10-Q 1 ni10q3q00.txt 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 31, 2000 [ ] 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 _____ _____ Common stock outstanding as of December 1, 2000: 133,953,503 shares of common stock. 1 of 17 NORDSTROM, INC. AND SUBSIDIARIES -------------------------------- INDEX -----
Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Statements of Earnings Three and Nine months ended October 31, 2000 and 1999 3 Consolidated Balance Sheets October 31, 2000 and 1999 and January 31, 2000 4 Consolidated Statements of Shareholders' Equity Nine months ended October 31, 2000 and 1999 5 Consolidated Statements of Cash Flows Nine months ended October 31, 2000 and 1999 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 6. Exhibits and Reports on Form 8-K 16
2 of 17 NORDSTROM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands except per share amounts) (unaudited)
Three Months Nine Months Ended October 31, Ended October 31, ---------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Net sales $1,254,296 $1,110,114 $3,850,090 $3,592,614 Cost of sales and related buying and occupancy (823,868) (717,844) (2,523,836) (2,349,388) ---------- ---------- ---------- ---------- Gross profit 430,428 392,270 1,326,254 1,243,226 Selling, general and administrative expenses (436,296) (351,564) (1,229,995) (1,063,427) ---------- ---------- ---------- ---------- Operating (loss)/income (5,868) 40,706 96,259 179,799 Interest expense, net (15,995) (13,091) (43,587) (37,583) Write-down of investment (20,655) - (31,195) - Service charge income and other, net 36,998 27,418 101,193 80,694 ---------- ---------- ---------- ---------- (Loss)/earnings before income taxes (5,520) 55,033 122,670 222,910 Income tax benefit/(expense) 2,200 (21,400) (47,800) (86,900) ---------- ---------- ---------- ---------- Net (loss)/earnings $ (3,320) $ 33,633 $ 74,870 $ 136,010 ========== ========== ========== ========== Basic (loss) earnings per share $ (.03) $ .25 $ .58 $ .98 ========== ========== ========== ========== Diluted (loss) earnings per share $ (.03) $ .25 $ .58 $ .97 ========== ========== ========== ========== Cash dividends paid per share of common stock outstanding $ .09 $ .08 $ .26 $ .24 ========== ========== ========== ========== These statements should be read in conjunction with the Notes to Consolidated Financial Statements contained herein.
3 of 17 NORDSTROM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands) (unaudited)
October 31, January 31, October 31, 2000 2000 1999 ---------- ---------- ---------- ASSETS Current Assets: Cash and cash equivalents $ 15,750 $ 27,042 $ 21,193 Short-term investment 1,662 25,527 18,762 Accounts receivable, net 638,936 616,989 551,574 Merchandise inventories 1,186,391 797,845 1,041,873 Prepaid income taxes and other 115,254 97,245 90,881 ---------- ---------- ---------- Total current assets 1,957,993 1,564,648 1,724,283 Land, buildings and equipment, net 1,597,302 1,429,492 1,454,187 Available-for-sale investment - 35,251 28,143 Intangible assets, net 158,042 - - Other assets 53,249 32,690 39,521 ---------- ---------- ---------- TOTAL ASSETS $3,766,586 $3,062,081 $3,246,134 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable $ 110,612 $ 70,934 $ 137,957 Accounts payable 624,011 390,688 496,580 Accrued salaries, wages and related benefits 195,209 211,308 183,390 Income taxes and other accruals 154,044 135,388 116,277 Current portion of long-term debt 11,591 58,191 58,146 ---------- ---------- ---------- Total current liabilities 1,095,467 866,509 992,350 Long-term debt 1,070,020 746,791 747,076 Deferred lease credits 328,934 194,995 240,223 Other liabilities 56,388 68,172 65,506 Shareholders' Equity: Common stock, no par: 250,000,000 shares authorized; 133,999,405, 132,279,988 and 135,185,569 shares issued and outstanding 330,990 247,559 246,698 Unearned stock compensation (3,937) (8,593) (8,681) Retained earnings 888,724 929,616 948,293 Accumulated other comprehensive income - 17,032 14,669 ---------- ---------- ---------- Total shareholders' equity 1,215,777 1,185,614 1,200,979 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,766,586 $3,062,081 $3,246,134 ========== ========== ========== These statements should be read in conjunction with the Notes to Consolidated Financial Statements contained herein.
