The firm has a target ratio of two times adjusted debt to EBITDAR and this target is consistent with its goal of maintaining its current credit ratings.
The firm ended the year with $358 million in cash and short term investments.
The firm’s liquidity levels and credit ratings provide the financial strength and flexibility to support its long-term growth objectives. The firm continues to generate strong operating cash flows and remains committed to returning excess capital to shareholders. The firm’s capital allocation framework has a balanced approach to returning capital over long periods of time. Over the past five years, the firm has more than tripled its quarterly dividend and repurchased almost $3 billion in stock. More recently, the firm announced that its Board of Directors approved a 19% increase in quarterly dividend from $0.135 to 16 cents per share. During the fourth quarter of 2007, the firm repurchased 11 million shares of stock for a total of $388 million at an average price of $34.
In the short-term, the firm faces challenges in its business, in particular in women’s apparel and regionally in California.
In a softer economy, the firm notices more important than ever to provide its customers with a reason to buy something new. The driver of the firm’s business today is new receipts. The company’s merchandizing teams continue to strive to achieve the right balance of assortment.
The firm has areas of business where its merchants are being successful. For instance, out t.b.d. department, a women’s apparel department, which carries premium denim and contemporary trend items, had an excellent year. The firm believes that an important part of every buyer''s role is to seek out new resources and anticipate its customer''s needs and wants.
The company continues to grow its presence in the top markets and best retail locations around the country.
Nordstrom plans to open eight Full-Line stores and relocate one store over the course of this year. Two weeks ago, the firm opened the first store of the year at Aventura mall in Miami, its eighth store in Florida. The performance of the store has exceeded the firm’s plans to-date. In two weeks, the company is opening its first Full-Line store in Hawaii at the Ala Moana Center in Honolulu, one of the best malls in the country. Additionally the firm will be opening its second store in the Boston market in Burlington next month. The firm is most interested in the very best opportunities rather than seeking to increase its square footage by a certain amount for growth sake and it is happy with the commitments it has made. Today the firm has 102 Full-Line stores and its plan is to have 140 to 150 stores by 2015. The firm is confident that it can grow in new markets and add stores in existing markets.
The firm will continue to invest in remodeling its existing stores as it is its belief that it must keep the experience fresh and relevant to customers.
The Mall of America and Downtown Portland stores are both good examples of remodels that occurred this past year resulting in significant volume increases. The firm was able to increase its designer merchandise offering in both stores as a result of the remodel and customers have responded enthusiastically to the improved offerings. The company currently plans to remodel roughly six stores a year.
The company is also are very encouraged by the continued growth it experienced with its direct business, which has grown to over $600 million. However, this number under represents the true value of the channel. The firm gains additional value from the volume attributed to the Full-Line division from sales initiated online in its stores, as well as immense value from being a multi-channel retailer, satisfying customers the way they want to be served today.
Fiscal 2007 Financial Highlights
The net earnings increased 5.5% to $715 million compared to net earnings of $678 million last year. Earnings per diluted share for the same periods were $2.88 and $2.55, respectively. Full year results include a gain of $20.9 million, net of tax, or 9 cents per diluted share, for the sale of the Faconnable business, which closed during the third quarter.
Total sales for the year increased 3.1% to $8.8 billion compared to prior year sales of $8.6 billion. The fiscal 2006 included a 53rd week of sales totaling $117.7 million. Excluding the extra week of sales in fiscal 2006, total sales increased 4.6% in fiscal year 2007. For the year, same-store sales increased 3.9%. The same-store sales calculations do not include the 53rd week.
For the fiscal year of 2007, the company repurchased 39 million shares for total of $1.7 billion at an average price of $44. The firm’s current authorization has approximately $1.4 billion and two years remaining.
Fiscal 2008 Outlook
Due to the uncertainty in economy, the company is planning its business accordingly. The firm’s business model provides flexibility, which helps to protect margins and cash flow during periods of changing trends. For example, the firm’s inventory turns on average five times per year, which is faster than most of its peers and gives it the flexibility to align inventory levels more quickly to changing sales trends. The company’s private label penetration is relatively low for the industry, which allows it to work with its vendor patterns to adjust inventory levels and receipt flows closer to the selling season. On the expense side, most of the firm’s compensation structure is tied to performance, whether through its commission sales force or through the performance based incentives of management. In addition, the firm is careful to ensure that its planning processes prioritizes the investments that are highest value and closest to the customer experience.
While the management believes that it can adjust to changing market trends, it is taking a cautious approach to 2008 and its planning same store sales to be approximately flat to negative 2% for the year. This sales plan yields earnings per share in the range of $2.75 to $2.90 for the full year, a negative 1% to positive 4% increase over 2007 earnings per share, excluding the gain from Faconnable.
The firm expects the 2008 gross profit rate to be 30 to 60 basis points lower than the rate in 2007, primarily due to increased occupancy cost from new stores in 2007 and 2008.
The company anticipates SG&A expense rate increase of 60 to 80 basis points, driven by a lower same store sales plan and continued investment in long-term growth. The firm’s operating model normally leverages SG&A expense with low single-digit same-store sales. The combination of a lower comp sales plan and new stores and related pre-opening costs are causing deleverage to its 2008 SG&A rate. The firm will continue to invest in high return projects including new stores, which will create long-term value far beyond the short-term impact today.
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