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Slide 1: NORDSTROM, INC. ANNUAL REPORT 2003 [more than a store] NORDSTROM, INC. ANNUAL REPORT 2003
Slide 2: financial highlights Dollars in thousands except per share amounts FISCAL YEAR 2003 2002 % Change Net sales Earnings before income taxes and cumulative effect of accounting change Earnings before cumulative effect of accounting change Net earnings Basic earnings per share Diluted earnings per share Cash dividends paid per share $6,491,673 $5,975,076 8.6 398,141 242,841 242,841 1.78 1.76 0.41 195,624 103,583 90,224 0.67 0.66 0.38 103.5 134.4 169.2 165.7 166.7 7.9 Sales per Square Foot/ Comp-Store Sales Percentage Change Gross Profit as a Percentage of Sales SG&A Expense as a Percentage of Sales 31.6% 35.1% 34.8% $350 $342 $327 $321 $319 29.6% 34.0% 33.6% 33.2% 30.0% 30.6% 30.4% 4.3% 0.3% -1.1% -2.9% 1.4% 99 00 01 02 03 99 00 01 02 03 99 00 01 02 03 Earnings before Income Taxes and Cumulative Effect of Accounting Change as a Percentage of Sales Inventory Turn (Cost of sales and related buying and occupancy divided by average inventory) 4.54 Cash Flow from Operations in millions $573.2 4.34 4.31 6.1% 4.19 4.10 3.6% 3.0% 3.3% $185.3 $369.2 $283.2 $426.4 6.4% 99 00 01 02 03 99 00 01 02 03 99 00 01 02 03 PLEASE VISIT WWW.NORDSTROM.COM TO OBTAIN ADDITIONAL SHAREHOLDER INFORMATION FINANCIAL INFORMATION TABLE OF CONTENTS ON PAGE 13
Slide 3: when you listen, an interesting thing happens. Bonnie Weiner, The Westchester, White Plains, New York Kieran Dodge, Alderwood, Lynnwood, Washington Elizabeth Duong, Valley Fair, San Jose, California People keep talking. They tell you what they like, what they don’t like, what works, what’s missing. It’s a simple process really — one that can lead a company to better performance and happier customers. By listening to you — our customers, empl employees and shareholders — we build lasting relationships and continue to define Nordstrom as a shopping experience that’s more than just a store. om [1]
Slide 4: He checked the stockroom, called the shipping company and looked in the mailroom. I want you to know Vanessa Q. Reyes, Alderwood, Lynnwood, Washington “ Matt did everything possible to ensure the shoes would be delivered to me that night. how grateful and delighted I am. Michael, Tysons Corner Center customer ” Susan Frad, Alderwood, Lynnwood, Washington To enhance the customer’s experience through better information and reduced wait times, new touch-screen “point of sale” registers and “personal book” software will be fully implemented by the end of 2004.
Slide 5: Susana Campos, John Calas, Kelly Derewenko, Sarah Stitt, Jason Bauer, Jose Vargas, employees at Village of Merrick Park, Coral Gables, Florida In a world of technology, people still matter the most. We live in an age where computers can do amazing things. But have you ever had a computer escort you through a store to find the perfect outfit for your daughter’s wedding? Or tailor it to perfection? Or have it delivered to your door that same day? That’s the advantage of real people. And at Nordstrom, you’ll find helpful people at every corner — from our sales floor to our concierge service to live operators at all 93 Nordstrom stores. Technology can be amazing too — especially if it’s helping people serve people. That’s the purpose behind our perpetual inventory system. It helps our buyers track their inventory nationwide, so they can maximize each store’s assortment and sales. And this year, two new tools — “point of sale” registers and “personal book” software — will be implemented in all Nordstrom stores to enhance service during and after the sale. Real operators. Personal shoppers. On-site tailors. Salespeople who have the tools they need to make their customers happy. Little things individually, but when you add them together you get something truly amazing — a shopping experience that’s one of a kind. [3]
Slide 6: From a steaming hot latte at our Ebar to a day of pampering at the Spa, Nordstrom is a great place to shop — and unwind. A place to delight your senses. We’re more than just a store — today’s customers seek a contemporary haven that’s equal parts bustling marketplace and soothing oasis. That’s the feeling we aim to create every day at Nordstrom. While our customers explore our store, we attend to the details that add value to the Nordstrom experience — spacious aisles, convenient restrooms, public seating and plenty of amenities. Other little extras add an exclusive touch and are available to everyone — elegant complimentary gift boxes, live piano music, a concierge service, personal shoppers, and free skincare and makeup consultations. We’ve learned from you that shopping is about more than buying new clothes — it’s an experience. So from the shine of our floors to the drape of our suits, we put our heart into every detail. [4]
Slide 7: Rickelle Jones, Alderwood, Lynnwood, Washington “ I thought I was ready to go, but Stephanie had not finished her magic. She had arranged a makeover in Cosmetics – Kathy, Old Orchard customer the first professional makeover of my life. ”
Slide 8: Fun, friends, fashion, real life, cool info. All at BPnordstrom.com When it comes to fashion, everyone wants to look great. As our customers have told us, fashion means different things to different people, and everyone enjoys finding something that’s fresh and new. As a fashion specialty store, we take pride in offering a unique selection of exclusive and name brand merchandise. Our merchants have developed a reputation over the years for nurturing new and small vendors — such as M•A•C, Exclusively Misook and Donald J Pliner — into national prominence. By taking a chance on new vendors, we differentiate our store and continue to attract new designers and customers to Nordstrom. We also seek to attract people of all shapes and sizes. Our commitment to sizes — men’s shoes in sizes 5-20 and widths aa to eeeeee, women’s shoes in sizes 4-14 and widths aaa to ww, petite to plus-sizes in women’s fashions, and short to extraextra-large tall clothes for men — distinguishes us from other retailers. Everyone wants to look great. At Nordstrom we go out of our way to make it happen. [6]
Slide 9: In all honesty, the “ Terry, my salesperson, was keenly aware that the clothes needed to be color-coordinated, sensibly styled and not too costly. She pulled together several items that looked fabulous. shopping experience was magical. Valerie, North County customer ” [7]
Slide 10: “ I want to make Nordstrom a great experience for every customer. Khaleel Grant, Downtown Seattle employee I know I have a reputation to uphold, as well as the Nordstrom name. ” A reputation built one customer at a time. One lesson we keep One learning from our customers is that loyalty is built over time. Every customer experience impacts our reputation, either positively or negatively, so we must continually earn our customers’ trust and business in everything we do — whether it’s in our stores, online or over the phone. By listening to you, and taking care of one customer at a time, we continue to define the Nordstrom experience. It’s an experience that’s built on people, products and place. But more importantly, it’s built on relationships — people-to-people connections that make Nordstrom more than just a store. [8]
Slide 11: our Chairman, Bruce Nordstrom, that I was worried no one would come. He stopped, looked at me kind of sideways, and said, ‘Young man, I always worry. And I’ve been doing this a long time.’ It just speaks, I think, to the humbleness of our company. “ Right up to the point that we opened the doors I was nervous and I remember saying to We work very hard every day to earn the loyalty of the customer. Bruce Bonnet, Alderwood Store Manager recalling the grand opening of the new Nordstrom Alderwood ”
Slide 12: message to shareholders Dear customers, employees and shareholders, The year 2003 was a pivotal one for our company. Over the last several years, we have focused on driving sales volume, reducing expenses and upgrading and utilizing new technology — all to improve service and our bottom-line results. We’ve made considerable progress on these goals this past year: • Posted second consecutive year of positive comparable store sales — our best performance in 9 years • Monthly same-store sales outperformed our retail peer group for 22 consecutive months • Improved gross profit 150 basis points for the full year — our best performance in over 10 years • Reduced S,G&A for third consecutive year • Achieved highest net income and earnings per share in company history As evidenced by our results, we are happy to report that Nordstrom is continuing to move in the right direction. Our customers are responding favorably to our merchandise mix. We’ve continued to find ways to manage and reduce expenses that we believe have maintained or enhanced the quality of our customers’ experience. Plus, we are beginning to take advantage of systems upgrades to maximize our inventory investment and deliver a fresh stream of compelling goods to each of our stores. Perhaps the biggest accomplishment is that we are becoming more disciplined as a company — while strengthening the foundation that has made Nordstrom so successful. Our goal has always been to drive volume by doing everything possible to enhance our customers’ shopping experience. Each of our choices on people, technology, merchandise, expense and capital investments must enable us to build on our culture and be competitive into the future. We’ve always believed that the best approach to this business is to have good people, give them the tools they need to be successful, then get out of their way and let them compete. Recently, we have added new technologies that will help our people be more competitive and better serve the customers as well. One example is our perpetual inventory system. This technology investment gives our merchants real-time visibility into which items are selling, so they can fine-tune their merchandise allocations by store. By delivering the right merchandise mix to each store, inventories turn more quickly, which opens up space for more fresh goods. Perpetual inventory is beginning to contribute to our results in a meaningful way. On a comparable basis, inventories per square foot are down over 8% from last year — and we are just beginning this journey. We need to keep pushing until we can utilize perpetual inventory to its full potential. [ 10 ]
Slide 13: We are especially excited about two new selling tools that will roll out to all full-line stores by the end of 2004. New touch-screen, point-of-sale registers will reduce wait times, speed up merchandise searches across our company, and connect our salespeople to Nordstrom.com and its inventory. These registers also contain “personal book” software, a powerful relationship-building tool that we consider a “people” initiative rather than a “technology” initiative. Similar to the physical personal books that many of our salespeople have relied on in the past, this new tool will track customer requests and needs online — ensuring better accuracy and more consistent and timely follow through. Success for our company is not going to take a new strategy or an entirely new business model. Instead it’s taking what we already do well and continuing to execute those strengths better — so we deliver meaningful results to both customers and shareholders. We are privileged to have a reputation built by thousands of Nordstrom employees over the years, as well as a current team committed to raising the bar even further. As always, our focus remains on the customer and doing everything possible to enhance the Nordstrom experience. We have made significant investments over the past three years on infrastructure and tools that will improve operating efficiencies. We are learning how to use technology to improve our flow of merchandise and strengthen our personal connection with the customer. And we are managing expenses more effectively, creating disciplines that will enable us to operate more profitably. We’re going to continue to invest in remodeling stores to maintain our existing store base in a relevant and compelling way for the customer. We owe it to our customers, employees and shareholders to evolve our operating model so it competes effectively for the long run — a model that will be poised to take advantage of future opportunities as they arise. For the past several years, we have all worked hard trying to strengthen the foundation that made this company so successful. We believe this is the best time in our company’s history to take advantage of numerous opportunities to move our business to the next level. We are an organization comprised of passionate, competitive individuals who are playing to win … and to make Nordstrom more than just a store. Blake W. Nordstrom President
Slide 14: executive team Laurie M. Black, 45 Executive Vice President and President, Nordstrom Rack Mark S. Brashear, 42 Executive Vice President and President, Façonnable James H. Bromley, 40 Executive Vice President and President, Nordstrom Direct Linda Toschi Finn, 56 Executive Vice President, Marketing Kevin T. Knight, 48 Executive Vice President, Chairman and Chief Executive Officer of Nordstrom fsb, President of Nordstrom Credit, Inc. Michael G. Koppel, 47 Executive Vice President and Chief Financial Officer Daniel F. Little, 42 Executive Vice President and Chief Administrative Officer Blake W. Nordstrom, 43 President Erik B. Nordstrom, 40 Executive Vice President, Full-line Stores Peter E. Nordstrom, 42 Executive Vice President and President, Full-line Stores James R. O'Neal, 45 Executive Vice President and President, Nordstrom Product Group Delena M. Sunday, 43 Executive Vice President, Human Resources and Diversity Affairs [ 12 ]
Slide 15: table of contents 14 25 26 27 28 29 30 48 50 Management’s Discussion and Analysis Independent Auditors’ and Management Reports Consolidated Statements of Earnings Consolidated Balance Sheets Consolidated Statements of Shareholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Eleven-Year Statistical Summary Retail Store Facilities 52 53 Officers of the Corporation and Executive Team Board of Directors and Committees 53 Shareholder Information NORDSTROM, INC. and SUBSIDIARIES [ 13 ]
Slide 16: management’s discussion and analysis Nordstrom is a fashion specialty retailer offering a wide selection of highquality apparel, shoes and accessories for women, men and children. We offer our products through multiple retail channels including our full-line stores, Nordstrom Rack stores, our catalogs and on the Internet at www.nordstrom.com. STRATEGIC PRIORITIES We remain committed to increasing our market share while achieving sustained increases in profitability and return on capital. Our core initiatives to accomplish these goals are as follows: CORE INITIATIVES Drive top-line growth – Our single most important goal is to drive and sustain positive comparable store sales into the future. We believe our ultimate success in accomplishing this goal will come from continuing to develop and maintain strong customer relationships by providing superior service and distinctive merchandise with an emphasis on quality and value. We are also working to increase sales volume through a combination of merchandising and productivity initiatives, such as maximizing system tools to better tailor our store inventories by market. Complete systems upgrades – Over the past three years we have made significant information technology investments. They have included the implementation of our perpetual inventory system which includes a more sophisticated replenishment system, a warehouse management system in our distribution centers and our financial system. We are currently rolling out our “Point of Sale” registers including new Personal Book technology and installing a new human resources management system. These additions have been successfully implemented and have not disrupted our operations. The systems upgrades that we have undertaken are providing the necessary tools to help us operate more efficiently and compete more effectively. Reduce expenses – We believe we have opportunities to reduce our expenses and achieve greater operating efficiency. Despite incremental costs associated with information technology and new store investments, we have lowered our selling, general and administrative expenses as a percent of sales in each of the last three years. We are pursuing several additional selling, general and administrative expense reduction opportunities, including reduced supply chain costs, information technology and nonselling costs, which we believe will help us achieve our intermediate-term goal of 28.0% - 28.5% by 2006. Improved operating efficiencies combined with solid sales performance will generate improved profitability for the company and our investors. OVERVIEW We are pleased to report a year of strong financial performance. Our results were driven by strong sales momentum, significant gross profit improvement and modest selling, general and administrative expense improvement resulting in diluted earnings per share of $1.76. During 2003, we generated 4-5-4 comparable store sales gains of 4.3% and total sales gains of 8.6% (see our GAAP sales reconciliation on page 18). In recent years, our sales per square foot have declined as we have ventured into new markets and opened new stores. This year we saw a turnaround in that trend as our sales per square foot increased to $327 from $319 last year, in spite of a 4% expansion in our retail square footage. Gross profit showed significant improvement, increasing to 35.1% of sales from 33.6% last year. Strong sales and substantially lower markdowns were the primary drivers of the improvement with lower shrinkage and improved buying and occupancy expense as a percent to sales also contributing. Our expenses as a percent of sales improved for the third year in a row. In 2003, selling, general and administrative expenses as a percent of sales were down 0.4% to 30.0%. This decrease is in addition to the 0.2% improvement we achieved in 2002. While we continue to make progress in this area, we are still focused on reaching our goal of 28.0% - 28.5% of sales by 2006. Pretax margin increased to 6.1% of sales, a level we had not expected to achieve until 2005. Return on equity increased to 16.15% from a prior year return of 6.71%. Both pretax margin and return on equity reached their highest levels in three years. Overall, our diluted earnings per share increased to $1.76 from $0.66 last year. Improved profitability and reduced inventory levels contributed to higher cash levels in 2003. A portion of these funds were used to retire $105.7 million in debt during 2003 and $196.8 million of debt in the first quarter of 2004, reducing our debt to capital ratio to approximately 39% by the end of first quarter 2004. NORDSTROM, INC. and SUBSIDIARIES [ 14 ]
