Nordstrom, Inc.
10-K on 03/20/2020   Download
SEC Document
SEC Filing
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 1, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to___________
Commission file number 001-15059
NORDSTROM, INC.
(Exact name of registrant as specified in its charter)
Washington
 
91-0515058
State or other jurisdiction of incorporation or organization
 
(I.R.S. Employer Identification No.)
1617 Sixth Avenue, Seattle, Washington 98101
(Address of principal executive offices)
Registrant’s telephone number, including area code (206) 628-2111
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common stock, without par value
JWN
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No 
As of August 2, 2019, the aggregate market value of the Registrant’s voting and non-voting stock held by non-affiliates of the Registrant was approximately $3.8 billion using the closing sales price on that day of $30.79. On March 11, 2020, 156,346,167 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2020 Annual Meeting of Shareholders, scheduled to be held on May 20, 2020, are incorporated into Part III.


Nordstrom, Inc. and subsidiaries 1

























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Nordstrom, Inc. and subsidiaries 3

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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” “pursue,” “going forward,” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, our anticipated financial outlook for the fiscal year ending January 30, 2021, trends in our operations and the following:
Strategic and Operational
successful execution of our customer strategy to provide customers the best possible service, product and experience, both in stores and online,
timely and effective implementation and execution of our evolving business model, including:
scaling our market strategy, which consists of the integration of our physical and digital assets, development of new supply chain capabilities and timely delivery of products,
our merchandise strategy, including our ability to offer compelling assortments,
enhancing our platforms and processes to allow for more flexible inventory management,
our ability to effectively allocate and scale our marketing strategies and resources between The Nordy Club, advertising and promotional campaigns,
our ability to respond to the evolving retail environment and our development of new market strategies and customer offerings, which result from new fashion trends, environmental considerations and our customers’ changing expectations of service and experience in stores and online,
our ability to properly balance our investments in existing and new store locations, technology and supply chain facilities, including the expansion of our market strategy,
successful execution of our information technology strategy, including engagement with third-party service providers,
our ability to effectively utilize internal and third-party data in strategic planning and decision making,
our ability to maintain or expand our presence, including timely completion of construction associated with new, relocated and remodeled stores, and Supply Chain Network facilities, all of which may be impacted by third parties, consumer demand and other natural or man-made disruptions,
efficient and proper allocation of our capital resources,
effective inventory management processes and systems, fulfillment and supply chain processes and systems, our ability to prevent or mitigate disruptions in our supply chain and our ability to control costs,
the impact of any systems or network failures, cybersecurity and/or security breaches, including any security breach of our systems or those of a third-party provider that results in the theft, transfer or unauthorized disclosure of customer, employee or Company information or compliance with information security and privacy laws and regulations in the event of such an incident,
our ability to safeguard our reputation and maintain relationships with our vendors and third-party service providers,
our ability to maintain relationships with and motivate our employees and to effectively attract, develop and retain our top talent and future leaders,
our ability to realize the expected benefits, respond to potential risks and appropriately manage costs associated with our credit card revenue sharing program,
market fluctuations, increases in operating costs, exit costs and overall liabilities and losses associated with owning and leasing real estate,
potential goodwill impairment charges, future impairment charges, fluctuations in the fair values of reporting units or of assets in the event projected financial results are not achieved within expected time frames or our strategic direction changes,
compliance with debt and operating covenants, availability and cost of credit, changes in our credit rating and changes in interest rates, and our ability to maintain an investment grade credit rating,
the actual timing, price, manner and amounts of future share repurchases by us, if any, or any share issuances by us,
Economic and External
the impact of the seasonal nature of our business and cyclical customer spending,
the impact of economic and market conditions and the resultant impact on consumer spending and credit patterns,
the impact of economic, environmental or political conditions in the U.S. and Canada and countries where our third-party vendors operate,
weather conditions, natural disasters, epidemics, national security or other market and supply chain disruptions, or the effects of tariffs, or the prospects of these events and the resulting impact on consumer spending patterns or information technology systems and communications,


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the recent COVID-19 (novel coronavirus) outbreak and its adverse impact on store operations, consumer spending patterns, our third-party vendors, supply chain disruptions and employees,
Legal and Regulatory
our compliance with applicable domestic and international laws, regulations and ethical standards, including those related to employment and tax, information security and privacy, consumer credit and the outcome of any claims and litigation and resolution of such matters,
the impact of the current regulatory environment and financial system, health care and tax reforms,
the impact of changes in accounting rules and regulations, changes in our interpretation of the rules or regulations, or changes in underlying assumptions, estimates or judgments,
the impact of claims, litigation and regulatory investigations, including those related to information security, privacy and consumer credit.
These and other factors, including those factors described in Item 1A. Risk Factors to our Annual Report on Form 10-K for the fiscal year ended February 1, 2020, could affect our financial results and cause our actual results to differ materially from any forward-looking information we may provide. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
All references to “Nordstrom,” “we,” “us,” “our,” or the “Company” mean Nordstrom, Inc. and its subsidiaries.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the filing date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.


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DEFINITIONS
The following table includes definitions of Nordstrom commonly used terms:
Term
Definition
2002 Plan
2002 Nonemployee Director Stock Incentive Plan
2010 Plan
2010 Equity Incentive Plan
2019 Plan
2019 Equity Incentive Plan
2019 Annual Report
Annual Report on Form 10-K filed on March 20, 2020
Adjusted EBITDA
Adjusted earnings before interest, income taxes, depreciation and amortization (a non-GAAP financial measure)
Adjusted EBITDAR
Adjusted earnings before interest, income taxes, depreciation, amortization and rent (a non-GAAP financial measure)
Adjusted ROIC
Adjusted return on invested capital (a non-GAAP financial measure)
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
CODM
Chief operating decision maker
Estimated Non-recurring Charge
Estimated non-recurring credit-related charge recognized during the third quarter of 2018
Digital sales
Online and digitally assisted store sales, which include Online Order Pickup, Ship to Store and Style Board, a digital selling tool
EBIT
Earnings before interest and income taxes
EPS
Earnings per share
ESPP
Employee Stock Purchase Plan
Exchange Act
Securities Exchange Act of 1934, as amended
Express Services
Full-Price order pickups and returns offered at certain Nordstrom Rack stores
FASB
Financial Accounting Standards Board
Fiscal year 2019
52 fiscal weeks ended February 1, 2020
Fiscal year 2018
52 fiscal weeks ended February 2, 2019
Fiscal year 2017
53 fiscal weeks ended February 3, 2018
Fiscal year 2016
52 fiscal weeks ended January 28, 2017
Fiscal year 2015
52 fiscal weeks ended January 30, 2016
FLS
Full-line stores
Full-Price
Nordstrom U.S. FLS, Nordstrom.com, Canada, Trunk Club, Jeffrey and Nordstrom Local
GAAP
Generally accepted accounting principles
Generational Investments
NRHL, Canada, Trunk Club and Nordstrom NYC
Gross profit
Net sales less cost of sales and related buying and occupancy costs
Inventory turnover rate
Trailing 4-quarter cost of sales and related buying and occupancy costs divided by the trailing 4-quarter average inventory
Lease Standard
ASU No. 2016-02, Leases, and all related amendments (ASC 842)
LIBOR
London Inter-bank Offered Rate
MD&A
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Nordstrom Local
Nordstrom Local service hubs, which offer Full-Price order pickups, returns, alterations and other services
Nordstrom NYC
Our New York City flagship FLS, including the Men’s location
The Nordy Club
Our customer loyalty program enhanced in October 2018
NRHL
Nordstromrack.com/HauteLook
NYSE
New York Stock Exchange
Off-Price
Nordstrom U.S. Rack stores, NRHL and Last Chance clearance stores
Operating Lease Cost
Fixed rent expense, including fixed common area maintenance expense, net of developer reimbursement amortization
PCAOB
Public Company Accounting Oversight Board (United States)
Property incentives
Developer and vendor reimbursements
PSU
Performance share unit
Revenue Standard
ASU No. 2014-09, Revenue from Contracts with Customers, and all related amendments (ASC 606)
Revolver
Senior unsecured revolving credit facility
ROU asset
Operating lease right-of-use asset
RSU
Restricted stock unit
SEC
Securities and Exchange Commission
SERP
Unfunded defined benefit Supplemental Executive Retirement Plan
SG&A
Selling, general and administrative
Supply Chain Network
Fulfillment centers that primarily process and ship orders to our customers, distribution centers that primarily process and ship merchandise to our stores and other facilities and omni-channel centers that both fulfill customer orders and ship merchandise to our stores
Tax Act
Tax Cuts and Jobs Act
TD
Toronto-Dominion Bank, N.A.


