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beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer salesperson event planner web designer housekeeper salesperson tailor alter- ations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nord- strom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divi- sional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager salesperson chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director salesperson barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nord- strom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divi- sional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer salesperson salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper sales- person tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager salesperson creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer cre- ator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine salesperson skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stock- person piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event plan- ner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corpo- rate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet salesperson beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchan- dise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager salesperson chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchan- diser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager salesperson chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alter- ations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer the business of fashion nordstrom, inc. annual report 2004 20500205 Annual Report - 2004 - 58pgs pg. OBC-OFC 8.375 x 10.875 - PDFX1A -KODAK 175 EURO 100# OPUS DULL Color OK Color Revisions Type OK Type Revisions client initials Cyan Mag Yelo Blk A iridio 5050 FFIRST VE. S. SEATTLE, WA. 98134 206.587.0800 888.587.0911 FAX 587.0356 PMS 187 Cool Gray 3 l , i . n c 2 0 0 4 a n n u a r e p o r t spresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator ent manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager egional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merc r concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager desi 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director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merc ise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager salesperson chef visual merchandiser concierge stockperson piano player person hopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer houseke alesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director spresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator epartment manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise ma egional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merc iser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager de reator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager salesperson chef visual merchandiser concierge stockperson piano player personal shopper shoeshine v kincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor a the business of fashion nordstrom, inc. annual report 2004 2003 2004 % Change Dollars in thousands except per share amounts Fiscal Year Net sales Earnings before income taxes Net earnings Basic earnings per share Diluted earnings per share Cash dividends paid per share Financial Highlights: Our continuous progress in delivering a quality shopping experience to our customers is resulting in increasing value to our shareholders. We’re proud to share our results with you. Overall, 2004 was the best year in our company’s history. spresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operat ent manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise mana erchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchand oncierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager desi vent planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoesh kincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson ta tions store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar baris orporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager caf erver chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional 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operator department manag ordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional mercha onal merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge sto ano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event plan esigner housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare eauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations stor perator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate me anager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server che erchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandis esigner creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player person hoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper ailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso arista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator departme afé nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional m visional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge iano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event pla esigner housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare eauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store perator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate me anager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server che oursco recard $6,448,678 398,141 242,841 1.78 1.76 0.41 $7,131,388 647,281 393,450 2.82 2.77 0.48 10.6% 62.6 62.0 58.4 57.4 17.1 30.3% 30.0% 29.4% 3.6% 3.3% $488.5 $390.5 $599.3 $606.3 $210.4 31.2% 32.9% 33.2% 34.6% 36.1% 33.6% 28.3% 8.5% 3.0% 6.2% 9.1% 0.3% 1.4% 4.1% $319 $341 $317 $325 $347 3.73 3.81 3.85 4.10 4.51 -2.9% 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 Sales per Square Foot and Same-store Sales Percentage Change Gross Profit as a Percentage of Sales SG&A Expense as a Percentage of Sales Earnings before Income Taxes and Cumulative Effect of Accounting Change as a Percentage of Sales Inventory Turn (cost of sales and related buying and occupancy divided by average inventory) Cash Flow from Operations in millions 3 ual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator depart- 2003 2004 % Change 10.6% 62.6 62.0 58.4 57.4 17.1 $7,131,388 647,281 393,450 2.82 2.77 0.48 $6,448,678 398,141 242,841 1.78 1.76 0.41 Dollars in thousands except per share amounts Fiscal Year Net sales Earnings before income taxes Net earnings Basic earnings per share Diluted earnings per share Cash dividends paid per share shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional lesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser spresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet erchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alter- erge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer ent planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom care specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional mer- store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer house- hef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director manager designer creator event planner 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before Income Taxes and Cumulative Effect of Accounting Change as a Percentage of Sales Inventory Turn (cost of sales and related buying and occupancy divided by average inventory) Cash Flow from Operations in millions 20500205 Annual Report - 2004 - 58pgs pgs. 3 x 4 16.0 x 10.875 - PDFX1A -KODAK 175 EURO 70# SOMERSET SATIN 3 PMS 5855 2004 delivering a great shopping experience is born out of teamwork – creative people coming together to delight the customer It takes an incredible team to deliver a shopping experience that’s rewarding for so many customers. From top designers to innovative merchants, meticulous tailors to attentive salespeople, our teams are comprised of talented people who work hard to inspire each customer and make that magic moment happen – the moment when the customer says, “I have to have it!” Color OK Color Revisions Type OK Type Revisions client initials Cyan Mag Yelo Blk A iridio 5050 FFIRST VE. S. SEATTLE, WA. 98134 206.587.0800 888.587.0911 FAX 587.0356 sue patneaude evp/corporate merchandise manager designer/savvy neville “sammy” samuels tailor nordstrom garden state plaza pete nordstrom president full-line stores jeff gardner women’s shoes buyer south region dale cameron evp/corporate merchandise manager cosmetics roberto cavalli designer tracy reese designer kwesi patterson rail salesperson nordstrom king of prussia ruben toledo artist and fashion illustrator kandice dolkart store manager nordstrom at the grove cheryl zahniser vp/brand creative director lisa gennardo t.b.d. salesperson nordstrom woodfield shopping center bobbi brown creator bobbi brown cosmetics g p g p we sold 30 million pairs of shoes last year — from active and functional, to fun and down- right fanciful p concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso buyer corporate merchandise manager regional merchandiser divisional merchandise manager 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server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beau- ty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shop- per shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper sales- person tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skin- care specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divi- sional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beau- ty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise “We want to be the ultimate fashion destination for our customers and continue to work hard to deliver a superior service experience. If we can continue to bring both together, we believe the future holds no boundaries.” pete nordstrom, president, full-line stores salesperson tailor alterations store manager operator department manager café nordstrom server chef visual m diser concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director e bar barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager design ator event planner web designer housekeeper salesperson tailor alterations store manager operator department café nordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine v skincare specialist beauty director espresso bar barista buyer corporate merchandise manager regional mercha divisional merchandise manager designer creator event planner web designer housekeeper salesperson tailor alt store manager operator department manager café nordstrom server chef visual merchandiser concierge stockpe piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer cor merchandise manager regional merchandiser divisional merchandise manager designer creator event planner we er housekeeper salesperson tailor alterations store manager operator department manager café nordstrom serve visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare specialist be director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional merchand ager designer creator event planner web designer housekeeper salesperson tailor alterations store manager oper department manager café nordstrom server chef visual merchandiser concierge stockperson piano player person per shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise manag regional merchandiser divisional merchandise manager designer creator event planner web designer housekeepe person tailor alterations store manager operator department manager café nordstrom server chef visual merchan concierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espress barista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer event planner web designer housekeeper salesperson tailor alterations store manager operator department mana the business of fashion message to shareholders dear customers, employees and shareholders, It’s an exciting time to be in the business of fashion. For the past few years we’ve been working hard to ensure the long-term success of our company. Our business is now performing at a higher level than ever – and we’re confident in our game plan. Here are a few highlights from 2004, a breakthrough year in which Nordstrom: • achieved total sales of $7.1 billion, a milestone for our company. Total sales increased 10.6%, and comparable sales increased 8.5% – our third consecutive year of positive comparable store sales. • marked the fourth consecutive year of SG&A rate improvement. • posted our best gross margin percentage in the history of our company. • increased inventory turn 10%, with sales growth exceeding inventory growth, 10.6% vs. 1.7%. • achieved a pre-tax margin of 9.1% – our best in over 10 years (it exceeded the 7.5%-8.5% level we planned to achieve by 2006). We’re pleased by these results – and we’re equally excited by the strides we’ve made behind the scenes and on the frontlines. Going into 2004, we wanted to improve our inventory management disciplines and take advantage of new system tools. One significant advance: our merchants are doing a better job of reacting quickly to feedback from the sales floor by leveraging our new perpetual inventory management system. As a result, we’re selling more of the right merchandise in the right store at the right time. This improved merchandise flow brings more fresh and compelling goods to the floor, resulting in fewer markdowns. On the selling floor, our goal has been to create an environment that’s fair and positive, while at the same time, providing our people with the tools they need to run their own businesses within our four walls. By giving each individual the ability and freedom to excel, we enhance our company’s ability to do the same. Our top performers are now selling even more. Last year, a record 61 Nordstrom salespeople sold $1 million or more – that’s twice the number of million-dollar sellers we had just two years ago. An important enhancement has been our implementation of new touch-screen registers, completed last November in all Full-Line stores. We also added Personal Book to the registers, a dynamic tool that allows salespeople to build and strengthen customer relationships. We are just beginning to realize the benefits of this powerful tool. Personal Book will be a key focus for our company in 2005. We believe it will help improve the experience customers have in our store – and the overall service we provide them. It’s our belief that successful, top-line performance starts and ends with the experience each customer has in our stores. For us, the foundation of that experience is the consistent offering of compelling product and customer service. Our primary focus is on our Full-Line stores. We’ve begun an extensive remodel schedule to continue to ensure that all our stores will be the best Nordstrom stores possible. In addition, we opened two new Full-Line stores in 2004 at SouthPark Mall in Charlotte, North Carolina, and at Dadeland Mall in Miami, Florida. At Dadeland – one of the leading malls in Florida – we were able to acquire a former Lord & Taylor store and transform it into a Nordstrom store in less than nine months. This rapid makeover proves we’re positioned to take advantage of similar opportunities that may arise throughout the country. On March 11 of this year, we opened in another former Lord & Taylor store at Phipps Plaza in Atlanta, Georgia (140,000 sq. ft.). Additionally, we’ll be opening three more new stores in 2005: The Shops at La Cantera in San Antonio, Texas (Sept. 11; 149,000 sq. ft.) The Spectrum Center in Irvine, California (Sept. 20; 129,000 sq. ft.) NorthPark Center in Dallas, Texas (Nov. 11; 212,000 sq. ft.) Other highlights from 2004 include a record year by our Nordstrom Rack stores, which far outpaced other off-price retailers, and an excellent year by our online business, which outpaced industry average growth rates and contributed to our overall success. We’re confident we can continue to build momentum in the coming year. For some time now, we’ve been taking a look at the different ways our customers choose to shop with us, whether by phone, online, or in our stores. We want to create a seamless shopping experience, sending customers a clear and consistent message with the merchandise we offer, across all channels. Starting this summer, we’ll better integrate our Direct and Full-Line store catalogs, sending out roughly one catalog per month, each of which will be filled with exciting merchandise we hope our customers will love. We want to leverage our resources and expertise to tell our story in a clearer, more concise and more efficient manner. Our goal is to be in the best position to take advantage of opportunities as they may present themselves. We’ve greatly improved our shareholders’ return on equity and significantly reduced debt. Our merchant team is responding well to what our customers have been asking for: interpreting trends and bringing in fresh, compelling merchandise. The result of these efforts has been a significant increase in sales. We have the best talent, a distinct shopping experience, multiple sales channels, and the discipline to make the right choices that will drive our company to the next level. We’re incredibly proud of our people and all the hard work they’ve put forth – work that’s put us in the position we’re in today. Our business is not static. There’s always work to be done. But we believe we can continue to build on our momentum and redefine what’s possible at Nordstrom. Thank you for your support over the past years. We look forward to bringing you more positive news in the months and years ahead. Blake W. Nordstrom President, Nordstrom, Inc. 14 15 table of contents alesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser oncierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar arista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator vent planner web designer housekeeper salesperson tailor alterations store manager operator department manager café ordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare pecialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional erchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store anager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player ersonal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise anager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper alesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser oncierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar arista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator vent planner web designer housekeeper salesperson tailor alterations store manager operator department manager café ordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare pecialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional erchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store anager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player ersonal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise anager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper alesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser oncierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar arista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator vent planner web designer housekeeper salesperson tailor alterations store manager operator department manager café ordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare pecialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional erchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store 17 management’s discussion and analysis anager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player ersonal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise anager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper alesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser oncierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar arista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator vent planner web designer housekeeper salesperson tailor alterations store manager operator department manager café ordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare pecialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional erchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store 29 consolidated statements of earnings anager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player ersonal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise anager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper alesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser oncierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar arista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator vent planner web designer housekeeper salesperson tailor alterations store manager operator department manager café ordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare pecialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional erchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store anager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player ersonal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise 50 eleven-year statistical summary anager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper alesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser oncierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar arista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator vent planner web designer housekeeper salesperson tailor alterations store manager operator department manager café ordstrom server chef visual merchandiser concierge stockperson piano player personal shopper shoeshine valet skincare pecialist beauty director espresso bar barista buyer corporate merchandise manager regional merchandiser divisional 55 board of directors and committees erchandise manager designer creator event planner web designer housekeeper salesperson tailor alterations store anager operator department manager café nordstrom server chef visual merchandiser concierge stockperson piano player ersonal shopper shoeshine valet skincare specialist beauty director espresso bar barista buyer corporate merchandise anager regional merchandiser divisional merchandise manager designer creator event planner web designer housekeeper alesperson tailor alterations store manager operator department manager café nordstrom server chef visual merchandiser oncierge stockperson piano player personal shopper shoeshine valet skincare specialist beauty director espresso bar arista buyer corporate merchandise manager regional merchandiser divisional merchandise manager designer creator vent planner web designer housekeeper salesperson tailor alterations store manager operator department manager café 27 auditors’ report on internal control over financial reporting 28 auditors’ report on consolidated financial statements 31 consolidated statements of shareholders’ equity 54 officers of the corporation and executive team 33 notes to consolidated financial statements 32 consolidated statements of cash flows 30 consolidated balance sheets 56 shareholder information 52 retail store facilities 26 management reports 16 management’s discussion and analysis Management’s Discussion and Analysis Nordstrom is a fashion specialty retailer offering a wide selection of high-quality apparel, shoes, cosmetics and accessories for women, men and children. Nordstrom offers classic and contemporary brand name and private label merchandise as well as exclusive couture designs. We offer our products through multiple retail channels including our Full-Line Nordstrom stores, our discount Nordstrom Rack stores, our Façonnable boutiques, our catalogs and on the Internet at www.nordstrom.com. Our stores are primarily located throughout the United States. In addition, our credit operations offer customers a variety of payment products and services including our loyalty program. STRATEGIC INITIATIVES FOR 2005 Our long-term goal is to deliver industry-leading performance. We have two overarching initiatives in 2005 that will take us towards that goal. Drive top-line growth — One of our top goals is to drive and sustain positive same-store sales into the future. Our ultimate success in accomplishing this goal starts and ends with the experience each customer has in our stores. We believe the foundation of that customer experience is based upon providing superior service and compelling products. These two key elements of our business will be an ongoing focus for our company as we work to sustain our same-store sales momentum. Customers want fashion, and we strive to be a leader in the marketplace with products and trends. One of the core elements of what we do is give customers a reason to buy something new. We believe this is a core strength of our merchant team, but the dynamic nature of our business means that there will always be opportunities in this area to improve the speed and flexibility by which we respond to fashion trends. In addition, to maximize our inventory investment, we will continue to develop proficiency with our existing perpetual inventory tools. In 2005, our service-focused initiative is to use our Personal Book system. Personal Book is a dynamic tool that helps our people build and strengthen customer relationships by better anticipating and responding to customer needs. With Personal Book, our salespeople are able to set and manage their customer follow-ups, organize and track customer preferences and easily reference customer purchases and contact information. The result is that our salespeople are able to tailor our service to the needs of each customer. We are able to stay connected with our customers and invite them back in for the new trends, merchandise, sales and events that interest them. Overall, Personal Book provides us with increased opportunities to exceed expectations, build customer loyalty and drive additional sales volume. Improve operational efficiencies — In addition to delivering solid top-line results, we are continuing to focus on improving operational efficiencies. We focus on managing the costs which do not impact customer service. Our current expense initiatives focus on the areas of logistics, information technology, and merchandising. In addition, we expect planned system enhancements to result in additional opportunities to streamline our processes and reduce costs over the next few years. Our planning processes are also more rigorous, challenging our organization to make better business decisions. OVERVIEW For the year we are pleased to report improved profitability for the company and our investors, with diluted earnings per share up 57.4% to $2.77. Our strong business performance in the latter half of 2003 and throughout 2004 generated significant increases in our operating cash flows, which we have used to invest in our business, prepay debt and repurchase common stock. Key highlights include: • Total net sales were $7.1 billion, which is the first time in our history that sales have exceeded $7.0 billion. Also, in 2004, same-store sales increased 8.5% (see our GAAP sales reconciliation on page 21). This was our third consecutive year with same-store sales increases and indicates that our existing store base continues to gain market share. • Gross profit increased from 34.6% of sales in 2003 to 36.1% in 2004. Continued improvement in merchandise management and sales growth leverage on our buying and occupancy expenses were the primary drivers. In 2004, inventory turn was 4.51, up from 4.10 in 2003. • With our strong sales performance in 2004, management was focused on ensuring that fixed costs were controlled and that variable costs fluctuated at a rate consistent with the sales growth. Such disciplined expense management resulted in significant improvement in selling, general and administrative expense as a percentage of sales and maximized the flow through of incremental sales to earnings. • Pre-tax earnings as a percentage of sales increased from 6.2% in 2003 to 9.1% in 2004, demonstrating that we were able to transform top-line growth into significant incremental earnings. 17 management’s discussion and analysis management’s discussion and analysis Percentage of 2004 Sales by Merchandise Category other 3% children’s apparel 3% men’s apparel 18% women’s apparel 36% shoes 20% women’s accessories and cosmetics 20% RESULTS OF OPERATIONS Segment results are discussed in each of the following sections as applicable. Net Sales (in millions) $7,131 $6,449 $5,945 $5,608 $5,512 2000 2001 2002 2003 2004 Fiscal Year Net sales increase Same-store sales increase 2002 6.0% 1.4% 2003 8.5% 4.1% 2004 10.6% 8.5% See our GAAP sales reconciliation on page 21. 2004 VS 2003 NET SALES In general, retailers’ sales results were mixed in 2004. Our net sales increased as our customers responded to our merchandise offerings. Both our Full-Line and Rack stores had overall and same-store sales increases. All of our geographic regions and major merchandise categories also reported overall and same-store sales increases. The strongest performing categories were Accessories, Women’s Shoes and Women’s Better Apparel, followed by Women’s Designer and Men’s Apparel. Total net sales also benefited from the six Full-Line stores and two Rack stores opened since February 2003, increasing our retail square footage 5% during the last two years. Sales at Nordstrom Direct increased 28.3% due to strong Internet sales and improved fulfillment of customer orders. Internet sales increased 53.1% due to an increase in the rate of website visits that result in sales and increased Internet advertising. Catalog net sales decreased in 2004 by 3%, which is consistent with our strategy to shift catalog customers to the Internet. 2003 VS 2002 NET SALES We had significant sales growth in 2003 as net sales increased 8.5% over the prior year. This overall growth resulted from same-store sales increases and store openings. Same-store sales on a 4-5-4 basis increased 4.1% due to increases at both our Full-Line stores and Rack stores. Additionally, we opened twelve Full-Line and six Rack stores since February 2002. We also closed one Rack store. The net impact was an increase to our retail square footage of 12%. Sales at Nordstrom Direct increased 15.4% due to improved fulfillment of customers orders and strong Internet sales. During 2003, Internet sales increased approximately 46% while catalog sales declined by 9%. In 2003, merchandise division sales growth was led by Women’s Designer Apparel, Accessories and Cosmetics, followed by Men’s Apparel and Women’s and Men’s Shoes. Gross Profit Selling, General and Administrative Expenses Fiscal Year Gross profit as a percentage of net sales Average inventory per square foot Inventory turnover 2002 2003 2004 33.2% $58.15 3.85 34.6% $54.81 4.10 36.1% $52.46 4.51 2004 VS 2003 GROSS PROFIT In 2004, the improvement in gross profit as a percentage of net sales was primarily a result of meeting our customers’ desire for fresh, compelling merchandise, which increased the sales of regular priced merchandise. In addition, gross profit benefited from our ongoing improvement in managing inventory and by holding buying costs and the fixed portion of occupancy expenses flat. Contributing to our gross profit rate improvement was the continuous improvement we are making utilizing our perpetual inventory system investment, which we made in 2003. We have better visibility into sales trends and on-hand content, allowing us to more effectively manage our merchandise; the result was a significant improvement in our inventory turnover rate. Increased sell-through of regular priced merchandise reduced the markdowns necessary to sell slow moving goods. We maintained our inventory at levels consistent with the prior year, even though our sales and square footage grew in 2004. The overall improvements in merchandise management have generated higher margins on our inventory investments. 2003 VS 2002 GROSS PROFIT Gross profit as a percentage of net sales improved in 2003 due to strong sales, substantially lower markdowns and improved shrink results, as well as an improvement in expenses related to our private label business. Merchandise division gross profit was led by Accessories, Women’s Specialized Apparel, Women’s Contemporary/Juniors Apparel and Men’s Apparel. Average inventory per square foot declined due to improved merchandise management at both our Full-Line and Rack stores. Buying and occupancy expenses benefited from leverage on a higher sales base resulting in a small improvement on a percentage of sales basis. Fiscal Year Selling, general and administrative 2002 2003 2004 expenses as a percentage of sales 30.0% 29.4% 28.3% 2004 VS 2003 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES We continued to use our infrastructure to support increased sales. In 2004, our selling, general and administrative expenses as a percentage of net sales improved 110 basis points. We were able to control and leverage our fixed general and administrative expenses, especially non-selling labor. While selling expense increased in 2004, primarily from higher costs linked to increased sales, we experienced a slight rate improvement in selling expense as a percentage of net sales. 2003 VS 2002 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The 2002 selling, general and administrative expense includes an impairment charge of $15.6 million related to the write-down of an information technology investment in a supply chain software application in our private label division. We believe that excluding this charge provides a more comparable basis from which to evaluate performance between years. Without this charge, 2002 selling, general and administrative expenses as a percentage of net sales would have been 29.7%. Excluding the effects of the 2002 impairment charge, selling, general and administrative expenses as a percentage of net sales decreased in 2003 to 29.4% from 29.7% in the prior year. This improvement was primarily the result of leverage on better-than-planned sales and overall expense improvements. 2005 FORECAST OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES In 2005, selling, general and administrative expenses as a percentage of net sales are expected to improve 40 to 60 basis points as we continue to take steps to improve the effectiveness and efficiency of our business processes. Interest Expense, Net 2004 VS 2003 INTEREST EXPENSE, NET We prepaid debt of $198.2 million in 2004 and $105.7 million in 2003. We incurred debt prepayment costs of $20.9 million in 2004 and $14.3 million in 2003. The decrease in our interest expense, net in 2004 was due to the reduction in our 2004 average outstanding debt, partially offset by the increase in the prepayment costs. 2005 FORECAST OF NET SALES 2005 FORECAST OF GROSS PROFIT In 2005, we plan to open four Full-Line stores, increasing retail square footage by approximately 3%. We expect 2005 same-store sales to increase 1 to 3%. In 2005, we will expand the integration of our merchandise offerings across our full-price channels. Our goal for the next several years is to build a multi-channel merchandise offering that creates a superior and seamless experience for our customers. In 2005, we expect to see a 10 to 20 basis point improvement in our gross profit rate performance from ongoing merchandise margin improvement as well as buying and occupancy efficiencies. 