Slide 17: management’s discussion and analysis Percentage of 2003 Sales by Merchandise Category Children’s Apparel and Accessories 4% Men’s Apparel and Furnishings 17% We had significant sales growth in 2003 as net sales increased 8.6% over the prior year. This growth resulted from comparable store sales increases and store openings. Comparable store sales on a 4-5-4 basis increased 4.3% due to increases at both full-line stores and Nordstrom Rack stores. Additionally, we opened four full-line stores and two Nordstrom Rack Other 4% Women’s Apparel 36% stores during 2003, increasing our retail square footage 4%. Sales at Nordstrom Direct increased approximately 15.4% due to favorable fill rates and strong Internet sales. During 2003, Internet sales increased approximately 46% while catalog sales declined by 9%. Merchandise division sales were led by Women's Designer, Accessories Shoes 20% and Cosmetics, followed by Men's Apparel and Women’s and Men’s Shoes. The results in these divisions were driven by fresh inventories, compelling values and new product launches. All divisions realized benefits from our Women’s Accessories and Cosmetics 19% new perpetual inventory system, which is discussed further in the next section. Moderate customer response to our merchandise mix caused sales declines in our Women’s Special Sizes and Children’s divisions. RESULTS OF OPERATIONS In 2002, net sales increased 6.1% over the prior year. This growth was primarily Segment results are discussed in each of the following sections as applicable. Net Sales (in millions) $6,492 $5,975 due to store openings. During 2002, we opened eight full-line stores, four Nordstrom Rack stores and one Façonnable boutique. We also closed one Nordstrom Rack location. The net impact was an increase in our retail square footage of 8%. Comparable store sales increased 1.4% due to increases at both full-line stores and Nordstrom Rack stores. Sales at Nordstrom Direct declined slightly with a planned reduction in catalog sales partially offset by an increase in Internet sales. $5,529 $5,634 In 2004, we plan to open two full-line stores, increasing retail square footage by approximately 2%. We expect 2004 comparable store sales to increase in the low single digits and total sales to increase in the mid-single digits. Internet sales are expected to continue increasing while catalog sales are expected to decline slightly for an overall moderate increase in $5,149 99 00 01 02 03 Nordstrom Direct sales. Sales increases and 4-5-4 comparable store sales are shown in the table below. Comparable stores are stores open at least one full fiscal year at the beginning of the fiscal year. Fiscal Year Net sales increase 4-5-4 Comparable store sales 2001 1.9% (2.9%) 2002 6.1% 1.4% 2003 8.6% 4.3% See our GAAP sales reconciliation on page 18. NORDSTROM, INC. and SUBSIDIARIES [ 15 ]
Slide 18: management’s discussion and analysis Gross Profit Fiscal Year Gross profit as a percent of net sales Inventory per square foot Inventory turnover 33.2% $52.10 4.10 33.6% $51.72 4.31 35.1% $47.11 4.54 2001 2002 2003 Selling, General and Administrative Fiscal Year Selling, general and administrative expense as a percent of sales 30.6% 30.4% 30.0% 2001 2002 2003 The 2002 selling, general and administrative expense includes an impairment charge of $15.6 million related to the write-down of an information technology investment in a supply chain tool in our private label division. We believe that excluding this charge provides a more comparable basis from which to evaluate performance between years. Without this charge, 2002 selling, general and administrative expenses as a percentage of sales would have been 30.2%. Excluding the effects of the 2002 impairment charge, selling, general and administrative expenses as a percentage of net sales decreased in 2003 to 30.0% from 30.2% in the prior year. This improvement is primarily the result of leverage on better-than-planned sales and overall expense improvements. The most notable expense improvements were: •Information technology expense declined this year after the completion of our perpetual inventory implementation. •Distribution costs improved as a result of efficiencies gained from our new warehouse management system. •Nordstrom Direct continued to execute planned reductions in catalog size consistent with their catalog sales trends, reducing overall catalog costs. •Selling expense as a percent to sales improved due to effective management of our staffing levels. These improvements were partially offset by the following: •Incentive compensation expense increased as our financial performance improved. •Our credit and collection expense increased primarily due to additional loyalty program expense resulting from higher credit sales. We saw an improvement in our 2003 gross profit as a percentage of net sales due to strong sales, substantially lower markdowns and improved shrinkage numbers as well as an improvement in expenses related to our private label business. Merchandise division gross profit was led by Accessories, Women's Specialized Apparel, Women’s Contemporary/Juniors and Men's Apparel. Our new perpetual inventory system gives us greater visibility into our inventory, allowing us to more effectively manage this capital. Better inventory management has enabled us to reduce the markdowns needed to turn slow-moving merchandise and decrease overall inventory levels in spite of new store additions. Inventory per square foot declined 8.9% due to improved performance at both the fullline stores and our Nordstrom Rack division. Buying and occupancy expenses benefited from leverage on a higher sales base resulting in a small improvement on a percent of sales basis. Gross profit as a percentage of net sales improved in 2002 due to better inventory management. In our merchandising divisions, improvement in gross profit rate offset lower sales in certain categories. Merchandise division gross profit was led by both Women's and Men's Apparel. Additionally, costs related to our private label operations improved. This was partially offset by increased markdowns in certain categories due to excess inventories. Total inventory increased as we added new stores, however, inventory per square foot declined due to improved performance at fullline stores partially offset by inventory increases at our Nordstrom Rack division. Total shrinkage as a percentage of sales was even with the previous year. In 2004, we expect to see continuing improvement in our gross profit performance through lower markdowns and increased inventory turnover. Additionally we plan a slight improvement in our buying and occupancy expenses on a percent of sales basis. NORDSTROM, INC. and SUBSIDIARIES [ 16 ]
Slide 19: management’s discussion and analysis Selling, general and administrative expenses as a percentage of net sales decreased in 2002 to 30.2% from 30.6% in the prior year, excluding the effect of the 2002 write-down. This decrease is the result of improvements in bad debt and selling expense and reductions in sales promotion. These costs were partially offset by higher distribution costs and higher information systems expense. Bad debt expense decreased as both delinquency and write-off trends stabilized. Selling expense decreased primarily due to continued efficiencies in shipping costs at Nordstrom Direct. Sales promotion decreased as Nordstrom Direct executed planned reductions in catalog size and number of mailings consistent with sales trends. Distribution costs increased primarily due to higher merchandise volumes and temporary inefficiencies caused by the implementation of our perpetual inventory system. The information systems expense increase resulted from depreciation and rollout costs of our new perpetual inventory system. Minority Interest Purchase and Reintegration Costs During 2002, we purchased the outstanding shares of Nordstrom.com, Inc. series C preferred stock for $70.0 million. The excess of the purchase price over the fair market value of the preferred stock and professional fees resulted in a one-time charge of $42.7 million. No tax benefit was recognized on the share purchase, as we do not believe it is probable that this benefit will be realized. The impact of not recognizing this income tax benefit increased our 2002 effective tax rate to 47% before the cumulative effect of accounting change. Also in 2002, $10.4 million of expense was recognized related to the purchase of the outstanding Nordstrom.com options and warrants. Service Charge Income and Other, Net (in millions) $155 In 2004, selling, general and administrative expenses as a percent of sales are expected to continue to improve as we identify and pursue expense reduction opportunities. Some of the key areas we are targeting include Supply Chain and Information Technology. Our distribution centers are beginning to reduce the merchandise ticketing needed and are focusing on freight costs. We plan on streamlining our information technology, eliminating old systems and leveraging off of new systems. In addition, we continue to focus on maximizing productivity improvements resulting from our new technologies. Interest Expense, Net Interest expense, net increased 11.0% in 2003 primarily due to the repurchase of $105.7 million in debt and lower capitalized interest. The debt repurchase resulted in additional expense of $14.3 million. These expenses were partially offset by lower interest expense resulting from the reduced debt balance outstanding. Capitalized interest decreased due to lower average construction and software in progress balances resulting primarily from the completion of several software projects. Interest expense, net increased 9.2% in 2002 primarily due to lower capitalized interest. Capitalized interest decreased due to lower average balances during the year for construction and software in progress. Interest expense for 2004 is expected to increase in the first quarter of 2004 as we repurchased $196.8 million in debt. The debt repurchase resulted in $20.8 million of additional expense. Interest expense will decline for the rest of the year due to our reduced debt balance outstanding. We expect to see a year-over-year reduction in interest expense of $11.0 - $13.0 million. 99 00 01 $117 $131 $134 $141 02 03 We continued to see improvements in our 2003 service charge income and other, net primarily due to higher VISA securitization income. Our securitization income benefited from substantial increases in our VISA credit sales and receivables during the year, as well as a small improvement in the cost of funds and bad debt write-offs. This increase was partially offset by a decline in service charge and late fee income resulting from a decline in our private label accounts receivable. Service charge income and other, net increased in 2002 primarily due to income recorded from our VISA securitization. Securitization income increased this year as credit spreads improved, the cost of funds decreased and bad debt write-offs stabilized. This increase was partially offset by a decline in service charge and late fee income resulting from a decline in our private label accounts receivable. In 2004, service charge income and other, net is expected to increase $7.0 - $9.0 million as we continue to see growth in our VISA credit sales and corresponding securitization income, offset by a small decline in service charge and late fee income from our private label credit card. NORDSTROM, INC. and SUBSIDIARIES [ 17 ]
Slide 20: management’s discussion and analysis Diluted Earnings per Share $1.76 $1.46 $0.93 $0.78 $0.66 Gross profit as a percentage of sales showed strong improvement, increasing to 36.8% from 33.3% last year. Significant improvements in markdowns and shrinkage combined with a small improvement in buying and occupancy expenses substantially increased gross profit as a percent of sales. Selling, general and administrative expenses as a percent of sales increased to 29.1% from 28.6% last year primarily due to higher incentive 99 00 01 02 03 compensation offset by improved selling costs, lower distribution costs, lower marketing costs and lower information systems expense. GAAP Sales Reconciliation (in millions) We converted to a 4-5-4 Retail Calendar at the beginning of 2003. Sales performance numbers included in this document have been calculated on a comparative 4-5-4 basis. We believe that adjusting for the difference in days provides a more comparable basis (4-5-4 vs 4-5-4) from which to evaluate sales performance. The following reconciliation bridges the reported GAAP sales to the 4-5-4 comparable sales. Dollar Increase % Change % Change Total Comp Sales Sales In 2002, our earnings per share included the write down of a supply chain tool, the Nordstrom.com minority interest purchase and reintegration costs and the cumulative effect of accounting change, for a total impact of $71.0 million or $0.53 per share. We believe that excluding these charges provides a more comparable basis from which to evaluate performance between years. Without the impact of these charges, 2002 earnings per share would have been $1.19. Our earnings per share in 2003 increased to $1.76 from $0.66 in 2002. Excluding the prior year charges noted above, 2003 earnings per share increased $0.57 or 48%. This increase was primarily driven by a strong increase in comparable store sales, significant improvement in gross profit percent and a moderate decrease in selling, general and administrative expenses as a percent of sales. Earnings per share decreased in 2002 compared to 2001 due to the charges described above. Excluding the impact of these charges, earnings per share would have been $1.19, an increase from 2001 of 28.0%. This increase was primarily driven by an increase in comparable store sales, an improvement in gross profit percent and a decrease in selling, general and administrative expenses as a percent of sales. Diluted earnings per share are expected to increase 15% - 18% in 2004. Fourth Quarter Results Fourth quarter 2003 earnings were $104.3 million compared with $60.0 million in 2002. Total sales for the quarter increased by 10.4% versus the same quarter in the prior year and comparable store sales increased by 8.5%. The increase in total sales resulted from an increase in comparable store sales for the quarter and the opening of four full-line stores and two Nordstrom Rack stores during the year. Sales Reconciliation QTD 2003 QTD 2002 Number of Days Reported GAAP Reported GAAP sales Plus Feb. 1, 2003 sales Reported 4-5-4 sales 4-5-4 Adjusted Days Less Nov. 1-2, 2002 sales 91 91 92 10.4% 7.0% $(43.7) $18.2 12.0% 8.5% 91 $1,932.5 $1,750.6 $181.9 $1,932.5 $1,725.1 $207.4 Sales Reconciliation YTD 2003 YTD 2002 Dollar Increase % Change % Change Total Comp Sales Sales Number of Days Reported GAAP Reported GAAP sales Less Feb. 1, 2003 sales Less Feb. 1-2, 2002 sales Plus Feb. 1, 2003 sales Reported 4-5-4 sales 4-5-4 Adjusted Days 365 $(18.2) 364 365 8.6% 4.1% $(30.9) $18.2 8.6% 4.3% 364 $6,491.7 $5,975.1 $516.6 $6,473.5 $5,962.4 $511.1 NORDSTROM, INC. and SUBSIDIARIES [ 18 ]