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PART I
Item 1. Business.
DESCRIPTION OF BUSINESS
Founded in 1901 as a retail shoe business in Seattle, Nordstrom later incorporated in Washington State in 1946 and went on to become one of the leading fashion retailers based in the U.S. We aspire to be the best fashion retailer in a digitally-connected world by remaining focused on our customers, serving them through our three strategic pillars: providing a compelling product offering, delivering outstanding services and experiences and leveraging the strength of the Nordstrom brand. We offer an extensive selection of high-quality brand-name and private label merchandise focused on apparel, shoes, cosmetics and accessories. No matter how customers choose to shop, we are committed to delivering the best possible service, product and experience, including alterations, order pickup, dining and styling, to make shopping fun, personalized and convenient.
We invested early in our omni-channel capabilities, integrating our operations, merchandising and technology across our stores and online, in both our Full-Price and Off-Price businesses. We have more than 60 combinations in which merchandise can be ordered, fulfilled and delivered. Though this has enabled us to serve customers in multiple ways, we are focused on providing a seamless experience for our customer across stores and online. We view our business as one reportable “Retail” segment, which aligns with how management operates, evaluates and views the results of our operations. For more information about our business and our reportable segments, see Item 7: MD&A and Note 16: Segment Reporting in Item 8.
As of March 20, 2020, our reportable segment, Retail, includes:
Full-Price
110 Nordstrom-branded FLS in the U.S.
six FLS and six Rack stores in Canada
Full-Price Nordstrom.com website and mobile application
TrunkClub.com website and six Trunk Club clubhouses
three Jeffrey boutiques
five Nordstrom Locals

Our Full-Price operating segment is a combination of physical and digital retail assets. This combination of retail platforms and services allows us to provide our customers with a unique and seamless shopping experience, engaging them on their terms. We continue to evolve our Full-Price business, blurring the lines between the digital and in-store experience. This primarily includes traditional in-store and online shopping, ship-to or pickup from a store of choice, and try on at home and pay only for what is kept, among various other personalized services including convenient access to alterations.
As our Full-Price business evolves, our market strategy leverages our inventory to serve customers on their terms through investments in digital capabilities and in people, product and place. Our goal is to gain market share while driving customer engagement and inventory efficiencies. There are two elements to this strategy: first, we provide customers a greater selection of merchandise available for next-day pickup or delivery, without increasing inventory levels. Second, we are increasing engagement with customers by offering express services such as order pickup, returns and alterations at additional convenient locations. We accelerated our strategy to five of our top markets — New York, Los Angeles, Chicago, Dallas and San Francisco — in 2019 and will expand our strategy into five additional markets in 2020, including Philadelphia, Washington, D.C., Boston, Seattle and Toronto. In addition, we are integrating Trunk Club into Nordstrom full-line stores and Nordstrom.com to create a cohesive styling offering across Nordstrom and to gain efficiencies.
Off-Price
242 Off-Price Nordstrom Rack stores in the U.S.
Off-Price NRHL website and mobile application
two Last Chance clearance stores
In Off-Price, Nordstrom Rack and Nordstromrack.com purchase merchandise primarily from the same vendors carried in our Full-Price channel and also serve as outlets for clearance merchandise from the Full-Price channel. NRHL offers both a persistent selection of Off-Price merchandise, as well as limited-time flash sale events on fashion and lifestyle brands. Nordstromrack.com combines the technology expertise of HauteLook with the merchant expertise of Nordstrom Rack.
FISCAL YEAR
We operate on a 52/53-week fiscal year ending on the Saturday closest to January 31st. References to 2019 and all years except 2017 within this document are based on a 52-week fiscal year, while 2017 is based on a 53-week fiscal year.


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RETURN POLICY
We have a fair and reasonable approach to returns, handling them on a case-by-case basis with the ultimate objective of making our customers happy. We have no formal policy on how long we accept returns at Nordstrom FLS or Nordstrom.com. Our goal is to take care of our customers, which includes making returns and exchanges easy, whether in stores or online, where we offer free shipping on purchases and returns. Trunk Club accepts returns within five days of delivery, which are free for the customer if the items are returned in the box provided by Trunk Club with the original price tag and packaging. Trunks can also be returned at any Nordstrom FLS. Our Nordstrom Rack stores and NRHL generally accept returns of apparel, footwear, accessories and home products up to 45 days from the date of purchase or date of shipment with the original price tag and sales receipt. Off-Price merchandise can be returned by mail or at any Nordstrom Rack store location.
SEASONALITY
Our business, like that of other retailers, is subject to seasonal fluctuations. Our sales are typically higher during our Anniversary Sale in July and the holidays in the fourth quarter. Beginning in 2018, our Anniversary Sale occurred in our second fiscal quarter. In 2017, our Anniversary Sale occurred in the second and third fiscal quarters. Results for any one quarter are not indicative of the results that may be achieved for a full fiscal year.
WORKING CAPITAL
Our working capital requirements are funded primarily through cash flows generated from operations. In addition, we have access to the commercial paper market and can draw on our revolving credit facilities for working capital, capital expenditures and general corporate purposes. Consistent with our seasonal fluctuations, our working capital requirements have historically increased during the months leading up to the Anniversary sale and the holidays as we purchase inventory in anticipation of increased sales. Refer to the Liquidity and Capital Resources section in Item 7: MD&A for more detailed information.
LOYALTY PROGRAM
We evolved our customer loyalty program with the launch of The Nordy Club in October 2018, which incorporates a traditional point system and the favorite benefits of our previous program, while providing customers exclusive access to products and events, enhanced services, personalized experiences and more convenient ways to shop. Customers accumulate points based on their level of spending and type of participation. Upon reaching certain point thresholds, customers receive Nordstrom Notes, which can be redeemed for goods or services offered at Nordstrom FLS, Nordstrom.com, Nordstrom Rack and NRHL. Nordstrom cardmembers can also earn rewards at Trunk Club. The Nordy Club member benefits will vary based on the level of customer spend, and include Bonus Points days and shopping and fashion events.
We offer customers access to a variety of payment products and services, including a selection of Nordstrom-branded Visa® credit cards in the U.S. and Canada, as well as a Nordstrom-branded private label credit card for Nordstrom purchases. When customers use a Nordstrom-branded credit or debit card, they also participate in The Nordy Club and receive additional benefits, which can vary depending on the level of spend, including early access to the Anniversary Sale, Nordstrom to You (an in-home stylist) and incremental accumulation of points toward Nordstrom Notes.
COMPETITIVE CONDITIONS
We operate in a highly competitive business environment. We compete with other international, national, regional and local retailers, including internet-based businesses, omni-channel department stores, specialty stores, off-price stores and boutiques, which may carry similar lines of merchandise. Our specific competitors vary from market to market. We believe the keys to competing in our industry are what will always matter most to our customers: providing compelling product and outstanding service, both digitally and in stores, backed by people who care. This includes serving customers on their terms by providing a seamless digital and physical experience, offering compelling, curated and quality products across a range of price points, and strategically partnering with relevant and limited distribution brands, all in top markets.


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SUPPLY CHAIN NETWORK
Our “Supply Chain Network” consists of:
fulfillment centers that primarily process and ship orders to our customers
distribution centers that primarily process and ship merchandise to our stores and other facilities
omni-channel centers that both fulfill customer orders and ship merchandise to our stores.
We expanded our Supply Chain Network facilities and enhanced our inventory management systems to support our omni-channel capabilities and provide greater access to merchandise selection and faster delivery. We select locations and customize inventory allocations to enable merchandise to flow more efficiently and quickly to our customers. Full-Price online purchases are primarily shipped to our customers from our fulfillment centers but may also be shipped from our Nordstrom FLS, distribution centers or omni-channel centers. Full-Price in-store purchases are primarily fulfilled from that store’s inventory, but when inventory is unavailable at that store, it may also be shipped to our customers from our fulfillment centers, distribution centers, omni-channel centers, or from other Nordstrom FLS. Off-Price online purchases are shipped to our customers from our fulfillment centers and distribution centers. Both businesses selectively use vendor dropship to supplement their online offerings, which are then shipped directly from the vendor to the end customer.
Our first large-scale omni-channel center in Riverside, California will initially support our Full-Price customers in the West Coast region and is expected to open in Spring 2020. Off-Price inventory and fulfillment will be added to this facility in the future. Our smaller Local Omni-channel Hub in Torrance, California was opened in 2019 and supports the greater Los Angeles market as part of our market strategy and will have highly curated inventory that serves the specialized needs of that market.
INVENTORY
We plan our merchandise purchases and receipts to coincide with expected sales trends. For instance, our merchandise purchases and receipts increase prior to our Anniversary Sale, which has historically extended over the last two weeks of July. We purchase and receive a larger amount of merchandise in the fall as we prepare for the holiday shopping season (from late November through December). At Nordstrom Rack, we invest in pack and hold inventory, which involves the strategic purchase of merchandise from some of our top Full-Price brands in advance of the upcoming selling seasons, to take advantage of favorable buying opportunities. This inventory is typically held for six months on average.
In order to offer merchandise that our customers want, we purchase from a wide variety of high-quality domestic and foreign suppliers. We also have arrangements with agents and contract manufacturers to produce our private label merchandise.
EMPLOYEES
During 2019, we employed approximately 68,000 employees on a full- or part-time basis. Due to the seasonal nature of our business, employment increased to approximately 75,000 in December 2019 due to the holidays. All of our employees are non-union. We believe our relationship with our employees is good.
TRADEMARKS
Our most notable trademarks include Nordstrom, Nordstrom Rack, HauteLook, Trunk Club, Halogen, BP., Zella, Caslon, 1901, Treasure & Bond and Tucker+Tate. Each of our trademarks is renewable indefinitely, provided it is still used in commerce at the time of the renewal.
SEC FILINGS
We file annual, quarterly and current reports, proxy statements and other documents with the SEC. The SEC maintains a website at SEC.gov that contains reports, proxy and information statements, and other information regarding issuers that file with the SEC.
WEBSITE ACCESS
Our website address is Nordstrom.com. Our annual and quarterly reports on Form 10-K and Form 10-Q, current reports on Form 8-K, proxy statements, our executives’ statements of changes in beneficial ownership of securities on Form 4 and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available for free on or through our website as soon as reasonably practicable after we electronically file the report with or furnish it to the SEC. Interested parties may also access a webcast of quarterly earnings conference calls and other financial events through our website.
CORPORATE RESPONSIBILITY
We continue to evolve our approach to corporate social responsibility to deliver on our core intention to leave it better than we found it.
We are reducing our greenhouse gas emissions by making regular investments in energy efficiency, renewable energy and fuel efficiency. We are making choices that help us conserve resources like water, paper and food. Recyclable paper and corrugated cardboard, our two largest waste streams, have continued to be recycled domestically. As a sign of our continued commitment, we are proud to have joined the G7 Fashion Pact, a new coalition of 56 fashion companies that is working to identify and promote goals that will reduce our impact on the climate, biodiversity and the oceans.


