(Dollar and share amounts in millions except per share amounts) OVERVIEW At the onset of the pandemic, our primary objective was protecting and enhancing liquidity, which we achieved. Given the uncertainty over how long our temporary store closures would last, and with inventory as our biggest investment, we took decisive action to minimize risk and stabilize our business. In the first quarter, we significantly reduced inventory levels by more than 25%, allowing us to mitigate markdowns and bring in newness for customers. As the pace of change in customer behavior continued to accelerate, we also took proactive steps to execute our strategic plans with greater speed. This included restructuring our organization and permanently closing 16 FLS, which contributed to overhead cost reductions of nearly 20% in the second quarter. For the second quarter, we successfully executed on our operating plan with earnings, cash and liquidity well exceeding our expectations. Our net loss per share of$1.62 and EBIT loss of$370 included COVID-19 related charges of$0.08 per share or$23 , primarily associated with corporate asset impairments. We ended the quarter with almost$1,300 in liquidity, including$991 in cash. We generated quarterly operating cash flow of more than$185 , enabling us to pay down$300 on our revolving line of credit. Total net sales declined 53%, reflecting our stores being closed approximately 50% of the days for the quarter and also included a timing shift of approximately 10 percentage points from moving the entire Anniversary event from the second quarter into the third quarter. Our digital sales decrease of 5% was also negatively impacted by the Anniversary shift by approximately 25 percentage points. Excluding the shift impact, digital sales increased approximately 20% in the second quarter. From a top-line perspective, we achieved our expectations and identified opportunities to drive further improvement. Our streamlined operations and inventory position gave us flexibility to bring in new and relevant product. While inventories were constrained and we left some demand unmet, our decision to be prudent with our inventory plans helped deliver better than expected merchandise margin, earnings and operating cash flow. We exited the quarter in an advantageous position, with clean inventory and an ability to amplify relevant categories to capture customer demand. We increased receipts in July as we geared up for our Anniversary Sale that began onAugust 4th . This is our largest event, offering new arrivals at limited-time savings. It represents an important opportunity for us to provide a one-of-a-kind experience for our loyalty customers while introducing new customers toNordstrom . Due to COVID-19, we moved our event from July to August to help ensure the safety and comfort of our customers and employees and to deliver the most relevant merchandise assortment. As we head into the second half of the year, we continue to take a flexible and prudent approach to planning our business. Given the highly uncertain environment, we are prepared for a range of scenarios to ensure we can sustain and grow our business. We are confident in our ability to continue developing critical enablers of the customer experience while maintaining the ability to adjust quickly. Based on current trends and our inventory plans, we expect sequential and gradual improvement in sales, earnings and cash flow in the back half of the year. Our actions to shore up our financial position in the first half of 2020 allow us to head into the second half of this year and prepare for 2021 from a position of strength. We accelerated our long-term strategic plans by optimizing the mix of physical and digital assets and increasing our agility through a leaner and more efficient organization. When combined with a capital structure that provides a strong foundation for reinvestment, we are well-positioned to respond quickly to a period of accelerated change in customer behavior. Over the near and medium term, we are focused on reinvesting in our strategic growth priorities to deliver a best-in-class customer experience while maintaining a strong balance sheet. As we emerge from this disruptive period, our ambition is forNordstrom to be positioned as a retail winner by gaining market share and driving profitable growth. 16 of 27 -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollar and share amounts in millions except per share amounts) RESULTS OF OPERATIONS In our ongoing effort to enhance the customer experience, we are focused on providing 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 overallNordstrom brand experience and view us simply asNordstrom , which is ultimately how we view our company. We have one Retail reportable segment and analyze our results on a total company basis, using customer, market share, operational and net sales metrics.Net Sales The following table summarizes net sales by business: Quarter Ended Six Months Ended August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019 Net sales by business: Full-Price$1,066 $2,530 $2,423 $4,657 Off-Price 712 1,248 1,381 2,470 Total net sales$1,778 $3,778 $3,804 $7,127 Net sales decrease by business: Full-Price (57.9 %) (6.5 %) (48.0 %) (5.9 %) Off-Price (43.0 %) (1.9 %) (44.1 %) (1.3 %)Total Company (53.0 %) (5.1 %) (46.6 %) (4.3 %) Digital sales as % of total net sales 61 % 30 % 57 % 31 %Total Company net sales decreased 53.0% and 46.6% for the second quarter and six months endedAugust 1, 2020 , compared with the same periods in 2019. These declines primarily resulted from COVID-19, including our temporary store closures for approximately 50% of the days for the quarter and six months endedAugust 1, 2020 , as well as the timing impact of the Anniversary Sale shifting from the second quarter to the third quarter in 2020. The top-performing merchandise categories were Home, Kids' and Accessories for the second quarter of 2020 and six months endedAugust 1, 2020 . During the six months endedAugust 1, 2020 , we closed 16 FLS, sixTrunk Club clubhouses and three Jeffrey boutiques. Digital sales decreased 5% for the second quarter of 2020 and were flat for the six months endedAugust 1, 2020 , compared with the same periods in 2019, primarily due to the Anniversary Sale timing shift that negatively impacted the second quarter by approximately 25 percentage points. By excluding the shift impact, digital sales increased approximately 20% in the second quarter and in the mid-teens range for the six months endedAugust 1, 2020 . Full-Price net sales decreased 57.9% and 48.0% for the second quarter and six months endedAugust 1, 2020 , compared with the same periods in 2019. These declines resulted from the temporary store closures and the Anniversary Sale timing shift. Off-Price net sales decreased 43.0% and 44.1% for the second quarter and six months endedAugust 1, 2020 , compared with the same periods in 2019. These declines resulted primarily from the temporary store closures. 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 was$84 and$177 for the second quarter and six months endedAugust 1, 2020 , compared with$94 and$188 for the same periods in 2019. The decreases were primarily a result of lower interchange revenue from lower spend on our credit cards at other merchants. 17 of 27 -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollar and share amounts in millions except per share amounts) Gross Profit The following table summarizes gross profit: Quarter Ended Six Months Ended August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019 Gross profit$372 $1,302 $588 $2,423 Gross profit as a % of net sales 20.9 % 34.5 % 15.5 % 34.0 % August 1, 2020 August 3, 2019 Inventory turnover rate 4.52 4.71 Gross profit decreased$930 and 14% as a percentage of net sales for the second quarter of 2020, and$1,835 and 19% for the six months endedAugust 1, 2020 compared with the same periods in 2019, primarily due to planned markdowns and deleverage from lower sales volume. Ending inventory as ofAugust 1, 2020 decreased 24% compared with the prior period, primarily due to the impact of our aggressive actions in prior quarter to reduce receipts and clear inventory, enabling targeted new receipts to support the Anniversary Sale. Lower sales volume led to a decrease in inventory turnover rate as ofAugust 1, 2020 . Selling, General and Administrative Expenses SG&A is summarized in the following table: Quarter Ended Six Months Ended August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019 SG&A expenses$826 $1,180 $1,948 $2,319 SG&A expenses as a % of net sales 46.5 % 31.2 % 51.2 % 32.5 % SG&A decreased$354 for the second quarter of 2020 and$371 for the six months endedAugust 1, 2020 , compared with the same periods in 2019, primarily as a result of lower sales volumes in addition to reduced overhead labor and benefit costs. SG&A rates increased for the second quarter of 2020 and six months endedAugust 1, 2020 , primarily as a result of deleverage on lower sales volumes. Earnings (Loss) Before Interest and Income Taxes EBIT is summarized in the following table: Quarter Ended Six Months Ended August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019 EBIT ($370 )$216 ($1,183 )$292 EBIT as a % of sales (20.8 %) 5.7 % (31.1 %) 4.1 % EBIT decreased$586 for the second quarter of 2020 and$1,475 for the six months endedAugust 1, 2020 , compared with the same periods in 2019, primarily due to lower sales volume from COVID-19 and the Anniversary Sale timing shift. COVID-19 related charges of$23 in the second quarter of 2020 consisted primarily of corporate asset impairments. COVID-19 related charges of$303 for the six months endedAugust 1, 2020 consisted primarily of asset impairments from store closures, premium pay and benefits and restructuring charges. 18 of 27 -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollar and share amounts in millions except per share amounts) Interest Expense, Net Interest expense, net was$51 for the second quarter of 2020, compared with$23 for the same period in 2019, and$85 for the six months endedAugust 1, 2020 , compared with$46 for the same period in 2019. The increase for the second quarter of 2020 and six months endedAugust 1, 2020 was primarily due to additional interest related to the Revolver drawdown and the new Senior Secured Note in the first quarter of 2020, as well as lower capitalized interest in 2020. Income Tax Expense Income tax expense is summarized in the following table: Quarter Ended
Six Months Ended
August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019 Income tax expense ($166 )$52 ($492 )$69 Effective tax rate 39.5 % 27.2 % 38.8 % 28.0 % The effective tax rate increased in the second quarter of 2020 and for the six months endedAugust 1, 2020 , compared with the same periods in 2019, primarily due to the CARES Act that allows us to carry back expected 2020 losses at the higher tax rate in previous years. The increase was partially offset by reduced federal credits and increased nondeductible stock compensation. Earnings (Loss) Per Share EPS is as follows: Quarter Ended Six Months Ended August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019 Basic ($1.62 )$0.91 ($4.95 )$1.14 Diluted ($1.62 )$0.90 ($4.95 )$1.14 Earnings (loss) per diluted share decreased$2.52 for the second quarter of 2020, compared with the same period in 2019, and decreased$6.09 for the six months endedAugust 1, 2020 , compared with the same period in 2019, primarily due to lower sales as a result of COVID-19 and the Anniversary Sale timing shift. 19 of 27 -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollar and share amounts in millions except per share amounts) Adjusted ROIC (Non-GAAP financial measure) We believe that Adjusted ROIC is a useful financial measure for investors 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 comprised of two quarters of activity under the Lease Standard for 2019, and 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, GAAP and should not be considered in isolation or as a substitution 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:
Four Quarters Ended
August 1, 2020 August 3, 2019 Net (loss) earnings ($458 )$492 Add: income tax (benefit) expense (375) 144 Add: interest expense 149 109 (Loss) earnings before interest and income tax expense (684) 745 Add: operating lease interest1 98 47 Add: rent expense, net - 127 Less: estimated depreciation on capitalized operating leases2 - (68) Adjusted net operating (loss) profit (586) 851 Less: estimated income tax expense 264 (193) Adjusted net operating (loss) profit after tax ($322 )$658 Average total assets$9,850 $9,016
Add: average estimated asset base of capitalized operating leases2
- 1,005
Less: average deferred property incentives and deferred rent liability
- (303)
Less: average deferred property incentives in excess of ROU assets3
(296) (154) Less: average non-interest-bearing current liabilities (3,267) (3,528) Average invested capital$6,287 $6,036 Return on assets4 (4.6 %) 5.5 % Adjusted ROIC4 (5.1 %) 10.9 % 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 the four quarters endedAugust 3, 2019 included the$72 impact related to the Estimated Non-recurring Charge, which negatively impacted return on assets by approximately 50 basis points and Adjusted ROIC by approximately 70 basis points. Integration charges, primarily related toTrunk Club , of$32 in the fourth quarter of 2019, were primarily non-cash related and negatively impacted return on assets by approximately 30 basis points and Adjusted ROIC by approximately 30 basis points for the four quarters endedAugust 1, 2020 . COVID-19 related charges for the four quarters endedAugust 1, 2020 negatively impacted return on assets by approximately 190 basis points and Adjusted ROIC by approximately 270 basis points for the four quarters endedAugust 1, 2020 . 20 of 27 -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollar and share amounts in millions except per share amounts) LIQUIDITY AND CAPITAL RESOURCES In response to the uncertainty related to the COVID-19 pandemic, we took action to provide further liquidity and flexibility during these unprecedented times. Our stores were temporarily closed approximately 50% of the days for the quarter and six months endedAugust 1, 2020 . We continue to review state and local legal requirements and conditions and may need to close some or all of the stores currently open as COVID-19 and other uncertainties, including civil unrest, continue to unfold. We remain open and ready to serve our customers through our apps and online at Nordstrom.com, Nordstrom.ca, Nordstromrack.com, HauteLook.com and TrunkClub.com, including digital styling, online order pickup and contactless curbside services at certain FLS. Our business model serves us well as we fulfill digital orders through many of our stores. We have taken the following actions to date to increase our cash position and preserve financial flexibility: •Drew down$500 net on our Revolver and issued$600 in Secured Notes •Suspended quarterly cash dividends beginning in the second quarter of 2020 and share repurchases •Planned expense savings of$200 to$250 and further net cash savings of more than$500 in operating expenses, capital expenditures and working capital in fiscal year 2020 Second quarter operating cash flow of$187 exceeded our expectations and enabled us to pay down$300 on our Revolver.Nordstrom ended the second quarter with$991 in cash and cash equivalents and$300 of additional liquidity available on our Revolver. With our financial position strengthened, we are prioritizing market share gains and profitable sales growth. 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. While this is a time of great uncertainty, we believe that our operating cash flows 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. The following is a summary of our cash flows by activity:
Six Months Ended
August 1, 2020 August 3, 2019 Net cash (used in) provided by operating activities ($591 )$692 Net cash used in investing activities (211) (454) Net cash provided by (used in) financing activities 949 (239) Operating Activities Cash from operating activities decreased$1,283 for the six months endedAugust 1, 2020 , compared with the same period in 2019, primarily due to a reduction in net earnings as a result of temporary store closures and the Anniversary Sale timing shift. Investing Activities Net cash used in investing activities decreased$243 for the six months endedAugust 1, 2020 , compared with the same period in 2019, primarily due to a decrease in capital expenditures, as we prioritized investments in supply chain and technology, while reducing non-critical spend on store remodels. Capital Expenditures Our capital expenditures, net are summarized as follows: Six Months Ended August 1, 2020 August 3,
2019
Capital expenditures$228 $480 Less: deferred property incentives1 (27) (39) Capital expenditures, net$201 $441 Capital expenditures % of net sales 6.0 % 6.7 % 1 Deferred property incentives are included in our cash provided by operations in our Consolidated Statements of Cash Flows in Item 1. We operationally view the property incentives we receive from our developers and vendors as an offset to our capital expenditures. Financing Activities Cash from financing activities increased$1,188 for the six months endedAugust 1, 2020 , compared with the same period in 2019, primarily due to the net proceeds from the Revolver and Secured Notes. 21 of 27 -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollar and share amounts in millions except per share amounts) 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 (used in) provided by operating activities. The following is a reconciliation of net cash (used in) provided by operating activities to Free Cash Flow:
Six Months Ended
August 1, 2020 August 3, 2019 Net cash (used in) provided by operating activities ($591 )$692 Less: capital expenditures (228) (480) (Less) Add: change in cash book overdrafts (84) 92 Free Cash Flow ($903 )$304 Adjusted EBITDA and Adjusted EBITDAR (Non-GAAP financial measures) 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 EBITDAR is also one of our key financial metrics as it will be used to measure compliance with one of our Revolver covenants beginning in the third quarter of 2020. Adjusted EBITDAR reflects the items in Adjusted EBITDA, excludes rent expense as defined by the Revolver agreement, and captures other differences between the contractual requirements in the Revolver agreement and Adjusted EBITDA, including the inclusion or exclusion of certain non-cash charges. The financial measure calculated under GAAP which is most directly comparable to Adjusted EBITDAR is net earnings. Adjusted EBITDA and Adjusted EBITDAR are not measures 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 and Adjusted EBITDAR: Six Months Ended August 1, 2020 August 3, 2019 Net (loss) earnings ($776 )$177 Add: income tax (benefit) expense (492) 69 Add: interest expense, net 85 46 (Loss) earnings before interest and income taxes (1,183) 292 Add: depreciation and amortization expenses 342 323 Less: amortization of developer reimbursements (42) (38) Add: asset impairments 137 - Adjusted EBITDA ($746 )$577 Add: rent expense1 116 130 Add: other Revolver covenant adjustments2 2 5 Adjusted EBITDAR ($628 )$712 1 Rent expense, exclusive of amortization of developer reimbursements, is added back for consistency with our debt covenant calculation requirements, and is calculated under the previous lease standard. 2 Other adjusting items to reconcile Adjusted EBITDA to Adjusted EBITDAR as defined by our Revolver covenant includes interest income, and certain non-cash charges where relevant. 22 of 27 -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollar and share amounts in millions except per share amounts) Credit Capacity and Commitments During the first quarter of 2020, we amended our existing Revolver and borrowed$800 . As ofAugust 1, 2020 , we had$500 outstanding under the facility. The Revolver contains customary representations, warranties, covenants and terms, including paying a variable rate of interest and a commitment fee based on our debt rating. The Revolver is available for working capital, capital expenditures and general corporate purposes. Provided that we obtain written consent from our lenders, 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. For more information about our credit facilities, see Note 3: Debt and Credit Facilities in Item 1. Impact of Credit Ratings Changes in our credit ratings may impact our costs to borrow, whether our personal property secures our Revolver and the debt covenants we follow. 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 Baa3 Negative Standard & Poor's BB+ Negative 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. InJune 2020 , we amended our program agreement with TD to eliminate the prior requirement to post collateral and extend the term of the agreement untilApril 2024 . Debt Covenants As ofAugust 1, 2020 , our borrowings under the Revolver were classified as secured as our Leverage Ratio exceeded four, and we met our asset coverage and minimum liquidity covenants. For more information about our debt covenants, see Note 3: Debt and Credit Facilities in Item 1. Contractual Obligations As ofAugust 1, 2020 , there have been no material changes to our contractual obligations as disclosed in our 2019 Annual Report except as disclosed in Note 3: Debt and Credit Facilities and Note 5: Commitments and Contingencies of Item 1. CRITICAL ACCOUNTING ESTIMATES The preparation of our financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We believe that the estimates, assumptions and judgments involved in the accounting policies referred to in our 2019 Annual Report have the greatest potential effect on our financial statements, so we consider these to be our critical accounting policies and estimates. Our management has discussed the development and selection of these critical accounting estimates with theAudit & Finance Committee of our Board of Directors. Except as disclosed in Note 1: Basis of Presentation of Item 1, pertaining to the impact of COVID-19, there have been no material changes to our significant accounting policies or critical accounting estimates as described in our 2019 Annual Report. 23 of 27
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