4 of 17 NORDSTROM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (dollars in thousands) (unaudited)
Accumulated Other Common Stock Unearned Retained Comprehensive Shares Amount Compensation Earnings Income Total ------------------------------------------------------------------------ Balance at February 1, 2000 132,279,988 $247,559 $(8,593) $929,616 $17,032 $1,185,614 Net earnings - - - 74,870 - 74,870 Other comprehensive earnings: Unrealized loss on investment during period, net of tax (23,461) (23,461) Reclassification of realized loss, net of tax - - - - 6,429 6,429 ------- Comprehensive net earnings 57,838 Cash dividends ($.26 per share) - - - (33,877) (33,877) Issuance of common stock for: Stock option plans 173,558 3,904 - - - 3,904 Employee stock purchase plan 165,842 2,194 - - - 2,194 Business acquisition 5,074,000 77,696 - - - 77,696 Stock-based compensation (14,075) (363) 4,656 - - 4,293 Purchase and retirement of common stock (3,679,908) - - (81,885) - (81,885) ----------------------------------------------------------------------- Balance at October 31, 2000 133,999,405 $330,990 $(3,937) $888,724 $ - $1,215,777 ======================================================================= Balance at February 1, 1999 142,114,167 $230,761 $(4,703) $1,074,487 - $1,300,545 Net earnings - - - 136,010 - 136,010 Unrealized gain on investment, net of tax - - - - $14,669 14,669 ------ Comprehensive net earnings 150,679 Cash dividends ($.24 per share) - - - (33,686) - (33,686) Issuance of common stock 344,802 9,343 - - - 9,343 Stock-based compensation - 6,594 (3,978) - - 2,616 Purchase and retirement of common stock (7,273,400) - - (228,518) - (228,518) ----------------------------------------------------------------------- Balance at October 31, 1999 135,185,569 $246,698 $(8,681) $ 948,293 $14,669 $1,200,979 ======================================================================= These statements should be read in conjunction with the Notes to Consolidated Financial Statements contained herein.
5 of 17 NORDSTROM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited)
Nine Months Ended October 31, --------------------- 2000 1999 -------- -------- OPERATING ACTIVITIES: Net earnings $ 74,870 $136,010 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 149,195 143,179 Amortization of deferred lease credits and other, net (8,800) (4,943) Stock-based compensation expense 4,293 2,616 Write-down of investment 31,195 - Changes in assets and liabilities, net of effects of acquisition: Accounts receivable, net (12,367) 35,561 Merchandise inventories (377,042) (291,604) Prepaid income taxes and other (14,460) (1,027) Accounts payable 212,984 156,945 Accrued salaries, wages and related benefits (16,099) (12,976) Income taxes and other accruals 5,090 (5,380) Other liabilities (10,255) 4,933 -------- -------- Net cash provided by operating activities 38,604 163,314 -------- -------- INVESTING ACTIVITIES: Capital expenditures (283,644) (219,360) Additions to deferred lease credits 142,370 98,599 Payment for acquisition, net of cash acquired (83,377) - Other, net (5,614) (6,025) -------- -------- Net cash used for investing activities (230,265) (126,786) -------- -------- FINANCING ACTIVITIES: Increase in notes payable 39,678 59,174 Proceeds from long-term borrowings 308,266 - Principal payments on long-term debt (57,911) (63,079) Proceeds from issuance of common stock 6,098 9,343 Cash dividends paid (33,877) (33,686) Purchase and retirement of common stock (81,885) (228,518) -------- -------- Net cash provided by (used for) financing activities 180,369 (256,766) -------- -------- Net decrease in cash and cash equivalents (11,292) (220,238) Cash and cash equivalents at beginning of period 27,042 241,431 -------- -------- Cash and cash equivalents at end of period $ 15,750 $ 21,193 ======== ======== Noncash financing activities: Assets acquired by incurring long-term debt $ 24,402 $ - ======== ======== These statements should be read in conjunction with the Notes to Consolidated Financial Statements contained herein.