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We are also including more sustainable products in our merchandise assortment and helping customers make responsible choices with items they are no longer using. We keep clothing out of landfills by extending their useful life, through our clothing donation program, and with the launch of our new Sustainable Style section on Nordstrom.com, customers can easily shop for products that use more sustainable raw materials and that are made in factories with higher social and environmental standards.
Through our charitable giving efforts, we support hundreds of nonprofit organizations and donate millions of dollars to organizations and programs that empower youth, support children and care for families. Our Nordstrom Made brand Treasure & Bond donates 2.5% of net sales to nonprofits that empower youth. In 2019, we made our largest-ever annual donation of more than $1 million, bringing our total Treasure & Bond donation to more than $5 million since the brand launched in 2014.
We are working to protect human rights for individuals across our value chain, from our employees to the people who manufacture the products we sell. In March of 2020, we announced a new goal to have 90% of our Nordstrom Made products be produced in factories that support women's empowerment by 2025. We formalized our Corporate Human Rights Commitment and have robust Partnership Guidelines to ensure we work with vendor partners who share our commitment to producing quality products through the use of ethical business practices. We are also committed to creating an inclusive environment where all employees can be themselves, contribute their ideas and do their best work. We are proud to have achieved 100% pay equity for employees of all genders and races, and we are close to achieving pay parity — median pay for women across the company being equal to the median pay for men.
For more information on our corporate responsibility strategy and efforts, please refer to the Sharing Our Progress report available at nordstromcares.com.
CORPORATE GOVERNANCE
We have a long-standing commitment to upholding a high level of ethical standards. In addition, we have adopted Codes of Business Conduct and Ethics for our employees, officers and directors and Corporate Governance Guidelines, which comply with the listing standards of the NYSE and SEC requirements. Our Codes of Business Conduct and Ethics, Corporate Governance Guidelines and Committee Charters for the following Board of Director Committees are available through our website:
Audit and Finance
Compensation, People and Culture
Corporate Governance and Nominating
Technology
Any amendments to these documents, or waivers of the requirements they contain, will also be available on our website.
For printed versions of these items or any other inquiries, please contact:
Nordstrom Investor Relations
1700 Seventh Avenue, Suite 1500
Seattle, Washington 98101
(206) 303-3200
invrelations@nordstrom.com


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Item 1A. Risk Factors.
Our business faces many risks. We believe the risks described below outline the items of most concern to us. In evaluating Nordstrom and our business, you should carefully consider the following factors, in addition to the other information in this 2019 Annual Report. Before you buy our common stock or invest in our debt, you should know that making such an investment involves risks including, but not limited to, the risks described below. Any one of the following risks could harm our business, financial condition, results of operations, or reputation, which could cause our stock price to decline or a default on our debt payments, and you may lose all or a part of your investment. Additional risks, trends and uncertainties not presently known to us or that we currently believe are immaterial may also harm our business, financial condition, results of operations or reputation.
RISKS DUE TO STRATEGIC AND OPERATIONAL FACTORS
Our inability to successfully execute our customer strategy or evolve our business model could negatively impact our business and future profitability and growth.
The retail environment is rapidly evolving. Customer shopping preferences continue to shift, including to digital channels, reducing traffic in malls, as well as the emergence of rental and recommerce companies and other brands that are not traditional retailers. In this changing landscape, we continue to focus on better serving our customers through our three strategic pillars: providing a compelling product offering, delivering exceptional services and experiences, and leveraging the strength of the Nordstrom brand. Our customer strategy focuses on providing a differentiated and seamless experience in a digital world across all Nordstrom businesses, including mobile and social channels. Our “One Nordstrom” model, in which engagement across our four boxes of Full-Price, Off-Price, Stores and Digital encourages more visits and more spend, allows for our company as a whole to be greater than the sum of the parts. Our market strategy is an example of this where we bring all of our assets together in one market to serve customers when, where and how they want by connecting physical and digital assets.
Our focus on the customer will require us to execute new supply chain capabilities and enhance existing ones, develop applications for electronic devices, improve customer-facing technology, deliver digitally purchased products timely, enhance inventory management systems and allow greater and more fluid inventory availability between digital and retail locations through our market strategy. In addition, these strategies will require further expansion and reliance on data science and analytics. This business model has a highly variable cost structure driven by fulfillment and marketing costs and will continue to require investments in cross-channel operations and supporting technologies.
If we do not successfully implement our customer strategy, including thoroughly understanding and delivering on our customer needs and wants, effectively integrating our stores and digital channels and scaling our market strategy, expanding our supply chain initiatives, and efficiently getting product to our customers, we may fall short of our customers’ expectations, impacting our brand, reputation, profitability and growth.
Our business could suffer if we do not appropriately assess and react to competitive market forces and changes in customer behavior.
We compete with other international, national, regional and local retailers, including internet-based businesses, omni-channel department stores, specialty stores, off-price stores and boutiques, which may carry similar lines of merchandise. Digital channels continue to facilitate comparison shopping, intensifying competition in the retail market, and marketing digitally is controlled by a few key platforms. If we fail to adequately anticipate and respond to customer and market dynamics, we may lose market share or our ability to remain competitive, causing our sales and profitability to suffer. If the efficiency and allocation of loyalty marketing, advertising and promotional campaigns that attract customers through various programs and media, including digital media and print, is unsuccessful in influencing consumer behavior in our stores and digital channels, or if our competitors are more effective with their programs than we are, our growth and profitability could suffer. We also may not gather accurate and relevant data or effectively utilize that data, which may impact our strategic planning, marketing and loyalty programs and our overall decision making. In addition, if we do not efficiently scale our business, or if customers shift to digital channels at a different pace than we anticipate, we may need to quickly modify our initiatives and investments in our store and digital environments, or in our Full-Price and Off-Price businesses to accommodate changes in consumer behavior and expectations, which may adversely impact our growth and profitability.


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Our customer relationships and sales may be negatively impacted if we do not anticipate and respond to consumer preferences and fashion trends or manage inventory levels appropriately.
Our ability to predict or respond to constantly changing fashion trends, consumer preferences and spending patterns significantly impacts our sales and operating results. In addition, we expanded our brand partnership model, including strategic brands, recommerce, wholesale, and vertical brands, to curate an assortment that offers newness. If we do not identify and respond to emerging trends in consumer spending and preferences quickly enough, identify the right partners that align with our customer strategy, or develop, evolve, and retain our team's talent, mindset and technical skills to support changing operating models, we may harm our ability to retain our existing customers or attract new customers. Ensuring we optimize our inventory and improve the planning and management of inventory through use of data and analytics is critical to serving the customer, driving growth and maximizing profitability. If we purchase too much inventory, we may be forced to sell our merchandise at lower average margins, which could harm our business. Conversely, if we fail to purchase enough merchandise, we may lose opportunities for additional sales and potentially harm relationships with our customers.
The investment in existing and new locations may not achieve our expected returns.
The locations of our existing stores, planned store openings and relocations and Supply Chain Network facilities are assessed based upon desirability, demographics and retail environment. In particular, we are expanding our market strategy, where we leverage and connect our physical and digital assets in one market to seamlessly serve our customer, and select physical locations to create synergies between our stores and our Supply Chain Network. Additionally, we must equip our locations with the proper processes, technology and tools for timely and accurate fulfillment and inventory replenishment. This involves certain risks, including properly balancing our capital investments between new stores, relocations, remodels, fulfillment capabilities, technology and digital channels, assessing the suitability of locations, in new domestic and international markets, and constructing, furnishing and supplying a store or facility in a timely and cost-effective manner, which may be affected by the actions of third parties, including but not limited to private entities and local, state or federal regulatory agencies.
Customers’ expectations regarding speed of delivery are evolving. If we do not effectively integrate our physical and digital assets as part of our market strategy, or select locations to optimize our market strategy, we could incur significantly higher costs and shipping times that do not meet customer expectations, which in turn could have a material adverse effect on our business. Particularly in light of the changing trends between digital and brick-and-mortar shopping channels, sales at our stores or through our digital channels may not meet projections, which could adversely affect our return on investment. If we do not properly allocate capital expenditures between locations, or maintain them properly, customer expectations may not be met and we may lose sales.
Even if we take appropriate measures to use or safeguard our information, network and environment from security breaches, our customers, employees and business could still be exposed to risk.
Nordstrom, our subsidiaries and third-party providers access, collect, store and transmit sensitive and confidential Company, customer, and employee data and information, including consumer preferences and credit card information, all of which are subject to demanding and constantly changing privacy and security laws and regulations. A number of jurisdictions where we do business have enacted or are considering new privacy and data protection laws which impact our responsibilities with respect to this data, such as the California Consumer Privacy Act.
We have taken measures to help prevent a breach of our information and comply with cybersecurity requirements by implementing safeguards and procedures designed to protect the security, confidentiality and access of such information. In addition, where possible, we require our third-party providers to implement administrative, physical and technical safeguards and procedures. We, and several of our vendors, have suffered breaches of our cybersecurity in the past and are at risk for such breaches in the future.
Any measures we or our third-party providers have implemented to prevent intentional or inadvertent information security breaches may not be completely effective. Security breaches and cyber incidents and their remediation, whether at Nordstrom, our third-party providers or other retailers, could expose us to a risk of loss or unauthorized release of customer, employee or Company confidential information, litigation, investigation, regulatory enforcement action, penalties and fines, orders to stop any alleged noncompliant activity, information technology system failures or network disruptions, increased cyber-protection and remediation costs, financial losses, potential liability, or loss of customers’, employees’ or third-party providers’ trust and business, any of which could adversely impact our reputation, competitiveness and financial performance. Concerns about our practices with regard to the collection, use, retention, security or disclosure of personal information or other privacy-related matters, even if unfounded, could damage our reputation and adversely affect our operating results.
Our business may be impacted by information technology system failures or network disruptions.
Our ability to transact with customers and operate our business depends on the efficient operation of various information systems, including data centers, hardware, software and applications, to manage certain aspects of our Company, including store and online transactions, logistics and communication, inventory and reporting systems. We seek to build quality systems, select reputable system vendors and implement procedures intended to enable us to protect our systems when we modify them. We test our systems to address vulnerabilities and train our employees regarding practices to protect the safety of our systems.


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There are inherent risks associated with modifying or replacing systems, and with new or changed relationships, including accurately capturing and maintaining data, realizing the expected benefit of the change and managing the potential disruption of the operation of the systems as the changes are implemented. Potential issues associated with implementing technology initiatives and the time and resources required to optimize the benefits of new elements of our systems and infrastructure could reduce the efficiency of our operations in the short term.
If we encounter an interruption or deterioration in critical systems or processes or experience the loss of critical data, which may result from security or cybersecurity threats or attacks, natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins or third-party or other disruptions, our business could be harmed or our digital activity may decrease because it is more difficult to use. Depending on the severity of the failure, our disaster recovery plans may be inadequate or ineffective. These events could also damage our reputation, result in loss of sales and be expensive to remedy.
Improvements to our merchandise buying and fulfillment processes and systems could adversely affect our business if not successfully executed.
Our business depends on accuracy throughout our product flow process. We are making investments to streamline and standardize our merchandise planning, procurement, allocation and fulfillment capabilities through changes in personnel, processes, location logistics and technology. If we encounter challenges associated with change management, inventory integrity and implementation of associated information technology or adoption of new processes, features or capabilities, our ability to continue to successfully execute our strategy or evolve our strategy with changes in the retail environment could be adversely affected. Or, if we are unable to maintain accurate, reliable and effective inventory tracking systems, it may result in canceled orders and we may not derive the expected benefits to our sales and profitability, or we may incur increased costs relative to our current expectations.
Our customer, employee and vendor relationships could be negatively affected if we fail to maintain our corporate culture and reputation.
We have a well-recognized culture and reputation that consumers may associate with a high level of integrity, customer service and quality merchandise, and it is one of the reasons customers shop with us and employees choose us as a place of employment. Any significant damage to our reputation, including damages arising from our business or privacy practices, or factors outside our control or on social media, could diminish customer trust, weaken our vendor relationships, reduce employee morale and productivity and lead to difficulties in recruiting and retaining qualified employees. Additionally, management may not accurately assess the impact of significant legislative changes, including those that relate to privacy, employment matters and health care, impacting our relationship with our customers or our workforce and adversely affecting our sales and operations.
If we do not effectively design and implement our strategic and business planning processes to attract, retain, train and develop talent and future leaders, our business may suffer.
We rely on the experience of our senior management, who have specific knowledge relating to us and our industry that is difficult to replace, to execute our business strategies and objectives. We have succession plans in place and our Board of Directors reviews these succession plans. If our succession plans do not adequately cover significant and unanticipated turnover, the loss of the services of any of these individuals, or any resulting negative perceptions of our business, could damage our reputation and our business.
Additionally, our success depends on the talents and abilities of our workforce in all areas of our business, especially personnel that can adapt to complexities and grow their skillset across the changing environment. Our ability to successfully execute our customer strategy depends on acquiring, developing and retaining qualified talent with diverse sets of skills. If we are unable to offer competitive compensation and benefits, appropriate training, or a compelling work environment, our culture may be adversely affected, our reputation may be damaged, and we may incur costs related to turnover.
Our program agreement with TD, or changes to that agreement, could adversely impact our business.
The program agreement with TD was consummated on terms that allow us to maintain customer-facing activities while TD provides Nordstrom-branded payment methods and payment processing services. If we fail to meet certain service levels, TD has the right to assume certain individual servicing functions including managing accounts and collection activities. If we lose control of such activities and functions, if we do not successfully respond to potential risks and appropriately manage potential costs associated with the program agreement with TD, or if these transactions negatively impact the customer service associated with our cards, resulting in harm to our business reputation and competitive position, our operations, cash flows and returns to shareholders could be adversely affected. The program agreement requires us to hold collateral depending on our credit ratings and as a result, a significant downgrade may adversely affect our liquidity and cash flow position. If, upon expiration of our current program agreement in 2022, a new contract has less favorable terms, our results could be negatively impacted. If TD became unwilling or unable to provide these services or if there are changes to the risk management policies implemented under our program agreement with TD, our results may be negatively impacted. If we lose control over certain servicing functions and TD is unable to successfully manage accounts and collection activities, it may heighten the risk of credit losses.


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Owning and leasing real estate exposes us to possible liabilities and losses.
We own or lease the land, buildings and equipment for all of our stores and Supply Chain Network facilities and are therefore subject to all of the risks associated with owning and leasing real estate. In particular, the value of the assets could decrease, their operating costs could increase, or a store or facility may not be opened as planned due to changes in the real estate market, demographic trends, site competition, dependence on third-party performance or overall economic environment. Additionally, we are potentially subject to liability for environmental conditions, exit costs associated with disposal of a store and commitments to pay base rent for the entire lease term or operate a store for the duration of an operating covenant.
If we fail to appropriately manage our capital, we may negatively impact our operations and shareholder return.
We utilize working capital to finance our operations, make capital expenditures and acquisitions, manage our debt levels and return value to our shareholders through dividends and share repurchases. Changes in the credit and capital markets, including market disruptions, limited liquidity and interest rate fluctuations, may increase the cost of financing or restrict access to a potential source of liquidity. A deterioration in our capital structure or the quality and stability of our earnings could result in noncompliance with our debt covenants or a downgrade of our credit rating, constraining the financing available to us. If our access to financing is restricted or our borrowing costs increase, our operations and financial condition could be adversely impacted. Further, if we do not properly allocate our capital to maximize returns, our operations, cash flows and returns to shareholders could be adversely affected.
The concentration of stock ownership in a small number of our shareholders may limit a shareholder’s ability to influence corporate matters and impact the price of our shares.
We have regularly reported in our annual proxy statements the holdings of members of the Nordstrom family, including Bruce A. Nordstrom, our former Co-President and Chairman of the Board, his sister Anne E. Gittinger and members of the Nordstrom family within our Executive Team. As of February 29, 2020, these individuals beneficially owned an aggregate of approximately 31% of our common stock. As a result, either individually or acting together, they may be able to exercise considerable influence over matters requiring shareholder approval, including the election of directors or other matters impacting our management or corporate governance. In addition, as reported in our periodic filings, our Board of Directors has from time to time authorized share repurchases. While these share repurchases may be offset in part by share issuances under our equity incentive plans and as consideration for acquisitions, the repurchases may nevertheless have the effect of increasing the overall percentage ownership held by these shareholders. The corporate law of the State of Washington, where the Company is incorporated, provides that approval of a merger or similar significant corporate transaction requires the affirmative vote of two-thirds of a company’s outstanding shares. The interests of these shareholders may differ from the interests of our shareholders as a whole, and the beneficial ownership of these shareholders may have the effect of discouraging offers to acquire us, delay or otherwise prevent a significant corporate transaction because the consummation of any such transaction would likely require their approval. As a result of any of these factors, the market price of our common stock may be affected.
RISKS DUE TO ECONOMIC AND EXTERNAL MARKET FACTORS
Our revenues and operating results are affected by the seasonal nature of our business and cyclical trends in consumer spending.
Our business, like that of other retailers, is subject to seasonal fluctuations and cyclical trends in consumer spending. Due to our Anniversary Sale in July and the holidays in the fourth quarter, our sales are typically higher in the second and fourth quarters than in the first and third quarters of the fiscal year. Any factor that negatively impacts these selling seasons could have an adverse and disproportionate effect on our results of operations for the entire year. To provide shareholders a better understanding of management’s expectations surrounding results, we provide public outlook on our expected operating and financial results for future periods comprised of forward-looking statements subject to certain risks and uncertainties.
A downturn in economic conditions and other external market factors could have a significant adverse effect on our business and stock price.
During economic downturns, including any potential impacts from COVID-19, fewer customers may shop for the high-quality items in our stores and on our websites, as these products may be seen as discretionary, and those who do shop may limit the amount of their purchases. This reduced demand may lead to lower sales, higher markdowns and an overly promotional environment or increased marketing and promotional spending.
Additionally, factors such as results differing from guidance, changes in sales and operating income in the peak seasons, changes in our market valuations, performance results for the general retail industry, announcements by us or our industry peers or changes in analysts’ recommendations may cause volatility in the price of our common stock and our shareholder returns.
Our stores located in shopping centers may be adversely affected by any declines in consumer traffic of shopping centers.
The majority of our stores are located within shopping centers and benefit from the abilities that we and other anchor tenants have to generate consumer traffic. A substantial decline in shopping center traffic, the development of new shopping centers, the lack of availability of favorable locations within existing or new shopping centers, the success of individual shopping centers and the success of other anchor tenants may negatively impact our ability to maintain or grow our sales in existing stores, as well as our ability to open new stores, which could have an adverse effect on our financial condition or results of operations.


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Our business depends on third parties for the production, supply or delivery of goods, and a disruption could result in lost sales or increased costs.
Timely receipts of quality merchandise from third parties is critical to our business. Our process to identify qualified vendors and access quality products in an efficient manner on acceptable terms and cost can be complex. Violations of law with respect to quality and safety by our importers, manufacturers or distributors could result in delays in shipments and receipt of goods or damage our reputation, resulting in lost sales. These vendors may experience supply chain or port disruptions or other difficulties due to economic, political, environmental or epidemic conditions. The countries in which merchandise is manufactured could become subject to new trade restrictions, including increased customs restrictions, tariffs or quotas. Additionally, changes in tax and trade policies that impact the retail industry, such as increased taxation on imported goods, could have a material adverse effect on our business, results of operations and liquidity.
The results from our credit card operations could be adversely affected by changes in market conditions or laws.
Revenues earned under our program agreement with TD are indirectly subject to economic and market conditions that are beyond our control, including, but not limited to, interest rates, consumer credit availability, demand for credit, consumer debt levels, payment patterns, delinquency rates, employment trends, laws and other factors. Changes in these economic and market conditions could impair our revenues and profitability.
Our business and operations could be materially and adversely affected by severe weather patterns, natural disasters, widespread pandemics, epidemics and other natural or man-made economic, political or environmental disruptions.
Disruptions could cause, among other things, a decrease in consumer spending that would negatively impact our sales, staffing shortages in our stores, Supply Chain Network facilities or corporate offices, interruptions in the flow of merchandise to our stores, disruptions in the operations of our merchandise vendors or property developers, increased costs and a negative impact on our reputation and long-term growth plans. We have a significant amount of our total sales, stores and square footage in the west coast of the United States, particularly in California, where we have experienced earthquakes, wildfires and power outages and shortages that increase our exposure to any market-disrupting conditions in this region.
Our business may be materially and adversely affected by the spread of the novel coronavirus COVID-19.
A novel strain of coronavirus, COVID-19, that was first identified in China in December 2019, has surfaced in several regions across the world and resulted in travel restrictions and business slowdowns or shutdowns in affected areas. Many of our vendors either produce their products or source component parts of their products from affected areas. As a result, the business disruptions caused by the spread of COVID-19 may impact our ability to timely acquire the products we sell to our customers and our business may be adversely affected. In addition, public concern regarding the risk of contracting COVID-19 may itself materially and adversely affect our business, as customers may be unwilling to visit many of the high-traffic locations in which we operate our stores for fear of being exposed to the virus. Finally, COVID-19 has been found in the Seattle metropolitan area where we maintain our corporate headquarters and have a significant number of employees.
Accordingly, we have implemented a number of protective measures throughout our Company, including increasing the frequency and extent of cleaning and disinfecting in our stores and other locations, restricting travel, limiting large gatherings, and encouraging use of telecommuting among our corporate staff, all in an effort to help limit the spread of the virus. Effective March 17, 2020, we announced the temporary closure of our stores in the U.S. and Canada, including our FLS, Nordstrom Rack stores, Trunk Club clubhouses and Jeffrey boutiques in response to the increased impact from COVID-19. We have also temporarily closed one of our distribution centers to comply with a shelter-in-place order. While this is expected to be temporary, we will determine the actual duration of the closure based on available information at that time. We continue to monitor the rapidly evolving situation and guidance from federal, state and local public health authorities and may take additional actions based on their recommendations. The further spread of COVID-19, and the requirement to take action to limit the spread of the illness, will impact our ability to carry out our business as usual and may materially adversely impact global economic conditions, our business, results of operations and financial condition, including on our potential to conduct financings on terms acceptable to us, if at all.


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RISKS DUE TO LEGAL AND REGULATORY FACTORS
We are subject to certain laws, litigation, regulatory matters and ethical standards, and compliance or our failure to comply with or adequately address developments as they arise could adversely affect our reputation and operations.
Our policies, procedures and practices and the technology we implement are designed to comply with applicable federal, state, local and foreign laws, tariffs, rules and regulations, including those imposed by federal, state and local jurisdictions, the SEC, consumer protection and other regulatory agencies, the marketplace, and foreign countries, as well as responsible business, social and environmental practices, all of which may change from time to time. Compliance with laws and regulations and/or significant legislative changes may cause our business to be adversely impacted, or even limit or restrict the activities of our business. In addition, if we fail to comply with applicable laws and regulations or implement responsible business, social, environmental and supply chain practices, we could be subject to damage to our reputation, class action lawsuits, regulatory investigations, legal and settlement costs, charges and payments, civil and criminal liability, increased cost of regulatory compliance, losing our ability to accept credit and debit card payments from our customers, restatements of our financial statements, disruption of our business and loss of customers. New and emerging privacy and data protection laws may increase compliance expenses and limit business opportunities and strategic initiatives, including customer engagement. Any required changes to our employment practices could result in the loss of employees, reduced sales, increased employment costs, low employee morale and harm to our business and results of operations. In addition, political and economic factors could lead to unfavorable changes in federal, state and foreign tax laws, which may affect our tax assets or liabilities and adversely affect our results of operations. We are also regularly involved in various litigation matters that arise in the ordinary course of business. Litigation or regulatory developments could adversely affect our business and financial condition.
Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 requires management assessments of the effectiveness of our internal controls over financial reporting through documenting, testing, monitoring and enhancement of internal control over financial reporting. If we fail to implement or maintain adequate internal controls, we may not produce reliable financial reports or fail to prevent or detect financial fraud, which may adversely affect our financial position, investor confidence or our stock price.
Changes to accounting rules and regulations could affect our financial results or financial condition.
Accounting principles and related pronouncements, implementation guidelines and interpretations with regard to a wide variety of accounting matters that are relevant to our business, including, but not limited to, revenue recognition, merchandise inventories, leasing, impairment of long-lived assets and tax matters are highly complex and involve subjective assumptions, estimates and judgments. Changes in these rules and regulations, changes in our interpretation of the rules or regulations or changes in underlying assumptions, estimates or judgments could adversely affect our financial performance or financial position.
Item 1B. Unresolved Staff Comments.
None.


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Item 2. Properties.
The following table summarizes the number of retail stores we own or lease, and the percentage of total store square footage represented by each listed category as of February 1, 2020:
 
 
Number of stores
 
 
 
 
Full-Price

 
Off-Price

 
% of total store
square footage

Leased stores on leased land
 
41
 
243

 
45
%
Owned stores on leased land
 
60
 

 
35
%
Owned stores on owned land
 
33
 
1

 
18
%
Partly owned and partly leased stores
 
2
 

 
2
%
Total
 
136

 
244

 
100
%
The following table summarizes our store count and square footage activity:
 
 
Store count
 
Square footage (000’s)
Fiscal year
 
2019

 
2018

 
2019

 
2018

Total, beginning of year
 
379

 
366

 
30,385

 
30,218

Store openings1:
 
 
 
 
 
 
 
 
Full-Price
 
3

 
10

 
513

 
277

Off-Price
 
5

 
6

 
147

 
170

Stores closed
 
(7
)
 
(3
)
 
(847
)
 
(280
)
Total, end of year
 
380

 
379

 
30,198

 
30,385

 
 
 
 
 
 
 
 
 
Relocations and other1
 
1

 
1

 
34

 
(5
)
1 Store opening square footage includes adjustments due to store relocations or remodels.


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The following table lists our retail store count and square footage by state/province as of February 1, 2020:
Business
 
Full-Price
 
Off-Price
 
Total
 
 
Count

Square Footage
(000’s)

 
Count

Square Footage
(000’s)

 
Count

Square Footage
(000’s)

U.S.
 
 
 
 
 
 
 
 
 
Alabama
 


 
1

35

 
1

35

Alaska
 


 
1

35

 
1

35

Arizona
 
2

384

 
9

313

 
11

697

California
 
34

5,081

 
55

2,022

 
89

7,103

Colorado
 
3

559

 
7

239

 
10

798

Connecticut
 
2

341

 
1

36

 
3

377

Delaware
 
1

127

 
1

32

 
2

159

Florida
 
8

1,262

 
16

545

 
24

1,807

Georgia
 
3

395

 
4

153

 
7

548

Hawaii
 
1

195

 
2

78

 
3

273

Idaho
 


 
1

37

 
1

37

Illinois
 
5

973

 
16

594

 
21

1,567

Indiana
 
1

134

 
2

60

 
3

194

Iowa
 


 
1

35

 
1

35

Kansas
 
1

219

 
1

35

 
2

254

Kentucky
 


 
1

33

 
1

33

Louisiana
 


 
3

90

 
3

90

Maine
 


 
1

30

 
1

30

Maryland
 
4

765

 
6

219

 
10

984

Massachusetts
 
5

604

 
7

266

 
12

870

Michigan
 
2

430

 
5

178

 
7

608

Minnesota
 
2

380

 
5

173

 
7

553

Missouri
 
2

342

 
2

69

 
4

411

Nevada
 
1

207

 
3

101

 
4

308

New Jersey
 
5

991

 
8

284

 
13

1,275

New Mexico
 


 
1

34

 
1

34

New York
 
7

878

 
12

430

 
19

1,308

North Carolina
 
2

300

 
2

74

 
4

374

Ohio
 
3

549

 
6

224

 
9

773

Oklahoma
 


 
2

67

 
2

67

Oregon
 
3

484

 
6

218

 
9

702

Pennsylvania
 
2

381

 
7

240

 
9

621

Puerto Rico
 
1

143

 


 
1

143

Rhode Island
 


 
1

38

 
1

38

South Carolina
 


 
3

101

 
3

101

Tennessee
 
1

145

 
2

69

 
3

214

Texas
 
10

1,580

 
18

613

 
28

2,193

Utah
 
2

277

 
4

130

 
6

407

Virginia
 
3

580

 
7

268

 
10

848

Washington
 
6

1,270

 
9

354

 
15

1,624

Washington D.C.
 
1

8

 
3

107

 
4

115

Wisconsin
 
1

150

 
2

67

 
3

217

Canada
 
 
 
 
 
 
 
 
 
Alberta
 
3

208

 


 
3

208

British Columbia
 
1

231

 


 
1

231

Ontario
 
8

899

 


 
8

899

Total
 
136

21,472

 
244

8,726

 
380

30,198



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Our Supply Chain Network includes the following locations:
eight owned locations (Portland, Oregon; Dubuque, Iowa; Ontario, California; Newark, California; Upper Marlboro, Maryland; Gainesville, Florida; Cedar Rapids, Iowa and Elizabethtown, Pennsylvania),
two leased locations (Torrance, California and San Bernardino, California).
Our headquarters are located in Seattle, Washington, where our offices consist of both leased and owned space. We also have four leased office facilities (Chicago, Illinois; Centennial, Colorado; Los Angeles, California and New York City, New York).
In 2020, we expect to open:
one omni-channel center (Riverside, California),
two Nordstrom Rack stores (Tacoma, Washington and Langley, British Columbia).
Item 3. Legal Proceedings.
We are subject from time to time to various claims and lawsuits arising in the ordinary course of business, including lawsuits alleging violations of state and/or federal wage and hour and other employment laws, privacy and other consumer-based claims. Some of these lawsuits include certified classes of litigants, or purport or may be determined to be class or collective actions and seek substantial damages or injunctive relief, or both, and some may remain unresolved for several years. We believe the recorded accruals in our Consolidated Financial Statements are adequate in light of the probable and estimable liabilities. As of the date of this report, we do not believe any currently identified claim, proceeding or litigation, either alone or in the aggregate, will have a material impact on our results of operations, financial position or cash flows. Since these matters are subject to inherent uncertainties, our view of them may change in the future.
Item 4. Mine Safety Disclosures.
None.