18 19 management’s discussion and analysis management’s discussion and analysis 2003 VS 2002 INTEREST EXPENSE, NET 2004 VS 2003 OTHER INCOME INCLUDING FINANCE CHARGES, NET 2003 VS 2002 DILUTED EARNINGS PER SHARE Interest expense, net increased in 2003 because of debt prepayment costs of $14.3 million in 2003 and lower capitalized interest. The debt prepayment costs were partially offset by lower interest expense resulting from the reduced debt balance outstanding. Capitalized interest decreased as the completion of several software projects in early 2003 reduced our software development balance. 2005 FORECAST OF INTEREST EXPENSE, NET Interest expense for 2005 is expected to decrease as we re-pay the remaining $96.0 million of our 6.7% medium-term notes due in July 2005. We expect to see a year-over-year reduction in interest expense of approximately $26 million. A portion of the forecasted interest expense is based on variable interest rates, which could fluctuate. Minority Interest Purchase and Reintegration Costs During 2002, we purchased the outstanding shares of Nordstrom.com, Inc. series C preferred stock for $70.0 million. The minority interest purchase and reintegration costs resulted in a one-time charge of $53.2 million. No tax benefit was recognized as there was no possibility of a future tax benefit. The impact of not recognizing this income tax benefit increased our 2002 effective tax rate to 47% before the cumulative effect of accounting change. Other Income Including Finance Charges, Net (in millions) $173 $155 $139 $134 $131 2000 2001 2002 2003 2004 Fiscal Year Other income including finance charges, 2002 2003 2004 net as a percentage of sales 2.4% 2.4% 2.4% Our overall other income including finance charges, net increased $17.9 million, primarily from our co-branded VISA credit card program growth. Since 2002, we marketed this credit card to our in-store customers and the inactive Nordstrom private label credit card holders. These marketing efforts showed success in 2004, as the co-branded VISA credit card holders used the cards more extensively in 2004, resulting in a 45.7% volume increase. 2003 VS 2002 OTHER INCOME INCLUDING FINANCE CHARGES, NET We continued to see improvements in our 2003 other income including finance charges, net primarily due to growth in the co-branded VISA program. Our income benefited from substantial increases in our VISA credit card volume and receivables during the year, as well as a small improvement in the cost of funds and bad debt write-offs. This increase was partially offset by a decline in finance charge and late fee income resulting from a decline in our private label accounts receivable. 2005 FORECAST OF OTHER INCOME INCLUDING FINANCE CHARGES, NET In 2005, other income including finance charges, net is expected to increase approximately $12 million as we continue to see growth in our VISA credit card volume and corresponding income. Diluted Earnings per Share $2.77 $1.76 $0.93 $0.78 $0.66 2000 2001 2002 2003 2004 2004 VS 2003 DILUTED EARNINGS PER SHARE In 2004, earnings per share increased to $2.77 from $1.76 in 2003. This increase was driven by a strong increase in overall and same- store sales, improvements in gross profit through better inventory management, and sales leverage on buying and occupancy and selling, general and administrative expenses. Our earnings per share in 2002 included the write down of a supply chain software application, the Nordstrom.com minority interest purchase and reintegration costs and the cumulative effect of an accounting change associated with the adoption of FAS 142, for a total impact of $71.0 million or $0.53 per share. We believe that excluding these charges provides a more comparable basis from which to evaluate performance between 2003 and 2002. Without the impact of these charges, 2002 earnings per share would have been $1.19. Our earnings per share in 2003 increased to $1.76 from $0.66 in 2002. Excluding the prior year charges noted above, 2003 earnings per share increased $0.57 or 47.9%. This increase was primarily driven by a strong increase in overall and same-store sales, significant improvement in gross profit rate and a moderate decrease in selling, general and administrative expenses as a percentage of sales. 2005 FORECAST OF DILUTED EARNINGS PER SHARE Based upon the factors discussed above, especially the expected 2005 same-store sales increase and the 2004 debt prepayment cost that will not recur in 2005, our diluted earnings per share is expected to increase 16% - 20% in 2005. As we saw in 2004, earnings trends should be consistent with same-store sales trends. Fourth Quarter Results Fourth quarter 2004 net earnings was $140.0 million compared with $104.3 million in 2003. Fourth quarter 2004 net earnings was reduced $4.7 million or $0.03 per share due to a non-cash expense adjustment related to a correction in our lease accounting policy. Our new policy is to record lease expense when we take possession of a location; in the past, lease expense started when our retail operations started. Total sales for the quarter increased by 9.4% to $2.1 billion and same- store sales increased by 7.2%. This was the first time in our history that sales exceeded $2.0 billion in a quarter. Gross profit as a percentage of net sales increased to 36.6% from 36.2% last year. The quarterly improvement in gross profit as a percentage of net sales was primarily the result of sales growth leverage on our buying and occupancy expenses. Selling, general and administrative expense as a percentage of sales improved 160 basis points from 28.5% to 26.9%, primarily from lower year-over-year incentive compensation costs in the quarter. GAAP Sales Reconciliation (in millions) We converted to a 4-5-4 Retail Calendar at the beginning of 2003 so our financial results are more comparable to other retailers. Sales performance numbers included in this document have been calculated on a comparative 4-5-4 basis. We believe that adjusting for the difference in days provides a more comparable basis from which to evaluate sales performance. The following reconciliation bridges the reported GAAP sales to the 4-5-4 comparable sales. YTD 2003 YTD 2004 Sales Reconciliation Number of Days 364 Reported GAAP $6,448.7 $7,131.4 Reported GAAP Sales — Less Feb. 1, 2003 Reported 4-5-4 Sales $6,430.5 $7,131.4 364 4-5-4 Adjusted Days (18.2) 365 364 %Change %Change Comp Sales Total Sales Dollar Increase $682.7 10.6% N/A $700.9 10.9% 8.5% LIQUIDITY AND CAPITAL RESOURCES Overall, cash and short-term investments decreased by $113.8 million to $402.4 million at the end of 2004, as we used our cash from operations for capital expenditures, additional debt prepayments and repurchases of common stock. Operating Activities Our operations are seasonal in nature. The second quarter, which includes our Anniversary Sale, accounts for approximately 27% of net sales, while the fourth quarter, which includes the holiday season, accounts for about 29% of net sales. Cash requirements are highest in the third quarter as we build our inventory for the holiday season. 2004 VS 2003 OPERATING ACTIVITIES In 2004, cash flow from operating activities increased to $606.3 million, a $7.1 million increase. Higher net earnings was offset by our merchandise purchase and payment flow changes in 2004 as compared to 2003 and the timing of income tax payments. Toward the end of 2003 and into 2004, we have achieved a more even flow of merchandise purchases in relation to our sales trends. Our 2004 inventory turns have improved over the prior year; the payables leverage we achieved in 2004 is consistent with our merchandise purchase plan. Income tax payments have increased in 2004 as a result of our earnings growth. 2003 VS 2002 OPERATING ACTIVITIES The increase in net cash provided by operating activities between 2003 and 2002 was primarily due to an increase in net earnings before noncash items, decreases in inventories and increases in accounts payable, partially offset by an increase in our investment in asset backed securities. Strong sales and effective inventory management left us with lower, appropriate inventory levels after the holidays. January receipts of new merchandise replenished our inventory levels resulting in an increase in accounts payable. Investment in asset backed securities increased as Nordstrom VISA credit sales increased during the year. 20 21 management’s discussion and analysis management’s discussion and analysis 2005 FORECAST FOR OPERATING ACTIVITIES Total Square Footage (in thousands) In 2005, cash flows provided by operating activities are expected to increase slightly as a result of increased earnings. Investing Activities In 2004, investing activities have primarily consisted of capital expenditures and the sales and purchases of high quality short-term investments. Capital expenditures in 2004 decreased slightly in comparison to 2003 as a planned reduction in store openings reduced our capital expenditures. In 2004, 37% of our capital expenditures was for remodels and 28% was for new stores, half of which related to stores that opened in 2004 and the other half for stores opening in 2005. In addition, 22% of our capital expenditures was for information technology and 13% for other routine projects. Our capital expenditures over the last three years totaled $833.3 million; we received property incentives of $151.1 million over that same period, which offsets a portion of the cash we used for capital expenditures. The capital expenditures added stores, enhanced existing facilities and improved our information systems. More than 2.3 million square feet of retail store space has been added during this period, representing an increase of 14% since January 31, 2002. We plan to spend approximately $850-$875 million, net of property incentives of approximately $130 million, on capital projects during the next three years. We plan to use approximately 40% of this capital to build new stores, 30% on remodels, and 15% toward information technology. The remaining 15% is planned for other routine projects. Compared to the previous three years, this represents a 30% increase in capital expenditures, with more spending allocated to improving our existing facilities and less spending on information systems. We watch over our store locations so they meet our customer expectations for a high-quality shopping experience. We also analyze the useful lives assigned to our stores so we can match our depreciation with the actual use of these assets. In the information systems area, we completed the implementation of our “Point of Sale” system in 2004 and plan to continue to make investments to enhance our technology platform. As of January 29, 2005, approximately $171.0 million has been contractually committed primarily for constructing new stores or remodeling existing stores. Consistent with our investment policy, we utilize our high quality short- term investments to generate income on our available working capital. 19,397 19,138 18,428 17,048 16,056 2000 2001 2002 2003 2004 Financing Activities Financing activities primarily consist of principal payments on debt, dividend payments, repurchases of common stock and proceeds from the exercise of stock options. During 2004, we retired $196.8 million of our 8.95% senior notes and $1.5 million of our 6.7% medium-term notes for a total cash payment of $220.1 million. After considering non-cash items related to these debt retirements, our pre-tax expense for debt buyback was $20.9 million. During 2003, we purchased $103.2 million of our 8.95% senior notes and $2.5 million of our 6.7% medium-term notes for a total cash payment of $120.8 million. Approximately $14.3 million of expense was recognized during 2003 related to these purchases. In July 2005, we plan to re-pay the remaining $96.0 million of our 6.7% medium-term notes at maturity. No additional debt repurchases are planned for 2005. In August 2004, our Board of Directors authorized $300.0 million of share repurchases, replacing a previous share repurchase authorization. We purchased 6.9 million shares in the open market for the entire authorized amount of $300.0 million at an average price of $43.43 per share. In February 2005, our Board of Directors authorized $500.0 million of additional share repurchases. The actual number and timing of share repurchases will be subject to market conditions and applicable SEC rules. Debt to Capital Ratio Our recent strong operating results allowed us to repay debt, which contributed to a decrease in our debt to capital ratio from 43.0% at the end of 2003 to 36.5% at the end of 2004. Other factors that impacted this ratio in 2004 were the share repurchase described above and the volume of stock option activity. We believe that a debt to capital ratio in the range of 25% to 40% results in favorable debt ratings and sets us on a capital structure that provides appropriate flexibility while we maintain a reasonable cost of capital. Off-Balance Sheet Financing We transfer our Nordstrom co-branded VISA credit card receivables to a third-party trust that issued $200 million of VISA receivable backed securities to third parties in 2002. The outstanding balance of the co-branded VISA credit card receivables exceeds the receivable backed securities balance. As a result, we hold securities that represent our retained interests in the trust, recorded as investment in asset backed securities in our consolidated balance sheets. We do not record the $200.0 million of VISA receivable backed securities or the co-branded Nordstrom VISA credit card receivables transferred to the trust on our consolidated balance sheets. This off-balance sheet financing allows us greater financial flexibility. Additionally, our exposure to credit losses on the underlying co-branded Nordstrom VISA credit card receivables is limited to our investment in asset backed securities. Interest Rate Swaps To manage our interest rate risk, we entered into an interest rate swap agreement in 2003, which had a $250.0 million notional amount expiring in 2009. Under the agreement, we receive a fixed rate of 5.63% and pay a variable rate based on LIBOR plus a margin of 2.3% set at six-month intervals (5.20% at January 29, 2005, based on the January 18, 2005 LIBOR rate); this reduced our net interest expense in 2004. The interest rate swap agreement had a fair value of ($7.8) million and ($8.1) million at January 29, 2005 and January 31, 2004. We have locked in our LIBOR rate until July 15, 2005. Available Credit In May 2004, we replaced our existing $300.0 million unsecured line of credit with a $350.0 million unsecured line of credit, which is available as liquidity support for our commercial paper program. Under the terms of the agreement, we pay a variable rate of interest based on LIBOR plus a margin of 0.31% (2.90% at January 29, 2005). The variable rate of interest increases to LIBOR plus a margin of 0.41% if more than $175.0 million is outstanding on the facility. The line of credit agreement expires in May 2007 and contains restrictive covenants, which include maintaining a leverage ratio. We also pay a commitment fee for the line based on our debt rating. Also in May 2004, we renewed our variable funding note backed by Nordstrom private label card receivables, but we reduced the capacity by $50.0 million to $150.0 million due to better pricing on the unsecured line of credit. This note is renewed annually and interest is paid based on the actual cost of commercial paper plus specified fees. We also pay a commitment fee for the note based on the amount of the commitment. We did not make any borrowings under our unsecured line of credit or our variable funding note backed by Nordstrom private label card receivables during 2004. We also 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. Debt Ratings The following table shows our credit ratings at the date of this report. Credit Ratings Senior unsecured debt Commercial paper Outlook Moody’s Baa1 P-2 Stable Standard and Poor’s A- A-2 Stable These ratings could change depending on our performance and other factors. Our outstanding debt is not subject to termination or interest rate adjustments based on changes in our credit ratings. Contractual Obligations (in millions) The following table summarizes our contractual obligations and the expected effect on our liquidity and cash flows. We expect to fund these commitments primarily with operating cash flows generated in the normal course of business and credit available to us under existing and potential future facilities. Fiscal Year Long-term debt Capital lease obligations Operating leases Purchase obligations Other long-term liabilities Total Less than 1 year $100.1 1-3 years $507.3 3-5 years $258.0 More than 5 years $362.1 Total $1,227.5 17.8 699.8 2.3 72.5 3.9 138.5 3.3 128.5 8.3 360.3 1,007.5 932.9 65.2 9.4 — 153.2 $3,105.8 — 55.4 $770.3 $1,107.8 20.4 $419.6 77.4 $808.1 22 23 management’s discussion and analysis management’s discussion and analysis Long-term debt includes financing related to the $200.0 million off-balance sheet receivable backed securities due in April 2007. In addition to the required debt repayments disclosed above, we estimate total interest payments of approximately $628.5 million as of January 29, 2005, being paid over the remaining life of the debt. Purchase obligations primarily consist of purchase orders for unreceived goods or services and capital expenditure commitments. This table excludes the short-term liabilities, other than the current portion of long-term debt, disclosed on our balance sheets as the amounts recorded for these items will be paid in the next year. Other long-term liabilities consist of workers’ compensation and general liability insurance reserves and postretirement benefits. The repayment amounts presented above were determined based on historical payment trends. Other long-term liabilities not requiring cash payments, such as deferred property and lease credits, were excluded from the table above. Dividends In 2004, we paid dividends of $0.48 per share, our eighth consecutive annual dividend increase. We paid dividends of $0.41 and $0.38 per share in fiscal 2003 and 2002. Liquidity We maintain a level of liquidity to allow us to cover our seasonal cash needs and to minimize our need for short-term borrowings. We believe that our operating cash flows, existing cash and available credit facilities are sufficient to finance our cash requirements for the next 12 months. We plan to pay the remaining $96.0 million of our 6.7% medium-term notes due in July 2005 with existing cash and cash from operations. Over the long term, we manage our cash and capital structure to maximize shareholder return, strengthen our financial position and maintain flexibility for future strategic initiatives. We continuously assess our debt and leverage levels, capital expenditure requirements, principal debt payments, dividend payouts, potential share repurchases, and future investments or acquisitions. We believe our operating cash flows, existing cash and available credit facilities, as well as any potential future borrowing facilities will be sufficient to fund these scheduled future payments and potential long term initiatives. CRITICAL ACCOUNTING POLICIES The preparation of our financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We regularly evaluate our estimates including those related to off-balance sheet financing, inventory valuation, sales return accruals, self-insurance liabilities, doubtful accounts, intangible assets, income taxes, post-retirement benefits, contingent liabilities and litigation. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The following discussion highlights the policies we feel are critical. Off-Balance Sheet Financing Our co-branded Nordstrom VISA credit card receivables are transferred to a third-party trust on a daily basis. The balance of the receivables transferred to the trust fluctuates as new receivables are generated and old receivables are retired (through payments received, charge-offs, or credits from merchandise returns). The trust issues securities that are backed by the receivables. Certain of these securities or “beneficial interests” are sold to third-party investors and those remaining securities are issued to us. We recognize gains or losses on the sale of the co-branded Nordstrom VISA receivables to the trust based on the difference between the face value of the receivables sold and the estimated fair value of the assets created in the securitization process. The fair value of the assets is calculated as the present value of their expected cash flows. The internal rate of returns used to calculate fair value represent the volatility and risk of the assets. Assumptions and judgments are made to estimate the fair value of our investment in asset backed securities. We have no other off-balance sheet transactions. Inventory Our inventory is stated at the lower of cost or market using the retail inventory method (first-in, first-out basis). Under the retail method, inventory is valued by applying a cost-to-retail ratio to the ending inventory’s retail value. As our inventory retail value is adjusted regularly to reflect market conditions, our inventory is valued at the lower of cost or market. Factors considered in determining markdowns include current and anticipated demand, customer preferences, age of the merchandise and fashion trends. We also reserve for obsolescence based on historical trends and specific identification. Shrinkage is estimated as a percentage of sales for the period from the most recent semi-annual inventory count based on historical shrinkage results. Revenue Recognition We recognize revenues net of estimated returns and we exclude sales taxes. Our retail stores record revenue at the point of sale. Our catalog and Internet sales include shipping revenue and are recorded when the merchandise is delivered to the customer. Our sales return liability is estimated based on historical return rates. Vendor Allowances Recent Accounting Pronouncements We receive allowances from merchandise vendors for purchase price adjustments, cooperative advertising programs, cosmetic selling expenses and vendor sponsored contests. Purchase price adjustments are recorded as a reduction of cost of sales after an agreement with the vendor is executed and the related merchandise has been sold. Allowances for cooperative advertising programs and vendor sponsored contests are recorded in cost of sales and selling, general and administrative expenses as a reduction to the related cost when incurred. Allowances for cosmetic selling expenses are recorded in selling, general and administrative expenses as a reduction to the related cost when incurred. Any allowances in excess of actual costs incurred that are recorded in selling, general and administrative expenses are recorded as a reduction to cost of sales. Self Insurance We are self insured for certain losses related to health and welfare, workers’ compensation and general liability. We record estimates of the total cost of claims incurred as of the balance sheet date. These estimates are based on internal analysis of historical data and validated by independent actuarial estimates. Allowance For Doubtful Accounts Our allowance for doubtful accounts represents our best estimate of the losses inherent in our private label credit card receivable as of the balance sheet date. We evaluate the collectibility of our accounts receivable based on several factors, including historical trends of aging of accounts, write-off experience and expectations of future performance. We recognize finance charges on delinquent accounts until the account is written off. Delinquent accounts are written off when they are determined to be uncollectible, usually after the passage of 151 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy or other circumstances that make further collection unlikely. Our write-off experience and aging trends have been consistent over the last two years. Valuation of Long-Lived Assets We review our intangibles and other long-lived assets annually for impairment or when events or changes in circumstances indicate the carrying value of these assets may not be recoverable. We estimate the fair value of an asset based on the future cash flows the asset is expected to generate. An impairment loss is recognized when the carrying value of the asset exceeds its fair value. Factors used in the valuation of long-lived assets include, but are not limited to, management’s plans for future operations, recent operating results and projected cash flows. In November 2004, the FASB issued SFAS No. 151, “Inventory Costs an amendment of ARB No. 43, Chapter 4.” SFAS 151 amends ARB No. 43, Chapter 4, “Inventory Pricing” to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material should be recognized as current period charges. In addition, this statement requires that fixed overhead production be allocated to the costs of conversion based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, and should be applied prospectively. We do not believe the adoption of SFAS 151 will have a material impact on our financial statements. In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS 123R requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award. We have not yet quantified the effects of the adoption of SFAS 123R, but it is expected that the new standard will result in significant stock-based compensation expense. SFAS 123R will be effective for our third fiscal quarter beginning July 31, 2005. Cautionary Statement The preceding disclosures included forward-looking statements regarding our performance, liquidity, capital expenditures and adequacy of capital resources. These statements are based on our current assumptions and expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Forward-looking statements are qualified by the risks and challenges posed by our ability to predict fashion trends, consumer apparel buying patterns, our ability to control costs, weather conditions, hazards of nature, trends in personal bankruptcies and bad debt write-offs, changes in interest rates, employee relations, our ability to continue our expansion plans, potential opportunities that may be related to the current changes in our industry, changes in governmental or regulatory requirements, and the impact of economic and competitive market forces, including the impact of terrorist activity or the impact of a war on us, our customers and the retail industry. As a result, while we believe there is a reasonable basis for the forward-looking statements, you should not place undue reliance on those statements. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances. This discussion and analysis should be read in conjunction with the consolidated financial statements and the eleven-year statistical summary. 24 25 management reports auditors’ report on internal control over financial reporting MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities and Exchange Act of 1934 rules. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the company’s internal control over financial reporting was effective as of January 29, 2005. Management’s assessment of the effectiveness of our internal control over financial reporting as of January 29, 2005 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein. MANAGEMENT RESPONSIBILITY FOR FINANCIAL INFORMATION We are responsible for the preparation, integrity and fair presentation of our financial statements and the other information that appears in the annual report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include estimates based on our best judgment. We maintain a comprehensive system of internal controls and procedures designed to provide reasonable assurance, at an appropriate cost-benefit relationship, that our financial information is accurate and reliable, our assets are safeguarded and our transactions are executed in accordance with established procedures. Deloitte and Touche LLP, an independent registered public accounting firm, is retained to audit Nordstrom’s consolidated financial statements and management’s assessment of the effectiveness of the company’s internal control over financial reporting. Its accompanying reports are based on audits conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States). The Audit Committee, which is comprised of six independent directors, meets regularly with our management, our internal auditors and the independent registered public accounting firm to ensure that each is properly fulfilling its responsibilities. The Committee oversees our systems of internal control, accounting practices, financial reporting and audits to ensure their quality, integrity and objectivity are sufficient to protect shareholders’ investments. Michael G. Koppel Executive Vice President and Chief Financial Officer Blake W. Nordstrom President 26 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Nordstrom, Inc. We have audited management’s assessment, included in the accompanying Management’s Report, that Nordstrom, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of January 29, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of January 29, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended January 29, 2005 of the Company and our report dated April 7, 2005, expresses a unqualified opinion on those financial statements. Deloitte & Touche LLP Seattle, Washington April 7, 2005 27 auditors’ report on consolidated financial statements consolidated statements of earnings REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Nordstrom, Inc. We have audited the accompanying consolidated balance sheets of Nordstrom, Inc. and subsidiaries (the “Company”) as of January 29, 2005 and January 31, 2004, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for each of the three years in the period ended January 29, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Nordstrom, Inc. and subsidiaries as of January 29, 2005 and January 31, 2004, and the results of their operations and their cash flows for each of the three years in the period ended January 29, 2005, 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. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 29, 2005, based on the criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 7, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Deloitte & Touche LLP Seattle, Washington April 7, 2005 28 Consolidated Statements of Earnings Amounts in thousands except per share amounts Fiscal year Net sales Cost of sales and related buying and occupancy costs Gross profit Selling, general and administrative expenses Operating income Interest expense, net Minority interest purchase and reintegration costs Other income including finance charges, net Earnings before income taxes and cumulative effect of accounting change Income tax expense Earnings before cumulative effect of accounting change Cumulative effect of accounting change (net of tax of $8,541) Net earnings Basic earnings per share Diluted earnings per share Basic shares Diluted shares Cash dividends paid per share of common stock outstanding Consolidated Statements of Earnings (% of sales) Fiscal year Net sales Cost of sales and related buying and occupancy costs Gross profit Selling, general and administrative expenses Operating income Interest expense, net Minority interest purchase and reintegration costs Other income including finance charges, net Earnings before income taxes and cumulative effect of accounting change Income tax expense Earnings before cumulative effect of accounting change Cumulative effect of accounting change Net earnings 2004 $7,131,388 (4,559,388) 2,572,000 (2,020,233) 551,767 (77,428) — 172,942 647,281 (253,831) 393,450 — $393,450 $2.82 $2.77 139,497 142,267 $0.48 2004 100.0% (63.9) 36.1 (28.3) 7.8 (1.1) — 2.4 9.1 (3.6) 5.5 — 5.5% 2003 $6,448,678 (4,215,546) 2,233,132 (1,899,129) 334,003 (90,952) — 155,090 398,141 (155,300) 242,841 — $242,841 $1.78 $1.76 136,329 137,739 $0.41 2003 100.0% (65.4) 34.6 (29.4) 5.2 (1.4) — 2.4 6.2 (2.4) 3.8 — 3.8% The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 2002 $5,944,656 (3,970,022) 1,974,634 (1,783,210) 191,424 (81,921) (53,168) 139,289 195,624 (92,041) 103,583 (13,359) $90,224 $0.67 $0.66 135,107 135,724 $0.38 2002 100.0% (66.8) 33.2 (30.0) 3.2 (1.4) (0.9) 2.4 3.3 (1.6) 1.7 (0.2) 1.5% 29 consolidated balance sheets consolidated statements of shareholders’ equity Amounts in thousands Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Investment in asset backed securities Merchandise inventories Current deferred tax assets Prepaid expenses and other Total current assets Land, buildings and equipment, net Goodwill, net Tradename, net Other assets Total assets Liabilities and Shareholders’ Equity Current liabilities: Accounts payable Accrued salaries, wages and related benefits Other current liabilities Income taxes payable Current portion of long-term debt Total current liabilities Long-term debt, net Deferred property incentives, net Other liabilities Shareholders’ equity: Common stock, no par value: 500,000 shares authorized; 135,665 and 138,377 shares issued and outstanding Unearned stock compensation Retained earnings Accumulated other comprehensive earnings Total shareholders’ equity Total liabilities and shareholders’ equity January 29, 2005 January 31, 2004 $360,623 41,825 645,663 422,416 917,182 131,547 53,188 2,572,444 1,780,366 51,714 84,000 116,866 $4,605,390 $482,394 287,904 354,201 115,556 101,097 1,341,152 929,010 367,087 179,147 552,655 (299) 1,227,303 9,335 1,788,994 $4,605,390 $340,281 176,000 666,811 272,294 901,623 121,681 46,153 2,524,843 1,807,778 51,714 84,000 100,898 $4,569,233 $458,809 276,007 314,753 66,157 6,833 1,122,559 1,227,410 407,856 177,399 424,645 (597) 1,201,093 8,868 1,634,009 $4,569,233 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Amounts in thousands except per share amounts Balance at January 31, 2002 Net earnings Other comprehensive earnings: Foreign currency translation adjustment SERP adjustment, net of tax of $4,163 Securitization fair value adjustment, net of tax of $607 Comprehensive net earnings Cash dividends paid ($0.38 per share) Issuance of common stock for: Stock option plans Employee stock purchase plan Stock compensation Balance at January 31, 2003 Net earnings Other comprehensive earnings: Foreign currency translation adjustment SERP adjustment, net of tax of $3,304 Securitization fair value adjustment, net of tax of $(2,530) Comprehensive net earnings Cash dividends paid ($0.41 per share) Issuance of common stock for: Stock option plans Employee stock purchase plan Stock compensation Balance at January 31, 2004 Net earnings Other comprehensive earnings: Foreign currency translation adjustment SERP adjustment, net of tax of $76 Securitization fair value adjustment, net of tax of $(59) Comprehensive net earnings Cash dividends paid ($0.48 per share) Issuance of common stock for: Stock option plans Employee stock purchase plan Stock compensation Repurchase of common stock Balance at January 29, 2005 Common Stock Shares 134,469 — Amount $341,316 — Unearned Stock Compensation $(2,680) — — — — — — — — — — — 350 596 29 135,444 — 7,959 8,062 732 358,069 — — — — — — — — — — — 2,260 648 25 138,377 — 57,981 9,677 (1,082) 424,645 — — — — — — — — — — — 3,618 489 89 (6,908) 135,665 111,315 14,081 2,614 — $552,655 — — — — — — — 670 (2,010) — — — — — — — — 1,413 (597) — — — — — — — — 298 — $(299) 30 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Accumulated Other Comprehensive Earnings $2,406 — Retained Earnings $975,203 90,224 — — — — 7,755 (6,511) (950) — Total $1,316,245 90,224 7,755 (6,511) (950) 90,518 (51,322) — (51,322) — — — 1,014,105 242,841 — — — — — — — 2,700 — 7,379 (5,168) 3,957 — 7,959 8,062 1,402 1,372,864 242,841 7,379 (5,168) 3,957 249,009 (55,853) — (55,853) — — — 1,201,093 393,450 — — — — (67,240) — — — (300,000) $1,227,303 — — — 8,868 — 493 (119) 93 — — 57,981 9,677 331 1,634,009 393,450 493 (119) 93 