6 of 17 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 1 - Summary of Significant Accounting Policies Basis of Presentation --------------------- The consolidated balance sheets of Nordstrom, Inc. and subsidiaries (the "Company") as of October 31, 2000 and 1999, and the related consolidated statements of earnings, cash flows and shareholders' equity for the periods then ended, have been prepared from the accounts without audit. The consolidated financial information applicable to interim periods is not necessarily indicative of the results for the fiscal year. The financial information should be read in conjunction with the Notes to Consolidated Financial Statements contained in the Nordstrom, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 2000. In the opinion of management, the consolidated financial information includes all adjustments (consisting only of normal, recurring adjustments) necessary to present fairly the financial position of Nordstrom, Inc. and subsidiaries as of October 31, 2000 and 1999, and the results of their operations and cash flows for the periods then ended, in accordance with accounting principles generally accepted in the United States of America applied on a consistent basis. The consolidated financial statements include the operating results of Faconnable, S.A. ("Faconnable") from the date of acquisition (Note 2). Certain reclassifications of prior year balances have been made for consistent presentation with the current year. Recent Accounting Pronouncements -------------------------------- Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting For Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and No. 138, requires the Company to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Adoption of this standard in the fiscal year beginning February 1, 2001, is not expected to have a material impact on the Company's consolidated financial statements. The Company adopted Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation" in July 2000, which provides guidance for certain issues that arose in applying Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Adoption of this Interpretation did not have a material impact on the Company's consolidated financial statements. In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"), a replacement of Statement 125 with the same title. It revises the standards for securitizations and other transfers of financial assets and collateral and requires certain additional disclosures, but otherwise retains most of SFAS No. 125's provisions. SFAS No. 140 is effective for transfers after March 31, 2001 with certain disclosures required for periods ending on 7 of 17 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 1 - Summary of Significant Accounting Policies (cont.) or after December 31, 2000. Adoption of the accounting provisions of this standard is not expected to have a material impact on the Company's consolidated financial statements. Note 2 - Acquisition On October 24, 2000, the Company acquired 100% of Faconnable, of Nice, France, a designer, wholesaler and retailer of high quality men's and women's apparel and accessories. The Company paid $87,685 in cash and issued 5,074,000 shares of common stock of the Company, for a total value of approximately $170,000 including expenses. The acquisition is being accounted for under the purchase method of accounting, and, accordingly, Faconnable's results of operations have been included in the Company's results of operations since October 24, 2000. The purchase price has been allocated to Faconnable's assets and liabilities based on their estimated fair values as of the date of acquisition. Goodwill and other identifiable intangible assets related to this acquisition are being amortized over their estimated useful lives on a straight-line basis over 10 years to 35 years. The purchase also provides for contingent payments to two shareholders that may be paid after five years from the date of acquisition based on the performance of the subsidiary and the continued active involvement of the principals in Faconnable. The contingent payments will be recorded as compensation expense when it becomes probable that the performance targets will be met. The following unaudited pro forma information presents the results of the Company's operations assuming the Faconnable acquisition occurred at the beginning of each period presented: Nine Months Ended October 31, ----------------------- 2000 1999 ---------- ---------- Net sales $3,896,288 $3,634,448 Net earnings $ 74,166 $ 132,776 Basic and diluted earnings per share $ 0.55 $ 0.92 The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated as of the beginning of each period presented, nor is it necessarily indicative of future operating results. A summary of the purchase price allocation for the Faconnable acquisition is as follows: Fair value of identifiable assets acquired $ 38,646 Intangible assets recorded 158,144 Liabilities assumed (27,410) ========== Total purchase price $ 169,380 ========== 8 of 17 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 3 - Earnings Per Share Three Months Nine Months Ended October 31, Ended October 31, ------------------------ ------------------------ 2000 1999 2000 1999 ----------- ----------- ----------- ------------ Basic shares 129,315,092 136,721,774 130,041,747 139,274,764 Dilutive effect of stock options and restricted stock - 345,158 144,612 709,897 ----------- ----------- ----------- ----------- Diluted shares 129,315,092 137,066,932 130,186,359 139,984,661 =========== =========== =========== =========== Antidilutive options 8,913,270 4,885,296 5,754,360 2,439,582 =========== =========== =========== =========== Note 4 - Investment In September 1998, the Company purchased non-voting convertible preferred stock in Streamline, Inc. ("Streamline"), an internet grocery and consumer goods delivery company, for total consideration of $22,857. In June 1999, Streamline completed an initial public offering of common stock. Upon completion of the offering, the Company's investment was converted to common stock. In January 2000, Streamline merged with Beacon Home Direct, Inc., a privately-held company, in which the Company had previously purchased preferred stock for total consideration of $10,000. The total investment in Streamline was reduced to its quoted market value of $1,662 as of October 31, 2000, which is classified as short-term. Due to the financial condition of Streamline, the Company determined that the decline in the fair market value of its investment is other than temporary, therefore a loss of $20,655 was recorded in the statement of earnings for the quarter ended October 31, 2000, for a total loss on the investment of $31,195 for the year to date. Streamline ceased its operations effective November 22, 2000, due to failure to obtain additional capital to fund its operations. The Company will write- off the reminder of its investment in Streamline in the fourth quarter of this fiscal year. Note 5 - Debt In October 2000, the Company issued $300 million of 8.95% Senior Notes due 2005. These proceeds were used to reduce short-term indebtedness, to fund the acquisition of Faconnable and for general corporate purposes. The Company owns a 49% interest in a limited partnership which is constructing a new corporate office building in which the Company will be the primary occupant. In accordance with Emerging Issues Task Force Issue No. 97-10 "The Effect of Lessee Involvement in Asset Construction," the Company is considered to be the owner of the property. Construction in progress includes 9 of 17 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 5 - Debt (cont.) capitalized costs related to this building of $39,700 as of October 31, 2000. The corresponding finance obligation of $35,600 as of October 31, 2000 is included in other long-term debt. The Company is a guarantor of a $93,000 construction credit facility of the limited partnership. This credit facility provides for interest at either the LIBOR rate plus 0.75%, or the greater of the Federal Funds rate plus 0.5% and the prime rate and matures in August 2002. Note 6 - Segment Reporting The following tables set forth information for the Company's reportable segments and a reconciliation to the consolidated totals:
Three months ended Retail Credit Catalog/ Corporate October 31, 2000 Stores Operations Internet and Other Eliminations Total --------------------------------------------------------------------------------------------------- Net sales and revenues to external customers $1,181,807 - $ 72,489 - - $1,254,296 Service charge income - $ 34,071 - - 34,071 Intersegment revenues 11,940 5,950 - $(17,890) - Net earnings 54,636 5,459 (12,971) $ (50,444) - (3,320) Three months ended Retail Credit Catalog/ Corporate October 31, 1999 Stores Operations Internet and Other Eliminations Total --------------------------------------------------------------------------------------------------- Net sales and revenues to external customers $1,058,105 - $ 52,009 - - $1,110,114 Service charge income - $ 28,651 - - 28,651 Intersegment revenues 7,198 5,396 - $(12,594) - Net earnings 51,943 8,293 (10,010) $ (16,593) - 33,633 Nine months ended Retail Credit Catalog/ Corporate October 31, 2000 Stores Operations Internet and Other Eliminations Total --------------------------------------------------------------------------------------------------- Net sales and revenues to external customers $3,649,696 - $200,394 - - $3,850,090 Service charge income - $ 96,665 - - - 96,665 Intersegment revenues 25,914 18,601 - - $(44,515) - Net earnings 196,585 12,899 (24,709) $(109,905) - 74,870 Nine months ended Retail Credit Catalog/ Corporate October 31, 1999 Stores Operations Internet and Other Eliminations Total --------------------------------------------------------------------------------------------------- Net sales and revenues to external customers $3,451,583 - $141,031 - - $3,592,614 Service charge income - $ 84,135 - - - 84,135 Intersegment revenues 14,575 17,907 - - $(32,482) - Net earnings 208,198 20,461 (21,295) $ (71,354) - 136,010
10 of 17 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 7 - Contingent Liabilities Because all of the lawsuits described below (with the exception of Nine West) are in their preliminary stages, the Company is not in a position at this time to quantify the amount or range of any possible losses related to those claims. The Company intends to vigorously defend itself in the described cases. While no assurance can be given as to the ultimate outcome of these lawsuits, based on preliminary investigations, management currently believes that these matters will not have a material adverse effect on the Company's financial position. Cosmetics --------- The Cosmetics lawsuit has been previously described in the Nordstrom, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 2000. Nine West --------- With regard to the Nine West lawsuit, as described in the Nordstrom, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 2000, the court has preliminarily approved a settlement and has authorized