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PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
MARKET AND SHAREHOLDER INFORMATION
Our common stock, without par value, is traded on the New York Stock Exchange under the symbol “JWN.” The approximate number of holders of common stock as of March 11, 2020 was 148,000, based upon the number of registered and beneficial shareholders and the number of employee shareholders in the Nordstrom 401(k) Plan. On this date, we had 156,346,167 shares of common stock outstanding.
For cash dividends declared and paid per share for each fiscal quarter in 2019 and 2018, refer to Note 17: Selected Quarterly Data in Item 8.
SHARE REPURCHASES
(Dollar and share amounts in millions, except per share amounts)
In August 2018, our Board of Directors authorized a program to repurchase up to $1,500 of our outstanding common stock, with no expiration date. During the fourth quarter of 2019, we did not repurchase any shares of our common stock and we had $707 remaining in share repurchase capacity as of February 1, 2020. The actual timing, price, manner and amounts of future share repurchases, if any, will be subject to market and economic conditions and applicable SEC rules.


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STOCK PRICE PERFORMANCE
The following graph compares the cumulative total return of Nordstrom common stock, Standard & Poor’s Retail Index (“S&P Retail”) and Standard & Poor’s 500 Index (“S&P 500”) for each of the last five fiscal years, ended February 1, 2020. The Retail Index is composed of 26 retail companies, including Nordstrom, representing an industry group of the S&P 500. The following graph assumes an initial investment of $100 each in Nordstrom common stock, S&P Retail and the S&P 500 on January 31, 2015 and assumes reinvestment of dividends.
chart-35caaa915782f4b3684a01.jpg
End of fiscal year
2014

 
2015

 
2016

 
2017

 
2018

 
2019

Nordstrom common stock
100

 
71

 
64

 
74

 
72

 
60

S&P Retail
100

 
116

 
137

 
194

 
210

 
251

S&P 500
100

 
98

 
119

 
146

 
146

 
177



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Item 6. Selected Financial Data.
(Dollars in millions except per square foot and per share amounts)
The following selected financial data are derived from the audited Consolidated Financial Statements and should be read in conjunction with Item 1A: Risk Factors, Item 7: MD&A and Item 8: Financial Statements and Supplementary Data of this 2019 Annual Report.
Fiscal year
2019

 
2018

 
2017

 
2016

 
2015

Earnings Results
 
 
 
 
 
 
 
 
 
Net sales

$15,132

 

$15,480

 

$15,137

 

$14,498

 

$14,095

Credit card revenues, net
392

 
380

 
341

 
259

 
342

EBIT1
784

 
837

 
926

 
805

 
1,101

Net earnings1,2
496

 
564

 
437

 
354

 
600

 
 
 
 
 
 
 
 
 
 
Balance Sheet and Cash Flow Data
 
 
 
 
 
 
 
 
 
Cash and cash equivalents

$853

 

$957

 

$1,181

 

$1,007

 

$595

Merchandise inventories
1,920

 
1,978

 
2,027

 
1,896

 
1,945

Total assets3
9,737

 
7,886

 
8,115

 
7,858

 
7,698

Total long-term debt
2,676

 
2,685

 
2,737

 
2,774

 
2,805

Net cash provided by operating activities4
1,236

 
1,296

 
1,400

 
1,658

 
2,470

Capital expenditures
935

 
654

 
731

 
846

 
1,082

 
 
 
 
 
 
 
 
 
 
Performance Metrics
 
 
 
 
 
 
 
 
 
Net sales (decrease) increase
(2.2
%)
 
2.3
%
 
4.4
%
 
2.9
%
 
7.5
%
Digital sales as % of net sales
33.0
%
 
30.0
%
 
27.0
%
 
24.0
%
 
21.0
%
EBIT % of net sales1,2
5.2
%
 
5.4
%
 
6.1
%
 
5.6
%
 
7.8
%
Capital expenditures % of net sales
6.2
%
 
4.2
%
 
4.8
%
 
5.8
%
 
7.7
%
Return on assets3
5.1
%
 
6.8
%
 
5.4
%
 
4.5
%
 
6.6
%
Adjusted ROIC3,5
10.8
%
 
12.0
%
 
9.7
%
 
8.4
%
 
10.7
%
 
 
 
 
 
 
 
 
 
 
Per Share Information
 
 
 
 
 
 
 
 
 
Earnings per diluted share1,2,6

$3.18

 

$3.32

 

$2.59

 

$2.02

 

$3.15

Dividends declared per share4
1.48

 
1.48

 
1.48

 
1.48

 
6.33

1 In the fourth quarter of 2019, we incurred charges related to the integration of Trunk Club and debt refinancing costs, which reduced net earnings by $29, or $0.19 per diluted share. The integration charges reduced earnings before interest and income taxes by $32 and debt refinancing costs increased interest expense by $8.
2 Results for 2018 include the Estimated Non-recurring Charge of $72, or $0.28 per diluted share. See Note 1: Nature of Operations and Summary of Significant Accounting Policies in Item 8.
3 Amounts were impacted by the 2019 adoption of the Lease Standard. As a result, return on assets was negatively impacted by approximately 120 basis points and Adjusted ROIC was negatively impacted by approximately 40 basis points. See Note 1: Nature of Operations and Summary of Significant Accounting Policies in Item 8.
4 Amounts were impacted by the 2015 and 2017 credit card receivable transactions. As a result of the transaction, the dividends paid in 2015 included a special cash dividend of $4.85 per share. For further information regarding these impacts, see Note 4: Credit Card Receivable Transaction.
5 See Adjusted ROIC (non-GAAP financial measures) in Item 7: MD&A for additional information and reconciliation to the most directly comparable GAAP financial measure.
6 Earnings per diluted share included the impacts associated with the Tax Act of $0.25 per share in 2017 and the Trunk Club goodwill impairment charge of $1.12 per share in 2016.


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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollar and share amounts in millions except percentages and per share amounts, except where noted otherwise)
The following discussion and analysis of our financial condition and results of operations contains forward-looking statements and should be read in conjunction with Item 1A: Risk Factors, Item 6: Selected Financial Data, our Consolidated Financial Statements and related Notes thereto, as well as other cautionary statements and risks described elsewhere in this 2019 Annual Report, before deciding to purchase, hold or sell shares of our common stock.
OVERVIEW
We strive to serve customers seamlessly across multiple touchpoints, which includes our two brands — Nordstrom and Nordstrom Rack — both in stores and online. We have a high-quality store portfolio with 95% of our 116 FLS located in “A” malls and most of our 248 Nordstrom Racks in off-mall centers. Our established and growing digital business now makes up one-third of sales. Roughly 30% of our customers are shopping across more than one of these touchpoints. And as a result of this engagement, we know these customers spend four to 11 times more on average.
In 2019, net earnings were $496, or $3.18 per diluted share, which included $0.19 of charges primarily related to the integration of Trunk Club as part of our market strategy and debt refinancing costs. Our net sales decrease of 2.2% started with the first half of the year below expectations, while we improved sales trends in the second half across our Full-Price and Off-Price businesses. We made tremendous progress executing our market strategy, accelerating our sales trends, and maintaining our inventory and expense discipline, including the following:
Customer Satisfaction — Meaningfully improved customer satisfaction scores in many areas of our business and during our two key events — Anniversary Sale and Holiday.
Market Strategy — Accelerated the rollout of our market strategy to five of our top markets and significantly expanded our presence in the New York market with our NYC flagship opening.
Top-Line Trends — Successfully executed plans to drive our top-line as evidenced by a 400 basis-point improvement in the second half of the year relative to the first half.
Operating Discipline — Realized $225 in savings, exceeding our plans by 10%, maintained a positive sales and inventory spread for four straight quarters and generated annual operating cash flow of more than one billion dollars for the 11th consecutive year.
Our market strategy and the strength of our digital and physical assets allows us to better serve customers while increasing efficiencies. In 2020, we’re focused on scaling in 10 of our top markets, which represent more than half of our sales. As we continue into 2020, we remain focused on connecting with customers and serving them on their terms to position ourselves for long-term success.


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RESULTS OF OPERATIONS
In our ongoing effort to enhance the customer experience, we are focused on providing customers with a seamless experience across our businesses. We invested early in our omni-channel capabilities, integrating our operations, merchandising and technology across our stores and online, in both our Full-Price and Off-Price businesses. While our customers may engage with us through multiple businesses, we know they value the overall Nordstrom brand experience and view us simply as Nordstrom, which is ultimately how we view our company. We have one Retail reportable segment and analyze our results on a total company basis.
We measure our performance through customer, market share, operational and net sales metrics. As this is how we measure our performance, and as the change in comparable sales approximates the change in net sales in 2019, we only report changes in net sales.
In 2019, we adopted the SEC’s rule of FAST Act Modernization and Simplification of Regulation S-K. In accordance with this new standard, we limit our presentation and discussion below to the two most recent fiscal years. For our comparison and discussion of 2018 and 2017, see Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II of our 2018 Annual Report, which we filed with the SEC on March 18, 2019.
Net Sales
The following table summarizes net sales by business:
Fiscal year
2019

 
2018

Net sales by business:
 
 
 
Full-Price

$9,943

 

$10,299

Off-Price
5,189

 
5,181

Total net sales

$15,132

 

$15,480

 
 
 
 
Net sales (decrease) increase by business:
 
 
 
Full-Price1
(3.5
%)
 
(1.5
%)
Off-Price2
0.2
%
 
4.5
%
Total Company3
(2.2
%)
 
2.3
%
 
 
 
 
Digital sales as % of total net sales
33
%
 
30
%
Digital sales increase
7
%
 
15
%
1 Prior year Full-Price net sales included a decrease of approximately 300 basis points in 2018 due primarily to loyalty related adjustments and the 53rd week in 2017.
2 Prior year Off-Price net sales included a decrease of approximately 250 basis points in 2018 due primarily to the 53rd week and loyalty related adjustments in 2017.
3 Prior year net sales included a decrease of approximately 150 basis points in 2018 due to the 53rd week in 2017.

In 2019, total Company net sales decreased 2.2%, compared with 2018. While net sales decreased, we successfully executed plans to drive our top-line in the second half of the year due to our loyalty, digital marketing and merchandising programs. Digital sales increased 7% compared with 2018 and order pickup as a percentage of digital sales increased compared with 2018.
During the year, we expanded Nordstrom NYC with the opening of our flagship store, which is a cornerstone of our market strategy. In addition, we opened one FLS, five Nordstrom Rack stores and two Nordstrom Locals. We closed six Nordstrom FLS and one Nordstrom Rack store.
Full-Price net sales decreased 3.5%, compared with 2018. Full-Price sales reflected a decrease in the number of items sold, partially offset by an increase in the average selling price per item sold. Shoes was the top-performing merchandise category.
Off-Price net sales increased 0.2%, compared with 2018. Off-Price sales reflected an increase in the average selling price per item sold, partially offset by a decrease in the number of items sold. Men’s was the top-performing merchandise category.
Credit Card Revenues, Net
Credit card revenues, net include our portion of the ongoing credit card revenue, net of credit losses, pursuant to our program agreement with TD. TD is the exclusive issuer of our consumer credit cards and we perform the account servicing functions. Credit card revenues, net were $392 in 2019, compared with $380 in 2018, increasing $12 primarily as a result of our strategic partnership with TD to responsibly grow our receivables and associated revenues as well as efforts to drive new account growth.


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Gross Profit
The following table summarizes gross profit:
Fiscal year
2019

 
2018

Gross profit

$5,200

 

$5,325

Gross profit as a % of net sales
34.4
%
 
34.4
%
Inventory turnover rate
4.79

 
4.70

Our gross profit decreased $125 primarily from lower sales volume, while the rate remained flat compared with 2018. This reflected increased merchandise margins, offset by higher costs from growth in our loyalty program and planned occupancy costs related to the NYC flagship store.
Ending inventory as of February 1, 2020 decreased 2.9% compared with prior year, marking four consecutive quarters of sales growing faster than inventory. Our continued focus on inventory execution led to improvements in inventory turnover rate in 2019, particularly in Off-Price.
Selling, General and Administrative Expenses
SG&A is summarized in the following table:
Fiscal year
2019

 
2018

SG&A expenses

$4,808

 

$4,868

SG&A expenses as a % of net sales
31.8
%
 
31.5
%
Our SG&A rate increased 32 basis points and decreased $60 in 2019 compared with 2018. We recorded charges of $32 in 2019 primarily related to the integration of Trunk Club to create a cohesive styling offering across Full-Price and to gain efficiencies. Excluding the integration charges in 2019 and the Estimated Non-recurring Charge in 2018 of $72, SG&A rate increased by approximately 60 basis points, driven primarily by deleverage of fixed costs from lower sales volume. SG&A decreased $20 compared with 2018 due to our progress in reducing our fixed expense structure, partially offset by higher costs to drive sales, including fulfillment and marketing.
Earnings Before Interest and Income Taxes 
EBIT is summarized in the following table:
Fiscal year
2019

 
2018

EBIT

$784

 

$837

EBIT as a % of net sales
5.2
%
 
5.4
%
EBIT decreased $53 in 2019 compared with 2018, primarily due to lower sales volume. Excluding the integration charges of $32 in 2019 and the Estimated Non-recurring Charge of $72 in 2018, EBIT margin deleveraged by approximately 50 basis points from lower sales volume.
Interest Expense, Net
Interest expense, net is summarized in the following table:
Fiscal year
2019


2018

Interest on long-term debt and short-term borrowings

$151

 

$146

Less:
 
 
 
Interest income
(10
)
 
(15
)
Capitalized interest
(39
)
 
(27
)
Interest expense, net

$102

 

$104

Interest expense, net decreased $2 in 2019 compared with 2018 primarily due to higher capitalized interest in 2019 associated with our NYC flagship store and Supply Chain Networks, partially offset by $8 of debt refinancing costs.


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Income Tax Expense
Income tax expense is summarized in the following table:
Fiscal year
2019

 
2018

Income tax expense

$186

 

$169

Effective tax rate
27.3
%
 
23.1
%
The following table illustrates the components of our effective tax rate:
Fiscal year
2019

 
2018

Statutory rate
21.0
%
 
21.0
%
Tax Act impact

 
(0.1
%)
State and local income taxes, net of federal income taxes
5.4
%
 
5.8
%
Federal credits
(0.9
%)
 
(1.5
%)
Valuation allowance release
%
 
(1.2
%)
Other, net
1.8
%
 
(0.9
%)
Effective tax rate
27.3
%
 
23.1
%
The increase in the effective tax rate for 2019 compared with 2018 was primarily due to lower tax benefits from stock compensation and one-time tax benefits recognized in 2018 associated with the release of a foreign valuation allowance (see Note 14: Income Taxes in Item 8).
Earnings Per Share
EPS is as follows:
Fiscal year
2019

 
2018

Basic

$3.20

 

$3.37

Diluted

$3.18

 

$3.32

Diluted EPS decreased $0.14 in 2019 compared with 2018. Excluding $0.19 of charges related to the integration of Trunk Club and debt refinancing costs in 2019 and the Estimated Non-recurring Charge of $0.28 in 2018, diluted EPS decreased $0.23 primarily due to lower sales volume.
2020 Outlook
We remain committed to increasing total shareholder returns through three financial objectives: gaining market share; increasing profitability and return on invested capital; and maintaining disciplined capital allocation. Our initial 2020 financial expectations released on March 3, 2020, did not include the impact of COVID-19, including the temporary closures of our stores (see Note 1: Nature of Operations and Summary of Significant Accounting Policies in Item 8). Due to heightened uncertainty relating to the impacts of COVID-19 on our business operations, including the duration and impact on overall customer demand, we withdrew our 2020 guidance. We are making further reductions to our expense and capital expenditure plans and are currently suspending share repurchases.


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Adjusted ROIC (Non-GAAP financial measure)
We believe that Adjusted ROIC is a useful financial measure for investors and credit agencies in evaluating the efficiency and effectiveness of the capital we have invested in our business to generate returns over time. In addition, we have incorporated it in our executive incentive measures and we believe it is an important indicator of shareholders’ return over the long term.
For 2019, income statement activity for adjusted net operating profit and balance sheet amounts for average invested capital are measured under the Lease Standard, and the remaining years disclosed are under the previous lease standard. Under the previous lease standard, we estimated the value of our operating leases as if they met the criteria for capital leases or we had purchased the properties. This provided additional supplemental information that estimated the investment in our operating leases. Estimated depreciation on capitalized operating leases and average estimated asset base of capitalized operating leases are not calculated in accordance with, nor an alternative for, GAAP and should not be considered in isolation or as a substitute for our results as reported under GAAP.
Adjusted ROIC is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, return on assets, net earnings, total assets or other GAAP financial measures. Our method of determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to Adjusted ROIC is return on assets. The following is a reconciliation of return on assets to Adjusted ROIC:
Fiscal year
2019

 
2018

 
2017

 
2016

 
2015

Net earnings

$496

 

$564

 

$437

 

$354

 

$600

Add: income tax expense
186

 
169

 
353

 
330

 
376

Add: interest expense
112

 
119

 
141

 
122

 
125

Earnings before interest and income tax expense
794

 
852

 
931

 
806

 
1,101

 
 
 
 
 
 
 
 
 
 
Add: operating lease interest1
101

 

 

 

 

Add: rent expense, net

 
251

 
250

 
202

 
176

Less: estimated depreciation on capitalized operating leases2

 
(134
)
 
(133
)
 
(108
)
 
(94
)
Adjusted net operating profit
895

 
969

 
1,048

 
900

 
1,183

 
 
 
 
 
 
 
 
 
 
Less: estimated income tax expense
(244
)
 
(223
)
 
(468
)
 
(416
)
 
(456
)
Adjusted net operating profit after tax

$651

 

$746

 

$580

 

$484

 

$727

 
 
 
 
 
 
 
 
 
 
Average total assets

$9,765

 

$8,282

 

$8,055

 

$7,917

 

$9,076

Add: average estimated asset base of capitalized operating leases2

 
2,018

 
1,805

 
1,512

 
1,236

Less: average deferred property incentives and deferred rent liability

 
(616
)
 
(644
)
 
(644
)
 
(548
)
Less: average deferred property incentives in excess of ROU assets3
(307
)
 

 

 

 

Less: average non-interest-bearing current liabilities
(3,439
)
 
(3,479
)
 
(3,261
)
 
(3,012
)
 
(2,993
)
Average invested capital

$6,019

 

$6,205

 

$5,955

 

$5,773

 

$6,771

 
 
 
 
 
 
 
 
 
 
Return on assets4,5
5.1
%
 
6.8
%
 
5.4
%
 
4.5
%
 
6.6
%
Adjusted ROIC4,5
10.8
%
 
12.0
%
 
9.7
%
 
8.4
%
 
10.7
%
1 As a result of the adoption of the Lease Standard, we add back the operating lease interest to reflect how we manage our business. Operating lease interest is a component of operating lease cost recorded in occupancy costs and is calculated in accordance with the Lease Standard.  
2 Capitalized operating leases is our best estimate of the asset base we would record for our leases that are classified as operating under the previous lease standard if they had met the criteria for a finance lease or we had purchased the property. The asset base for each quarter is calculated as the trailing four quarters of rent expense multiplied by eight, a commonly used method to estimate the asset base we would record for our capitalized operating leases.
3 For leases with property incentives that exceed the ROU assets, we reclassify the amount from assets to other current liabilities and other liabilities. As a result of the adoption of the Lease Standard, we reduce average total assets, as this better reflects how we manage our business.  
4 Results for 2018 included lower income tax expense primarily associated with the Tax Act and a $72 unfavorable impact related to the Estimated Non-recurring Charge, which negatively impacted return on assets by approximately 60 basis points and Adjusted ROIC by approximately 80 basis points (see Note 1: Nature of Operations and Summary of Significant Accounting Policies in Item 8). Results for 2017 included a $42 unfavorable impact related to the Tax Act. Results for 2016 included a $197 unfavorable impact related to the Trunk Club non-cash goodwill impairment charge.
5 For 2019, the adoption of the Lease Standard negatively impacted return on assets by approximately 120 basis points and Adjusted ROIC by approximately 40 basis points. Integration charges of $32 in 2019, were primarily non-cash related and negatively impacted return on assets by approximately 30 basis points and Adjusted ROIC by approximately 40 basis points.  