Slide 21: management’s discussion and analysis LIQUIDITY AND CAPITAL RESOURCES We finance our working capital needs, capital expenditures, acquisitions, debt repurchase and share repurchase activity with a combination of cash flows from operations and borrowings. We believe that our operating cash flows, existing cash and available credit facilities are sufficient to finance our cash requirements for the next 12 months. Additionally, we believe our operating cash flows, existing cash and credit available to us under existing and potential future facilities are sufficient to meet our cash requirements for the next 10 years. Operating Activities Our operations are seasonal in nature. The second quarter, which includes our Anniversary Sale, accounts for approximately 28% of net sales, while the fourth quarter, which includes the holiday season, accounts for about 30% of net sales. Cash requirements are highest in the third quarter as we build our inventory for the holiday season. The increase in net cash provided by operating activities between 2003 and 2002 was primarily due to an increase in net earnings before noncash items, decreases in inventories and increases in accounts payable partially offset by an increase in our retained interest in accounts receivable. Strong sales and effective inventory management left us with low inventory levels after the holidays. January receipts of new merchandise replenished our inventory levels resulting in an increase in accounts payable. Retained interest in accounts receivable increased as Nordstrom VISA credit sales increased during the year. The decrease in net cash provided by operating activities between 2002 and 2001 was primarily due to increases in inventories and accounts receivable partially offset by an increase in net earnings before noncash items and an increase in our accrual for income taxes. Inventory grew as we added stores during the year. Accounts receivable increased as Nordstrom VISA credit sales improved. The increased income tax accrual resulted from the timing of payments. Investing Activities For the last three years, investing activities have primarily consisted of capital expenditures and the minority interest purchase of Nordstrom.com. Capital Expenditures Our capital expenditures over the last three years totaled approximately $712 million, net of developer reimbursements, principally to add stores, improve existing facilities and purchase or develop new information systems. More than 3.0 million square feet of retail store space has been added during this period, representing an increase of 19% since January 31, 2001. We plan to spend approximately $725 - $775 million, net of developer reimbursements, on capital projects during the next three years. Approximately 63% of this investment will be to build new stores and remodel existing stores and 17% will go toward information technology, while the remaining 20% is for maintenance and other miscellaneous spending. Compared to the previous three years, we plan to open fewer stores, slow spending on information systems and increase our spending on the improvement of existing facilities. To maximize the profitability of our new stores, we are opening fewer new stores but are placing them in established large regional shopping centers. In the information systems area, we are in the process of implementing our “Point of Sale” system, which we expect to complete during 2004. At January 31, 2004, approximately $249 million has been contractually committed primarily for the construction of new stores or remodeling of existing stores. Although we have made commitments for stores opening in 2004 and beyond, it is possible that some stores may not be opened as scheduled because of delays in the development process, or because of the termination of store site negotiations. Total Square Footage (in thousands) 19,138 18,428 17,048 In 2004, cash flows provided by operating activities are expected to be in the range of approximately $380.0 - $420.0 million. Payables are expected to remain consistent with 2003 and inventory is expected to increase modestly from new store openings. These factors will be partially offset by a slower growth in accounts receivable compared to 2003. 14,487 16,056 99 00 01 02 03 NORDSTROM, INC. and SUBSIDIARIES [ 19 ]
Slide 22: management’s discussion and analysis Financing Activities Financing activities primarily consist of proceeds from the exercise of stock options, dividend payments and principal payments on debt. Dividends In 2003, we paid $0.41 per share in common stock dividends, the seventh consecutive annual dividend increase. We paid $0.38 and $0.36 per share of common stock in fiscal 2002 and 2001. Debt Buyback During 2003, we purchased $103.2 million of our 8.95% senior notes and $2.5 million of our 6.7% medium-term notes for a total cash payment of $120.8 million. Approximately $14.3 million of expense was recognized during the year related to these purchases. During the first quarter of 2004, we retired $196.8 million of our 8.95% senior notes for a total cash payment of $218.6 million. Approximately $20.8 million of expense has been recorded in first quarter of 2004. This expense and the related interest savings is expected to reduce first quarter earnings per share by approximately $0.08 per share. Debt to Capital Ratio At the end of 2003, our debt to capital ratio decreased to 43.0% from 49.6% in 2002 and a high of 52.1% in 2001. This was primarily due to the repurchase of $105.7 million in debt during 2003. Our first quarter 2004 repurchase of $196.8 million in debt brings our debt to capital ratio to about 39%, exceeding our near-term debt to capital goal of 40% to 45%. Off-Balance Sheet Financing We have $200 million in outstanding term notes collateralized by our Nordstrom VISA credit card receivables. On an ongoing basis, our Nordstrom VISA receivables are transferred to a master note trust, which has issued Class A and B notes to third party investors. We hold securities that represent our retained interests in the trust. Based on SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” this debt and the related receivables are not reflected in our consolidated balance sheets, however the carrying amount of our retained interests is included on our balance sheet. Our off-balance sheet financing allows us to obtain financing at rates lower than our conventional unsecured debt, adding another option to diversify our financing sources. Additionally, our exposure to credit losses on the underlying VISA receivables is limited to our retained interests. The details of our off-balance sheet financing are disclosed in Note 9: Off-balance Sheet Financing. Class A and B notes total $200 million and were issued by the trust in May 2002. These are 5-year term notes backed by our VISA credit card receivables. The proceeds from these notes were used to retire $200 million outstanding on a previous off-balance sheet securitization also backed by our VISA credit card receivables. Debt In November 2001, we issued $300 million of Class A notes backed by Nordstrom private label receivables. These notes bear a fixed interest rate of 4.82% and have a maturity of five years. Both the debt and related assets are included in our consolidated balance sheets. A portion of the proceeds was used to pay-down approximately $77 million in mediumterm notes and the purchase of Nordstrom.com, Inc.'s preferred stock for $70 million. The remaining proceeds will be used for general corporate purposes and capital expansion. Interest Rate Swaps To manage our interest rate risk, we had interest rate swaps with a fair value of ($8.1) million and $3.2 million outstanding at January 31, 2004 and 2003. Both interest rate swaps were designated as fully effective fair value hedges. Our current swap has a $250 million notional amount, expiring in 2009. Under the agreement, we received a fixed rate of 5.63% and paid a variable rate based on LIBOR plus a margin of 2.3% set at six-month intervals (3.945% at January 31, 2004). In 2002 and 2003, we received $4.9 million and $2.3 million for the sale of two interest rate swaps. The first swap converted our $300 million, 8.95% fixed-rate debt to variable rate, while the second swap converted our $250 million, 5.63% fixed-rate debt to variable rate. The cash proceeds from each of the swap terminations will be recognized as interest income evenly over the remaining life of the related debt. Noncash Financing We own 49% of a limited partnership which constructed a new corporate office building in which we are the primary occupant. During the first quarter of 2002, the limited partnership refinanced its construction loan obligation with an $85 million mortgage secured by the property, of which $79.2 million was included in our balance sheet at January 31, 2004. The obligation has a fixed interest rate of 7.68% and a term of 18 years. NORDSTROM, INC. and SUBSIDIARIES [ 20 ]
Slide 23: management’s discussion and analysis Available Credit We have an unsecured revolving credit facility totaling $300 million that expires in November 2004. Under the terms of the agreement, we pay a variable rate of interest based on LIBOR plus a margin of 0.50% (1.6% at January 31, 2004.) The margin increases to 0.63% if more than $150 million is outstanding on the facility. The line of credit agreement contains restrictive covenants, which include maintaining certain financial ratios. We also pay a commitment fee for the line based on our debt rating. As of January 31, 2004, no borrowings have been made against this revolving credit facility. We plan to renew this credit facility or replace it with a similar facility prior to its expiration. Based on the factors above, we do not believe the expiration of this credit facility will have an impact on our liquidity. Also in November 2001, we issued a variable funding note backed by Nordstrom private label receivables with a $200 million capacity that we renew annually. Interest on this facility varies based on the actual cost of commercial paper plus specified fees. As of January 31, 2004, no borrowings were outstanding against this note. Contractual Obligations The following table summarizes our contractual obligations and the expected effect on our liquidity and cash flows. We expect to fund these commitments primarily with operating cash flows generated in the normal course of business and credit available to us under existing and potential future facilities. Less than 1 year 1-3 years 3-5 years More than 5 years Fiscal Year Long-term debt Capital lease obligations Operating leases Purchase obligations Other long-term liabilities Total Total $1,234.3 16.2 718.2 341.8 86.2 $2,396.7 $5.4 2.4 73.3 231.9 4.1 $317.1 $405.4 3.5 134.7 100.3 12.9 $656.8 $457.2 $366.3 3.1 119.5 7.3 7.3 7.2 390.7 2.3 61.9 $594.4 $828.4 Long-term debt includes $200 million in off-balance sheet financing Additionally, we have universal shelf registrations on file with the Securities and Exchange Commission that permit us to offer an additional $450 million of securities to the public. These registration statements allow us to issue various types of securities, including debt, common stock, warrants to purchase common stock, warrants to purchase debt securities and warrants to purchase or sell foreign currency. This table excludes the short-term liabilities, other than the current Debt Ratings The following table shows our credit ratings at the date of this report. Credit Ratings Senior unsecured debt Commercial paper Outlook Moody’s Baa1 P-2 Stable Standard and Poor’s AA-2 Stable portion of long-term debt, disclosed on our balance sheets as the amounts recorded for these items will be paid in the next year. Purchase orders totaling $681.2 million have also been excluded from this table. Other long-term liabilities include estimated repayment schedules primarily for postretirement benefits based on their current payout rates. Other long-term liabilities not requiring cash payments, such as deferred revenue, were excluded from the table above. These ratings could change depending on our performance and other factors. A significant ratings drop could result in the termination of the $200 million Nordstrom private label receivables variable funding note and an interest rate change on the $300 million revolving credit facility. The remainder of our outstanding debt is not subject to termination or interest rate adjustments based on changes in credit ratings. related to our VISA securitization, which comes due in April 2007 and does not include the $196.8 million of debt repurchased in the first quarter of 2004. In addition to the required debt repayment disclosed above, we estimate total interest payments of approximately $669 million being paid over the remaining life of the debt. NORDSTROM, INC. and SUBSIDIARIES [ 21 ]
Slide 24: management’s discussion and analysis Share Repurchase In May 1995, the Board of Directors authorized $1.1 billion of share repurchases. As of January 31, 2004, we have purchased 39 million shares of our common stock for $1 billion, with remaining share repurchase authority of $82 million. The share repurchase represents 24% of the shares outstanding as of May 1995 after adjusting for the 1998 stock split, at an average price per share of $25.93. No shares were repurchased during 2003. CRITICAL ACCOUNTING POLICIES The preparation of our financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We regularly evaluate our estimates including those related to doubtful accounts, inventory valuation, intangible assets, income taxes, self-insurance liabilities, post-retirement benefits, sales return accruals, contingent liabilities and litigation. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The following discussion highlights the policies we feel are critical. Revenue Recognition We recognize revenues net of estimated returns and exclude sales tax. Retail stores record revenue at the point of sale. Catalog and Internet sales include shipping revenue and are recorded upon delivery to the customer. Our sales return liability is estimated based on historical return levels. Inventory Our inventory is stated at the lower of cost or market using the retail inventory method (first-in, first-out basis). Under the retail method, inventory is valued by applying a cost-to-retail ratio to the ending retail value of inventory. As our inventory retail value is adjusted regularly to reflect market conditions, our inventory method approximates the lower of cost or market. Factors considered in determining markdowns include current and anticipated demand, customer preferences, age of the merchandise and fashion trends. We also reserve for obsolescence based on historical trends and specific identification. Shrinkage is estimated as a percentage of sales for the period from the last inventory date, based on historical shrinkage losses. Vendor Allowances We receive allowances from merchandise vendors for purchase price adjustments, cooperative advertising programs and cosmetic selling expenses. Purchase price adjustments are recorded as a reduction of cost of sales at the point they have been earned and the related merchandise has been sold. Allowances for cooperative advertising programs and cosmetic selling expenses are recorded as a reduction of selling, general and administrative expense when the advertising or selling expense is incurred. Allowances in excess of actual costs incurred are recorded as a reduction to cost of sales. Self Insurance We are self insured for certain losses related to health and welfare, workers' compensation and general liability. We record estimates of the total cost of claims incurred as of the balance sheet date. These estimates are based on analysis of historical data and independent actuarial estimates. Allowance for Doubtful Accounts Our allowance for doubtful accounts represents our best estimate of the losses inherent in our customer accounts receivable as of the balance sheet date. We evaluate the collectibility of our accounts receivable based on several factors, including historical trends, aging of accounts, write-off experience and expectations of future performance. We recognize finance charges on delinquent accounts until the account is written off. Delinquent accounts are written off when they are determined to be uncollectible, usually after the passage of 151 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy or other circumstances that make further collection unlikely. NORDSTROM, INC. and SUBSIDIARIES [ 22 ]
Slide 25: management’s discussion and analysis Off-Balance Sheet Financing On an ongoing basis, our Nordstrom VISA receivables are sold to a master note trust, which has issued $200 million in term notes backed by those VISA receivables. We recognize gains or losses on the sale of the VISA receivables to the trust based on the difference between the face value of the receivables sold and the fair value of the assets created during the securitization process. The fair value of the assets is calculated as the present value of their expected cash flows. The discount rates used to calculate present value represent the volatility and risk of the assets. Significant assumptions and judgments are made to estimate the present value of expected cash flows and to determine the fair value of our retained interest. We have no other off-balance sheet transactions. For additional information see Note 9: Off-balance sheet financing. Valuation of Long-Lived Assets We review our intangibles and other long-lived assets annually for impairment or when events or changes in circumstances indicate the carrying value of these assets may not be recoverable. We estimate the fair value of an asset based on the future cash flows the asset is expected to generate. An impairment loss is recognized when the carrying value of the asset exceeds its fair value. Factors used in the valuation of longlived assets include, but are not limited to, management’s plans for future operations, recent operating results and projected cash flows. Realization of Deferred Tax Assets In January 2002, we sold our Denver Credit facility generating a capital gain for tax purposes of $15.5 million, which was used to offset a portion of our existing capital loss carryforwards. Capital loss carryforwards of $16.1 million remain available to offset capital gain income in the next two years. No valuation allowance reserve has been provided because we believe it is probable that the full benefit of these carryforwards will be realized. Our 2002 purchase of the outstanding shares of Nordstrom.com, Inc. series C preferred stock resulted in an expense of $40.4 million which we believe will not be deductible for tax purposes. As a result, we have established a valuation allowance reserve of $15.8 million to offset the deferred tax asset related to this purchase. Recent Accounting Pronouncements In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” for certain decisions made by the FASB as part of the Derivatives Implementation Group process. SFAS No. 149 also amends SFAS No. 133 to incorporate clarifications of the definition of a derivative. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively. The adoption of this statement did not have a material impact on our financial statements. In January 2003, the FASB issued Interpretation No. 46 (Revised 2003) or FIN 46, “Consolidation of Variable Interest Entities,” which requires the consolidation of variable interest entities (VIEs). An entity is considered to be a VIE when its equity investors lack controlling financial interest or the entity has insufficient capital to finance its activities without additional subordinated financial support. Consolidation of a VIE by an investor is required when it is determined that the majority of the entity’s expected losses or residual returns will be absorbed by that investor. FIN 46 is effective for variable interest entities created or acquired after January 31, 2003. For variable interest entities created before February 1, 2003, FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. The adoption of FIN 46 did not have an impact on our financial statements. During November 2003, the EITF reached a consensus on Issue 03-10, "Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers." EITF 03-10 addresses the accounting and disclosure treatment for a retailer’s reimbursement receipt from a vendor for coupons offered directly to consumers by the vendor. EITF 0310 is effective for coupons distributed to consumers for fiscal years beginning after December 15, 2003. We do not believe the adoption of EITF 03-10 will have an impact on our financial statements. NORDSTROM, INC. and SUBSIDIARIES [ 23 ]
Slide 26: management’s discussion and analysis In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about Pensions and other Postretirement Benefits," establishing additional annual disclosure requirements about plan assets, investment strategy, measurement date, plan obligations and cash flows. The revised standard also establishes interim disclosure requirements related to the benefit cost recognized and contributions paid. Our adoption of the revised SFAS No. 132 as of January 2004 did not have any impact on our results of operation or financial condition. Cautionary Statement The preceding disclosures include forward-looking statements regarding our performance, liquidity and adequacy of capital resources. These statements are based on our current assumptions and expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Forward-looking statements are qualified by the risks and challenges posed by our ability to predict fashion trends, consumer apparel buying patterns, our ability to control costs, weather conditions, hazards of nature such as earthquakes and floods, trends in personal bankruptcies and bad debt write-offs, changes in interest rates, employee relations, our ability to continue our expansion plans, and the impact of economic and competitive market forces, including the impact of terrorist activity or the impact of a war on us, our customers and the retail industry. As a result, while we believe there is a reasonable basis for the forward-looking statements, you should not place undue reliance on those statements. This discussion and analysis should be read in conjunction with the consolidated financial statements and the Eleven-Year Statistical Summary. NORDSTROM, INC. and SUBSIDIARIES [ 24 ]
Slide 27: independent auditors’ and management reports INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated balance sheets of Nordstrom, Inc. and subsidiaries (the "Company") as of January 31, 2004 and 2003, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended January 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Nordstrom, Inc. and subsidiaries as of January 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2004, in conformity with accounting principles generally accepted in the United States of America. The Company changed its method of accounting for goodwill and other intangible assets upon adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, for the year ended January 31, 2003, as discussed in Note 2 to the consolidated financial statements. MANAGEMENT REPORT We are responsible for the preparation, integrity and fair presentation of our financial statements and the other information that appears in the annual report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include estimates based on our best judgment. We maintain a comprehensive system of internal controls and procedures designed to provide reasonable assurance, at an appropriate cost-benefit relationship, that our financial information is accurate and reliable, our assets are safeguarded and transactions executed in accordance with established procedures. Deloitte and Touche LLP audits our financial statements in accordance with auditing standards generally accepted in the United States of America and provides an objective, independent review of our internal controls and the fairness of our reported financial condition and results of operations. The Audit Committee, which is comprised of five independent directors, meets regularly with our management, internal auditors and the independent auditors to ensure that each is properly fulfilling its responsibilities. The Committee oversees our systems of internal control, accounting practices, financial reporting and audits to ensure their quality, integrity and objectivity are sufficient to protect shareholders' investments. Michael G. Koppel Executive Vice President and Chief Financial Officer Blake W. Nordstrom Deloitte & Touche LLP Seattle, Washington March 26, 2004 President NORDSTROM, INC. and SUBSIDIARIES [ 25 ]
Slide 28: consolidated statements of earnings Dollars in thousands except per share amounts % of sales 100.0 (64.9) 35.1 (30.0) 5.1 (1.4) — 2.4 6.1 (2.4) 3.7 — 3.7 % of sales 100.0 (66.4) 33.6 (30.4) 3.2 (1.4) (0.9) 2.4 3.3 (1.6) 1.7 (0.2) 1.5 % of sales 100.0 (66.8) 33.2 (30.6) 2.6 (1.4) — 2.4 3.6 (1.4) 2.2 — 2.2 Fiscal Year Net sales Cost of sales and related buying and occupancy Gross profit Selling, general and administrative Operating income Interest expense, net Minority interest purchase and reintegration costs Service charge income and other, net Earnings before income taxes and cumulative effect of accounting change Income taxes Earnings before cumulative effect of accounting change Cumulative effect of accounting change (net of tax of $8,541) Net earnings Basic earnings per share Diluted earnings per share Cash dividends paid per share 2003 $6,491,673 (4,213,955) 2,277,718 (1,943,715) 334,003 (90,952) — 155,090 398,141 (155,300) 242,841 — $242,841 $1.78 $1.76 $0.41 2002 $5,975,076 (3,965,271) 2,009,805 (1,818,381) 191,424 (81,921) (53,168) 139,289 195,624 (92,041) 103,583 (13,359) $90,224 $0.67 $0.66 $0.38 2001 $5,634,130 (3,762,754) 1,871,376 (1,725,740) 145,636 (75,038) — 133,890 204,488 (79,800) 124,688 — $124,688 $0.93 $0.93 $0.36 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. NORDSTROM, INC. and SUBSIDIARIES [ 26 ]
Slide 29: consolidated balance sheets Dollars in thousands January 31, Assets Current assets: Cash and cash equivalents Accounts receivable, net Retained interest in accounts receivable Merchandise inventories Prepaid expenses Other current assets Total current assets Land, buildings and equipment, net Goodwill, net Tradename, net Other assets Total assets Liabilities and Shareholders’ Equity Current liabilities: Notes payable Accounts payable Accrued salaries, wages and related benefits Income taxes and other accruals Current portion of long-term debt Total current liabilities Long-term debt Deferred lease credits Other liabilities Shareholders’ equity: Common stock, no par: 500,000,000 shares authorized; 138,376,669 and 135,444,041 shares issued and outstanding Unearned stock compensation Retained earnings Accumulated other comprehensive earnings Total shareholders’ equity Total liabilities and shareholders’ equity 424,645 (597) 1,201,093 8,868 1,634,009 $4,465,688 358,069 (2,010) 1,014,105 2,700 1,372,864 $4,111,907 $286 512,035 333,428 196,967 6,833 1,049,549 1,227,410 377,321 177,399 $244 429,808 260,562 188,986 5,545 885,145 1,345,050 383,100 125,748 $476,224 633,858 272,294 901,623 49,750 121,681 2,455,430 1,724,273 56,609 84,000 145,376 $4,465,688 $219,344 639,630 124,543 953,112 40,261 111,138 2,088,028 1,761,544 56,609 84,000 121,726 $4,111,907 2004 2003 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. NORDSTROM, INC. and SUBSIDIARIES [ 27 ]
Slide 30: consolidated statements of shareholders’ equity Dollars in thousands except per share amounts Common Stock Unearned Stock Shares Amount Compensation Balance at February 1, 2001 Net earnings Other comprehensive earnings: Foreign currency translation adjustment Securitization fair value adjustment, net of tax of $1,355 Comprehensive net earnings Cash dividends paid ($0.36 per share) Issuance of common stock for: Stock option plans Employee stock purchase plan Stock compensation Purchase and retirement of common stock Balance at January 31, 2002 Net earnings Other comprehensive earnings: Foreign currency translation adjustment SERP adjustment, net of tax of $4,163 Securitization fair value adjustment, net of tax of $607 Comprehensive net earnings Cash dividends paid ($0.38 per share) Issuance of common stock for: Stock option plans Employee stock purchase plan Stock compensation Balance at January 31, 2003 Net earnings Other comprehensive earnings: Foreign currency translation adjustment SERP adjustment, net of tax of $3,304 Securitization fair value adjustment, net of tax of $(2,530) Comprehensive net earnings Cash dividends paid ($0.41 per share) Issuance of common stock for: Stock option plans Employee stock purchase plan Stock compensation Balance at January 31, 2004 2,259,771 647,480 25,377 138,376,669 57,981 9,677 (1,082) $424,645 — — 1,413 $(597) — — — — — — — — — — — — — — — 350,004 596,351 29,078 135,444,041 — 7,959 8,062 732 358,069 — — — 670 (2,010) — — — — — — — — — — — — — — — — (76,000) 134,468,608 — — 341,316 — — (2,680) — 186,165 541,677 19,009 3,788 6,754 380 — — 1,060 — — — — — — — — — — — — 133,797,757 — $330,394 — $(3,740) — Retained Earnings $900,090 124,688 — — — (48,265) — — — (1,310) 975,203 90,224 — — — — (51,322) — — — 1,014,105 242,841 — — — — (55,853) — — — $1,201,093 Accum. Other Comprehensive Earnings $6,701 — (2,175) (2,120) — — — — — — 2,406 — 7,755 (6,511) (950) — — — — — 2,700 — 7,379 (5,168) 3,957 — — — — — $8,868 Total $1,233,445 124,688 (2,175) (2,120) 120,393 (48,265) 3,788 6,754 1,440 (1,310) 1,316,245 90,224 7,755 (6,511) (950) 90,518 (51,322) 7,959 8,062 1,402 1,372,864 242,841 7,379 (5,168) 3,957 249,009 (55,853) 57,981 9,677 331 $1,634,009 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. NORDSTROM, INC. and SUBSIDIARIES [ 28 ]
Slide 31: consolidated statements of cash flows Dollars in thousands Fiscal Year Operating Activities Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of buildings and equipment Amortization of goodwill and tradename Amortization of deferred lease credits and other, net Stock-based compensation expense Deferred income taxes, net Cumulative effect of accounting change, net of tax Impairment of IT investment Minority interest purchase expense Change in operating assets and liabilities: Accounts receivable, net Retained interest in accounts receivable Merchandise inventories Prepaid expenses Other assets Accounts payable Accrued salaries, wages and related benefits Income taxes and other accruals Other liabilities Net cash provided by operating activities Investing Activities Capital expenditures Additions to deferred lease credits Proceeds from sale-leaseback of Denver Credit facility Minority interest purchase Other, net Net cash used in investing activities Financing Activities Proceeds (payments) from notes payable Proceeds from issuance of long-term debt Principal payments on long-term debt Proceeds from sale of interest rate swap Proceeds from issuance of common stock Cash dividends paid Purchase and retirement of common stock Net cash (used in) provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2003 $242,841 250,683 — (27,712) 17,894 32,027 — — — 15,593 (141,264) 28,213 86 (10,109) 99,516 56,115 3,105 6,237 573,225 (258,314) 46,007 — — 3,451 (208,856) 3 — (111,439) 2,341 57,459 (55,853) — (107,489) 256,880 219,344 $476,224 2002 $90,224 233,931 — (22,179) 1,130 6,190 13,359 15,570 40,389 6,362 (67,561) (117,379) 521 3,378 (2,537) 23,763 43,771 14,227 283,159 (328,166) 97,673 20,000 (70,000) (3,513) (284,006) 96 1,665 (87,697) 4,931 14,663 (51,322) — (117,664) (118,511) 337,855 $219,344 2001 $124,688 213,089 4,630 (8,886) 3,414 16,114 — — — 28,168 (5,475) 80,246 (2,438) (16,770) (11,850) (203) (10,413) 12,088 426,402 (396,048) 126,383 — — (3,104) (272,769) (82,912) 300,000 (18,640) — 10,090 (48,265) (1,310) 158,963 312,596 25,259 $337,855 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. NORDSTROM, INC. and SUBSIDIARIES [ 29 ]
Slide 32: notes to consolidated financial statements Dollars in thousands except per share amounts Note 1: Summary of Significant Accounting Policies The Company: We are a fashion specialty retailer offering high-quality apparel, shoes and accessories for women, men and children with 148 U.S. stores located in 27 states. Shipping and Handling Costs: Our shipping and handling costs include payments to third-party shippers and costs to store, move and prepare merchandise for shipment. Shipping and handling costs of $47,614, $42,506 and $30,868 in 2003, 2002 and 2001 were included in selling, general and administrative expenses. Advertising: Costs for newspaper, television, radio and other media are We also operate 31 Façonnable boutiques located primarily in Europe. Additionally, we generate catalog and Internet sales through Nordstrom Direct (formerly known as Nordstrom.com) and service charge income through Nordstrom Credit, Inc. Change in Fiscal Year: On February 1, 2003, our fiscal year end changed from January 31st to the Saturday closest to January 31st. Our new fiscal year consists of four 13 week quarters, with an extra week added onto the fourth quarter every five to six years. A one-day transition period is included in our first quarter 2003 results. Fiscal years 2003, 2002 and 2001 ended on January 31, 2004, 2003 and 2002, respectively. Basis of Presentation: The consolidated financial statements include the balances of Nordstrom, Inc. and its subsidiaries for the entire fiscal year. All significant intercompany transactions and balances are eliminated in consolidation. Use of Estimates: We make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications: Certain reclassifications of prior year balances have been made for consistent presentation with the current year. Revenue Recognition: We record revenues net of estimated returns and exclude sales tax. Retail stores record revenue at the point of sale. Catalog and Internet sales include shipping revenue and are recorded upon delivery to the customer. Our sales return liability is estimated based on historical return levels. Buying and Occupancy Costs: Buying costs consist primarily of salaries and expenses incurred by our merchandise managers, buyers and private label product development group. Occupancy costs include rent, depreciation, property taxes and operating costs of our retail and distribution facilities. generally expensed as they occur. Direct response advertising costs, such as catalog book production and printing costs, are expensed over the life of the catalog, not to exceed six months. Total advertising expenses were $154,466, $151,368 and $145,341 in 2003, 2002 and 2001. Store Preopening Costs: Store opening and preopening costs are expensed as they occur. Stock Compensation: We apply APB No. 25, "Accounting for Stock Issued to Employees," in measuring compensation costs under our stock-based compensation programs, which are described more fully in Note 15. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Fiscal Year Net earnings, as reported Add: stock-based compensation expense included in reported net income, net of tax Deduct: stock-based compensation expense determined under fair value, net of tax Pro forma net earnings Earnings per share: Basic — as reported Diluted — as reported Basic — pro forma Diluted — pro forma $1.78 $1.76 $1.68 $1.67 $0.67 $0.66 $0.52 $0.52 $0.93 $0.93 $0.80 $0.80 (23,749) $228,990 (21,914) $70,550 (19,850) $107,436 9,898 2,240 2,598 2003 $242,841 2002 $90,224 2001 $124,688 NORDSTROM, INC. and SUBSIDIARIES [ 30 ]