the plaintiffs to send notices of the settlement to class members. A hearing on final approval of the settlement is scheduled for December 2000. The settlement does not admit any violation of the law or admit liability by any defendant. The settlement does not require any payment from the Company. Credit Fees ----------- The Company has been named a defendant in a purported class action in the Federal District Court for the Eastern District of Pennsylvania. The case purports to be brought under the National Bank Act and the Arizona Consumer Loan Act of 1997. Plaintiff, a resident of Pennsylvania and a user of Nordstrom's credit through Nordstrom fsb, a wholly owned subsidiary of the Company, claims to represent all customers of Nordstrom who have been extended credit by Nordstrom fsb under revolving credit accounts for consumer purchases at Nordstrom stores. Plaintiff claims that Nordstrom fsb has been paid principal, interest and late fees in violation of said statutes on account of which plaintiff seeks recovery or forfeiture thereof. The Company has not yet filed a response to the Amended Complaint which was filed in October 2000. Bar Code -------- The Company is named as one of 135 retailer defendants in a lawsuit filed in the United States District Court for the District of Arizona. Plaintiff claims that the Company and the other defendants have infringed certain patents held by it related to methods of scanning production markings (bar codes) placed on work pieces or merchandise. The complaint seeks from each defendant an award of damages for past infringement, to be trebled because of alleged willful and deliberate infringement. Most of the retailer defendants, including the Company, have entered into a Joint Defense Agreement. The Company is also subject to other ordinary routine litigation incidental to its business and with respect to which no material liability is expected. 11 of 17 NORDSTROM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following "management's discussion and analysis of financial condition and results of operations" includes "forward-looking statements" within the meaning of the private securities litigation reform act of 1995. This act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. Statements made in this filing that are not historical facts are forward looking information that involve risks and uncertainties. Forward-looking statements typically are identified by the use of such terms as "may," "will," "expect," "believe," "anticipate," "estimate," "plan" and similar words, although some forward-looking statements are expressed differently. You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, which include, but are not limited to, the following: the Company's ability to predict fashion trends, consumer apparel buying patterns, the Company's ability to control costs and expenses, the Company's ability to overcome technological problems, trends in personal bankruptcies and bad debt write- offs, employee relations, adverse weather conditions and other hazards of nature such as earthquakes and floods, the Company's ability to continue its store, brand and line expansion plans, and the impact of competitive market forces. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. The following discussion should be read in conjunction with the Management's Discussion and Analysis section of the Nordstrom, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 2000. Results of Operations: ---------------------- During the third quarter of 2000, sales increased 13.0% compared to the corresponding quarter in 1999. For the nine-month period, sales increased 7.2% compared to the corresponding period in 1999. Comparable store sales (sales in stores open at least one full fiscal year at the beginning of the fiscal year) increased 4.7% for the quarter and 1.2% for the nine-month period. The increase in comparable store sales for the quarter was primarily due to calendar variations, the most significant of which was a shift in the timing of the 2000 Anniversary Sale which resulted in five more Anniversary Sale days being included in the third quarter of 2000 than were in the 1999 third quarter. Gross profit as a percentage of net sales decreased to 34.3% in the third quarter of 2000, as compared to 35.3% in the same period in 1999. For the nine-month period, gross profit as a percentage of net sales decreased to 34.4%, as compared to 34.6% in the same period in 1999. The decrease for the quarter and the nine-month period was primarily due to an increase in markdowns. 12 of 17 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) For the third quarter of 2000, selling, general and administrative expenses as a percentage of net sales increased to 34.8%, compared to 31.7% for the third quarter of 1999. For the nine-month period, selling, general and administrative expenses as a percentage of net sales were 31.9%, compared to 29.6% for the corresponding period in 1999. The increase for the quarter was partially due to nonrecurring charges in 2000 related to severance expenses of approximately $13 million as a result of changes in management, and a charge for the write-off of certain information technology investments of approximately $10 million. The increases for the quarter and the nine-month period were also due to several other factors, including: increased sales promotion expenses in the full-line stores; increased credit expenses related to marketing programs for numerous credit products and a new loyalty program for the Company's proprietary credit card; and higher wage and other personnel expenses. Interest expense, net increased by 22.2% during the quarter, to $16 million. For the nine-month period, interest expense, net increased 16.0% to $43.6 million. The increases for the quarter and the nine-month period were due to an increase in levels of short-term debt outstanding and an increase in interest rates, partially offset by a decrease in the average levels of long- term debt outstanding. During the quarter and the nine-month period, losses of $20.7 million and $31.2 million, respectively, were recorded to recognize the write down of the value of the investment in Streamline, Inc., which was deemed by management to be other than temporary. The fair market value of the investment in Streamline is $1.7 million as of October 31, 2000. Streamline ceased its operations effective November 22, 2000, due to failure to obtain additional capital to fund its operations. The Company will write-off the remainder of this investment in the fourth quarter of this year. Service charge income and other, net increased by 34.9% during the quarter, to $37 million. For the nine-month period, service charge income and other, net increased 25.4% to $101.2 million. The increase for the quarter and the nine-month period was due to higher accounts receivable securitization gains, and higher service charge and late fee income associated with increases in the number of credit accounts and credit sales. The net loss for the quarter ended October 31, 2000 was $3.3 million, compared to net earnings of $33.6 million in the same period in 1999. The diluted loss per share was $0.03 for the third quarter ended October 31, 2000, compared to diluted earnings per share of $0.25 achieved in the same period in 1999. Net earnings for the nine months ended October 31, 2000 decreased 45.0% to $74.9 million from $136 million in the same period in 1999. For the nine months ended October 31, 2000, diluted earnings per share were $0.58, a decrease of 40.2% from the $0.97 achieved in the same period in 1999. The decreases in earnings and earnings per share for the quarter and the nine-month period were primarily due to nonrecurring charges related to changes in management and write-off of certain information technology investments, and higher selling, general and administrative expenses, partially offset by higher service charge income. Net earnings and earnings per share were also impacted by a $20.7 million pretax charge for the quarter and a $31.2 million pretax charge for the nine-month period related to the write-down of the Streamline investment. The decreases in diluted earnings per share for the quarter and year to date were partially offset by a decrease in the number of shares outstanding. 13 of 17 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Liquidity and Capital Resources: -------------------------------- The Company finances its working capital needs, capital expenditures and share repurchase activity with cash provided by operations and external borrowings. The Company's cash and cash equivalents decreased $11,300 during the nine-month period ended October 31, 2000, as cash used for investing activities was more than the cash provided by operations and additional financing activities. The increase in accounts payable was primarily due to a change in the Company's policy to pay its vendors based on receipt of goods rather than the invoice date. For the nine months ended October 31, 2000, cash flow used for investing activities is comprised primarily of capital expenditures for new store expansion and information technology-related projects. During the quarter, the Company opened four new full-line stores in Frisco, Texas; Broomfield, Colorado; Roseville, California and Chicago, Illinois. The Company also opened five new Rack stores in Honolulu, Hawaii; Spokane, Washington; Oak Brook, Illinois; Scottsdale, Arizona and Chandler, Arizona during the quarter. For the year to date, the Company has opened a total of five new full-line and ten new Rack stores. Additionally, in November 2000, the Company opened one full-line store in Boca Raton, Florida. Construction is progressing as planned on new stores scheduled to open in 2001. Although the Company has made commitments for stores opening in 2001 and beyond, it is possible that in one or more instances store site negotiations may be terminated and the store may not be built or delays may occur. Furthermore, environmental and land use regulations and the difficulties encountered by shopping center developers in securing financing could make future development of stores more difficult, time-consuming and expensive. For the nine months ended October 31, 2000, cash provided by financing activities was $180 million, due primarily to debt proceeds partially offset by cash used to purchase and retire common stock under the Company's stock purchase program. In October 2000, the Company issued $300 million of 8.95% Senior Notes due 2005, these proceeds were used to reduce short-term indebtedness, to fund the acquisition of Faconnable and for general corporate purposes. During the nine months ended October 31, 2000, the Company repurchased 3.6 million shares of its common stock for an aggregate of approximately $81.3 million under a stock purchase program. At October 31, 2000, the Company had remaining share repurchase authorization of approximately $87 million. Seasonality ------------ The Company's business, like that of other retailers, is subject to seasonal fluctuations. Due to the Company's anniversary sale in July and holidays in December, sales are higher in the second and fourth quarters of the fiscal year than in the first and third quarters. Accordingly, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. 14 of 17 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Recent Accounting Pronouncements -------------------------------- Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting For Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and No. 138, requires the Company to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Adoption of this standard in the fiscal year beginning February 1, 2001, is not expected to have a material impact on the Company's consolidated financial statements. The Company adopted Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation" in July 2000, which provides guidance for certain issues that arose in applying Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Adoption of this Interpretation did not have a material impact on the Company's consolidated financial statements. In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"), a replacement of Statement 125 with the same title. It revises the standards for securitizations and other transfers of financial assets and collateral and requires certain additional disclosures, but otherwise retains most of SFAS No. 125's provisions. SFAS No. 140 is effective for transfers after March 31, 2001 with certain disclosures required for periods ending on or after December 31, 2000. Adoption of the accounting provisions of this Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to the risk of fluctuating interest rates in the normal course of business, primarily as a result of its short-term borrowing and investment activities which generally bear interest at variable rates. Because the short-term borrowings and investments, other than the investment in marketable equity securities, have maturities of three months or less, the Company believes that the risk of material loss is low, and that the carrying amount approximates fair value. The Company's investment in marketable equity securities is classified as short-term and is recorded on the balance sheet at fair value based upon the quoted market price with unrealized gains or losses reported as a separate component of accumulated other comprehensive earnings. Realized gains and losses and declines in value judged to be other than temporary are included in net earnings. At October 31, 2000, the Company had outstanding borrowings of approximately $111 million under short- term notes payable, which bear interest from 6.56% to 6.70%, and mature from November 1, 2000 to November 7, 2000. In October 2000, the Company issued $300 million of 8.95% Senior Notes due 2005. These proceeds were used to reduce short-term indebtedness, to fund the acquisition of Faconnable and for general corporate purposes. 15 of 17 PART II - OTHER INFORMATION Item 1. Legal Proceedings ------------------------- The information required under this item is included in the following section of Part I, Item 1 of this report: Note 7 in Notes to Consolidated Financial Statements Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- (a) Exhibits -------- (10.1) Share Purchase and Contribution Agreement dated as of September 27, 2000 by and among Nordstrom, Inc., Nordstrom European Capital Group, and the Selling Shareholders of Faconnable, S.A., is hereby incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-3, Registration No. 333-50028 filed on November 15, 2000. (10.2) Amendment to the Share Purchase and Contribution Agreement dated as of October 20, 2000 by and among Nordstrom, Inc., Nordstrom European Capital Group, and the Selling Shareholders of Faconnable, S.A., is hereby incorporated by reference to Exhibit 2.2 to the Registrant's Registration Statement on Form S-3, Registration No. 333-50028 filed on November 15, 2000. (10.3) The Put Agreement dated November 1, 1999 between Nordstrom, Inc. and the holders of the Series C Preferred Stock of Nordstrom.com, Inc. is filed herein as an Exhibit. (27.1) Financial Data Schedule is filed herein as an Exhibit. (b) Reports on Form 8-K ------------------- The Company filed a Form 8-K on September 7, 2000 to announce senior management changes. The Company also filed a Form 8-K on October 11, 2000 to announce non-recurring charges and third quarter earnings expectations. 16 of 17 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 Vice President and Corporate Controller (Principal Accounting Officer) Date: December 13, 2000 ----------------- 17 of 17 NORDSTROM, INC. AND SUBSIDIARIES Exhibit Index Exhibit Method of Filing ------- ---------------- 10.1 Share Purchase and Contribution Incorporated by reference to Exhibit Agreement dated as of September 2.1 to the Registrant's Registration 27, 2000 by and among Nordstrom, Statement on Form S-3, Registration Inc., Nordstrom European Capital No. 333-50028 filed on November Group, and the Selling 15, 2000. Shareholders of Faconnable, S.A. 10.2 Amendment to the Share Purchase Incorporated by reference to Exhibit and Contribution Agreement dated 2.2 to the Registrant's Registration as of October 20, 2000 by and Statement on Form S-3, Registration among Nordstrom, Inc., Nordstrom No. 333-50028 filed on November European Capital Group, and the 15, 2000. Selling Shareholders of Faconnable, S.A. 10.3 The Put Agreement dated November Filed herewith electronically 1, 1999 between Nordstrom, Inc. and the holders of the Series C Preferred Stock of Nordstrom.com, Inc. 27.1 Financial Data Schedule Filed herewith electronically