Nordstrom
Annual Report 2002

Plain-text annual report

ANNUAL REPORT 2002 [forward motion] financial highlights Dollars in thousands except per share amounts Fiscal Year Net sales Earnings before income taxes and cumulative effect of accounting change Earnings before cumulative effect of accounting change Net earnings Basic earnings per share Diluted earnings per share Cash dividends paid per share 2002 2001 % Change $5,975,076 $5,634,130 195,624 103,583 90,224 .67 .66 .38 204,488 124,688 124,688 .93 .93 .36 6.1 (4.3) (16.9) (27.6) (28.0) (29.0) 5.6 Comp-Store Sales % Change Sales per Square Foot % 4 . 4 • % 7 . 2 • % 4 . 1 • % 0 4 . • % 6 . 0 • % 7 0 - . • % 4 . 1 • % 3 . 0 • % 1 1 - . • % 7 2 - . • % 9 . 2 - • 1 8 3 $ • 3 8 3 $ 5 9 3 $ • • 2 8 3 $ • 7 7 3 $ • 4 8 3 $ • 2 6 3 $ • 0 5 3 $ • 2 4 3 $ • 1 2 3 $ • 9 1 3 $ • 92 93 94 95 96 97 98 99 00 01 02 92 93 94 95 96 97 98 99 00 01 02 Gross Profit % of Sales SG&A as a % of Sales % 3 . 3 % 3 • 2 . 1 3 • % 6 . 1 3 • % 2 . 2 3 • % 9 . 1 3 • % 9 . 0 3 • % 8 . 4 3 • % 0 . 4 3 • % 8 . 3 3 • % 5 . 3 3 • % 2 . 3 3 • % 4 . 6 2 • % 2 . 6 2 % 4 . 6 2 •• % 6 . 1 % 3 • 6 . 9 2 • % 6 . 0 3 • % 3 . 0 3 • % 3 . 8 2 • % 5 . 7 2 • % 6 . 7 2 % 7 . 7 2 •• 92 93 94 95 96 97 98 99 00 01 02 92 93 94 95 96 97 98 99 00 01 02 Table of contents 12 Management’s Discussion and Analysis 24 Consolidated Statements of Shareholders’ Equity 46 Retail Store Facilities 21 Independent Auditors’ and Management Reports 25 Consolidated Statements of Cash Flows 48 Officers of the Corporation and Executive Team 22 Consolidated Statements of Earnings 26 Notes to Consolidated Financial Statements 49 Board of Directors 23 Consolidated Balance Sheets 44 Eleven-Year Statistical Summary 49 Shareholder Information View this entire report online. Please visit www.nordstrom.com to see this report and obtain the latest available information. The saying goes, “It’s the little things that count.” We’d like to add—it’s the big ones too. In fact, it all counts when it comes to customer satisfaction. quality experience Our focus at Nordstrom is simple—take care of the customer and offer a wide selection of quality, distinctive merchandise at fair prices every day. It is this commitment that ultimately drives sales and results. Everything we do, directly or indirectly, supports our focus on our customers. And our story always begins with our people… our pleasure In a competitive retail environment, you must have the best people in the industry on the sales floor. We look for people who will approach work with pride and ownership. Our salespeople are empowered to do whatever it takes to make the customer happy. Every day, they find new ways to respond to each customer’s needs. In addition to anticipating what the customer wants, we offer special services that enhance the shopping experience. Whether someone needs a gift wrapped in our signature pewter and silver boxes (of course, free of charge), last minute alterations, or a complimentary makeover, our services are a unique complement to our superior salespeople. BP. Salesperson Nicole Rhotton, Mission Viejo, CA Café Bistro Jose “Pepe” Ruvalcaba, Mission Viejo, CA 2 NORDSTROM INC. AND SUBSIDIARIES Personal Touch Personal shopping specialist Eun Kim, Michigan Ave., IL Concierge Cynthia Sanchez, Michigan Ave., IL BP. Shoe Salesperson Russell Felicitas, Downtown Seattle, WA “As shoe merchants, we were raised kneeling in front of customers, and I believe this represents the essence of our company’s values and the very core of our culture.” Bruce Nordstrom CHAIRMAN OF THE BOARD Men’s Clothing Salesperson Million-dollar seller Larry Smiley, Michigan Ave., IL Regional Fit Specialist Lingerie and Prosthesis Debra Duden, Oak Brook, IL Alterations Deena Vu, Bellevue Sq., WA Cosmetics Skincare Specialist Claudia Myszko, Mission Viejo, CA NORDSTROM INC. AND SUBSIDIARIES 3 4 NORDSTROM INC. AND SUBSIDIARIES distinctive merchandise Our goal is to offer a well-edited range of products for a variety of lifestyles. We serve a broad base of customers and work hard to offer them an appealing combination of unique vendors, national and exclusive brands and private label merchandise. To have the merchandise when the customer wants it is the highest form of service we can provide. We won’t be undersold, and we stand by our commitment to provide the best possible price for every item sold in our stores. Customers want fresh, compelling merchandise and they recognize quality and value. When we focus on those things it’s possible to send more customers home happy—with a shopping bag in hand. NORDSTROM INC. AND SUBSIDIARIES 5 k c a e R h T g a t a l o C o m o m . c s t r d r o n b l e a n n o ç a F 6 NORDSTROM INC. AND SUBSIDIARIES e r e S t o h T all together We want to build long-lasting relationships with our customers—and we want to be wherever they want us to be. Because we are one of the few fashion specialty retailers that provide customers the convenience of shopping multiple channels: in our stores, at Nordstrom Racks, through our catalogs or online, we work hard to demonstrate this commitment every day. Whether it’s a midnight shopping spree on nordstrom.com, or a lunchtime dash to the Rack, the customer will always find Nordstrom represented in the quality, value, selection and service each channel provides. NORDSTROM INC. AND SUBSIDIARIES 7 right direction Ultimately, it’s our customers who judge whether or not we are on the right track. Through emails, calls, letters and personal feedback on the sales floor, they let us know how we are serving them. But we know that the best service we can offer is to sell them something. As our results reflect, our customers are responding positively. In 2002 our sales results beat our industry peer group for 10 consecutive months. And eight months out of those 10 we achieved comparable sales increases. While we still have ground to cover, we are pleased with the customer feedback, and with the progress we’ve made over the past two years. 8 NORDSTROM INC. AND SUBSIDIARIES NORDSTROM INC. AND SUBSIDIARIES 9 dear customers, employees and shareholders Nordstrom is not a faceless company. It includes our salespeople, department managers, store managers, merchants, support personnel, and our board of directors—all working together to achieve sustained improvement in our results by providing better service to our customers. Ours is not a one-quarter, two-quarter, or even a 2003 story. It’s a story focused on constantly striving to be better, supported by a well-established culture: competitive and empowering, challenging and supportive, flexible in responding to market opportunities, and unyielding in working every day to warrant the trust of our customers, employees, shareholders, and business partners. Our progress in the past year is measured in small but meaningful steps. We set out to improve service, drive top line sales, reduce expenses, and implement our perpetual inventory system nationwide. We’re pleased to report we made progress on all four fronts. For example, comparable store sales, a reflection of customers voting with their hard earned dollars, grew 1.4 percent in 2002. We also recognize that in this challenging economic environment in which a number of retailers experienced negative comparable store sales, we made strides in regaining lost market share. We continued to make progress in better managing expenses. Selling, general and administrative expense, as a percentage of sales, showed improvement for the second consecutive year. This expense had grown considerably in recent years relative to our growth in sales. The progress with expenses over the last two years, while modest, moves us in the right direction. Opportunities remain to become more efficient and we intend to act on them, while remaining committed to enhancing the customer experience—in our stores, through our catalogs and online. Blake W. Nordstrom William D. Ruckelshaus Bruce A. Nordstrom John A. McMillan 10 NORDSTROM INC. AND SUBSIDIARIES Jeanne P. Jackson Enrique Hernandez Jr. We opened eight full-line stores in 2002, the most we’ve ever opened in a single year, in addition to four Nordstrom Racks and one Façonnable boutique. We also successfully implemented a company-wide perpetual inventory system. While we believe that no implementation is completely seamless when it comes to installing a roughly $200 million information technology system, we were able to accomplish this within the established budget and without a significant misstep. Although our perpetual inventory system is a wonderful tool, it is not the all-encompassing answer. With this technology in place, the responsibility now lies with Nordstrom employees, not the system, to make sure that ultimately our customers benefit from our stores carrying more of the merchandise they are looking for. Our technology will continue to improve in 2003 as we begin implementation of a new point-of-sale system, which will enable our salespeople to be more efficient in sales transactions with customers. Different trends and formats have created a stir within retail over the last few years, from specialty stores in one period, to e-commerce in another, to discounters and increased promotions more recently. Our challenge in 2003 and beyond is to be the best Nordstrom we can be, which we believe is an increasingly attractive niche. While we have a platform that is viable in multiple channels—full-line stores, Racks, Façonnable boutiques, catalogs, Internet—we want to act as one company providing customers with a consistent Nordstrom experience. Thank you for your support of this company. We look forward to continuing to move in the right direction in 2003 and we’re eager to demonstrate through our actions and results why you should continue to be associated with Nordstrom. Sincerely, Blake W. Nordstrom PRESIDENT John N. Nordstrom Alfred E. Osborne Jr. D. Wayne Gittinger For more information regarding these individuals, please turn to page 50. NORDSTROM INC. AND SUBSIDIARIES 11 Alison A. Winter Stephanie M. Shern Bruce G. Willison management’s discussion and analysis OVERVIEW Percentage of 2002 Sales by Merchandise Category Nordstrom is a fashion specialty retailer offering a wide selection of high-quality apparel, shoes and accessories for men, women and children. We believe that we offer our customers an exceptional shopping experience by providing superior service and distinctive merchandise with an emphasis on quality and value. We also offer our products through multiple retail channels including our full-line stores, Nordstrom Rack stores, our catalogs and on the Internet. Our financial performance is driven largely by our ability to generate positive comparable store sales, successfully execute store openings, Children’s Apparel and Accessories 4% Other 3% Men’s Apparel and Furnishings 17% Women’s Apparel 35% manage inventory and control expenses. To that end, our goals for Shoes 19% 2002 were to drive top-line growth, implement our new perpetual inventory system and continue lowering expense levels as a percent of sales. Women’s Accessories 22% During 2002, we were able to generate comparable store sales gains of 1.4%. We are encouraged by these gains in this challenging retail RESULTS OF OPERATIONS: and economic environment. In recent years, our sales per square foot have declined as we have ventured into new markets and opened new stores. This year our sales per square foot decline Segment results are discussed in each of the following sections as applicable. slowed. In 2002, sales per square foot declined from $321 to Net Sales (in millions) $319, in spite of an 8% expansion in our retail square footage. We substantially completed the implementation of our perpetual inventory system, which allows us to more effectively manage inventory. Additionally, we are implementing a new replenishment system, which is scheduled for completion in the first quarter of 2003. Progress was made on controlling expenses in the current year. In 2002, selling, general and administrative expenses as a percent of sales were down 0.3% to 30.3%. This decrease is in addition to the 1.0% decrease we achieved in 2001. While we have made 9 4 0 , 5 $ 9 4 1 , 5 $ 9 2 5 , 5 $ 4 3 6 , 5 $ 5 7 9 , 5 $ • • • • • $6,000 $5,750 $5,500 $5,250 $5,000 98 99 00 01 02 progress in this area, we are still focused on reaching our goal of Sales increases and comparable store sales are shown in the table 28.5% to 29.0% of sales in the next few years. below. Comparable stores are stores open at least one full fiscal Our focus for 2003 is to increase top line growth through positive comparable store sales and store openings, improve gross margin performance through better inventory control, and further reduce our expenses as a percent of sales. year at the beginning of the fiscal year. Fiscal Year 2000 2001 2002 Net sales increase 7.4% 1.9% 6.1% Comparable store sales: Full-line stores Nordstrom Rack & other Total 0.2% 1.2% 0.3% (2.6%) (5.9%) (2.9%) 0.7% 7.4% 1.4% 12 NORDSTROM INC. AND SUBSIDIARIES management’s discussion and analysis In 2002, net sales increased 6.1% over the prior year. This growth we added new stores, however, inventory per square foot declined was primarily due to store openings. During 2002, we opened eight due to improved performance at full-line stores partially offset by full-line stores, four Nordstrom Rack stores and one Façonnable inventory increases at our Nordstrom Rack division. Total shrinkage boutique. We also closed one Nordstrom Rack location. The net as a percentage of sales was even with the previous year. impact was an increase to our retail square footage of 8%. Comparable store sales increased 1.4% due to increases at both full-line stores and Nordstrom Rack stores. Sales at Nordstrom Direct (formerly known as Nordstrom.com) declined slightly with a planned reduction in catalog sales partially offset by an increase in Internet sales. Gross profit as a percentage of net sales declined in 2001 due to increased markdowns and new store occupancy expenses. The markdowns were taken to drive sales and to liquidate excess inventory caused by the decrease in comparable store sales. Inventory declines at comparable stores were partially offset by the addition of new stores. The comparable stores inventory decrease Merchandise division sales were led by Women’s Designer, Cosmetics was due to a concerted effort to reduce inventory levels during the and Accessories. Men’s Apparel and Shoes experienced small sales year resulting in lower inventory per square foot. Total shrinkage as declines. The Women’s Designer division benefited from the a percentage of sales was even with the previous year. addition of new vendors, close scrutiny of developing trends and a targeted marketing plan. The increase in Cosmetics was primarily due to the addition of product lines. Accessories improved by In 2003, we anticipate continuing progress in our ability to improve gross profit performance through better inventory management. differentiating its product and offering attractive values. Selling, General and Administrative In 2001, net sales increased 1.9% due to store openings. During 2001, we opened four full-line stores, eight Nordstrom Rack stores and three Façonnable boutiques. We also closed one Nordstrom Rack store and one full-line store. The net impact was an increase to our retail square footage of 6%. New store sales were partially offset by negative comparable store sales and a decline in sales at Nordstrom Direct. The most significant sales declines were in Fiscal Year 2000 2001 2002 Selling, general and administrative expense as a percent of net sales 