Slide 33: notes to consolidated financial statements Cash Equivalents: Cash equivalents are short-term investments with a maturity of three months or less from the date of purchase. As of January 31, 2004 and 2003, we have restricted cash of $7,140 and $7,523 included in our cash balances. The restricted cash is held in a trust for use by our Supplemental Executive Retirement Plan and Deferred Compensation Plans. Cash Management: Our cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Accounts payable at January 31, 2004 and 2003 includes $17,853 and $13,882 of checks not yet presented for payment drawn in excess of cash balances. Merchandise Inventories: Merchandise inventories are valued at the lower of cost or market, using the retail method (first-in, first-out basis). Land, Buildings and Equipment: Depreciation is computed using a combination of accelerated and straight-line methods. Estimated useful lives by major asset category are as follows: Asset Buildings Store fixtures and equipment Leasehold improvements Software Life (in years) 5-40 3-15 Shorter of life of lease or asset life 3-7 Foreign Currency Translation: The assets and liabilities of our foreign subsidiary have been translated to U.S. dollars using the exchange rates effective on the balance sheet date, while income and expense accounts are translated at the average rates in effect during the year. Resulting translation adjustments are recorded as other comprehensive earnings. Income Taxes: We use the asset and liability method of accounting for income taxes. Using this method, deferred tax assets and liabilities are recorded based on differences between financial reporting and tax basis of assets and liabilities. The deferred tax assets and liabilities are calculated using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We establish valuation allowances for tax benefits when we believe it is not likely that the related expense will be deductible for tax purposes. Loyalty Programs: We have customer loyalty programs in which customers receive points for qualifying purchases. Upon the accumulation of a certain number of points, customers receive a merchandise certificate. Anticipated merchandise certificate redemptions are expensed as points are earned by the customer, adjusted for expected redemption based on historical trends. Credit customers generally earn one to three points for every dollar charged to their Nordstrom Retail or Nordstrom VISA credit card, and each point is worth $0.01. The related expense is recorded in selling, general and administrative expense. Vendor Allowances: We receive allowances from merchandise vendors for purchase price adjustments, cooperative advertising programs and cosmetic selling expenses. Purchase price adjustments are recorded as a reduction of cost of sales at the point they have been earned and the related merchandise has been sold. Allowances for cooperative advertising programs and cosmetic selling expenses are recorded as a reduction of selling, general and administrative expense when the advertising or selling expense is incurred. Allowances in excess of actual costs incurred are recorded as a reduction to cost of sales. Fair Value of Financial Instruments: The carrying amounts of cash equivalents and notes payable approximate fair value. See Note 13 for the fair values of our long-term debt, including current maturities and interest rate swap agreements. Asset Impairment: We review our intangibles and other long-lived assets annually for impairment or when circumstances indicate the carrying value of these assets may not be recoverable. Deferred Lease Credits: We receive developer reimbursements as incentives to construct stores in certain developments. We capitalize the property, plant and equipment for these stores during the construction period in accordance with EITF Issue No. 97-10, “The Effect of Lessee Involvement in Asset Construction.” At the end of the construction period, developer reimbursements in excess of construction costs are recorded as deferred lease credits and amortized as a reduction to rent expense, on a straight-line basis over the life of the applicable lease or operating covenant. Construction costs in excess of developer reimbursements are recorded as prepaid rent and amortized as rent expense on a straightline basis over the life of the applicable lease or operating covenant. NORDSTROM, INC. and SUBSIDIARIES [ 31 ]
Slide 34: notes to consolidated financial statements Derivatives Policy: We limit our use of derivative financial instruments to the management of foreign currency and interest rate risks. Our derivative financial instruments for foreign currency are not material to our financial condition or results of operations and we have no material off-balance sheet credit risk. See Note 13 for a further description of our interest rate swaps. Recent Accounting Pronouncements: In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” for certain decisions made by the FASB as part of the Derivatives Implementation Group process. SFAS No. 149 also amends SFAS No. 133 to incorporate clarifications of the definition of a derivative. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively. The adoption of this statement did not have a material impact on our financial statements. In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about Pensions and other Postretirement Benefits," establishing additional annual disclosure requirements about plan assets, investment strategy, measurement date, plan obligations and cash flows. The revised standard also establishes interim disclosure requirements related to the benefit cost recognized and contributions paid. Our adoption of the revised SFAS No. 132 as of January 2004 did not have an impact on our results of operation or financial condition. Note 2: Cumulative Effect of Accounting Change In 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets having indefinite lives are no longer amortized but will be subject to annual impairment tests. Our intangible assets were determined to be either goodwill or indefinite lived tradename. We have three reporting units that we evaluate. At the beginning of 2002, In January 2003, the FASB issued Interpretation No. 46 (Revised 2003) or FIN 46, “Consolidation of Variable Interest Entities,” which requires the consolidation of variable interest entities (VIEs). An entity is considered to be a VIE when its equity investors lack controlling financial interest or the entity has insufficient capital to finance its activities without additional subordinated financial support. Consolidation of a VIE by an investor is required when it is determined that the majority of the entity’s expected losses or residual returns will be absorbed by that investor. FIN 46 is effective for variable interest entities created or acquired after January 31, 2003. For variable interest entities created before February 1, 2003, FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. The adoption of FIN 46 did not have an impact on our financial statements. During November 2003, the EITF reached a consensus on Issue 03-10, "Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers." EITF 03-10 addresses the accounting and disclosure treatment for a retailer’s reimbursement receipt from a vendor for coupons offered directly to consumers by the vendor. EITF 0310 is effective for coupons distributed to consumers for fiscal years beginning after December 15, 2003. We do not believe the adoption of EITF 03-10 will have an impact on our financial statements. we had $138,331 of intangibles associated with our Façonnable Business Unit, one level below our reportable Retail Stores segment. The purchase of the minority interest of Nordstrom.com in the first quarter of 2002 resulted in additional goodwill of $24,178 of which $8,462 was allocated to the Retail Stores reporting unit and $15,716 to the Catalog/Internet reporting unit. We test our intangible assets for impairment by comparing the fair value of the reporting unit with its carrying value. Fair value was determined using a discounted cash flow methodology. We perform our impairment test annually during our first quarter or when circumstances indicate we should do so. Our initial impairment test of the Façonnable Business Unit resulted in an impairment charge to tradename of $16,133 and to goodwill of $5,767. These impairments resulted from a reduction in management's estimate of future growth for this reporting unit. The impairment charge is reflected as a cumulative effect of accounting change. No further impairments have occurred to date. NORDSTROM, INC. and SUBSIDIARIES [ 32 ]
Slide 35: notes to consolidated financial statements The changes in the carrying amount of our intangible assets for the year ended January 31, 2004 and 2003 are as follows: Retail Stores Segment Goodwill Tradename Catalog/ Internet Segment Goodwill Note 3: Employee Benefits We provide a profit sharing plan and 401(k) plan for our employees. The profit sharing plan is non-contributory and is fully funded by us. The Board of Directors establishes our contribution to the profit sharing plan each year. The 401(k) plan is funded by voluntary employee contributions. In addition, we provide matching contributions up to a stipulated percentage of employee contributions. Our contributions to the profit sharing plan and matching contributions to the 401(k) plan totaled $52,030, $35,162 and $28,525 in 2003, 2002 and 2001. Total February 1, 2002 Impairment Goodwill acquired through purchase of minority interest (see Note 20) $38,198 $100,133 (5,767) (16,133) $— $138,331 — (21,900) 8,462 — $84,000 15,716 24,178 Note 4: Postretirement Benefits We have an unfunded Supplemental Executive Retirement Plan ("SERP"), January 31, 2004 and 2003 $40,893 $15,716 $140,609 which provides retirement benefits to certain officers and select employees. During 2003, the SERP was amended to change the target benefit, provide transition benefits, eliminate the offset of our contributions to the 401(k) and profit sharing plans and increase the retirement age. Certain 2002 $90,224 — 2001 $124,688 2,824 The following provides a reconciliation of benefit obligations and funded status of the SERP: January 31, 2004 2003 grandfathered participants will remain under the previous plan provisions. The following table shows the actual results of operations as well as pro-forma results adjusted to exclude intangible amortization and the cumulative effect of the accounting change. Fiscal Year Reported net earnings Cumulative effect of the accounting change, net of tax Adjusted net earnings — $242,841 13,359 $103,583 — $127,512 Intangible amortization, net of tax 2003 $242,841 — Change in benefit obligation: Accumulated benefit obligation at beginning of year Service cost $47,573 819 3,420 1,444 9,046 (2,689) $59,613 $(64,870) 6,228 24,403 $(34,239) $(25,373) 6,228 $34,411 1,447 3,537 2,941 7,760 (2,523) $47,573 $(50,125) 3,805 15,074 $(31,246) $(16,327) 3,805 Basic and diluted earnings per share: Fiscal Year Earnings per share: Reported net earnings Intangible amortization, net of tax Cumulative effect of accounting change, net of tax Adjusted net earnings — $1.78 — $1.76 0.10 $0.77 0.10 $0.76 — $0.95 — — — — 0.02 2003 Basic $1.78 Diluted $1.76 2002 Basic $0.67 2001 Basic & Diluted Diluted $0.66 $0.93 Interest cost Amortization of adjustments Change in additional minimum liability Distributions Accumulated benefit obligation at end of year Funded status of plan: Under funded status Unrecognized prior service cost Unrecognized loss Accrued pension cost Balance sheet amounts: Additional minimum liability Intangible asset Before adoption of SFAS No. 142, we amortized our intangible assets over their estimated useful lives on a straight-line basis ranging from 10 to 35 years. Accumulated amortization of intangible assets was $5,881 as of January 31, 2004 and 2003. NORDSTROM, INC. and SUBSIDIARIES [ 33 ]
Slide 36: notes to consolidated financial statements The components of SERP expense and a summary of significant assumptions are as follows: Fiscal Year Service cost Interest cost Amortization of adjustments Total SERP expense Assumption percentages: Discount rate Rate of compensation increase Measurement date Note 5: Interest Expense, Net The components of interest expense, net are as follows: Fiscal Year Short-term debt Long-term debt Total interest expense Less: Interest income Capitalized interest Interest expense, net (5,981) (3,585) $90,952 (4,254) (4,352) $81,921 (1,545) (10,383) $75,038 2003 $652 99,866 100,518 2002 $677 89,850 90,527 2001 $3,741 83,225 86,966 6.25% 4.00% 10/31/03 7.00% 4.00% 10/31/02 7.25% 5.00% 12/1/01 2003 $819 3,420 1,444 $5,683 2002 $1,447 3,537 2,941 $7,925 2001 $1,092 2,668 1,821 $5,581 Note 6: Income Taxes Income tax expense consists of the following: Fiscal Year Current income taxes: Federal State and local Total current income taxes Deferred income taxes: Current Non-current Total deferred income taxes Total before cumulative effect of accounting change Deferred income taxes on cumulative effect of accounting change Total income taxes — $155,300 (8,541) $83,500 — $79,800 155,300 92,041 79,800 21,225 4,507 15,536 (7,904) 29,129 (4,225) 8,732 (7,217) 22,753 134,075 87,534 64,264 $118,559 15,516 $76,901 10,633 $58,122 6,142 2003 2002 2001 NORDSTROM, INC. and SUBSIDIARIES [ 34 ]
Slide 37: notes to consolidated financial statements A reconciliation of the statutory Federal income tax rate to the effective tax rate on earnings before the cumulative effect of accounting change is as follows: Fiscal Year Statutory rate State and local income taxes, net of Federal income taxes Change in valuation allowance Other, net Effective tax rate 3.10 — 0.91 39.01% 3.78 8.45 (0.18) 47.05% 3.93 — 0.09 39.02% 2003 35.00% 2002 35.00% 2001 35.00% In January 2003 we sold our Denver Credit facility, generating a capital gain for tax purposes of $15,484 which was used to offset a portion of our existing capital loss carryforwards. Capital loss carryforwards of $16,117 remain available to offset capital gain income in the next two years. No valuation allowance has been provided because we believe it is probable that the full benefit of these carryforwards will be realized. Our purchase of the outstanding shares of Nordstrom.com, Inc. series C preferred stock in 2002 resulted in an expense of $40,389, which we believe will not be deductible for tax purposes. As a result, we have established a valuation allowance of $15,752 to offset the deferred tax asset related to this purchase. Note 7: Earnings per Share Basic earnings per share is computed using the weighted average number of common shares outstanding during the year. Diluted earnings per share uses the weighted average number of common shares outstanding during the year plus dilutive common stock equivalents, primarily stock options and performance share units. Options with an exercise price greater than the average market price were Deferred income taxes reflect the net tax effect of temporary differences between amounts recorded for financial reporting purposes and amounts used for tax purposes. The major components of deferred tax assets and liabilities are as follows: January 31, Accrued expenses Compensation and benefits accruals Merchandise inventories Capital loss carryforwards Loss on minority interest purchase Other Total deferred tax assets Land, buildings and equipment basis and depreciation differences Employee benefits Other Total deferred tax liabilities Valuation allowance Net deferred tax assets (78,558) (6,540) (5,532) (90,630) (15,752) $65,349 (50,401) (9,657) (3,891) (63,949) (15,752) $86,056 61,553 24,630 6,286 15,752 22,414 171,731 52,969 25,831 7,406 15,752 28,319 165,757 2004 $41,096 2003 $35,480 not included in diluted earnings per share. These options totaled 5,335,209, 7,259,273 and 8,563,996 shares in 2003, 2002 and 2001. Fiscal Year Net earnings Basic shares Basic earnings per share Dilutive effect of stock options and performance share units Diluted shares Diluted earnings per share 1,409,997 137,739,141 $1.76 617,468 135,724,240 $0.66 234,587 134,339,169 $0.93 2003 $242,841 136,329,144 $1.78 2002 $90,224 135,106,772 $0.67 2001 $124,688 134,104,582 $0.93 NORDSTROM, INC. and SUBSIDIARIES [ 35 ]
Slide 38: notes to consolidated financial statements Note 8: Accounts Receivable The components of accounts receivable are as follows: January 31, Trade receivables: Unrestricted Restricted Allowance for doubtful accounts Trade receivables, net Other Accounts receivable, net $25,228 589,992 (20,320) 594,900 38,958 $633,858 $15,599 613,647 (22,385) 606,861 32,769 $639,630 2004 2003 In accordance with SFAS No. 140, our consolidated balance sheets do not include this debt and the related receivables. These related VISA credit card receivables are sold to the trust on an ongoing basis. We recognize gains or losses on the sale of VISA receivables to the trust based on the difference between the face value of the receivables sold and the fair value of the assets created in the securitization process. The receivables sold to the trust are then allocated between the various interests in the trust based on those interests' relative fair market values. The fair values of the assets are calculated as the present value of their expected future cash flows. The following table summarizes the estimated fair values of our retained interests as well as the assumptions used: The restricted private label receivables back the $300 million of Class A notes and the $200 million variable funding note issued by us in November 2001. Other accounts receivable consist primarily of vendor receivables and cosmetic rebates receivable. As all vendor receivables are fully earned at period end, no allowance for doubtful vendor receivables has been recorded. Bad debt expense totaled $27,975, $29,080 and $34,750 in 2003, 2002 and 2001. Note 9: Off-balance Sheet Financing In May 2002, we replaced our $200 million variable funding note backed by VISA credit card receivables ("VISA VFN") with 5-year term notes also backed by the VISA credit card receivables. Class A and B notes with a combined face value of $200 million were issued to third party investors. These proceeds were used to retire the $200 million outstanding on the VISA VFN. We hold securities that represent our retained interests in a master note trust. The carrying amounts of the retained interests approximate fair value as defined by SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” and are included in the balance sheets as retained interest in accounts receivable. January 31, Fair value of retained interests: Assumptions: Weighted average remaining life (in months) Average credit losses Average gross yield Average interest expense on issued securities Average payment rate Discount rates of retained interests: Class C Certificate Seller Retained Interest Interest Only Strip 10.67% 6.80% 12.60% 16.79% 10.51% 19.92% 1.41% 23.39% 1.70% 20.94% 2.5 5.45% 17.79% 2.8 6.38% 17.81% 2004 $270,570 2003 $124,791 These discount rates represent the volatility and risk of the assets and are calculated using an established formula that considers both the current interest rate environment and credit spreads. NORDSTROM, INC. and SUBSIDIARIES [ 36 ]
Slide 39: notes to consolidated financial statements The following table illustrates the sensitivity in the fair market value estimates of the retained interests given independent changes in assumptions as of January 31, 2004: +10% Gross Yield Interest Expense on Issued Classes Card Holders Payment Rate Charge Offs Discount Rate (60) (532) (539) (411) (121) (842) (1,077) (821) 60 537 541 412 121 1,264 1,084 825 $1,594 +20% $3,187 -10% $(1,594) -20% $(3,187) The total principal balance of the VISA receivables was $465,198 and $323,101 as of January 31, 2004 and 2003. Gross credit losses were $22,393, $18,580 and $17,050 for the years ended January 31, 2004, 2003 and 2002, and receivables past due for more than 30 days were $8,805 and $8,519 at January 31, 2004 and 2003. The following table illustrates default projections using net credit losses as a percentage of average outstanding receivables in comparison to actual performance: Fiscal Year Original projection Actual 2004 5.59% N/A 2003 6.16% 5.57% 2002 7.66% 6.59% These sensitivities are hypothetical and should be used with caution. The effect of an adverse change in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might alter the reported sensitivities. The following table summarizes certain income, expenses and cash flows received from and paid to the master note trust. Fiscal Year Principal collections reinvested in new receivables Gains on sales of receivables Cash flows from retained assets: Retained interests Servicing fees 58,222 7,631 28,100 5,407 11,916 8,440 $1,332,790 4,920 $824,715 8,290 10,786 $669,582 3,147 6,711 2003 2002 2001 Under the terms of the trust agreement, we may be required to fund certain amounts upon the occurrence of specific events. The securitization agreements set a maximum percentage of receivables that can be associated with employee accounts. As of January 31, 2004, this maximum was exceeded by $1,595. In addition, other excess concentrations total $186. It is possible that we may be required to repurchase these receivables. Aside from these instances, we do not believe any additional funding will be required. Our continued involvement in the securitization of VISA receivables will include recording gains/losses on sales in accordance with SFAS No. 140 and recognizing income on retained assets as prescribed by EITF 99-20 "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," holding subordinated, non-subordinated and residual interests in the trust, and servicing the portfolio. Income earned on retained interests 31,926 Interest income earned on the retained interests is included in service charge income and other on the consolidated statements of earnings. NORDSTROM, INC. and SUBSIDIARIES [ 37 ]
Slide 40: notes to consolidated financial statements Note 10: Receivable-backed Securities Total principal receivables of the securitized portfolio at January 31, 2004 and 2003 were approximately $584,828 and $609,784, and receivables more than 30 days past due were approximately $14,910 and $16,973. Net charged off receivables for the years ended January 31, 2004, 2003 and 2002 were $28,703, $29,555 and $28,134. The private label receivables also serve as collateral for a variable funding facility with a limit of $200,000. Interest on the facility varies based on the actual cost of commercial paper plus specified fees. Nothing was outstanding on this facility at January 31, 2004 or 2003. Our continuing involvement in the securitization of private label receivables will include pledging new receivables to the master note trust, accounting for the transaction as a secured financing and servicing the portfolio. Note 11: Land, Buildings and Equipment Land, buildings and equipment consist of the following: January 31, Land and land improvements Buildings Leasehold improvements Capitalized software Store fixtures and equipment Construction in progress Less accumulated depreciation and amortization Land, buildings and equipment, net (2,108,936) $1,724,273 (1,882,976) $1,761,544 2004 $63,636 768,373 991,366 206,751 1,724,067 79,016 3,833,209 2003 $60,692 829,885 943,555 150,655 1,222,842 436,891 3,644,520 The total cost of capitalized leased buildings was $20,035 and $13,884 at January 31, 2004 and 2003 respectively, with related accumulated amortization of $14,021 and $9,261. The amortization of capitalized leased buildings was recorded in depreciation expense. In January 2003, we sold our Denver Credit facility for $20,000 and subsequently leased it back. The related gain of $16,022 is being recognized as a reduction to rent expense evenly over the 15 year life of the lease. At January 31, 2004, we have contractual commitments of approximately $249,000 primarily for the construction of new stores or remodeling of existing stores. Note 12: Notes Payable During 2002, we borrowed $15,000 at 2% on our variable funding note (described in Note 10.) Nothing was outstanding at January 31, 2004 and 2003. We have an unsecured line of credit totaling $300 million, which is available as liquidity support for our commercial paper program, and expires in November 2004. Under the terms of the agreement, we pay a variable rate of interest based on LIBOR plus a margin of 0.50%, or 1.6% at January 31, 2004. The margin increases to 0.63% if more than $150 million is outstanding on the facility. The line of credit agreement contains restrictive covenants, which include maintaining certain financial ratios. We also pay a commitment fee for the line based on our debt rating. As of January 31, 2004, no borrowings have been made against this revolving credit facility. We plan to renew this credit facility or replace it with a similar facility prior to its expiration. Additionally, in connection with the purchase of foreign merchandise, we have outstanding import letters of credit totaling $54,536 and standby letters of credit totaling $1,370 at January 31, 2004. Capitalized software includes external direct costs, internal direct labor and employee benefits, as well as interest associated with the development of the computer software. Depreciation begins in the period in which the software is ready for its intended use. Construction in progress includes $24,657 and $61,384 of software in progress at January 31, 2004 and 2003. NORDSTROM, INC. and SUBSIDIARIES [ 38 ]
Slide 41: notes to consolidated financial statements Note 13: Long-Term Debt A summary of long-term debt is as follows: January 31, Receivable-backed PL Term, 4.82%, due 2006 Senior debentures, 6.95%, due 2028 Senior notes, 5.625%, due 2009 Senior notes, 8.95%, due 2005 Notes payable, 6.7%, due 2005 Mortgage payable, 7.68%, due 2020 Other Fair market value of interest rate swap Total long-term debt Less current portion Total due beyond one year (8,091) 1,234,243 (6,833) $1,227,410 3,224 1,350,595 (5,545) $ 1,345,050 300,000 250,000 196,770 97,500 79,204 18,860 300,000 250,000 300,000 100,000 79,618 17,753 $300,000 $300,000 2004 2003 In 2002 and 2003, we received $4,931 and $2,341 for the sale of two interest rate swaps. The first swap converted our $300 million, 8.95% fixedrate debt to variable rate, while the second swap converted our $250 million, 5.63% fixed-rate debt to variable rate. The cash proceeds from each of the swaps will be recognized as interest income evenly over the remaining life of the related debt. The fair value of long-term debt, including current maturities, using quoted market prices of the same or similar issues, was approximately $1,336,000 and $1,443,000 at January 31, 2004 and 2003. We own a 49% interest in a limited partnership which constructed a new corporate office building in which we are the primary occupant. During 2002, the limited partnership refinanced its construction loan obligation with a mortgage secured by the property. This mortgage will be amortized as we make rental payments to the limited partnership over the life of the mortgage. Required principal payments on long-term debt, excluding capital lease obligations, the fair market value of the interest rate swap and $196,770 of debt repurchased in the first quarter of 2004, are as follows: Year ended January 31, 2005 2006 2007 2008 2009 Thereafter 5,420 101,613 303,800 3,677 253,564 366,253 Year to date we have purchased $103,230 of our 8.95% senior notes and $2,500 of our 6.7% medium-term notes for a total cash payment of $120,760. Approximately $14,300 of expense has been recorded during the year related to these purchases. During the first quarter of 2004, we retired $196,770 of our 8.95% senior notes for a total cash payment of $218,554. Approximately $20,781 of expense has been recorded in the first quarter of 2004. This expense and the related interest savings is expected to reduce first quarter earnings per share by approximately $0.08 per share. To manage our interest rate risk, we had outstanding at January 31, 2004 and 2003, interest rate swaps with a fair value of ($8,091) and $3,224 recorded in other liabilities and other assets, respectively. All interest rate swaps were designated as fully effective fair value hedges. Our current swap has a $250 million notional amount, expiring in 2009. Under the agreement, we received a fixed rate of 5.63% and paid a variable rate based on LIBOR plus a margin of 2.3% set at six-month intervals (3.945% at January 31, 2004). NORDSTROM, INC. and SUBSIDIARIES [ 39 ]
Slide 42: notes to consolidated financial statements Note 14: Leases We lease land, buildings and equipment under noncancelable lease agreements with expiration dates ranging from 2004 to 2080. Certain leases include renewal provisions at our option. Most of the leases provide for additional rent payments based upon specific percentages of sales and require us to pay for certain common area maintenance and other costs. Fiscal Year Minimum rent: Store locations Offices, warehouses and equipment Percentage rent: Store locations Total rent expense 7,920 $55,149 7,776 $54,995 8,047 $55,142 23,158 27,610 20,144 $24,071 $19,609 $26,951 2003 2002 2001 Note 15: Stock-Based Compensation Stock Option Plan: We have a stock option plan ("the Plan") under which stock options, performance share units and restricted stock are granted to key employees. Options vest over periods ranging from four to eight years, and expire ten years after the date of grant. Performance Share Units: In 2003, 2002 and 2001 we granted 113,904, 190,396 and 273,864 performance share units, which will vest over three years if certain financial goals are met. For the first time, 227,881 performance share units vested at 125% of their value as of January 31, 2004. Employees do not pay any monetary consideration upon vesting and may elect to receive common stock or cash. At January 31, 2004 and 2003, $18,657 and $4,441 were recorded in accrued salaries, wages and related benefits for the 2001-2003 grants. As of January 31, 2004 and 2003, 284,805 and 415,640 units were outstanding. At January 31, 2004, approximately 4,166,239 shares are reserved for future stock option grants pursuant to the Plan. We apply APB No. 25, "Accounting for Stock Issued to Employees," in measuring compensation costs under our stock-based compensation programs. Stock options are issued at the fair market value of the stock at the date of grant. Accordingly, we recognized no compensation cost for stock options issued under the Plan. For performance share units, we record compensation expense over the performance period at the fair value of the stock on the date when it is probable that the employees will earn the units. Stock-based compensation expense for 2003, 2002 and 2001 was $17,894, $1,130 and $3,414. $11,487 Future minimum lease payments as of January 31, 2004 are as follows: Year ended January 31, 2005 2006 2007 2008 2009 Thereafter Total minimum lease payments Less amount representing interest Present value of net minimum lease payments Capital Leases $2,398 1,932 1,564 1,565 1,565 7,167 16,191 4,704 Operating Leases $73,265 69,522 65,216 61,140 58,332 390,731 $718,206 NORDSTROM, INC. and SUBSIDIARIES [ 40 ]
Slide 43: notes to consolidated financial statements Stock option activity for the Nordstrom, Inc. Plan was as follows: Fiscal Year 2003 WeightedAverage Exercise Price 2002 WeightedAverage Exercise Price 2001 WeightedAverage Exercise Price Shares Shares Shares Outstanding, beginning of year Granted Exercised Cancelled Expired Outstanding, end of year Options exercisable at end of year 11,886,345 2,714,503 (2,259,771) (655,737) (1,488) 11,683,852 5,356,810 $25 18 22 23 14 $24 $27 10,763,893 2,423,966 (350,004) (948,788) (2,722) 11,886,345 5,724,629 $24 25 19 26 18 $25 $26 8,873,342 3,288,826 (186,165) (1,151,884) (60,226) 10,763,893 4,533,281 $27 19 18 26 22 $24 $27 The following table summarizes information about stock options outstanding for the Nordstrom, Inc. Plan as of January 31, 2004: Options Outstanding Weighted Average Remaining Contractual Life (Years) WeightedAverage Exercise Price Options Exercisable WeightedAverage Exercise Price Range of Exercise Prices Shares Shares $15 – $22 $23 – $32 $33 – $40 6,209,577 3,820,685 1,653,590 11,683,852 7 6 5 7 $19 26 36 $24 2,054,663 1,842,619 1,459,528 5,356,810 $20 27 36 $27 Stock option activity for the Nordstrom.com 1999 and 2000 Plans was as follows: Fiscal Year 2002 WeightedAverage Exercise Price 2001 WeightedAverage Exercise Price Shares Shares Outstanding, beginning of year Granted Exercised Cancelled Outstanding, end of year Options exercisable at end of year 3,524,808 112,500 — (3,637,308) — — $1.73 1.92 — 1.73 — — 4,174,950 41,500 — (691,642) 3,524,808 1,241,104 $1.72 1.92 — 1.68 $1.73 $1.68 NORDSTROM, INC. and SUBSIDIARIES [ 41 ]
Slide 44: notes to consolidated financial statements Nonemployee Director Stock Incentive Plan The Nonemployee Director Stock Incentive Plan authorizes the grant of stock awards to nonemployee directors. These awards may be deferred or issued in the form of restricted or unrestricted stock, nonqualified stock options or stock appreciation rights. We issued 15,849 and 18,981 shares of common stock for a total expense of $318 and $405 for the years ended January 31, 2004 and 2003. An additional 10,672 shares were deferred for a total expense of $183 in 2003. At January 31, 2004, we had 404,498 remaining shares available for issuance. Nordstrom.com Grants To Executive Officers Options and performance share units granted to our president and the other four most highly compensated individuals were 9.3%, 8.3% and 7.9% as a percent of total options and performance share units granted in 2003, 2002 and 2001. SFAS No. 123 The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Fiscal Year 2003 $242,841 2002 $90,224 2001 $124,688 Nordstrom.com had two stock option plans, the "1999 Plan" and the "2000 Plan," as well as warrants issued to vendors in exchange for services. In the third quarter of 2002, we purchased 3,608,322 options and 470,000 warrants in connection with the purchase of the minority interest in Nordstrom.com (see Note 20) for a total cash payment of $11,802. At January 31, 2004 and 2003, there are no outstanding options or warrants for Nordstrom.com. Employee Stock Purchase Plan We offer an Employee Stock Purchase Plan as a benefit to our employees. Employees participate through payroll deductions in amounts related to their base compensation. At the end of each offering period, the participants purchase shares at 85% of the lower of the fair market value at the beginning or the end of the offering period, usually six months. We issued 647,480, 596,351 and 541,677 shares under this plan in 2003, 2002 and 2001. As of January 31, 2004 and 2003, we had payroll deductions totaling $3,728 and $3,000 for the purchase of shares. We have 1,548,650 shares available for issuance at January 31, 2004. Pacesetter Stock Plan We granted 9,528, 10,653 and 6,687 shares of common stock to key employees under the Pacesetters stock plan in 2003, 2002 and 2001. The Pacesetter stock plan was established in 1997 to provide additional incentive to employees, officers, consultants or advisors to promote the success of the business. The related expense of $164, $240 and $130 was recorded in 2003, 2002 and 2001. An additional 1,527 shares were deferred for a related expense of $26 in 2003. As of January 31, 2004, there are no remaining shares available for issuance. Net earnings, as reported Add: stock-based compensation expense included in reported net income, net of tax 9,898 2,240 2,598 Deduct: stock-based compensation expense determined under fair value, net of tax Pro forma net earnings Earnings per share: Basic — as reported Diluted — as reported Basic — pro forma Diluted — pro forma $1.78 $1.76 $1.68 $1.67 $0.67 $0.66 $0.52 $0.52 $0.93 $0.93 $0.80 $0.80 (23,749) $228,990 (21,914) $70,550 (19,850) $107,436 NORDSTROM, INC. and SUBSIDIARIES [ 42 ]
Slide 45: notes to consolidated financial statements The Black-Scholes method was used to estimate the fair value of the options at grant date based on the following factors: Fiscal Year Stock Options: Risk-free interest rate Volatility Dividend yield Expected life in years Weighted-average fair value at grant date ESPP: Risk-free interest rate Volatility Dividend yield Expected life in years Weighted-average fair value at grant date $7 $7 $5 1.1% 71.0% 1.5% 0.5 1.9% 69.0% 1.5% 0.5 4.3% 68.0% 1.3% 0.5 $10 $14 $10 2.9% 71.0% 1.5% 5.0 4.3% 69.0% 1.5% 5.0 4.8% 68.0% 1.3% 5.0 2003 2002 2001 Fiscal Year Noncash activity: Reclassification of new stores Corporate office construction 2003 2002 2001 $753 1,880 $61,792 (3,951) $75,555 36,120 Supplementary cash flow information includes the following: Fiscal Year Cash paid during the year for: Interest (net of capitalized interest) Income taxes Note 18: Segment Reporting We have four segments: Retail Stores, Credit Operations, Catalog/Internet, and Corporate and Other. The Retail Stores segment derives its revenues from sales of high-quality apparel, shoes and accessories. It includes our full-line, Nordstrom Rack and Façonnable stores as well as our product development group, which coordinates the design and production of private label merchandise sold in our retail stores. The Credit Operations segment revenues consist primarily of finance charges earned through issuance of the Nordstrom private label and VISA credit cards. The Catalog/Internet segment generates revenues from direct mail catalogs and the Nordstrom.com website. During 2003, Nordstrom Direct, which contains our Internet and catalog business, was consolidated into Nordstrom, Inc. as a division. As a result of this change, the Internet and catalog segment will be presented as part of our retail stores segment starting in 2004. $96,824 121,271 $84,898 48,386 $77,025 80,689 2003 2002 2001 For options issued in 2001 under the Nordstrom.com plans, we used a riskfree interest rate of 4.5%, volatility of 127%, dividend yield of 0% and expected life of 4 years to calculate the fair value at grant date of $1.56. Note 16: Accumulated Other Comprehensive Earnings The following table shows the components of accumulated other comprehensive earnings: January 31, Foreign currency translation SERP adjustment Securitization fair value adjustment Total accumulated other comprehensive earnings $8,868 $2,700 $2,406 4,764 807 1,757 2004 $15,783 (11,679) 2003 $8,404 (6,511) 2002 $649 — We use the same measurements to compute net earnings for reportable segments as we do for the consolidated company. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in Note 1. Note 17: Supplementary Cash Flow Information We capitalize certain property, plant and equipment during the construction period of commercial buildings which is subsequently derecognized and reclassed to prepaid rent or deferred lease credits. We also had noncash activity related to the construction of our corporate office building. The noncash activity is as follows: NORDSTROM, INC. and SUBSIDIARIES [ 43 ]
Slide 46: notes to consolidated financial statements The following tables set forth the information for our reportable segments and a reconciliation to the consolidated totals: Fiscal Year 2003 Revenues from external customers (b) Service charge income Intersegment revenues Interest expense, net Depreciation and amortization Earnings before taxes Net earnings (loss) Assets (a)(b) Capital expenditures Retail Stores $6,199,023 — 25,652 697 224,018 582,737 355,432 2,686,927 242,331 Retail Stores $5,721,517 — 29,737 191 201,861 450,476 261,439 2,686,252 230,864 Retail Stores $5,370,761 — 20,192 994 182,960 4,630 402,313 245,313 2,570,375 379,819 Credit Operations — $142,773 34,276 22,122 2,838 17,473 10,658 878,541 1,104 Credit Operations — $133,587 32,783 23,582 3,212 21,194 12,929 753,377 2,058 Credit Operations — $131,267 25,514 25,013 2,253 — 10,652 6,495 699,454 2,054 Catalog/ Internet $292,650 — — (105) 5,052 8,625 5,261 93,070 4,729 Catalog/ Internet $253,559 — — 972 4,977 (21,926) (13,375) 89,512 4,507 Catalog/ Internet $263,369 — — 77 5,498 — (8,153) (4,971) 69,457 2,554 Corporate and Other — — — $68,238 18,775 (210,694) (128,510) 807,150 10,150 Corporate and Other — — — $57,176 23,881 (254,120) (170,769) 582,766 90,737 Corporate and Other — — — $48,954 22,378 — (200,324) (122,149) 720,964 11,621 Eliminations — — $(59,928) — — — — — — Total $6,491,673 142,773 — 90,952 250,683 398,141 242,841 4,465,688 258,314 Fiscal Year 2002 Revenues from external customers (b) Service charge income Intersegment revenues Interest expense, net Depreciation and amortization Earnings before taxes and cumulative effect of accounting change Net earnings (loss) Assets (a)(b) Capital expenditures Eliminations — — $(62,520) — — — — — — Total $5,975,076 133,587 — 81,921 233,931 195,624 90,224 4,111,907 328,166 Fiscal Year 2001 Revenues from external customers (b) Service charge income Intersegment revenues Interest expense, net Depreciation and amortization Amortization of intangible assets Earnings before taxes Net earnings (loss) Assets (a)(b) Capital expenditures Eliminations — — $(45,706) — — — — — — — Total $5,634,130 131,267 — 75,038 213,089 4,630 204,488 124,688 4,060,250 396,048 (a) Segment assets in Corporate and Other include unallocated assets in corporate headquarters, consisting primarily of cash, land, buildings and equipment, and deferred tax assets. (b) Includes foreign sales of $92,524, $82,126 and $78,210 for the years ended January 31, 2004, 2003 and 2002, and assets of $234,459, $219,861 and $198,689 as of January 31, 2004, 2003 and 2002. NORDSTROM, INC. and SUBSIDIARIES [ 44 ]
Slide 47: notes to consolidated financial statements Note 19: Restructurings and Impairments In 2002, we recognized a charge of $15,570 to write-down an IT investment in a supply chain tool intended to support our private label division. A strategic decision was made not to expand our private label division to support an external wholesale business, resulting in impairment to an in-process software project designed to support this activity. This charge to the Retail Stores segment reduced this asset to its estimated market value. The charge was recorded in selling, general and administrative expense. Fiscal Year Excess of the purchase price over the fair market value of the preferred stock Nordstrom.com option/warrant buyback expense Professional fees incurred Total Note 21: Self Insurance 2002 $40,389 10,432 2,347 $53,168 We are self insured for certain losses related to health and welfare, In 2001, we streamlined our operations through a reduction in workforce of approximately 2,600 employees. As a result, we recorded a restructuring charge of $1,791 in selling, general and administrative expenses relating to severance for approximately 195 employees. Personnel affected were primarily located in the corporate center and in full-line stores. Workers Compensation – we have a deductible per claim of $1,000 or less The following table presents the activity and balances of the reserves established in connection with the restructuring charges: Fiscal Year Beginning balance Additions Payments Adjustments Ending balance Note 20: Nordstrom.com In May 2002, we paid $70,000 for the outstanding shares of Nordstrom.com, Inc. series C preferred stock in fulfillment of our put agreement with the minority interest holders of Nordstrom.com LLC. The excess of the purchase price over the fair market value of the preferred stock and professional fees resulted in a one-time charge of $42,736. No tax benefit was recognized, as we do not believe it is probable that this benefit will be realized. Purchase of the minority interest of Nordstrom.com also resulted in additional goodwill of $24,057. In July 2002, we purchased 3,608,322 Nordstrom.com options and 470,000 warrants for $11,802. We recognized $10,432 of expense related to the purchase of these options and warrants. The following table presents the charges associated with the minority interest purchase and reintegration costs: 2003 $— — — — $— 2002 $— — — — $— 2001 $178 1,791 (1,890) (79) $— Health and Welfare – We are self insured for our health and welfare coverage and do not have stop-loss coverage. Participants contribute to the cost of their coverage and are subject to certain plan limits and deductibles. Our health and welfare reserve is $10,000 at January 31, 2004. Note 22: Vulnerability Due to Certain Concentrations Approximately 29% of our retail square footage is located in the state of California. At January 31, 2004, the net book value of property located in California was approximately $284,000. We carry earthquake insurance in all states with a $50,000 deductible and a $50,000 payout limit per occurrence. At January 31, 2004 and 2003, approximately 37% and 38% of our receivables were obligations of customers residing in California. Concentration of the remaining receivables is considered to be limited due to their geographical dispersion. and no policy limits. Our workers compensation reserve is $57,400 at January 31, 2004. General Liability – we have a deductible per claim of $1,000 or less and a policy limit up to $150,000. Our general liability reserve is $10,300 at January 31, 2004. workers' compensation and general liability. We record estimates of the total cost of claims incurred as of the balance sheet date. These estimates are based on analysis of historical data and independent actuarial estimates. NORDSTROM, INC. and SUBSIDIARIES [ 45 ]
Slide 48: notes to consolidated financial statements Note 23: Contingent Liabilities We have been named in various lawsuits and intend to vigorously defend ourselves. While we cannot predict the outcome of these lawsuits, we believe these matters will not have a material adverse effect on our financial position, results of operations or cash flows. Cosmetics. We were originally named as a defendant along with other department store and specialty retailers in nine separate but virtually identical class action lawsuits filed in various Superior Courts of the State of California in May, June and July 1998 that have now been consolidated in Marin County state court. In May 2000, plaintiffs filed an amended complaint naming a number of manufacturers of cosmetics and fragrances and two other retailers as additional defendants. Plaintiffs' amended complaint alleges that the retail price of the "prestige" or “Department Store” cosmetics sold in department and specialty stores was collusively controlled by the retailer and manufacturer defendants in violation of the Cartwright Act and the California Unfair Competition Act. Plaintiffs seek treble damages and restitution in an unspecified amount, attorneys' fees and prejudgment interest, on behalf of a class of all California residents who purchased cosmetics and fragrances for personal use from any of the defendants during the period four years prior to the filing of the amended complaint. Defendants, including us, have answered the amended complaint denying the allegations. The defendants have produced documents and responded to plaintiffs' other discovery requests, including providing witnesses for depositions. We entered into a settlement agreement with the plaintiffs and the other defendants on July 16, 2003. In furtherance of the settlement agreement, the case was refiled in the United States District Court for the Northern District of California on behalf of a class of all persons who currently reside in the United States and who purchased “Department Store” cosmetics from the defendants during the period May 29, 1994 through July 16, 2003. The Court has given preliminary approval to the settlement. A summary notice of class certification and the terms of the settlement has been disseminated to class members. A hearing on whether the Court will grant final approval of the settlement is scheduled for June 8, 2004. If approved by the Court, the settlement will result in the plaintiffs' claims and the claims of all class members being dismissed, with prejudice, in their entirety. In connection with the settlement agreement, the defendants will provide class members with certain free products and pay the plaintiffs’ attorneys’ fees. Our share of the cost of the settlement will not have a material adverse effect on our financial condition. Washington Public Trust Advocates. In early 2002, we were named as one of 30 defendants in Washington Public Trust Advocates, ex rel., et al. v. City of Spokane, et al., filed in the Spokane County Superior Court, State of Washington. Plaintiff is a not-for-profit corporation bringing claims on behalf of the City of Spokane and the Spokane Parking Public Development Authority. The claims relate to the River Park Square Mall and Garage Project in Spokane, Washington (the "Project"), which includes a Nordstrom store. The portion of the complaint applicable to us seeks to recover from us the amount of a Department of Housing and Urban Development (“HUD”) loan made to the developer of the Project. Damages are sought in the amount of $22.75 million, or a lesser amount to the extent that the HUD loan proceeds were used for the construction of the store and not as tenant improvements. Other portions of the complaint seek to invalidate bonds issued to finance the public parking garage serving the Project, terminate the lease of the parking garage by the City of Spokane, and rescind other agreements between the City of Spokane and the developer of the Project, as well as damages from the developer of the Project in unspecified amounts. The Complaint also alleges breach of fiduciary duties by various defendants, including us, to the people of the City of Spokane regarding lack of disclosures concerning the developer and the Project. By order dated August 9, 2002, the court granted our motion to dismiss us from that lawsuit. Plaintiff attempted to obtain direct review by the Washington Supreme Court which declined to hear the case and referred it to the Washington Court of Appeals. On May 20, 2003, the Washington Court of Appeals affirmed our dismissal. Other. We are subject to routine litigation incidental to our business. No material liability is expected. NORDSTROM, INC. and SUBSIDIARIES [ 46 ]
Slide 49: notes to consolidated financial statements Note 24: Selected Quarterly Data (unaudited) Fiscal Year 2003 Net sales Gross profit Earnings before income taxes Net earnings Basic earnings per share Diluted earnings per share Dividends per share Common stock price High Low Fiscal Year 2002 Net sales Gross profit Minority interest purchase and reintegration costs (Loss)/earnings before cumulative effect of accounting change Cumulative effect of accounting change, net of tax Net (loss)/earnings Basic (loss)/earnings per share Diluted (loss)/earnings per share Dividends per share Common stock price High Low 26.29 22.15 26.87 16.58 21.93 15.06 22.39 17.87 26.87 15.06 (11,213) (13,359) (24,572) (.18) (.18) .09 36,335 — 36,335 .27 .27 .09 18,427 — 18,427 .14 .14 .10 60,034 — 60,034 .44 .44 .10 103,583 (13,359) 90,224 .67 .66 .38 18.61 15.00 1st Quarter $1,245,761 422,953 (42,047) 21.75 15.78 2nd Quarter $1,655,528 551,960 (11,121) 31.23 20.81 3rd Quarter $1,323,201 451,988 — 40.75 29.76 4th Quarter $1,750,586 582,904 — 40.75 15.00 Total $5,975,076 2,009,805 (53,168) 1st Quarter $1,343,539 455,081 44,455 27,155 .20 .20 .10 2nd Quarter $1,794,975 602,780 108,071 65,871 .48 .48 .10 3rd Quarter $1,420,610 509,296 74,569 45,469 .33 .33 .10 4th Quarter $1,932,549 710,561 171,046 104,346 .76 .74 .11 Total $6,491,673 2,277,718 398,141 242,841 1.78 1.76 .41 The per share amounts for the (loss)/earnings before cumulative effect of accounting change were $(0.08) for basic and diluted in the first quarter, and $0.77 and $0.76 for basic and diluted for the total year. Nordstrom, Inc. common stock is traded on the New York Stock Exchange, NYSE Symbol JWN. NORDSTROM, INC. and SUBSIDIARIES [ 47 ]
