UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended August 1,October 31, 2020

or

For the transition period from ___________ to___________

Commission File Number: 001-15059

1617 Sixth Avenue, Seattle, Washington 98101

206-628-2111

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” “pursue,” “going forward,” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, our anticipated financial outlook for the fiscal year ending January 30, 2021, trends in our operations and the following:

All references to “Nordstrom,” “we,” “us,” “our,” or the “Company” mean Nordstrom, Inc. and its subsidiaries.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

The following table includes definitions of Nordstrom commonly used terms:

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

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

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

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

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

The accompanying Condensed Consolidated Financial Statements include the balances of Nordstrom, Inc. and its subsidiaries. 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 2019 Annual Report 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 1,October 31, 2020 and August 3,November 2, 2019 are unaudited. The Condensed Consolidated Balance Sheet as of February 1, 2020 has been derived from the audited Consolidated Financial Statements included in our 2019 Annual Report. The interim Condensed Consolidated Financial Statements should be read together with the Consolidated Financial Statements and related footnote disclosures contained in our 2019 Annual Report.

Our business, like that of other retailers, is subject to seasonal fluctuations. Our sales are typically higher in our second quarter, which historically included our Anniversary Sale, and the holidays in the fourth quarter. As a result of COVID-19, the Anniversary Sale haswas moved to August in 2020, which falls entirely in our third fiscal quarter. Results for any one quarter may not be indicative of the results that may be achieved for a full fiscal year.

The preparation of financial statements in conformity with GAAP in the U.S. 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 during the reporting period. Uncertainties regarding such estimates and assumptions are inherent in the preparation of financial statements and actual results may differ from these estimates and assumptions. Our most significant accounting judgments and estimates include leases, revenue recognition, long-lived asset recoverability, goodwill impairment and income taxes, all of which involve assumptions about future events. We may be unable to accurately predict the impact of COVID-19 going forward and as a result our estimates may change in the near term. See below for areas that required more judgmentswhere our estimates and estimation as a result ofassumptions were further impacted by COVID-19.

Revenue Recognition

We reduce sales and cost of sales by an estimate of our future customer merchandise returns, which is calculated based on historical return patterns, and record a sales return allowance and an estimated return asset. We record the impact of the sales return allowance in our separate Full-Price, Off-Price and digital sales metrics. The majority of our returns from both digital and physical sales come through our stores. While our stores were temporarily closed approximately 50% ofDuring the days for the quarter and six months ended August 1, 2020, our customers were generally not able to return goodscurrent year, we have experienced declines in our stores, impacting the expected timing of returns. As a result,actual return rates, primarily at Full-Price. Accordingly, we have adjusted our estimates of future return rates to reflect recent experience. Estimating future returns require more judgment,requires substantial judgement based on current and historical trends, and actual returns may differvary from our historical return rates.estimates.

Long-Lived Assets

When facts and circumstances indicate that the carrying values of buildings, equipment and ROU assets may be impaired, we compare the carrying value to the related projected future cash flows, among other quantitative and qualitative analysis. These projections are inherently subject to uncertainties and while we believe the inputs and assumptions utilized in our future cash flows are reasonable, our estimates may change in the near term based on our future performance.

As we optimizeoptimized our mix of physical and digital assets to align with longer-term customer trends, we closed 16 FLS, 6 Trunk Club clubhouses and 3 Jeffrey boutiques.boutiques in the first half of 2020. As part of these closures, we incurred non-cash impairment charges on long-lived tangible and ROU assets, primarily associated with the FLS closures, to adjust the carrying values to their estimated fair value. The following table provides details related to asset impairment charges as a result of COVID-19:

These charges are primarily included in our Retail segment SG&A expense on the Condensed Consolidated Statement of Earnings.

Goodwill Impairment

We review our goodwill annually in the fourth quarter or when circumstances indicate that the carrying value may exceed fair value. Our most recently completed goodwill impairment analyses in the fourth quarter of 2019 indicated significant excess fair values over carrying values. After performing both qualitative and quantitative analyses, including review of future long-term revenue and cash flow assumptions, we concluded a triggering event requiring us to accelerate our annual goodwill impairment analysis did not occur, as we still expect any potential change in fair value to exceed carrying value. As a result, we did not record a goodwill impairment charge for the sixnine months ended August 1,October 31, 2020.

CARES Act and Other COVID-19 Stimulus

On March 27, 2020, the CARES Act was signed into law, providing payroll tax credits for employee retention, deferral of payroll taxes and several income tax provisions including modifications to the net interest deduction limitation, changes to certain property depreciation and allowing for carryback of certain operating losses.

Severance

In the first quarter of 2020, we recorded $88 of restructuring costs in connection with our regional and corporate reorganization, including $25 in cost of sales and related buying and occupancy costs and $63 in SG&A on the Condensed Consolidated Statement of Earnings. We have approximately $25 of payments remaining as of August 1, 2020.

Contract liabilities represent our obligation to transfer goods or services to customers and include deferred revenue for The Nordy Club (including points and Nordstrom Notes) and gift cards. Our contract liabilities are classified as current on the Condensed Consolidated Balance Sheets and are as follows:

Revenues recognized from our beginning contract liability balance were $71$98 and $175$223 for the quarter and sixnine months ended August 1,October 31, 2020 and $138$110 and $231$269 for the quarter and sixnine months ended August 3,November 2, 2019.

The following table summarizes our disaggregated net sales:

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

During the first quarter of 2020, we issued $600 aggregate principal amount of 8.750% Senior Secured Notes due May 2025. These notes are guaranteed by certain subsidiaries and secured by various store, distribution center and corporate properties. The Secured Notes contain covenants that include limitations on indebtedness, liens, mergers, acquisitions, asset sales, investments, dividend payments and equity distributions, in addition to certain change of control triggering events and provisions for events of default. We will be permitted to prepay our Secured Notes at a premium beginning in 2022.

During the first quarter of 2020, we amended our existing Revolver and borrowed $800. Under the terms of the amendment, if our Leverage Ratio is greater than 4 or our unsecured debt is rated below BBB- with a stable outlook at Standard & Poor’s or Baa3 with a stable outlook at Moody’s, any borrowings under our Revolver will be secured by substantially all our personal property and we will be subject to asset coverage and minimum liquidity covenants, as well as a fixed charge coverage covenant beginning in the third quarter of 2020. If our Leverage Ratio is below 4 and our unsecured debt is rated at or above BBB- with a stable outlook at Standard & Poor’s or Baa3 with a stable outlook at Moody’s, any borrowings under our Revolver will be unsecured, we will not be subject to the above covenants and the restrictions on dividend payments and share repurchases will be removed. As of August 1,October 31, 2020, our borrowings under the Revolver were classified as secured as our Leverage Ratio exceeded 4 and we did not meet or exceed our credit rating threshold. We met our asset coverage and minimum liquidity covenants.all other financial covenant measures for the quarter. Provided that we obtain written consent from the lenders, we have the option to increase the Revolver by up to $200, to a total of $1,000, and 2 options to extend the Revolver by one year.

The Revolver expires in September 2023 and is classified in total current liabilities on the Condensed Consolidated Balance Sheet. DuringAs of October 31, 2020, we had $200 outstanding under this facility after repaying $300 in the second quarter and $300 in the third quarter of 2020, we repaid $300 of the $800 previously borrowed.2020. The Revolver contains customary representations, warranties, covenants and terms, including paying a variable rate of interest and a commitment fee based on our debt rating. The Revolver is available for working capital, capital expenditures and general corporate purposes.

As a result of our borrowings under the Revolver, the full capacity of our $800 commercial paper program is not available to us at this time. When available, the 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 of reducing available liquidity under the Revolver by an amount equal to the principal amount of commercial paper outstanding. As of August 1,October 31, 2020, we had 0 issuances outstanding under our commercial paper program.

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:

Financial instruments measured at carrying value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable and our Revolver, which approximate fair value due to their short-term nature.

Long-term debt is recorded at carrying value. If long-term debt was measured at fair value, we would use quoted market prices of the same or similar issues, which 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:

We had $707 remaining in share repurchase capacity as of August 1,October 31, 2020. The actual timing, price, manner and amounts of future share repurchases, if any, will be subject to market and economic conditions, certain financial covenants and applicable SEC rules.

The amendment to our Revolver contains negative covenants with respect to the payment of dividends and share repurchases when either our Leverage Ratio is above 4 or our unsecured debt is rated below BBB- with a stable outlook at Standard & Poor’s or Baa3 with a stable outlook at Moody’s. As of August 1,October 31, 2020, our Leverage Ratio exceeded 4 and we did not meet our credit rating covenant, preventing us from paying dividends or repurchasing shares.

The following table summarizes our stock-based compensation expense:

The computation of EPS is as follows:

The following table sets forth information for our reportable segment:

For information about disaggregated revenues, see Note 2: Revenue.

AtSince the onsetfounding of our company, our focus has always been on the pandemic, our primary objective was protectingcustomer. Fast forward over 100 years, and enhancing liquidity, which we achieved. Giventhat focus has never been more important. In this moment of retail disruption, the uncertainty over how long our temporary store closures would last,key to success is moving with speed and with inventory as our biggest investment,flexibility to adapt to the rapid changes in customer expectations.

Our third quarter results benefited from the immediate actions we took decisive actionearlier this year to minimize risk and stabilize our business.

Total net sales declined 53%decreased 16%, reflectingin-line with our stores being closed approximately 50% of the days for the quarterexpectations and also included a timing shiftpositive impact of approximately 10 percentage points from movingdue to the entireshift of the Nordstrom Anniversary eventSale from the second quarter into the third quarter. Our digital sales decrease of 5% was also negatively impacted byAfter normalizing for the Anniversary Sale event shift, trends improved by approximately 2517 percentage points. Excluding the shift impact, digital sales increased approximately 20% inpoints relative to the second quarter.

Year-to-date, we realized cash savings of $550, net of COVID-19 related charges, across expense, capex and working capital. We expect to continue this momentum, tracking ahead of the high end of our targeted cash savings of $750 for the year. This isincluded $330 in expense savings across our largest event, offering new arrivals at limited-time savings. It represents an important opportunity forincome statement primarily from taking out roughly 20% of our overhead base, excluding occupancy costs. Going forward, we expect the vast majority of this rebasing of our cost structure to continue, supporting our improved EBIT flow-through as we continue our sales recovery.

We ended the quarter with $1,489 in liquidity, including $889 in cash. We delivered operating cash flow of $342 over the past two quarters and returned to positive free cash flow during the third quarter. The strength of our cash flow generation enabled us to providepay down a one-of-a-kind experience fortotal of $600 on our loyalty customers while introducing new customers to Nordstrom. Due to COVID-19, we moved our event from July to August to help ensurerevolver year-to-date with $200 outstanding at the safety and comfort of our customers and employees and to deliver the most relevant merchandise assortment.

Our actions to shore up ourstrong financial position in the first half of 2020 allowenables us to head into the second half of this yeargive customers a relevant product offering and prepare for 2021 from a position of strength. We accelerated our long-term strategic plans by optimizing the mix of physical and digital assets and increasing our agility through a leaner and more efficient organization. When combined with a capital structure that provides a strong foundation for reinvestment, we are well-positioned to respond quickly to a period of accelerated change in customer behavior. Over the near and medium term, we are focused on reinvestingreinvest in our strategic growth priorities to deliver a best-in-class customer experience while maintainingexperience. To achieve our goals of accelerating growth and improving returns, we prioritized three areas where there is a strong balance sheet. Assignificant potential for growth:

First, we emerge from this disruptive period,are building on the success of our ambition is for Nordstrommarket strategy, which we now consider our blueprint in how we operate to be positioned as a retail winner by gainingbetter serve customers on their terms, gain market share and driving profitableincrease inventory efficiencies. By linking our digital and physical assets at the market level, we are able to offer customers up to seven times more selection with two-day delivery or next-day order pickup. We have now reached scale in 10 of our top markets, which account for more than half of our sales, and will continue to roll out our strategy across our top markets.

Our third driver of growth is to increase the velocity of our digital business. In 2019, digital made up 33% of sales and accelerated to 54% this quarter. We view this as a fundamental shift in shopping behavior, and we are well positioned to support our customers across both Nordstrom and Rack with a scalable platform that has been built to support many years of growth. We also know that we must translate the heritage of service that defines us more effectively in this digitally connected world. This means delivering personalization at scale by creating greater linkages between the digital and the physical experience. During the quarter, virtual styling accounted for roughly 30% of all styling appointments, and sales from personalized looks created by our salespeople tripled in volume from the second quarter.

In our ongoing effort to enhance the customer experience, we are focused on providing a seamless experience across our businesses. We invested early in our omni-channel capabilities, integrating our operations, merchandising and technology across our stores and online, in both our Full-Price and Off-Price businesses. While our customers may engage with us through multiple businesses, we know they value the overall Nordstrom brand experience and view us simply as Nordstrom, which is ultimately how we view our company. We have one Retail reportable segment and analyze our results on a total company basis, using customer, market share, operational and net sales metrics.

The following table summarizes net sales by business:

Total Company net sales decreased 53.0%15.8% and 46.6%36.4% for the secondthird quarter and sixnine months ended August 1,October 31, 2020, compared with the same periods in 2019. These declines primarily resulted from COVID-19, includingCOVID-19. After adjusting for the Anniversary Sale event shift, our improvement in the third quarter of 2020 compared with the second quarter of 2020 reflected strength in our Anniversary Sale execution, sequential improvement in both FLS and Rack store traffic trends and continued digital growth. For the nine months ended October 31, 2020, the decrease of the prior period is due primarily to the temporary store closures for approximately 50%that occurred in the first half of the days for the quarter and six months ended August 1, 2020, as well as the timing impact of the Anniversary Sale shifting from the second quarter to the third quarter in 2020.year. The top-performing merchandise categories were Active, Home, Kids’ and AccessoriesBeauty for the secondthird quarter of 2020 and sixfor the nine months ended August 1,October 31, 2020. During the six months ended August 1, 2020, we closed 16 FLS, six Trunk Club clubhouses and three Jeffrey boutiques.

Digital sales decreased 5%increased 37.3% and 12.9% for the secondthird quarter of 2020 and were flat for the sixnine months ended August 1,October 31, 2020, compared with the same periods in 2019, primarily due to accelerated growth from the impacts COVID-19 has had on customer shopping behavior and expanded fulfillment capabilities. The Anniversary Sale timingevent shift that negativelypositively impacted the secondthird quarter of 2020 by approximately 25 percentage points. By excludingExcluding the event shift, impact, digital sales increased approximately 20% in the second quarter and in the mid-teens rangetrends for the six months ended August 1, 2020.third quarter of 2020 were consistent with the first half of the year.

Full-Price net sales decreased 57.9%6.6% and 48.0%34.4% for the secondthird quarter and sixnine months ended August 1,October 31, 2020, compared with the same periods in 2019. These declines resultedThe Anniversary Sale event shift positively impacted the third quarter of 2020 by approximately 17 percentage points. For the nine months ended October 31, 2020, the decrease is primarily from the temporary store closures andthat occurred in the Anniversary Sale timing shift.first half of the year. Off-Price net sales decreased 43.0%32.0% and 44.1%39.9% for the secondthird quarter and sixnine months ended August 1,October 31, 2020, compared with the same periods in 2019. These declines resulted primarily from the impacts of COVID-19 and temporary store closures.closures in the first half of the year.

Credit card revenues, net include our portion of the ongoing credit card revenue, net of credit losses, pursuant to our program agreement with TD. TD is the exclusive issuer of our consumer credit cards and we perform the account servicing functions. Credit card revenues, net was $84$87 and $177$264 for the secondthird quarter and sixnine months ended August 1,October 31, 2020, compared with $94$106 and $188$293 for the same periods in 2019. The decreases were primarily a result of lower finance charges, lower late fee revenues from COVID-19 accommodations and lower interchange revenue from lower spend on our credit cards at other merchants.

The following table summarizes gross profit: