UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~July 29, 2017~~August 4, 2018



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to___________

Commission File Number: 001-15059

NORDSTROM, INC.

(Exact name of registrant as specified in its charter)



Washington		91-0515058
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



1617 Sixth Avenue, Seattle, Washington		98101
(Address of principal executive offices)		(Zip Code)

206-628-2111

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES þ NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



	Large accelerated filer þ		Accelerated filer ¨
	Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company ¨
			Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨ NO þ

Common stock outstanding as of August ~~23, 2017: 166,239,726~~29, 2018: 168,565,459 shares

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Table of Contents

NORDSTROM, INC.

TABLE OF CONTENTS



		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited).

	Condensed Consolidated Statements of Earnings Quarter and Six Months Ended August 4, 2018 and July 29, 2017 ~~and July 30, 2016~~	3

	Condensed Consolidated Statements of Comprehensive Earnings Quarter and Six Months Ended August 4, 2018 and July 29, 2017 ~~and July 30, 2016~~	3

	Condensed Consolidated Balance Sheets August 4, 2018, February 3, 2018, and July 29, 2017 ~~January 28, 2017 and July 30, 2016~~	4

	Condensed Consolidated Statements of Shareholders’ Equity Six Months Ended August 4, 2018 and July 29, 2017 ~~and July 30, 2016~~	5

	Condensed Consolidated Statements of Cash Flows Six Months Ended August 4, 2018 and July 29, 2017 ~~and July 30, 2016~~	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	25

Item 4.	Controls and Procedures.	25

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings.	26

Item 1A.	Risk Factors.	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	2726

Item 6.	Exhibits.	26

Exhibit Index		27

Signatures		28

~~Exhibit Index~~		29

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

NORDSTROM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Amounts in millions except per share amounts)

(Unaudited)


	Quarter Ended						Six Months Ended						Quarter Ended						Six Months Ended
	July 29, 2017			July 30, 2016			July 29, 2017			July 30, 2016			August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Net sales		$3,717			$3,592			$6,996			$6,784			$3,980			$3,717			$7,450			$6,996
Credit card revenues, net	76			59			152			116			87			76			179			152
Total revenues	3,793			3,651			7,148			6,900			4,067			3,793			7,629			7,148
Cost of sales and related buying and occupancy costs	(2,451		)	(2,359		)	(4,607		)	(4,459		)	(2,589		)	(2,451		)	(4,877		)	(4,607		)
Selling, general and administrative expenses	(1,125		)	(1,071		)	(2,173		)	(2,114		)	(1,232		)	(1,125		)	(2,353		)	(2,173		)
Earnings before interest and income taxes	217			221			368			327			246			217			399			368
Interest expense, net	(29		)	(30		)	(76		)	(61		)	(28		)	(29		)	(56		)	(76		)
Earnings before income taxes	188			191			292			266			218			188			343			292
Income tax expense	(78		)	(74		)	(119		)	(103		)	(56		)	(78		)	(94		)	(119		)
Net earnings		$110			$117			$173			$163			$162			$110			$249			$173

Earnings per share:
Basic		$0.66			$0.67			$1.04			$0.94			$0.97			$0.66			$1.48			$1.04
Diluted		$0.65			$0.67			$1.02			$0.93			$0.95			$0.65			$1.46			$1.02

Weighted-average shares outstanding:
Basic	166.4			173.5			166.8			173.3			167.8			166.4			167.8			166.8
Diluted	168.5			174.8			168.8			175.2			170.3			168.5			170.3			168.8

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

NORDSTROM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(Amounts in millions)

(Unaudited)


	Quarter Ended					Six Months Ended				Quarter Ended					Six Months Ended
	July 29, 2017		July 30, 2016			July 29, 2017		July 30, 2016		August 4, 2018			July 29, 2017		August 4, 2018			July 29, 2017
Net earnings		$110		$117			$173		$163		$162			$110		$249			$173
Foreign currency translation adjustment	32		(10		)	20		17		(4		)	32		(15		)	20
Postretirement plan adjustments, net of tax	1		—			2		1
Post retirement plan adjustments, net of tax										1			1		2			2
Cumulative effect of adopted accounting standard										—			—		(5		)	—
Comprehensive net earnings		$143		$107			$195		$181		$159			$143		$231			$195

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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NORDSTROM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions)

(Unaudited)


	July 29, 2017			January 28, 2017			July 30, 2016			August 4, 2018			February 3, 2018			July 29, 2017
Assets
Current assets:
Cash and cash equivalents		$919			$1,007			$892			$1,343			$1,181			$919
Accounts receivable, net	320			199			263			200			145			320
Merchandise inventories	2,077			1,896			2,032			2,065			2,027			2,077
Prepaid expenses and other	157			140			163			439			150			157
Total current assets	3,473			3,242			3,350			4,047			3,503			3,473

Land, property and equipment (net of accumulated depreciation of $5,866, $5,596 and $5,330)	3,930			3,897			3,812
Land, property and equipment (net of accumulated depreciation of $6,393, $6,105 and $5,866)										3,860			3,939			3,930
Goodwill	238			238			435			249			238			238
Other assets	520			481			533			334			435			520
Total assets		$8,161			$7,858			$8,130			$8,490			$8,115			$8,161

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$1,704			$1,340			$1,604			$1,840			$1,409			$1,704
Accrued salaries, wages and related benefits	397			455			381			394			578			397
Other current liabilities	1,339			1,223			1,326			1,380			1,246			1,339
Current portion of long-term debt	11			11			10			54			56			11
Total current liabilities	3,451			3,029			3,321			3,668			3,289			3,451

Long-term debt, net	2,729			2,763			2,772			2,680			2,681			2,729
Deferred property incentives, net	524			521			530			480			495			524
Other liabilities	672			675			570			522			673			672

Commitments and contingencies (Note 4)
Commitments and contingencies (Note 6)

Shareholders’ equity:
Common stock, no par value: 1,000 shares authorized; 166.2, 170.0 and 173.3 shares issued and outstanding	2,757			2,707			2,612
Common stock, no par value: 1,000 shares authorized; 167.5, 167.0 and 166.2 shares issued and outstanding										2,899			2,816			2,757
Accumulated deficit	(1,951		)	(1,794		)	(1,635		)	(1,712		)	(1,810		)	(1,951		)
Accumulated other comprehensive loss	(21		)	(43		)	(40		)	(47		)	(29		)	(21		)
Total shareholders’ equity	785			870			937			1,140			977			785
Total liabilities and shareholders’ equity		$8,161			$7,858			$8,130			$8,490			$8,115			$8,161

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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NORDSTROM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Amounts in millions except per share amounts)

(Unaudited)


																					Accumulated
																					Other
														Common Stock				Accumulated			Comprehensive
														Shares		Amount		Deficit			Loss			Total
Balance at February 3, 2018														167.0			$2,816		($1,810	)		($29	)		$977
Cumulative effect of adopted accounting standards														—		—		60			(5		)	55
Net earnings														—		—		249			—			249
Other comprehensive loss														—		—		—			(13		)	(13		)
Dividends ($0.74 per share)														—		—		(124		)	—			(124		)
Issuance of common stock under stock compensation plans														1.5		49		—			—			49
Stock-based compensation														0.8		34		—			—			34
Repurchase of common stock														(1.8	)	—		(87		)	—			(87		)
Balance at August 4, 2018														167.5			$2,899		($1,712	)		($47	)		$1,140


								Accumulated													Accumulated
								Other													Other
	Common Stock				Accumulated			Comprehensive						Common Stock				Accumulated			Comprehensive
	Shares		Amount		Deficit			Loss			Total			Shares		Amount		Deficit			Loss			Total
Balance at January 28, 2017	170.0			$2,707		($1,794	)		($43	)		$870		170.0			$2,707		($1,794	)		($43	)		$870
Net earnings	—		—		173			—			173			—		—		173			—			173
Other comprehensive earnings	—		—		—			22			22			—		—		—			22			22
Dividends ($0.74 per share)	—		—		(124		)	—			(124		)	—		—		(124		)	—			(124		)
Issuance of common stock under stock compensation plans	0.4		14		—			—			14			0.4		14		—			—			14
Stock-based compensation	0.4		36		—			—			36			0.4		36		—			—			36
Repurchase of common stock	(4.6	)	—		(206		)	—			(206		)	(4.6	)	—		(206		)	—			(206		)
Balance at July 29, 2017	166.2			$2,757		($1,951	)		($21	)		$785		166.2			$2,757		($1,951	)		($21	)		$785


								Accumulated
								Other
	Common Stock				Accumulated			Comprehensive
	Shares		Amount		Deficit			Loss			Total
Balance at January 30, 2016	173.5			$2,539		($1,610	)		($58	)		$871
Net earnings	—		—		163			—			163
Other comprehensive earnings	—		—		—			18			18
Dividends ($0.74 per share)	—		—		(128		)	—			(128		)
Issuance of common stock under stock compensation plans	0.9		31		—			—			31
Stock-based compensation	0.2		42		—			—			42
Repurchase of common stock	(1.3	)	—		(60		)	—			(60		)
Balance at July 30, 2016	173.3			$2,612		($1,635	)		($40	)		$937

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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NORDSTROM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)


	Six Months Ended						Six Months Ended
	July 29, 2017			July 30, 2016			August 4, 2018			July 29, 2017
Operating Activities
Net earnings		$173			$163			$249			$173
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization expenses	320			319			338			320
Amortization of deferred property incentives and other, net	(48		)	(35		)	(34		)	(48		)
Deferred income taxes, net	(71		)	(53		)	(13		)	(71		)
Stock-based compensation expense	41			47			51			41
Change in operating assets and liabilities:
Accounts receivable	(120		)	(66		)	(55		)	(120		)
Merchandise inventories	(141		)	(59		)	(122		)	(141		)
Prepaid expenses and other assets	(24		)	96			(149		)	(24		)
Accounts payable	319			262			404			319
Accrued salaries, wages and related benefits	(58		)	(36		)	(183		)	(58		)
Other current liabilities	117			175			76			117
Deferred property incentives	46			31			29			46
Other liabilities	20			12			3			20
Net cash provided by operating activities	574			856			594			574

Investing Activities
Capital expenditures	(341		)	(407		)	(269		)	(341		)
Other, net	33			33			(21		)	33
Net cash used in investing activities	(308		)	(374		)	(290		)	(308		)

Financing Activities
Proceeds from long-term borrowings, net of discounts	635			—			—			635
Principal payments on long-term borrowings	(655		)	(5		)	(5		)	(655		)
Increase (decrease) in cash book overdrafts	6			(18		)
Increase in cash book overdrafts							63			6
Cash dividends paid	(124		)	(128		)	(124		)	(124		)
Payments for repurchase of common stock	(211		)	(59		)	(82		)	(211		)
Proceeds from issuances under stock compensation plans	14			30			49			14
Tax withholding on share-based awards	(6		)	(4		)	(17		)	(6		)
Other, net	(13		)	(1		)	(26		)	(13		)
Net cash used in financing activities	(354		)	(185		)	(142		)	(354		)

Net (decrease) increase in cash and cash equivalents	(88		)	297
Net increase (decrease) in cash and cash equivalents							162			(88		)
Cash and cash equivalents at beginning of period	1,007			595			1,181			1,007
Cash and cash equivalents at end of period		$919			$892			$1,343			$919

Supplemental Cash Flow Information
Cash paid during the period for:
Income taxes (refund), net		$188			($50	)
Income taxes, net								$181			$188
Interest, net of capitalized interest	84			67			61			84

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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NORDSTROM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in millions except per share, per option and per unit amounts)

(Unaudited)

NOTE 1: BASIS OF PRESENTATION

The accompanying Condensed Consolidated Financial Statements include the balances of Nordstrom, Inc. and its subsidiaries (the “Company”). All intercompany transactions and balances are eliminated in consolidation. The interim Condensed Consolidated Financial Statements have been prepared on a basis consistent in all material respects with the accounting policies described and applied in our ~~2016~~2017 Annual Report on Form 10-K (“Annual Report”), except as described in Note 2: Revenue, and reflect all adjustments of a normal recurring nature that are, in management’s opinion, necessary for the fair presentation of the results of operations, financial position and cash flows for the periods presented.

The Condensed Consolidated Financial Statements as of and for the periods ended August 4, 2018 and July 29, 2017 ~~and July 30, 2016~~ are unaudited. The Condensed Consolidated Balance Sheet as of ~~January 28, 2017~~February 3, 2018 has been derived from the audited Consolidated Financial Statements included in our ~~2016~~2017 Annual Report. The interim Condensed Consolidated Financial Statements should be read together with the Consolidated Financial Statements and related footnote disclosures contained in our ~~2016~~2017 Annual Report.

The preparation of our financial statements requires management to make estimates and assumptions 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 and assumptions.

Our business, like that of other retailers, is subject to seasonal fluctuations. Our sales are typically higher during our Anniversary Sale in July and the holidays in the fourth quarter. ~~Consistent~~Our Anniversary Sale shifted to the second quarter in 2018 compared with the ~~timing~~second and third quarters in ~~2016, our 2017 Anniversary Sale began in July and extended one week of the event into the third quarter.~~2017. Results for any one quarter are not indicative of the results that may be achieved for a full fiscal year.

~~Accounts Receivable~~Goodwill

O~~n July 31,~~ 2017, we entered into an agreement with TD Bank USA, N.A. (“TD”) to sell our employee credit card receivables for an amount equal to the gross value of the outstanding receivables. Additionally, we entered into an amended long-term program agreement under which TD willWe continue to bemake investments in evolving the ~~exclusive issuer~~customer experience, with a strong emphasis on integrating technology across our business. To support these efforts, we have acquired two retail technology companies. During the first quarter of ~~all our U.S. Visa and private label credit cards and~~2018, we ~~will continue to perform account servicing functions.~~ ~~The transaction is subject to regulatory approvals and other customary conditions, and is expected to close by the end~~recorded $11 of ~~the year. As~~goodwill as a result of July 29, 2017, our employee credit card receivables of $58, included in accounts receivable, net on the Condensed Consolidated Balance Sheets, is “held for sale” and, as such, is recorded at the lower of cost or fair value (see Note 3: Fair Value Measurements).these acquisitions.

Recent Accounting Pronouncements

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2014-09,~~2016-02, ~~Revenue from Contracts with Customers~~Leases, which was subsequently ~~modified~~amended in ~~August 2015~~July 2018 by ASU No. ~~2015-14,~~ 2018-10,~~Revenue from Contracts with Customers: Deferral of the Effective Date~~ Codification Improvements to Topic 842, Leases ~~. The core principle of~~and ASU No. 2014-09 is that companies should recognize revenue when the transfer of promised goods or services to customers occurs in an amount that reflects what the company expects to receive. It requires additional disclosures to describe the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. In 2016, the FASB issued additional ASUs which clarify the implementation guidance on principal versus agent considerations, on identifying performance obligations and licensing, on the revenue recognition criteria and other technical corrections. In our ongoing evaluation of this ASU, we have determined that the new standard will primarily impact the following areas: gift card breakage will be estimated based on expected customer redemption periods, rather than when redemption is considered remote; sales attributable to the loyalty program benefits (e.g., points, alterations) will be deferred rather than recorded as an increase to cost of sales; revenue related to our online sales will be recognized at the shipping point rather than receipt by the customer; and estimated costs of returns will be recorded as a current asset rather than netted with our sales return reserve. We plan to adopt this ASU in the first quarter of 2018 and are continuing to evaluate the impacts this ASU and related disclosures will have on our Consolidated Financial Statements, as well as our preferred transition method.

~~In February 2016, the FASB issued ASU No. 2016-02,~~2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”). This ASU increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as right-of-use assets and lease liabilities. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification dictates whether lease expense is to be recognized based on an effective interest method or on a straight-line basis over the term of the lease. Additional qualitative and quantitative disclosures will be required to give financial statement users information on the amount, timing and judgments related to a reporting entity’s cash flows arising from leases. ~~This~~We plan to adopt this ASU ~~is effective for us beginning~~ in the first quarter of ~~2019. We are currently evaluating~~2019 and we anticipate using the ~~standard,~~additional (and optional) transition method provided in ASU 2018-11, which ~~will require recognizing and measuring leases~~would allow for application of the guidance at the beginning of the ~~earliest~~ period ~~presented using~~in which it is adopted by recognizing a ~~modified retrospective approach.~~cumulative-effect adjustment to the opening balance of retained earnings. We expect adoption of this standard will have a material impact on our Consolidated Financial Statements.

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~~NORDSTROM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Dollar and share amounts in millions except per share, per option and per unit amounts)~~

~~(Unaudited)~~

~~In March 2016, the FASB issued ASU No. 2016-09,~~ ~~Compensation — Stock Compensation — Improvements to Employee Share-Based Payment Accounting~~, which simplifies several aspects of the accounting for share-based payments and presentation within the financial statements. We adopted ASU No. 2016-09 with an effective date of January 29, 2017. The impact of the adoption resulted in the following:

Excess tax benefits and deficiencies resulting from stock-based compensation arrangements are now recorded within income tax expense on the Condensed Consolidated Statement of Earnings when the awards vest or are settled, rather than within equity. Additionally, excess tax benefits are now excluded from assumed future proceeds in our calculation of diluted shares for purposes of determining diluted earnings per share. The prospective adoption of this provision did not have a material effect on the Condensed Consolidated Financial Statements for the six months ended July 29, 2017. We had no previously unrecognized excess tax benefits that would have resulted in a cumulative-effect adjustment to beginning retained earnings.

Forfeitures on share-based awards are recorded as they occur, rather than our historical method of estimating forfeitures at the grant date. In evaluating the impact of this change, the adjustment to adopt on a modified retrospective basis was immaterial, therefore no adjustment has been made to beginning retained earnings.

Excess tax benefits from stock-based compensation arrangements are classified as cash flows from operations, rather than as cash flows from financing activities. We adopted this change retrospectively, which resulted in an increase to net cash provided by operating activities and an increase in cash flows used in financing activities of $1 for the six months ended July 30, 2016. Additionally, cash flows related to withholding shares for tax purposes on net-settled awards are classified as financing activities, rather than operating activities. This classification change was also adopted retrospectively, resulting in an increase of $4 to net cash provided by operating activities with an offsetting increase to net cash used in financing activities on the Condensed Consolidated Statement of Cash Flows for the six months ended July 30, 2016.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. Under this new guidance, if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment charge shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ~~The ASU~~This guidance is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact this guidance would have on our ~~Condensed~~ Consolidated Financial Statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement — Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This new guidance allows a reclassification from accumulated other comprehensive loss to accumulated deficit for certain tax effects resulting from the 2017 Tax Cuts and Jobs Act (“Tax Act”), which could not be recorded under prior guidance. We elected to early adopt this standard in the first quarter of 2018 and reclassified $5 of tax impacts resulting from the change in the federal corporate tax rate, decreasing the beginning accumulated deficit for the six months ended August 4, 2018.

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NORDSTROM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in millions except per share, per option and per unit amounts)

(Unaudited)

NOTE 2: ~~DEBT AND CREDIT FACILITIES~~REVENUE

~~Debt~~

~~A summary of our long-term debt, including capital leases, is as follows:~~

July 29, 2017

January 28, 2017

July 30, 2016
Secured
Mortgage payable, 7.68%, due April 2020
$22

$24

$27
Other 1
3
4
Total secured debt 23
27
31

Unsecured
Net of unamortized discount:
Senior notes, 6.25%, due January 2018 —
650
649
Senior notes, 4.75%, due May 2020 499
499
499
Senior notes, 4.00%, due October 2021 500
500
500
Senior notes, 4.00%, due March 2027 349
—
—
Senior debentures, 6.95%, due March 2028 300
300
300
Senior notes, 7.00%, due January 2038 146
146
146
Senior notes, 5.00%, due January 2044 890
602
601
Other 33
50
56
Total unsecured debt 2,717
2,747
2,751

Total long-term debt 2,740
2,774
2,782
Less: current portion (11 ) (11 ) (10 )
Total due beyond one year
$2,729

$2,763

$2,772

During the first quarter of ~~2017,~~fiscal 2018, we ~~issued $350 aggregate principal amount~~adopted ASU No. 2014-09, Revenue from Contracts with Customers, and all related amendments (“Revenue Standard”),using the modified retrospective adoption method. Results for reporting periods beginning in the first quarter of ~~4.00% senior unsecured notes~~2018 are presented under the new Revenue Standard while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605 — Revenue Recognition. Upon adoption, we recorded a net cumulative effect adjustment to decrease beginning accumulated deficit of $55. Excluding the impact of the new Revenue Standard, our second quarter net sales would have been $3,950 for the second quarter and $7,402 for the six months ended August 4, 2018 primarily due March 2027 and $300 aggregate principal amount of 5.00% senior unsecured notes due January 2044. With the proceeds of these new notes, we retired our $650 senior unsecured notes that were due January 2018. We incurred $18 of net interest expense related to the ~~refinancing,~~seasonal timing of the Anniversary Sale at the end of the second quarter. We do not expect the impact of adopting the new Revenue Standard to be material to our Consolidated Statement of Earnings for the year ended February 2, 2019. The impact of adoption on our Condensed Consolidated Balance Sheet for the period ended August 4, 2018 was as follows:



	August 4, 2018
	As Reported			Revenue Standard Adjustment			Excluding Impact of Revenue Standard
Assets
Merchandise inventories		$2,065			$72			$2,137
Prepaid expenses and other	439			(268		)	171
Other assets	334			87			421

Liabilities and Shareholders’ Equity
Other current liabilities	1,380			(182		)	1,198
Other liabilities	522			150			672
Accumulated deficit	(1,712		)	(77		)	(1,789		)

Revenue Recognition

NET SALES

We recognize sales revenue net of estimated returns and excluding sales taxes. Revenue from sales to customers shipped from our fulfillment centers, stores and directly from our vendors (“shipped revenues”), which ~~included~~includes shipping revenue when applicable, is recognized at shipping point, the ~~write-off~~point in time where control has transferred to the customer. Costs to ship orders to customers are expensed as a fulfillment activity at shipping point and commissions from sales at our full-line stores are expensed at the point of sale and both are recorded in selling, general and administrative expenses. Prior to 2018, shipped revenues were recognized upon estimated receipt by the customer and we recorded an estimated in-transit reserve for orders shipped prior to a period’s end, but not yet received by the customer.

We reduce sales and cost of sales by an estimate of customer merchandise returns, which is calculated based on historical return patterns, and record a sales return reserve and an estimated returns asset. Our sales return reserve is classified in other current liabilities and our estimated returns asset, calculated based on the cost of merchandise sold, is classified in prepaid expenses and other on the Condensed Consolidated Balance Sheet. Due to the seasonality of our business, these balances typically increase with higher sales occurring in the last month of a period, such as the Anniversary Sale, and decrease in the following period. Prior to 2018, the estimated cost of merchandise returned was netted with our sales return reserve in other current liabilities.

CREDIT CARD REVENUES, NET

Credit program revenues, net include our portion of the ongoing credit card revenue, net of credit losses, pursuant to the program agreement with TD Bank N.A. (“TD”).

Upon adoption of the new Revenue Standard, the remaining unamortized balances of the investment in contract asset and deferred revenue associated with the ~~debt discount, issue costs and fair value hedge adjustment resulting from the~~ sale of ~~our interest rate swap agreements~~the credit card receivables to TD in ~~2012. It also included~~2015 and 2017 were eliminated as part of a ~~one-time payment~~cumulative-effect adjustment, reducing the opening balance of ~~$24~~accumulated deficit for 2018. As a result, the asset amortization and deferred revenue recognition are no longer recorded in credit card revenues, net. Prior to 2018, ~~Senior Note holders under a make-whole provision, which represents~~ the ~~net present value of expected coupon payments had~~investment in contract asset was classified in prepaid expenses and other and other assets, while the ~~notes been outstanding through~~deferred revenue was classified in other current liabilities and other liabilities on the ~~original maturity date.~~

~~Credit Facilities~~

As of July 29, 2017, we had total short-term borrowing capacity of $800 under our senior unsecured revolving credit facility (“revolver”) that expires in April 2020. Under the terms of our revolver, we pay 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. We have the option to increase the revolving commitment by up to $200, to a total of $1,000, provided that we obtain written consent from the lenders. From time to time we utilize our commercial paper program to fund working capital needs which has the effect of reducing available liquidity under the revolver until repaid.

~~As of July 29, 2017, we had no issuances outstanding under our commercial paper program and no borrowings outstanding under our revolver.~~

The revolver requires that we maintain an adjusted debt to earnings before interest, income taxes, depreciation, amortization and rent (“EBITDAR”) leverage ratio of no more than four times. As of July 29, 2017, we were in compliance with this covenant.Condensed Consolidated Balance Sheet.

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NORDSTROM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in millions except per share, per option and per unit amounts)

(Unaudited)

LOYALTY PROGRAM

The Nordstrom Rewards loyalty program allows customers to accumulate points based on their level of spending, regardless of how they choose to pay. Upon reaching certain point thresholds, customers receive Nordstrom Notes (“Notes”), which can be redeemed for goods or services offered at Nordstrom full-line stores, Nordstrom.com, Nordstrom Rack and Nordstromrack.com/HauteLook. Nordstrom cardholders can also earn rewards at Trunk Club. Customers who participate in our loyalty program through our credit and debit cards receive additional benefits, including Notes or reimbursements for alterations, Personal Triple Points days, shopping and fashion events and early access to the Anniversary Sale.

As our customers earn points and Notes in the loyalty program, a portion of underlying sales revenue is deferred. We recognize the revenue and related cost of sale when the Notes are ultimately redeemed. The amount of revenue deferred is based on an estimated stand-alone selling price of the points and other loyalty benefits, such as alternations, and included in other current liabilities on the Condensed Consolidated Balance Sheet. Other benefits of the loyalty program, including shopping and fashion events, are recorded in selling, general and administrative expenses as these are not a material right of the program.

Our outstanding performance obligation for the Nordstrom Rewards loyalty program consists of unredeemed points and Notes and was $149 as of August 4, 2018. Almost all Notes are redeemed within six months of issuance. We record breakage revenue of unused points and unredeemed Notes based on expected customer redemption. We estimate, based on historical usage, that 6% of Notes will be unredeemed and recognized as revenue. Prior to 2018, we estimated the net cost of Notes that will be issued and redeemed and recorded this cost as rewards points were accumulated. These costs, as well as reimbursed alterations, were recorded in cost of sales as we provided customers with products and services for these rewards.

GIFT CARDS

We record deferred revenue from the sale of gift cards at the time of purchase. As gift cards are redeemed, we recognize revenue and reduce our contract liability. Though our gift cards do not have an expiration date, we include this deferred revenue in other current liabilities on the Condensed Consolidated Balance Sheet as customers can redeem gift cards at any time.

As of August 4, 2018, our outstanding performance obligation for unredeemed gift cards was $296. Almost all gift cards are redeemed within two years of issuance. We record breakage revenue on unused gift cards based on expected customer redemption. We estimate, based on historical usage, that 2% will be unredeemed and recognized as revenue. Prior to 2018, gift card breakage was recorded in selling, general and administrative expenses and was estimated based on when redemption was considered remote.

Contract Liabilities

Under the new Revenue Standard, contract liabilities represent our obligation to transfer goods or services to customers and include deferred revenue for our loyalty program (including points and Notes) and gift cards. Our contract liabilities are classified as current on the Condensed Consolidated Balance Sheet. Our contract liabilities are as follows:



	Contract Liabilities
Opening balance as of February 4, 2018		$498
Balance as of May 5, 2018	460
Ending balance as of August 4, 2018	445

The amount of revenue recognized from our beginning contract liability balance was $77 in the second quarter ended 2018 and $228 for the six months ended August 4, 2018.

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NORDSTROM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in millions except per share, per option and per unit amounts)

(Unaudited)

Disaggregation of Revenue

The following table summarizes our disaggregated net sales:



	Quarter Ended						Six Months Ended
	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Full-Price¹		$2,707			$2,850			$4,948			$5,006
Off-Price¹	1,273			1,189			2,502			2,341
Other¹	—			(322		)	—			(351		)
Total net sales		$3,980			$3,717			$7,450			$6,996

Digital sales as % of total net sales²	34		%	29		%	31		%	27		%

¹ We present our sales with how management views our results internally, including presenting 2018 under the new Revenue Standard and allocating our sales return reserve and the loyalty related adjustments to Full-Price and Off-Price. Amounts in 2018 related to adoption of the new Revenue Standard have not been recast for any prior periods due to the modified retrospective method of adoption. For 2017, Other primarily included unallocated sales return, in-transit and loyalty related adjustments necessary to reconcile sales by business to total net sales. If we applied the sales return reserve allocation and the loyalty related adjustments to the second quarter and six months ended July 29, 2017, Full-Price net sales would decrease $254 and $271, Off-Price net sales would decrease $11 and $28 and Other net sales would increase $265 and $299. This activity is typically higher at the end of the second quarter primarily due to the seasonal timing of the Anniversary Sale.

²Digital sales are online sales and digitally assisted store sales which include Buy Online, Pickup in Store (“BOPUS”), Reserve Online, Try on in Store (Store Reserve) and Style Boards, a digital selling tool.

The following table summarizes the percent of net sales by merchandise category:



	August 4, 2018
	Quarter Ended		Six Months Ended
Women’s Apparel	32	%	33	%
Shoes	23	%	24	%
Men’s Apparel	17	%	16	%
Women’s Accessories	11	%	11	%
Beauty	11	%	11	%
Kids’ Apparel	4	%	3	%
Other	2	%	2	%
Total	100	%	100	%

NOTE 3: SEGMENT REPORTING

We continually monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments. In the first quarter of 2018, as a result of the evolution of our operations, our reportable segments have become progressively more integrated such that we have changed to one reportable “Retail” segment to align with how management operates, evaluates and views the results of our operations. Our principal executive officer, who is our chief operating decision maker (“CODM”), reviews results on a total company, Full-Price and Off-Price basis and uses earnings before interest and taxes as a measure of profitability. We completed the reporting and budgeting in the first quarter of 2018 to better align with how the CODM allocates resources and assesses business performance. As part of this evolution, we now allocate our previous Credit segment results across our other businesses while credit assets are included in Corporate/Other.

Our Retail segment aggregates our two operating segments, Full-Price and Off-Price. Full-Price consists of Nordstrom U.S. full-line stores, Nordstrom.com, Canada, Trunk Club, Jeffrey and Nordstrom Local. Off-Price consists of Nordstrom U.S. Rack stores, Nordstromrack.com/HauteLook and Last Chance clearance stores.

Our Full-Price and Off-Price operating segments both generate revenue by offering customers an extensive selection of high-quality, brand-name and private label merchandise, which includes apparel, shoes, cosmetics and accessories for women, men, young adults and children. We continue to focus on omni-channel initiatives by integrating the operations, merchandising and technology necessary to be consistent with our customers’ expectations of a seamless shopping experience regardless of channel or business. Full-Price and Off-Price have historically had similar economic characteristics and are expected to have similar economic characteristics and long-term financial performance in future periods. They also have other similar qualitative characteristics, including suppliers, method of distribution, type of customer and regulatory environment. Due to their similar qualitative and economic characteristics, we have aggregated our Full-Price and Off-Price operating segments into a single reportable segment.

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NORDSTROM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in millions except per share, per option and per unit amounts)

(Unaudited)

The following table sets forth information for our reportable segment:



	Quarter Ended						Six Months Ended
	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Retail segment earnings before interest and income taxes¹		$313			$359			$530			$545
Corporate/Other loss before interest and income taxes¹	(67		)	(142		)	(131		)	(177		)
Interest expense, net	(28		)	(29		)	(56		)	(76		)
Earnings before income taxes		$218			$188			$343			$292

¹We present our segment results with how management views our results internally, including allocating our sales return reserve and the loyalty related adjustments to Full-Price and Off-Price in 2018. Amounts in 2018 reflect the adoption of the new Revenue Standard, whereas 2017 amounts have not been recast due to the modified retrospective method of adoption described in Note 2: Revenue. If we applied the sales return reserve allocation and the loyalty related adjustments to the second quarter ended 2017 and six months ended July 29, 2017, Retail segment earnings before interest and income taxes would decrease $74 and $68 and Corporate/Other loss before interest and income taxes would decrease $74 and $68. This activity is typically higher at the end of the second quarter primarily due to the seasonal timing of the Anniversary Sale.

NOTE 3:4: DEBT AND CREDIT FACILITIES

Debt

A summary of our long-term debt, including capital leases, is as follows:



	August 4, 2018			February 3, 2018			July 29, 2017
Secured
Mortgage payable, 7.68%, due April 2020		$14			$17			$22
Other	—			1			1
Total secured debt	14			18			23

Unsecured
Net of unamortized discount:
Senior notes, 4.75%, due May 2020	500			500			499
Senior notes, 4.00%, due October 2021	500			500			500
Senior notes, 4.00%, due March 2027	349			349			349
Senior debentures, 6.95%, due March 2028	300			300			300
Senior notes, 7.00%, due January 2038	146			146			146
Senior notes, 5.00%, due January 2044	893			892			890
Other¹	32			32			33
Total unsecured debt	2,720			2,719			2,717

Total long-term debt	2,734			2,737			2,740
Less: current portion	(54		)	(56		)	(11		)
Total due beyond one year		$2,680			$2,681			$2,729

¹ Other unsecured debt includes our Puerto Rico unsecured borrowing facility partially offset by deferred bond issue costs.

During the first quarter of 2017, we issued $350 aggregate principal amount of 4.00% senior unsecured notes due March 2027 and $300 aggregate principal amount of 5.00% senior unsecured notes due January 2044. With the proceeds of these new notes, we retired our $650 senior unsecured notes that were due January 2018. We incurred $18 of net interest expense related to the refinancing, which included the write-off of unamortized balances associated with the debt discount, issue costs and fair value hedge adjustment resulting from the sale of our interest rate swap agreements in 2012. It also included a one-time payment of $24 to 2018 Senior Note holders under a make-whole provision, which represents the net present value of expected coupon payments had the notes been outstanding through the original maturity date.

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NORDSTROM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in millions except per share, per option and per unit amounts)

(Unaudited)

Credit Facilities

As of August 4, 2018, we had total short-term borrowing capacity of $800 under our senior unsecured revolving credit facility (“revolver”) that expires in April 2020. Under the terms of our revolver, we pay 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. We have the option to increase the revolving commitment by up to $200, to a total of $1,000, provided that we obtain written consent from the lenders.

The revolver requires that we maintain an adjusted debt to earnings before interest, income taxes, depreciation, amortization and rent (“EBITDAR”) leverage ratio of no more than four times. As of August 4, 2018, we were in compliance with this covenant.

Our $800 commercial paper program allows us to use the proceeds to fund operating cash requirements. Under the terms of the commercial paper agreement, we pay a rate of interest based on, among other factors, the maturity of the issuance and market conditions. The issuance of commercial paper has the effect, while it is outstanding, of reducing available liquidity under the revolver by an amount equal to the principal amount of commercial paper.

As of August 4, 2018, we had no issuances outstanding under our commercial paper program and no borrowings outstanding under our revolver.

Our wholly owned subsidiary in Puerto Rico maintains a $52 unsecured borrowing facility to support our expansion into that market. The facility expires in Fall 2018 and borrowings on this facility incur interest based upon the LIBOR plus 1.275% per annum and also incur a fee based on any unused commitment. As of August 4, 2018, we had $47 outstanding on this facility, which is included in the current portion of long-term debt.

NOTE 5: FAIR VALUE MEASUREMENTS

We disclose our financial assets and liabilities that are measured at fair value in our Condensed Consolidated Balance Sheets by level within the fair value hierarchy as defined by applicable accounting standards:

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Other observable market-based inputs or unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs that cannot be corroborated by market data that reflect the reporting entity’s own assumptions

Financial Instruments Not Measured at Fair Value

Financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, ~~(excluding employee credit card receivables “held for sale”),~~and accounts payable, ~~and certificates of deposit,~~ which approximate fair value due to their short-term nature, and long-term debt.

We estimate the fair value of our long-term debt using quoted market prices of the same or similar issues and, as such, this is considered a Level 2 fair value measurement. The following table summarizes the carrying value and fair value estimate of our long-term debt, including current maturities:

July 29, 2017
January 28, 2017
July 30, 2016
Carrying value of long-term debt
$2,740

$2,774

$2,782
Fair value of long-term debt 2,908
2,949
3,076

~~Financial Instruments Measured at Fair Value on a Nonrecurring Basis~~

Our employee credit card receivables are classified as “held for sale” (“receivables held for sale”) and are recorded at the lower of cost or fair value (see Note 1: Basis of Presentation). We estimate the fair value of our receivables held for sale based on a discounted cash flow model using estimates and assumptions regarding future credit card portfolio performance. This fair value estimate is primarily based on Level 3 inputs in the fair value hierarchy. Based upon this assessment, the carrying value of the receivables held for sale approximated fair value at July 29, 2017.



	August 4, 2018		February 3, 2018		July 29, 2017
Carrying value of long-term debt		$2,734		$2,737		$2,740
Fair value of long-term debt	2,797		2,827		2,908

Non-financial Assets Measured at Fair Value on a Nonrecurring Basis

We also measure certain non-financial assets at fair value on a nonrecurring basis, primarily goodwill ~~investment in contract asset~~ and long-lived tangible and intangible assets, in connection with periodic evaluations for potential impairment. We estimate the fair value of these assets using primarily unobservable inputs and, as such, these are considered Level 3 fair value measurements. There were no material impairment charges for these assets for the six months ended August 4, 2018 and July 29, ~~2017 and July 30, 2016.~~2017.

~~NOTE 4: COMMITMENTS AND CONTINGENCIES~~

Plans for our Manhattan full-line store, which we currently expect to open in 2019, ultimately include owning a condominium interest in a mixed-use tower and leasing certain nearby properties. As of July 29, 2017, we had approximately $249 of fee interest in land, which is expected to convert to a condominium interest once the store is constructed. We have committed to make future installment payments based on the developer meeting pre-established construction and development milestones. In the event that this project is not completed, the opening may be delayed and we may be subject to future losses or capital commitments in order to complete construction or to monetize our investment in the land.

NOTE ~~5: SHAREHOLDERS’ EQUITY~~6: COMMITMENTS AND CONTINGENCIES

Plans for our Nordstrom NYC store, which we currently expect to open in 2019, ultimately include owning a condominium interest in a mixed-use tower and leasing certain nearby properties. As of August 4, 2018, we had approximately $289 of fee interest in land, which is expected to convert to the condominium interest once the store is constructed. We have committed to make future installment payments based on the developer meeting pre-established construction and development milestones. In February 2017, our Board of Directors authorized a program to repurchase up to $500 of our outstanding common stock through August 31, 2018. Our October 1, 2015 Board authorized share repurchase program expired in March 2017, which had $409 of unused capacity upon program expiration.

~~During~~ the ~~six months ended July 29, 2017,~~event that this project is not completed, the opening may be delayed and we repurchased 4.6 shares of our common stock for an aggregate purchase price of $206 and had $414 remaining in share repurchase capacity as of July 29, 2017. The actual timing, price, manner and amounts of future share repurchases, if any, willmay be subject to ~~market and economic conditions and applicable Securities and Exchange Commission (“SEC”) rules.~~

~~In August 2017, subsequent~~future losses or capital commitments in order to ~~quarter end, we declared a quarterly dividend of $0.37 per share, which will be paid on September 12, 2017.~~complete construction or to monetize our investment.

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NORDSTROM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in millions except per share, per option and per unit amounts)

(Unaudited)

NOTE ~~6: STOCK-BASED COMPENSATION~~7: SHAREHOLDERS’ EQUITY

~~On May 16,~~In February 2017, our ~~shareholders approved an amendment~~Board of Directors authorized a program to ~~the 2010 Equity Incentive Plan (“Plan”). The amendment increases~~repurchase up to $500 of our outstanding common stock ~~available for issuance by 6.2. As of July 29, 2017,~~through August 31, 2018. During the ~~aggregate number of~~six months ended August 4, 2018, we repurchased 1.8 shares ~~to be issued under the Plan may not exceed 36.6, plus any shares currently outstanding under the 2004 Plan that are forfeited or expire during the term of the 2010 plan.~~

~~The following table summarizes our stock-based compensation expense:~~

Quarter Ended Six Months Ended
July 29, 2017
July 30, 2016
July 29, 2017
July 30, 2016
Restricted stock units
$15

$9

$28

$15
Stock options 5
11
8
19
Acquisition-related stock compensation 1
4
1
8
Other 3
3
4
5
Total stock-based compensation expense, before income tax benefit 24
27
41
47
Income tax benefit (9 ) (9 ) (16 ) (15 )
Total stock-based compensation expense, net of income tax benefit
$15

$18

$25

$32

~~In 2014, restricted stock units became a growing component~~ of our ~~stock-based compensation mix.~~ common stock for an aggregate purchase price of $87 and had $327 remaining in share repurchase capacity as of August 4, 2018. There was $319 of unused capacity upon program expiration on August 31, 2018.

In ~~the first half~~August 2018, subsequent to quarter end, our Board of ~~2017, this trend continued~~Directors authorized an additional program to repurchase up to $1,500 of our outstanding common stock, with no expiration date, and we declared a quarterly dividend of $0.37 per share, which will be paid on September 19, 2018 to holders of record as ~~our annual grant allocation shifted towards more restricted stock units~~of September 4, 2018. The actual timing, price, manner and ~~less options~~amounts of future share repurchases, if any, will be subject to ~~better align with our compensation program’s guiding principles. The following table summarizes our grants:~~

Six Months Ended
July 29, 2017 July 30, 2016
Granted
Weighted-average grant-date fair value per unit
Granted
Weighted-average grant-date fair value per unit
Restricted stock units 1.8

$43
1.6

$43
Stock options 0.3

$16
2.9

$15
Performance share units 0.1

$40
0.1

$44
market and economic conditions and applicable Securities and Exchange Commission (“SEC”) rules.

NOTE 7:8: STOCK-BASED COMPENSATION

The following table summarizes our stock-based compensation expense:



	Quarter Ended						Six Months Ended
	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Restricted stock units		$22			$15			$40			$28
Stock options	3			5			6			8
Other	3			4			5			5
Total stock-based compensation expense, before income tax benefit	28			24			51			41
Income tax benefit	(7		)	(9		)	(13		)	(16		)
Total stock-based compensation expense, net of income tax benefit		$21			$15			$38			$25

The following table summarizes our grant allocations:



	Six Months Ended
	August 4, 2018			July 29, 2017
	Granted	Weighted-average grant-date fair value per unit		Granted	Weighted-average grant-date fair value per unit
Restricted stock units	2.1		$49	1.8		$43
Stock options	—	—		0.3		$16
Performance share units	—	—		0.1		$40

NOTE 9: EARNINGS PER SHARE

The computation of earnings per share is as follows:


	Quarter Ended				Six Months Ended				Quarter Ended				Six Months Ended
	July 29, 2017		July 30, 2016		July 29, 2017		July 30, 2016		August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
Net earnings		$110		$117		$173		$163		$162		$110		$249		$173

Basic shares	166.4		173.5		166.8		173.3		167.8		166.4		167.8		166.8
Dilutive effect of common stock equivalents	2.1		1.3		2.0		1.9		2.5		2.1		2.5		2.0
Diluted shares	168.5		174.8		168.8		175.2		170.3		168.5		170.3		168.8

Earnings per basic share		$0.66		$0.67		$1.04		$0.94		$0.97		$0.66		$1.48		$1.04
Earnings per diluted share		$0.65		$0.67		$1.02		$0.93		$0.95		$0.65		$1.46		$1.02

Anti-dilutive common stock equivalents	10.3		13.6		11.2		10.2		5.2		10.3		7.4		11.2

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~~NORDSTROM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Dollar and share amounts in millions except per share, per option and per unit amounts)~~

~~(Unaudited)~~

~~NOTE 8: SEGMENT REPORTING~~

~~The following table sets forth information for our reportable segments:~~

Retail
Corporate/Other

Retail
Business

Credit
Total
Quarter Ended July 29, 2017
Net sales
$4,039

($322 )
$3,717

$—

$3,717
Credit card revenues, net —
—
—
76
76
Earnings (loss) before interest and income taxes 388
(211 ) 177
40
217
Interest expense, net —
(29 ) (29 ) —
(29 )
Earnings (loss) before income taxes 388
(240 ) 148
40
188

Quarter Ended July 30, 2016
Net sales
$3,871

($279 )
$3,592

$—

$3,592
Credit card revenues, net —
—
—
59
59
Earnings (loss) before interest and income taxes 383
(179 ) 204
17
221
Interest expense, net —
(30 ) (30 ) —
(30 )
Earnings (loss) before income taxes 383
(209 ) 174
17
191

Six Months Ended July 29, 2017
Net sales
$7,347

($351 )
$6,996

$—

$6,996
Credit card revenues, net —
—
—
152
152
Earnings (loss) before interest and income taxes 600
(308 ) 292
76
368
Interest expense, net —
(76 ) (76 ) —
(76 )
Earnings (loss) before income taxes 600
(384 ) 216
76
292

Six Months Ended July 30, 2016

Net sales
$7,129

($345 )
$6,784

$—

$6,784
Credit card revenues, net —
—
—
116
116
Earnings (loss) before interest and income taxes 572
(278 ) 294
33
327
Interest expense, net —
(61 ) (61 ) —
(61 )
Earnings (loss) before income taxes 572
(339 ) 233
33
266

~~Retail Business represents a subtotal of the Retail segment and Corporate/Other and is not a reportable segment.~~

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~~NORDSTROM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Dollar and share amounts in millions except per share, per option and per unit amounts)~~

~~(Unaudited)~~

~~The following table summarizes net sales within our reportable segments:~~

Quarter Ended Six Months Ended
July 29, 2017
July 30, 2016
July 29, 2017
July 30, 2016
Nordstrom full-line stores - U.S.
$1,887

$1,978

$3,369

$3,560
Nordstrom.com 819
683
1,367
1,178
Full-price 2,706
2,661
4,736
4,738

Nordstrom Rack 990
926
1,944
1,819
Nordstromrack.com/HauteLook 199
157
397
323
Off-price 1,189
1,083
2,341
2,142

Other retail¹
144
127
270
249
Retail segment 4,039
3,871
7,347
7,129
Corporate/Other (322 ) (279 ) (351 ) (345 )
Total net sales
$3,717

$3,592

$6,996

$6,784

¹~~Other retail includes Nordstrom Canada full-line stores, Trunk Club and Jeffrey boutiques.~~

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(Dollar and share amounts in millions except per share and per square foot amounts)

CAUTIONARY STATEMENT

Certain statements in this Quarterly Report on Form 10-Q contain or may suggest “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties including, but not limited to, our anticipated financial outlook for the fiscal year ending February ~~3, 2018,~~2, 2019, our anticipated annual total and comparable sales rates, our anticipated new store openings in existing, new and international markets, our anticipated Return on Invested Capital and trends in our operations. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Our actual future results may differ materially from historical results or current expectations depending upon factors including, but not limited to:

Strategic and Operational

successful execution of our customer strategy including expansion into new domestic and international markets, acquisitions, investments in our stores and online, as well as investments in technology, our ability to realize the anticipated benefits from growth initiatives and our ability to provide a differentiated and seamless experience across all Nordstrom channels,

timely and effective implementation of our plans to evolve our business model, including development of applications for electronic devices, improvement of customer-facing technology, timely delivery of products purchased digitally, enhancement of inventory management systems, greater and more fluid inventory availability between our digital channels and retail store locations, increased reliance on third parties and greater consistency in marketing and pricing strategies, as well as our ability to manage the costs associated with this evolving business model,

our ability to evolve our business model as necessary to respond to the business and retail environment, as well as fashion trends and consumer preferences, including changing expectations of service and experience in stores and online, ~~and evolve our business model,~~

~~timely and effective execution of~~ our ~~ecommerce initiatives and~~ ability to ~~manage the costs~~properly balance our investments in existing and ~~organizational changes associated with this evolving business model,~~new store locations, especially our investments in our Nordstrom Men’s Store NYC and Nordstrom NYC and our Los Angeles market integration,

successful execution of our information technology strategy, including engagement with third-party service providers,

our ability to effectively utilize internal and third-party data in strategic planning and decision making,

our ability to maintain or expand our presence, including timely completion of construction associated with ~~newly planned~~new, relocated and remodeled stores ~~relocations~~ and ~~remodels,~~fulfillment and distribution centers, all of which may be impacted by ~~the financial health of~~ third parties and consumer demand,

efficient and proper allocation of our capital resources,

effective inventory management processes and systems, fulfillment and supply chain processes and systems, disruptions in our supply chain and our ability to control costs,

the impact of any systems or network failures, cybersecurity and/or security breaches, including any security breach of our systems or those of a ~~third party~~third-party provider that results in the theft, transfer or unauthorized disclosure of customer, employee or Company information or compliance with information security and privacy laws and regulations in the event of such an incident,

~~effective inventory management processes and systems, fulfillment processes and systems, disruptions in our supply chain and our ability to control costs,~~

the effect of the announcement by the members of the Nordstrom family relating to the exploration of a possible “going private transaction” on our relationships with our customers, employees, suppliers and partners, operating results and business generally,

our ability to safeguard our reputation and maintain relationships with our ~~vendor relationships,~~vendors and third-party service providers,

our ability to maintain relationships with and motivate our employees and to effectively attract, develop and retain our future leaders, ~~which could be impacted by the uncertainty about the possibility of a “going private transaction,”~~

our ability to realize the expected benefits, respond to potential risks and appropriately manage costs associated with our program agreement with TD, ~~Bank USA, N.A. (“TD”),~~

the effectiveness of planned advertising, marketing and promotional campaigns in the highly competitive and promotional retail industry,

market fluctuations, increases in operating costs, exit costs and overall liabilities and losses associated with owning and leasing real estate,

potential goodwill impairment charges, future impairment charges and fluctuations in the fair values of reporting units or of assets in the event projected financial results are not achieved within expected time frames,

compliance with debt and operating covenants, availability and cost of credit, changes in our credit rating and changes in interest rates,

the timing, price, manner and amounts of future share repurchases by ~~the Company,~~us, if any, or any share issuances by ~~the Company, including issuances associated with option exercises or other matters,~~us,

Economic and External

the impact of the seasonal nature of our business and cyclical customer spending,

the impact of economic and market conditions and the resultant impact on consumer spending and credit patterns,

the impact of economic, environmental or political conditions in the U.S. and countries where our ~~third party~~third-party vendors operate,

weather conditions, natural disasters, health hazards, national security or other market and supply chain disruptions, including the effects of tariffs, or the prospects of these events and the resulting impact on consumer spending patterns or information technology systems and communications,

Legal and Regulatory

our compliance with applicable domestic and international laws, regulations and ethical standards, including those related to ~~banking,~~ employment and tax, and the outcome of claims and litigation and resolution of such matters,

the impact of the current regulatory environment and financial system, ~~and~~ health care, and tax reforms, ~~and~~

~~compliance with debt covenants, availability~~the impact of changes in accounting rules and ~~cost of credit,~~regulations, changes in our ~~credit rating,~~interpretation of the rules or regulations, or changes in ~~interest rates, debt repayment patterns~~underlying assumptions, estimates or judgments.

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Item 2. Management’s Discussion and ~~personal bankruptcies.~~Analysis of Financial Condition and Results of Operations.

(Dollar and share amounts in millions except per share and per square foot amounts)

These and other factors, including those factors described in Part I, “Item 1A. Risk Factors” in our ~~2016~~2017 Annual Report on Form 10-K and Part II, “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances, except as may be required by law.

OVERVIEW

We strive to be the best fashion retailer in a digital world with our customer strategy centered on three strategic pillars: providing a compelling product offering, delivering outstanding services and experiences, and leveraging the strength of the Nordstrom brand. We are targeting higher shareholder returns through three key deliverables: growing market share, improving profitability and returns, and continuing our disciplined capital allocation approach.

Our second quarter results demonstrated our continued progress in executing our strategy and delivering on our long-term financial commitments:

Net earnings of $162, or $0.95 per diluted share for the second quarter reflected a 7.1% net sales increase with growth across Full-Price and Off-Price.

Through our market-leading presence, digital sales increased by 23% in the second quarter, compared with 20% for the same period last year.

During the first day of our Anniversary Sale, we achieved record digital demand, surpassing our previous peak by 80% at 10 times our average daily demand. Digital sales accounted for more than 40% of our event.

Our strategic brands enable us to provide customers with a compelling product offering. In the second quarter, strategic brand sales grew 13%, making up approximately 45% of Full-Price.

We continue to execute our local market strategy to drive increased customer engagement and gain market share.

Starting in Los Angeles, our largest market, we are bringing our digital and physical assets together in a seamless ecosystem to deliver outstanding services and experiences.

This includes investments in our supply chain capabilities, which are a critical enabler to better serve customers, improve our efficiencies, and better leverage inventory in our local markets. We have identified sites for our West Coast fulfillment center and local omni-channel hub, which are scheduled to open in late 2019.

Our Nordstrom Local concepts are another component of our local market strategy to engage with customers through more convenient access to product and services, such as buy online pick up in store, alterations, store reserve, and personal styling. This fall, we plan to open two additional locations in the Los Angeles market.

We are encouraged with our progress and we plan 2018 to be an inflection point for long-term profitable growth. We are confident in our path forward and are well-positioned to achieve our financial plans for the year and over the long-term.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(Continued) ~~(Dollar and share amounts~~(Amounts in millions except per share ~~and per square foot amounts)~~

~~OVERVIEW~~

Our second quarter net earnings of $110, or $0.65 per diluted share, achieved our expectations, reflecting our positive Anniversary Sale results, ongoing inventory and expense discipline, and continued strength of our financial position.

Our net sales increased 3.5%, and comparable sales increased 1.7% driven by our digital businesses and our Anniversary Sale, our biggest event of the year, with significant volumes rivaling the holiday period. This event outperformed our recent sales trends as customers responded favorably to newness and the ability to shop the way they prefer, whether in stores, with a mobile device, or online. Sales outside of this event were more consistent with our recent trends, and therefore, our Anniversary Sale results may not necessarily inform our second half performance.

~~We continued our progress in executing our customer strategy while maintaining discipline around inventory and expenses:~~

As a result of our ongoing efforts to provide newness and limited-distribution product to customers, our Nordstrom proprietary labels represented three of the top five selling brands during the Anniversary Sale.

~~In executing our digital strategy, we delivered online sales growth of 20% at Nordstrom.com, reflecting our largest online volume day in our history, and 27% at Nordstromrack.com/HauteLook.~~

The Nordstrom Rewards loyalty program continues to play an important role in reaching new customers and strengthening existing customer relationships. We had 9.4 million active Rewards customers in the U.S. and Canada, up approximately 50%, from 6.2 million a year ago. Sales from Nordstrom Rewards customers represented 56% of second quarter sales, compared with 48% a year ago.

~~Looking to the second half of the year, we continue to focus on enhancing the customer experience and reaching new customers by leveraging our digital capabilities and investing in our top markets:~~

As part of our customer strategy, we continually test and roll out new ways to connect the physical and digital shopping experiences. We plan to expand our Reserve Online and Try In Store service from six stores to approximately 50 stores by the end of the year. We have been encouraged to find that around 80% of customers who try this service choose to shop this way again.

We are executing on our digital strategy to meet our ambition for continued double-digit online growth. We continue to modernize our platform, enabling us to increase the speed and agility of enhancements to our product pages, navigation, and content.

In our efforts to gain market share, we continue to prioritize our investments in the top North American markets. In September, we will complete our planned full-line store expansion into Canada with a sixth store – at Sherway Gardens in Toronto. In October, we will relocate two full-line stores in California – one from Westside Pavilion to Century City in Los Angeles, and the other into a new space in University Towne Centre in La Jolla.

Our Nordstrom Rack business is an important way to attract new customers to Nordstrom. We opened six stores this spring with 11 more opening this fall, which will bring our total Rack store count to 232 at year end. These stores incorporate our latest store designs, with improvements to the layout and fitting room experience.

Through strategic partnerships with our vendors, we continue to focus on providing customers with newness and relevant product. Our efforts to expand product with limited distribution helps us provide customers with the most relevant brands while strengthening our regular-price business.

We are well-positioned in the market, with the combination of our physical and digital assets representing a competitive advantage. Our omni-channel business model provides favorable economics related to the cost of serving customers and strengthening our brand. Our local market assets – our stores, salespeople, product, and services – are the core of our brand and play an important role in engaging with our customers. Nearly 80% of customers who shop with us across multiple channels began at our stores. With our customers at the center of everything we do, our ongoing efforts to better serve them in more ways have contributed positively to our second quarter results.

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~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.~~

~~(Continued)~~ ~~(Dollar and share amounts in millions except per share and per square foot~~ amounts)

RESULTS OF OPERATIONS

Our reportable segments are Retail and Credit. We analyze our results of operations through earnings before interest and income taxes for our Retail Business and Credit, while interest expense, income taxes and earnings per share are discussed on a total Company basis.

~~Retail Business~~

Our Retail Business includes our Nordstrom U.S. and Canada full-line stores, Nordstrom.com, Nordstrom Rack stores, Nordstromrack.com/HauteLook, Trunk Club, Jeffrey boutiques and Last Chance clearance stores. For purposes of discussion and analysis of our results of operations of our Retail Business, we combine our Retail segment results with revenues and expenses in the “Corporate/Other” column of Note 8: Segment Reporting in Item 1 (collectively, the “Retail Business”).

Certain metrics we use to evaluate the Retail Business may not be calculated in a consistent manner among industry peers. Provided below are definitions of metrics we present within our analysis of the Retail Business:

~~Comparable Sales – includes sales from stores that have been open at least one full year at the beginning of the year~~

~~Total Company comparable sales includes sales from our online channels~~

~~Gross Profit – net sales less cost of sales and related buying and occupancy costs~~

~~Inventory Turnover Rate – trailing 12-months cost of sales and related buying and occupancy costs (for all segments) divided by the trailing 4-quarter average inventory~~

~~Total Sales Per Square Foot – net sales divided by weighted-average square footage~~

4-wall Sales Per Square Foot – sales for Nordstrom U.S. and Canada full-line stores, Nordstrom Rack stores, Trunk Club clubhouses, Jeffrey boutiques and Last Chance clearance stores divided by their weighted-average square footage

~~Summary~~

~~The following table summarizes the results of our Retail Business:~~

Quarter Ended
July 29, 2017 July 30, 2016
Amount

% of net sales¹

Amount

% of net sales¹

Net sales
$3,717
100.0 %
$3,592
100.0 %
Cost of sales and related buying and occupancy costs (2,449 ) (65.9 %) (2,358 ) (65.6 %)
Gross profit 1,268
34.1 % 1,234
34.4 %
Selling, general and administrative expenses (1,091 ) (29.4 %) (1,030 ) (28.7 %)
Earnings before interest and income taxes
$177
4.8 %
$204
5.7 %

Six Months Ended
July 29, 2017 July 30, 2016
Amount

% of net sales¹

Amount

% of net sales¹

Net sales
$6,996
100.0 %
$6,784
100.0 %
Cost of sales and related buying and occupancy costs (4,603 ) (65.8 %) (4,456 ) (65.7 %)
Gross profit 2,393
34.2 % 2,328
34.3 %
Selling, general and administrative expenses (2,101 ) (30.0 %) (2,034 ) (30.0 %)
Earnings before interest and income taxes
$292
4.2 %
$294
4.3 %

¹~~Subtotals and totals may not foot due to rounding.~~

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~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.~~

~~(Continued)~~ ~~(Dollar and share amounts in millions except per share and per square foot amounts)~~

~~Retail Business Net Sales~~

In our ongoing effort to enhance the customer experience, we are focused on providing customers with a seamless experience across our channels. 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 channels, we know they value the overall Nordstrom brand experience and view us simply as Nordstrom, which is ultimately how we view our business. ~~The following is~~We have one Retail reportable segment in 2018 and analyze our results on a ~~summary~~total Company basis.

We may not calculate certain metrics used to evaluate our business in a consistent manner among industry peers. Provided below are definitions of metrics we present within our ~~net~~ analysis:

Comparable Sales – sales ~~by channel for our Retail Business:~~

Quarter Ended Six Months Ended
July 29, 2017
July 30, 2016
July 29, 2017
July 30, 2016
Net sales by channel:
Nordstrom full-line stores - U.S.
$1,887

$1,978

$3,369

$3,560
Nordstrom.com 819
683
1,367
1,178
Full-price 2,706
2,661
4,736
4,738

Nordstrom Rack 990
926
1,944
1,819
Nordstromrack.com/HauteLook 199
157
397
323
Off-price 1,189
1,083
2,341
2,142

Other retail¹
144
127
270
249
Retail segment 4,039
3,871
7,347
7,129
Corporate/Other (322 ) (279 ) (351 ) (345 )
Total net sales
$3,717

$3,592

$6,996

$6,784

Net sales increase (decrease) 3.5 % (0.2 %) 3.1 % 1.0 %

Comparable sales increase (decrease) by channel:
Nordstrom full-line stores - U.S. (4.4 %) (6.5 %) (5.3 %) (7.0 %)
Nordstrom.com 19.8 % 9.4 % 16.0 % 6.7 %
Full-price 1.8 % (2.8 %) — % (4.0 %)
Nordstrom Rack (1.0 %) 1.1 % (0.9 %) 0.2 %
Nordstromrack.com/HauteLook 26.7 % 34.7 % 22.8 % 38.3 %
Off-price 3.1 % 5.3 % 2.7 % 4.9 %
Total Company 1.7 % (1.2 %) 0.6 % (1.5 %)

Sales per square foot:
Total sales per square foot
$125

$125

$235

$236
4-wall sales per square foot 100
104
186
193
Full-line sales per square foot - U.S. 91
95
163
171
Nordstrom Rack sales per square foot 123
126
243
249

¹~~Other retail includes Nordstrom Canada full-line~~from stores ~~Trunk Club and Jeffrey boutiques.~~

~~Total Company net sales increased 3.5% for~~that have been open at least one full year at the quarter and 3.1% for the six months ended July 29, 2017, compared with the same periods in 2016, while comparable sales increased 1.7% for the quarter and 0.6% for the six months ended July 29, 2017. The Anniversary Sale, historically the largest eventbeginning of the year ~~performed better than recent trends. To date~~

Comparable sales include sales from our online channels

Due to the 53rd week in ~~fiscal~~ 2017, ~~we closed one full-line~~our 2018 comparable sales are reported on a like-for-like basis with no impact from event shifts or revenue recognition

Digital Sales – online sales and digitally assisted store sales which include Buy Online, Pickup in Store (“BOPUS”), Reserve Online, Try on in Store (Store Reserve) and ~~opened six Nordstrom Rack stores.~~Style Board, a digital selling tool

~~Full-price~~Gross Profit – net sales ~~which consists~~less cost of sales and related buying and occupancy costs

Inventory Turnover Rate – trailing 12-months cost of sales and related buying and occupancy costs divided by the trailing 4-quarter average inventory

Net Sales

During the first quarter of 2018, we adopted the new revenue recognition standard using the modified retrospective adoption method. Results beginning in the first quarter of 2018 are presented under the new Revenue Standard, while prior period amounts are not adjusted. Also beginning in 2018, we aligned our sales presentation with how we view the results of our operations internally and how our customers shop with us, by our Full-Price and Off-Price businesses.

Full-Price – Nordstrom U.S. full-line stores, Nordstrom.com, Canada, Trunk Club, Jeffrey and ~~Nordstrom.com channels, increased 1.7% for the quarter~~Nordstrom Local.

Off-Price – Nordstrom U.S. Rack stores, Nordstromrack.com/HauteLook and ~~was flat for the six months ended July 29, 2017, compared with the same periods in 2016, while~~Last Chance clearance stores

The following table summarizes net sales and comparable sales increased 1.8% for the quarter and was flat for the six months ended July 29, 2017. Also on a comparable basis for the quarter, full-price experienced increases in the average selling price per item sold and the total number of items sold. For the six months ended July 29, 2017, there was a decrease in the total number of items sold, partially offset by an increase in the average selling price per item sold. The top-performing merchandise categories were Women’s Apparel and Beauty for the quarter and six months ended ~~July 29, 2017. The top-performing U.S. geographic region was~~August 4, 2018, compared with the ~~East for~~same periods in fiscal 2017:



	Quarter Ended						Six Months Ended
	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Net sales by business¹:
Full-Price		$2,707			$2,850			$4,948			$5,006
Off-Price	1,273			1,189			2,502			2,341
Other	—			(322		)	—			(351		)
Total net sales		$3,980			$3,717			$7,450			$6,996

Comparable sales increase (decrease) by business:
Full-Price	4.1		%	1.4		%	2.6		%	(0.4		%)
Off-Price	4.0		%	3.1		%	2.2		%	2.7		%
Total Company	4.0		%	1.7		%	2.4		%	0.6		%

Digital sales as % of total net sales	34		%	29		%	31		%	27		%

¹ We present our sales with how management views our results internally, including presenting 2018 under the ~~quarter~~new Revenue Standard and ~~the West for the six months ended July 29, 2017.~~allocating our sales return reserve to Full-Price and Off-Price. For 2017, Other primarily included unallocated sales return, in-transit and loyalty related adjustments necessary to reconcile sales by business to total net sales.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(Continued) ~~(Dollar and share amounts~~(Amounts in millions except per share ~~and per square foot~~ amounts)

~~Off-price~~Total Company net sales ~~which consists of Nordstrom Rack~~increased 7.1% and ~~Nordstromrack.com/HauteLook channels, increased 9.8%~~6.5% for the second quarter ended 2018 and ~~9.3% for the~~ six months ended ~~July 29, 2017,~~August 4, 2018, compared with the same periods in ~~2016, while comparable~~2017. This included an increase of approximately 100 basis points in the second quarter and 200 basis points for the six months ended August 4, 2018, primarily due to the impact of the new Revenue Standard as it relates to the timing of the Anniversary Sale. We expect a corresponding decrease of approximately 100 basis points in the third quarter of 2018. We do not expect the impact of adopting the new Revenue Standard to be material for the year ended February 2, 2019. We do expect the impact of the 53rd week in 2017 to result in a decrease of approximately 100 basis points in 2018 compared with 2017. Digital sales increased ~~3.1%~~23% in the second quarter ended 2018 and ~~2.7%~~21% in the six months ended August 4, 2018 compared with the same periods in 2017. To date in fiscal 2018, we opened our Nordstrom Men’s Store NYC and seven Nordstrom Rack stores and closed one full-line store and one Trunk Club clubhouse.

Full-Price net sales decreased 5.0% and 1.2% for the second quarter ended 2018 and six months ended August 4, 2018, compared with the same periods in 2017. This included a decrease of approximately 900 basis points for the second quarter and 400 basis points for the six months ended August 4, 2018, due primarily to the sales return reserve allocation and to a lesser extent the new Revenue Standard. We expect a corresponding increase of approximately 800 basis points in the third quarter of 2018 primarily related to the sales return reserve allocation. Full-Price sales reflected an increase in the average selling price per item sold and the number of items sold. The top-ranking merchandise categories were Kids’ Apparel and Beauty for the quarter and six months ended ~~July 29,~~August 4, 2018.

Off-Price net sales increased 7.0% and 6.9% for the second quarter ended 2018 and six months ended August 4, 2018, compared with the same periods in 2017. ~~On a quarter and year-to-date basis, Nordstrom Rack experienced~~This reflected an increase in the number of items sold, partially offset by a decrease in the average selling price per item ~~sold, partially offset by an~~sold. The increase in sales included a decrease of approximately 150 basis points for the ~~total number of items sold. Men’s Apparel~~second quarter and 50 basis points for the six months ended August 4, 2018, primarily due to the new Revenue Standard. Shoes was the top-performing ~~Nordstrom Rack~~ merchandise category for the quarter and six months ended ~~July 29,~~August 4, 2018.

Credit Card Revenue, Net

Credit program revenues, net includes our portion of the credit card revenue, net of credit losses, from credit card receivables pursuant to our program agreement with TD.

Credit card revenue, net was $87 for the quarter ended August 4, 2018, compared with $76 for the same period in 2017 and $179 for the six months ended August 4, 2018, compared with $152 for the same period in 2017. The ~~East was the top-performing geographic region~~increases of $11 and $27 for the quarter and six months ended ~~July 29, 2017.~~August 4, 2018 were a result of our strategic partnership with TD to responsibly grow our receivables and associated revenues as well as efforts to drive new account growth.

Other retail net sales increased for the quarter and six months ended July 29, 2017, compared with the same periods in 2016 due to new store openings in Canada, partially offset by decreases in Trunk Club.

~~Retail Business~~ Gross Profit

The following table summarizes ~~the Retail Business~~gross profit:



	Quarter Ended						Six Months Ended
	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Gross profit		$1,391			$1,266			$2,573			$2,389
Gross profit as a % of net sales	35.0		%	34.0		%	34.5		%	34.2		%

							August 4, 2018			July 29, 2017
Inventory turnover rate							4.74			4.53

Our gross profit ~~(“Retail GP”):~~

Quarter Ended Six Months Ended
July 29, 2017
July 30, 2016
July 29, 2017
July 30, 2016
Retail gross profit
$1,268

$1,234

$2,393

$2,328
Retail gross profit as a % of net sales 34.1 %
34.4 %
34.2 %
34.3 %

July 29, 2017
July 30, 2016
Ending inventory per square foot
$69.69

$70.51
Inventory turnover rate 4.53
4.43

~~Our Retail GP~~ rate ~~decreased 25~~increased 91 basis points for the second quarter ended ~~July 29, 2017~~2018 and 1039 basis points for the six months ended ~~July 29, 2017,~~August 4, 2018, compared with the same periods in ~~2016, primarily~~2017. This increase included a favorable shift of $30 million due to ~~higher occupancy expenses related~~the impact of the new Revenue Standard as it relates to ~~new store growth for Nordstrom Rack and Canada in addition to higher loyalty expenses during~~the timing of the Anniversary ~~Sale. This decrease~~Sale, which is expected to fully reverse in the third quarter. In addition, the increase was ~~partially offset~~driven by ~~improved merchandise~~higher product margins ~~reflecting the continued strength in regular-price selling.~~from favorable regular price selling trends and leverage on occupancy expenses. Continued inventory execution led to improvements in ~~both ending inventory per square foot and the~~ inventory turnover rate as of ~~July 29, 2017.~~August 4, 2018. For additional information on the impacts of the new Revenue Standard, see Note 2: Revenue in Item 1.

~~Retail Business~~

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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)

Selling, General and Administrative Expenses

~~Retail Business selling,~~Selling, general and administrative expenses (“~~Retail~~ SG&A”) are summarized in the following table:

Quarter Ended Six Months Ended
July 29, 2017
July 30, 2016
July 29, 2017
July 30, 2016
Retail selling, general and administrative expenses
$1,091

$1,030

$2,101

$2,034
Retail selling, general and administrative expenses as a % of net sales 29.4 % 28.7 % 30.0 % 30.0 %



	Quarter Ended						Six Months Ended
	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Selling, general and administrative expenses		$1,232			$1,125			$2,353			$2,173
Selling, general and administrative expenses as a % of net sales	31.0		%	30.3		%	31.6		%	31.1		%

~~For~~SG&A increased $107 and 71 basis points for the second quarter ended ~~July 29, 2017, Retail SG&A increased $61~~2018 and ~~our Retail SG&A rate increased 67~~$180 and 53 basis points ~~primarily due to planned increases in technology and supply chain expenses associated with our growth initiatives. For~~for the six months ended ~~July 29, 2017, Retail SG&A increased $67~~August 4, 2018, primarily due to ~~planned technology and~~higher supply chain expenses ~~partially offset by 2016 credit chargeback expenses associated~~related to planned growth and the Anniversary Sale.

Earnings Before Interest and Income Taxes

Earnings before interest and income taxes (“EBIT”) are summarized in the following table:



	Quarter Ended						Six Months Ended
	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Earnings before interest and income taxes		$246			$217			$399			$368
Earnings before interest and income taxes as a % of net sales	6.2		%	5.8		%	5.4		%	5.3		%

EBIT increased $29 and 33 basis points for the second quarter ended 2018 and $31 and 10 basis points for the six months ended August 4, 2018. The increase in EBIT included a favorable shift of $30 primarily due to the impact of the new Revenue Standard as it relates to the timing of the Anniversary Sale, which is expected to fully reverse in the third quarter.

Interest Expense, net

Interest expense, net was $28 for the second quarter ended 2018, compared with ~~an industry change~~$29 for the same period in ~~liability rules.~~2017, and $56 for the six months ended August 4, 2018, compared with $76 for the same period in 2017. The decrease for the six months ended August 4, 2018, is due to a net interest expense charge of $18 related to the $650 debt refinancing completed in the first quarter of 2017 (see Note 4: Debt and Credit Facilities in Item 1).

Income Tax Expense

Income tax expense is summarized in the following table:



	Quarter Ended						Six Months Ended
	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Income tax expense		$56			$78			$94			$119
Effective tax rate	25.7		%	41.8		%	27.4		%	40.7		%

The effective tax rate decreased for the second quarter ended 2018 and six months ended August 4, 2018, compared with the same periods in 2017, primarily due to the lower statutory tax rate enacted under the Tax Act.

Earnings Per Share

Earnings per share is as follows:



	Quarter Ended				Six Months Ended
	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
Basic		$0.97		$0.66		$1.48		$1.04
Diluted		$0.95		$0.65		$1.46		$1.02

Earnings per diluted share increased $0.30 for the second quarter ended 2018 and increased $0.44 for the six months ended August 4, 2018, compared with the same periods in 2017 due to higher sales volume, a lower tax rate and the impact of the new Revenue Standard as it relates to the timing of the Anniversary Sale.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(Continued) ~~(Dollar and share amounts~~(Amounts in millions except per share ~~and per square foot~~ amounts)

~~Credit Segment~~Fiscal Year 2018 Outlook

~~The Nordstrom credit~~We raised our annual outlook expectations for sales and ~~debit card products~~earnings per diluted share to incorporate our first half results. Our current expectations for fiscal 2018 are ~~designed~~as follows:



	Prior Outlook	Current Outlook
Net sales	$15.2 to $15.4 billion	$15.4 to $15.5 billion
Credit card revenues	Mid-teens growth	Mid-teens growth
Comparable sales (percent)	0.5 to 1.5	1.5 to 2
EBIT	$895 to $940 million	$925 to $960 million
Earnings per diluted share (excluding the impact of any future share repurchases)	$3.35 to $3.55	$3.50 to $3.65

Our updated full year outlook incorporated the following assumptions:

For the second half of fiscal 2018, we expect the third quarter to ~~strengthen customer relationships~~contribute approximately 30 percent of EBIT and ~~grow retail sales by providing loyalty benefits, valuable services~~the fourth quarter to contribute approximately 70 percent of EBIT.

Third quarter EBIT margin is expected to deleverage on fixed expenses and ~~payment products. We believe our credit business allows us to build deeper relationships with our customers by fully integrating~~reflect an unfavorable shift of $30. This represents the Nordstrom Rewards program with our retail business and provide better service, which in turn fosters greater customer loyalty. Nordstrom cardholders tend to visit our stores more frequently and spend more than non-cardholders. Nordstrom private label credit and debit cards can be used at all of our U.S. retail channels, while Nordstrom Visa credit cards may also be used for purchases outside of Nordstrom (“outside volume”).

~~Summary~~

~~The table below provides a detailed view~~reversal of the ~~operational results~~second quarter benefit of ~~our Credit segment,~~the new Revenue Standard as it relates to the timing of the Anniversary Sale.

Fourth quarter EBIT is expected to leverage from higher sales volume and reflect a favorable comparison of $16 from a one-time employee investment in 2017 associated with last year’s tax reform. When normalizing for this one-time impact, we anticipate the fourth quarter’s EBIT contribution to the second half will be generally consistent with ~~Note 8: Segment Reporting in Item 1:~~

Quarter Ended Six Months Ended
July 29, 2017
July 30, 2016
July 29, 2017
July 30, 2016
Credit card revenues, net
$76

$59

$152

$116
Credit expenses (36 ) (42 ) (76 ) (83 )
Earnings before interest and income taxes
$40

$17
76
33

Credit and debit card volume¹:

Outside
$1,061

$1,068

$2,062

$2,084
Inside 1,760
1,708
2,997
2,975
Total volume
$2,821

$2,776

$5,059

$5,059

¹~~Credit and debit card volume represents sales on the total portfolio plus applicable sales taxes.~~

~~Credit Card Revenues, net~~

~~The following is a summary of our credit card revenues, net~~:

Quarter Ended Six Months Ended
July 29, 2017
July 30, 2016
July 29, 2017
July 30, 2016
Credit program revenues, net
$73

$56

$145

$109
Other 3
3
7
7
Total credit card revenues, net
$76

$59

$152

$116

Pursuant to our program agreement with TD, we receive our portion of the ongoing credit card revenue, net of credit losses, from both sold and newly generated credit card receivables, which is recorded in credit program revenues, net. Asset amortization and deferred revenue recognition associated with the assets and liabilities recorded as part of the transaction are also recognized in credit program revenues, net. Revenue earned under the program agreement is impacted by the credit quality of receivables, both owned and serviced, and factors such as deteriorating economic conditions, declining creditworthiness of cardholders and the execution of account management and collection activities may heighten the risk of credit losses. Other credit card revenues include finance charge revenue, interchange fees and late fees on our accounts receivable retained (including debit, employee and Canadian receivables).

Credit card revenues, net increased $17 for the quarter and $36 for the six months ended July 29, 2017, compared with the same periods in 2016, reflecting our strategic partnership with TD to responsibly grow our receivables and associated revenues. There was also a reduction in amortization expense related to the sale of the credit card portfolio.

~~Credit Expenses~~

Total credit expenses decreased $6 for the quarter and $7 for the six months ended July 29, 2017, compared with the same periods in 2016, primarily due to lower processing costs driven by operational efficiencies.historical trends.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(Continued) ~~(Dollar and share amounts~~(Amounts in millions except per share ~~and per square foot~~ amounts)

~~Total Company Results~~

~~Interest Expense, net~~

Interest expense, net was $29 for the quarter ended July 29, 2017, compared with $30 for the same period in 2016, and $76 for the six months ended July 29, 2017, compared with $61 for the same period in 2016. The increase for the six months ended July 29, 2017 was primarily due to a net interest expense charge of $18 related to the $650 debt refinancing completed in the first quarter of 2017 (see Note 2: Debt and Credit Facilities in Item 1).

~~Income Tax Expense~~

~~Income tax expense is summarized in the following table:~~

Quarter Ended Six Months Ended
July 29, 2017
July 30, 2016
July 29, 2017
July 30, 2016
Income tax expense
$78

$74

$119

$103
Effective tax rate 41.8 % 38.7 % 40.7 % 38.7 %

~~The effective tax rate increased for the quarter and six months ended July 29, 2017, compared with the same periods in 2016, as a result of the jurisdictional mix of income.~~

~~Earnings Per Share~~

~~Earnings per share is as follows:~~

Quarter Ended Six Months Ended
July 29, 2017
July 30, 2016
July 29, 2017
July 30, 2016
Basic
$0.66

$0.67

$1.04

$0.94
Diluted
$0.65

$0.67

$1.02

$0.93

Earnings per diluted share remained relatively consistent for the quarter ended July 29, 2017, compared with the same period in 2016. Earnings per diluted share increased for the six months ended July 29, 2017, reflecting increased sales in addition to a favorable comparison related to higher credit chargeback expenses associated with an industry change in liability rules in 2016.

~~2017 Outlook~~

We updated our annual earnings per diluted share expectations to incorporate our second quarter results. Nordstrom’s expectations for fiscal 2017, which include the impact of the 53rd week, are as follows:



	~~Current Outlook~~
~~Net sales (percent)~~	~~Approximately 4~~
~~Comparable sales (percent)~~	~~Approximately flat~~
~~Retail EBIT~~	~~$790 to $840~~
~~Credit EBIT~~	~~Approximately $145~~
~~Earnings per diluted share (excluding the impact of any future share repurchases)~~	~~$2.85 to $3.00~~

The income tax rate is estimated at 40% for fiscal 2017. The 53rd week is expected to add approximately $200 to net sales and approximately $0.02 to $0.03 to earnings per diluted share. The 53rd week is not included in comparable sales calculations.

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~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.~~

~~(Continued)~~ ~~(Dollar and share amounts in millions except per share and per square foot amounts)~~

Adjusted Return on Invested Capital (“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 ~~use~~business to generate returns. Adjusted ROIC adjusts our operating leases as if they met the criteria for capital leases or we had purchased the properties. This provides additional supplemental information that reflects the investment in our off-balance sheet operating leases, controls for differences in capital structure between us and our competitors and provides investors and credit agencies with another way to comparably evaluate the efficiency and effectiveness of our capital investments over time. In addition, we incorporate Adjusted ROIC into our executive incentive measures and ~~believe ROIC~~it is an important ~~component~~indicator of shareholders’ return over the long term. In addition, we incorporate ROIC in our executive incentive compensation measures. For the 12 fiscal months ended July 29, 2017, our ROIC decreased to 8.9% compared with 9.1% for the 12 fiscal months ended July 30, 2016. Results for the current period were negatively impacted by approximately 310 basis points due to the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016.

We define Adjusted ROIC as our adjusted net operating profit after tax divided by our average invested capital using the trailing 12-month average. Adjusted ROIC is not a measure of financial performance under generally accepted accounting principles (“GAAP”) and should be considered in addition to, and not as a substitute for, return on assets, net earnings, total assets 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. Estimated depreciation on capitalized operating leases and average estimated asset base of capitalized operating leases are not calculated in accordance with, or an alternative for, GAAP and should not be considered in isolation or as a substitution of our results as reported under GAAP. The financial measure calculated under GAAP which is most directly comparable to Adjusted ROIC is return on assets.

For the 12 fiscal months ended August 4, 2018, our Adjusted ROIC increased to 10.8% compared with 8.9% for the 12 fiscal months ended July 29, 2017. Results for the prior period were negatively impacted by approximately 310 basis points due to the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016.

The following is a reconciliation of the components of Adjusted ROIC and return on assets:

12 Fiscal Months Ended
July 29, 2017
July 30, 2016
Net earnings
$364

$424
Add: income tax expense 346
261
Add: interest expense 139
121
Earnings before interest and income tax expense 849
806

Add: rent expense 230
190
Less: estimated depreciation on capitalized operating leases¹
(123 ) (101 )
Net operating profit 956
895

Less: estimated income tax expense (438 ) (341 )
Net operating profit after tax
$518

$554

Average total assets
$8,018

$8,332
Less: average non-interest-bearing current liabilities²
(3,173 ) (3,062 )
Less: average deferred property incentives and deferred rent liability²
(646 ) (549 )
Add: average estimated asset base of capitalized operating leases³
1,636
1,388
Average invested capital
$5,835

$6,109

Return on assets⁴
4.5 % 5.1 %
ROIC⁴
8.9 % 9.1 %



	12 Fiscal Months Ended
	August 4, 2018			July 29, 2017
Net earnings		$513			$364
Add: income tax expense¹	329			346
Add: interest expense	124			139
Earnings before interest and income tax expense	966			849

Add: rent expense, net	249			230
Less: estimated depreciation on capitalized operating leases²	(133		)	(123		)
Adjusted net operating profit	1,082			956

Less: estimated income tax expense	(422		)	(438		)
Adjusted net operating profit after tax		$660			$518

Average total assets		$8,175			$8,018
Less: average non-interest-bearing current liabilities³	(3,371		)	(3,173		)
Less: average deferred property incentives and deferred rent liability³	(635		)	(646		)
Add: average estimated asset base of capitalized operating leases²	1,962			1,636
Average invested capital		$6,131			$5,835

Return on assets⁴	6.3		%	4.5		%
Adjusted ROIC⁴	10.8		%	8.9		%

¹ Results for the 12 fiscal months ended August 4, 2018 include a $42 unfavorable impact related to the Tax Act.

²Capitalized operating leases is our best estimate of the asset base 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. ~~Asset~~The asset base is calculated ~~as described in footnote 3 below.~~

² ~~Balances associated with our deferred rent liability have been classified as long-term liabilities in the current period.~~

³~~Based~~based upon the trailing 12-month average of the monthly asset base. The asset base for each month is calculated as the trailing 12 months of rent expense multiplied by eight. The multiple of eight times rent expense is a commonly used method of estimating the asset base we would record for our capitalized operating ~~leases described in footnote 1.~~leases.

³ Balances associated with our deferred rent liability have been classified as long-term liabilities as of January 28, 2017.

⁴ Results for the 12 fiscal months ended July 29, 2017 include the $197 impact of the Trunk Club non-cash goodwill impairment charge in the third quarter of 2016, which negatively impacted the ~~current~~prior period return on assets by ~~234~~approximately 230 basis points and Adjusted ROIC by approximately 310 basis points.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(Continued) ~~(Dollar and share amounts~~(Amounts in millions except per share ~~and per square foot~~ 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. We believe that our operating cash flows, available credit ~~facilities~~facility and potential future borrowings are sufficient to ~~finance~~meet our cash requirements for the next 12 months and beyond.

Over the long term, we manage our cash and capital structure to maximize shareholder return, maintain our financial position, manage refinancing risk and allow flexibility for strategic initiatives. We regularly assess our debt and leverage levels, capital expenditure requirements, debt service payments, dividend payouts, potential share repurchases and other future investments. We believe that as of ~~July 29, 2017,~~August 4, 2018, our existing cash and cash equivalents on-hand of ~~$919,~~$1,343, available credit ~~facilities~~facility of $800 and potential future operating cash flows and borrowings will be sufficient to fund these scheduled future payments and potential long-term initiatives.

The following is a summary of our cash flows by activity:



	Six Months Ended
Fiscal year	August 4, 2018			July 29, 2017
Net cash provided by operating activities		$594			$574
Net cash used in investing activities	(290		)	(308		)
Net cash used in financing activities	(142		)	(354		)

Operating Activities

Net cash provided by operating activities ~~decreased $282~~increased $20 for the ~~six months~~period ended ~~July 29, 2017,~~August 4, 2018, compared with the same period in ~~2016,~~2017, primarily due to ~~a tax refund received in 2016, as well as~~ the timing of ~~credit card receivables from~~ the payments for inventory purchases and higher ~~volume~~net earnings, partially offset by the timing of payroll and increased incentive compensation payouts, which included $16 for our ~~Anniversary Event sales.~~one-time investment in employees paid in 2018 in response to the Tax Act.

Investing Activities

Net cash used in investing activities decreased ~~$66~~$18 for the ~~six months~~period ended ~~July 29, 2017,~~August 4, 2018, compared with the same period in ~~2016,~~2017, primarily due to a planned ~~reduction~~reductions in capital expenditures, ~~associated with fewer store openings and decreased~~partially offset by the acquisitions of two retail technology ~~investments.~~companies, which were classified in other investing activities, net (see Note 1: Basis of Presentation in Item 1).

Financing Activities

Net cash used in financing activities ~~increased $169~~decreased $212 for the ~~six months~~period ended ~~July 29, 2017,~~August 4, 2018, compared with the same period in ~~2016,~~2017, primarily due to ~~increased~~decreased share repurchase activity.

~~Short-term and Long-term~~ Borrowing Activity

During the first quarter of 2017, we issued $350 aggregate principal amount of 4.00% senior unsecured notes due March 2027 and $300 aggregate principal amount of 5.00% senior unsecured notes due January 2044. We recorded debt issuance costs incurred as a result of the issuance in other financing activities, net in the Condensed Consolidated Statements of Cash Flows in Item 1. With the proceeds of these new notes, we retired our $650 senior unsecured notes that were due January 2018. ~~See Note 2: Debt~~

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Item 2. Management’s Discussion and ~~Credit Facilities~~Analysis of Financial Condition and Results of Operations.

(Continued) (Amounts in ~~Item 1 for additional information.~~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, provides investors with a meaningful analysis of our ability to generate cash from our business. For the six months ended ~~July 29, 2017,~~August 4, 2018, we had Free Cash Flow of ~~$115~~$388 compared with ~~$303~~$239 for the six months ended July ~~30, 2016.~~29, 2017.

Beginning in the first quarter of fiscal 2018, we no longer adjust free cash flow for cash dividends paid. We believe this presentation is more reflective of our operating performance and more consistent with the way we manage our business, how our peers calculate free cash flows and prevailing industry practice. Prior period Free Cash Flow financial measures have been recast to conform with current period presentation.

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
	July 29, 2017			July 30, 2016			August 4, 2018			July 29, 2017
Net cash provided by operating activities		$574			$856			$594			$574
Less: capital expenditures	(341		)	(407		)	(269		)	(341		)
Less: cash dividends paid	(124		)	(128		)
Add (less): change in cash book overdrafts	6			(18		)
Add: change in cash book overdrafts							63			6
Free Cash Flow		$115			$303			$388			$239

Adjusted EBITDA (Non-GAAP financial measure)

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. As of August 4, 2018 and July 29, 2017, Adjusted EBITDA was $697 and $650.

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
	August 4, 2018			July 29, 2017
Net earnings		$249			$173
Add: income tax expense	94			119
Add: interest expense, net	56			76
Earnings before interest and income taxes	399			368

Add: depreciation and amortization expenses	338			320
Less: amortization of deferred property incentives	(40		)	(38		)
Adjusted EBITDA		$697			$650

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(Continued) ~~(Dollar and share amounts~~(Amounts in millions except per share ~~and per square foot~~ amounts)

Credit Capacity and Commitments

As of ~~July 29, 2017,~~August 4, 2018, we had total short-term borrowing capacity of $800 under our senior unsecured revolving credit facility (“revolver”) that expires in April 2020. Under the terms of our revolver, we pay 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. We have the option to increase the revolving commitment by up to $200, to a total of $1,000, provided that we obtain written consent from the lenders. ~~From time~~

Our wholly owned subsidiary in Puerto Rico maintains a $52 unsecured borrowing facility to ~~time~~support our expansion into that market. The facility expires in Fall 2018 and borrowings on this facility incur interest based upon the LIBOR plus 1.275% per annum and also incur a fee based on any unused commitment. As of August 4, 2018, we ~~utilize our commercial paper program to fund working capital needs, which has the effect of reducing our available liquidity under the revolver until repaid.~~had $47 outstanding on this facility.

As of ~~July 29, 2017,~~August 4, 2018, we had no issuances outstanding under our commercial paper program and no borrowings outstanding under our revolver.

Impact of Credit Ratings

Under the terms of our revolver, any borrowings we may enter into will accrue interest for Euro-Dollar Rate Loans at a floating base rate tied to LIBOR, for Canadian Dealer Offer Rate Loans at a floating rate tied to CDOR, and for Base Rate Loans at the highest of: (i) the Euro-Dollar rate plus 100 basis points, (ii) the federal funds rate plus 50 basis points and (iii) the prime rate.

The rate depends upon the type of borrowing incurred, plus in each case an applicable margin. This applicable margin varies depending upon the credit ratings assigned to our long-term unsecured debt. At the time of this report, our long-term unsecured debt ratings, outlook and resulting applicable margin were as follows:



	Credit Ratings	Outlook
Moody’s	Baa1	Stable
Standard & Poor’s	BBB+	~~Negative~~Stable



	Base Interest Rate	Applicable Margin
Euro-Dollar Rate Loan	LIBOR	1.02	%
Canadian Dealer Offer Rate Loan	CDOR	1.02	%
Base Rate Loan	various	—

Should the ratings assigned to our long-term unsecured debt improve, the applicable margin associated with any such borrowings may decrease, resulting in a lower borrowing cost under this facility. Should the ratings assigned to our long-term unsecured debt worsen, the applicable margin associated with our borrowings may increase, resulting in a higher borrowing cost under this facility.

Debt Covenants

The revolver requires that we maintain an adjusted debt to earnings before interest, income taxes, depreciation, amortization and rent (“EBITDAR”) leverage ratio of no more than four ~~times (see the following additional discussion of Adjusted Debt to EBITDAR).~~times. As of ~~July 29, 2017,~~August 4, 2018, we were in compliance with this covenant.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(Continued) ~~(Dollar and share amounts~~(Amounts in millions except per share ~~and per square foot~~ 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. Our goal is to manage debt levels to maintain an investment-grade credit rating and operate with an efficient capital structure. In evaluating our debt levels, this measure provides a reflection of our credit worthiness that could impact our credit rating and borrowing costs. We also have a debt covenant that requires an adjusted debt to EBITDAR leverage ratio of no more than four times. As of ~~July 29, 2017,~~August 4, 2018, our Adjusted Debt to EBITDAR was ~~2.4, compared with 2.6~~2.5, and as of July ~~30, 2016.~~29, 2017, it was 2.4.

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 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 Adjusted Debt to EBITDAR is debt to net earnings. The following is a reconciliation of the components of Adjusted Debt to EBITDAR and debt to net earnings:


	2017¹		2016¹			2018¹		2017¹
Debt		$2,740		$2,782			$2,734		$2,740
Add: estimated capitalized operating lease liability²	1,841		1,518			1,993		1,841
Less: fair value hedge adjustment included in long-term debt	—		(18		)
Adjusted Debt		$4,581		$4,282			$4,727		$4,581

Net earnings		$364		$424			$513		$364
Add: income tax expense	346		261
Add: income tax expense³						329		346
Add: interest expense, net	136		121			115		136
Earnings before interest and income taxes	846		806			957		846

Add: depreciation and amortization expenses	646		617			683		646
Add: rent expense	230		190
Add: non-cash acquisition-related charges	204		7
EBITDAR		$1,926		$1,620
Add: rent expense, net						249		230
Add: non-cash acquisition-related charges⁴						1		204
Adjusted EBITDAR							$1,890		$1,926

Debt to Net Earnings	7.5		6.6
Debt to Net Earnings⁵						5.3		7.5
Adjusted Debt to EBITDAR	2.4		2.6			2.5		2.4

¹The components of Adjusted Debt are as of August 4, 2018 and July 29, 2017, ~~and July 30, 2016,~~ while the components of Adjusted EBITDAR are for the 12 months ended August 4, 2018 and July 29, ~~2017 and July 30, 2016.~~2017.

²Based upon the estimated lease liability as of the end of the period, calculated as the trailing 12 months of rent expense multiplied by eight. The multiple of eight times rent expense is 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 Results for the 12 fiscal months ended August 4, 2018 include a $42 unfavorable impact related to the Tax Act.

⁴Non-cash acquisition-related charges for the 12 months ended July 29, 2017 include the goodwill impairment charge of $197 related to Trunk Club.

⁵Results for the period ended July 29, 2017 include the $197 impact of the Trunk Club goodwill impairment charge, which approximates 260 basis points.

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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)

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 Annual Report on Form 10-K for the year ended February 3, 2018 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 the Audit Committee of our Board of Directors.

Except as disclosed in Note 2: Revenue of Item 1, pertaining to our adoption of the new Revenue Standard, there have been no significant changes to our significant accounting policies as described in our Annual Report on Form 10-K filed with the SEC on March 19, 2018.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We discussed our interest rate risk and our foreign currency exchange risk in Part II, “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our ~~2016~~2017 Annual Report on Form 10-K filed with the SEC on March ~~20, 2017.~~19, 2018. There have been no material changes to these risks since that time.

Item 4. Controls and Procedures.

DISCLOSURE CONTROLS AND PROCEDURES

On May 4, 2017, the Company filed an 8-K announcing the retirement of Michael G. Koppel as an officer, employee and the Company’s principal financial officer for the purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Blake W. Nordstrom served as the Company’s interim principal financial officer until June 2, 2017, at which point Anne L. Bramman assumed the position of Chief Financial Officer and the Company’s principal financial officer.

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company performed an evaluation under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the design and effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective in the timely and accurate recording, processing, summarizing and reporting of material financial and non-financial information within the time periods specified within the SEC’s rules and forms. Our principal executive officer and principal financial officer also concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

We are subject from time to time to various claims and lawsuits arising in the ordinary course of business, including lawsuits alleging violations of state and/or federal wage and hour and other employment laws, privacy and other consumer-based claims. Some of these lawsuits include certified classes of litigants, or purport or may be determined to be class or collective actions and seek substantial damages or injunctive relief, or both, and some may remain unresolved for several years. We believe the recorded reserves in our Condensed Consolidated Financial Statements are adequate in light of the probable and estimable liabilities. As of the date of this report, we do not believe any currently identified claim, proceeding or litigation, either alone or in the aggregate, will have a material impact on our results of operations, financial position or cash flows. Since these matters are subject to inherent uncertainties, our view of them may change in the future.

Item 1A. Risk Factors.

~~We discussed our~~There have been no other material changes to the risk factors we discussed in Part I, “Item 1A. Risk Factors” inof our ~~2016~~2017 Annual Report on Form 10-K filed with the SEC on March ~~20, 2017. The following is an update to~~19, 2018, as updated by our ~~risk factors as previously disclosed:~~

The exploration of a possible “going private transaction” by the Nordstrom family could impact our relationships with our customers, employees, suppliers and partners, operating results and business.

In June 2017, members of the Nordstrom family formed a group (the “Group”) to explore the possibility of pursuing a “going private transaction” involving the acquisition by the Group of 100% of our outstanding shares of common stock (a “Going Private Transaction”). The Group has not made a proposal to us regarding any such Going Private Transaction and may never make such a proposal. Our Board of Directors has formed a special committee (the “Special Committee”) comprised of independent directors to actsubsequent quarterly report on our behalf in connection with such exploration by the Group and any possible transaction, which may or may not be accepted by the Special Committee. We do not plan to disclose developments or provide updates on the progress or status of any potential Going Private Transaction until the Special Committee deems further disclosure is appropriate or required. Accordingly, speculation regarding any developments related to the review of a Going Private Transaction and perceived uncertainties related to our future could cause our stock price to fluctuate significantly.

The exploration of a potential Going Private Transaction or alternative may expose us and our operations to a number of risks and uncertainties, including the potential failure to retain, attract or strengthen our relationships with key personnel, current and potential customers, suppliers, and partners which may cause them to terminate, or not to renew or enter into, arrangements with us; the potential incurrence of expenses associatedForm 10-Q filed with the retention of legal, financial and other advisors regardless of whether any transaction is consummated; distractions and disruptions in our business; and exposure to potential litigation in connection with this process and effecting any transaction, ~~any of which could adversely affect our business, financial condition and results of operations as well as the market price of our common stock.~~

~~If we do not effectively design and implement our strategic and business planning processes to attract, retain, train and develop talent and future leaders, our business may suffer.~~

~~We rely~~SEC on the experience of our senior management, who have specific knowledge relating to us and our industry that is difficult to replace, and the talents of our workforce to execute our business strategies and objectives. If unexpected turnover occurs without adequate succession plans, the loss of the services of any of these individuals, or any resulting negative perceptions of our business, could damage our reputation and our business. Additionally, our ability to maintain relationships with and motivate our employees and to effectively attract, develop and retain our future leaders, could be impacted by the uncertainty about the possibility of a Going Private Transaction.June 7, 2018.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(Dollar and share amounts in millions, except per share amounts)

The following is a summary of our second quarter share repurchases:



	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
May 2018 (May 6, 2018 to June 2, 2018)	0.6		$48.26	0.6		$371
June 2018 (June 3, 2018 to July 7, 2018)	0.7		$50.99	0.7		$337
July 2018 (July 8, 2018 to August 4, 2018)	0.2		$50.78	0.2		$327
Total	1.5		$49.81	1.5

Our February 2017Board authorized share repurchase program, which had$327 of remaining capacity as of August 4, 2018, expired on August 31, 2018. There was $319 of unused capacity upon program expiration.In ~~February 2017,~~August 2018, our Board of Directors authorized aan additional program to repurchase up to ~~$500~~$1,500 of our outstanding common stock, ~~through August 31, 2018.~~During the second quarter of 2017, we did not repurchase any shares of our common stock and do not plan to do so while the Group explores the possibility of a “going private transaction.” We had $414 remaining in share repurchase capacity as of July 29, 2017.with no expiration date. The actual timing, price, manner and amounts of future share repurchases, if any, will be subject to market and economic conditions and applicable SEC rules.

Item 6. Exhibits.

Exhibits are incorporated herein by reference or are filed or furnished with this report as set forth in the Exhibit Index on page 2927 hereof.

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~~SIGNATURES~~

~~Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~



~~NORDSTROM, INC.~~
~~(Registrant)~~

~~/s/ Anne L. Bramman~~
~~Anne L. Bramman~~
~~Chief Financial Officer~~
~~(Principal Financial Officer)~~

~~Date:~~	~~August 29, 2017~~

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NORDSTROM, INC.

Exhibit Index



Exhibit		Method of Filing
3.1	Bylaws, as amended and restated as of ~~June 7, 2017~~May 8, 2018	~~Incorporated by reference from the Registrant’s Form 8-K filed on June 8, 2017, Exhibit 3.1~~Filed herewith electronically

10.1	~~Letter Agreement, dated as of June 7, 2017~~Nordstrom, Inc. 2002 Nonemployee Director Stock Incentive Plan (2018 Amendment)	~~Incorporated by reference from the Registrant’s Form 8-K filed on June 8, 2017, Exhibit 99.2, and the Registrant’s SC 13D filed on June 8, 2017, Exhibit 3~~Filed herewith electronically

31.1	Certification of Co-President required by Section 302(a) of the Sarbanes-Oxley Act of 2002	Filed herewith electronically

31.2	Certification of Chief Financial Officer required by Section 302(a) of the Sarbanes-Oxley Act of 2002	Filed herewith electronically

32.1	Certification of Co-President and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished herewith electronically

101.INS	XBRL Instance Document	Filed herewith electronically

101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith electronically

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith electronically

101.LAB	XBRL Taxonomy Extension Labels Linkbase Document	Filed herewith electronically

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith electronically

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith electronically

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



NORDSTROM, INC.
(Registrant)

/s/ Anne L. Bramman
Anne L. Bramman
Chief Financial Officer
(Principal Financial Officer)

Date:	September 5, 2018

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	Retail		Corporate/Other			Retail Business			Credit		Total
Quarter Ended July 29, 2017
Net sales		$4,039		($322	)		$3,717			$—		$3,717
Credit card revenues, net	—		—			—			76		76
Earnings (loss) before interest and income taxes	388		(211		)	177			40		217
Interest expense, net	—		(29		)	(29		)	—		(29		)
Earnings (loss) before income taxes	388		(240		)	148			40		188

Quarter Ended July 30, 2016
Net sales		$3,871		($279	)		$3,592			$—		$3,592
Credit card revenues, net	—		—			—			59		59
Earnings (loss) before interest and income taxes	383		(179		)	204			17		221
Interest expense, net	—		(30		)	(30		)	—		(30		)
Earnings (loss) before income taxes	383		(209		)	174			17		191

Six Months Ended July 29, 2017
Net sales		$7,347		($351	)		$6,996			$—		$6,996
Credit card revenues, net	—		—			—			152		152
Earnings (loss) before interest and income taxes	600		(308		)	292			76		368
Interest expense, net	—		(76		)	(76		)	—		(76		)
Earnings (loss) before income taxes	600		(384		)	216			76		292

Six Months Ended July 30, 2016
Net sales		$7,129		($345	)		$6,784			$—		$6,784
Credit card revenues, net	—		—			—			116		116
Earnings (loss) before interest and income taxes	572		(278		)	294			33		327
Interest expense, net	—		(61		)	(61		)	—		(61		)
Earnings (loss) before income taxes	572		(339		)	233			33		266