Nordstrom, Inc. Annual Report 2

ANNUAL R E P O R T 2 0 0 7 Nordstrom, Inc. Annual Report 2007 PLEASE RECYCLE 328526_02_06.qxp 3/28/08 12:21 PM Page 1 D R eA customers, employees and shareholders, On behalf of everyone at Nordstrom, I am pleased to share with you our company’s 2007 performance and outlook for 2008 and beyond. Overall, we realized a number of top performances in 2007, thanks to the hard work of more than 55,000 Nordstrom employees. Let’s review the highlights: • Total sales increased 3.1% to a record high $8.8 billion and comparable sales increased 3.9% — our sixth consecutive year of same-store sales gains. • Improving store productivity resulted in a return on investment (ROIC) of 19.4%, and sales of $402 per square foot on a 52-week basis, our best performance ever. • Our SG&A rate (expenses as a percentage of net sales) improved for the seventh year in a row at 26.7%, improving by 9 basis points over last year. • Earnings Before Interest and Taxes (EBIT) were $1.247 billion this year, an improvement of 8.5% over last year. In total, 2007 was a year of good performance for our company. But 2007 was really a tale of two halves. In the first half, the industry was robust, our team executed well, and we experienced comparable store growth of 7.5%. Around mid-year, the market slowed dramatically and our comparable store sales growth was only 0.5%. While we managed our operating expenses well throughout the year, inventories increased in the third and fourth quarters, at about the same time the economy began to slow and sales softened. We addressed the inventory issues quickly and corrected many of them by the beginning of 2008. Thus, we believe we are positioned to perform well in what we expect to be a continued soft retail environment in 2008. Our focus remains on growing market share with our core customers. When we challenge ourselves to offer the best service and merchandise, we give the customer a reason to buy. We have one of the fastest inventory turns among our direct competitors and when we continue to flow in new merchandise, our customers respond best. By executing well, we increase comparable sales and improve profitability, ultimately the best sign that we are taking care of our customers. 328526_02_06.qxp 3/28/08 12:51 PM Page 2 We’ve learned that we have tremendous opportunities to gain share of wallet from our core customers. We know these customers as a group are growing at two times the rate of the overall U.S. market, which presents substantial opportunity to grow with these customers as well as increase our share of their spend. We continue to grow our presence in the top markets and best retail locations around the country. We are most interested in pursuing the very best opportunities available rather than increasing square footage just for growth’s sake, and we are happy with the commitments we have made. This spring we opened three new full-line stores and will open five more during the year. We are particularly excited to share with you the opening of our first full-line store in Hawaii, which opened March 7 at Ala Moana Center in Honolulu. This 210,000-square-foot store is the culmination of 12 years of trying to secure a space in one of the best malls in the country. We also opened our eighth store in Florida at Aventura Mall and our second Boston-area store in Burlington, Massachusetts. Additional full-line openings for 2008 include: Clinton Township, Michigan, April 18; Thousand Oaks, California, September 5; Indianapolis, Indiana, September 19; Pittsburgh, Pennsylvania, October 24; and Naples, Florida, November 7. Additionally, we are looking forward to relocating our Tacoma Mall store — which originally opened in 1966 — to a brand new building in the mall on October 3. By the end of 2008, we will have 109 full-line stores. Our longer-term plan is to have 140 to 150 stores by 2015. We believe new stores are a good investment for our shareholders and are the most productive use of our capital. Equally critical to our long-term growth is the continued strong performance of our existing stores. Therefore, a top priority for our company remains devoting a significant portion of our capital to store remodels to keep the Nordstrom experience current for all our customers. In 2007, we invested $106 million in remodels and expect to invest similar amounts going forward. We also see tremendous opportunities for Nordstrom Direct, our online and catalog business, which has now grown to over $600 million in volume. However, this number underrepresents the true value of this channel. We gain additional value from the volume attributed to the full-line division from sales initiated online in our stores, as well as immense value from being a multi-channel retailer — satisfying customers the way they want to be served today. In addition to our full-line and Nordstrom Direct channels, we are also serving many customers in our Nordstrom Rack stores. The division had another successful year with an 8.7% comparable sales increase in 2007, on top of a double-digit increase in the prior year. Every decision made and dollar spent by our company revolves around the customer. One long-term initiative that began in response to customer requests is creating technology that will enable our salespeople to have a single view of total company inventory. To that end, we are excited to announce that we have taken a major step forward on this initiative and will have this tool in place by late spring, making it easier for salespeople to find merchandise for customers. Another tool that has helped us gain share of wallet is our enhanced Nordstrom Fashion Rewards™ program, designed to reward our best customers. This program is generating many additional customers loyal to Nordstrom. 328526_02_06.qxp 3/28/08 12:52 PM Page 3 We also continued to invest time and resources in developing our leaders. While there is never a finish line, we worked hard during 2007 to accelerate our salespeople’s selling skills to better serve customers and drive results. Last year, our best sellers were 7% more productive. We believe that is significant, because our top sellers set the bar and in turn raise the performance level of all our people. Every day we are reminded of the entrepreneurial spirit of the people who run this business as if it is their own. We are fortunate to have people like Chris Sharma, who works in Men’s Furnishings at our Tysons Corner Center store. Chris has been our company’s top performing salesperson for a number of years now and he had another outstanding year, increasing his sales 5.9% and exceeding $2 million for the third consecutive year. We are also making an effort to attract the best new talent. For example, we are currently in our third year of an internship partnership with three prominent design schools — Parsons the New School for Design in New York, Otis College of Art and Design in Los Angeles and the Academy of Art University in San Francisco — to create opportunities for promising young designers in our product development area. While there may be current economic issues faced by the industry and our customers, we feel we are well positioned now — and for the future. We have plenty of room to improve market share and share of our customers’ wallet. We are also in a strong financial position to respond to opportunities that may present themselves. On behalf of all of us at Nordstrom, thank you for your continued support. We look forward to continuing to improve our business and results to warrant your ongoing trust. Sincerely, Blake W. Nordstrom President, Nordstrom, Inc. 328526_02_06.qxp 3/28/08 12:52 PM Page 4 A Ntefrom our Chairman oOver the course of my 11 years on the Nordstrom board, I have seen the company nearly double in revenue, dramatically improve Return On Invested Capital to 19.4%, expand its store presence into a number of major metropolitan areas and advance to become a leader among our peer group in multi-channel retailing. With growth have come changes in operations, technology and merchandise strategies. Yet, as processes and tools evolve to become more sophisticated, the essence that makes Nordstrom unique — its focus on serving the customer — remains constant. As a long-time Nordstrom customer, I’ve seen up close the emotional bond between Nordstrom customers and their salespeople. On business trips, I’ve encountered numerous travelers eager to share their “Nordstrom stories” and profess their loyalty to Nordstrom and its people. This deep one-on-one connection creates an important, tangible value for Nordstrom as is evidenced in the company’s record sales per square foot of $402. This customer focus will remain the foundation for the success and growth of Nordstrom in the years ahead. While there are challenges in the retail environment today, the future prospects for this company are incredibly bright. The board of directors enthusiastically supports the leadership team and firmly believes in its continued focus and key initiatives — growing the business through its merchandise strategies, striving to provide a superior multi-channel shopping experience and growing the company’s presence in top markets around the nation. This sound strategy, based on the company’s knowledge of its customers, will provide for long-term growth and success, and is best for the company, its customers, employees and shareholders.

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