Slide 50: eleven-year statistical summary Dollars in thousands except square footage and per share amounts Fiscal Year Financial Position Customer accounts receivable, net Retained interest in accounts receivable Merchandise inventories Current assets Current liabilities Working capital Working capital ratio Land, buildings and equipment, net Long-term debt, including current portion Debt/capital ratio Shareholders’ equity Shares outstanding Book value per share Total assets Operations Net sales Gross profit Selling, general, and administrative Operating income Interest expense, net Write-down of investment Minority interest purchase and reintegration costs Service charge income and other, net Earnings before income taxes and cumulative effect of accounting change Income taxes Earnings before cumulative effect of accounting change Cumulative effect of accounting change, net of tax Net earnings Basic earnings per share Diluted earnings per share Dividends per share Comparable store sales percentage increase (decrease) Net earnings as a percent of net sales Return on average shareholders’ equity Sales per square foot for Company-operated stores Stores Total square footage 398,141 (155,300) 242,841 — 242,841 1.78 1.76 .41 4.3% 3.74% 16.15% 327 179 19,138,000 195,624 (92,041) 103,583 (13,359) 90,224 .67 .66 .38 1.4% 1.51% 6.71% 319 166 18,428,000 204,488 (79,800) 124,688 — 124,688 .93 .93 .36 (2.9%) 2.21% 9.78% 321 156 17,048,000 167,018 (65,100) 101,918 — 101,918 .78 .78 .35 .3% 1.84% 8.43% 342 140 16,056,000 6,491,673 2,277,718 (1,943,715) 334,003 (90,952) — — 155,090 5,975,076 2,009,805 (1,818,381) 191,424 (81,921) — (53,168) 139,289 5,634,130 1,871,376 (1,725,740) 145,636 (75,038) — — 133,890 5,528,537 1,879,021 (1,747,048) 131,973 (62,698) (32,857) — 130,600 $594,900 272,294 901,623 2,455,430 1,049,549 1,405,881 2.34 1,724,273 1,234,243 .4304 1,634,009 138,376,669 11.81 4,465,688 $606,861 124,543 953,112 2,088,028 885,145 1,202,883 2.36 1,761,544 1,350,595 .4960 1,372,864 135,444,041 10.14 4,111,907 $621,491 55,659 888,172 2,057,111 950,138 1,106,973 2.17 1,761,082 1,429,271 .5206 1,316,245 134,468,608 9.79 4,051,179 $649,504 50,183 945,687 1,812,982 950,568 862,414 1.91 1,599,938 1,112,296 .4922 1,233,445 133,797,757 9.22 3,608,503 2003 2002 2001 2000 NORDSTROM, INC. and SUBSIDIARIES [ 48 ]
Slide 51: eleven-year statistical summary 1999 $557,190 38,830 797,845 1,564,648 866,509 698,139 1.81 1,429,492 804,982 .4249 1,185,614 132,279,988 8.96 3,062,081 1998 $560,564 7,097 750,269 1,668,689 794,490 874,199 2.10 1,378,006 868,234 .4214 1,300,545 142,114,167 9.15 3,103,689 1997 $621,704 20,158 826,045 1,613,492 979,031 634,461 1.65 1,252,513 420,865 .3194 1,458,950 152,518,104 9.57 2,890,664 1996 $661,332 31,791 719,919 1,549,819 795,321 754,498 1.95 1,152,454 380,632 .2720 1,457,084 159,269,954 9.15 2,726,495 1995 $874,103 — 626,303 1,612,776 833,443 779,333 1.94 1,103,298 439,943 .3232 1,408,053 162,226,288 8.68 2,732,619 1994 $655,715 — 627,930 1,397,713 693,015 704,698 2.02 984,195 373,910 .2575 1,330,437 164,488,196 8.09 2,396,783 1993 $565,151 — 585,602 1,314,914 631,064 683,850 2.08 845,596 438,574 .2934 1,153,594 164,118,256 7.03 2,177,481 5,149,266 1,789,506 (1,523,836) 265,670 (50,396) — — 116,783 332,057 (129,500) 202,557 — 202,557 1.47 1.46 .32 (1.1%) 3.93% 16.29% 350 104 14,487,000 5,049,182 1,704,237 (1,429,837) 274,400 (47,091) — — 110,414 337,723 (131,000) 206,723 — 206,723 1.41 1.41 .30 (2.7%) 4.09% 14.98% 362 97 13,593,000 4,864,604 1,568,791 (1,338,235) 230,556 (34,250) — — 110,907 307,213 (121,000) 186,213 — 186,213 1.20 1.20 .265 4.0% 3.83% 12.77% 384 92 12,614,000 4,457,931 1,378,472 (1,232,860) 145,612 (39,400) — — 135,331 241,543 (95,227) 146,316 — 146,316 .90 .90 .25 0.6% 3.28% 10.21% 377 83 11,754,000 4,113,717 1,310,931 (1,136,069) 174,862 (39,295) — — 134,179 269,746 (106,190) 163,556 — 163,556 1.00 1.00 .25 (0.7%) 3.98% 11.94% 382 78 10,713,000 3,895,642 1,297,018 (1,029,856) 267,162 (30,664) — — 98,311 334,809 (132,304) 202,505 — 202,505 1.23 1.23 .1925 4.4% 5.20% 16.30% 395 76 9,998,000 3,591,228 1,121,539 (940,708) 180,831 (37,646) — — 88,509 231,694 (90,804) 140,890 — 140,890 .86 .86 .17 2.7% 3.92% 12.85% 383 74 9,282,000 NORDSTROM, INC. and SUBSIDIARIES [ 49 ]
Slide 52: retail store facilities open at january 31, 2004 Year Store Opened Location Year Store Opened Location SOUTHWEST GROUP Store Name Square Footage Store Name Square Footage Georgia Atlanta Chandler Fashion Center Scottsdale Fashion Square Santa Anita Brea Mall Topanga Los Cerritos Center The Village at Corte Madera South Coast Plaza North County Glendale Galleria The Grove Westside Pavilion The Shops at Mission Viejo Montclair Plaza Stanford Shopping Center Stoneridge Mall South Bay Galleria The Galleria at Tyler in Riverside Galleria at Roseville Arden Fair Fashion Valley Horton Plaza University Towne Centre San Francisco Shopping Centre Stonestown Galleria Valley Fair Hillsdale Shopping Center MainPlace/Santa Ana Paseo Nuevo in Santa Barbara Broadway Plaza Fashion Show 149,000 235,000 151,000 195,000 154,000 122,000 116,000 235,000 156,000 147,000 120,000 150,000 172,000 134,000 187,000 173,000 161,000 164,000 149,000 190,000 220,000 151,000 130,000 350,000 174,000 232,000 149,000 169,000 186,000 193,000 207,000 2001 1998 1994 1979 1984 1981 1985 1978 1986 1983 2002 1985 1999 1986 1984 1990 1985 1991 2000 1989 1981 1985 1984 1988 1988 1987 1982 1987 1990 1984 2002 CENTRAL STATES GROUP Buford Perimeter Mall Mall of Georgia Annapolis Mall Montgomery Mall The Mall in Columbia Towson Town Center Menlo Park Freehold Raceway Mall Garden State Plaza The Mall at Short Hills Roosevelt Field The Westchester The Streets at Southpoint The Plaza at King of Prussia Providence Place The Fashion Centre at Pentagon City Dulles Town Center Tysons Corner Center MacArthur Center Short Pump Town Center 243,000 172,000 162,000 225,000 173,000 205,000 204,000 174,000 282,000 188,000 241,000 219,000 149,000 238,000 206,000 1998 2000 1994 1991 1999 1992 1991 1992 1990 1995 1997 1995 2002 1996 1999 Arizona Chandler Scottsdale Maryland Annapolis Bethesda Columbia Towson California Arcadia Brea Canoga Park Cerritos Corte Madera Costa Mesa Escondido Glendale Los Angeles Los Angeles Mission Viejo Montclair Palo Alto Pleasanton Redondo Beach Riverside Roseville Sacramento San Diego San Diego San Diego San Francisco San Francisco San Jose San Mateo Santa Ana Santa Barbara Walnut Creek New Jersey Edison Freehold Paramus Short Hills New York Garden City White Plains North Carolina Durham Pennsylvania King of Prussia Rhode Island Providence Virginia Arlington Dulles McLean Norfolk Richmond 241,000 148,000 253,000 166,000 128,000 1989 2002 1988 1999 2003 Illinois Chicago Oak Brook Schaumburg Skokie Michigan Avenue Oakbrook Center Woodfield Shopping Center Old Orchard Center Circle Centre Oak Park Mall Somerset Collection Mall of America West County 274,000 249,000 215,000 209,000 216,000 219,000 258,000 240,000 193,000 2000 1991 1995 1994 1995 1998 1996 1992 2002 Nevada Las Vegas EAST COAST GROUP Indiana Indianapolis Connecticut Farmington Westfarms Town Center at Boca Raton Village of Merrick Park The Florida Mall International Plaza The Mall at Wellington Green 189,000 193,000 212,000 174,000 172,000 127,000 1997 2000 2002 2002 2001 2003 Kansas Overland Park Florida Boca Raton Coral Gables Orlando Tampa Wellington Michigan Troy Minnesota Bloomington Missouri Des Peres NORDSTROM, INC. and SUBSIDIARIES [ 50 ]
Slide 53: retail store facilities open at january 31, 2004 Year Store Opened Location Fresno, CA Beachwood Place Easton Town Center Barton Creek Square Dallas Galleria Stonebriar Centre The Galleria North East Mall 231,000 174,000 150,000 249,000 149,000 226,000 149,000 1997 2001 2003 1996 2000 2003 2001 Ontario, CA Oxnard, CA Roseville, CA Sacramento, CA San Diego, CA NORTHWEST GROUP San Francisco, CA Anchorage FlatIron Crossing Park Meadows Clackamas Town Center Downtown Portland Lloyd Center Salem Center Washington Square Fashion Place University Mall Crossroads Plaza Bellevue Square Alderwood Downtown Seattle Northgate Spokane Tacoma Mall Southcenter Vancouver 97,000 172,000 245,000 121,000 174,000 150,000 71,000 189,000 110,000 122,000 140,000 285,000 151,000 383,000 122,000 137,000 134,000 170,000 71,000 1975 2000 1996 1981 1966 1963 1980 1974 1981 2002 1980 1967 1979 1963 1965 1974 1966 1968 1977 San Jose, CA San Leandro, CA Woodland Hills, CA Broomfield, CO Littleton, CO Sunrise, FL Buford, GA Honolulu, HI Chicago, IL Northbrook, IL Oak Brook, IL Schaumburg, IL Gaithersburg, MD Towson, MD Grand Rapids, MI Troy, MI Bloomington, MN Las Vegas, NV Westbury, NY Beaverton, OR Clackamas, OR Portland, OR King of Prussia, PA Hurst, TX Ward Centre Shoes U.S. (5 boutiques) International (31 boutiques) 16,000 58,000 92,000 1997 Plano, TX Salt Lake City, UT Dulles, VA Woodbridge, VA 37,000 48,000 38,000 45,000 38,000 31,000 50,000 2000 1992 2000 1999 1987 1987 1983 Auburn, WA Bellevue, WA Lynnwood, WA Seattle, WA Spokane, WA Glendale, CA Long Beach, CA Los Angeles, CA Location Store Name Square Footage Store Name Villaggio Retail Center Rack Glendale Fashion Center Rack Long Beach CityPlace Rack The Promenade at Howard Hughes Center Rack Ontario Mills Mall Rack Esplanade Shopping Center Rack Creekside Town Center Rack Howe `Bout Arden Center Rack Mission Valley Rack 555 Ninth Street Retail Center Rack Westgate Mall Rack San Leandro Rack Topanga Rack Flatiron Marketplace Rack Meadows Marketplace Rack The Oasis at Sawgrass Mills Rack Mall of Georgia Crossing Rack Victoria Ward Center Rack The Shops at State and Washington Rack Northbrook Rack The Shops at Oak Brook Place Rack Woodfield Rack Gaithersburg Rack Towson Rack Centerpointe Mall Rack Troy Marketplace Rack Mall of America Rack Silverado Ranch Plaza Rack The Mall at the Source Rack Tanasbourne Town Center Rack Clackamas Promenade Rack Downtown Portland Rack The Shops at North East Mall Rack Preston Shepard Place Rack Sugarhouse Rack Dulles Town Crossing Rack Potomac Mills Rack SuperMall of the Great Northwest Rack Factoria Mall Rack Golde Creek Plaza Rack Downtown Seattle Rack NorthTown Mall Rack Square Footage 32,000 36,000 33,000 41,000 40,000 38,000 36,000 54,000 57,000 43,000 48,000 44,000 64,000 36,000 34,000 27,000 44,000 34,000 41,000 40,000 42,000 45,000 49,000 31,000 40,000 40,000 41,000 33,000 48,000 53,000 28,000 19,000 40,000 39,000 31,000 41,000 46,000 48,000 46,000 38,000 42,000 28,000 Year Store Opened 2002 2000 2002 2001 2002 2001 2001 1999 1985 2001 1998 1990 1984 2001 1998 2003 2000 2000 2003 1996 2000 1994 1999 1992 2001 2000 1998 2001 1997 1998 1983 1986 2002 2000 2000 1991 2001 1990 1995 1997 1985 1987 2000 Ohio Beachwood Columbus Texas Austin Dallas Frisco Houston Hurst Alaska Anchorage Colorado Broomfield Littleton Oregon Portland Portland Portland Salem Tigard Utah Murray Orem Salt Lake City Washington Bellevue Lynnwood Seattle Seattle Spokane Tacoma Tukwila Vancouver OTHER Honolulu, HI Façonnable Façonnable The Overlook at King of Prussia Rack 45,000 NORDSTROM RACK GROUP Chandler, AZ Phoenix, AZ Scottsdale, AZ Brea, CA Chino, CA Colma, CA Costa Mesa, CA Chandler Festival Rack Last Chance Scottsdale Promenade Rack Brea Union Plaza Rack Chino Spectrum Towne Center Rack Colma Rack Metro Pointe at South Coast Rack NORDSTROM, INC. and SUBSIDIARIES [ 51 ]
Slide 54: officers of the corporation and executive team Jammie Baugh, 51 Executive Vice President, Human Resources, Full-line Stores Michael G. Koppel, 47 Executive Vice President and Chief Financial Officer Member of Executive Team Peter E. Nordstrom, 42 Executive Vice President and President, Full-line Stores Member of Executive Team Laurie M. Black, 45 Executive Vice President and President, Nordstrom Rack Member of Executive Team Llynn (Len) A. Kuntz, 43 Executive Vice President, WA/AK Regional Manager, Full-line Stores James R. O'Neal, 45 Executive Vice President and President, Nordstrom Product Group Member of Executive Team Mark S. Brashear, 42 Executive Vice President and President, Façonnable Member of Executive Team David P. Lindsey, 54 Vice President, Store Planning Suzanne R. Patneaude, 57 Vice President, Corporate Merchandise Manager, Designer/Savvy, Full-line Stores Daniel F. Little, 42 James H. Bromley, 40 Executive Vice President and President, Nordstrom Direct Member of Executive Team Executive Vice President and Chief Administrative Officer Member of Executive Team R. Michael Richardson, 47 Vice President and Chief Information Officer David L. Mackie, 55 Dale Cameron, 55 Executive Vice President, Corporate Merchandise Manager, Cosmetics, Full-line Stores Vice President, Real Estate, and Corporate Secretary Karen Bowman Roesler, 48 Vice President, Marketing Nordstrom Credit Group Robert J. Middlemas, 47 Executive Vice President, Central States Regional Manager, Full-line Stores Robert E. Campbell, 48 Vice President, Finance, Full-line Stores K. C. (Karen) Shaffer, 50 Executive Vice President, Nordstrom Rack NW Rack Regional Manager Jack H. Minuk, 49 Linda Toschi Finn, 56 Executive Vice President, Marketing Member of Executive Team Vice President, Corporate Merchandise Manager, Women's Shoes, Full-line Stores Delena M. Sunday, 43 Executive Vice President, Human Resources and Diversity Affairs Member of Executive Team Bonnie M. Junell, 47 Vice President, Corporate Merchandise Manager, Point of View and Narrative, Full-line Stores Blake W. Nordstrom, 43 President Member of Executive Team Geevy S. K. Thomas, 39 Executive Vice President, South Regional Manager, Full-line Stores Bruce A. Nordstrom, 70 Chairman of the Board of Directors Kevin T. Knight, 48 Executive Vice President, Chairman and Chief Executive Officer of Nordstrom fsb, President of Nordstrom Credit, Inc. Member of Executive Team Erik B. Nordstrom, 40 Executive Vice President, Full-line Stores Member of Executive Team NORDSTROM, INC. and SUBSIDIARIES [ 52 ]
Slide 55: board of directors and committees shareholder information BOARD OF DIRECTORS D. Wayne Gittinger, 71 Partner, Lane Powell Spears Lubersky LLP Seattle, Washington AUDIT COMMITTEE Enrique Hernandez, Jr., Chair Jeanne P. Jackson Alfred E. Osborne, Jr. William D. Ruckelshaus Alison A. Winter COMPENSATION COMMITTEE Enrique Hernandez, Jr. Jeanne P. Jackson Alfred E. Osborne, Jr. William D. Ruckelshaus, Chair Alison A. Winter CORPORATE GOVERNANCE AND NOMINATION COMMITTEE Enrique Hernandez, Jr. Alfred E. Osborne, Jr., Chair William D. Ruckelshaus EXECUTIVE COMMITTEE Enrique Hernandez, Jr. John A. McMillan Bruce A. Nordstrom John N. Nordstrom FINANCE COMMITTEE D. Wayne Gittinger Jeanne P. Jackson John A. McMillan John N. Nordstrom Alison A. Winter, Chair INDEPENDENT AUDITORS Deloitte & Touche LLP Seattle, Washington COUNSEL Lane Powell Spears Lubersky LLP Seattle, Washington Enrique Hernandez, Jr., 48 Lead Director President and CEO, Inter-Con Security Systems, Inc. Pasadena, California TRANSFER AGENT AND REGISTRAR Mellon Investor Services LLC P. O. Box 3315 South Hackensack, New Jersey 07606 Telephone (800) 318-7045 TDD for Hearing Impaired (800) 231-5469 Foreign Shareholders (201) 329-8660 TDD Foreign Shareholders (201) 329-8354 Jeanne P. Jackson, 52 Founder and General Partner, MSP Capital Newport, California GENERAL OFFICES 1617 Sixth Avenue Seattle, Washington 98101-1742 Telephone (206) 628-2111 John A. McMillan, 72 Retired Co-Chairman of the Board of Directors Seattle, Washington ANNUAL MEETING May 25, 2004 at 11:00 a.m. Pacific Daylight Time Nordstrom Downtown Seattle Store John W. Nordstrom Room, fifth floor 1617 Sixth Avenue Seattle, Washington 98101-1742 Bruce A. Nordstrom, 70 Chairman of the Board of Directors Seattle, Washington John N. Nordstrom, 67 Retired Co-Chairman of the Board of Directors Seattle, Washington FORM 10-K The Company's annual report on Form 10-K for the year ended January 31, 2004 will be provided to shareholders upon request to: Nordstrom, Inc. Investor Relations P. O. Box 2737 Seattle, Washington 98111 (206) 303-3200 invrelations@nordstrom.com Alfred E. Osborne, Jr., Ph.D., 59 Senior Associate Dean UCLA Anderson Graduate School of Management Los Angeles, California William D. Ruckelshaus, 71 A Strategic Director, Madrona Venture Group Seattle, Washington SHAREHOLDER INFORMATION Additional shareholder information, including Nordstrom’s Corporate Governance Guidelines and Code of Business Conduct and Ethics, is available online at www.nordstrom.com. In addition, the Company is always willing to discuss matters of concern to shareholders. (206) 303-3200 invrelations@nordstrom.com Alison A. Winter, 57 President, Northeast Personal Financial Services, The Northern Trust Corporation Chicago, Illinois CERTIFICATIONS We have filed the required certifications under Section 302 of the Sarbanes-Oxley Act of 2002 regarding the quality of our public disclosures as Exhibits 31.1 and 31.2 to our annual report on Form 10-K for the year ended January 31, 2004. After our 2004 Annual Meeting of Shareholders, we intend to file with the New York Stock Exchange the CEO certification regarding our compliance with the NYSE's corporate governance listing standards as required by NYSE Rule 303A.12(a). Shown on back cover: Faith Vergara, Alderwood, Lynnwood, Washington NORDSTROM, INC. and SUBSIDIARIES [ 53 ]