<page> UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 29, 2005 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 001-15059 Nordstrom, Inc. ______________________________________________________ (Exact name of Registrant as specified in its charter) Washington 91-0515058 _______________________________ ___________________ (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1617 Sixth Avenue, Seattle, Washington 98101 ____________________________________________________ (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (206) 628-2111 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO _____ _____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO _____ _____ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X _____ _____ Common stock outstanding as of November 16, 2005: 269,882 shares of common stock (in thousands). 1 of 23 <page> <table> <caption> NORDSTROM, INC. AND SUBSIDIARIES -------------------------------- INDEX ----- <s> <c> Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Statements of Earnings Quarter and Year to Date ended October 29, 2005 and October 30, 2004 3 Condensed Consolidated Balance Sheets October 29, 2005, January 29, 2005 and October 30, 2004 4 Condensed Consolidated Statements of Shareholders' Equity Year to Date ended October 29, 2005 and October 30, 2004 5 Condensed Consolidated Statements of Cash Flows Year to Date ended October 29, 2005 and October 30, 2004 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 4. Controls and Procedures 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20 Item 6. Exhibits 21 SIGNATURES 22 INDEX TO EXHIBITS 23 </table> 2 of 23 <page> <table> <caption> NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (amounts in thousands except per share amounts and percentages) (unaudited) <s> <c> <c> <c> <c> Quarter Ended Year to Date Ended ---------------------- ---------------------- October 29, October 30, October 29, October 30, 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net sales $1,666,130 $1,542,075 $5,427,042 $5,031,045 Cost of sales and related buying and occupancy costs (1,058,452) (984,908) (3,452,132) (3,228,732) ---------- ---------- ---------- ---------- Gross profit 607,678 557,167 1,974,910 1,802,313 Selling, general and administrative expenses (481,768) (465,769) (1,498,386) (1,454,736) ---------- ---------- ---------- ---------- Operating income 125,910 91,398 476,524 347,577 Interest expense, net (10,248) (13,485) (33,791) (64,260) Other income including finance charges, net 47,350 45,000 135,052 127,489 ---------- ---------- --------- -------- Earnings before income taxes 163,012 122,913 577,785 410,806 Income tax expense (55,559) (45,085) (216,876) (157,336) ---------- ---------- --------- -------- Net earnings $ 107,453 $ 77,828 $ 360,909 $ 253,470 ========== ========== ========= ========== Basic earnings per share $ 0.40 $ 0.28 $ 1.32 $ 0.90 Diluted earnings per share $ 0.39 $ 0.27 $ 1.30 $ 0.89 Basic shares 271,599 281,395 272,683 280,361 Diluted shares 277,293 286,298 278,399 285,736 Quarter Ended Year to Date Ended ---------------------- ---------------------- October 29, October 30, October 29, October 30, (% of Net sales)(1) 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales and related buying and occupancy costs (63.5%) (63.9%) (63.6%) (64.2%) ---------- ---------- ---------- ---------- Gross profit 36.5% 36.1% 36.4% 35.8% Selling, general and administrative expenses (28.9%) (30.2%) (27.6%) (28.9%) ---------- ---------- ---------- ---------- Operating income 7.6% 5.9% 8.8% 6.9% Interest expense, net (0.6%) (0.9%) (0.6%) (1.3%) Other income including finance charges, net 2.8% 2.9% 2.5% 2.5% ---------- ---------- ---------- ---------- Earnings before income taxes 9.8% 8.0% 10.6% 8.2% Income tax expense(2) (34.1%) (36.7%) (37.5%) (38.3%) ---------- ---------- ---------- ---------- Net earnings 6.4% 5.0% 6.7% 5.0% ========== ========== ========== ========== </table> (1) Subtotals and totals may not foot due to rounding (2) Percent of earnings before income taxes The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements. 3 of 23 <page> <table> <caption> NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (amounts in thousands) (unaudited) <s> <c> <c> <c> October 29, January 29, October 30, 2005 2005 2004 ---------- ---------- ---------- ASSETS Current Assets: Cash and cash equivalents $ 205,943 $ 360,623 $ 240,407 Short-term investments 34,000 41,825 95,000 Accounts receivable, net 626,864 645,663 635,409 Investment in asset backed securities 509,759 422,416 382,325 Merchandise inventories 1,166,471 917,182 1,193,144 Current deferred tax assets 149,622 131,547 134,896 Prepaid expenses and other 53,451 53,188 49,439 ---------- ---------- ---------- Total current assets 2,746,110 2,572,444 2,730,620 Land, buildings and equipment (net of accumulated depreciation of $2,500,228, $2,310,607 and $2,271,531) 1,778,579 1,780,366 1,773,258 Goodwill, net 51,714 51,714 51,714 Tradename, net 84,000 84,000 84,000 Other assets 129,130 116,866 111,406 ---------- ---------- ---------- TOTAL ASSETS $4,789,533 $4,605,390 $4,750,998 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 683,137 $ 482,394 $ 672,847 Accrued salaries, wages and related benefits 235,137 287,904 252,022 Other current liabilities 365,872 354,201 305,216 Income taxes payable 47,850 115,556 52,877 Current portion of long-term debt 306,967 101,097 103,021 ---------- ---------- ---------- Total current liabilities 1,638,963 1,341,152 1,385,983 Long-term debt 626,978 929,010 932,384 Deferred property incentives, net 367,511 367,087 393,807 Other liabilities 206,980 179,147 168,426 Shareholders' Equity: Common stock, no par: 1,000,000 shares authorized; 269,690, 271,331 and 279,866 shares issued and outstanding 663,810 552,655 529,284 Unearned stock compensation (438) (299) (373) Retained earnings 1,277,674 1,227,303 1,330,511 Accumulated other comprehensive earnings 8,055 9,335 10,976 ---------- ---------- ---------- Total shareholders' equity 1,949,101 1,788,994 1,870,398 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,789,533 $4,605,390 $4,750,998 ========== ========== ========== </table> The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements. 