31.6% 30.6% 30.3% In 2002, we recognized a charge of $15.6 million to write-down an investment in a supply chain tool intended to support our private label division. Due to changes in business strategy, we determined that this asset was impaired. This charge reduced this asset to its Men’s Apparel and Shoes while Women’s Apparel was essentially flat. estimated market value. In 2003, we plan to open four full-line stores and two Nordstrom Rack stores, increasing retail square footage by approximately 4%. Because of the continued challenging retail environment, comparable store sales are expected to be flat to slightly positive. Gross Profit Fiscal Year 2000 2001 2002 Gross profit as a percent of net sales 34.0% 33.2% 33.5% Gross profit as a percentage of net sales improved in 2002 due to better inventory management. In our merchandising divisions, improvement in gross profit rate offset lower sales in certain categories. Merchandise division gross profit was led by both Women’s and Men’s Apparel. Additionally, costs related to our private label operations improved. Total inventory increased as Excluding the effect of the write-down, selling, general and administrative expenses as a percentage of net sales decreased in 2002 to 30.1% from 30.6% in the prior year. This decrease is the result of improvements in bad debt and selling expense and reductions in sales promotion. These costs were partially offset by higher distribution costs and higher information systems expense. Bad debt expense decreased as both delinquency and write-off trends stabilized. Selling expense decreased primarily due to continued efficiencies in shipping costs at Nordstrom Direct. Sales promotion decreased as Nordstrom Direct executed planned reductions in catalog size and number of mailings consistent with sales trends. Distribution costs increased primarily due to higher merchandise volumes and temporary inefficiencies caused by the implementation of our perpetual inventory system. The information NORDSTROM INC. AND SUBSIDIARIES 13 management’s discussion and analysis systems expense increase resulted from depreciation and rollout Minority Interest Purchase and Reintegration Costs costs of our new perpetual inventory system. During 2002, we purchased the outstanding shares of In 2000, we recognized a charge of $13.0 million for certain severance and other costs related to a change in management. Also in 2000, we recorded an impairment charge of $10.2 million. Due to changes in business strategy, we determined that several software projects under development were either impaired or obsolete. Excluding the effect of the severance and impairment charge, selling, general and administrative expenses as a percentage of net sales decreased in 2001 to 30.6% versus 31.2% in the prior year. This improvement in selling, general and administrative expenses Nordstrom.com, Inc. series C preferred stock for $70.0 million. The excess of the purchase price over the fair market value of the preferred stock and professional fees resulted in a one-time charge of $42.7 million. No tax benefit was recognized on the share purchase, as we do not believe it is probable that this benefit will be realized. The impact of not recognizing this income tax benefit increased our effective tax rate to 47% before the cumulative effect of accounting change. Also in 2002, $10.4 million of expense was recognized related to the purchase of the outstanding Nordstrom.com options and as a percentage of net sales is due to reductions in sales promotion warrants. and improvements in selling expenses. Sales promotion expenses decreased due to the discontinuation of a company-wide brand advertising program. Selling expenses decreased as Nordstrom Direct improved the efficiency of their shipping and call center activities. These improvements were partially offset by an increase in bad debt on our credit cards due to increased delinquencies and write-offs. In 2003, selling, general and administrative expenses as a percent of net sales are expected to improve slightly as we continue our focus on expense management. Interest Expense, Net Service Charge Income and Other, Net (in millions) 1 4 1 $ • 4 3 1 $ • 0 1 1 $ 7 1 1 $ 1 3 1 $ • • • $150 $140 $130 $120 $110 $100 $90 Interest expense, net increased 9.2% in 2002 primarily due to 98 99 00 01 02 lower capitalized interest. Capitalized interest decreased due to Service charge income and other, net increased in 2002 primarily lower average balances during the year for construction and due to gains recorded from our VISA securitization. Securitization software in progress. Interest expense, net increased 19.7% in 2001 due to higher average borrowings, partially offset by a decrease in interest rates. gains increased this year as credit spreads improved, the cost of funds decreased and bad debt write-offs stabilized. This increase was partially offset by a decline in service charge and late fee income resulting from a decline in our private Interest expense, net for 2003 is expected to be flat with 2002. label accounts receivable. Write-down of Streamline.com, Inc. Service charge income declined slightly in 2001 due to We held an investment in Streamline.com, Inc., an Internet grocery lower interest rates, flat credit sales and a steady number of and consumer goods delivery company. Streamline ceased its credit accounts. operations effective November 2000. During 2000 we wrote off our entire investment in Streamline, for a total expense of $32.9 million. In 2003, service charge income is expected to be higher due to a small increase in credit sales and credit accounts, and adjustments to interest rates charged. 14 NORDSTROM INC. AND SUBSIDIARIES management’s discussion and analysis Diluted Earnings per Share LIQUIDITY AND CAPITAL RESOURCES $1.60 $1.40 $1.20 $1.00 $0.80 8 7 . 0 $ 3 9 . 0 $ 6 6 . 0 $ 1 4 . 1 $ • 6 4 . 1 $ • • • 98 99 00 01 • 02 We finance our working capital needs, capital expenditures, acquisitions and share repurchase activity with a combination of cash flows from operations and borrowings. We believe that our operating cash flows, existing cash and available credit facilities are sufficient to finance our operations and planned growth for the foreseeable future. Operating Activities Our operations are seasonal in nature. The second quarter, which includes our Anniversary Sale, accounts for approximately 28% Earnings per share decreased in 2002 due to the write down of net sales, while the fourth quarter, which includes the holiday of the supply chain tool, the minority interest purchase and season, accounts for about 29% of net sales. Cash requirements reintegration costs and the cumulative effect of accounting change. are highest in the third quarter as we build our inventory for the Excluding the impact of these charges, earnings per share would holiday season. have been $1.19, an increase from the prior year of 28.0%. This increase was primarily driven by an increase in comparable store sales, an improvement in gross profit percent and a decrease in selling, general and administrative expenses as a percent of sales. The decrease in net cash provided by operating activities between 2002 and 2001 was primarily due to increases in inventories and accounts receivable partially offset by an increase in net earnings before noncash items and an increase in our accrual for income Earnings per share for 2001 were 19.2% higher than 2000 due to taxes. Inventory grew as we added stores during the year. Accounts charges recognized in 2000, which include the write-down of receivable increased as Nordstrom VISA credit sales improved. The Streamline, the management severance and the asset impairments. increased income tax accrual resulted from the timing of payments. Excluding the impact of these charges, 2000 earnings per share would have been $1.04 resulting in a 2001 earnings per share decrease of 10.6%. This decrease is primarily due to a decline in comparable store sales and a decline in gross profit percent offset by decreases in selling, general and administrative expenses as a percent of sales. Fourth Quarter Results Net cash provided by operating activities increased approximately $235 million in 2001 compared to 2000 primarily due to decreases in inventories and accounts receivable. The inventories decreased as a result of improved inventory management, while accounts receivable declined due to lower credit sales. In 2003, cash flows provided by operating activities are expected to remain fairly consistent with 2002. Inventory increases from store Fourth quarter 2002 earnings per share were $0.44 compared openings are expected to slow, offset by slower increases in accounts with $0.38 in 2001. Total sales for the quarter increased by 7.3% payable. Accounts receivable should increase modestly as credit versus the same quarter in the prior year and comparable store sales grow. sales increased by 1.9%. The increase in sales was primarily due to the opening of eight full-line stores and four Nordstrom Rack stores during the year. Gross profit as a percentage of sales was flat with the same quarter in the prior year. Selling, general and administrative expenses as a percent of sales decreased in the quarter compared to the prior year primarily due to improved selling costs and reduced sales promotion offset by higher distribution costs and information systems expense. Investing Activities For the last three years, investing activities have primarily consisted of capital expenditures, the minority interest purchase of Nordstrom.com and the acquisition of Façonnable. NORDSTROM INC. AND SUBSIDIARIES 15 management’s discussion and analysis Capital Expenditures five years from the acquisition date. If the former owner continues Our capital expenditures over the last three years totaled to have involvement in the business and performance targets are approximately $738 million, net of developer reimbursements, met, the contingent payment could approximate $12 million. principally to add stores, improve existing facilities and purchase The contingent payment will be expensed when it becomes or develop new information systems. More than 3.9 million square probable that the targets will be met. feet of retail store space has been added during this period, representing an increase of 27% since January 31, 2000. Financing Activities We plan to spend approximately $700-$750 million, net of developer reimbursements, on capital projects during the next three Financing activities primarily consist of share repurchases, dividend payments, as well as proceeds and payments on debt. years. Compared to the previous three years, we plan to open fewer Share Repurchase stores, slow spending on information systems and increase our In May 1995, the Board of Directors authorized $1.1 billion spending on the improvement of existing facilities. In the of share repurchases. As of January 31, 2003, we have purchased information systems area, we are in the process of replacing our 39 million shares of our common stock for $1 billion, with remaining point of sale system, which we expect to be substantially completed share repurchase authority of $82 million. The share repurchase by 2004. At January 31, 2003, approximately $227 million has been contractually committed primarily for the construction of new stores or remodeling of existing stores. Although we have made commitments for stores opening in 2003 and beyond, it is possible that some stores may not be opened as scheduled because of delays in the development process, or because of the termination of store site negotiations. Total Square Footage (in thousands) 6 5 0 , 6 1 • 8 2 4 , 8 1 • 8 4 0 7, 1 • 3 9 5 , 3 1 7 8 4 , 4 1 • • 20,000 18,000 16,000 14,000 12,000 10,000 8,000 98 99 00 01 02 Acquisition In 2000, we acquired Façonnable, S.A.S. in exchange for $88 million of cash and 5,074,000 shares of our common stock, for a total consideration of $169 million. The purchase provides for a contingent payment to a former owner that may be paid after 16 NORDSTROM INC. AND SUBSIDIARIES represents 24% of the shares outstanding as of May 1995 after adjusting for the 1998 stock split, at an average price per share of $25.93. Dividends In 2002, we paid $.38 per share in common stock dividends, the sixth consecutive annual dividend increase. We paid $.36 and $.35 per share of common stock in fiscal 2001 and 2000. Debt to Capital Ratio By the end of 2001, our debt to capital ratio had increased to 52.1% as a result of retail expansion, share repurchases and an acquisition. By the end of 2002, this ratio had decreased to 49.6%. Our near-term goal is to reduce this ratio to be in the range of 40% to 45%. Debt In May 2002, we replaced the $200 million variable funding note backed by Nordstrom VISA credit card receivables with 5-year term notes also backed by the VISA credit card receivables. Class A and B notes with a combined face value of $200 million were issued to third party investors. We used the proceeds to retire the $200 million outstanding on the variable funding note. Based on SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” this debt and the related assets are not reflected in our consolidated balance sheets. management’s discussion and analysis In November 2001, we issued $300 million of Class A notes Available Credit backed by Nordstrom private label receivables. These notes bear In November 2001, we entered into a $300 million unsecured a fixed interest rate of 4.82% and have a maturity of five years. revolving credit facility that expires in November 2004. As of Both the debt and related assets are included in our consolidated January 31, 2003, no borrowings have been made against this balance sheets. A portion of the proceeds was used to pay-down revolving credit facility. Also in November 2001, we issued a variable funding note backed by Nordstrom private label receivables with a $200 million capacity. As of January 31, 2003, no borrowings were outstanding against this note. Additionally, we have universal shelf registrations on file with the Securities and Exchange Commission that permit us to offer an additional $450 million of securities to the public. These registration statements allow us to issue various types of securities, including debt, common stock, warrants to purchase common stock, warrants to purchase debt securities and warrants to purchase or sell foreign currency. Contractual Obligations The following table summarizes our contractual obligations and the expected effect on liquidity and cash flows. Fiscal Year Total 1 Year Years Years Less than 1-3 4-5 Over 5 Years Long-term Debt $1,338.4 $5.2 $407.9 $307.1 $618.2 Capital Leases 16.0 Operating Leases 780.4 1.1 73.2 2.2 2.2 141.3 123.9 10.5 442.0 Construction Commitments 227.3 165.2 62.1 — — Total $2,362.1 $244.7 $613.5 $433.2 $1,070.7 approximately $77 million in medium-term notes and the purchase of Nordstrom.com, Inc.’s preferred stock for $70 million. The remaining proceeds will be used for general corporate purposes and capital expansion. In October 2000, we issued $300 million of 8.95% senior notes due in 2005. These proceeds were used to reduce short-term indebtedness, to fund the acquisition of Façonnable, and for general corporate purposes. Interest Rate Swaps We entered into a variable interest rate swap agreement in the fourth quarter of 2002. The swap had a $250 million notional amount and a six-year term. Under the agreement, we received a fixed rate of 5.63% and paid a variable rate based on LIBOR plus a margin of 1.31% set at six-month intervals (3.25% at January 31, 2003). The swap agreement qualified as a fair value hedge and was recorded at fair value in other assets at January 31, 2003. Subsequent to January 31, 2003, we sold the interest rate swap and received cash of $2.3 million, which will be recognized as interest income evenly over the remaining life of the related debt. In the third quarter of 2002, we sold the interest rate swap that converted our $300 million, 8.95% fixed-rate debt to variable rate. We received cash of $4.9 million, which will be recognized as interest income evenly over the remaining life of the related debt. Noncash Financing We own 49% of a limited partnership which constructed a new corporate office building in which we are the primary occupant. During the first quarter of 2002, the limited partnership refinanced its construction loan obligation with an $85 million mortgage secured by the property, of which $79 million was included in our balance sheet at January 31, 2003. The obligation has a fixed interest rate of 7.68% and a term of 18 years. NORDSTROM INC. AND SUBSIDIARIES 17 management’s discussion and analysis Debt Ratings approximates the lower of cost or market. Factors considered in The following table shows our credit ratings at the date of this report. determining markdowns include current and anticipated demand, Credit Ratings Senior unsecured debt Commercial paper * negative outlook Moody’s* Baa1 P-2 Standard and Poor’s* A- A-2 customer preferences, age of the merchandise and fashion trends. We also reserve for obsolescence based on historical trends and specific identification. Shrinkage is estimated as a percentage of sales for the period from the last inventory date, based on historical shrinkage losses. Vendor Allowances These ratings could change depending on our performance and other factors. A significant ratings drop could result in the termination We receive allowances from merchandise vendors for purchase price of the $200 million Nordstrom private label receivables variable adjustments, cooperative advertising programs and cosmetic selling funding note and a change in interest rates on the $300 million expenses. Purchase price adjustments are recorded as a reduction 8.95% senior notes and the $300 million revolving credit facility. of cost of sales at the point they have been earned and the related The remainder of our outstanding debt is not subject to termination merchandise has been sold. Allowances for cooperative advertising or interest rate adjustments based on changes in credit ratings. programs and cosmetic selling expenses are recorded as a reduction Critical Accounting Policies of selling, general and administrative expense when the advertising or selling expense is incurred. The preparation of our financial statements requires that we make estimates and judgments that affect the reported amounts of assets, Self Insurance liabilities, revenues and expenses, and disclosure of contingent We are self insured for certain losses related to health and welfare, assets and liabilities. We regularly evaluate our estimates including workers’ compensation and general liability. We record estimates those related to doubtful accounts, inventory valuation, intangible of the total cost of claims incurred as of the balance sheet date. assets, income taxes, self-insurance liabilities, post-retirement These estimates are based on analysis of historical data and benefits, contingent liabilities and litigation. We base our estimates actuarial estimates. on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The following discussion highlights the policies we feel are critical. Revenue Recognition Allowance for Doubtful Accounts We evaluate the collectibility of our customer accounts receivable based on several factors, including historical trends, aging of accounts, write-off experience and expectations of future performance. Delinquent accounts are usually written off after We recognize revenues net of estimated returns and exclude sales the passage of 151 days without receiving a full scheduled tax. Retail stores record revenue at the point of sale. Catalog monthly payment. Accounts are written off sooner in the event and Internet sales include shipping revenue and are recorded upon of customer bankruptcy or other circumstances that make further delivery to the customer. Our sales return liability is estimated collection unlikely. based on historical return levels. Off-balance Sheet Financing Inventory We have $200 million in outstanding term notes backed by our Our inventory is stated at the lower of cost or market using the retail Nordstrom VISA credit card receivables. On an ongoing basis, inventory method (first-in, first-out basis). Under the retail method, our Nordstrom VISA receivables are transferred to a master note inventory is valued by applying a cost-to-retail ratio to the ending trust which has issued Class A and B notes to third party investors. retail value of inventory. As our inventory retail value is adjusted We hold securities that represent our retained interests in the trust. regularly to reflect market conditions, our inventory method 18 NORDSTROM INC. AND SUBSIDIARIES management’s discussion and analysis We recognize gains or losses on the sale of Nordstrom VISA SFAS No. 144 “Accounting for the Impairment or Disposal of receivables to the trust based on the difference between the face Long-Lived Assets” - SFAS No. 144 retains the fundamental value of the receivables sold and the fair value of the assets created provisions of SFAS No. 121, but establishes new criteria for asset during the securitization process. The fair value of the assets classification and broadens the scope of qualifying discontinued is calculated as the present value of their expected cash flows. operations. The adoption of this statement did not have a material The discount rates used to calculate present value represent the impact on our financial statements. volatility and risk of the assets. Significant assumptions and judgments are made to estimate the present value of expected cash flows and to determine the fair value of our retained interest. We have no other off-balance sheet transactions. Realization of Deferred Tax Assets In January 2003, we sold our Denver Credit facility generating a capital gain for tax purposes of $15.4 million, which was used to We adopted SFAS No. 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” in the second quarter of 2002. SFAS No. 145 updates, clarifies and simplifies existing accounting pronouncements related to extinguishments of debt, provisions of the Motor Carrier Act of 1980 and lease transactions. The adoption of this statement did not have a material impact on our financial statements. offset a portion of our existing capital loss carryforwards. Capital SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal loss carryforwards of $19.0 million remain available to offset capital Activities” was also adopted by us in the second quarter of 2002. gain income in the next three years. No valuation allowance reserve SFAS No. 146 nullifies EITF 94-3 “Liability Recognition for Certain has been provided because we believe it is probable that the full Employee Termination Benefits and Other Costs to Exit an Activity benefit of these carryforwards will be realized. Our purchase of the outstanding shares of Nordstrom.com, Inc. series C preferred stock resulted in an expense of $40.4 million which we believe will not be deductible for tax purposes. As a result, we have established a valuation allowance reserve of $16.5 million (including Certain Costs Incurred in a Restructuring)” by requiring that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred versus when an entity is committed to an exit plan. The adoption of this statement did not have a material impact on our financial statements. to offset the deferred tax asset related to this purchase. We adopted SFAS No. 148 “Accounting for Stock-Based Recent Accounting Pronouncements Compensation” in the fourth quarter of 2002. SFAS No. 148 amends SFAS No. 123 of the same name and provides alternative SFAS No. 141 “Business Combinations” - SFAS No. 141 requires transition methods for a voluntary change to fair value based that the purchase method of accounting be used for all business accounting for stock-based employee compensation. SFAS No. 148 combinations initiated after June 30, 2001, and establishes specific also requires more prominent and frequent disclosures about the criteria for the recognition of goodwill separate from other intangible effects of stock-based compensation. Adoption of SFAS No. 148 assets. Adoption of SFAS No. 141 did not have a material impact did not have a material impact on our financial statements. on our financial statements. In November 2002, the Emerging Issues Task Force reached a SFAS No. 142 “Goodwill and Other Intangible Assets” - Under SFAS consensus on certain issues discussed in EITF 02-16, “Accounting No. 142, goodwill and intangible assets having indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be by a Reseller for Cash Consideration Received from a Vendor.” This pronouncement addresses the timing and classification of cash payments received by a reseller from a vendor. Adoption of EITF 02- amortized over their estimated useful lives. Adoption of SFAS 16 did not have a material impact on our financial statements. No. 142 resulted in an impairment charge and a reduction in amortization expense, which is detailed in Note 2 of the Notes to Consolidated Financial Statements. In November 2002, the FASB issued FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including NORDSTROM INC. AND SUBSIDIARIES 19 management’s discussion and analysis Indirect Guarantees of the Indebtedness of Others.” FIN 45 and challenges posed by increased competition, shifting consumer elaborates on the disclosures made by a guarantor and also clarifies demand, changing consumer credit markets, changing capital that a guarantor is required to recognize, at the inception of a markets, changing interest rates and general economic conditions, guarantee, a liability for the fair value of the obligation undertaken hiring and retaining effective team members, sourcing merchandise in issuing the guarantee. Adoption of FIN 45 in the fourth quarter from domestic and international vendors, investing in new business of 2002 did not have a material impact on our financial statements. strategies, achieving our growth objectives and the impact of Cautionary Statement The preceding disclosures included forward-looking statements regarding our performance, liquidity and adequacy of capital resources. These statements are based on our current assumptions and expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Forward-looking statements are qualified by the risks economic and competitive market forces, including the impact of terrorist activity or the impact of war. As a result, while we believe there is a reasonable basis for the forward-looking statements, you should not place undue reliance on those statements. This discussion and analysis should be read in conjunction with the consolidated financial statements and the Eleven-Year Statistical Summary. 20 NORDSTROM INC. AND SUBSIDIARIES independent auditors’ and management reports Independent Auditors’ Report Management Report We have audited the accompanying consolidated balance sheets We are responsible for preparing our financial statements and the of Nordstrom, Inc. and subsidiaries (the “Company”) as of January other information that appears in the annual report. The financial 31, 2003 and 2002, and the related consolidated statements of statements have been prepared in accordance with accounting earnings, shareholders’ equity and cash flows for each of the three principles generally accepted in the United States of America years in the period ended January 31, 2003. These financial and include estimates based on our best judgment. statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We maintain a comprehensive system of internal controls and procedures designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with We conducted our audits in accordance with auditing standards established procedures. The concept of reasonable assurance generally accepted in the United States of America. Those standards is based on the recognition that the cost of maintaining the system require that we plan and perform the audit to obtain reasonable of internal accounting controls should not exceed the benefit assurance about whether the financial statements are free of derived from the system. material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Nordstrom, Inc. and subsidiaries as of January 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2003, in conformity with accounting principles generally accepted in the United States of America. The Company changed its method of accounting for goodwill and other intangible assets upon adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, for the year ended January 31, 2003, as discussed in Note 2 to the consolidated financial statements. Deloitte and Touche LLP audits our financial statements in accordance with auditing standards generally accepted in the United States of America and provides an objective, independent review of our internal controls and the fairness of our reported financial condition and results of operations. The Audit Committee, which is comprised of six independent directors, meets periodically with our management and the independent auditors to ensure that each is properly fulfilling its responsibilities. The Committee oversees our systems of internal control, accounting practices, financial reporting and audits to ensure their quality, integrity and objectivity are sufficient to protect shareholders’ investments. Michael G. Koppel Executive Vice President and Chief Financial Officer Deloitte & Touche LLP Seattle, Washington March 28, 2003 NORDSTROM INC. AND SUBSIDIARIES 21 consolidated statements of earnings 2003 % of sales 2002 % of sales 2001 % of sales $5,975,076 100.0 $5,634,130 100.0 $5,528,537 100.0 (66.8) 33.2 (30.6) 2.6 (1.4) — — 2.4 3.6 (1.4) 2.2 — 2.2 (66.0) 34.0 (31.6) 2.4 (1.1) (0.6) — 2.3 3.0 (1.2) 1.8 — 1.8 (3,649,516) 1,879,021 (1,747,048) 131,973 (62,698) (32,857) — 130,600 167,018 (65,100) 101,918 — $101,918 $0.78 $0.78 $0.35 Dollars in thousands except per share amounts Year ended January 31, Net sales Cost of sales and related buying and occupancy Gross profit Selling, general and administrative Operating income Interest expense, net Write-down of investment (3,971,372) 2,003,704 (1,813,968) 189,736 (81,9 21) — (66.5) 33.5 (30.3) 3.2 (1.4) — (0.9) 2.4 3.3 (1.6) (3,765,859) 1,868,271 (1,722,635) 145,636 (75,038) — — 133,890 204,488 (79,800) Minority interest purchase and reintegration costs (53,168) Service charge income and other, net 140,977 Earnings before income taxes and cumulative effect of accounting change Income taxes Earnings before cumulative effect of 195,624 (92,0 41 ) accounting change 103,583 1.7 124,688 Cumulative effect of accounting change (net of tax) Net earnings Basic earnings per share Diluted earnings per share Cash dividends paid per share (0.2) 1.5 (13,359) $90,224 $0.67 $0.66 $0.38 — $124,688 $0.93 $0.93 $0.36 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 22 NORDSTROM INC. AND SUBSIDIARIES consolidated balance sheets Dollars in thousands January 31, Assets Current assets: Cash and cash equivalents Accounts receivable, net Merchandise inventories Prepaid expenses Other current assets Total current assets Land, buildings and equipment, net Goodwill, net Tradename, net Other assets Total assets Liabilities and Shareholders’ Equity Current liabilities: Notes payable Accounts payable Accrued salaries, wages and related benefits Income taxes and other accruals Current portion of long-term debt Total current liabilities Long-term debt Deferred lease credits Other liabilities Shareholders’ equity: Common stock, no par: 500,000,000 shares authorized; 135,444,041 and 134,468,608 shares issued and outstanding Unearned stock compensation Retained earnings Accumulated other comprehensive earnings Total shareholders’ equity Total liabilities and shareholders’ equity The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 2003 2002 $208,329 759,262 953,112 40,261 111,654 2,072,618 1,761,544 40,355 100,133 121,726 $331,327 698,475 888,172 36,888 102,249 2,057,111 1,761,082 38,198 100,133 94,655 $4,096,376 $4,051,179 $244 414,754 260,562 188,986 5,545 870,091 1,341,826 383,100 129,302 358,069 (2,010) 1,014,105 1,893 1,372,057 $4,096,376 $148 490,988 236,373 144,402 78,227 950,138 1,351,044 342,046 93,463 341,316 (2,680) 975,203 649 1,314,488 $4,051,179 NORDSTROM INC. AND SUBSIDIARIES 23 consolidated statements of shareholders’ equity Dollars in thousands except per share amounts Balance at February 1, 2000 Net earnings Other comprehensive earnings: Unrealized loss on investment during period, net of tax Reclassification of realized loss, net of tax Foreign currency translation adjustment Comprehensive net earnings: Cash dividends paid ($.35 per share) Issuance of common stock for: Stock option plans Employee stock purchase plan Business acquisition Stock compensation Purchase and retirement of common stock Balance at January 31, 2001 Net earnings Other comprehensive earnings: Foreign currency translation adjustment Comprehensive net earnings: Cash dividends paid ($.36 per share) Issuance of common stock for: Stock option plans Employee stock purchase plan Stock compensation Purchase and retirement of common stock Balance at January 31, 2002 Net earnings Other comprehensive earnings: Foreign currency translation adjustment SERP adjustment, net of tax Comprehensive net earnings: Cash dividends paid ($.38 per share) Issuance of common stock for: Stock option plans Employee stock purchase plan Stock compensation Balance at January 31, 2003 Common Stock Shares Amount Unearned Stock Compensation 132,279,988 — $247,559 — $(8,593) — Retained Earnings $929,616 101,918 Accum. Other Comprehensive Earnings Total $17,032 — $1,185,614 101,918 — — — — — 181,910 165,842 5,074,000 (14,075) (3,889,908) 133,797,757 — — — — 186,165 541,677 19,009 (76,000) 134,468,608 — — — — — — — — — — 4,039 2,211 77,696 (1,111) — 330,394 — — — — 3,788 6,754 380 — 341,316 — — — — — — — — — — — — — 4,853 — (3,740) — — — — — — 1,060 — (2,680) — — — — — — — — — (45,935) — — — — (23,461) (23,461) 6,429 2,824 — — — — — — 6,429 2,824 87,710 (45,935) 4,039 2,211 77,696 3,742 (85,509) 900,090 124,688 — 2,824 — (85,509) 1,229,568 124,688 — — (2,175) — (48,265) — — — (1,310) 975,203 90,224 — — — — — 649 — (2,175) 122,513 (48,265) 3,788 6,754 1,440 (1,310) 1,314,488 90,224 — — — 7,755 (6,511) — (1) (1) 7,755 (6,511) 91,468 (51,322) — (51,322) 350,004 596,351 29,078 135,444,041 7,959 8,062 732 $358,069 — — 670 $(2,010) — — — $1,014,105 — — — $1,893 7,959 8,062 1,402 $1,372,057 (1) The ending balance of the foreign currency translation adjustment and SERP adjustment, net of tax was $8,404 and $(6,511) as of January 31, 2003. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 24 NORDSTROM INC. AND SUBSIDIARIES consolidated statements of cash flows Dollars in thousands Year ended January 31, Operating Activities Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of buildings and equipment Amortization of intangible assets Amortization of deferred lease credits and other, net Stock-based compensation expense Deferred income taxes, net Cumulative effect of accounting change, net of tax Write-down of investment Impairment of IT investment Minority interest purchase expense Change in operating assets and liabilities, net of effects from acquisition of business: Accounts receivable, net Merchandise inventories Prepaid expenses Other assets Accounts payable Accrued salaries, wages and related benefits Income tax liabilities and other accruals Other liabilities Net cash provided by operating activities Investing Activities Capital expenditures Additions to deferred lease credits Proceeds from sale-leaseback of Denver Credit facility Minority interest purchase Payment for acquisition, net of cash acquired Other, net Net cash used in investing activities Financing Activities Proceeds (payments) from notes payable Proceeds from issuance of long-term debt Principal payments on long-term debt Proceeds from sale of interest rate swap Proceeds from issuance of common stock Cash dividends paid Purchase and retirement of common stock Net cash (used in) provided by financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 2003 2002 2001 $90,224 $124,688 $101,918 233,931 — (22,179) 1,130 6,190 13,359 — 15,570 40,389 (58,397) (117,379) 521 3,378 (9,826) 23,763 43,771 14,227 278,672 (328,166) 97,673 20,000 (70,000) — (3,513) (284,006) 96 1,665 (87,697) 4,931 14,663 (51,322) — (117,664) (122,998) 331,327 $208,329 213,089 4,630 (8,886) 3,414 16,114 — — — — 22,556 80,246 (2,438) (16,770) (18,241) (203) (10,413) 12,088 419,874 (396,048) 126,383 — — — (3,104) (272,769) (82,912) 300,000 (18,640) — 10,090 (48,265) (1,310) 158,963 306,068 25,259 $331,327 203,048 1,251 (12,761) 6,480 (3,234) — 32,857 10,227 — (102,945) (120,729) (1,191) (3,821) 58,212 17,850 5,309 (7,184) 185,287 (330,347) 92,361 — — (83,828) (1,781) (323,595) 12,126 308,266 (58,191) — 5,768 (45,935) (85,509) 136,525 (1,783) 27,042 $25,259 NORDSTROM INC. AND SUBSIDIARIES 25 notes to consolidated financial statements Dollars in thousands except per share amounts costs of $42,506, $30,868 and $38,062 in 2002, 2001 and Note 1: Summary of Significant Accounting Policies 2000 were included in selling, general and administrative expenses. The Company: We are a fashion specialty retailer offering high-quality apparel, shoes and accessories for women, men and children with 142 U.S. stores located in 27 states. We also operate 23 Façonnable boutiques located primarily in Advertising: Costs for newspaper, television, radio and other media are generally expensed as they occur. Direct response advertising costs, such as catalog book production and printing costs, are expensed over the life of the catalog, not to exceed six months. Europe. Additionally, we generate catalog and Internet sales through Total advertising expenses were $144,482, $145,341 and Nordstrom Direct (formerly known as Nordstrom.com) and service $190,991 in 2002, 2001 and 2000. charge income through Nordstrom Credit, Inc. Store Preopening Costs: Store opening and preopening costs are Change in Fiscal Year: Beginning February 1, 2003, our fiscal year expensed as they occur. end will change from January 31 to the Saturday closest to January 31. Each fiscal year will consist of four 13 week quarters, with an extra week added onto the fourth quarter every five to six years. This fiscal calendar is widely used in the retail industry. Basis of Presentation: The consolidated financial statements include the balances of Nordstrom, Inc. and its subsidiaries for the entire fiscal year. All significant intercompany transactions and balances are eliminated in consolidation. Use of Estimates: We make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock Compensation: We apply APB No. 25, “Accounting for Stock Issued to Employees,” in measuring compensation costs under our stock-based compensation programs, which are described more fully in Note 17. If we had elected to recognize compensation cost based on the fair value of the options and shares at grant date, net earnings and earnings per share would have been as follows: Year ended January 31, 2003 2002 2001 Net earnings, as reported $90,224 $124,688 $101,918 Incremental stock-based compensation expense Reclassifications: Certain reclassifications of prior year balances under fair value, net of tax (19,674) (17,252) (13,458) have been made for consistent presentation with the current year. Pro forma net earnings $70,550 $107,436 $88,460 Revenue Recognition: We record revenues net of estimated returns and exclude sales tax. Retail stores record revenue at the point of sale. Catalog and Internet sales include shipping revenue and are recorded upon delivery to the customer. Buying and Occupancy Costs: Buying costs consist primarily of salaries and expenses incurred by our merchandise managers, buyers and private label product development group. Occupancy Earnings per share: Basic—as reported Basic—pro forma Diluted—as reported Diluted—pro forma $0.67 $0.52 $0.66 $0.52 $0.93 $0.80 $0.93 $0.80 $0.78 $0.68 $0.78 $0.67 Cash Equivalents: Cash equivalents are short-term investments with a maturity of three months or less from the date of purchase. costs include rent, depreciation, property taxes and operating costs Cash Management: Our cash management system provides of our retail and distribution facilities. for the reimbursement of all major bank disbursement accounts on Shipping and Handling Costs: Our shipping and handling costs include payments to third-party shippers and costs to store, move and prepare merchandise for shipment. Shipping and handling a daily basis. Accounts payable at January 31, 2002 includes $31,817 of checks not yet presented for payment drawn in excess of cash balances. 26 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements Customer Accounts Receivable: Based on industry practices, reporting and tax basis of assets and liabilities. The deferred tax installments maturing in more than one year or deferred payment assets and liabilities are calculated using the enacted tax rates accounts receivable are included in current assets. and laws that will be in effect when the differences are expected Merchandise Inventories: Merchandise inventories are valued at to reverse. the lower of cost or market, using the retail method (first-in, Loyalty Programs: We have customer loyalty programs in which first-out basis). Land, Buildings and Equipment: Depreciation is computed using a combination of accelerated and straight-line methods. Estimated useful lives by major asset category are as follows: customers receive points for qualifying purchases. Upon the accumulation of a certain number of points, customers receive a merchandise certificate. We accrue the cost of anticipated merchandise certificate redemptions upon issuance of the certificate to the customer. The related expense is recorded Asset Buildings Store fixtures and equipment Life (in years) in selling, general and administrative expense. 5-40 3-15 Vendor Allowances: We receive allowances from merchandise vendors for purchase price adjustments, cooperative advertising Leasehold improvements Shorter of life of lease or asset life programs and cosmetic selling expenses. Purchase price Software 3-7 adjustments are recorded as a reduction of cost of sales at the Asset Impairment: We review our intangibles and other long-lived assets annually for impairment or when circumstances indicate the carrying value of these assets may not be recoverable. Deferred Lease Credits: We receive developer reimbursements as incentives to construct stores in certain developments. We capitalize the property, plant and equipment for these stores during the construction period. At the end of the construction period, developer reimbursements in excess of construction costs are recorded as deferred lease credits and amortized as a reduction to rent expense, on a straight-line basis over the life of the point they have been earned and the related merchandise has been sold. Allowances for cooperative advertising programs and cosmetic selling expenses are recorded as a reduction of selling, general and administrative expense when the advertising or selling expense is incurred. Fair Value of Financial Instruments: The carrying amounts of cash equivalents and notes payable approximate fair value. The fair value of long-term debt, including current maturities, using quoted market prices of the same or similar issues, was approximately $1,443,000 and $1,378,000 at January 31, 2003 and 2002. applicable lease or operating covenant. Construction costs in Derivatives Policy: We limit our use of derivative financial excess of developer reimbursements are recorded as prepaid rent instruments to the management of foreign currency and interest rate and amortized as rent expense on a straight-line basis over the risks. The effect of these activities is not material to our financial life of the applicable lease or operating covenant. condition or results of operations. We have no material off-balance Foreign Currency Translation: The assets and liabilities of our foreign subsidiary have been translated to U.S. dollars using the exchange sheet credit risk, and the fair value of derivative financial instruments at January 31, 2003 and 2002 was not material. rates effective on the balance sheet date, while income and expense Recent Accounting Pronouncements: In February 2002, we adopted accounts are translated at the average rates in effect during the year. the following three pronouncements: Resulting translation adjustments are recorded as other SFAS No. 141 “Business Combinations” - SFAS No. 141 requires comprehensive earnings. Income Taxes: We use the asset and liability method of accounting for income taxes. Using this method, deferred tax assets and liabilities are recorded based on differences between financial that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and establishes specific criteria for the recognition of goodwill separate from other intangible assets. Adoption of SFAS No. 141 did not have a material impact on our financial statements. NORDSTROM INC. AND SUBSIDIARIES 27 notes to consolidated financial statements SFAS No. 142 “Goodwill and Other Intangible Assets” - Under SFAS by a Reseller for Cash Consideration Received from a Vendor.” No. 142, goodwill and intangible assets having indefinite lives will This pronouncement addresses the timing and classification no longer be amortized but will be subject to annual impairment of cash payments received by a reseller from a vendor. tests. Other intangible assets will continue to be amortized over Adoption of EITF 02-16 did not have a material impact on their estimated useful lives. Adoption of SFAS No. 142 resulted our financial statements. in an impairment charge and a reduction in amortization expense, which is detailed in Note 2. In November 2002, the FASB issued FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including SFAS No. 144 “Accounting for the Impairment or Disposal of Indirect Guarantees of the Indebtedness of Others.” FIN 45 Long-Lived Assets” - SFAS No. 144 retains the fundamental elaborates on the disclosures made by a guarantor and also clarifies provisions of SFAS No. 121, but establishes new criteria for asset that a guarantor is required to recognize, at the inception of a classification and broadens the scope of qualifying discontinued guarantee, a liability for the fair value of the obligation undertaken operations. The adoption of this statement did not have a material in issuing the guarantee. Adoption of FIN 45 in the fourth quarter impact on our financial statements. of 2002 did not have a material impact on our financial statements. We adopted SFAS No. 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” in the second quarter of 2002. SFAS No. 145 updates, clarifies and simplifies existing accounting pronouncements related to extinguishments of debt, provisions of the Motor Carrier Act of 1980 and lease transactions. The adoption of this statement did not have a material impact on our financial statements. SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” was also adopted by us in the second quarter of 2002. SFAS No. 146 nullifies EITF 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” by requiring that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred versus when an entity is committed to an exit plan. The adoption of this statement did not have a material impact on our financial statements. We adopted SFAS No. 148 “Accounting for Stock-Based Compensation” in the fourth quarter of 2002. SFAS No. 148 amends SFAS No. 123 of the same name and provides alternative transition methods for a voluntary change to fair value based accounting for employee stock compensation. SFAS No. 148 also requires more prominent and frequent disclosures about the effects of stock-based compensation. Adoption of SFAS No. 148 did not have a material impact on our financial statements. Note 2: Cumulative Effect of Accounting Change Effective February 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which establishes new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets having indefinite lives will no longer be amortized but will be subject to annual impairment tests. In connection with the adoption of SFAS No. 142, we reviewed the classification and useful lives of our intangible assets. Our intangible assets were determined to be either goodwill or indefinite lived tradename. As required by SFAS No. 142, we defined our reporting unit as the Façonnable Business Unit, one level below our reportable Retail Stores segment. We then tested our intangible assets for impairment by comparing the fair value of the reporting unit with its carrying value. Fair value was determined using a discounted cash flow methodology. SFAS No. 142 requires us to perform these impairment tests at adoption and at least annually thereafter. We expect to perform our impairment test annually during our first quarter or when circumstances indicate we should do so. Our initial impairment test resulted in an impairment charge to goodwill of $21,900 in the first quarter of 2002, while the tradename was determined not to be impaired. The goodwill impairment resulted from a reduction in management’s estimate of future growth for this reporting unit. The impairment charge In November 2002, the Emerging Issues Task Force reached a is reflected as a cumulative effect of accounting change. consensus on certain issues discussed in EITF 02-16, “Accounting 28 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements The changes in the carrying amount of our intangible assets for the Before adoption of SFAS No. 142, we amortized our intangible year ended January 31, 2003, are as follows: assets over their estimated useful lives on a straight-line basis Retail Stores Segment Goodwill Tradename Catalog/ Internet Segment Goodwill Total February 1, 2002 $38,198 $100,133 $ — $138,331 Goodwill impairment (21,900) — — (21,900) Goodwill acquired through purchase of minority interest (see Note 21) — — 24,057 24,057 January 31, 2003 $16,298 $100,133 $24,057 $140,488 ranging from 10 to 35 years. Accumulated amortization of intangible assets was $5,881 as of January 31, 2003 and 2002. Note 3: Acquisition In 2000, we acquired Façonnable, S.A.S., of Nice, France, a designer, wholesaler and retailer of high quality men’s and women’s apparel and accessories. We paid $87,685 in cash and issued 5,074,000 shares of our common stock for a total consideration of $168,868. The purchase provides for a contingent payment to a former owner that may be paid after five years from the acquisition date. If the former owner continues to have involvement in the The following table shows the actual results of operations as well as business and performance targets are met, the contingent payment pro-forma results adjusted to exclude intangible amortization and the could approximate $12,000. The contingent payment will be cumulative effect of accounting change. expensed when it becomes probable that the targets will be met. Year ended January 31, 2003 2002 2001 Note 4: Employee Benefits Reported net earnings $90,224 $124,688 $101,918 We provide a profit sharing plan and 401(k) plan for our employees. Intangible amortization, The profit sharing plan is non-contributory and is fully funded by us. net of tax — 2,824 763 The Board of Directors establishes our contribution to the profit Cumulative effect of accounting change, sharing plan each year. The 401(k) plan is funded by voluntary employee contributions. In addition, we provide matching net of tax 13,359 — — contributions up to a stipulated percentage of employee Adjusted net earnings $103,583 $127,512 $102,681 contributions. Our contributions to the profit sharing plan and matching contributions to the 401(k) plan totaled $35,162, Basic and diluted earnings per share: $28,525 and $29,113 in 2002, 2001 and 2000. Year ended January 31, 2003 2002 2001 Earnings per share: Reported net earnings Basic $0.67 Diluted $0.66 Basic and Diluted $0.93 $0.78 Intangible amortization, net of tax — — 0.02 Cumulative effect of accounting change, net of tax Adjusted net earnings 0.10 $0.77 0.10 $0.76 — — — $0.95 $0.78 NORDSTROM INC. AND SUBSIDIARIES 29 notes to consolidated financial statements Note 5: Postretirement Benefits The components of SERP expense and a summary of significant We have an unfunded Supplemental Executive Retirement Plan assumptions are as follows: (“SERP”), which provides retirement benefits to certain officers and select employees. Effective February 2003, the SERP was amended to change the target benefit, eliminate the offset of our contributions to the 401k and profit sharing plans and make additional participants eligible. Certain grandfathered participants will remain under the previous plan provisions. Year ended January 31, Service cost Interest cost 2003 $1,447 3,537 Amortization of adjustments 2,941 2002 $1,092 2,668 1,821 2001 $630 2,044 688 Total SERP expense $7,925 $5,581 $3,362 Assumption percentages: The following provides a reconciliation of benefit obligations and funded status of the SERP: Discount rate 7.00% Rate of compensation increase 4.00% 7.25% 5.00% 7.50% 5.00% January 31, 2003 2002 Note 6: Interest Expense, Net Change in benefit obligation: Benefit obligation at beginning of year $34,411 $23,543 The components of interest expense, net are as follows: Service cost Interest cost Amortization of adjustments Change in additional minimum liability 1,447 3,537 2,941 7,760 1,092 2,668 1,821 7,308 Year ended January 31, Short-term debt Long-term debt Total interest expense 2003 $677 89,850 90,527 2002 $3,741 83,225 86,966 2001 $12,682 58,988 71,670 Distributions (2,523) (2,021) Less: Benefit obligations at end of year $47,573 $34,411 Funded status of plan: Under funded status Unrecognized transitional obligation Unrecognized prior service cost Unrecognized loss Accrued pension cost Balance sheet amounts: Interest income Capitalized interest (4,254) (4,352) (1,545) (10,383) (1,330) (7,642) $(50,125) $(39,547) Interest expense, net $81,921 $75,038 $62,698 — 3,805 15,074 324 6,396 6,983 Note 7: Investment In September 1998, we made an investment in Streamline.com, $(31,246) $(25,844) Inc., an Internet grocery and consumer goods delivery company. Streamline ceased its operations effective November 2000, after Additional minimum liability $(16,327) $(8,567) failing to obtain additional capital to fund its operations. During Intangible asset 3,805 6,720 2000, we wrote-off our entire investment in Streamline, for a total pre-tax loss on the investment of $32,857. 30 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements Note 8: Income Taxes Income tax expense consists of the following: Year ended January 31, 2003 2002 2001 Current income taxes: Deferred income taxes reflect the net tax effect of temporary differences between amounts recorded for financial reporting purposes and amounts used for tax purposes. The major components of deferred tax assets and liabilities are as follows: 2003 2002 $35,480 $33,896 52,969 25,831 7,406 16,532 28,835 48,584 24,643 13,399 — 21,123 (9,657) (3,891) (63,949) (16,532) (9,771) (3,195) (62,944) — $86,572 $78,701 Federal $76,901 $58,122 $79,778 January 31, State and local 10,633 6,142 11,591 Total current income taxes 87,534 64,264 91,369 Accrued expenses Compensation and benefits accruals Merchandise inventories Deferred income taxes: Current Non-current Total deferred income taxes Total before cumulative effect (4,225) 8,732 (7,217) (11,215) Capital loss carryforwards 22,753 (15,054) Loss on minority interest purchase Other 4,507 15,536 (26,269) Total deferred tax assets 167,053 141,645 Land, buildings and equipment basis and depreciation differences (50,401) (49,978) of accounting change 92,041 79,800 65,100 Deferred income taxes on cumulative effect of Employee benefits accounting change (8,541) — — Other Total tax expense $83,500 $79,800 $65,100 Total deferred tax liabilities A reconciliation of the statutory Federal income tax rate to the effective tax rate on earnings before the cumulative effect of accounting change is as follows: Year ended January 31, 2003 2002 2001 Valuation allowance Net deferred tax assets In January 2003 we sold our Denver Credit facility, generating a capital gain for tax purposes of $15,367 which was used to offset a portion of our existing capital loss carryforwards. Capital loss Statutory rate State and local income taxes, net of Federal income taxes Change in valuation allowance Other, net Effective tax rate 35.00% 35.00% 35.00% carryforwards of $18,990 remain available to offset capital gain 3.78 8.45 (0.18) 47.05% 3.93 — .09 3.93 — .05 39.02% 38.98% income in the next three years. No valuation allowance has been provided because we believe it is probable that the full benefit of these carryforwards will be realized. Our purchase of the outstanding shares of Nordstrom.com, Inc. series C preferred stock resulted in an expense of $40,389 which we believe will not be deductible for tax purposes. As a result, we have established a valuation allowance of $16,532 to offset the deferred tax asset related to this purchase. NORDSTROM INC. AND SUBSIDIARIES 31 notes to consolidated financial statements Note 9: Earnings Per Share Note 11: Off-balance Sheet Financing Basic earnings per share is computed using the weighted average In May 2002, we replaced our $200 million variable funding note number of common shares outstanding during the year. Diluted backed by VISA credit card receivables (“VISA VFN”) with 5-year earnings per share uses the weighted average number of common term notes also backed by the VISA credit card receivables. shares outstanding during the year plus dilutive common stock Class A and B notes with a combined face value of $200 million equivalents, primarily stock options and performance share units. were issued to third party investors. These proceeds were used Options with an exercise price greater than the average market price were not included in diluted earnings per share. These options totaled 7,259,273, 8,563,996 and 7,409,387 shares in 2002, 2001 and 2000. Year ended January 31, 2003 2002 2001 Net earnings Basic shares $90,224 $124,688 $101,918 135,106,772 134,104,582 131,012,412 Basic earnings per share $0.67 $0.93 $0.78 Dilutive effect of stock options and performance share units 617,468 234,587 100,673 Diluted shares 135,724,240 134,339,169 131,113,085 Diluted earnings per share $0.66 $0.93 $0.78 Note 10: Accounts Receivable The components of accounts receivable are as follows: to retire the $200 million outstanding on the VISA VFN. We hold securities that represent our retained interests in a master note trust. The carrying amounts of the retained interests approximate fair value and are included in accounts receivable. In accordance with SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” our consolidated balance sheets do not include this debt and the related receivables. These related VISA credit card receivables are sold to the trust on an ongoing basis. We recognize gains or losses on the sale of VISA receivables to the trust based on the difference between the face value of the receivables sold and the fair value of the assets created in the securitization process. The receivables sold to the trust are then allocated between the various interests in the trust based on those interests’ relative fair market values. The fair values of the assets are calculated as the present value of their expected future cash flows. The following table summarizes the estimated fair values 2003 2002 of our retained interests as well as the assumptions used: January 31, Private label trade receivables: Unrestricted Restricted $15,599 613,647 $16,242 628,271 Allowance for doubtful accounts (22,385) (23,022) Private label trade receivables, net 606,861 621,491 VISA securitization master trust certificates 123,220 Other 29,181 55,659 21,325 Accounts receivable, net $759,262 $698,475 The restricted private label receivables back the $300 million of Class A notes and the $200 million variable funding note issued by us in November 2001. Other accounts receivable consist primarily of vendor receivables and cosmetic rebates receivable. Bad debt expense totaled $29,080, $34,750 and $20,368 in 2002, 2001 and 2000. 32 NORDSTROM INC. AND SUBSIDIARIES January 31, Fair value of retained interests: Assumptions: Weighted average remaining life (in months) Average credit losses Average gross yield Average interest expense on issued securities Average payment rate Discount rates of retained interests: Class C Certificate Seller Retained Interest Interest Only Strip 2003 $124,791 2.8 6.38% 17.81% 1.70% 20.94% 16.79% 10.51% 19.92% These discount rates represent the volatility and risk of the assets and are calculated using an established formula that considers both the current interest rate environment and credit spreads. notes to consolidated financial statements The following table illustrates the sensitivity in the fair market value The following table illustrates default projections using net credit estimates of the retained interests given independent changes in losses as a percentage of average outstanding receivables in assumptions as of January 31, 2003: comparison to actual performance: Gross Yield $1,207 $2,414 $(1,207) $(2,414) Original projection +10% +20% -10% -20% Year ended January 31, Interest Expense on Issued Classes Card Holders Payment Rate Charge Offs Discount Rate (76) (99) (152) (296) (531) (1,059) (337) (673) 76 207 533 339 152 384 1,069 680 Actual Under the terms of the trust agreement, we may be required to fund certain amounts upon the occurrence of specific events. The securitization agreements set a maximum percentage of receivables that can be associated with employee accounts. 2004 6.16% N/A 2003 7.66% 6.59% 2002 5.99% 6.62% The following table summarizes certain income, expenses and cash As of January 31, 2003, this maximum was exceeded by $1,500. flows received from and paid to the master note trust. It is possible that we may be required to repurchase these Year ended January 31, 2003 2002 2001 Principal collections reinvested in new receivables $824,715 $669,582 $485,422 Gains on sales of receivables 8,290 3,147 5,356 Income earned on retained interests 10,786 6,711 9,035 Cash flows from retained assets: Retained interests 28,100 11,916 10,050 Servicing fees 5,407 8,440 8,121 Interest income earned on the retained interests is included in service charge income and other on the consolidated statements of earnings. The total principal balance of the VISA receivables was $323,101 and $258,075 as of January 31, 2003 and 2002. Gross credit losses were $18,580 and $17,050 for the years ended January 31, 2003 and 2002, and receivables past due for more than 30 days were $8,519 and $8,170 at January 31, 2003 and 2002. receivables. Aside from this instance, we do not believe any additional funding will be required. Our continued involvement in the securitization of VISA receivables will include recording gains/losses on sales in accordance with SFAS No. 140 and recognizing income on retained assets as prescribed by EITF 99-20 “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets,” holding subordinated, non-subordinated and residual interests in the trust, and servicing the portfolio. Note 12: Receivable-backed Securities In 2001, we issued $300 million of receivable-backed securities supported by substantially all of our private label credit card receivables. This transaction is accounted for as a secured financing. Total principal receivables of the securitized portfolio at January 31, 2003 and 2002 were approximately $609,784 and $625,516, and receivables more than 30 days past due were approximately $16,973 and $19,301. Net charged off receivables for the years ending January 31, 2003 and 2002 were $29,555 and $28,134. The private label receivables also serve as collateral for a variable funding facility with a limit of $200,000. Interest on the facility varies based on the actual cost of commercial paper plus specified fees. Nothing was outstanding on this facility at January 31, 2003 or 2002. NORDSTROM INC. AND SUBSIDIARIES 33 notes to consolidated financial statements Our continuing involvement in the securitization of private label Note 14: Notes Payable receivables will include pledging new receivables to the master note A summary of notes payable is as follows: trust, accounting for the transaction as a secured financing and servicing the portfolio. Year ended January 31, 2003 2002 2001 Average daily short- Note 13: Land, Buildings and Equipment term borrowings $370 $81,647 $192,392 Land, buildings and equipment consist of the following: Maximum amount outstanding 15,000 177,100 360,480 January 31, Land and land improvements Buildings Leasehold improvements Capitalized software 2003 $60,692 829,885 943,555 150,655 2002 $59,141 683,926 910,291 46,603 Weighted average interest rate: During the year At year-end 2.0% — 4.6% — 6.6% 6.4% Store fixtures and equipment 1,222,842 1,142,169 Short-term borrowings during the year represent amounts drawn Construction in progress 436,891 582,361 on our variable funding note, which is described in Note 12. 3,644,520 3,424,491 Less accumulated depreciation and amortization (1,882,976) (1,663,409) Land, buildings and equipment, net $1,761,544 $1,761,082 Capitalized software includes external direct costs, internal direct labor and employee benefits, as well as interest associated with the development of the computer software. Depreciation begins We have an unsecured line of credit totaling $300,000, which is available as liquidity support for our commercial paper program, and expires in November 2004. The line of credit agreement contains restrictive covenants, which include maintaining certain financial ratios. We pay a commitment fee for the line based on our debt rating. At January 31, 2003 and 2002, there were no borrowings on the line of credit. in the period in which the software is ready for its intended use. Additionally, in connection with the purchase of foreign Construction in progress includes $61,384 and $127,847 of merchandise, we have outstanding import letters of credit software in progress at January 31, 2003 and 2002. totaling $58,059 and standby letters of credit totaling $20,649 at January 31, 2003. The total cost of capitalized leased buildings was $13,884 at January 31, 2003 and 2002, with related accumulated amortization of $9,261 and $8,854. The amortization of capitalized leased buildings was recorded in depreciation expense. In January 2003, we sold our Denver Credit facility for $20,000 and subsequently leased it back. A gain of $103 was recorded at the time of the sale, while the remaining gain of $15,919 will be recognized as a reduction to rent expense evenly over the 15 year life of the lease. At January 31, 2003, we have contractual commitments of approximately $227,340 primarily for the construction of new stores or remodeling of existing stores. 34 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements Note 15: Long-Term Debt We own a 49% interest in a limited partnership which 300,000 250,000 300,000 76,750 100,000 102,521 A summary of long-term debt is as follows: January 31, 2003 2002 Receivable-backed PL Term, 4.82%, due 2006 $300,000 $300,000 Senior debentures, 6.95%, due 2028 Senior notes, 5.625%, due 2009 Senior notes, 8.95%, due 2005 300,000 250,000 300,000 Medium-term notes, 7.25%, due 2002 — Notes payable, 6.7%, due 2005 Other Total long-term debt Less current portion 100,000 97,371 1,347,371 1,429,271 (5,545) (78,227) Total due beyond one year $1,341,826 $1,351,044 In the third quarter of 2002, we sold the interest rate swap that converted our $300,000, 8.95% fixed-rate debt to variable rate. We received cash of $4,931, which will be recognized as interest income evenly over the remaining life of the related debt. We entered into a variable interest rate swap agreement effective in the fourth quarter of 2002. The swap had a $250 million notional amount and a six-year term. Under the agreement, we received a fixed rate of 5.63% and paid a variable rate based on LIBOR plus a margin of 1.31% set at six-month intervals (3.25% at January 31, 2003). The swap agreement qualified as a fair value hedge and was recorded at fair value in other assets at January 31, 2003. Subsequent to January 31, 2003, we sold the interest rate swap and received cash of $2,341, which will be recognized as interest income evenly over the remaining life of the related debt. constructed a new corporate office building in which we are the primary occupant. During the first quarter of 2002, the limited partnership refinanced its construction loan obligation with an $85,000 mortgage secured by the property, of which $79,319 was included on our balance sheet at January 31, 2003. This financial obligation will be amortized as we make rental payments to the limited partnership over the 18 year life of the permanent financing. The obligation has a fixed interest rate of 7.68% and a term of 18 years. Required principal payments on long-term debt, excluding capital lease obligations, are as follows: Year ended January 31, 2004 2005 2006 2007 2008 Thereafter $5,226 4,683 403,171 303,538 3,584 618,232 NORDSTROM INC. AND SUBSIDIARIES 35 notes to consolidated financial statements Note 16: Leases Performance Share Units: In 2002, 2001 and 2000 we granted We lease land, buildings and equipment under noncancelable lease 190,396, 273,864 and 355,072 performance share units which agreements with expiration dates ranging from 2003 to 2080. will vest over three years if certain financial goals are met. Certain leases include renewal provisions at our option. Most of Employees may elect to receive common stock or cash upon vesting the leases provide for additional rent payments based upon specific of these performance shares. At January 31, 2003 and 2002, percentages of sales and require us to pay for certain common area $4,441 and $4,713 was recorded in accrued salaries, wages and maintenance and other costs. Year ended January 31, 2003 2002 2001 Minimum rent: related benefits for these performance shares. Employees who receive performance share units pay no monetary consideration. No amounts have been paid and no common stock has been issued in connection with this program. As of January 31, 2003 and Store locations $23,511 $26,951 $16,907 2002, 415,640 and 518,189 units were outstanding. Offices, warehouses and equipment 25,851 20,144 21,070 Restricted Stock: We also granted 30,069 and 180,000 shares Percentage rent: of restricted stock in 1999 and 1998, with a weighted average Store locations 7,776 8,047 9,241 fair value of $32.09 and $27.75. In September 2000, we Total rent expense $57,138 $55,142 $47,218 accelerated the vesting of 144,000 shares of restricted stock resulting in compensation expense of $3,039, and cancelled Future minimum lease payments as of January 31, 2003 are as 14,175 shares of restricted stock. In January 2002, we follows: Year ended January 31, 2004 2005 2006 2007 2008 Capital Leases $1,120 1,120 1,120 1,120 1,120 Operating Leases $73,158 73,053 68,271 63,796 60,088 Thereafter Total minimum lease payments 10,350 442,015 15,950 $780,381 Less amount representing interest 7,013 accelerated 9,536 unvested shares of restricted stock, resulting in compensation expense of $193. The remaining shares vested normally. As of January 31, 2003 and 2002, there were no shares of unvested restricted stock. At January 31, 2003, approximately 6,391,703 shares are reserved for future stock option grants pursuant to the Plan. We apply APB No. 25, “Accounting for Stock Issued to Employees,” in measuring compensation costs under our stock-based compensation programs. Stock options are issued at the fair market value of the stock at the date of grant. Accordingly, we recognized no compensation cost for stock options issued under Present value of net minimum lease payments Note 17: Stock-Based Compensation $8,937 the plan. For performance share units, we record compensation expense over the performance period at the fair value of the stock on the date when it is probable that the employees will earn the Stock Option Plan: We have a stock option plan (the “Nordstrom, Inc. units. Restricted stock compensation expense is based on the Plan”) under which stock options, performance share units and market price on the date of grant and is recorded over the vesting restricted stock may be granted to key employees. Options vest period. Stock-based compensation expense for 2002, 2001 over periods ranging from four to eight years, and expire ten years and 2000 was $1,130, $3,414 and $6,480. after the date of grant. 36 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements Stock option activity for the Nordstrom, Inc. Plan was as follows: Year ended January 31, 2003 2002 2001 Outstanding, beginning of year Granted Exercised Cancelled Outstanding, end of year Options exercisable at end of year Shares 10,763,893 2,423,966 (350,004) (951,510) 11,886,345 5,724,629 Weighted- Average Exercise Price $24 25 19 26 $25 $26 Weighted- Average Exercise Price $27 19 18 25 $24 $27 Shares 8,873,342 3,288,826 (186,165) (1,212,110) 10,763,893 4,533,281 Weighted- Average Exercise Price $28 21 20 28 $27 $26 Shares 8,135,301 2,470,169 (181,910) (1,550,218) 8,873,342 3,833,379 The following table summarizes information about stock options outstanding for the Nordstrom, Inc. Plan as of January 31, 2003: Range of Exercise Prices Shares $13 – $22 5,499,006 $23 – $32 4,503,716 $33 – $40 1,883,623 11,886,345 Options Outstanding Options Exercisable Weighted- Average Remaining Contractual Life (Years) Weighted- Average Exercise Price 7 7 6 7 $19 $26 $36 $25 Weighted- Average Exercise Price $20 $27 $35 $26 Shares 2,557,503 1,716,077 1,451,049 5,724,629 Stock option activity for the Nordstrom.com 1999 and 2000 Plans was as follows: Year ended January 31, 2003 2002 2001 Outstanding, beginning of year Granted Exercised Cancelled Outstanding, end of year Options exercisable at end of year Shares 3,524,808 112,500 — (3,637,308) — — Weighted- Average Exercise Price $1.73 1.92 — 1.73 $ — $ — Weighted- Average Exercise Price $1.72 1.92 — 1.68 $1.73 $1.68 Shares 4,174,950 41,500 — (691,642) 3,524,808 1,241,104 Weighted- Average Exercise Price Shares 1,373,950 $1.67 3,794,931 (135,000) (858,931) 4,174,950 703,750 1.73 1.67 1.68 $1.72 $1.67 NORDSTROM INC. AND SUBSIDIARIES 37 notes to consolidated financial statements Nonemployee Director Stock Incentive Plan and 3.4% as a percent of total options and performance share units In May 2002, our shareholders approved the 2002 Nonemployee granted in 2002, 2001 and 2000. Director Stock Incentive Plan under which we reserved 450,000 shares of our common stock for issuance to nonemployee directors. SFAS No. 123 The plan authorizes the grant of awards in the form of restricted shares, stock units, nonqualified stock options or stock appreciation rights, or any combination of these forms. As of January 31, 2003, we issued 18,981 shares of common stock for a total expense of $405 and had 431,019 remaining shares available for issuance. If we had elected to recognize compensation cost based on the fair value of the options and shares at grant date as prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” net earnings and earnings per share would have been the pro forma amounts shown below: Nordstrom.com Nordstrom.com had two stock option plans, the “1999 Plan” and the “2000 Plan,” as well as warrants issued to vendors in exchange for services. In the third quarter of 2002, we purchased 3,608,322 options and 470,000 warrants in connection with the purchase of the minority interest in Nordstrom.com (see Note 21) for a total cash payment of $11,802. At January 31, 2003, there are no outstanding options or warrants for Nordstrom.com. Employee Stock Purchase Plan We offer an Employee Stock Purchase Plan (“ESPP”) as a benefit to our employees. Employees participate through payroll deductions Year ended January 31, 2003 2002 2001 Net earnings, as reported $90,224 $124,688 $101,918 Incremental stock-based compensation expense under fair value, net of tax (19,674) (17,252) (13,458) Pro forma net earnings $70,550 $107,436 $88,460 Earnings per share: Basic—as reported Basic—pro forma Diluted—as reported Diluted—pro forma $0.67 $0.52 $0.66 $0.52 $0.93 $0.80 $0.93 $0.80 $0.78 $0.68 $0.78 $0.67 in amounts related to their base compensation. At the end of each The Black-Scholes method was used to estimate the fair value of the offering period, the participants purchase shares at 85% of the lower options at grant date based on the following factors: of the fair market value at the beginning or the end of the offering period, usually six months. Under the ESPP, we issued 596,351, 541,677 and 165,842 shares in 2002, 2001 and 2000. As of January 31, 2003 and 2002, we had payroll deductions totaling $3,000 and $2,641 for the purchase of shares. We have 2,196,130 shares available for issuance at January 31, 2003. Pacesetter Stock Plan Year ended January 31, 2003 2002 2001 Stock Options: Risk-free interest rate Volatility Dividend yield Expected life in years Weighted-average fair value 4.3% 69.0% 1.5% 5.0 4.8% 68.0% 1.3% 5.0 6.4% 65.0% 1.0% 5.0 We granted 10,653, 6,687 and 100 shares of common stock to at grant date $14 $10 $12 key employees under the Pacesetters stock plan in 2002, 2001 and 2000. The Pacesetter stock plan was established in 1997 to provide additional incentive to employees, officers, consultants or advisors to promote the success of the business. The related expense of $240, $130 and $2 was recorded in 2002, 2001 and 2000. As of January 31, 2003, we have 11,055 shares available for issuance. ESPP: Risk-free interest rate Volatility Dividend yield Expected life in years Weighted-average fair value 1.9% 69.0% 1.5% 0.5 4.3% 68.0% 1.3% 0.5 6.0% 65.0% 1.0% 0.5 Grants to Executive Officers Options and performance share units granted to our president and four other most highly compensated individuals were 8.3%, 7.9% 38 NORDSTROM INC. AND SUBSIDIARIES at grant date $7 $5 $6 notes to consolidated financial statements For Nordstrom.com, we used the following weighted-average Supplementary cash flow information includes the following: Year ended January 31, 2003 2002 2001 Cash paid during the year for: Interest (net of capitalized interest) $84,898 $77,025 $58,190 Income taxes 48,386 80,689 88,911 $1.56 $1.39 We have four segments: Retail Stores, Credit Operations, Note 19: Segment Reporting assumptions: Year ended January 31, 2003 2002 2001 Risk-free interest rate Volatility Dividend yield Expected life in years Weighted-average fair value at grant date — — — — — 4.5% 6.2% 127.0% 121.0% 0.0% 4.0 0.0% 4.0 Note 18: Supplementary Cash Flow Information We capitalize certain property, plant and equipment during the construction period of commercial buildings which is subsequently derecognized and reclassed to prepaid rent or deferred lease credits. We also had noncash activity related to the construction of our corporate office building. The noncash activity is as follows: Year ended January 31, 2003 2002 2001 Noncash activity: Reclassification of new stores $61,792 $75,555 Corporate office construction (3,951) 36,120 Catalog/Internet, and Corporate and Other. The Retail Stores segment derives its revenues from sales of high- quality apparel, shoes and accessories. It includes our full-line, Nordstrom Rack and Façonnable stores as well as our product development group, which coordinates the design and production of private label merchandise sold in our retail stores. The Credit Operations segment revenues consist primarily of finance charges earned through issuance of the Nordstrom private label and VISA credit cards. — — The Catalog/Internet segment generates revenues from direct mail catalogs and the Nordstrom.com website. We use the same measurements to compute net earnings for reportable segments as we do for the consolidated company. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in Note 1. NORDSTROM INC. AND SUBSIDIARIES 39 notes to consolidated financial statements The following tables set forth the information for our reportable segments and a reconciliation to the consolidated totals: Year ended January 31, 2003 Revenues from external customers (b) Service charge income Intersegment revenues Interest expense, net Depreciation and amortization Earnings before taxes and cumulative effect of accounting change Net earnings (loss) Assets (a)(b) Capital expenditures Year ended January 31, 2002 Revenues from external customers (b) Service charge income Intersegment revenues Interest expense, net Depreciation and amortization Amortization of intangible assets Earnings before taxes Net earnings (loss) Assets (a)(b) Capital expenditures Year ended January 31, 2001 Revenues from external customers (b) Service charge income Intersegment revenues Interest expense, net Depreciation and amortization Amortization of intangible assets Earnings before taxes Net earnings (loss) Assets (a)(b) Intangible assets Capital expenditures Retail Stores Credit Operations Catalog/ Internet Corporate and Other Eliminations Total $5,704,795 — $270,281 — $133,587 29,737 191 201,861 442,115 256,339 2,677,790 230,864 Retail Stores $5,356,875 — 20,192 994 182,960 4,630 402,299 245,305 2,570,375 379,819 Retail Stores 32,783 23,582 3,212 21,194 12,929 750,510 2,058 Credit Operations — $131,267 25,514 25,013 2,253 — 10,652 6,495 699,454 2,054 Credit Operations — — 972 4,977 (13,565) (8,275) 97,853 4,507 Catalog/ Internet $277,255 — — 77 5,498 — (8,139) (4,963) 69,457 2,554 Catalog/ Internet $5,217,889 — $310,648 — $135,337 30,294 795 176,758 1,251 440,212 268,627 2,557,616 143,473 295,834 12,440 29,267 1,786 — 18,851 11,503 703,077 — 3,095 — — (604) 7,552 — (29,367) (17,920) 68,010 — 5,187 — — — $57,176 23,881 (254,120) (170,769) 570,223 90,737 Corporate and Other — — — $48,954 22,378 — (200,324) (122,149) 711,893 11,621 Corporate and Other — — — $33,240 16,952 — (262,678) (160,292) 279,800 — 26,231 — — $5,975,076 133,587 $(62,520) — — — — — — — 81,921 233,931 195,624 90,224 4,096,376 328,166 Eliminations Total — — $(45,706) — — — — — — — $5,634,130 131,267 — 75,038 213,089 4,630 204,488 124,688 4,051,179 396,048 Eliminations Total — — $5,528,537 135,337 $(42,734) — — — — — — — — — 62,698 203,048 1,251 167,018 101,918 3,608,503 143,473 330,347 (a) Segment assets in Corporate and Other include unallocated assets in corporate headquarters, consisting primarily of land, buildings and equipment, and deferred tax assets. (b) Includes sales of foreign operations of $75,645 and $68,487 for the years ended January 31, 2003 and 2002, and $12,318 for the period from October 24, 2000, the date of acquisition, to January 31, 2001, and assets of $219,861, $198,689 and $206,601 as of January 31, 2003, 2002 and 2001. 40 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements Note 20: Restructurings, Impairments and Other One-Time Charges services area. The charge consisted of $4,053 in the disposition of The following table provides a summary of restructuring, impairments several software projects under development, $2,685 in employee and other charges: Year ended January 31, 2003 2002 2001 severance and $1,206 in other miscellaneous costs. Additionally, we recorded $2,056 related to settlement costs for two lawsuits. The restructuring included the termination of 50 employees in the information technology department. At January 31, 2000, $1,452 Restructuring – employee severance Management severance Asset impairment Total charges $ — — 15,570 $15,570 $1,791 $ — of the charge remained unpaid. — — 13,000 10,227 $1,791 $23,227 The following table presents the activity and balances of the reserves established in connection with the restructuring charges: In July 2002, we recognized a charge of $15,570 to write-down an IT investment in a supply chain tool intended to support our manufacturing division. Due to changes in business strategy, we determined that this asset was impaired. This charge to the Retail Stores segment reduced this asset to its estimated market value. The charge was recorded in selling, general and administrative expense. Year ended January 31, Beginning balance Additions Payments Adjustments Ending balance Note 21: Nordstrom.com 2003 $ — — — — $ — 2002 $178 1,791 2001 $1,452 — (1,890) (1,220) (79) $ — (54) $178 During the year ended January 31, 2002, we streamlined our In May 2002, we paid $70,000 for the outstanding shares of operations through a reduction in workforce of approximately 2,600 Nordstrom.com, Inc. series C preferred stock in fulfillment of our employees. As a result, we recorded a restructuring charge of put agreement with the minority interest holders of Nordstrom.com $1,791 in selling, general and administrative expenses relating to LLC. The excess of the purchase price over the fair market value severance for approximately 195 employees. Personnel affected of the preferred stock and professional fees resulted in a one-time were primarily located in the corporate center and in full-line stores. charge of $42,736. No tax benefit was recognized, as we do not During the year ended January 31, 2001, we recorded an impairment charge of $10,227, consisting of $9,627 recorded in selling, general and administrative expenses and $600 in interest believe it is probable that this benefit will be realized. Purchase of the minority interest of Nordstrom.com also resulted in additional goodwill of $24,057. expense. Due to changes in business strategy, we determined that In July 2002, we purchased 3,608,322 Nordstrom.com options several software projects under development were either impaired or and 470,000 warrants for $11,802. We recognized $10,432 of obsolete. The charges consisted of $6,542 primarily related to the expense related to the purchase of these options and warrants. disposition of transportation management software. Additionally, merchandise software was written down $3,685 to its estimated fair value. We also accrued $13,000 for certain severance and other The following table presents the charges associated with the minority interest purchase and reintegration costs. costs related to a change in management. Year ended January 31, During the year ended January 31, 2000, we recorded a $10,000 Excess of the purchase price over the fair market charge in selling, general and administrative expenses primarily value of the preferred stock associated with the restructuring of our information technology Nordstrom.com option/warrant buyback expense Professional fees incurred Total 2003 $40,389 10,432 2,347 $53,168 NORDSTROM INC. AND SUBSIDIARIES 41 notes to consolidated financial statements Note 22: Vulnerability Due to Certain Concentrations Washington Public Trust Advocates. In early 2002, we were named Approximately 30% of our retail square footage is located in the as one of 30 defendants in Washington Public Trust Advocates, state of California. At January 31, 2003, the net book value of ex rel., et al. v. City of Spokane, et al., filed in the Spokane County property located in California was approximately $263,000. Superior Court, State of Washington. Plaintiff is a not-for-profit We carry earthquake insurance in all states with a $50,000 corporation bringing claims on behalf of the City of Spokane and deductible and a $50,000 payout limit per occurrence. the Spokane Parking Public Development Authority. The claims relate to the River Park Square Mall and Garage Project in Spokane, Washington (the "Project"), which includes a Nordstrom store. The portion of the complaint applicable to us seeks to recover from us the amount of a Department of Housing and Urban Development loan made to the developer of the Project. Damages are sought in the amount of $22.75 million, or a lesser amount to the extent that the HUD loan proceeds were used for the construction of the store and not as tenant improvements. Other portions of the complaint seek to invalidate bonds issued to finance the public parking garage serving the Project, terminate the lease of the parking garage by the City of Spokane, and rescind other agreements between the City of Spokane and the developer of the Project, as well as damages from the developer of the Project in unspecified amounts. The Complaint also alleges breach of fiduciary duties by various defendants, including us, to the people of the City of Spokane regarding lack of disclosures concerning the developer and the Project. By order dated August 9, 2002, the court granted our motion to dismiss us from that lawsuit. Plaintiff attempted to obtain direct review by the Washington Supreme Court which declined to hear the case and referred it to the Washington Court of Appeals. The Washington Court of Appeals has scheduled a hearing on the appeal for April 25, 2003. Other. We are subject to routine litigation incidental to our business. No material liability is expected. At January 31, 2003 and 2002, approximately 38% and 40% of our receivables were obligations of customers residing in California. Concentration of the remaining receivables is considered to be limited due to their geographical dispersion. Note 23: Contingent Liabilities We have been named in various lawsuits and intend to vigorously defend ourself. While we cannot predict the outcome of these lawsuits, we believe these matters will not have a material adverse effect on our financial position, results of operations or cash flows. Cosmetics. Nordstrom was originally named as a defendant along with other department store and specialty retailers in nine separate but virtually identical class action lawsuits filed in various Superior Courts of the State of California in May, June and July 1998 that have now been consolidated in Marin County state court. In May 2000, plaintiffs filed an amended complaint naming a number of manufacturers of cosmetics and fragrances and two other retailers as additional defendants. Plaintiffs’ amended complaint alleges that the retail price of the “prestige” cosmetics sold in department and specialty stores was collusively controlled by the retailer and manufacturer defendants in violation of the Cartwright Act and the California Unfair Competition Act. Plaintiffs seek treble damages and restitution in an unspecified amount, attorneys’ fees and prejudgment interest, on behalf of a class of all California residents who purchased cosmetics and fragrances for personal use from any of the defendants during the period four years prior to the filing of the amended complaint. Defendants, including us, have answered the amended complaint denying the allegations. The defendants have produced documents and responded to plaintiffs’ other discovery requests, including providing witnesses for depositions. Plaintiffs have not yet moved for class certification. Pursuant to an order of the court, plaintiffs and defendants have participated in mediation sessions. The California state court has set a status conference for June 2003. 42 NORDSTROM INC. AND SUBSIDIARIES notes to consolidated financial statements Note 24: Selected Quarterly Data (unaudited) Year ended January 31, 2003 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Net sales Gross profit Minority interest purchase $1,245,761 $1,655,528 $1,323,201 $1,750,586 421,464 551,263 449,354 581,623 $5,975,076 2,003,704 and reintegration costs (42,047) (11,121) — — (53,168) (Loss)/earnings before cumulative effect of accounting change (11,213) 36,335 18,427 60,034 103,583 Cumulative effect of accounting change (net of tax) Net (loss)/earnings Basic (loss)/earnings per share Diluted (loss)/earnings per share Dividends per share Common stock price High Low (13,359) (24,572) (.18) (.18) .09 26.29 22.15 — 36,335 .27 .27 .09 26.87 16.58 — 18,427 .14 .14 .10 21.93 15.06 — 60,034 .44 .44 .10 22.39 17.87 (13,359) 90,224 . 67 . 66 . 