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Nordstrom Reports Second Quarter 2019 Earnings

BusinessWire - Wed Aug 21, 3:05PM CDT

Nordstrom, Inc. (NYSE:JWN) today reported earnings per diluted share of $0.90 for the second quarter ended August 3, 2019. Total Company net sales decreased 5.1 percent in the second quarter.

"We delivered strong bottom-line results, demonstrating our inventory and expense discipline. We exited the quarter in a favorable inventory position and made important strides in productivity," said Erik Nordstrom, co-president, Nordstrom, Inc. "We're focused on driving our top-line, and while this can take time, we are confident in our ability to manage through cycles. We remain encouraged by our key initiatives, including our local market strategy, and are making good progress on key areas of focus that we believe will collectively drive increased value creation for our shareholders."

Nordstrom is focused on driving top-line growth, improving profitability and executing key strategies to enhance the customer experience:

The Company's earnings beat expectations, resulting from strong inventory discipline as well as significant expense efficiencies across the Company. Inventory was down 6.5 percent over last year, positioning the Company well to re-balance its merchandise assortment with customer demand.While the Company's bottom-line exceeded expectations, sales were around the low end of its expected range. This reflected a challenging start to the quarter as well as softer performance for the Anniversary Sale and Off-Price business. However, Nordstrom saw positive outcomes from the execution of its loyalty and digital marketing programs. The Company is taking advantage of its strong inventory position to increase depth in key items and improve in-stock levels, applying learnings from its Anniversary Sale. The Off-Price business is amplifying its marketing efforts and making strategic inventory investments to fuel growth in the second half of the year.During the Anniversary Sale, the Company experienced year-over-year improvements in customer metrics and anticipates improved sell-through of Anniversary product to favorably impact merchandise margin performance in the third quarter.The Off-Price business managed inventory efficiently, enabling it to be opportunistic in the marketplace to drive a constant flow of newness in the second half. The strength of its inventory and expense execution mitigated most of its year-to-date sales shortfall.The goal of Nordstrom's local market strategy is to gain market share by increasing customer engagement through services and leveraging inventory in its most important markets. Scaling in the broader Los Angeles market, customers have significantly greater access to merchandise selection, contributing to Buy Online & Pick Up in Store sales nearly tripling in this market in July.Nordstrom will expand its local market strategy to New York City, its largest market for online sales, with the opening of its flagship store on October 24 and two Nordstrom Local neighborhood hubs in September. The combination of Nordstrom's physical and digital assets is expected to add a significant sales lift in this market.

SECOND QUARTER 2019 SUMMARY

Second quarter net earnings were $141 million compared with $162 million during the same period in fiscal 2018.Earnings before interest and taxes ("EBIT") were $216 million, or 5.7 percent of net sales, compared with $246 million, or 6.2 percent of net sales, during the same period in fiscal 2018. The decrease was driven primarily by lower sales volume.In Full-Price, net sales decreased 6.5 percent compared with the same period in fiscal 2018. Off-Price net sales decreased 1.9 percent.Total company digital sales grew 4 percent and represented 30 percent of the business.Gross profit, as a percentage of net sales, of 34.5 percent decreased 50 basis points compared with the same period in fiscal 2018. This was primarily due to deleverage on occupancy expenses. Ending inventory decreased 6.5 percent from last year, reflecting two consecutive quarters of maintaining a positive spread between inventory and sales. Despite a continued elevated promotional environment, merchandise margin rate relative to last year sequentially improved from the prior quarter.Selling, general and administrative expenses, as a percentage of net sales, of 31.2 percent increased 26 basis points compared with the same period in fiscal 2018. This was primarily due to fixed expense deleverage on lower sales volume, partially offset by expense savings related to ongoing efficiency initiatives as well as adjustments to performance-related expenses. On a year-to-date basis, selling, general and administrative expenses decreased 1.4 percent over last year, reflecting Nordstrom's ability to increase productivity and bend the expense curve. To date, the Company has realized over $100 million in expense savings, tracking ahead of plans to achieve $150 to $200 million for the year.The Company's enhanced loyalty program continues to grow. The Nordy Club has 12 million active customers, which represented an increase of 12 percent over last year and 64 percent of sales.During the six months ended August 3, 2019, the Company repurchased 4.1 million shares of its common stock for $186 million. A total capacity of $707 million remains available under its existing share repurchase authorization. The actual timing, price, manner and amounts of future share repurchases, if any, will be subject to market and economic conditions and applicable Securities and Exchange Commission ("SEC") rules.

EXPANSION UPDATE

During the second quarter of 2019, the Company opened one store:

Location                    Store Name             Square                               Timing
                                                                                         Footage
                                                                                         (000's)
------------------------- -------------------- -------------------- -------------------- ---------------------------------- -------------------- --------------------
Off-Price                                          
                                                   
    U.S. - Nordstrom Rack
                            Empire Outlets         36                                   July 4
        Staten Island, NY
Number of Stores                     August 3, 2019        August 3, 2019           August 4, 2018
                                 --------------------- ---------------------                       ---------------------
Full-Price                                 
                                                   113                   113                      116
    U.S. - Nordstrom full-line
                                                     6                     6                        6
    Canada - Nordstrom full-line
                                                     6                     6                        3
    Canada - Nordstrom Rack
                                                    12                    12                        9
    Other Full-Price(1)
Off-Price                                  
                                                   242                   242                      236
    U.S. - Nordstrom Rack
                                                     2                     2                        2
    Last Chance clearance stores
                                 --------------------- ---------------------                       ---------------------
Total                                              381                   381                      372
                                 ===================== =====================                       =====================
(1) Other Full-Price includes Trunk Club clubhouses, Jeffrey boutiques and Nordstrom Local neighborhood hubs.
 
Gross Square Footage                        30,216,000            30,216,000               30,412,000

FISCAL YEAR 2019 OUTLOOK

The Company revised its annual outlook to reflect second quarter results and expectations for the second half of the year. While the Company is evaluating the fourth tranche of tariffs on goods from China and has not incorporated the associated impact in its annual outlook, the estimated impact is expected to be relatively immaterial for the year.

Prior Outlook                  Prior Outlook                  Current Outlook                  Current Outlook
                                                                                            ------------------------------ ------------------------------ -------------------------------- --------------------------------
Net sales                                                                                   2 percent decrease to flat     2 percent decrease to flat     Approximately 2 percent decrease Approximately 2 percent decrease
Credit card revenues, net                                                                   Low to mid single-digit growth Low to mid single-digit growth Low to mid single-digit growth   Low to mid single-digit growth
EBIT                                                                                        $805 to $890 million           $805 to $890 million           $805 to $855 million             $805 to $855 million
EBIT margin                                                                                 5.3 to 5.8 percent             5.3 to 5.8 percent             5.3 to 5.6 percent               5.3 to 5.6 percent
Earnings per diluted share (excluding the impact of any potential future share repurchases) $3.25 to $3.65                 $3.25 to $3.65                 $3.25 to $3.50                   $3.25 to $3.50

CONFERENCE CALL INFORMATION

The Company's senior management will host a conference call to discuss second quarter 2019 results and fiscal 2019 outlook at 4:45 p.m. Eastern Daylight Time today. To listen to the live call online and view the speakers' prepared remarks and the conference call slides, visit the Investor Relations section of the Company's corporate website at http://investor.nordstrom.com. An archived webcast with the speakers' prepared remarks and the conference call slides will be available in the Quarterly Results section for one year. Interested parties may also dial 201-689-8354. A telephone replay will be available beginning approximately three hours after the conclusion of the call by dialing 877-660-6853 or 201-612-7415 and entering Conference ID 13693167, until the close of business on August 28, 2019.

ABOUT NORDSTROM

Nordstrom, Inc. is a leading fashion retailer based in the U.S. Founded in 1901 as a shoe store in Seattle, today Nordstrom operates 380 stores in 40 states, including 118 full-line stores in the United States, Canada and Puerto Rico; 248 Nordstrom Rack stores; three Jeffrey boutiques; two clearance stores; six Trunk Club clubhouses; and three Nordstrom Local service concepts. Additionally, customers are served online through Nordstrom.com, Nordstromrack.com, HauteLook and TrunkClub.com. Nordstrom, Inc.'s common stock is publicly traded on the NYSE under the symbol JWN.

Certain statements in this press release contain or may suggest "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995) that involves risks and uncertainties that could cause results to be materially different from expectations. The words "will," "may," "designed to," "outlook," "believes," "should," "targets," "anticipates," "assumptions," "plans," "expects" or "expectations," "intends," "estimates," "forecasts," "guidance" and similar expressions identify certain of these forward-looking statements. The Company also may provide forward-looking statements in oral statements or other written materials released to the public. All statements contained or incorporated in this press release or in any other public statements that address such future events or expectations are forward-looking statements. Important factors that could cause actual results to differ materially from these forward-looking statements are detailed in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2019. These forward-looking statements are not guarantees of future performance and speak only as of the date hereof, and, except as required by law, the Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances.

NORDSTROM, INC.
                                                                                                                         CONSOLIDATED STATEMENTS OF EARNINGS
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             (unaudited; amounts in millions, except per share amounts)
                                                                                                               
                                      Quarter Ended                                           Quarter Ended                                                                              Six Months Ended
                                                     -------------------- ------------------------------------------------------------------------------------                            ------------------------------------------------------------------------------------
                                     August 3, 2019              August 3, 2019                       August 4, 2018                       August 3, 2019                       August 4, 2018
                                                     -------------------- --------------------------------                        --------------------------------                        --------------------------------                        --------------------------------
Net sales                                                               $      $  3,778          $  3,980          $  7,127          $  7,450  
Credit card revenues, net                                              94            94                87               188               179  
                                                     -------------------- ------------  --------------------                      ------------  --------------------                      ------------  --------------------                      ------------  --------------------
Total revenues                                                      3,872         3,872             4,067             7,315             7,629  
Cost of sales and related buying and occupancy costs               (2,476        (2,476 )                             (2,589 )                             (4,704 )                             (4,877 )
Selling, general and administrative expenses                       (1,180        (1,180 )                             (1,232 )                             (2,319 )                             (2,353 )
                                                     -------------------- ------------  --------------------                      ------------  --------------------                      ------------  --------------------                      ------------  --------------------
Earnings before interest and income taxes                             216           216               246               292               399  
Interest expense, net                                                 (23           (23 )                                (28 )                                (46 )                                (56 )
                                                     -------------------- ------------  --------------------                      ------------  --------------------                      ------------  --------------------                      ------------  --------------------
Earnings before income taxes                                          193           193               218               246               343  
Income tax expense                                                    (52           (52 )                                (56 )                                (69 )                                (94 )
                                                     -------------------- ------------  --------------------                      ------------  --------------------                      ------------  --------------------                      ------------  --------------------
Net earnings                                                            $      $    141          $    162          $    177          $    249  
                                                     ==================== ====== ====== ====================                      ====== ====== ====================                      ====== ====== ====================                      ====== ====== ====================
                                                                                           
Earnings per share:                                                                                           
                                                                        $      $   0.91          $   0.97          $   1.14          $   1.48  
    Basic
                                                                        $      $   0.90          $   0.95          $   1.14          $   1.46  
    Diluted
                                                                                           
Weighted-average shares outstanding:                                                                          
                                                                    155.0         155.0             167.8             155.0             167.8  
    Basic
                                                                    155.6         155.6             170.3             155.9             170.3  
    Diluted
                                                                                           
Percent of net sales:                                                                                         
Gross profit                                                         34.5          34.5 %                               35.0 %                               34.0 %                               34.5 %
Selling, general and administrative expenses                         31.2          31.2 %                               31.0 %                               32.5 %                               31.6 %
Earnings before interest and income taxes                             5.7           5.7 %                                6.2 %                                4.1 %                                5.4 %
NORDSTROM, INC.
                                                                                                                                CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                             (unaudited; amounts in millions)
                                                                                                                                    
                                                                                              August 3, 2019              August 3, 2019                       February 2, 2019                        August 4, 2018
                                                                                                              -------------------- --------------------------------                        ----------------------------------                        ----------------------------------
Assets                                                                                                                                                 
Current assets:                                                                                                                                        
                                                                                                                                 $      $    956           $     957           $   1,343  
    Cash and cash equivalents
                                                                                                                               211           211                 148                 200  
    Accounts receivable, net
                                                                                                                             1,932         1,932               1,978               2,065  
    Merchandise inventories
                                                                                                                               384           384                 291                 439  
    Prepaid expenses and other
                                                                                                              -------------------- ------------  --------------------                      --------------  --------------------                      --------------  --------------------
Total current assets                                                                                                         3,483         3,483               3,374               4,047  
                                                                                                                                    
Land, property and equipment (net of accumulated depreciation of $6,813, $6,647 and $6,393)                                  4,036         4,036               3,921               3,860  
Operating lease right-of-use assets                                                                                          1,801         1,801      --      --  
Goodwill                                                                                                                       249           249                 249                 249  
Other assets                                                                                                                   366           366                 342                 334  
                                                                                                              -------------------- ------------  --------------------                      --------------  --------------------                      --------------  --------------------
Total assets                                                                                                                     $      $  9,935           $   7,886           $   8,490  
                                                                                                              ==================== ====== ====== ====================                      ======= ======= ====================                      ======= ======= ====================
                                                                                                                                    
Liabilities and Shareholders' Equity                                                                                        
Current liabilities:                                                                                                                                   
                                                                                                                                 $      $  1,819           $   1,469           $   1,840  
    Accounts payable
                                                                                                                               442           442                 580                 394  
    Accrued salaries, wages and related benefits
                                                                                                                               237           237      --      --  
    Current portion of operating lease liabilities
                                                                                                                             1,427         1,427               1,324               1,380  
    Other current liabilities
                                                                                                                               500           500                   8                  54  
    Current portion of long-term debt
                                                                                                              -------------------- ------------  --------------------                      --------------  --------------------                      --------------  --------------------
Total current liabilities                                                                                                    4,425         4,425               3,381               3,668  
                                                                                                                                    
Long-term debt, net                                                                                                          2,178         2,178               2,677               2,680  
Deferred property incentives, net                                                                                                5             5                 457                 480  
Non-current operating lease liabilities                                                                                      1,912         1,912      --      --  
Other liabilities                                                                                                              656           656                 498                 522  
                                                                                                                                    
Commitments and contingencies                                                                                                                          
                                                                                                                                    
Shareholders' equity:                                                                                                       
                                                                                                                             3,084         3,084               3,048               2,899  
    Common stock, no par value: 1,000 shares authorized; 154.9, 157.6 and 167.5 shares issued and outstanding
                                                                                                                            (2,286        (2,286 )                               (2,138 )                               (1,712 )
    Accumulated deficit
                                                                                                                               (39           (39 )                                  (37 )                                  (47 )
    Accumulated other comprehensive loss
                                                                                                              -------------------- ------------  --------------------                      --------------  --------------------                      --------------  --------------------
Total shareholders' equity                                                                          759           759                 873               1,140  
                                                                                                              -------------------- ------------  --------------------                      --------------  --------------------                      --------------  --------------------
Total liabilities and shareholders' equity                                                            $      $  9,935           $   7,886           $   8,490  
                                                                                                              ==================== ====== ====== ====================                      ======= ======= ====================                      ======= ======= ====================
NORDSTROM, INC.
                                                                                  CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    (unaudited; amounts in millions)
                                                                    
                                                                   Six Months Ended                                          Six Months Ended
                                                                                    -------------------- ----------------------------------------------------------------------------------------
                                                                    August 3, 2019               August 3, 2019                         August 4, 2018
                                                                                    -------------------- ----------------------------------                        ----------------------------------
Operating Activities                                                                                       
Net earnings                                                                                           $       $     177           $     249  
Adjustments to reconcile net earnings to net cash provided by operating activities:                        
                                                                                                     325             325                 338  
    Depreciation and amortization expenses and other, net
                                                                                          --  --                 (34 )
    Amortization of deferred property incentives
                                                                                                      89              89      --  
    Non-cash lease expense (including developer reimbursement amortization of $38)
                                                                                                     (21             (21 )                                  (13 )
    Deferred income taxes, net
                                                                                                      40              40                  51  
    Stock-based compensation expense
                                                                                                           
    Change in operating assets and liabilities:
                                                                                                      21              21                 (55 )
        Accounts receivable
                                                                                                       1               1                (122 )
        Merchandise inventories
                                                                                                    (140            (140 )                                 (149 )
        Prepaid expenses and other assets
                                                                                                     322             322                 404  
        Accounts payable
                                                                                                    (137            (137 )                                 (183 )
        Accrued salaries, wages and related benefits
                                                                                                     128             128                  76  
        Other current liabilities
                                                                                                       4               4                  29  
        Deferred property incentives
                                                                                                    (125            (125 )                       --  
        Lease liabilities (including operating lease interest of $47)
                                                                                                       8               8                   3  
        Other liabilities
                                                                                    -------------------- --------------  --------------------                      --------------  --------------------
Net cash provided by operating activities                                                            692             692                 594  
                                                                                    -------------------- --------------  --------------------                      --------------  --------------------
                                                                                        
Investing Activities                                                                                       
                                                                                                    (480            (480 )                                 (269 )
    Capital expenditures
                                                                                                      26              26                 (21 )
    Other, net
                                                                                    -------------------- --------------  --------------------                      --------------  --------------------
Net cash used in investing activities                                                               (454            (454 )                                 (290 )
                                                                                    -------------------- --------------  --------------------                      --------------  --------------------
                                                                                        
Financing Activities                                                                                       
                                                                                          --  --                  (5 )
    Principal payments on long-term borrowings
                                                                                                      92              92                  63  
    Increase in cash book overdrafts
                                                                                                    (114            (114 )                                 (124 )
    Cash dividends paid
                                                                                                    (210            (210 )                                  (82 )
    Payments for repurchase of common stock
                                                                                                      11              11                  49  
    Proceeds from issuances under stock compensation plans
                                                                                                     (18             (18 )                                  (17 )
    Tax withholding on share-based awards
                                                                                          --  --                 (26 )
    Other, net
                                                                                    -------------------- --------------  --------------------                      --------------  --------------------
Net cash used in financing activities                                                               (239            (239 )                                 (142 )
                                                                                    -------------------- --------------  --------------------                      --------------  --------------------
                                                                                        
Net (decrease) increase in cash and cash equivalents                                                  (1              (1 )                                  162  
Cash and cash equivalents at beginning of period                                                     957             957               1,181  
                                                                                    -------------------- --------------  --------------------                      --------------  --------------------
Cash and cash equivalents at end of period                                                             $       $     956           $   1,343  
                                                                                    ==================== ======= ======= ====================                      ======= ======= ====================

NORDSTROM, INC.SUMMARY OF NET SALES(unaudited; amounts in millions)

Our Full-Price business includes our Nordstrom U.S. full-line stores, Nordstrom.com, Canada, Trunk Club, Jeffrey and Nordstrom Local. Our Off-Price business includes Nordstrom U.S. Rack stores, Nordstromrack.com/HauteLook and Last Chance clearance stores. The following table summarizes net sales for the quarter and six months ended August 3, 2019 compared with the same periods in fiscal 2018:

Quarter Ended                                           Quarter Ended                                                                              Six Months Ended
                                           -------------------- ------------------------------------------------------------------------------------                            ------------------------------------------------------------------------------------
                           August 3, 2019              August 3, 2019                       August 4, 2018                       August 3, 2019                       August 4, 2018
                                           -------------------- --------------------------------                        --------------------------------                        --------------------------------                        --------------------------------
Net sales by business:                                                                              
Full-Price                                                    $      $  2,530          $  2,707          $  4,657          $  4,948  
Off-Price                                                 1,248         1,248             1,273             2,470             2,502  
                                           -------------------- ------------  --------------------                      ------------  --------------------                      ------------  --------------------                      ------------  --------------------
Total net sales                                               $      $  3,778          $  3,980          $  7,127          $  7,450  
                                           ==================== ====== ====== ====================                      ====== ====== ====================                      ====== ====== ====================                      ====== ====== ====================
                                                                                 
Net sales increase (decrease) by business:                                                          
Full-Price                                                 (6.5          (6.5 %)                              (5.0 %)                              (5.9 %)                              (1.2 %)
Off-Price                                                  (1.9          (1.9 %)                               7.0 %                               (1.3 %)                               6.9 %
Total Company                                              (5.1          (5.1 %)                               7.1 %                               (4.3 %)                               6.5 %
                                                                                 
Digital sales as % of total net sales(1)                     30            30 %                                 28 %                                 31 %                                 28 %
(1) Digital sales are online sales and digitally assisted store sales which include Buy Online, Pick Up in Store ("BOPUS"), Ship to Store and Style Board, a digital selling tool. In 2019, we updated our digital sales calculation, including our prior year digital sales for comparability. Although we do not expect the change to be material for the full year, some timing differences will occur between the second and third quarters of the year. Digital sales are online sales and digitally assisted store sales which include Buy Online, Pick Up in Store ("BOPUS"), Ship to Store and Style Board, a digital selling tool. In 2019, we updated our digital sales calculation, including our prior year digital sales for comparability. Although we do not expect the change to be material for the full year, some timing differences will occur between the second and third quarters of the year.

NORDSTROM, INC.ADJUSTED RETURN ON INVESTED CAPITAL ("ADJUSTED ROIC")(NON-GAAP FINANCIAL MEASURE)(unaudited; dollar amounts in millions)

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 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 comprised of two quarters of activity under the new lease standard ("Lease Standard") for 2019, and the last two quarters of 2018 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, generally accepted accounting principles ("GAAP") and should not be considered in isolation or as a substitution of 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 the components of Adjusted ROIC and return on assets:

Four Quarters Ended                                      Four Quarters Ended
                                                                       -------------------- --------------------------------------------------------------------------------------
                                                       August 3, 2019              August 3, 2019                        August 4, 2018
                                                                       -------------------- --------------------------------                        ----------------------------------
Net earnings                                                                              $      $    492           $     513  
Add: income tax expense                                                                 144           144                 329  
Add: interest expense                                                                   109           109                 124  
                                                                       -------------------- ------------  --------------------                      --------------  --------------------
Earnings before interest and income tax expense                                         745           745                 966  
                                                                         
Add: operating lease interest(1)                                                         47            47      --  
Add: rent expense, net                                                                  127           127                 249  
Less: estimated depreciation on capitalized operating leases(2)                         (68           (68 )                                 (133 )
                                                                       -------------------- ------------  --------------------                      --------------  --------------------
Adjusted net operating profit                                                           851           851               1,082  
                                                                         
Less: estimated income tax expense                                                     (193          (193 )                                 (422 )
                                                                       -------------------- ------------  --------------------                      --------------  --------------------
Adjusted net operating profit after tax                                                   $      $    658           $     660  
                                                                       ==================== ====== ====== ====================                      ======= ======= ====================
                                                                         
Average total assets                                                                      $      $  9,016           $   8,175  
Less: average non-interest-bearing current liabilities                               (3,528        (3,528 )                               (3,371 )
Less: average deferred property incentives in excess of ROU assets(3)                  (154          (154 )                       --  
Add: average estimated asset base of capitalized operating leases(2)                  1,005         1,005               1,962  
Less: average deferred property incentives and deferred rent liability                 (303          (303 )                                 (635 )
                                                                       -------------------- ------------  -------------------- -------------------- --------------  --------------------
Average invested capital                                                                  $      $  6,036           $   6,131  
                                                                       ==================== ====== ====== ====================                      ======= ======= ====================
                                                                         
Return on assets(4)                                                                     5.5           5.5 %                                  6.3 %
Adjusted ROIC(4)                                                                       10.9          10.9 %                                 10.8 %
(1) As a result 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.                                                                                                                                                                                                           As a result 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. 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 operating lease right-of-use assets ("ROU assets"), we reclassify the amount from assets to other current liabilities and other liabilities. As a result of the Lease Standard, we reduce average total assets, as this better reflects how we manage our business.                                                                                                      For leases with property incentives that exceed the operating lease right-of-use assets ("ROU assets"), we reclassify the amount from assets to other current liabilities and other liabilities. As a result of the Lease Standard, we reduce average total assets, as this better reflects how we manage our business.
(4) Results for the four quarters ended August 3, 2019 included the $72 impact related to the estimated non-recurring credit-related charge, which negatively impacted return on assets by approximately 50 basis points and Adjusted ROIC by approximately 70 basis points. In addition, the impact of the Lease Standard negatively impacted return on assets by approximately 60 basis points and Adjusted ROIC by approximately 20 basis points.                                  Results for the four quarters ended August 3, 2019 included the $72 impact related to the estimated non-recurring credit-related charge, which negatively impacted return on assets by approximately 50 basis points and Adjusted ROIC by approximately 70 basis points. In addition, the impact of the Lease Standard negatively impacted return on assets by approximately 60 basis points and Adjusted ROIC by approximately 20 basis points.

NORDSTROM, INC.ADJUSTED DEBT TO EBITDAR (NON-GAAP FINANCIAL MEASURE)(unaudited; dollar amounts in millions)

Adjusted Debt to earnings before interest, income taxes, depreciation, amortization and rent ("EBITDAR") is one of our key financial metrics and we believe that our debt levels are best analyzed using this measure, 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 for adjusted EBITDAR is comprised of two quarters of activity under the Lease Standard for 2019 and the last two quarters of 2018 under the previous lease standard. Balance sheet amounts are as of the end of the quarter, and under the new Lease Standard for 2019 and the previous lease standard for 2018. 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 of 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 the components of Adjusted Debt to EBITDAR and debt to net earnings:

2019(1)                      2019(1)                                2018(1)
                                                        -------------------- ----------------------------------                        ----------------------------------
Debt                                                                       $       $   2,678           $   2,734  
Add: operating lease liabilities                                       2,149           2,149      --  
Add: estimated capitalized operating lease liability(2)       --  --               1,993  
                                                        -------------------- --------------  --------------------                      --------------  --------------------
Adjusted Debt                                                              $       $   4,827           $   4,727  
                                                        ==================== ======= ======= ====================                      ======= ======= ====================
                                                            
Net earnings                                                               $       $     492           $     513  
Add: income tax expense                                                  144             144                 329  
Add: interest expense, net                                                95              95                 115  
                                                        -------------------- --------------  --------------------                      --------------  --------------------
Earnings before interest and income taxes                                731             731                 957  
                                                            
Add: depreciation and amortization expenses                              653             653                 683  
Add: operating lease cost(3)                                             138             138      --  
Add: rent expense, net                                                   127             127                 249  
Add: non-cash acquisition-related charges                     --  --                   1  
                                                        -------------------- --------------  --------------------                      --------------  --------------------
Adjusted EBITDAR                                                           $       $   1,649           $   1,890  
                                                        ==================== ======= ======= ====================                      ======= ======= ====================
                                                            
Debt to Net Earnings(4)                                                  5.4             5.4                 5.3  
Adjusted Debt to EBITDAR(4)                                              2.9             2.9                 2.5
(1) The components of Adjusted Debt are as of August 3, 2019 and August 4, 2018, while the components of Adjusted EBITDAR are for the four quarters ended August 3, 2019 and August 4, 2018.                                                                                                                                                              The components of Adjusted Debt are as of August 3, 2019 and August 4, 2018, while the components of Adjusted EBITDAR are for the four quarters ended August 3, 2019 and August 4, 2018.
(2) Based upon the estimated lease liability as of the end of the period, calculated as the trailing four quarters of rent expense multiplied by eight, a commonly used method of estimating the debt we would record for our leases that are classified as operating if they had met the criteria for a capital lease or we had purchased the property.  Based upon the estimated lease liability as of the end of the period, calculated as the trailing four quarters of rent expense multiplied by eight, a commonly used method of estimating the debt we would record for our leases that are classified as operating if they had met the criteria for a capital lease or we had purchased the property.
(3) As a result of the Lease Standard, we add back the operating lease cost to calculate Adjusted EBITDAR.                                                                                                                                                                                                                                     As a result of the Lease Standard, we add back the operating lease cost to calculate Adjusted EBITDAR.
(4) Results for the four quarters ended August 3, 2019 included the $72 impact related to the estimated non-recurring credit-related charge, which negatively impacted Debt to Net Earnings by 0.5 and Adjusted Debt to EBITDAR by 0.1. In addition, the impact of the Lease Standard had no impact on Debt to Net Earnings nor Adjusted Debt to EBITDAR. Results for the four quarters ended August 3, 2019 included the $72 impact related to the estimated non-recurring credit-related charge, which negatively impacted Debt to Net Earnings by 0.5 and Adjusted Debt to EBITDAR by 0.1. In addition, the impact of the Lease Standard had no impact on Debt to Net Earnings nor Adjusted Debt to EBITDAR.

NORDSTROM, INC.FREE CASH FLOW (NON-GAAP FINANCIAL MEASURE)(unaudited; amounts in millions)

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:

Six Months Ended                                  Six Months Ended
                                          ---------------- ----------------------------------------------------------------------------
                        August 3, 2019          August 3, 2019                   August 4, 2018
                                          ---------------- ----------------------------                        ----------------------------
Net cash provided by operating activities                $    $  692        $  594  
Less: capital expenditures                            (480      (480 )                           (269 )
Add: change in cash book overdrafts                     92        92            63  
                                          ---------------- --------  --------------------                      --------  --------------------
Free Cash Flow                                           $    $  304        $  388  
                                          ================ ==== ==== ====================                      ==== ==== ====================

NORDSTROM, INC.ADJUSTED EBITDA (NON-GAAP FINANCIAL MEASURE)(unaudited; amounts in millions)

Adjusted earnings before interest, income taxes, depreciation and amortization ("EBITDA") is our key financial metric 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:

Six Months Ended                                        Six Months Ended
                                               -------------------- ------------------------------------------------------------------------------------
                               August 3, 2019              August 3, 2019                       August 4, 2018
                                               -------------------- --------------------------------                        --------------------------------
Net earnings                                                      $      $    177          $    249  
Add: income tax expense                                          69            69                94  
Add: interest expense, net                                       46            46                56  
                                               -------------------- ------------  --------------------                      ------------  --------------------
Earnings before interest and income taxes                       292           292               399  
                                                 
Add: depreciation and amortization expenses                     323           323               338  
Less: amortization of developer reimbursements                  (38           (38 )                                (40 )
                                               -------------------- ------------  --------------------                      ------------  --------------------
Adjusted EBITDA                                                   $      $    577          $    697  
                                               ==================== ====== ====== ====================                      ====== ====== ====================

View source version on businesswire.com: https://www.businesswire.com/news/home/20190821005586/en/

SOURCE: Nordstrom, Inc.

INVESTOR CONTACT:
Trina Schurman
Nordstrom, Inc.
(206) 303-6503


MEDIA CONTACT:
Gigi Ganatra Duff
Nordstrom, Inc.
(206) 303-3030

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