4 of 23 <page> <table> <caption> NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (amounts in thousands except per share amounts) (unaudited) <s> <c> <c> <c> <c> <c> <c> Accumulated Other Common Stock Unearned Retained Comprehensive Shares Amount Compensation Earnings Earnings Total ----------------------------------------------------------------------- Balance at January 29, 2005 271,331 $552,655 $(299) $1,227,303 $9,335 $1,788,994 Net earnings - - - 360,909 - 360,909 Other comprehensive earnings: Foreign currency translation adjustment - - - - (1,837) (1,837) Fair value adjustment to investment in asset backed securities, net of tax of $(356) - - - - 557 557 -------- Comprehensive net earnings - - - - - 359,629 Cash dividends paid ($0.235 per share) - - - (64,236) - (64,236) Issuance of common stock for: Stock option plans 4,870 91,327 - - - 91,327 Employee stock purchase plan 757 16,611 - - - 16,611 Stock-based compensation 127 3,217 (139) - - 3,078 Repurchase of common stock (7,395) - - (246,302) - (246,302) --------------------------------------------------------------------- Balance at October 29, 2005 269,690 $663,810 $(438) $1,277,674 $8,055 $1,949,101 ===================================================================== Accumulated Other Common Stock Unearned Retained Comprehensive Shares Amount Compensation Earnings Earnings Total ----------------------------------------------------------------------- Balance at January 31, 2004 276,753 $424,645 $(597) $1,201,093 $8,868 $1,634,009 Net earnings - - - 253,470 - 253,470 Other comprehensive earnings: Foreign currency translation adjustment - - - - 2,436 2,436 Fair value adjustment to investment in asset backed securities, net of tax of $210 - - - - (328) (328) -------- Comprehensive net earnings - - - - - 255,578 Cash dividends paid ($0.175 per share) - - - (49,091) - (49,091) Issuance of common stock for: Stock option plans 5,822 88,405 - - - 88,405 Employee stock purchase plan 977 13,942 - - - 13,942 Stock-based compensation 167 2,292 224 - - 2,516 Repurchase of common stock (3,853) - - (74,961) - (74,961) --------------------------------------------------------------------- Balance at October 30, 2004 279,866 $529,284 $(373) $1,330,511 $10,976 $1,870,398 ===================================================================== </table> The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements. 5 of 23 <page> <table> <caption> NORDSTROM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) (unaudited) <s> <c> <c> Year to Date Ended ------------------------- October 29, October 30, 2005 2004 ---------- ---------- OPERATING ACTIVITIES: Net earnings $360,909 $253,470 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of buildings and equipment 204,496 194,593 Amortization of deferred property incentives and other, net (24,331) (23,054) Stock-based compensation expense 7,672 4,663 Deferred income taxes, net 1,173 (5,012) Tax benefit on stock option exercises and employee stock purchases 31,281 19,906 Provision for bad debt expense 18,327 18,798 Change in operating assets and liabilities: Accounts receivable (769) 13,153 Investment in asset backed securities (86,786) (110,569) Merchandise inventories (250,441) (261,610) Prepaid expenses 855 (1,116) Other assets (6,079) (11,118) Accounts payable 190,601 183,369 Accrued salaries, wages and related benefits (56,758) (26,126) Other current liabilities (2,099) (9,558) Income taxes payable (67,705) (42,561) Property incentives 41,891 10,806 Other liabilities 14,209 17,844 ---------- ---------- Net cash provided by operating activities 376,446 225,878 ---------- ---------- INVESTING ACTIVITIES: Capital expenditures (205,015) (164,681) Proceeds from sale of assets - 5,473 Purchases of short-term investments (397,500) (2,918,875) Sales of short-term investments 405,325 2,999,875 Other, net (6,404) (959) ---------- ---------- Net cash used in investing activities (203,594) (79,167) ---------- ---------- FINANCING ACTIVITIES: Principal payments on long-term debt (99,769) (202,016) Increase (decrease) in cash book overdrafts 4,720 (2,958) Proceeds from exercise of stock options 61,057 69,549 Proceeds from employee stock purchase plan 15,600 12,892 Cash dividends paid (64,236) (49,091) Repurchase of common stock (246,302) (74,961) Other, net 1,398 - ---------- ---------- Net cash used in financing activities (327,532) (246,585) ---------- ---------- Net decrease in cash and cash equivalents (154,680) (99,874) Cash and cash equivalents at beginning of period 360,623 340,281 ---------- ---------- Cash and cash equivalents at end of period $205,943 $240,407 ========== ========== </table> The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements. 6 of 23 <page> NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts and percentages) (unaudited) Note 1 - Summary of Significant Accounting Policies Basis of Presentation - --------------------- The accompanying condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in our 2004 Annual Report. The same accounting policies are followed for preparing quarterly and annual financial information. All adjustments necessary for the fair presentation of the results of operations, financial position and cash flows have been included and are of a normal, recurring nature. Our business, like that of other retailers, is subject to seasonal fluctuations. Our Anniversary Sale in July and the holidays in December typically result in higher sales in the second and fourth quarters of our fiscal years. Accordingly, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. 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 off-balance sheet financing, inventory valuation, sales return accruals, self-insured liabilities, doubtful accounts, intangible assets, income taxes, post- retirement benefits, contingent liabilities and litigation. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. Our accounting policies and methodologies in 2005 are consistent with those discussed in our 2004 Annual Report. In the third quarter of 2005, our income tax expense as a percentage of our earnings before income taxes was 34.1% as compared to 36.7% in the prior year. The factors that caused this change were the final determination of our 2004 income tax expense and the completion of tax return audits for earlier years; these factors aggregated $6,267, or $0.02 per diluted share for the 2005 third quarter and year to date periods. Two-for-one Stock Split - ----------------------- On May 24, 2005, our Board of Directors approved a two-for-one stock split of our outstanding common stock and a proportional increase in the number of common shares authorized from 500,000 to 1,000,000. Additional shares issued as a result of the stock split were distributed on June 30, 2005 to shareholders of record as of June 13, 2005. The shares and per share information included herein have been adjusted to reflect this stock split. Stock Compensation - ------------------ We apply APB No. 25, "Accounting for Stock Issued to Employees," in measuring compensation costs under our stock-based compensation programs, which is described more fully in our 2004 Annual Report. We expect to adopt SFAS No. 123(R), "Share-Based Payment" in the first quarter of 2006 under the modified prospective method. We believe adoption of SFAS No. 123(R) will reduce our 2006 diluted earnings per share by $0.06. 7 of 23 <page> NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts and percentages) (unaudited) Note 1 - Summary of Significant Accounting Policies (Cont.) The table below illustrates the effect on net earnings and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." <table> <caption> <s> <c> <c> <c> <c> Quarter Ended Year to Date Ended ---------------------- ---------------------- October 29, October 30, October 29, October 30, 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net earnings, as reported $107,453 $ 77,828 $360,909 $253,470 Add: stock-based compensation expense included in reported net earnings, net of tax 228 (500) 4,795 2,844 Deduct: stock-based compensation expense determined under fair value, net of tax (4,525) (4,445) (18,153) (18,119) ---------- ---------- ---------- ---------- Pro forma net earnings $103,156 $ 72,883 $347,551 $238,195 ========== ========== ========== ========== Earnings per share: Basic - as reported $0.40 $0.28 $1.32 $0.90 Diluted - as reported $0.39 $0.27 $1.30 $0.89 Basic - pro forma $0.38 $0.26 $1.27 $0.85 Diluted - pro forma $0.37 $0.25 $1.25 $0.83 </table> Note 2 - Post-retirement Benefits The expense components of our Supplemental Executive Retirement Plan, which provides retirement benefits to certain officers and select employees, are as follows: <table> <caption> <s> <c> <c> <c> <c> Quarter Ended Year to Date Ended ------------------------ ------------------------ October 29, October 30, October 29, October 30, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Service cost $538 $372 $1,447 $1,116 Interest cost 1,031 991 3,076 2,973 Amortization of net loss 412 386 1,239 1,158 Amortization of prior service cost 262 240 757 720 ----------- ----------- ----------- ----------- Total expense $2,243 $1,989 $6,519 $5,967 =========== =========== =========== =========== </table> 8 of 23 <page> NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts and percentages) (unaudited) Note 3 - Earnings Per Share <table> <caption> <s> <c> <c> <c> <c> Quarter Ended Year to Date Ended ------------------------ ------------------------ October 29, October 30, October 29, October 30, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Net earnings $107,453 $ 77,828 $360,909 $253,470 =========== =========== =========== =========== Basic shares 271,599 281,395 272,683 280,361 Dilutive effect of stock options and performance share units 5,694 4,903 5,716 5,375 ----------- ----------- ----------- ----------- Diluted shares 277,293 286,298 278,399 285,736 =========== =========== =========== =========== Basic earnings per share $0.40 $0.28 $1.32 $0.90 Diluted earnings per share $0.39 $0.27 $1.30 $0.89 Antidilutive stock options and other - 20 - 20 </table> Note 4 - Accounts Receivable The components of accounts receivable are as follows: <table> <caption> <s> <c> <c> <c> ------------------------------------- October 29, January 29, October 30, 2005 2005 2004 ----------- ----------- ----------- Trade receivables: Unrestricted $ 31,127 $ 31,400 $ 35,988 Restricted 534,252 568,062 544,976 Allowance for doubtful accounts (18,262) (19,065) (19,534) ----------- ----------- ----------- Trade receivables, net 547,117 580,397 561,430 Other 79,747 65,266 73,979 ----------- ----------- ----------- Accounts receivable, net $626,864 $645,663 $635,409 =========== =========== =========== </table> Our restricted trade receivables relate to our Nordstrom private label retail card, which back the $300,000 Class A notes and the $150,000 variable funding note. The unrestricted trade receivables consist primarily of our Faconnable trade receivables and Nordstrom private label receivables that are not eligible for securitization, such as foreign and business receivables exceeding a contractual threshold. Other accounts receivable consist primarily of credit card receivables due from third party financial institutions and vendor rebates, which are believed to be fully realizable as they are collected soon after they are earned. 9 of 23 <page> NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts and percentages) (unaudited) Note 5 - Investment in Asset Backed Securities Our investment in asset backed securities and the off-balance sheet financing are described in Note 9 of our 2004 Annual Report. The following table presents the co-branded Nordstrom VISA credit card balances and the estimated fair value of our investment in asset backed securities: <table> <caption> <s> <c> <c> <c> ---------------------------------- October 29, January 29, October 30, 2005 2005 2004 ----------- ---------- ----------- Total face value of co-branded Nordstrom VISA credit card principal receivables $692,539 $612,549 $571,407 =========== ========== =========== Securities issued by the VISA Trust: Off-balance sheet (sold to third parties): 2002 Class A & B Notes at par value $200,000 $200,000 $200,000 =========== ========== =========== Amounts recorded on balance sheet: Investment in asset backed securities at fair value $509,759 $422,416 $382,325 =========== ========== =========== </table> In 2004, we revised the repayment period assumption in our valuation model that we use to determine the fair value of the VISA Trust. The 2004 repayment period assumption is based on historical payment, default and finance charge yield experience on a specific account basis. The prior repayment period assumption was based on our ongoing payment experience, which included payments by card holders who pay their account balance in full each month. While the assumptions used below are different in 2004, the impact of the assumption change was not significant and does not reflect a change in the underlying quality of the portfolio. The following table presents the key assumptions we use to value the investment in asset backed securities: <table> <caption> <s> <c> <c> <c> ------------------------------------------ October 29, January 29, October 30, 2005 2005 2004 ------------ ------------ ------------ Weighted average remaining life (in months) 7.7 8.1 2.3 Average annual credit losses 5.9% 6.9% 5.4% Average gross yield 17.3% 15.8% 18.2% Weighted average coupon on issued securities 5.1% 3.8% 2.6% Average monthly payment rates 8.1% 7.5% 22.0% Discount rate on investment in asset backed securities 5.7% to 10.9% 4.5% to 9.0% 8.1% to 14.3% </table> 10 of 23 <page> NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts and percentages) (unaudited) Note 5 - Investment in Asset Backed Securities (Cont.) The following table summarizes the income earned by the investment in asset backed securities that is included in other income including finance charges, net on the condensed consolidated statements of earnings: <table> <caption> <s> <c> <c> <c> <c> Quarter Ended Year to Date Ended ------------------------ ------------------------ October 29, October 30, October 29, October 30, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Interest income $15,461 $13,337 $48,028 $39,005 Gains on sales of receivables and other income 8,678 4,367 22,022 12,122 ----------- ----------- ----------- ----------- $24,139 $17,704 $70,050 $51,127 =========== =========== =========== =========== </table> Note 6 - Debt We retired the remaining $96,027 of our 6.7% medium-term notes when they matured in July 2005. To manage our interest rate risk, we have an interest rate swap outstanding recorded in other liabilities. Our swap has a $250,000 notional amount, expires in 2009 and is designated as a fully effective fair value hedge. Under the agreement, we receive a fixed rate of 5.63% and pay a variable rate based on LIBOR plus a margin of 2.3% set at six-month intervals (6.238% at October 29, 2005.) The fair value of our interest rate swap is as follows: <table> <caption> <s> <c> <c> <c> ------------------------------------- October 29, January 29, October 30, 2005 2005 2004 ----------- ----------- ----------- Interest rate swap fair value $(12,202) $(7,821) $(5,365) </table> 11 of 23 <page> NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts and percentages) (unaudited) Note 7 - Segment Reporting The following tables set forth the information for our reportable segments and a reconciliation to the consolidated totals: <table> <caption> <s> <c> <c> <c> <c> <c> <c> Quarter ended Retail Credit Catalog/ Corporate October 29, 2005 Stores(1) Operations Internet and Other Eliminations Total - --------------------------------------------------------------------------------------------------- Net sales $1,571,136 $- $94,994 $- $- $1,666,130 Intersegment revenues 4,265 7,836 - - (12,101) - Interest expense, net (94) (6,270) - (3,884) - (10,248) Other income including finance charges, net (1,689) 54,065 102 (5,128) - 47,350 Earnings before taxes 185,764 8,753 18,399 (49,904) - 163,012 Quarter ended Retail Credit Catalog/ Corporate October 30, 2004 Stores Operations Internet and Other Eliminations Total - --------------------------------------------------------------------------------------------------- Net sales $1,453,528 $- $88,547 $- $- $1,542,075 Intersegment revenues 8,440 7,323 - - (15,763) - Interest expense, net (61) (5,833) 26 (7,617) - (13,485) Other income including finance charges, net (188) 48,815 358 (3,985) - 45,000 Earnings before taxes 158,592 8,538 7,452 (51,669) - 122,913 Year to date ended Retail Credit Catalog/ Corporate October 29, 2005 Stores(1) Operations Internet and Other Eliminations Total - --------------------------------------------------------------------------------------------------- Net sales $5,161,893 $- $265,149 $- $- $5,427,042 Intersegment revenues 12,968 27,556 - - (40,524) - Interest expense, net (419) (18,818) - (14,554) - (33,791) Other income including finance charges, net (6,484) 162,800 66 (21,330) - 135,052 Earnings before taxes 665,572 33,754 36,218 (157,759) - 577,785 Assets 2,909,544 1,089,054 119,453 671,482 - 4,789,533 Year to date ended Retail Credit Catalog/ Corporate October 30, 2004 Stores Operations Internet and Other Eliminations Total - --------------------------------------------------------------------------------------------------- Net sales $4,776,943 $- $254,102 $- $- $5,031,045 Intersegment revenues 22,200 25,974 - - (48,174) - Interest expense, net (2) (324) (17,058) 113 (46,991) - (64,260) Other income including finance charges, net (4,038) 147,959 (88) (16,344) - 127,489 Earnings before taxes 547,308 28,498 17,689 (182,689) - 410,806 Assets 2,908,449 961,738 127,715 753,096 - 4,750,998 </table> As of October 29, 2005, January 29, 2005, and October 30, 2004, Retail Stores assets included $35,998 of goodwill and $84,000 of tradename, and Catalog/Internet assets included $15,716 of goodwill. (1) Beginning in the first quarter of 2005, we started to integrate the merchandise buying and marketing activities of our Retail Stores and Catalog/Internet segments. In 2005, the expenses for these activities are included in the Retail Stores segment. (2) During the first three quarters of 2004, we retired $196,770 of our 8.95% senior notes and $1,473 of our 6.7% medium-term notes for a total cash payment of $220,106. As a result, we recorded a pre-tax charge of $20,862 in interest expense, net in the Corporate and Other segment. 12 of 23 <page> NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share amounts and percentages) (unaudited) Note 8 - Supplementary Cash Flow Information <table> <caption> <s> <c> <c> Year to Date Ended ------------------------ October 29, October 30, 2005 2004 ----------- ----------- Cash paid during the year for: Interest (net of capitalized interest) $43,825 $73,992 Income taxes 287,362 185,261 </table> Note 9 - Litigation We are involved in routine claims, proceedings, and litigation arising from the normal course of our business. We do not believe any such claim, proceeding or litigation, either alone or in aggregate, will have a material impact on our results of operations, financial position, or liquidity. Note 10 - Subsequent Event In November 2005, we replaced our existing $350,000 unsecured line of credit with a $500,000 unsecured line of credit, which is available as liquidity support for our commercial paper program. Under the terms of the agreement, we pay a variable rate of interest and a commitment fee based on our debt rating. Based upon our current debt rating, we pay a variable rate of interest of LIBOR plus a margin of 0.225% on the outstanding balance and an annual commitment fee of 0.075% on the total capacity. The variable rate of interest increases to LIBOR plus a margin of 0.325% if more than $250,000 is outstanding on the facility. The line of credit expires in November 2010, and contains restrictive covenants, which include maintaining a leverage ratio. In the fourth quarter of 2005, we determined that our portion of the VISA/Mastercard antitrust litigation settlement is approximately $5,586. We will record the earnings from this settlement when the recognition criteria have been met, which could be in the fourth quarter of 2005. 13 of 23 <page> Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in millions except per share amounts) The following discussion should be read in conjunction with the Management's Discussion and Analysis section of our 2004 Annual Report. RESULTS OF OPERATIONS - --------------------- Overview - -------- Net earnings for the third quarter of 2005 increased 38% to $107.5, or $0.39 per diluted share, from $77.8, or $0.27 per diluted share, for the same period in 2004. For the year to date period ended October 29, 2005, net earnings increased 42% to $360.9, or $1.30 per diluted share, from $253.5, or $0.89 per diluted share, for the same period in 2004. Our net earnings growth was driven by: - - same-store sales increases of 5.9% for the quarter and 6.1% year to date, exceeding our operating plans, and - - holding our fixed operating costs in-line with our plan for both the quarter and year to date periods. Additionally, we improved two key operating metrics for the quarter and year to date periods ended October 29, 2005 as compared to the same periods in 2004: - - gross profit as a percentage of net sales, which increased 34 basis points for the quarter and 57 basis points for the year to date period, and - - selling, general and administrative expenses as a percentage of net sales, which improved 130 basis points for the quarter and year to date periods. We refer to these types of rate improvements as "leverage" on additional sales. In 2004, we incurred prepayment costs and wrote off deferred debt costs totaling $20.9, or $0.04 per diluted share, upon prepayment of $198.2 of long- term debt, primarily in the first quarter. We did not incur similar costs in 2005, which also improved our year to date 2005 results in relation to the 2004 results. Net Sales - --------- Total net sales increased 8.0% for the quarter and 7.9% year to date over the same periods in the prior year, primarily due to the strength of our same- store sales. Same-store sales increased 5.9% for the quarter and 6.1% year to date. Both our Full-Line and Rack stores had overall and same-store sales increases. For both the quarter and year to date periods: - all of our geographic regions reported same-store sales increases, and - our best performing merchandise divisions were junior women's apparel, accessories, men's wear, women's designer apparel and cosmetics. In addition, total sales benefited from the six Full-Line stores opened since November 2003, increasing our retail square footage by 4% during the last two years. 14 of 23 <page> Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) (Dollar amounts in millions except per share amounts) <table> <caption> <s> <c> <c> <c> <c> Gross Profit - ------------ Third Quarter Year to Date ------------------- ------------------- 2005 2004 2005 2004 -------- -------- -------- -------- Gross profit as a percentage of net sales 36.5% 36.1% 36.4% 35.8% </table> Gross profit as a percentage of net sales improved 34 basis points for the quarter and 57 basis points for the year to date period ended October 29, 2005. The quarter and year to date performance was primarily due to leverage on buying and occupancy expenses from increased sales volume. As a result of actual sales exceeding planned sales, our inventory levels declined slightly and our average inventory per square foot declined 2.6% compared to the prior year. Our rolling four quarter average inventory turnover rate improved to 4.53 at October 2005 from 4.18 at October 2004, indicating that our merchandising processes have improved. <table> <caption> Selling, General and Administrative Expense - ------------------------------------------- <s> <c> <c> <c> <c> Third Quarter Year to Date ------------------- ------------------- 2005 2004 2005 2004 -------- -------- -------- -------- Selling, general and administrative expenses as a percentage of net sales 28.9% 30.2% 27.6% 28.9% </table> Selling, general and administrative expenses as a percentage of net sales improved 130 basis points for the quarter and year to date periods. The quarter and year to date performance was primarily from leverage on same-store sales increases as we used our existing infrastructure to support increased sales. We continued to control and leverage our general and administrative expenses, especially non-selling labor and benefits. Interest Expense, net - --------------------- Interest expense, net decreased by $3.2 to $10.2 for the quarter ended October 29, 2005 compared to the same period in 2004. The decrease is primarily due to increased interest income from higher cash balances. Interest expense, net decreased by $30.5 to $33.8 for the year to date period ended October 29, 2005 compared to the same period in 2004. The decrease is primarily due to debt prepayment costs of $20.9 incurred in 2004 in connection with a $198.2 debt buyback. We did not incur similar costs in 2005. In addition, interest income increased in 2005, due to higher average cash balances. Other Income Including Finance Charges, net - ------------------------------------------- Other income including finance charges, net increased by $2.4 for the quarter and $7.6 for the year to date period ended October 29, 2005. The increase is primarily due to growth in our co-branded Nordstrom VISA credit card transaction volume and related finance charges. 15 of 23 <page> Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) (Dollar amounts in millions except per share amounts) Seasonality - ------------ Our business, like that of other retailers, is subject to seasonal fluctuations. Our Anniversary Sale in July and the holidays in December typically result in higher sales in the second and fourth quarters of our fiscal years. Accordingly, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Overall, our net cash provided by operating activities increased from the prior year by $150.6 or 66.7%. We have used this additional cash flow along with short-term capital that was on hand at the beginning of 2005 to increase our common stock repurchases, our capital expenditures, and our dividends, and to repay at maturity long-term debt. Operating Activities - -------------------- Net cash flow from operating activities increased by $150.6 to $376.4 in 2005 primarily due to the increase in our net earnings. Also, in 2005 our property incentive receipts have increased by $31.1. These receipts are not directly linked to our current earnings, as they are received under development and operating agreements for Full-Line stores that we have just opened in 2005 or we will open in 2006. The property incentive receipts have increased in 2005 primarily because we have opened four new stores in 2005 versus two in 2004. Investing Activities - -------------------- We have had two principal types of investing activities in the past two years: capital expenditures and short-term investment of the net cash provided by our operations. Our capital expenditures have increased in 2005 because we opened four stores this year as compared to two stores in 2004. As to net changes in our short-term investments, we reduced our holdings in 2004 when we repurchased $198.2 of long-term debt; in 2005, our short-term investment balances have been more consistent. We evaluate a number of short-term capital investment options, some with different yields and liquidity restrictions. Some of these short-term capital investment vehicles are classified as cash equivalents while others are classified as short-term investments; changes in the investment mix, while not significant to our overall short-term capital investment structure, can impact our investing activities net cash flows. Through October 2005, we opened three Full-Line stores: one in Atlanta, Georgia at Phipps Plaza, one in San Antonio, Texas at The Shops at La Cantera, and one in Irvine, Calif at The Irvine Spectrum. Gross square footage for the year increased approximately 2.4%, from 19,397,000 to 19,858,000 as of October 29, 2005. We also opened one Full-Line store in Dallas, Texas at the NorthPark Center in November 2005. We plan to spend approximately $1,100.0, net of property incentives, on capital projects during the next three fiscal years, with approximately $300.0 planned for 2006. Over the next three fiscal years, we plan to use approximately 45% of this investment to build new stores, 30% on remodels and 15% toward information technology. The remaining 10% is planned for maintenance and other miscellaneous spending. 16 of 23 <page> Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) (Dollar amounts in millions except per share amounts) Financing Activities - -------------------- Net cash used in financing activities increased $80.9 to $327.5 in 2005. In 2004 and 2005, we utilized cash on hand to retire debt and repurchase our common stock. In both years, employee stock option exercises have increased our cash balances. In 2005, our cash dividends paid increased as we returned a portion of our increased net earnings to our shareholders. In August 2004, our Board of Directors authorized $300.0 of share repurchases. Following this authorization, we repurchased $75.0 of our common shares in the third quarter of 2004, and spent the remaining $225.0 by the end of 2004. In February 2005, our Board of Directors authorized an additional $500.0 of share repurchases. The actual number and timing of share repurchases will be subject to market conditions and applicable SEC rules. Year to date in 2005, we have purchased 7,393,887 shares for $246.3 at an average price of $33.31 per share. In November 2005, we replaced our existing $350.0 unsecured line of credit with a $500.0 unsecured line of credit, which is available as liquidity support for our commercial paper program. Under the terms of the agreement, we pay a variable rate of interest and a commitment fee based on our debt rating. Based upon our current debt rating, we pay a variable rate of interest of LIBOR plus a margin of 0.225% on the outstanding balance and an annual commitment fee of 0.075% on the total capacity. The variable rate of interest increases to LIBOR plus a margin of 0.325% if more than $250.0 is outstanding on the facility. The line of credit expires in November 2010, and contains restrictive covenants, which include maintaining a leverage ratio. Liquidity - --------- We maintain a level of liquidity to allow us to cover our seasonal cash needs and to minimize our need for short-term 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. We plan to refinance our $300.0 Private Label Securitization due in October 2006 with a similar asset backed securitization. Over the long term, we strive to manage our cash and capital structure to maximize shareholder return, strengthen our financial position and maintain flexibility for future strategic initiatives. We continuously assess our debt and leverage levels, capital expenditure requirements, principal debt repayments, dividend payouts, potential share repurchases, and future investments or acquisitions. We believe our operating cash flows, existing cash, and available credit facilities, as well as any potential future borrowing facilities will be sufficient to fund scheduled future payments and potential long-term initiatives. 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 off-balance sheet financing, inventory valuation, sales return accruals, self-insured liabilities, doubtful accounts, intangible assets, income taxes, post- retirement benefits, contingent liabilities and litigation. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. Our accounting policies and methodologies in 2005 are consistent with those discussed in our 2004 Annual Report. 17 of 23 <page> Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) (Dollar amounts in millions except per share amounts) Effective February 2005, Nordstrom Direct sales, which include catalog and Internet, are included in same-store sales. See Note 7 in our Notes to Condensed Consolidated Financial Statements on page 12 for further details. In the third quarter of 2005, our income tax expense as a percentage of our earnings before income taxes was 34.1% as compared to 36.7% in the prior year. The factors that caused this change were the final determination of our 2004 income tax expense and the completion of tax return audits for earlier years; these factors aggregated $6.3, or $0.02 per diluted share for the 2005 third quarter and year to date periods. FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT - ------------------------------------------------ Certain statements in the preceding disclosures contain "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995) that involves risks and uncertainties, including anticipated results, store openings and trends in our operations. Actual future results and trends may differ materially from historical results or current expectations depending upon factors including, but not limited to, 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, our ability to predict fashion trends, consumer apparel buying patterns, trends in personal bankruptcies and bad debt write-offs, changes in interest rates, employee relations, our ability to continue our expansion plans, changes in government or regulatory requirements, our ability to control costs, weather conditions and hazards of nature. These and other factors could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. 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. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances. This discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements. Item 4. CONTROLS AND PROCEDURES As of the end of the period covered by this Quarterly Report on Form 10-Q, we performed an evaluation under the supervision and with the participation of management, including our President and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities and Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, our President and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures are effective in the timely recording, processing, summarizing and reporting of material financial and non-financial information. There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 18 of 23 <page> PART II - OTHER INFORMATION Item 1. Legal Proceedings - ------------------------- 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 were consolidated in Marin County Superior 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 and fragrances 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 four years prior to the filing of the amended complaint. We entered into a settlement agreement with the plaintiffs and the other defendants on July 13, 2003. In furtherance of the settlement agreement, the case was re-filed 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 and fragrances from the defendants during the period May 29, 1994 through July 16, 2003. The Court gave preliminary approval to the settlement, and a summary notice of class certification and the terms of the settlement were disseminated to class members. On March 30, 2005, the Court entered a final judgment approving the settlement and dismissing the plaintiffs' claims and the claims of all class members with prejudice, in their entirety. On April 29, 2005, two class members who had objected to the settlement filed notices of appeal from the Court's final judgment to the United States Court of Appeals for the Ninth Circuit. It is uncertain when the appeals will be resolved, but the appeal process could take as much as two years or more. If the Court's final judgment approving the settlement is affirmed on appeal, or the appeals are dismissed, the defendants will provide class members with certain free products and pay the plaintiffs' attorneys' fees, awarded by the Court, of $24 million. Our share of the cost of the settlement will not have a material adverse effect on our financial condition, results of operations or cash flows. Other - ----- We are involved in various routine legal proceedings incidental to the ordinary course of business. In management's opinion, the outcome of pending legal proceedings, separately and in the aggregate, will not have a material adverse effect on our business or consolidated financial condition. 19 of 23 <page> Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - -------------------------------------------------------------------- <table> <caption> (c) Repurchases ----------- (dollars in millions except per share amounts) <s> <c> <c> <c> <c> Total Total Number Maximum Number (or Number of Average of Shares (or Units) Approximate Dollar Value) Shares Price Paid Purchased as Part of of Shares (or Units) that (or Units) Per Share Publicly Announced May Yet Be Purchased Under Purchased (or Units) Plans or Programs the Plans or Programs (2) ---------- ---------- -------------------- -------------------------- Aug. 2005 385,846 (1) $32.18 385,000 $413.7 (7/31/05 to 8/27/05) ---------- ---------- -------------------- -------------------------- Sep. 2005 3,904,231 (3) $37.40 1,325,000 $267.7 (8/28/05 to 10/1/05) ---------- ---------- -------------------- -------------------------- Oct. 2005 413,456 $33.87 413,456 $253.7 (10/2/05 to 10/29/05) ---------- ---------- -------------------- -------------------------- Total 4,703,533 $36.67 2,123,456 $253.7 ---------- ---------- -------------------- -------------------------- </table> (1) Included in this balance are 846 shares that were not redeemed as part of a publicly announced repurchase plan or program. These shares were tendered by an employee to Nordstrom for tax withholding purposes. (2) In February 2005, the Board of Directors authorized $500.0 of share repurchases. The prior $300.0 authorization was completed during the fourth quarter of 2004. The actual number and timing of share repurchases will be subject to market conditions and applicable SEC rules. Year to date, we have purchased 7,393,887 shares for $246.3 at an average price of $33.31 per share. (3) In connection with the $500.0 authorization, we entered into an accelerated share repurchase agreement with Goldman, Sachs & Co. in September 2005 to repurchase shares of our common stock for an aggregate purchase price of $100.0. We repurchased 2,579,231 shares of our common stock on September 8, 2005 at $38.77 per share. Under the terms of the agreement, we may receive additional shares in March 2006 depending on the volume weighted average price of our common stock from September 8, 2005 to March 3, 2006. 20 of 23 <page> Item 6. Exhibits - ----------------- Exhibits are incorporated herein by reference or are filed with this report as set forth in the Index to Exhibits on page 23 hereof. 21 of 23 <page> SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORDSTROM, INC. (Registrant) /s/ Michael G. Koppel ---------------------------------------------------- Michael G. Koppel Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: November 30, 2005 ----------------- 22 of 23 <page> <table> <caption> NORDSTROM INC. AND SUBSIDIARIES Exhibit Index <s> <c> Exhibit Method of Filing - ------- ---------------- 10.1 Revolving Credit Facility Agreement Filed herewith electronically dated November 4, 2005, between Registrant and each of the initial lenders named therein as Lenders, JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A., as Syndication Agents, U.S. Bank, National Association, as Documentation Agent and Bank Of America, N.A., as administrative agent 31.1 Certification of President Filed herewith electronically required by Section 302(a) of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Filed herewith electronically Officer required by Section 302(a) of the Sarbanes-Oxley Act of 2002 32.1 Certification of President and Furnished herewith electronically Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 </table> 23 of 23