling price increased on a comparable basis for the quarter and six months ended August 1, 2015. Top-performing merchandise categories for the quarter and six months ended August 1, 2015 were Women's Apparel and Cosmetics.
U.S. full-line stores' comparable sales increased 0.8% for the quarter and 0.7% for the six months ended August 1, 2015, compared with the same periods in 2014. The top-performing geographic regions for full-line stores for the quarter ended August 1, 2015 were the Southwest and Southeast, while the top-performing geographic regions for the six months ended August 1, 2015 were the Northwest and Southwest.
Our online channels continued to experience outsized growth, driven by increased merchandise selection. Nordstrom.com net sales increased 20% in both the quarter and six months ended August 1, 2015. Nordstromrack.com/HauteLook net sales increased 50% in both the second quarter of 2015 and the six months ended August 1, 2015.
Nordstrom Rack net sales increased $98, or 13%, for the quarter and $188, or 13%, for the six months ended August 1, 2015, compared with the same periods in 2014. Nordstrom Rack comparable sales increased 1.7% for the quarter and 0.8% for the six months ended August 1, 2015. The average selling price increased, while the number of items sold decreased on a comparable basis for the quarter and six months ended August 1, 2015. Top-performing merchandise categories for the second quarter of 2015 included Shoes and Specialized, while the top-performing merchandise categories for the six months ended August 1, 2015 were Shoes and Cosmetics. Nordstrom Rack sales per square foot decreased 2.9% for the second quarter and 3.8% for the six months ended August 1, 2015 primarily due to new store openings.
Retail Business Gross Profit
The following table summarizes the Retail Business gross profit:
 
Quarter Ended
 
Six Months Ended
 
August 1, 2015
 
August 2, 2014
 
August 1, 2015
 
August 2, 2014
Retail gross profit1
$
1,272


$
1,167


$
2,391


$
2,184

Retail gross profit as a % of net sales
35.4
%

35.4
%

35.6
%

35.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
August 1, 2015
 
August 2, 2014
Ending inventory per square foot
 
 
 
 
$
72.72

 
$
68.27

Inventory turnover rate2
 
 
 
 
4.49

 
4.83

1 Retailers do not uniformly record the costs of buying and occupancy and supply chain operations (freight, purchasing, receiving, distribution, fulfillment, etc.) between gross profit and selling, general and administrative expenses. As such, our gross profit and selling, general and administrative expenses and rates may not be comparable to other retailers' expenses and rates.
2 Inventory turnover rate is calculated as the trailing 12-months' cost of sales and related buying and occupancy costs (for all segments) divided by the trailing 4-quarter average inventory. Retailers do not uniformly calculate inventory turnover as buying and occupancy costs may be included in selling, general and administrative expenses. As such, our inventory turnover rates may not be comparable to other retailers' rates.
Our Retail gross profit rate was flat for the quarter and six months ended August 1, 2015. Our Retail gross profit increased $105 for the second quarter of 2015 and $207 for the six months ended August 1, 2015, compared with the same periods in 2014, due primarily to increased sales, partially offset by Nordstrom Rack's continued store expansion.

20 of 34



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)

Our inventory turnover rate decreased to 4.49 times for the trailing 12-months ended August 1, 2015, from 4.83 times for the same period in 2014, due to planned inventory growth. The increase in ending inventory per square foot was due to planned growth across all channels. As we continue to grow our online channels, we expect increases in inventory without corresponding increases in square footage.
Ending inventory includes pack and hold inventory of $199 and $211 on August 1, 2015 and August 2, 2014, which represents strategic purchases of merchandise for upcoming selling seasons.
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
 
Six Months Ended
 
August 1, 2015
 
August 2, 2014
 
August 1, 2015
 
August 2, 2014
Selling, general and administrative expenses
$
999

 
$
889

 
$
1,920

 
$
1,682

Selling, general and administrative expenses as a % of net sales
27.8
%
 
27.0
%
 
28.6
%
 
27.4
%
Our Retail SG&A rate increased 82 basis points for the quarter and 118 basis points for the six months ended August 1, 2015, reflecting planned growth initiatives related to Trunk Club and Canada and higher fulfillment costs associated with online growth. Retail SG&A increased $110 for the quarter and $238 for the six months ended August 1, 2015 primarily due to planned growth initiatives related to Trunk Club and Canada and an increase in sales.
Other Loss
Other loss of $10 for the quarter and six months ended August 1, 2015 was due to impairment of an equity method investment as we determined it was no longer recoverable.


21 of 34



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

Credit Segment
Summary
The table below provides a detailed view of the operational results of our Credit segment, consistent with Note 11: Segment Reporting. 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.
We reached an agreement in May 2015 to sell substantially all of our U.S. Visa and private label credit card portfolio. These receivables are now classified as "held for sale" (see Note 2: Credit Card Receivable Transaction).
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 1, 2015
 
August 2, 2014
 
Amount
 
Annualized % of average credit card receivables1
 
Amount
 
Annualized % of average credit card receivables1
Credit card revenues
$
103

 
18.5
%
 
$
96

 
18.1
%
Credit expenses
(50
)
 
(9.0
%)
 
(43
)
 
(8.3
%)
Credit transaction, net
61

 
10.9
%
 

 

Earnings before interest and income taxes2
114

 
20.5
%
 
53

 
9.8
%
Interest expense
(5
)
 
(0.9
%)
 
(5
)
 
(0.9
%)
Intercompany merchant fees
34

 
6.2
%
 
31