NORDSTROM, INC. (Dollar and share amounts in millions except per share amounts) OVERVIEW Our first quarter results reflected improving sales momentum and continued progress in our transformation as we work to unlock the full potential of our digital-first platform. Net loss for the first quarter was$166 , or$1.05 per diluted share, including an after-tax debt refinancing charge of$0.41 . First quarter net sales increased 44% from the same period in 2020 and decreased 13% from the same period in 2019, representing a sequential improvement of 720 basis points relative to the fourth quarter of 2020. Our top-line trends increased sequentially for the third quarter in a row, with improvements in bothNordstrom andNordstrom Rack, supported by recovery in stores as COVID-19 restrictions were lifted, and continued growth in digital. Sales trends reflected broad-based improvement across channels, regions and merchandise categories, both in-store and online. Stores in markets that opened up earlier outperformed other markets by 7 to 10 percentage points, giving us increasing optimism about the pace of recovery as we look to the remainder of the year. Our performance in the quarter reflects solid execution toward the growth priorities we laid out at our investor day in February: win in our most important markets, broaden the reach ofNordstrom Rack and increase our digital velocity. Market Strategy - Our market strategy helps us engage with customers through better service and greater access to product, no matter how they choose to shop. During the quarter, we successfully expanded this strategy to our top 20 markets, which comprise approximately 75% of sales. We continued to scale the enhanced capabilities we launched in 2020, such as the expansion of order pick-up and ship-to-store to allNordstrom Rack stores. Almost one-third of next day order pickup volume for Nordstrom.com in our top 20 markets was picked up at Rack stores, as we continue to integrate our capabilities across our two powerful brands.Nordstrom Rack - First quarterNordstrom Rack sales declined 13% compared with 2019, a 10-percentage point sequential improvement from the fourth quarter of 2020. Merchandise repositioning across price, hybrid and brand doors is progressing, in spite of challenges managing slower than anticipated inbound inventory flow. We remain in the early stages of these initiatives, and our progress is encouraging. Increased customer choice of price-oriented offerings in Kids, Home and Active supported a 37% increase in sales compared with 2019 in these categories. Digital Velocity - We maintained strong growth at Nordstrom.com and Nordstromrack.com in the first quarter, even as store traffic and sales rebounded. Digital sales increased 23% over last year and 28% over the first quarter of 2019. With continued growth in digital, our total penetration has increased by 15 percentage points over the past two years, to 46%. One key opportunity we see is to offer our customers more choices, with plans to increase choice count to approximately 1.5 million over the next several years. This quarter, choice counts increased almost 20% compared with 2019, primarily driven by an expanded dropship assortment in both our core categories and in-demand categories like Home, Active and Kids. This allowed us to drive strong sales growth in our digital business without a corresponding increase in our inventory investment. As we look ahead to the second quarter, we believe that our Anniversary Sale will be well-timed to benefit from customers' increasing confidence and return to pre-pandemic activities. Our goal is to have an event that rewards and engages our best customers with a superior shopping experience. We will also significantly increase selection for Anniversary this year, with total customer choices up double-digits compared with 2019, supported by an expansion of alternative partnership models with our vendors. Our focus on accelerating our strategic priorities to serve customers in new and differentiated ways is gaining momentum. We are in a stronger position than ever to capitalize on our market share opportunity as customer demand recovers. While there is still considerable uncertainty with respect to COVID-19, we remain confident in our ability to deliver on our targets for 2021 and generate profitable sales growth as demand recovers. 16 of 28 -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued) (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 Company. We invested early in our omni-channel capabilities, integrating our operations, merchandising and technology across our stores and online, and in bothNordstrom andNordstrom Rack brands. While our customers may engage with us through multiple ways, we know they value the integrated brand experience, 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. Due to the extraordinary impact of COVID-19 on our results in fiscal 2020, we analyzed fiscal year 2021 net sales through EBIT against both fiscal years 2020 and 2019 to provide useful supplemental comparability.Net Sales The following table summarizes net sales: Quarter Ended May 1, 2021 May 2, 2020 May 4, 2019 Net sales: Nordstrom$1,854 $1,357 $2,127 Nordstrom Rack 1,067 669 1,222 Total net sales$2,921 $2,026 $3,349 Net sales increase (decrease): Nordstrom 36.7 % (36.2 %) (5.1 %) Nordstrom Rack 59.5 % (45.2 %) (0.6 %)Total Company 44.2 % (39.5 %) (3.5 %) Digital sales as a % of total net sales 46 % 54 % 31 % Digital sales increase 23 % 5 % 7 %Net Sales (2021 vs. 2020)Total Company net sales increased 44% for the first quarter of 2021, compared with the same period in 2020, during which stores were temporarily closed for approximately half of the quarter due to COVID-19.Total Company digital sales increased 23% in the first quarter of 2021, compared with the same period in 2020 and represented 46% of total net sales during the first quarter of 2021. During the quarter endedMay 1, 2021 , we closed oneNordstrom Rack store.Nordstrom net sales increased 37% for the first quarter of 2021, compared with the same period in 2020.Nordstrom Rack net sales increased 59% for the first quarter of 2021, compared with the same period in 2020. Home, active, designer and beauty were the top-performing merchandise categories.Net Sales (2021 vs. 2019)Total Company net sales decreased 13% for the first quarter of 2021, compared with the same period in 2019, and marked sequential improvement of 720 basis points relative to the fourth quarter of 2020.Total Company digital sales increased 28% in the first quarter of 2021, compared with the same period in 2019.Nordstrom net sales decreased 13% for the first quarter of 2021, compared with the same period in 2019.Nordstrom Rack net sales decreased 13% for the first quarter of 2021, compared with the same period in 2019. Home, active and kids were the top-performing merchandise categories. 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 (2021 vs. 2020 and 2021 vs. 2019) Credit card revenues, net were$88 for the quarter endedMay 1, 2021 , compared with$93 and$94 for the same periods in 2020 and 2019. These decreases were primarily a result of lower finance charges and late fee revenues throughout the first quarter of 2021 due to lower outstanding balances as consumers made higher payments, driven in part by government stimulus packages. 17 of 28 -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued) (Amounts in millions except per share amounts) Gross Profit The following table summarizes gross profit: Quarter Ended May 1, 2021 May 2, 2020 May 4, 2019 Gross profit$902 $216 $1,121 Gross profit as a % of net sales 30.9 % 10.7 % 33.5 % Inventory turnover rate 4.51 4.81 4.68 Gross Profit (2021 vs. 2020) Gross profit increased$686 and 20 percentage points as a rate of net sales during the first quarter of 2021, compared with the same period in 2020, primarily due to lower markdowns and leverage from higher net sales volume. Gross Profit (2021 vs. 2019) Gross profit decreased$219 and 260 basis points during the first quarter of 2021, compared with the same period in 2019, as a result of deleverage on lower sales and lower merchandise margins, partially offset by permanent reductions in buying and occupancy costs. Ending inventory decreased 2% compared with the same period in 2019, versus a 13% decrease in sales. The change in inventory levels compared with 2019 includes an approximately 700 basis point impact resulting from the acceleration of vendor shipments to support sales trends and mitigate potential supply chain backlogs in the second quarter. Selling, General and Administrative Expenses SG&A is summarized in the following table: Quarter Ended May 1, 2021 May 2, 2020 May 4, 2019 SG&A expenses$1,075 $1,122 $1,138
SG&A expenses as a % of net sales 36.8 % 55.4 % 34.0 %
SG&A (2021 vs. 2020) SG&A decreased$47 and 19 percentage points as a rate of net sales during the first quarter of 2021, compared with the same period in 2020, as a result of$250 in charges associated with the impact of COVID-19 in 2020, leverage on higher sales and the continued benefit of permanent reductions in overhead expenses of approximately 15%. This was partially offset by higher variable expenses such as supply chain costs associated with the sales volume increase. SG&A (2021 vs. 2019) SG&A decreased$63 during the first quarter of 2021, compared with the same period in 2019, primarily due to planned cost savings initiatives and lower sales volume, partially offset by COVID-19 related labor and freight cost pressures. SG&A rate increased 280 basis points during the first quarter of 2021, compared with the same period in 2019, as a result of COVID-19 related labor and freight cost pressures, partially offset by our planned savings initiatives. (Loss) Earnings Before Interest and Income Taxes EBIT is summarized in the following table: Quarter Ended May 1, 2021 May 2, 2020 May 4, 2019 EBIT ($85 ) ($813 )$77 EBIT as a % of net sales (2.9 %) (40.1 %) 2.3 % EBIT (2021 vs. 2020) EBIT improved$728 during the first quarter of 2021, compared with the same period in 2020. The increase was due to higher sales volume, lower markdowns and$280 in charges in the first quarter of 2020 related to the impacts of COVID-19. EBIT (2021 vs. 2019) For the first quarter of 2021, EBIT decreased$162 , compared with the same period in 2019 primarily due to lower sales volume as we continue to recover from the pandemic and higher freight cost pressures, partially offset by our planned savings initiatives. 18 of 28 -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued) (Amounts in millions except per share amounts) Interest Expense, Net Interest expense, net was$137 for the first quarter of 2021, compared with$34 for the same period in 2020. The increase was primarily due to the debt refinance charges of$88 related to the redemption of the Secured Notes. Income Tax Expense Income tax expense is summarized in the following table: Quarter Ended May 1, 2021 May 2, 2020 Income tax (benefit) expense ($56 ) ($326 ) Effective tax rate 25.4 % 38.4 % The effective tax rate decreased in the first quarter of 2021, compared with the same period in 2020, primarily due to additional tax benefits recorded in 2020 associated with losses eligible for carryback under the CARES Act. The decrease was partially offset by non-deductible stock compensation. Earnings Per Share EPS is as follows: Quarter Ended May 1, 2021 May 2, 2020 Basic ($1.05 ) ($3.33 ) Diluted ($1.05 ) ($3.33 ) Earnings per diluted share increased$2.28 for the first quarter of 2021, compared with the same period in 2020, during which stores were temporarily closed for approximately half of the quarter, partially offset by an interest expense charge of$88 , or$0.41 per diluted share related to the redemption of the Secured Notes in the first quarter of 2021. In the first quarter of 2020, COVID-19 related charges reduced earnings per diluted share by$1.10 . Fiscal Year 2021 Outlook The Company has reaffirmed the following financial expectations for fiscal 2021: •Revenue, including retail sales and credit card revenues, is expected to grow more than 25%, •EBIT margin is expected to be approximately 3% of sales, •Income tax rate is expected to be approximately 27%, •Leverage ratio is expected to be approximately 3x by year-end, •For the first half of the year, EBIT is expected to be approximately breakeven, reflecting approximately 45% of total year sales. 19 of 28 -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued) (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. 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 calculating 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 May 1, 2021 May 2, 2020 Net loss ($334 ) ($62 ) Less: income tax benefit (269) (156) Add: interest expense 285 121 Loss before interest and income tax expense (318) (97) Add: operating lease interest1 93 102 Adjusted net operating (loss) profit (225) 5 Add (Less): estimated income tax benefit (expense) 100 (4) Adjusted net operating (loss) profit after tax ($125 )$1 Average total assets$9,637 $9,811
Less: average deferred property incentives in excess of ROU assets2
(265) (303)
Less: average non-interest-bearing current liabilities (3,095) (3,324)
Average invested capital $6,277 $6,184
Return on assets3 (3.5 %) (0.6 %)
Adjusted ROIC3 (2.0 %) - %
1 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.
2 For leases with property incentives that exceed the ROU assets, we reclassify
the amount from assets to other current liabilities and other liabilities and
reduce average total assets, as this better reflects how we manage our business.
3 COVID-19 related charges during fiscal 2020 negatively impacted return on
assets by approximately 180 basis points and Adjusted ROIC by approximately 130
basis points for the four quarters ended May 2, 2020 .
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Continued) (Amounts in millions except per share amounts)
LIQUIDITY AND CAPITAL RESOURCES
We strive to maintain a level of liquidity sufficient to allow us to cover our
seasonal cash needs and to maintain appropriate levels of short-term borrowings.
Our ongoing working capital requirements are generally funded primarily through
cash flows generated from operations. In addition, we have access to the
commercial paper market and can draw on our revolving credit facilities for
working capital, capital expenditures and general corporate purposes. We ended
the first quarter of 2021 with $377 in cash and cash equivalents and $600 of
additional liquidity available on our Revolver. In May 2021 , subsequent to
quarter end, we completely repaid $200 on our Revolver. 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:
Quarter Ended
May 1, 2021 May 2, 2020
Net cash used in operating activities ($364 )
(
Net cash used in investing activities (110)
(126)
Net cash provided by financing activities 167
1,417
Operating Activities Net cash used in operating activities improved$414 for the quarter endedMay 1, 2021 , compared with the same period in 2020, primarily due to an improvement in net earnings and a decrease in performance-related payments. Investing Activities Net cash used in investing activities decreased$16 for the quarter endedMay 1, 2021 , compared with the same period in 2020, primarily due to increased proceeds from the sale of assets. Capital Expenditures Our capital expenditures, net are summarized as follows: Quarter Ended May 1, 2021 May 2, 2020 Capital expenditures$126 $131 Less: deferred property incentives1 (6) (8) Capital expenditures, net$120 $123 Capital expenditures % of net sales 4.3 % 6.4 % 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 Net cash provided by financing activities decreased$1,250 for the quarter endedMay 1, 2021 , compared with the same period in 2020, primarily due to decreased proceeds on the Revolver and the retirement of the Secured Notes (see Note 3: Debt and Credit Facilities in Item 1). 21 of 28 -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued) (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 calculating 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 operating activities. The following is a reconciliation of net cash used in operating activities to Free Cash Flow: Quarter Ended May 1, 2021 May 2, 2020 Net cash used in operating activities ($364 )
(
Less: capital expenditures (126)
(131)
(Less) Add: change in cash book overdrafts (17) 83 Free Cash Flow ($507 ) ($826 ) Adjusted EBITDA (Non-GAAP financial measure) Adjusted EBITDA is one of our key financial metrics to reflect our view of cash flow from net earnings. Adjusted EBITDA excludes significant items which are non-operating in nature in order to evaluate our core operating performance against prior periods. The financial measure calculated under GAAP which is most directly comparable to Adjusted EBITDA is net earnings. Adjusted EBITDA is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for net earnings, overall change in cash or liquidity of the business as a whole. Our method of calculating a non-GAAP financial measure 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 loss to Adjusted EBITDA: Quarter Ended May 1, 2021 May 2, 2020 Net loss ($166 ) ($521 ) Less: income tax benefit (56) (326) Add: interest expense, net 137 34 Loss before interest and income taxes (85)
(813)
Add: depreciation and amortization expenses 162
176
Less: amortization of developer reimbursements (20) (19) Add: asset impairments - 117 Adjusted EBITDA$57 ($539 ) 22 of 28
-------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued) (Amounts in millions except per share amounts) Credit Capacity and Commitments During the first quarter of 2021, we borrowed$200 and amended our existing Revolver. As ofMay 1, 2021 , we had$200 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+ Stable Fitch BBB- 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. Debt Covenants As ofMay 1, 2021 , we met all our covenants while our Leverage Ratio exceeded four. Under our current debt covenants, if our Leverage Ratio is greater than four or our unsecured debt is rated below BBB- with a stable outlook atStandard & Poor's or Baa3 with a stable outlook at Moody's, any outstanding borrowings under our Revolver will be secured by substantially all our personal property and we will be prevented from paying dividends and repurchasing shares. For more information about our debt covenants, see Note 3: Debt and Credit Facilities in Item 1. 23 of 28 -------------------------------------------------------------------------------- Table of Contents Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued) (Amounts in millions except per share amounts) Adjusted Debt to EBITDAR (Non-GAAP financial measure) Adjusted Debt to 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 creditworthiness that could impact our credit rating and borrowing costs. This metric is calculated in accordance with our debt covenant and is a key component in assessing whether our revolving credit facility is secured or unsecured, as well as our ability to make dividend payments and share repurchases. Our goal is to manage debt levels to maintain an investment-grade credit rating while operating with an efficient capital structure. Adjusted Debt to EBITDAR is not a measure of financial performance under GAAP and should be considered in addition to, and not as a substitute for, debt to net earnings, net earnings, debt or other GAAP financial measures. Our method of determining non-GAAP financial measures may differ from other companies' methods and therefore may not be comparable to those used by other companies. The following is a reconciliation of debt to net loss to Adjusted Debt to EBITDAR: May 1, 2021 Debt$3,547 Add: estimated capitalized operating lease liability1 1,335 Adjusted Debt$4,882 Four Quarters Ended May 1, 2021 Net loss ($334 ) Less: income tax benefit (269) Add: interest expense, net 284 Add: asset impairments 20 Adjusted loss before interest and income taxes ($299 ) Add: depreciation and amortization expenses 658 Add: rent expense, net2 223 Add: other Revolver covenant adjustments3 2 Adjusted EBITDAR$584 Debt to Net Loss (10.6) Adjusted Debt to EBITDAR 8.4 1 Based upon the estimated lease liability as of the end of the period, calculated as the trailing four quarters of rent expense multiplied by six, a 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 and is calculated under the previous lease standard, consistent with our debt covenant calculation requirements. The estimated lease liability is not calculated in accordance with, nor an alternative for, GAAP and should not be considered in isolation or as a substitution for our results reported under GAAP. 2 Rent expense, net of amortization of developer reimbursements, is added back for consistency with our debt covenant calculation requirements, and is calculated under the previous lease standard. 3 Other adjusting items to reconcile net loss to Adjusted EBITDAR as defined by our Revolver covenant include interest income and certain non-cash charges where relevant. 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 2020 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. There have been no material changes to our significant accounting policies or critical accounting estimates as described in our 2020 Annual Report. 24 of 28
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