38 26.87 15.06 The per share amounts for the (loss)/earnings before cumulative effect of accounting change were $(0.08) for basic and diluted in the first quarter, and $0.77 and $0.76 for basic and diluted for the total year. Year ended January 31, 2002 Net sales Gross profit Earnings before income taxes Net earnings Basic earnings per share Diluted earnings per share Dividends per share Common stock price High Low 1st Quarter $1,218,040 419,610 40,555 24,755 .18 .18 .09 21.17 15.60 2nd Quarter $1,545,759 504,851 63,499 38,699 .29 .29 .09 22.75 17.00 3rd Quarter $1,239,241 402,280 17,095 10,495 .08 .08 .09 22.97 13.80 4th Quarter $1,631,090 541,530 83,339 50,739 .38 .38 .09 25.50 14.25 Total $5,634,130 1,868,271 204,488 124,688 .93 .93 .36 25.50 13.80 Nordstrom, Inc. common stock is traded on the New York Stock Exchange, NYSE Symbol JWN. NORDSTROM INC. AND SUBSIDIARIES 43 eleven-year statistical summary Dollars in thousands except square footage and per share amounts Year ended January 31, Financial Position Customer accounts receivable, net Merchandise inventories Current assets Current liabilities Working capital Working capital ratio Land, buildings and equipment, net Long-term debt, including current portion Debt/capital ratio Shareholders’ equity Shares outstanding Book value per share Total assets Operations Net sales Gross profit 2003 2002 2001 2000 $730,081 953,112 2,072,618 870,091 1,202,527 2.38 1,761,544 1,347,371 .4955 $677,150 888,172 2,057,111 950,138 1,106,973 2.17 1,761,082 1,429,271 .5209 $699,687 945,687 1,812,982 950,568 862,414 1.91 1,599,938 1,112,296 .4929 $596,020 797,845 1,564,648 866,509 698,139 1.81 1,429,492 804,982 .4249 1,372,057 1,314,488 1,229,568 1,185,614 135,444,041 134,468,608 133,797,757 132,279,988 10.13 9.78 9.19 8.96 4,096,376 4,051,179 3,608,503 3,062,081 5,975,076 2,003,704 5,634,130 1,868,271 5,528,537 1,879,021 5,149,266 1,789,506 Selling, general and administrative (1,813,968) (1,722,635) (1,747,048) (1,523,836) Operating income Interest expense, net Write-down of investment Minority interest purchase and reintegration costs Service charge income and other, net Earnings before income taxes and cumulative effect of accounting change Income taxes Earnings before cumulative effect of accounting change Cumulative effect of accounting change (net of tax) Net earnings Basic earnings per share Diluted earnings per share Dividends per share Comparable store sales percentage increase (decrease) Net earnings as a percent of net sales Return on average shareholders’ equity Sales per square foot for Company-operated stores 189,736 (81,921) — (53,168) 140,977 195,624 (92,041) 103,583 (13,359) 90,224 .67 .66 .38 1.4% 1.51% 6.72% 319 145,636 (75,038) — — 131,973 (62,698) (32,857) — 265,670 (50,396) — — 133,890 130,600 116,783 204,488 (79,800) 124,688 — 167,018 (65,100) 101,918 — 124,688 101,918 .93 .93 .36 (2.9%) 2.21% 9.80% 321 .78 .78 .35 .3% 1.84% 8.44% 342 332,057 (129,500) 202,557 — 202,557 1.47 1.46 .32 (1.1%) 3.93% 16.29% 350 104 166 156 140 18,428,000 17,048,000 16,056,000 14,487,000 Stores Total square footage 44 NORDSTROM INC. AND SUBSIDIARIES 1999 1998 1997 1996 1995 1994 1993 $567,661 750,269 1,668,689 794,490 874,199 2.10 $641,862 826,045 1,613,492 979,031 634,461 1.65 $693,123 719,919 1,549,819 795,321 754,498 1.95 $874,103 626,303 1,612,776 833,443 779,333 1.94 1,378,006 1,252,513 1,152,454 1,103,298 868,234 .4214 420,865 .3194 380,632 .2720 439,943 .3232 $655,715 627,930 1,397,713 693,015 704,698 2.02 984,195 373,910 .2575 $565,151 585,602 1,314,914 631,064 683,850 2.08 845,596 438,574 .2934 $584,379 536,739 1,219,844 516,397 703,447 2.36 824,142 481,945 .3337 1,300,545 1,458,950 1,457,084 1,408,053 1,330,437 1,153,594 1,038,649 142,114,167 152,518,104 159,269,954 162,226,288 164,488,196 164,118,256 163,949,594 9.15 9.57 9.15 8.68 8.09 7.03 6.34 3,103,689 2,890,664 2,726,495 2,732,619 2,396,783 2,177,481 2,053,170 5,049,182 1,704,237 4,864,604 1,568,791 4,457,931 1,378,472 4,113,717 1,310,931 3,895,642 1,297,018 (1,429,837) (1,338,235) (1,232,860) (1,136,069) (1,029,856) 274,400 (47,091) — — 230,556 (34,250) — — 145,612 (39,400) — — 174,862 (39,295) — — 267,162 (30,664) — — 3,591,228 1,121,539 (940,708) 180,831 (37,646) — — 3,415,613 1,079,608 (901,446) 178,162 (44,810) — — 110,414 110,907 135,331 134,179 98,311 88,509 86,140 337,723 (131,000) 206,723 — 206,723 1.41 1.41 .30 (2.7%) 4.09% 14.98% 362 307,213 (121,000) 186,213 — 186,213 1.20 1.20 .265 4.0% 3.83% 12.77% 384 241,543 (95,227) 146,316 — 146,316 .90 .90 .25 0.6% 3.28% 10.21% 377 269,746 (106,190) 163,556 — 163,556 1.00 1.00 .25 (0.7%) 3.98% 11.94% 382 334,809 (132,304) 202,505 — 202,505 1.23 1.23 .1925 4.4% 5.20% 16.30% 395 231,694 (90,804) 140,890 — 219,492 (84,489) 135,003 — 140,890 135,003 .86 .86 .17 2.7% 3.92% 12.85% 383 .82 .82 .16 1.4% 3.95% 13.73% 381 97 92 83 78 76 74 72 13,593,000 12,614,000 11,754,000 10,713,000 9,998,000 9,282,000 9,224,000 NORDSTROM INC. AND SUBSIDIARIES 45 retail store facilities open at January 31, 2003 Location Store Name Square Footage Year Store Opened Location Store Name Square Footage Year Store Opened Southwest Group Arizona Chandler Scottsdale California Arcadia Brea Canoga Park Cerritos Corte Madera Costa Mesa Escondido Glendale Los Angeles Los Angeles Mission Viejo Montclair Palo Alto Pleasanton Redondo Beach Riverside Roseville Sacramento San Diego San Diego San Diego San Francisco San Francisco San Jose San Mateo Santa Ana Santa Barbara Walnut Creek Nevada Las Vegas East Coast Group Connecticut Farmington Florida Boca Raton Coral Gables Orlando Tampa Georgia Atlanta Buford Chandler Fashion Center Scottsdale Fashion Square 149,000 235,000 151,000 Santa Anita 195,000 Brea Mall 154,000 Topanga 122,000 Los Cerritos Center 116,000 The Village at Corte Madera 235,000 South Coast Plaza 156,000 North County 147,000 Glendale Galleria 120,000 The Grove 150,000 Westside Pavilion 172,000 The Shops at Mission Viejo 134,000 Montclair Plaza 187,000 Stanford Shopping Center 173,000 Stoneridge Mall in Pleasanton The Galleria at South Bay 161,000 The Galleria at Tyler in Riverside 164,000 149,000 Galleria at Roseville 190,000 Arden Fair 220,000 Fashion Valley 151,000 Horton Plaza University Towne Centre 130,000 San Francisco Shopping Centre 350,000 174,000 Stonestown Galleria 232,000 Valley Fair 149,000 Hillsdale Shopping Center MainPlace/Santa Ana 169,000 186,000 Paseo Nuevo in Santa Barbara Broadway Plaza in Walnut Creek 193,000 2001 1998 1994 1989 1984 1981 1985 1986 1986 1983 2002 1985 1999 1986 1984 1990 1985 1991 2000 1989 1981 1985 1984 1988 1988 2001 1982 1987 1990 1984 Fashion Show 207,000 2002 Westfarms 189,000 1997 Town Center at Boca Raton Village of Merrick Park The Florida Mall International Plaza Perimeter Mall Mall of Georgia 193,000 212,000 174,000 172,000 243,000 172,000 2000 2002 2002 2001 1998 2000 Maryland Annapolis Bethesda Columbia Towson New Jersey Edison Freehold Paramus Short Hills New York Garden City White Plains North Carolina Durham Pennsylvania King of Prussia Rhode Island Providence Virgina Arlington Dulles McLean Norfolk Central States Illinois Chicago Oak Brook Schaumburg Skokie Indiana Indianapolis Kansas Overland Park Michigan Troy Minnesota Bloomington Missouri Des Peres Ohio Beachwood Columbus Texas Dallas Frisco Hurst Annapolis Mall Montgomery Mall The Mall in Columbia Towson Town Center Menlo Park Freehold Raceway Mall Garden State Plaza The Mall at Short Hills Roosevelt Field The Westchester 162,000 225,000 173,000 205,000 204,000 174,000 282,000 188,000 241,000 219,000 1994 1991 1999 1992 1991 1992 1990 1995 1997 1995 The Streets at Southpoint 149,000 2002 The Plaza at King of Prussia 238,000 1996 Providence Place 206,000 1999 The Fashion Centre at Pentagon City Dulles Town Center Tysons Corner Center MacArthur Center 241,000 1989 148,000 253,000 166,000 2002 1988 1999 Michigan Avenue Oakbrook Center Woodfield Shopping Center Old Orchard Center 271,000 249,000 215,000 209,000 2000 1991 1995 1994 Circle Centre 216,000 1995 Oak Park Mall 219,000 1998 Somerset Collection 258,000 1996 Mall of America 240,000 1992 West County 193,000 2002 Beachwood Place Easton Town Center Dallas Galleria Stonebriar Centre North East Mall 231,000 174,000 249,000 149,000 149,000 1997 2001 1996 2000 2001 46 NORDSTROM INC. AND SUBSIDIARIES Location Store Name Square Footage Year Store Opened Location Store Name Square Footage Year Store Opened Anchorage 97,000 1975 Northwest Group Alaska Anchorage Colorado Broomfield Littleton Oregon Portland Portland Portland Salem Tigard Utah Murray Orem Salt Lake City Washington Bellevue Lynnwood Seattle Seattle Spokane Tacoma Tukwila Vancouver Other Honolulu, HI Façonnable Façonnable FlatIron Crossing Park Meadows Clackamas Town Center Downtown Portland Lloyd Center Salem Center Washington Square Fashion Place University Mall Crossroads Plaza Bellevue Square Alderwood Mall Downtown Seattle Northgate Spokane Tacoma Mall Southcenter Vancouver Ward Centre Shoes U.S. (5 boutiques) International (23 boutiques) Nordstrom Rack Group Chandler, AZ Phoenix, AZ Scottsdale, AZ Brea, CA Chandler Festival Rack Last Chance Scottsdale Promenade Rack Brea Union Plaza Rack Chino, CA Colma, CA Costa Mesa, CA Fresno, CA Glendale, CA Long Beach, CA Los Angeles, CA Ontario, CA Chino Spectrum Towne Center Rack Colma Rack Metro Pointe at South Coast Rack Villaggio Retail Center Rack Glendale Fashion Center Rack Long Beach CityPlace Rack The Promenade at Howard Hughes Center Rack Ontario Mills Mall Rack 172,000 245,000 121,000 174,000 150,000 71,000 189,000 110,000 122,000 140,000 285,000 127,000 383,000 122,000 137,000 134,000 170,000 71,000 16,000 46,000 77,000 37,000 48,000 38,000 45,000 38,000 31,000 50,000 32,000 36,000 33,000 41,000 2000 1996 1981 1977 1990 1980 1994 1981 2002 1980 1982 1979 1998 1965 1999 1966 1968 1977 2002 2000 1995 2000 1999 2002 1987 1997 2002 2000 2002 2001 40,000 2002 Oxnard, CA Roseville, CA Sacramento, CA San Diego, CA Esplanade Shopping Center Rack 38,000 36,000 Creekside Town Center Rack 54,000 Howe ‘Bout Arden Center Rack 57,000 Mission Valley Rack San Francisco, CA 555 Ninth Street Retail 43,000 Center Rack Westgate Mall Rack San Leandro Rack San Jose, CA San Leandro, CA Woodland Hills, CA Topanga Rack Littleton, CO Broomfield, CO Buford, GA Honolulu, HI Northbrook, IL Meadows Marketplace Rack Flatiron Marketplace Rack Mall of Georgia Crossing Rack Victoria Ward Center Rack Northbrook Rack 48,000 44,000 64,000 34,000 36,000 44,000 34,000 40,000 42,000 Oak Brook, IL The Shops at Oak Brook Place Rack Woodfield Rack Towson Rack Centerpointe Mall Rack Troy Marketplace Rack Schaumburg, IL Gaithersburg, MD Gaithersburg Rack Towson, MD Grand Rapids, MI Troy, MI Bloomington, MN Mall of America Rack Las Vegas, NV Westbury, NY Beaverton, OR Clackamas, OR Portland, OR 45,000 49,000 31,000 40,000 40,000 41,000 33,000 Silverado Ranch Plaza Rack The Mall at the Source Rack 48,000 Tanasbourne Town Center Rack 53,000 28,000 Clackamas Promenade Rack 19,000 Downtown Portland Rack King of Prussia, PA The Overlook at Philadelphia, PA Hurst, TX King of Prussia Rack Franklin Mills Mall Rack (1) The Shops at North East Mall Rack Preston Shepard Place Rack Plano, TX Salt Lake City, UT Sugarhouse Rack Dulles, VA Woodbridge, VA Dulles Town Crossing Rack Potomac Mills Rack Auburn, WA Bellevue, WA Lynnwood, WA Seattle, WA Spokane, WA SuperMall of the Great Northwest Rack Factoria Mall Rack Golde Creek Plaza Rack Downtown Seattle Rack NorthTown Mall Rack 45,000 43,000 40,000 39,000 31,000 41,000 46,000 48,000 46,000 38,000 42,000 28,000 2001 2001 1999 1997 2001 1998 1990 1984 1998 2001 2000 2000 1996 2000 1994 1999 1992 2001 2000 1998 2001 1997 1998 1988 1986 2002 1993 2000 2000 1991 2001 1990 1995 1997 1999 1987 2000 (1) Store closed January 26, 2003, however it has been treated as open for the full year. NORDSTROM INC. AND SUBSIDIARIES 47 officers of the corporation and executive team Michael G. Koppel, 46 Executive Vice President and Chief Financial Officer MEMBER OF EXECUTIVE TEAM Llynn (Len) A. Kuntz, 42 Executive Vice President, WA/AK Regional Manager, Full-line Stores David P. Lindsey, 53 Vice President, Store Planning David L. Mackie, 54 Vice President, Real Estate, and Corporate Secretary Robert J. Middlemas, 46 Executive Vice President, Central States Regional Manager, Full-line Stores Jack H. Minuk, 48 Vice President, Corporate Merchandise Manager, Women’s Shoes, Full-line Stores Blake W. Nordstrom, 42 President MEMBER OF EXECUTIVE TEAM Bruce A. Nordstrom, 69 Chairman of the Board of Directors Erik B. Nordstrom, 39 Executive Vice President, Full-line Stores MEMBER OF EXECUTIVE TEAM Peter E. Nordstrom, 41 Executive Vice President and President, Full-line Stores MEMBER OF EXECUTIVE TEAM James R. O’Neal, 44 Executive Vice President and President, Nordstrom Product Group MEMBER OF EXECUTIVE TEAM Suzanne R. Patneaude, 56 Vice President, Corporate Merchandise Manager, Designer/Savvy, Full-line Stores R. Michael Richardson, 46 Vice President and Chief Information Officer Karen Bowman Roesler, 47 Vice President, Marketing Nordstrom Credit Group K. C. (Karen) Shaffer, 49 Executive Vice President, Nordstrom Rack NW Rack Regional Manager Joel T. Stinson, 53 Executive Vice President and Chief Administrative Officer MEMBER OF EXECUTIVE TEAM Delena M. Sunday, 42 Executive Vice President, Human Resources and Diversity Affairs MEMBER OF EXECUTIVE TEAM Geevy S. K. Thomas, 38 Executive Vice President, South Regional Manager, Full-line Stores Officers of the Corporation and Executive Team Jammie Baugh, 50 Executive Vice President, Human Resources, Full-line Stores Laurie M. Black, 44 Executive Vice President and President, Nordstrom Rack MEMBER OF EXECUTIVE TEAM Mark S. Brashear, 41 Executive Vice President and President, Façonnable MEMBER OF EXECUTIVE TEAM James H. Bromley, 39 Executive Vice President and President, Nordstrom Direct, Inc. MEMBER OF EXECUTIVE TEAM Dale Cameron, 54 Executive Vice President, Corporate Merchandise Manager, Cosmetics, Full-line Stores Robert E. Campbell, 47 Vice President, Strategy and Planning, Treasurer Linda Toschi Finn, 55 Executive Vice President, Marketing MEMBER OF EXECUTIVE TEAM Bonnie M. Junell, 46 Vice President, Corporate Merchandise Manager, Point of View and Narrative, Full-line Stores Kevin T. Knight, 47 Executive Vice President, Chairman and Chief Executive Officer of Nordstrom fsb, President of Nordstrom Credit, Inc. MEMBER OF EXECUTIVE TEAM 48 NORDSTROM INC. AND SUBSIDIARIES board of directors Board of Directors D. Wayne Gittinger, 70 Partner, Lane Powell Spears Lubersky LLP Seattle, Washington Enrique Hernandez Jr., 47 President and CEO, Inter-Con Security Systems, Inc. Pasadena, California Jeanne P. Jackson, 51 Founder and General Partner, MSP Capital Newport, California John A. McMillan, 71 Retired Co-Chairman of the Board of Directors Seattle, Washington Bruce A. Nordstrom, 69 Chairman of the Board of Directors Seattle, Washington John N. Nordstrom, 66 Retired Co-Chairman of the Board of Directors Seattle, Washington Alfred E. Osborne Jr., 58 Director of the Harold Price Center for Entrepreneurial Studies and Associate Professor of Business Economics, The Anderson School at UCLA Los Angeles, California William D. Ruckelshaus, 70 A Strategic Director, Madrona Venture Group Seattle, Washington Stephanie M. Shern, 55 Former Vice Chairman and Partner, Ernst & Young LLP Little Falls, New Jersey Bruce G. Willison, 54 Dean, The Anderson School at UCLA Los Angeles, California Alison A. Winter, 56 President, Northeast Personal Financial Services, The Northern Trust Corporation Chicago, Illinois Audit Committee Enrique Hernandez Jr., Chair Jeanne P. Jackson Alfred E. Osborne Jr. William D. Ruckelshaus Stephanie M. Shern Alison A. Winter Compensation and Stock Option Committee Enrique Hernandez Jr. Jeanne P. Jackson Alfred E. Osborne Jr. William D. Ruckelshaus, Chair Bruce G. Willison Alison A. Winter Corporate Governance and Nominating Committee D. Wayne Gittinger Enrique Hernandez Jr. Alfred E. Osborne Jr., Chair William D. Ruckelshaus Executive Committee John A. McMillan Bruce A. Nordstrom John N. Nordstrom Finance Committee D. Wayne Gittinger John A. McMillan John N. Nordstrom Alfred E. Osborne Jr. Bruce G. Willison Alison A. Winter, Chair shareholder information Independent Auditors Deloitte & Touche LLP Seattle, Washington Counsel Lane Powell Spears Lubersky LLP Seattle, Washington Transfer Agent and Registrar Mellon Investor Services LLC P. O. Box 3315 South Hackensack, New Jersey 07606 Telephone (800) 318-7045 TDD for Hearing Impaired (800) 231-5469 Foreign Shareholders (201) 329-8660 TDD Foreign Shareholders (201) 329-8354 General Offices 1617 Sixth Avenue Seattle, Washington 98101-1742 Telephone (206) 628-2111 Annual Meeting May 20, 2003 at 11:00 a.m. Pacific Daylight Time Nordstrom Downtown Seattle Store John W. Nordstrom Room, fifth floor 1617 Sixth Avenue Seattle, Washington 98101-1742 Form 10-K The Company’s annual report on Form 10-K for the year ended January 31, 2003 will be provided to shareholders upon request to: Nordstrom, Inc. Investor Relations P. O. Box 2737 Seattle, Washington 98111 (206) 303-3200 invrelations@nordstrom.com Shareholder Information Please visit www.nordstrom.com to obtain shareholder information. In addition, the Company is always willing to discuss matters of concern to shareholders. Front cover: Erik Rufer, Assistant Buyer, Men’s Shoes, Washington and Alaska 

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