393,917 (67,240) — — — — $9,335 111,315 14,081 2,912 (300,000) $1,788,994 31 consolidated statements of cash flows notes to consolidated financial statements Amounts in thousands Fiscal year Operating Activities Net earnings Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization of buildings and equipment Amortization of deferred property incentives and other, net Stock-based compensation expense Deferred income taxes, net Tax benefit of stock option exercises and employee stock purchases Cumulative effect of accounting change, net of tax Impairment of IT investment Minority interest purchase expense Provision for bad debt expense Change in operating assets and liabilities: Accounts receivable, net Investment in asset backed securities Merchandise inventories Prepaid expenses Other assets Accounts payable Accrued salaries, wages and related benefits Other current liabilities Income taxes payable Property incentives Other liabilities Net cash from operating activities Investing Activities Capital expenditures Proceeds from sale of assets Minority interest purchase Sales of short-term investments Purchases of short-term investments Other, net Net cash used in investing activities Financing Activities Principal payments on long-term debt (Decrease) increase in cash book overdrafts Proceeds from exercise of stock options Proceeds from employee stock purchase plan Cash dividends paid Repurchase of common stock Other, net Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2004 $393,450 264,769 (31,378) 8,051 (8,040) 25,442 — — — 24,639 (2,950) (149,970) (11,771) (3,163) (8,143) 23,930 15,055 58,471 (18,999) 19,837 7,116 606,346 (246,851) 5,473 — 3,366,425 (3,232,250) (2,830) (110,033) (205,252) (2,680) 87,061 12,892 (67,240) (300,000) (752) (475,971) 20,342 340,281 $360,623 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 2003 $242,841 250,683 (27,712) 17,894 (1) 10,199 — — — 27,975 (30,677) (141,264) 28,213 86 (10,109) 75,736 42,885 38,970 21,319 46,007 6,237 599,282 (258,314) — — 2,090,175 (2,144,909) 3,451 (309,597) (111,436) 33,832 48,598 8,861 (55,853) — 2,341 (73,657) 216,028 124,253 $340,281 2002 $90,224 233,931 (22,179) 1,130 (11,030) 1,358 13,359 15,570 40,389 29,080 (24,227) (67,561) (117,379) 521 3,378 6,103 18,629 24,740 54,993 85,258 14,227 390,514 (328,166) 32,415 (70,000) 937,521 (1,058,787) (2,133) (489,150) (88,981) (11,908) 6,601 8,062 (51,322) — 6,596 (130,952) (229,588) 353,841 $124,253 Amounts in thousands except per share amounts Note 1: Nature of Operations and Summary of Significant Accounting Policies The Company: We are one of the nation's leading fashion specialty retailers, with 151 US stores located in 27 states. Founded in 1901 as a shoe store in Seattle, today we operate 95 Full-Line Nordstrom stores, 49 discount Nordstrom Racks, five Façonnable boutiques, one free-standing shoe store, and one clearance store. We also operate 31 international Façonnable boutiques in Europe. Additionally, we serve our customers through Nordstrom Direct (on the web at www.nordstrom.com and through our direct mail catalogs). Our Credit Operations offer a Nordstrom private label card and a co-branded Nordstrom VISA credit card, which generate earnings through finance charges and securitization-related gains. Our operations also include a product development group, which coordinates the design and production of private label merchandise sold in our retail stores. Change in Fiscal Year: On February 1, 2003, our fiscal year end changed from January 31st to the Saturday closest to January 31st. Our new fiscal year consists of four, 13 week quarters, with an extra week added onto the fourth quarter every five to six years. A one-day transition period is included in our first quarter 2003 results. All references to 2004 and 2003 relate to the fifty-two weeks ending January 29, 2005 and January 31, 2004, respectively. References to 2002 relate to the year ending January 31, 2003. Principles of Consolidation: The consolidated financial statements include the balances of Nordstrom, Inc. and its wholly-owned subsidiaries and investees controlled by the company for the entire fiscal year. All significant intercompany transactions and balances are eliminated in consolidation. Use of Estimates: We make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications: Certain prior year financial statement amounts have been reclassified to conform with our current year presentation. Revenue Recognition: We record revenues net of estimated returns and excluding sales taxes. Our retail stores record revenue at the point of sale. Our catalog and Internet sales include shipping revenue and are recorded upon delivery to the customer. Our sales returns are based upon historical return rates. Our sales return reserves were $49,745 and $39,841 at the end of 2004 and 2003. Buying and Occupancy Costs: Buying costs consist primarily of salaries and costs incurred by our merchandise and private label product development groups. Occupancy costs include rent, depreciation, property taxes and operating costs of our retail and distribution facilities. Shipping and Handling Costs: Our shipping and handling costs include payments to third-party shippers and costs to hold, move and prepare merchandise for shipment. Shipping and handling costs of $75,421 $67,583 and $54,961 in 2004, 2003, and 2002 were included in selling, general and administrative expenses. Advertising: Production costs for newspaper, radio and other media are expensed the first time the advertisement is run. Our direct response catalog advertising production costs are expensed over the estimated revenue stream, not to exceed six months. Total advertising expenses, net of vendor allowances, were $123,974, $117,411, and $112,618 in 2004, 2003, and 2002. Store Preopening Costs: Store preopening and opening costs are expensed as they occur. Other Income Including Finance Charges, Net: This consists primarily of income from finance charges and late fees generated by our Nordstrom private label cards and earnings from our investment in asset backed securities and securitization gains, which are both generated from the co-branded Nordstrom VISA credit card program. Stock Compensation: 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 expense for the issuance of our stock options. 32 33 notes to consolidated financial statements notes to consolidated financial statements The following table illustrates the effect on net earnings and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Fiscal year Net earnings, as reported Add: stock-based compensation expense included in reported net earnings, net of tax 2004 $393,450 2003 $242,841 2002 $90,224 4,894 9,898 2,240 Deduct: stock-based compensation expense determined under fair value, net of tax Pro forma net earnings Earnings per share: Basic–as reported Diluted–as reported Basic–pro forma Diluted–pro forma (25,001) $373,343 (30,154) $222,585 (22,834) $69,630 $2.82 $2.77 $2.68 $2.62 $1.78 $1.76 $1.63 $1.62 $0.67 $0.66 $0.52 $0.51 Cash Equivalents: Cash equivalents are short-term investments with a maturity of three months or less from the date of purchase. As of the end of 2004 and 2003, we have restricted cash of $6,886 and $7,140 included in other long term assets. The restricted cash is held in a trust for use by our Supplemental Executive Retirement Plan and Deferred Compensation Plans. Cash Management: Our cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Accounts payable at the end of 2004 and 2003 includes $86,725 and $89,404 of checks not yet presented for payment drawn in excess of our bank deposit balances. Short-term Investments: Short-term investments consist of auction rate securities classified as available-for-sale. Auction rate securities are high-quality variable rate bonds whose interest rate is periodically reset, typically every 7, 28, or 35 days. However, the underlying security can have a duration from 15 to 30 years. Our auction rate securities are stated at cost, which approximates fair value, and therefore there were no unrealized gains or losses related to these securities included in accumulated other comprehensive earnings. The cost of securities sold was based on the specific identification method. Securitization of Accounts Receivable: We offer Nordstrom private label cards and co-branded Nordstrom VISA credit cards to our customers. Substantially all of the receivables related to both credit cards are securitized. Under our credit card securitizations, the receivables are transferred to third-party trusts on a daily basis. The balance of the receivables transferred to the trusts fluctuates as new receivables are generated and old receivables are retired (through payments received, charge-offs, or credits from merchandise returns). The trusts issue securities that are backed by the receivables. Certain of these securities or “beneficial interests” are sold to third-party investors and the remaining securities are issued to us. Under the terms of the trust agreements, we may be required to fund certain amounts upon the occurrence of specific events. Both of our credit card securitization agreements set a maximum percentage of receivables that can be associated with various receivable categories, such as employee or foreign receivables. As of January 29, 2005, these maximums were exceeded by $166. It is possible that we may be required to repurchase these receivables. Aside from these instances, we do not believe any additional funding will be required. The private label securitizations are accounted for as a secured borrowing (on-balance sheet) while the VISA securitization qualifies for sale treatment (off-balance sheet). NORDSTROM PRIVATE LABEL RECEIVABLES (ON-BALANCE SHEET) We transfer these receivables to a third-party trust (“Private Label Trust”) that issues two Nordstrom private label receivable backed securitizations: •In November 2001, the Private Label Trust issued $300,000 of Class A notes to third party investors (“Private Label Securitization”). The Class A notes bear a fixed coupon rate of 4.82% and mature in October 2006. The Class A notes are included in long-term debt and the Nordstrom private label card receivables, which serve as collateral for the debt, are included in accounts receivable, net. •In December 2001, a variable funding note was established that is also collateralized by the Nordstrom private label receivables (“Private Label VFN”). The Private Label VFN was initially established with a facility limit of $200,000 with an annual renewal subject to agreement by all parties. In May 2004, we renewed the Private Label VFN and reduced the capacity by $50,000 to $150,000. Interest on the Private Label VFN varies based on the actual cost of commercial paper plus specified fees. We also pay a commitment fee for the Private Label VFN based on the amount of the commitment. No borrowings were made under the Private Label VFN in 2004 or 2003. Total principal receivables of the securitized private label portfolio at the end of 2004 and 2003 were approximately $566,967 and $584,828, and receivables more than 30 days past due were approximately $13,099 and $14,910. Net charged off receivables for 2004, 2003 and 2002 were $25,370, $28,703, and $29,555. CO-BRANDED NORDSTROM VISA RECEIVABLES (OFF-BALANCE SHEET) In order to enhance our cost-effective capital sources, we have in place a securitized asset structure. This allows us to reduce our investment in the co-branded Nordstrom VISA credit card receivables, so we can deploy our capital resources to greater-value opportunities. We transfer our co-branded Nordstrom VISA credit card receivables to a third-party trust (“VISA Trust”) that issues VISA receivable backed securities. In May 2002, the VISA Trust issued $200,000 of certificated Class A and Class B notes to third-party investors (“2002 Class A & B Notes”) and a certificated, subordinate Class C note to us. The receivables transferred to the VISA Trust exceeded the face value of the issued notes. This excess created a certificated, non-subordinated asset called the Transferor’s Interest, which was also conveyed to us. In addition, we hold a non-certificated Interest Only Strip, which results when the estimated value of projected cash inflows related to the notes exceeds the projected cash outflows. We do not record the $200,000 in debt related to the VISA securitization or the receivables transferred to the VISA Trust on our consolidated financial statements. However, we do hold the 2002 Class C note, the Transferor’s Interest and the Interest Only Strip. These amounts are included in the consolidated balance sheets as investment in asset backed securities and accounted for as investments in “available-for- sale” debt securities. As such, we record the investment in asset backed securities at its estimated fair value in our consolidated balance sheets. We recognize gains or losses on the sale of the co-branded Nordstrom VISA receivables to the VISA Trust based on the difference between the face value of the receivables sold and the estimated fair value of the assets created in the securitization process. The receivables sold to the VISA Trust are then allocated between the various interests in the VISA 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 unrealized gains and losses, as well as any adjustments to fair value of the investment in asset backed securities, are recorded as a component of accumulated other comprehensive earnings. In addition, we record interest income related to the investment in asset backed securities based upon their carrying value and their internal rate of returns. The gain on sales of receivables and the interest income earned on the beneficial interests are included in other income including finance charges, net in our consolidated statements of earnings. Accounts Receivable: Accounts receivable consist primarily of our Nordstrom private label receivables that serve as collateral for our Private Label Securitization. We record the face value of the principal, plus any assessed finance charges, late fees, or cash advance fees. We recognize these charges and fees when earned and accrue for any earned but not yet billed charges and fees. We report accounts receivable net of an allowance for doubtful accounts. Our allowance for doubtful accounts represents our best estimate of the losses inherent in our customer accounts receivable based on several factors, including historical trends of aging of accounts, write-off experience and expectations of future performance. We recognize finance charges on delinquent accounts until the account is written off or when an account is placed into a debt management program. Payments received for these accounts are recorded in the same manner as other accounts. Our approach for resuming accrual of interest on these accounts is made on an account by account basis. Delinquent accounts are written off when they are determined to be uncollectible, usually after the passage of 151 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy or other circumstances making further collection unlikely. Merchandise Inventories: Merchandise inventories are valued at the lower of cost or market, using the retail method (first-in, first-out basis). Land, Buildings and Equipment: Depreciation is computed using a combination of accelerated and straight-line methods. Estimated useful lives by major asset category are as follows: Asset Buildings and improvements Store fixtures and equipment Leasehold improvements Software Life (in years) 5-40 3-15 Shorter of life of lease or asset life 3-7 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. The goodwill and tradename associated with our Façonnable business are our largest impairment risk. See Note 2 for our impairment evaluation of goodwill and intangible assets. 34 35 notes to consolidated financial statements notes to consolidated financial statements Leases: We recognize lease expense on a straight-line basis over the initial lease term. In 2004, we corrected our lease accounting policy to recognize lease expense, net of landlord reimbursements, from the time that we control the leased property. In the past, we recorded net rent expense once lease payments or retail operations started. We recorded a charge of $7,753 ($4,729 net of tax) in the fourth quarter of 2004 to correct this accounting policy. The impact of this change was immaterial to prior periods. We lease the land or the land and building at many of our Full-Line stores, and we lease the building at many of our Rack stores. Additionally, we lease office facilities, warehouses and equipment. Most of these leases are classified as operating leases and they expire at various dates through 2080. We have no significant individual or master lease agreements. Our fixed, noncancelable terms of the lease generally are 20 to 30 years for Full Line stores and 10 to 15 years for Rack stores. Many of our leases include options that allow us to extend the lease term beyond the initial commitment period, subject to terms agreed to at lease inception. For leases that contain predetermined, fixed escalations of the minimum rentals, we recognize the rent expense on a straight-line basis and record the difference between the rent expense and the rental amount payable under the leases in liabilities. Most of our leases also provide for payment of operating expenses, such as common area charges, real estate taxes and other executory costs. Some leases require additional payments based on sales and are recorded in rent expense when the contingent rent is probable. Leasehold improvements made at the inception of the lease are amortized over the shorter of the asset life or the initial lease term as described above. Leasehold improvements made during the lease term are also amortized over the shorter of the asset life or the initial lease term. We receive incentives to construct stores in certain developments. These incentives are recorded as a deferred credit and recognized as a reduction to rent expense on a straight-line basis over the lease term as described above. At the end of 2004 and 2003, this deferred credit balance was $392,807 and $407,856. We also receive incentives based on a percentage of a store’s net sales and recognize these amounts in the year that they are earned as a reduction to rent expense. Foreign Currency Translation: The assets and liabilities of our foreign subsidiaries have been translated to U.S. dollars using the exchange rates effective on the balance sheet date, while income and expense accounts are translated at the average rates in effect during the year. The resulting translation adjustments are recorded in accumulated other comprehensive earnings. Income Taxes: We use the asset and liability method of accounting for income taxes. Using this method, deferred tax assets and liabilities are recorded based on differences between financial reporting and tax basis of assets and liabilities. The deferred tax assets and liabilities are calculated using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We establish valuation allowances for tax benefits when we believe it is not likely that the related expense will be deductible for tax purposes. Other current liabilities: The following table shows the components of other current liabilities: Fiscal Year Gift cards Other Total other current liabilities 2004 $133,532 220,669 $354,201 2003 $109,324 205,429 $314,753 Loyalty Program: Customers who reach a cumulative purchase threshold when using our Nordstrom private label cards or our co- branded Nordstrom VISA credit cards receive merchandise certificates. These merchandise certificates can be redeemed in our stores similar to a gift certificate. We estimate the net cost of the merchandise certificate that will be ultimately earned and redeemed by the customer and record this cost as the customer earns the merchandise certificates. The cost of the loyalty program is not significant in relation to the corresponding sales, so the program expense is recorded in cost of sales rather than as a reduction of net sales. Vendor Allowances: We receive allowances from merchandise vendors for purchase price adjustments, cooperative advertising programs, cosmetic selling expenses, and vendor sponsored contests. Purchase price adjustments are recorded as a reduction of cost of sales at the point they have been earned and the related merchandise has been sold. Allowances for cooperative advertising programs and vendor sponsored contests are recorded in cost of sales and selling, general and administrative expenses as a reduction to the related cost when incurred. Allowances for cosmetic selling expenses are recorded in selling, general and administrative expenses as a reduction to the related cost when incurred. Any allowances in excess of actual costs incurred that are recorded in selling, general and administrative expense are recorded as a reduction to cost of sales. The following table shows vendor allowances earned during the year: Fiscal Year Purchase price adjustments Cosmetic selling expenses Cooperative advertising Vendor sponsored contests Total vendor allowances 2004 $47,707 96,936 57,786 3,975 $206,404 2003 $49,312 88,518 44,939 4,180 $186,949 2002 $42,777 79,794 41,309 3,734 $167,614 Allowances were recorded in our consolidated statement of earnings as follows: Fiscal Year Cost of sales Selling, general and administrative 2004 $106,902 2003 $55,161 2002 $44,379 expense Total vendor allowances 99,502 $206,404 131,788 $186,949 123,235 $167,614 Fair Value of Financial Instruments: The carrying amounts of cash equivalents and short term-investments approximate fair value. See Note 11 for the fair values of our long-term debt, including current maturities and interest rate swap agreements. Derivatives Policy: We use derivative financial instruments to manage our interest rate and foreign currency exchange risks. Our derivative financial instruments for our interest rate lock and our foreign currencies are not material to our financial condition or results of operations and we have no material off-balance sheet credit risk. See Note 11 for a further description of our interest rate swaps. In November 2004, the FASB Recent Accounting Pronouncements: issued SFAS No. 151, “Inventory Costs an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 amends ARB No. 43, Chapter 4, “Inventory Pricing” to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material should be recognized as current period charges. In addition, this statement requires that fixed overhead production costs be allocated to conversion costs based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, and should be applied prospectively. We do not believe the adoption of SFAS No. 151 will have a material impact on our financial statements. In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award. We have not yet quantified the effects of the adoption of SFAS No. 123R, but it is expected that the new standard will result in significant stock-based compensation expense. SFAS No. 123R will be effective for our third fiscal quarter beginning July 31, 2005. Note 2: Cumulative Effect of Accounting Change In 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which revised the accounting and reporting requirements for goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets having indefinite lives are no longer amortized but are subject to annual impairment tests. Our intangible assets were determined to be either goodwill or indefinite lived tradename. We have three reporting units that we evaluate. At the beginning of 2002, we had $133,436 of intangibles associated with our Façonnable Business Unit, which is one level below our reportable Retail Stores segment. The purchase of the minority interest of Nordstrom.com LLC in the first quarter of 2002 resulted in additional goodwill of $24,178, of which $8,462 was allocated to the Retail Stores reporting unit and $15,716 to the Catalog/Internet reporting unit. We test our intangible assets for impairment by comparing the fair value of the reporting unit with its carrying value. Fair value was determined using a discounted cash flow methodology. We perform our impairment test annually during our first quarter or when circumstances indicate we should do so. Our initial impairment test of the Façonnable Business Unit resulted in an impairment charge to tradename of $16,133 and to goodwill of $5,767. These impairments resulted from a reduction in management’s estimate of future growth for this reporting unit. The impairment charge is reflected as a cumulative effect of accounting change. No further impairments have occurred to date. The following table shows the actual results of operations as well as pro-forma results adjusted to exclude the cumulative effect of the accounting change in 2002. There was no impact to 2004 or 2003. Fiscal year 2002 Net earnings Reported net earnings Cumulative effect of accounting change, net of tax Adjusted net earnings $90,224 13,359 $103,583 Earnings per share Diluted Basic $0.66 $0.67 0.10 $0.77 0.10 $0.76 36 37 notes to consolidated financial statements notes to consolidated financial statements Note 3: Employee Benefits We provide a 401(k) and profit sharing plan for our employees. The Board of Directors establishes our profit sharing contribution each year. The 401(k) component is funded by voluntary employee contributions. In addition, we provide matching contributions up to a fixed percentage of employee contributions. Our expense related to the profit sharing component and matching contributions to the 401(k) component totaled $54,186, $51,720, and $33,668 in 2004, 2003, and 2002. Note 4: Postretirement Benefits We have an unfunded Supplemental Executive Retirement Plan (“SERP”), which provides retirement benefits to certain officers and select employees. The following table provides a reconciliation of benefit obligations and funded status of the SERP: Change in benefit obligation: Accumulated benefit obligation at beginning of year Service cost Interest cost Amortization of net loss Amortization of prior service cost Change in additional minimum liability Distributions Accumulated benefit obligation at end of year Jan. 29, 2005 Jan. 31, 2004 $59,613 1,489 3,965 1,543 962 (766) (2,856) $63,950 $47,573 819 3,420 751 693 9,046 (2,689) $59,613 The components of SERP expense and a summary of significant assumptions are as follows: 2004 Fiscal Year $1,489 Service cost 3,965 Interest cost 1,543 Amortization of net loss 962 Amortization of prior service cost Amortization of transition obligation — $7,959 Total expense Assumption percentages: Discount rate Rate of compensation increase Measurement date 6.25% 4.00% 10/31/04 2003 $819 3,420 751 693 — $5,683 2002 $1,447 3,537 1,613 1,004 324 $7,925 6.25% 4.00% 10/31/03 7.00% 4.00% 10/31/02 The expected future benefit payments based upon the same assumptions as of January 29, 2005 and including benefits attributable for future employee service for the following periods are as follows: Fiscal Year 2005 2006 2007 2008 2009 2010 - 2014 $3,471 3,497 3,591 3,589 3,641 22,733 Note 5: Interest Expense, Net The components of interest expense, net are as follows: Funded status of plan: Underfunded status Unrecognized prior service cost Unrecognized loss Accrued pension cost Additional minimum liability Total SERP liability Other balance sheet amounts: Intangible asset included in other assets Accumulated other comprehensive loss, net of tax $(69,598) $(64,870) 5,266 6,228 24,989 24,403 (39,343) (34,239) (24,607) (25,374) $(63,950) $(59,613) $5,266 11,798 $6,228 11,679 Fiscal Year Short-term debt Long-term debt Total interest expense Less: Interest income Capitalized interest Interest expense, net 2004 $725 87,793 88,518 2003 $652 99,866 100,518 2002 $677 89,850 90,527 (7,929) (3,161) $77,428 (5,981) (3,585) $90,952 (4,254) (4,352) $81,921 Interest income is recorded in our Corporate and Other segment as an offset to interest expense, net. Note 6: Income Taxes Income tax expense consists of the following: Fiscal Year Current income taxes: Federal State and local Total current income tax expense Deferred income taxes: 2004 2003 2002 $282,430 45,091 327,521 $118,559 15,516 134,075 $76,901 10,633 87,534 Current Non-current (15,259) (58,431) (7,904) 29,129 (4,225) 8,732 Total deferred income tax (benefit) expense (73,690) 21,225 4,507 Total income tax expense before cumulative effect of accounting change Deferred income taxes on cumulative effect of accounting change Total income tax expense 253,831 155,300 92,041 — $253,831 — $155,300 (8,541) $83,500 A reconciliation of the statutory Federal income tax rate to the effective tax rate on earnings before the cumulative effect of accounting change is as follows: Fiscal Year Statutory rate State and local income taxes, net of Federal income taxes Change in valuation allowance Other, net Effective tax rate 2004 35.0% 2003 35.0% 2002 35.0% 3.5 0.3 0.4 39.2% 3.1 — 0.9 39.0% 3.8 8.5 (0.2) 47.1% Our effective tax rate in 2002 was unusually high, due to non- deductible losses we incurred in connection with our purchase of the Nordstrom.com minority interest. 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: Accrued expenses Compensation and benefits accruals Bad debts Gift cards and gift certificates Merchandise certificates Merchandise inventories Capital loss carryforwards Other Total deferred tax assets Land, buildings and equipment basis and depreciation differences Employee benefits Other Total deferred tax liabilities Valuation allowance Net deferred tax assets January 29, 2005 $56,135 57,947 6,309 12,743 3,461 20,933 6,286 1,654 165,468 January 31, 2004 $41,096 55,013 6,799 2,172 3,721 24,630 6,286 9,722 149,439 (13,294) — (11,317) (24,611) (1,800) $139,057 (78,558) — (5,532) (84,090) — $65,349 As of January 29, 2005, capital loss carryforwards of $16,117 remain available to offset capital gain income through the end of 2005. We expect to utilize most, but not all, of this capital loss carryforward in 2005. As a result, we established a valuation allowance in 2004 of $1,800 to offset the related deferred tax asset. Note 7: Earnings Per Share Basic earnings per share is computed using the weighted average number of common shares outstanding during the year. Diluted earnings per share uses the weighted average number of common shares outstanding during the year plus dilutive common stock equivalents, primarily stock options and performance share units. Options with an exercise price greater than the average market price were not included in diluted earnings per share. These anti-dilutive options totaled 5,335 and 7,259 shares in 2003 and 2002. There were no anti-dilutive options in 2004. Since the beginning of 2003, 5,878 shares have been issued upon the exercise of stock options; we repurchased 6,908 shares in 2004 to offset the impact of these share issuances and to return capital to our shareholders in an efficient manner. 38 39 notes to consolidated financial statements notes to consolidated financial statements 2004 $393,450 139,497 2003 $242,841 136,329 2002 $90,224 135,107 the assumptions used below are different in 2004, the impact of the assumption change was not significant and does not reflect a change in the underlying quality of the portfolio. Fiscal Year Net earnings Basic shares Dilutive effect of stock options and performance share units Diluted shares Basic earnings per share Diluted earnings per share 2,770 142,267 $2.82 $2.77 1,410 137,739 $1.78 $1.76 617 135,724 $0.67 $0.66 Note 8: Accounts Receivable The components of accounts receivable are as follows: Trade receivables: Unrestricted Restricted Allowance for doubtful accounts Trade receivables, net Other Accounts receivable, net January 29, 2005 January 31, 2004 $31,400 568,062 (19,065) 580,397 65,266 $645,663 $25,228 589,992 (20,320) 594,900 71,911 $666,811 Our restricted trade receivables relate to our Nordstrom private label card and back the previously discussed $300,000 Class A notes and the $150,000 variable funding note renewed in May 2004. The unrestricted trade receivables consist primarily of our Façonnable trade receivables and Nordstrom private label receivables that are not eligible for securitization, such as foreign and employee receivables exceeding a contractual threshold. Other accounts receivable consist primarily of credit card receivables due from third-party financial institutions and vendor rebates, which are believed to be fully realizable as they are collected soon after they are earned. Note 9: Investment in Asset Backed Securities – Co-branded Nordstrom VISA Credit Card Receivables The table below summarizes our co-branded Nordstrom VISA credit card activities and the estimated fair values of our investment in asset backed securities as well as the assumptions used. In 2004, we revised the repayment period assumption in our valuation model that we use to determine the fair value of the VISA Trust. The 2004 repayment period assumption is based on historical payment, default and finance charge yield experience on a specific account basis. The prior repayment period assumption was based on our ongoing payment experience, which included payments by card holders who pay their account balance in full each month. While Total face value of co-branded Nordstrom VISA credit card principal receivables Securities issued by the VISA Trust: Off-balance sheet (sold to third parties): 2002 Class A & B Notes at par value Amounts recorded on balance sheet: Investment in asset backed securities at fair value January 29, 2005 January 31, 2004 $612,549 $465,198 $200,000 $200,000 422,416 272,294 Expected assumptions used to estimate the fair value of the investment in asset backed securities: 8.1 Weighted average remaining life (in months) 6.9% Average credit losses 15.8% Average gross yield Weighted average coupon on issued securities 3.8% 7.5% Average payment rates Internal rate of returns on 2.5 5.5% 17.8% 1.4% 23.4% investment in asset backed securities 9.4-16.5% 6.8-12.6% The internal rate of returns represents the volatility and risk of the assets and is calculated using an established formula that considers both the current interest rate environment and credit spreads. The following table illustrates the changes in the fair market value estimates of the investment in asset backed securities given independent changes in assumptions as of January 29, 2005: Gross yield Interest expense on issued classes Card holders payment rate Charge offs Internal rate of return +10% $5,394 +20% $10,787 -10% $(5,394) -20% $(10,787) (1,038) 91 (2,463) (1,003) (2,076) 98 (4,898) (1,990) 1,038 (214) 2,492 1,019 2,076 (606) 5,014 2,054 These sensitivities are hypothetical and should be used with caution. The effect of an adverse change in a particular assumption on the fair value of the investment in asset backed securities is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might alter the reported sensitivities. The following table summarizes certain income, expenses and cash flows received from and paid to the VISA Trust: Fiscal Year Principal collections reinvested in 2004 2003 2002 new receivables $2,019,162 8,876 Gains on sales of receivables Income earned on retained interests 46,645 Cash flows from retained assets: $1,332,790 4,920 31,926 $824,715 8,290 10,786 Investment in asset backed securities Servicing fees 76,381 10,698 58,222 7,631 28,100 5,407 Gross credit losses were $25,182, $22,393, and $18,580 for 2004, 2003 and 2002, and receivables past due for more than 30 days were $9,736 and $8,805 at the end of 2004 and 2003. The following table illustrates default projections using net credit losses as a percentage of average outstanding receivables in comparison to actual performance: Note 10: Land, Buildings and Equipment Land, buildings and equipment consist of the following: Land and land improvements Buildings and improvements Leasehold improvements Store fixtures and equipment Software Construction in progress Less accumulated depreciation and amortization Land, buildings and equipment, net January 29, 2005 $64,037 818,733 1,066,383 1,817,294 233,223 91,303 4,090,973 January 31, 2004 $64,238 838,521 1,011,989 1,728,421 206,751 79,016 3,928,936 (2,310,607) $1,780,366 (2,121,158) $1,807,778 The total cost of buildings and equipment held under capital lease obligations was $20,035 at the end of 2004 and 2003, with related accumulated amortization of $15,259 and $14,021. The amortization of capitalized leased buildings and equipment was recorded in depreciation expense. In 2002, we sold the Credit Operation’s office complex and subsequently leased it back. We received net proceeds of $20,000, and the related gain of $16,022 is being recognized as a reduction to rent expense evenly over the 15 year life of the lease. Fiscal Year Original projection Actual 2005 4.43% N/A 2004 5.59% 4.62% 2003 6.16% 5.57% At January 29, 2005, we have contractual commitments of approximately $171,000 primarily for the construction of new stores and the remodeling of existing stores. Our continued involvement in the securitization of co-branded Nordstrom VISA credit card receivables will include recording gains/losses on sales, recognizing income on investment in asset backed securities, holding subordinated, non-subordinated and residual interests in the trust, and servicing the portfolio. Note 11: Long-Term Debt A summary of long-term debt is as follows: January 29, 2005 Private Label Securitization, 4.82%, due 2006 $300,000 300,000 Senior debentures, 6.95%, due 2028 250,000 Senior notes, 5.625%, due 2009 — Senior notes, 8.95%, due 2005 96,027 Notes payable, 6.7%, due 2005 75,406 Mortgage payable, 7.68%, due 2020 16,495 Other (7,821) Fair market value of interest rate swap 1,030,107 Total long-term debt (101,097) Less current portion $929,010 Total due beyond one year January 31, 2004 $300,000 300,000 250,000 196,770 97,500 79,204 18,860 (8,091) 1,234,243 (6,833) $ 1,227,410 40 41 notes to consolidated financial statements notes to consolidated financial statements In 2004, we prepaid $196,770 of our 8.95% senior notes and $1,473 of our 6.7% medium-term notes for a total cash payment of $220,106. After considering deferred issuance costs related to these debt retirements, we recorded a pre-tax charge for debt retirements in interest expense, net of $20,862. To manage our interest rate risk, we have an interest rate swap outstanding recorded in other liabilities. Our swap has a $250,000 notional amount, expires in 2009 and is designated as a fully effective fair value hedge. Under the agreement, we receive a fixed rate of 5.63% and pay a variable rate based on LIBOR plus a margin of 2.3% set at six-month intervals (5.20% at January 29, 2005). The fair value of long-term debt, including current maturities, using quoted market prices of the same or similar issues, was approximately $1,105,000 and $1,336,000 at the end of 2004 and 2003. We own a 49% interest in a limited partnership which constructed a corporate office building in which we are the primary occupant. During 2002, the limited partnership refinanced its construction loan obligation with a mortgage secured by the property. This mortgage, which is included in our long-term debt, will be amortized as we make rental payments to the limited partnership over the life of the mortgage. Required principal payments on long-term debt, excluding capital lease obligations and the fair market value of the interest rate swap, are as follows: Fiscal Year 2005 2006 2007 2008 2009 Thereafter 100,033 303,669 3,675 253,650 4,340 362,119 In May 2004, we replaced our existing $300,000 unsecured line of credit with a $350,000 unsecured line of credit, which is available as liquidity support for our commercial paper program. Under the terms of the agreement, we pay a variable rate of interest based on LIBOR plus a margin of 0.31%, or 2.90% at January 29, 2005. The variable rate of interest increases to LIBOR plus a margin of 0.41% if more than $175,000 is outstanding on the facility. The line of credit agreement expires in May 2007 and contains restrictive covenants, which include maintaining a leverage ratio. We also pay a commitment fee for the line based on our debt rating. As of January 29, 2005, no borrowings have been made against this revolving credit facility. Also in May 2004, we renewed our variable funding note backed by Nordstrom private label card receivables and reduced the capacity by $50,000 to $150,000. This note is renewed annually and interest 42 is paid based on the actual cost of commercial paper plus specified fees. We also pay a commitment fee for the note based on the amount of the commitment. As of January 29, 2005, no borrowings have been made against the variable funding note. Note 12: Leases Future minimum lease payments as of January 29, 2005 are as follows: Capital Leases Fiscal Year $2,314 2005 1,946 2006 1,946 2007 1,946 2008 1,376 2009 8,259 Thereafter $17,787 Total minimum lease payments Less amount representing interest (7,345) Present value of net minimum lease payments $10,442 Operating Leases $72,541 70,756 67,700 65,247 63,252 360,332 $699,828 Rental expense for 2004, 2003 and 2002 was as follows: Fiscal Year Minimum rent: Store locations Offices, warehouses and equipment Percentage rent: Store locations Property incentives: Total rent expense 2004 2003 2002 $79,285 $61,451 $54,061 21,104 23,158 23,026 9,214 (46,737) $62,866 7,920 (37,380) $55,149 7,776 (29,868) $54,995 Note 13: Stock-Based Compensation Stock Option Plans In 2004, our shareholders approved the 2004 Equity Incentive Plan. We currently grant stock options, performance share units and common shares under this new plan. Stock Options: As of January 29, 2005, we have options outstanding under three stock option plans, (collectively, the “Nordstrom, Inc. Plans”) with total shares authorized of 24,185. At January 29, 2005, approximately 9,100 shares are reserved for future stock grants pursuant to the Nordstrom, Inc. Plans. Options vest over periods ranging from four to eight years, and expire ten years after the date of grant. Stock option activity for the Nordstrom, Inc. Plans were as follows: Fiscal Year 2004 2003 2002 Outstanding, beginning of year Granted Exercised Cancelled Expired Outstanding, end of year Options exercisable at end of year Weighted- Average Exercise Price $24 39 24 25 — $26 $26 Shares 11,684 1,415 (3,620) (319) — 9,160 3,938 Weighted- Average Exercise Price $25 18 22 23 14 $24 $27 Shares 11,886 2,715 (2,260) (656) (1) 11,684 5,357 Weighted- Average Exercise Price $24 25 19 26 18 $25 $26 Shares 10,764 2,424 (350) (949) (3) 11,886 5,725 The following table summarizes information about stock options outstanding for the Nordstrom, Inc. Plans as of January 29, 2005: Range of Exercise Prices $15 – $22 $23 – $32 $33 – $40 Options Outstanding Options Exercisable Weighted Average Remaining Contractual Life (Years) 7 6 7 7 Weighted- Average Exercise Price $18 $26 $38 $26 Shares 4,177 2,572 2,411 9,160 Weighted- Average Exercise Price $19 $27 $36 $26 Shares 1,739 1,307 892 3,938 43 notes to consolidated financial statements notes to consolidated financial statements Nordstrom.com In connection with the purchase of the minority interest in Nordstrom.com (see Note 18), we purchased 3,608 options and 470 warrants for a total cash payment of $11,802 in the third quarter of 2002. At the end of 2004 and 2003, there are no outstanding options or warrants for Nordstrom.com. Stock Based Compensation Expense We apply APB No. 25, “Accounting for Stock Issued to Employees,” in measuring compensation costs under our stock-based compensation programs. Stock options are issued at the fair market value of the stock at the date of grant. Accordingly, we recognized no compensation cost for stock options issued under the Nordstrom, Inc. Plans. For performance share units, we record compensation expense over the performance period at the fair value of the stock at the end of each reporting period based on the vesting percentages on those dates. Stock-based compensation expense for 2004, 2003, and 2002 was $8,051, $17,894, and $1,130. SFAS No. 123 The table in Note 1, under Stock Compensation, illustrates the effect on net earnings and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock- Based Compensation.” Performance Share Units: Performance share units are earned over a three-year period. The number of performance share units earned is determined by the performance of our stock price and dividend payments relative to a pre-defined group of retail peers over the three- year period. Employees do not pay any monetary consideration upon vesting and may elect to receive common stock or cash. The following table outlines the performance share unit activity: Fiscal Year Granted Vested Cancelled Outstanding, end of year 2004 62 — — 62 2003 114 — — 114 2002 191 — (23) 168 At the end of 2004 and 2003, our liabilities included $15,278 and $18,657 for the unvested grants. Nonemployee Director Stock Incentive Plan The Nonemployee Director Stock Incentive Plan authorizes the grant of stock awards to nonemployee directors. These awards may be deferred or issued in the form of restricted or unrestricted stock, nonqualified stock options or stock appreciation rights, although we have only issued stock under the plan. We issued 5, 16 and 19 shares of common stock for a total expense of $202, $318 and $405 for 2004, 2003 and 2002. An additional 3 and 11 shares were deferred for a total expense of $140 and $183 in 2004 and 2003. At January 29, 2005, we had 399 remaining shares available for issuance. Employee Stock Purchase Plan We offer an Employee Stock Purchase Plan as a benefit to our employees. Employees may make payroll deductions of up to ten percent of their base compensation. At the end of each six-month offering period, the participants purchase shares of our common stock at 85% of the lower of the stock’s fair market value at the beginning or the end of the offering period. We issued 489, 647, and 596 shares under this plan in 2004, 2003, and 2002. As of January 29, 2005 and January 31, 2004, we had payroll deductions totaling $5,097 and $3,728 for the purchase of shares in the future. We have 1,060 shares available for issuance at January 29, 2005. The Black-Scholes method was used to estimate the fair value of the options at grant date under SFAS 123 based on the following factors: Fiscal Year Stock Options: Risk-free interest rate Volatility Dividend yield Expected life in years Weighted-average fair value at grant date 2004 2003 2002 3.0% 65.4% 1.5% 6.0 2.9% 70.6% 1.5% 5.0 4.3% 69.5% 1.5% 5.0 $21 $10 $14 Note 14: Accumulated Other Comprehensive Earnings The following table shows the components of accumulated other comprehensive earnings: Foreign currency translation SERP adjustment Securitization fair value adjustment Total accumulated other comprehensive earnings Jan. 29, 2005 $16,276 (11,798) 4,857 Jan. 31, 2004 $15,783 (11,679) 4,764 Jan. 31, 2003 $8,404 (6,511) 807 $9,335 $8,868 $2,700 Note 15: Supplementary Cash Flow Information In 2002, the VISA Trust issued $200,000 of certificated Class A and Class B notes. The proceeds from this securitization were used to retire the $200,000 outstanding on a previous off-balance sheet VISA securitization. Supplementary cash flow information includes the following: Fiscal Year Cash paid during the year for: Interest (net of capitalized interest) Income taxes 2004 2003 2002 $88,876 253,576 $96,824 121,271 $84,898 48,386 Note 16: Segment Reporting We have four segments: Retail Stores, Credit Operations, Catalog/Internet, and Corporate and Other. The Retail Stores segment derives its revenues from sales of high- quality apparel, shoes, cosmetics and accessories. It includes our Full-Line, 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 operation of the Nordstrom private label and co-branded VISA credit cards. The Catalog/Internet segment generates revenues from high-quality apparel, shoes, cosmetics and accessories via 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. 44 45 notes to consolidated financial statements notes to consolidated financial statements The following tables set forth the information for our reportable segments and a reconciliation to the consolidated totals: Note 17: Impairment Fiscal Year 2004 Net sales (a) Other income including finance charge, net Intersegment revenues Interest expense, net Depreciation and amortization Earnings before taxes Goodwill Tradename Assets (b)(c) Capital expenditures Fiscal Year 2003 Net sales (a) Other income including finance charge, net Intersegment revenues Interest expense, net Depreciation and amortization Earnings before taxes Goodwill Tradename Assets (b)(c) Capital expenditures Fiscal Year 2002 Net sales (a) Other income including finance charge, net Intersegment revenues Interest expense, net Depreciation and amortization Earnings before taxes and cumulative effect of accounting change Goodwill Tradename Assets (b)(c) Capital expenditures Retail Stores $6,756,054 (8,656) 26,546 (413) 233,081 789,204 35,998 84,000 2,665,425 212,729 Retail Stores $6,156,028 (7,563) 25,652 (697) 224,018 582,737 35,998 84,000 2,717,462 242,331 Retail Stores $5,691,097 (1,999) 29,737 (191) 201,861 450,476 35,998 84,000 2,718,781 230,864 Credit Operations — $202,359 36,645 (23,522) 1,107 39,503 — — 1,030,941 605 Credit Operations — $176,551 34,276 (22,122) 2,838 17,473 — — 878,541 1,104 Credit Operations — $165,564 32,783 (23,582) 3,212 21,194 — — 753,377 2,058 Catalog/ Internet $375,334 (208) — 148 4,395 34,324 15,716 — 103,960 6,196 Catalog/ Internet $292,650 (602) — 105 5,052 8,625 15,716 — 93,070 4,729 Catalog/ Internet $253,559 (11,721) — (972) 4,977 (21,926) 15,716 — 89,512 4,507 Corporate and Other — $(20,553) — (53,641) 26,186 (215,750) — — 805,064 27,321 Corporate and Other — $(13,296) — (68,238) 18,775 (210,694) — — 880,160 10,150 Corporate and Other — $(12,555) — (57,176) 23,881 (254,120) — — 623,599 90,737 Eliminations Total — $7,131,388 172,942 — — $(63,191) (77,428) — 264,769 — 647,281 — 51,714 — 84,000 — — 4,605,390 246,851 — Eliminations Total — $6,448,678 155,090 — — $(59,928) (90,952) — 250,683 — 398,141 — 51,714 — 84,000 — — 4,569,233 258,314 — Eliminations Total — $5,944,656 139,289 — — $(62,520) (81,921) — 233,931 — 195,624 — 51,714 — 84,000 — — 4,185,269 328,166 — (a) Retail stores net sales includes foreign sales of $94,994, $92,524, and $82,126 for 2004, 2003 and 2002. (b) Retail stores assets include foreign assets of $207,095, $234,459, and $219,861 at the end of 2004 2003, and 2002. (c) Segment assets in Corporate and Other include unallocated assets in corporate headquarters, consisting primarily of cash, land, buildings and equipment, and deferred tax assets. In 2002, we recognized a charge of $15,570 to write-down an IT investment in a supply chain software application intended to support our private label division. A strategic decision was made not to expand our private label division to support an external wholesale business, resulting in impairment to an in-process software project designed to support this activity. This charge to the Retail Stores segment reduced this asset to its estimated market value. The charge was recorded in selling, general and administrative expense. Note 18: Nordstrom.com In May 2002, we paid $70,000 for the outstanding shares of Nordstrom.com, Inc. series C preferred stock in fulfillment of our put agreement with the minority interest holders of Nordstrom.com LLC. The excess of the purchase price over the fair market value of the preferred stock and professional fees resulted in a one-time charge of $42,736. No tax benefit was recognized, as we do not believe it is probable that this benefit will be realized. Purchase of the minority interest of Nordstrom.com also resulted in goodwill of $15,716. In July 2002, we purchased 3,608 Nordstrom.com options and 470 warrants for $11,802. We recognized $10,432 of expense related to the purchase of these options and warrants. The following table presents the charges associated with the minority interest purchase and reintegration costs: Fiscal Year Excess of the purchase price over the fair market value of the preferred stock Nordstrom.com option/warrant buyback expense Professional fees incurred Total 2002 $40,389 10,432 2,347 $53,168 Note 19: Self Insurance We are self insured for certain losses related to health and welfare, workers’ compensation and general liability. We record estimates of the total cost of claims incurred as of the balance sheet date. These estimates are based on analysis of historical data and independent actuarial estimates. Workers’ Compensation – we have a deductible per claim of $1,000 or less and no policy limits. Our workers’ compensation reserve was $64,446 and $57,421 at the end of 2004 and 2003 and our expense was $29,263, $33,782 and $21,368 in 2004, 2003 and 2002. General Liability – we have a deductible per claim of $1,000 or less and a policy limit up to $150,000. Our general liability insurance reserve was $9,872 and $10,266 at the end of 2004 and 2003. Health and Welfare – We are self insured for our health and welfare coverage and do not have stop-loss coverage. Participants contribute to the cost of their coverage and are subject to certain plan limits and deductibles. Our health and welfare reserve was $10,545 and $9,998 at the end of 2004 and 2003. Note 20: Commitments and Contingent Liabilities We are involved in routine claims, proceedings, and litigation arising from the normal course of our business. We do not believe any such claim, proceeding or litigation, either alone or in aggregate, will have a material impact on our results of operations, financial position, or liquidity. We are routinely audited for tax compliance by the federal, state, local and foreign jurisdictions in which we operate. The audits generally cover several years and issues raised in an audit can impact other years that are available to be audited. We have accrued $25,000 for anticipated exposures for audit issues in all years that are open to adjustment by a tax jurisdiction. Additionally, in connection with the purchase of foreign merchandise, we have outstanding import letters of credit totaling $28,961 and standby letters of credit totaling $1,370 as of January 29, 2005. 46 47 notes to consolidated financial statements Note 21: Selected Quarterly Data (unaudited) Fiscal Year 2004 Net sales Same-store sales percentage change Gross profit Earnings before income taxes Net earnings Net earnings as a percentage of net sales Basic earnings per share Diluted earnings per share Dividends per share Common stock price High Low Fiscal Year 2003 Net sales Same-store sales percentage change Gross profit Earnings before income taxes Net earnings Net earnings as a percentage of net sales Basic earnings per share Diluted earnings per share Dividends per share Common stock price High Low 1st Quarter $1,535,490 13.2% 562,558 112,627 68,727 4.5% .49 .48 .11 2nd Quarter $1,953,480 6.8% 682,588 175,266 106,915 5.5% .76 .75 .11 3rd Quarter $1,542,075 8.1% 557,167 122,913 77,828 5.0% .55 .54 .13 4th Quarter $2,100,343 7.2% 769,687 236,475 139,980 6.7% 1.02 1.00 .13 Total $7,131,388 8.5% 2,572,000 647,281 393,450 5.5% 2.82 2.77 .48 41.25 35.14 46.30 34.85 44.24 36.06 48.98 42.68 48.98 34.85 1st Quarter $1,335,472 (1.5%) 449,377 44,455 27,155 2.0% .20 .20 .10 2nd Quarter $1,784,849 3.8% 590,420 108,071 65,871 3.7% .48 .48 .10 3rd Quarter $1,409,109 4.7% 497,680 74,569 45,469 3.2% .33 .33 .10 4th Quarter $1,919,248 8.3% 695,655 171,046 104,346 5.4% .76 .74 .11 Total $6,448,678 4.1% 2,233,132 398,141 242,841 3.8% 1.78 1.76 .41 18.61 15.00 21.75 15.78 31.23 20.81 40.75 29.76 40.75 15.00 Nordstrom, Inc. common stock is traded on the New York Stock Exchange, NYSE Symbol JWN. 48 49 eleven-year statistical summary Dollars in thousands except square footage and per share amounts eleven-year statistical summary Fiscal Year Financial Position Customer accounts receivable, net Investment in asset backed securities 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 (in thousands) Book value per share Total assets Operations Net sales Gross profit Selling, general, and administrative Operating income Interest expense, net Write-down of investment Minority interest purchase and reintegration costs Other income including finance charges, 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 Same-store sales percentage increase (decrease) Earnings before income taxes and cumulative effect of accounting change as a percentage of net sales Net earnings as a percentage of net sales Return on average shareholders’ equity Sales per square foot for Company-operated stores 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 $580,397 422,416 917,182 2,572,444 1,341,152 1,231,292 1.92 1,780,366 1,030,107 .3654 1,788,994 135,665 13.19 4,605,390 7,131,388 2,572,000 (2,020,233) 551,767 (77,428) — — 172,942 647,281 (253,831) 393,450 — 393,450 2.82 2.77 .48 8.5% 9.1% 5.5% 23.0% 347 $594,900 272,294 901,623 2,524,843 1,122,559 1,402,284 2.25 1,807,778 1,234,243 .4304 1,634,009 138,377 11.81 4,569,233 6,448,678 2,233,132 (1,899,129) 334,003 (90,952) — — 155,090 398,141 (155,300) 242,841 — 242,841 1.78 1.76 .41 4.1% 6.2% 3.8% 16.2% 325 $606,861 124,543 953,112 2,125,356 925,978 1,199,378 2.30 1,849,961 1,350,595 .4960 1,372,864 135,444 10.14 4,185,269 5,944,656 1,974,634 (1,783,210) 191,424 (81,921) — (53,168) 139,289 195,624 (92,041) 103,583 (13,359) 90,224 .67 .66 .38 1.4% 3.3% 1.5% 6.7% 317 $621,491 58,539 888,172 2,095,317 986,587 1,108,730 2.12 1,761,082 1,424,242 .5197 1,316,245 134,469 9.79 4,084,356 5,607,687 1,844,133 (1,698,497) 145,636 (75,038) — — 133,890 204,488 (79,800) 124,688 — 124,688 .93 .93 .36 (2.9%) 3.6% 2.2% 9.8% 319 $649,504 50,183 945,687 1,812,982 950,568 862,414 1.91 1,599,938 1,112,296 .4922 1,233,445 133,798 9.22 3,608,503 5,511,908 1,854,220 (1,722,247) 131,973 (62,698) (32,857) — 130,600 167,018 (65,100) 101,918 — 101,918 .78 .78 .35 0.3% 3.0% 1.8% 8.4% 341 $557,190 38,830 797,845 1,564,648 866,509 698,139 1.81 1,429,492 804,982 .4249 1,185,614 132,280 8.96 3,062,081 5,144,754 1,781,929 (1,516,259) 265,670 (50,396) — — 116,783 332,057 (129,500) 202,557 — 202,557 1.47 1.46 .32 (1.1%) 6.5% 3.9% 16.3% 349 $560,564 7,097 750,269 1,668,689 794,490 874,199 2.10 1,378,006 868,234 .4214 1,300,545 142,114 9.15 3,103,689 5,049,182 1,704,237 (1,429,837) 274,400 (47,091) — — 110,414 337,723 (131,000) 206,723 — 206,723 1.41 1.41 .30 (2.7%) 6.7% 4.1% 15.0% 362 $621,704 20,158 826,045 1,613,492 979,031 634,461 1.65 1,252,513 420,865 .3194 1,458,950 152,518 9.57 2,890,664 4,864,604 1,568,791 (1,338,235) 230,556 (34,250) — — 110,907 307,213 (121,000) 186,213 — 186,213 1.20 1.20 .265 4.0% 6.3% 3.8% 12.8% 384 $661,332 31,791 719,919 1,549,819 795,321 754,498 1.95 1,152,454 380,632 .2720 1,457,084 159,270 9.15 2,726,495 4,457,931 1,378,472 (1,232,860) 145,612 (39,400) — — 135,331 241,543 (95,227) 146,316 — 146,316 .90 .90 .25 0.6% 5.4% 3.3% 10.2% 377 $874,103 — 626,303 1,612,776 833,443 779,333 1.94 1,103,298 439,943 .3232 1,408,053 162,226 8.68 2,732,619 4,113,717 1,310,931 (1,136,069) 174,862 (39,295) — — 134,179 269,746 (106,190) 163,556 — 163,556 1.00 1.00 .25 (0.7%) 6.6% 4.0% 11.9% 382 $655,715 — 627,930 1,397,713 693,015 704,698 2.02 984,195 373,910 .2575 1,330,437 164,488 8.09 2,396,783 3,895,642 1,297,018 (1,029,856) 267,162 (30,664) — — 98,311 334,809 (132,304) 202,505 — 202,505 1.23 1.23 .1925 4.4% 8.6% 5.2% 16.3% 395 Full-Line stores Rack and other stores International Façonnable boutiques Total square footage 94 56 31 19,397,000 92 56 31 19,138,000 88 55 23 18,428,000 80 52 24 17,048,000 77 43 20 16,056,000 71 33 0 14,487,000 67 30 0 13,593,000 65 27 0 12,614,000 62 21 0 11,754,000 58 20 0 10,713,000 55 21 0 9,998,000 50 51 retail store facilities open at january 29, 2005 retail store facilities open at january 29, 2005 The Plaza at King of Prussia 238,000 1996 Providence Place 206,000 1999 Location Store Name Square Footage Year Store Opened Location Store Name 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 Maryland Annapolis Bethesda Columbia Towson New Jersey Edison Freehold Chandler Fashion Center Scottsdale Fashion Square Santa Anita Brea Mall Topanga Los Cerritos Center The Village at Corte Madera South Coast Plaza North County Glendale Galleria The Grove Westside Pavilion The Shops at Mission Viejo Montclair Plaza Stanford Shopping Center Stoneridge Mall in Pleasanton South Bay Galleria The Galleria at Tyler in Riverside Galleria at Roseville Arden Fair Fashion Valley Horton Plaza University Towne Centre San Francisco Shopping Centre Stonestown Galleria Valley Fair Hillsdale Shopping Center MainPlace/Santa Ana Paseo Nuevo in Santa Barbara Broadway Plaza in Walnut Creek 149,000 235,000 151,000 195,000 154,000 122,000 116,000 235,000 156,000 147,000 120,000 150,000 172,000 134,000 187,000 173,000 161,000 164,000 149,000 190,000 220,000 151,000 130,000 350,000 174,000 232,000 149,000 169,000 186,000 193,000 2001 1998 1994 1979 1984 1981 1985 1978 1986 1983 2002 1985 1999 1986 1984 1990 1985 1991 2000 1989 1981 1985 1984 1988 1988 1987 1982 1987 1990 1984 Fashion Show 207,000 2002 Westfarms 189,000 1997 Annapolis Mall Montgomery Mall The Mall in Columbia Towson Town Center Menlo Park Freehold Raceway Mall 162,000 225,000 173,000 205,000 204,000 174,000 1994 1991 1999 1992 1991 1992 52 Garden State Plaza The Mall at Short Hills Roosevelt Field The Westchester Paramus Short Hills New York Garden City White Plains Pennsylvania King of Prussia Rhode Island Providence Virginia Arlington The Fashion Centre at Pentagon City Dulles Town Center Tysons Corner Center MacArthur Center Short Pump Town Center Dulles McLean Norfolk Richmond SOUTH GROUP Georgia Atlanta Buford Florida Boca Raton Coral Gables Miami Orlando Tampa Wellington North Carolina Charlotte Durham Texas Austin Dallas Frisco Houston Hurst CENTRAL STATES GROUP Illinois Chicago Oak Brook Schaumburg Skokie Indiana Indianapolis Kansas Overland Park Perimeter Mall Mall of Georgia Town Center at Boca Raton Village of Merrick Park Dadeland Mall The Florida Mall International Plaza The Mall at Wellington Green SouthPark The Streets at Southpoint Barton Creek Square Galleria Dallas Stonebriar Centre The Galleria North East Mall Michigan Avenue Oakbrook Center Woodfield Shopping Center Old Orchard Center Circle Centre Oak Park Mall Square Footage 282,000 188,000 Year Store Opened 1990 1995 241,000 219,000 1997 1995 241,000 148,000 211,000 166,000 128,000 243,000 172,000 193,000 212,000 150,000 174,000 172,000 127,000 151,000 149,000 150,000 249,000 149,000 226,000 149,000 274,000 249,000 215,000 209,000 1989 2002 1988 1999 2003 1998 2000 2000 2002 2004 2002 2001 2003 2004 2002 2003 1996 2000 2003 2001 2000 1991 1995 1994 216,000 1995 Store Name Somerset Collection Mall of America West County Beachwood Place Easton Town Center Anchorage FlatIron Crossing Park Meadows Clackamas Town Center Downtown Portland Lloyd Center Salem Center Washington Square Fashion Place University Mall Crossroads Plaza Bellevue Square Alderwood Downtown Seattle Northgate Spokane Tacoma Mall Southcenter Vancouver Location Michigan Troy Minnesota Bloomington Missouri Des Peres Ohio Beachwood Columbus 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 NORDSTROM RACK GROUP Chandler, AZ Phoenix, AZ Scottsdale, AZ Brea, CA Chino, CA Ward Centre Shoes U.S. (5 boutiques) International (31 boutiques) Chandler Festival Rack Last Chance Scottsdale Promenade Rack Brea Union Plaza Rack Chino Spectrum Towne Center Rack Colma Rack Square Footage Year Store Opened 258,000 1996 240,000 1992 193,000 2002 231,000 174,000 1997 2001 97,000 1975 172,000 245,000 121,000 174,000 150,000 71,000 189,000 110,000 122,000 140,000 285,000 151,000 383,000 122,000 137,000 134,000 170,000 71,000 16,000 58,000 92,000 37,000 48,000 38,000 45,000 38,000 31,000 2000 1996 1981 1966 1963 1980 1974 1981 2002 1980 1967 1979 1963 1965 1974 1966 1968 1977 1997 2000 1992 2000 1999 1987 1987 Location Store Name Square Footage Year Store Opened Costa Mesa, CA Fresno, CA Glendale, CA Long Beach, CA Los Angeles, CA Ontario, CA Oxnard, CA Roseville, CA Sacramento, CA San Diego, CA San Francisco, CA San Jose, CA San Leandro, CA Woodland Hills, CA Broomfield, CO Littleton, CO Sunrise, FL Buford, GA Honolulu, HI Chicago, IL Northbrook, IL Oak Brook, IL Schaumburg, IL Gaithersburg, MD Towson, MD Grand Rapids, MI Troy, MI Bloomington, MN Las Vegas, NV Westbury, NY Beaverton, OR Clackamas, OR Portland, OR King of Prussia, PA Hurst, TX Plano, TX Salt Lake City, UT Dulles, VA Woodbridge, VA Auburn, WA Bellevue, WA Lynnwood, WA Seattle, WA Spokane, WA 41,000 40,000 Metro Pointe at South Coast Rack 50,000 32,000 Villaggio Retail Center Rack 36,000 Glendale Fashion Center Rack Long Beach CityPlace Rack 33,000 The Promenade at Howard 41,000 Hughes Center Rack 40,000 Ontario Mills Mall Rack Esplanade Shopping Center Rack 38,000 36,000 Creekside Town Center Rack 54,000 Howe `Bout Arden Center Rack 57,000 Mission Valley Rack 555 Ninth Street Retail 43,000 Center Rack 48,000 Westgate Mall Rack 44,000 San Leandro Rack 64,000 Topanga Rack 36,000 Flatiron Marketplace Rack Meadows Marketplace Rack 34,000 The Oasis at Sawgrass Mills Rack 27,000 44,000 Mall of Georgia Crossing Rack Victoria Ward Centers Rack 34,000 The Shops at State and Washington Rack Northbrook Rack The Shops at Oak Brook Place Rack Woodfield Rack Gaithersburg Rack Towson Rack Centerpointe Mall Rack Troy Marketplace Rack Mall of America Rack Silverado Ranch Plaza Rack The Mall at the Source Rack Tanasbourne Town Center Rack Clackamas Promenade Rack Downtown Portland Rack The Overlook at King of Prussia Rack The Shops at North East Mall Rack Preston Shepard Place Rack Sugarhouse Rack Dulles Town Crossing Rack Potomac Mills Rack SuperMall of the Great Northwest Rack Factoria Mall Rack Golde Creek Plaza Rack Downtown Seattle Rack NorthTown Mall Rack 42,000 45,000 49,000 31,000 40,000 40,000 41,000 33,000 48,000 53,000 28,000 19,000 40,000 39,000 31,000 41,000 46,000 48,000 46,000 38,000 42,000 28,000 45,000 1983 2002 2000 2002 2001 2002 2001 2001 1999 1985 2001 1998 1990 1984 2001 1998 2003 2000 2000 2003 1996 2000 1994 1999 1992 2001 2000 1998 2001 1997 1998 1983 1986 2002 2000 2000 1991 2001 1990 1995 1997 1985 1987 2000 53 219,000 1998 Colma, CA officers of the corporation and executive team board of directors and committees Jammie Baugh, 52 Executive Vice President, Human Resources, Full-Line Stores Laurie M. Black, 46 Executive Vice President and President, Nordstrom Rack Member of Executive Team Mark S. Brashear, 43 Executive Vice President and President, Façonnable Member of Executive Team Dale Cameron, 56 Executive Vice President, Corporate Merchandise Manager, Cosmetics, Full-Line Stores Robert E. Campbell, 49 Vice President, Finance, Full-Line Stores Paul Favaro, 47 Executive Vice President, Strategy and Development Member of Executive Team Linda Toschi Finn, 57 Executive Vice President, Marketing Member of Executive Team Bonnie M. Junell, 48 Vice President, Corporate Merchandise Manager, Point of View and Narrative, Full-Line Stores Kevin T. Knight, 49 Executive Vice President, Chairman and Chief Executive Officer of Nordstrom fsb, President of Nordstrom Credit, Inc. Member of Executive Team Michael G. Koppel, 48 Executive Vice President and Chief Financial Officer Member of Executive Team Llynn (Len) A. Kuntz, 44 Executive Vice President, WA/AK Regional Manager, Full-Line Stores David P. Lindsey, 55 Vice President, Store Planning Daniel F. Little, 43 Executive Vice President and Chief Administrative Officer Member of Executive Team David L. Mackie, 56 Vice President, Real Estate, and Corporate Secretary Robert J. Middlemas, 48 Executive Vice President, Central States Regional Manager, Full-Line Stores Jack H. Minuk, 50 Vice President, Corporate Merchandise Manager, Women's Shoes, Full-Line Stores Blake W. Nordstrom, 44 President Member of Executive Team Bruce A. Nordstrom, 71 Chairman of the Board of Directors Erik B. Nordstrom, 41 Executive Vice President, Full-Line Stores Member of Executive Team James (Jamie) F. Nordstrom, 32 Executive Vice President and President, Nordstrom Direct Member of Executive Team Peter E. Nordstrom, 43 Executive Vice President and President, Full-Line Stores Member of Executive Team James R. O'Neal, 46 Executive Vice President and President, Nordstrom Product Group Member of Executive Team Suzanne R. Patneaude, 58 Vice President, Corporate Merchandise Manager, Designer/Savvy, Full-Line Stores R. Michael Richardson, 48 Vice President and Chief Information Officer Karen Bowman Roesler, 49 Vice President, Marketing Nordstrom Credit Group K. C. (Karen) Shaffer, 51 Executive Vice President, Nordstrom Rack NW Rack Regional Manager Delena M. Sunday, 44 Executive Vice President, Human Resources and Diversity Affairs Member of Executive Team Geevy S. K. Thomas, 40 Executive Vice President, South Regional Manager, Full-Line Stores AUDIT COMMITTEE Phyllis J. Campbell Enrique Hernandez, Jr., Chair Jeanne P. Jackson Alfred E. Osborne, Jr. William D. Ruckelshaus Alison A. Winter COMPENSATION COMMITTEE Phyllis J. Cambell Enrique Hernandez, Jr. Jeanne P. Jackson Alfred E. Osborne, Jr. William D. Ruckelshaus, Chair Alison A. Winter CORPORATE GOVERNANCE AND NOMINATION COMMITTEE Enrique Hernandez, Jr. Alfred E. Osborne, Jr., Chair William D. Ruckelshaus EXECUTIVE COMMITTEE D. Wayne Gittinger Enrique Hernandez, Jr. Bruce A. Nordstrom FINANCE COMMITTEE D. Wayne Gittinger Jeanne P. Jackson John N. Nordstrom Alison A. Winter, Chair BOARD OF DIRECTORS Phyllis J. Campbell, 53 President and CEO, The Seattle Foundation Seattle, Washington D. Wayne Gittinger, 72 Partner, Lane Powell PC Seattle, Washington Enrique Hernandez, Jr., 49 Lead Director President and CEO, Inter-Con Security Systems, Inc. Pasadena, California Jeanne P. Jackson, 53 Founder and General Partner, MSP Capital Newport Beach, California Bruce A. Nordstrom, 71 Chairman of the Board of Directors Seattle, Washington John N. Nordstrom, 68 Retired Co-Chairman of the Board of Directors Seattle, Washington Alfred E. Osborne, Jr., Ph.D., 60 Senior Associate Dean UCLA Anderson Graduate School of Management Los Angeles, California William D. Ruckelshaus, 72 A Strategic Director, Madrona Venture Group Seattle, Washington Alison A. Winter, 58 President, Northeast Personal Financial Services, The Northern Trust Corporation Chicago, Illinois 54 55 shareholder information INDEPENDENT AUDITORS Deloitte & Touche LLP Seattle, Washington COUNSEL Lane Powell PC 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 24, 2005 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 29, 2005 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 Additional shareholder information, including Nordstrom’s Corporate Governance Guidelines and Code of Business Conduct and Ethics, is available online at www.nordstrom.com. In addition, the Company is always willing to discuss matters of concern to shareholders. (206) 303-3200 invrelations@nordstrom.com CERTIFICATIONS We have filed the required certifications under Section 302 of the Sarbanes-Oxley Act of 2002 regarding the quality of our public disclosures as Exhibits 31.1 and 31.2 to our annual report on Form 10-K for the year ended January 29, 2005. After our 2005 Annual Meeting of Shareholders, we intend to file with the New York Stock Exchange the CEO certification regarding our compliance with the NYSE's corporate governance listing standards as required by NYSE Rule 303A.12(a). 56