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LIQUIDITY AND CAPITAL RESOURCES
We strive to maintain a level of liquidity sufficient to allow us to cover our seasonal cash needs and to maintain appropriate levels of short-term borrowings. We believe that our operating cash flows, available credit facility and potential future borrowings are sufficient to meet our cash requirements for the next 12 months and beyond.
Over the long term, we manage our cash and capital structure to maximize shareholder return, maintain our financial position, manage refinancing risk and allow flexibility for strategic initiatives. We regularly assess our debt and leverage levels, capital expenditure requirements, debt service payments, dividend payouts, potential share repurchases and other future investments. We believe that as of February 1, 2020, our existing cash and cash equivalents on-hand of $853, available credit facility of $800 and potential future operating cash flows and borrowings will be sufficient to fund these scheduled future payments and potential long-term initiatives. For more information, see subsequent events in Note 1: Nature of Operations and Summary of Significant Accounting Policies in Item 8.
The following is a summary of our cash flows by activity:
Fiscal year
2019

 
2018

Net cash provided by operating activities

$1,236

 

$1,296

Net cash used in investing activities
(909
)
 
(653
)
Net cash used in financing activities
(431
)
 
(867
)
Operating Activities
The majority of our operating cash inflows are derived from sales. We also receive cash payments for property incentives from developers. Our operating cash outflows generally consist of payments to our merchandise vendors (net of vendor allowances) and shipping carriers, payments to our employees for wages, salaries and other employee benefits and payments to our landlords for rent. Operating cash outflows also include payments for income taxes and interest payments on our short-term and long-term borrowings.
Net cash provided by operating activities decreased by $60 between 2019 and 2018 primarily due to payments made related to the Estimated Non-recurring Charge and a decrease in sales.
Investing Activities
Our investing cash outflows include payments for capital expenditures, including stores, supply chain improvements and technology costs. Our investing cash inflows are generally from proceeds from sales of property and equipment.
Net cash used in investing activities increased by $256 between 2019 and 2018 due to increases in capital expenditures, primarily related to our Supply Chain Network, including our omni-channel center, and Nordstrom NYC.
The opening of our first large-scale omni-channel center in Riverside, California, which will initially support our Full-Price customers in the West Coast region and Off-Price customers in the future, is expected to open in the spring of 2020. We also opened a smaller Local Omni-channel Hub in Torrance, California in 2019, which supports the greater Los Angeles market as part of our market strategy.
Capital Expenditures
Our capital expenditures, net are summarized as follows:
Fiscal year
2019

 
2018

Capital expenditures

$935

 

$654

Less: deferred property incentives1
(85
)
 
(53
)
Capital expenditures, net

$850

 

$601

 
 
 
 
Capital expenditures % of net sales
6.2
%
 
4.2
%
 
 
 
 
Capital expenditures, net category allocation:
 
 
 
Technology
25
%
 
30
%
Supply chain
27
%
 
18
%
Generational investments
32
%
 
30
%
New stores, relocations, remodels and other
16
%
 
22
%
Total
100
%
 
100
%
1 Deferred property incentives are included in our cash provided by operations in our Consolidated Statements of Cash Flows in Item 8. We operationally view the property incentives we receive from our developers and vendors as an offset to our capital expenditures.


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Financing Activities
The majority of our financing activities include repurchases of common stock, long-term debt proceeds and/or payments and dividend payments.
Net cash used in financing activities decreased $436 between 2019 and 2018 primarily due to decreased share repurchase activity.
Share Repurchases
In August 2018, our Board of Directors authorized a new program to repurchase up to $1,500 of our outstanding common stock, with no expiration date. In 2019, we repurchased 4.1 shares of our common stock for an aggregate purchase price of $186, compared with 14.3 shares for an aggregate purchase price of $702 during 2018. We had $707 remaining in share repurchase capacity as of February 1, 2020. The actual timing, price, manner and amounts of future share repurchases, if any, will be subject to market and economic conditions and applicable SEC rules.
Borrowing Activity
During 2019, we issued $500 aggregate principal amount of 4.375% senior unsecured notes due April 2030. We recorded debt issuance costs incurred as a result of the issuance in other financing activities, net in the Consolidated Statements of Cash Flows. With the proceeds of these new notes, we retired our $500 senior unsecured notes that were due May 2020 (see Note 9: Debt and Credit Facilities in Item 8).
Additionally, in 2018, we fully repaid $47 outstanding on our wholly owned subsidiary Puerto Rico’s unsecured borrowing facility (see Note 9: Debt and Credit Facilities in Item 8).
Dividends
In 2019, we paid dividends of $229, or $1.48 per share, compared with $250, or $1.48 per share, in 2018. In determining the dividends to pay, we analyze our dividend payout ratio and dividend yield, while taking into consideration our current and projected operating performance and liquidity. Our dividend payout ratio target range is 30% to 40% of the prior year’s net earnings.
In February 2020, subsequent to year end, we declared a quarterly dividend of $0.37 per share, which will be paid on March 25, 2020 to shareholders of record as of March 10, 2020.
Free Cash Flow (Non-GAAP financial measure)
Free Cash Flow is one of our key liquidity measures, and when used in conjunction with GAAP measures, we believe it provides investors with a meaningful analysis of our ability to generate cash from our business.
Free Cash Flow is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, operating cash flows or other financial measures prepared in accordance with GAAP. Our method of determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies. The financial measure calculated under GAAP which is most directly comparable to Free Cash Flow is net cash provided by operating activities. The following is a reconciliation of net cash provided by operating activities to Free Cash Flow:
Fiscal year
2019

 
2018

 
2017

Net cash provided by operating activities

$1,236

 

$1,296

 

$1,400

Less: capital expenditures
(935
)
 
(654
)
 
(731
)
Add: proceeds from sale of credit card receivables originated at third parties

 

 
16

Add (Less): change in cash book overdrafts
8

 

 
(55
)
Free Cash Flow

$309

 

$642

 

$630



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Adjusted EBITDA (Non-GAAP financial measure)
Adjusted EBITDA is one of our key financial metrics to reflect our view of cash flow from net earnings. Adjusted EBITDA excludes significant items which are non-operating in nature in order to evaluate our core operating performance against prior periods. The financial measure calculated under GAAP which is most directly comparable to Adjusted EBITDA is net earnings.

Adjusted EBITDA is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for net earnings, overall change in cash or liquidity of the business as a whole. Our method of determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies. The following is a reconciliation of net earnings to Adjusted EBITDA:
Fiscal year
2019

 
2018

 
2017

Net earnings

$496

 

$564

 

$437

Add: income tax expense
186

 
169

 
353

Add: interest expense, net
102

 
104

 
136

Earnings before interest and income taxes
784


837

 
926

 
 
 
 
 
 
Add: depreciation and amortization expenses
671


669

 
666

Less: amortization of developer reimbursements
(75
)

(79
)
 
(79
)
Adjusted EBITDA

$1,380



$1,427



$1,513

Credit Capacity and Commitments
As of February 1, 2020, we had total short-term borrowing capacity of $800 under the Revolver that expires September 2023. Provided that we obtain written consent from our lenders and that we are in compliance with the Revolver at the time, we have the option to increase the Revolver by up to $200, to a total of $1,000, and two options to extend the Revolver by one year. As of February 1, 2020, we had no borrowings outstanding under our Revolver. For more information, see subsequent events in Note 1: Nature of Operations and Summary of Significant Accounting Policies and Note 9: Debt and Credit Facilities in Item 8. In October 2021, our $500 4.00% senior unsecured notes will come due.
We maintain trade and standby letters of credit to facilitate our international payments. As of February 1, 2020, we have $8 available and none outstanding under the trade letter of credit and $15 available and $2 outstanding under the standby letter of credit.
Impact of Credit Ratings
Changes in our credit ratings may impact our costs to borrow and may require we hold collateral.
For our Revolver, the interest rate applicable to any borrowings we may enter into depends upon the type of borrowing incurred plus an applicable margin, which is determined based on our credit ratings. At the time of this report, our credit ratings and outlook were as follows:
 
Credit Ratings
 
Outlook
Moody’s
Baa2
 
Stable
Standard & Poor’s
BBB
 
Stable
Should the ratings assigned to our long-term debt improve, the applicable margin associated with any borrowings under the Revolver may decrease, resulting in a lower borrowing cost under this facility. Conversely, should the ratings assigned to our long-term debt worsen, the applicable margin associated with any borrowings under the Revolver may increase, resulting in a higher borrowing cost under this facility.
Debt Covenants
The Revolver requires that we maintain an adjusted debt to EBITDAR leverage ratio of no more than four times. The Revolver’s ratio calculation methodology has not been impacted by the adoption of the Lease Standard. As of February 1, 2020, we were in compliance with this covenant.


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Adjusted Debt to EBITDAR (Non-GAAP financial measure)
Adjusted Debt to EBITDAR is one of our key financial metrics and we believe using this measure is useful for analyzing our debt levels, as it provides a reflection of our credit worthiness that could impact our credit rating and borrowing costs. Our goal is to manage debt levels to maintain an investment-grade credit rating and operate with an efficient capital structure.
For 2019, income statement activity and balance sheet amounts are measured under the Lease Standard, while 2018 activity and amounts were measured under the previous lease standard. Under the previous lease standard, we estimated the value of our operating leases as if they met the criteria for capital leases or we had purchased the properties. This provided additional supplemental information that estimated the investment in our operating leases. Estimated capitalized operating lease liability is not calculated in accordance with, nor an alternative for, GAAP and should not be considered in isolation or as a substitution for our results as reported under GAAP.
Adjusted Debt to EBITDAR is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, debt to net earnings, net earnings, debt or other GAAP financial measures. Our method of determining non-GAAP financial measures may differ from other companies’ methods and therefore may not be comparable to those used by other companies.
The following is a reconciliation of debt to net earnings to Adjusted Debt to EBITDAR: