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

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

Commission file number 001-15059

NORDSTROM, INC.

(Exact name of Registrant as specified in its charter)

Washington (State or other jurisdiction of incorporation or organization)		91-0515058 (IRS employer Identification No.)

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

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

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

YES o NO þ

Common stock outstanding as of August 28, 2009: 216,755,725 shares of common stock

 

 

NORDSTROM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

						Page
PART I – FINANCIAL INFORMATION
	Item 1.			Financial Statements (Unaudited)
				Condensed Consolidated Statements of Earnings Quarter and Six Months Ended August 1, 2009 and August 2, 2008			3
				Condensed Consolidated Balance Sheets August 1, 2009, January 31, 2009 and August 2, 2008			4
				Condensed Consolidated Statements of Shareholders’ Equity Six Months Ended August 1, 2009 and August 2, 2008			5
				Condensed Consolidated Statements of Cash Flows Six Months Ended August 1, 2009 and August 2, 2008			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			27
	Item 4.			Controls and Procedures			27
PART II – OTHER INFORMATION
	Item 1A.			Risk Factors			28
	Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds.			28
	Item 4.			Submission of Matters to a Vote of Security Holders.			29
	Item 6.			Exhibits			29
SIGNATURES							30
INDEX TO EXHIBITS							31
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in millions except per share amounts)
(Unaudited)

		Quarter Ended								Six Months Ended
		August 1,				August 2,				August 1,				August 2,
		2009				2008				2009				2008
Net sales		$	2,145			$	2,287			$	3,851			$	4,166
Credit card revenues			87				72				173				142
Total revenues			2,232				2,359				4,024				4,308
Cost of sales and related buying and occupancy costs			(1,418	)			(1,488	)			(2,525	)			(2,667	)
Selling, general and administrative expenses:
Retail stores, direct and other segments			(531	)			(545	)			(978	)			(1,038	)
Credit segment			(77	)			(57	)			(169	)			(107	)
Earnings before interest and income taxes			206				269				352				496
Interest expense, net			(36	)			(34	)			(67	)			(65	)
Earnings before income taxes			170				235				285				431
Income tax expense			(65	)			(92	)			(99	)			(169	)
Net earnings		$	105			$	143			$	186			$	262
Earnings per basic share		$	0.49			$	0.66			$	0.86			$	1.21
Earnings per diluted share		$	0.48			$	0.65			$	0.86			$	1.19
Basic shares			216.5				216.5				216.2				217.6
Diluted shares			218.8				219.5				217.9				220.6

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

NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
(Unaudited)

		August 1, 2009				January 31, 2009				August 2, 2008
Assets
Current assets:
Cash and cash equivalents		$	519			$	72			$	92
Accounts receivable, net			2,102				1,942				2,045
Merchandise inventories			929				900				1,000
Current deferred tax assets, net			234				210				196
Prepaid expenses and other			67				93				65
Total current assets			3,851				3,217				3,398
Land, buildings and equipment, net			2,241				2,221				2,139
Goodwill			53				53				53
Other assets			195				170				219
Total assets		$	6,340			$	5,661			$	5,809
Liabilities and Shareholders’ Equity
Current liabilities:
Commercial paper		$	—			$	275			$	79
Accounts payable			884				563				724
Accrued salaries, wages and related benefits			232				214				226
Other current liabilities			541				525				514
Current portion of long-term debt			375				24				260
Total current liabilities			2,032				1,601				1,803
Long-term debt, net			2,260				2,214				2,234
Deferred property incentives, net			465				435				399
Other liabilities			226				201				244
Commitments and contingencies
Shareholders’ equity:
Common stock, no par value: 1,000 shares authorized; 216.4, 215.4 and 215.6 shares issued and outstanding			1,026				997				969
Retained earnings			340				223				181
Accumulated other comprehensive loss			(9	)			(10	)			(21	)
Total shareholders’ equity			1,357				1,210				1,129
Total liabilities and shareholders’ equity		$	6,340			$	5,661			$	5,809

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

NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Amounts in millions except per share amounts)
(Unaudited)

														Accumulated
														Other
		Common Stock								Retained				Comprehensive
		Shares				Amount				Earnings				(Loss) Earnings				Total
Balance at January 31, 2009			215.4			$	997			$	223			$	(10	)		$	1,210
Net earnings			—				—				186				—				186
Other comprehensive earnings:
Amounts amortized into net periodic benefit cost, net of tax			—				—				—				1				1
Comprehensive net earnings																			187
Cash dividends paid ($0.32 per share)			—				—				(69	)			—				(69	)
Issuance of common stock for:
Stock option plans			0.5				7				—				—				7
Employee stock purchase plan			0.5				7				—				—				7
Stock-based compensation			—				15				—				—				15
Balance at August 1, 2009			216.4			$	1,026			$	340			$	(9	)		$	1,357
														Accumulated
														Other
		Common Stock								Retained				Comprehensive
		Shares				Amount				Earnings				(Loss) Earnings				Total
Balance at February 2, 2008			220.9			$	936			$	201			$	(22	)		$	1,115
Net earnings			—				—				262				—				262
Other comprehensive earnings:
Amounts amortized into net periodic benefit cost, net of tax of ($1)			—				—				—				1				1
Comprehensive net earnings																			263
Cash dividends paid ($0.32 per share)			—				—				(70	)			—				(70	)
Issuance of common stock for:
Stock option plans			0.5				10				—				—				10
Employee stock purchase plan			0.3				9				—				—				9
Stock-based compensation			—				14				—				—				14
Repurchase of common stock			(6.1	)			—				(212	)			—				(212	)
Balance at August 2, 2008			215.6			$	969			$	181			$	(21	)		$	1,129

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

NORDSTROM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six Months Ended
		August 1, 2009				August 2, 2008
Operating Activities
Net earnings		$	186			$	262
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization of buildings and equipment, net			155				146
Amortization of deferred property incentives and other, net			(21	)			(20	)
Stock-based compensation expense			17				15
Deferred income taxes, net			(32	)			(30	)
Tax benefit from stock-based payments			1				2
Excess tax benefit from stock-based payments			(2	)			(2	)
Provision for bad debt expense			119				56
Change in operating assets and liabilities:
Accounts receivable			(143	)			(138	)
Merchandise inventories			(38	)			(67	)
Prepaid expenses and other assets			(13	)			8
Accounts payable			324				161
Accrued salaries, wages and related benefits			18				(42	)
Other current liabilities			39				(35	)
Deferred property incentives			62				57
Other liabilities			25				(2	)
Net cash provided by operating activities			697				371
Investing Activities
Capital expenditures			(196	)			(295	)
Change in accounts receivable originated at third parties			(133	)			(174	)
Other, net			—				1
Net cash used in investing activities			(329	)			(468	)
Financing Activities
Commercial paper:
(Repayments of) proceeds from commercial paper borrowings, net			(135	)			79
Repayment of commercial paper classified as long-term			(140	)			—
Proceeds from long-term borrowings, net			399				—
Principal payments on long-term borrowings			(3	)			(3	)
Increase in cash book overdrafts			15				44
Proceeds from exercise of stock options			6				7
Proceeds from employee stock purchase plan			7				9
Excess tax benefit from stock-based payments			2				2
Cash dividends paid			(69	)			(70	)
Repurchase of common stock			—				(238	)
Other, net			(3	)			1
Net cash provided by (used in) financing activities			79				(169	)
Net increase (decrease) in cash and cash equivalents			447				(266	)
Cash and cash equivalents at beginning of period			72				358
Cash and cash equivalents at end of period		$	519			$	92
Supplementary Cash Flow Information
Cash paid during the period for:
Interest (net of capitalized interest)		$	61			$	74
Income taxes		$	95			$	216

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

NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in our 2008 Annual Report on Form 10-K. The same accounting policies are followed for preparing quarterly and annual financial information. All adjustments necessary for the fair presentation of the results of operations, financial position and cash flows have been included and are of a normal, recurring nature.

Our business, like that of other retailers, is subject to seasonal fluctuations. Our Anniversary Sale in July, the holidays in December, and our Half-yearly sales events typically result in higher sales in the second and fourth quarters of our fiscal years. Accordingly, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

Accounting Policies

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.

Our accounting policies in 2009 are consistent with those discussed in our 2008 Annual Report on Form 10-K.

Reclassification

In order to improve the transparency related to our Credit segment, we have reclassified credit card revenues and expenses in our consolidated statements of earnings for the quarter and six months ended August 2, 2008 to conform to our 2009 presentation. Credit card revenues were previously included in finance charges and other, net in our consolidated statements of earnings and selling, general and administrative expenses for our credit segment were previously included in total selling, general and administrative expenses in our consolidated statements of earnings. These reclassifications, which were made beginning with our 2008 Annual Report on Form 10-K, did not impact our reported net earnings, earnings per share or cash flows for the quarter and six months ended August 2, 2008.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for a noncontrolling interest (minority interest) in a subsidiary, provides guidance on the accounting for and reporting of the deconsolidation of a subsidiary, and increases transparency through expanded disclosures. Specifically, SFAS 160 requires the recognition of a minority interest as equity in the consolidated financial statements and separate from the parent company’s equity. It also requires consolidated net earnings in the consolidated statement of earnings to include the amount of net earnings attributable to minority interest. This statement became effective for Nordstrom as of the beginning of fiscal year 2009 and did not have a material impact on our consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 expands the disclosure requirements in SFAS 133 about an entity’s derivative instruments and hedging activities. This statement became effective for Nordstrom as of the beginning of fiscal year 2009 and did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1, which requires disclosure about the fair value of financial instruments in interim financial statements as well as in annual financial statements, is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. We have adopted this guidance and have included the required disclosures in this Form 10-Q for the quarter ended August 1, 2009. This FSP has not impacted our consolidated financial position or results of operations, as its requirements are disclosure-only in nature.

NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In May 2009, the FASB issued Statement of Accounting Standards No. 165, Subsequent Events (“SFAS 165”), which establishes general standards of accounting and disclosure for events that occur after the balance sheet date but before financial statements are issued. This standard is effective for reporting periods ending after June 15, 2009. We have included the required disclosures in this Form 10-Q for the quarter ended August 1, 2009. SFAS 165 did not impact our consolidated financial position or results of operations, as its requirements are disclosure-only in nature.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (“SFAS 168”) which establishes the FASB Accounting Standards Codification as the source of authoritative U.S. generally accepted accounting principles (GAAP) (other than guidance issued by the SEC) to be used in the preparation of financial statements. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The provisions of SFAS 168 will be applied prospectively beginning in our third quarter of 2009 and the impact on our consolidated financial statements will be disclosure-only in nature.

NOTE 2: ACCOUNTS RECEIVABLE

The components of accounts receivable are as follows:

		August 1, 2009				January 31, 2009				August 2, 2008
Trade receivables:
Restricted		$	2,148			$	2,005			$	1,994
Unrestricted			39				14				30
Allowance for doubtful accounts			(164	)			(138	)			(83	)
Trade receivables, net			2,023				1,881				1,941
Other			79				61				104
Accounts receivable, net		$	2,102			$	1,942			$	2,045

The following table summarizes the restricted trade receivables:

		August 1, 2009				January 31, 2009				August 2, 2008
Nordstrom VISA credit card receivables		$	1,463			$	1,369			$	1,324
Private label card receivables			685				636				670
Restricted trade receivables		$	2,148			$	2,005			$	1,994

The restricted trade receivables secure our Series 2007-1 Notes, the Series 2007-2 Notes and our two variable funding notes. The restricted trade receivables relate to substantially all of our Nordstrom private label card receivables and Nordstrom VISA credit card receivables.

The unrestricted trade receivables consist primarily of the remaining portion of our Nordstrom private label and Nordstrom VISA credit card receivables and accrued finance charges not yet allocated to customer accounts. Other accounts receivable consist primarily of credit card receivables due from third-party financial institutions and vendor claims.

Our Nordstrom private label cards can be used only in Nordstrom stores, while the Nordstrom VISA cards allow our customers the option of using the cards for purchases of Nordstrom merchandise and services, as well as for purchases outside of Nordstrom. We record the Nordstrom private label and VISA credit card receivables as trade receivables on our consolidated balance sheets at outstanding principal, net of an allowance for doubtful accounts.

Cash flows from the use of both the private label cards and Nordstrom VISA cards for sales originating at our Nordstrom stores are treated as an operating activity in the condensed consolidated statements of cash flows as they relate to sales at Nordstrom. Cash flows arising from the use of Nordstrom VISA cards outside of Nordstrom stores are treated as an investing activity within the condensed consolidated statements of cash flows, as they represent loans made to our customers for purchases at third parties.

NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3: DEBT AND CREDIT FACILITIES

We hold both secured and unsecured debt. The primary collateral for our secured debt is our Nordstrom private label card and Nordstrom VISA credit card receivables. A summary of long-term debt is as follows:

		August 1, 2009				January 31, 2009				August 2, 2008
Secured
Series 2007-1 Class A Notes, 4.92%, due April 2010		$	326			$	326			$	326
Series 2007-1 Class B Notes, 5.02%, due April 2010			24				24				24
Series 2007-2 Class A Notes, one-month LIBOR plus 0.06% per year, due April 2012			454				454				454
Series 2007-2 Class B Notes, one-month LIBOR plus 0.18% per year, due April 2012			46				46				46
Mortgage payable, 7.68%, due April 2020			61				63				65
Other			16				17				18
			927				930				933
Unsecured
Senior notes, 5.625%, due January 2009			—				—				250
Senior notes, 6.75%, due June 2014, net of unamortized discount			399				—				—
Senior notes, 6.25%, due January 2018, net of unamortized discount			647				646				646
Senior debentures, 6.95%, due March 2028			300				300				300
Senior notes, 7.00%, due January 2038, net of unamortized discount			343				343				343
Other			19				19				22
			1,708				1,308				1,561
Total long–term debt			2,635				2,238				2,494
Less: current portion			(375	)			(24	)			(260	)
Total due beyond one year		$	2,260			$	2,214			$	2,234

As of August 1, 2009 and August 2, 2008, we had $375 and $260 classified as current portion of long-term debt in our condensed consolidated balance sheets. As of August 1, 2009, this balance was primarily composed of $350 related to our series 2007-1 notes due in April 2010. As of August 2, 2008, the current portion of long-term debt consisted primarily of $250 related to our senior notes due in January 2009.

During the second quarter of 2009, we issued $400 senior unsecured notes at 6.75%, due June 2014. After deducting the original issue discount of $1 and other fees and expenses of $3, net proceeds from the offering were $396. We used a portion of the proceeds from the issuance to repay the $140 in outstanding issuances of commercial paper as of May 26, 2009, the date the senior notes were issued.

We had no outstanding issuances under our $650 commercial paper program as of August 1, 2009. The issuance of commercial paper has the effect, while it is outstanding, of reducing borrowing capacity under our unsecured revolving credit facility by an amount equal to the principal amount of commercial paper. As of August 1, 2009, we had no outstanding borrowings under our credit facility. On August 14, 2009, we entered into a new unsecured revolving credit facility with a capacity of $650. This new credit facility replaced our existing $650 unsecured line of credit, which was scheduled to expire in November 2010. See further discussion of our $650 revolving credit facility in Note 8: Subsequent Event.

Additionally, we had $300 in short-term capacity as of August 1, 2009 available under a Variable Funding Note facility (“2007-A VFN”). As of August 1, 2009 we had no outstanding issuances against this facility. The 2007-A VFN matures in November 2009 and can be cancelled if our debt ratings fall below Standard & Poor’s BB+ rating or Moody’s Ba1 rating. As of September 9, 2009, our rating by Standard & Poor’s was BBB+, four grades above the cancellation threshold, and by Moody’s was Baa2, three grades above the cancellation threshold.

As of August 1, 2009, the fair value of long-term debt, including current maturities, using quoted market prices of the same or similar issues, was $2,620.

NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4: STOCK COMPENSATION PLANS

Stock-based compensation expense before income tax benefit was recorded in our condensed consolidated statements of earnings as follows:

		Quarter Ended								Six Months Ended
		August 1, 2009				August 2, 2008				August 1, 2009				August 2, 2008
Cost of sales and related buying and occupancy costs		$	4			$	3			$	6			$	5
Selling, general and administrative expenses			6				6				11				10
Total stock-based compensation expense before income tax benefit		$	10			$	9			$	17			$	15

Stock Options

During the six months ended August 1, 2009, 4.9 options were granted, 0.5 options were exercised, 0.1 options expired and 0.3 options were cancelled. During the six months ended August 2, 2008, 2.2 options were granted, 0.5 options were exercised, and 0.1 options were cancelled. The weighted average fair values per option at the date of grant was $7 and $15 in 2009 and 2008. We used the following assumptions to estimate the fair value of stock options at the date of grant:

		2009				2008
Risk-free interest rate: Represents the yield on U.S. Treasury zero-coupon securities that mature over the 10-year life of the stock options.			0.7% - 3.3	%			2.0% - 4.3	%
Weighted average expected volatility: Based on a combination of the historical volatility of our common stock and the implied volatility of exchange traded options for our common stock.			61.0	%			45.0	%
Weighted average expected dividend yield: Our forecasted dividend yield for the next ten years.			1.3	%			1.3	%
Weighted average expected life in years: Represents the estimated period of time until option exercise. The expected term of options granted was derived from the output of the Binomial Lattice option valuation model and was based on our historical exercise behavior, taking into consideration the contractual term of the option and our employees’ expected exercise and post-vesting employment termination behavior.			5.3				5.5

Performance Share Units

As of August 1, 2009, our liabilities included $1 for performance share units. As of both January 31, 2009 and August 2, 2008, we had no liabilities related to performance share units. For both the six months ended August 1, 2009 and August 2, 2008, stock-based compensation expense related to performance share units was approximately $1. As of August 1, 2009, the remaining unrecognized stock-based compensation expense related to unvested performance share units was $3, which is expected to be recognized over a weighted average period of 30 months. At January 31, 2009, 117,389 units were unvested. During the six months ended August 1, 2009, 144,891 units were granted, no units vested and no units cancelled, resulting in an ending balance of 262,280 unvested units as of August 1, 2009.

NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5: EARNINGS PER SHARE

The computation of earnings per share is as follows:

		Quarter Ended								Six Months Ended
		August 1, 2009				August 2, 2008				August 1, 2009				August 2, 2008
Net earnings		$	105			$	143			$	186			$	262
Basic shares			216.5				216.5				216.2				217.6
Dilutive effect of stock options and performance share units			2.3				3.0				1.7				3.0
Diluted shares			218.8				219.5				217.9				220.6
Earnings per basic share		$	0.49			$	0.66			$	0.86			$	1.21
Earnings per diluted share		$	0.48			$	0.65			$	0.86			$	1.19
Antidilutive stock options and other			6.6				5.1				11.7				5.1

NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and unit amounts)
(Unaudited)

NOTE 6: SEGMENT REPORTING

We aggregate our full-line, Rack and Jeffrey stores into the Retail Stores segment and report Direct as a separate segment. The Credit segment earns finance charges, interchange and late fee income through operation of the Nordstrom private label and Nordstrom VISA credit cards. The Other segment includes our product development group, which coordinates the design and production of private label merchandise sold in our retail stores, and our distribution network. This segment also includes our corporate center operations. The following tables set forth the information for our reportable segments:

Quarter ended		Retail
August 1, 2009		Stores				Direct				Credit				Other				Total
Net sales		$	2,040			$	179				—			$	(74	)		$	2,145
Net sales (decrease) increase			(6.4%	)			3.5%				N/A				N/A				(6.2%	)
Credit card revenues			—				—				87				—				87
Earnings before interest and income taxes			255				52				(3	)			(98	)			206
Interest expense, net			—				—				(10	)			(26	)			(36	)
Earnings before income taxes			255				52				(13	)			(124	)			170
Earnings before income taxes as a percentage of net sales			12.5%				28.9%				N/A				N/A				7.9%
Quarter ended		Retail
August 2, 2008		Stores				Direct				Credit				Other				Total
Net sales		$	2,179			$	174				—			$	(66	)		$	2,287
Net sales (decrease) increase			(3.3%	)			13.1%				N/A				N/A				(4.3%	)
Credit card revenues			—				—				73				(1	)			72
Earnings before interest and income taxes			294				43				1				(69	)			269
Interest expense, net			—				—				(13	)			(21	)			(34	)
Earnings before income taxes			294				43				(12	)			(90	)			235
Earnings before income taxes as a percentage of net sales			13.5%				25.0%				N/A				N/A				10.3%
Six Months ended		Retail
August 1, 2009		Stores				Direct				Credit				Other				Total
Net sales		$	3,623			$	328				—			$	(100	)		$	3,851
Net sales (decrease) increase			(7.8%	)			1.8%				N/A				N/A				(7.6%	)
Credit card revenues			—				—				173				—				173
Earnings before interest and income taxes			439				99				(21	)			(165	)			352
Interest expense, net			—				—				(20	)			(47	)			(67	)
Earnings before income taxes			439				99				(41	)			(212	)			285
Earnings before income taxes as a percentage of net sales			12.1%				30.1%				N/A				N/A				7.4%
Total assets		$	2,822			$	132			$	2,120			$	1,266			$	6,340
Six Months ended		Retail
August 2, 2008		Stores				Direct				Credit				Other				Total
Net sales		$	3,931			$	323				—			$	(88	)		$	4,166
Net sales (decrease) increase			(2.8%	)			8.5%				N/A				N/A				(4.1%	)
Credit card revenues			—				—				143				(1	)			142
Earnings before interest and income taxes			540				83				12				(139	)			496
Interest expense, net			—				—				(26	)			(39	)			(65	)
Earnings before income taxes			540				83				(14	)			(178	)			431
Earnings before income taxes as a percentage of net sales			13.7%				25.8%				N/A				N/A				10.4%
Total assets		$	2,760			$	143			$	2,029			$	877			$	5,809

NORDSTROM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in millions except per share, per option and unit amounts)
(Unaudited)

NOTE 7: CONTINGENT LIABILITIES

We are subject from time to time to various claims, proceedings and litigation arising from the normal course of our business including lawsuits alleging violations of state and/or federal wage and hour laws. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. The results of these claims, proceedings and litigation cannot be predicted with certainty. However, we do not believe any such claim, proceeding or litigation, either alone or in aggregate, will have a material impact on our results of operations, financial position or cash flows.

NOTE 8: SUBSEQUENT EVENT

On August 14, 2009, we entered into a new unsecured revolving credit facility with a capacity of $650, which expires in August 2012. The new credit facility replaced our existing $650 unsecured line of credit, which was scheduled to expire in November 2010. The new facility is available for working capital, capital expenditures and other general corporate purposes, including as liquidity support for our commercial paper program. Under the terms of the agreement, we pay a variable rate of interest and a commitment fee based on our debt rating. Consistent with our previous unsecured revolving credit facility, the new revolving credit facility requires that we maintain a leverage ratio of not greater than four times Adjusted Debt to EBITDAR. The new facility also requires that we maintain a fixed charge coverage ratio of at least two times, defined as:

		EBITDAR less gross capital expenditures
		Interest expense, net + rent expense

Under the new credit facility we have the option to increase the revolving commitment by up to $100, to a total of $750, provided that we obtain written consent from the lenders who choose to increase their commitment. We have no borrowings under the new credit facility as of September 9, 2009.

We evaluated subsequent events through September 9, 2009, which is the date the financial statements were issued. We are not aware of any significant events, other than those identified above, which occurred subsequent to the balance sheet date but prior to September 9, 2009, that would have a material impact on our financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Amounts in millions except per share and per square foot amounts)

The following discussion should be read in conjunction with the Management’s Discussion and Analysis section of our 2008 Annual Report on Form 10-K filed with the Commission on March 23, 2009.

FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT

Certain statements in this Quarterly Report on Form 10-Q contain “forward-looking” statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties, including anticipated financial results, use of cash and liquidity, growth, store openings and trends in our operations. Actual future results and trends may differ materially from historical results or current expectations depending upon various factors including, but not limited to:

	•		the impact of deteriorating economic and market conditions and the resulting impact on consumer spending patterns
	•		our ability to respond to the business environment and fashion trends
	•		our ability to safeguard our brand and reputation
	•		our ability to effectively manage inventory
	•		efficient and proper allocation of our capital resources
	•		successful execution of our store growth strategy including the timely completion of construction associated with newly planned stores, relocations and remodels, all of which may be impacted by the financial health of third parties
	•		our compliance with applicable banking and related laws and regulations impacting our ability to extend credit to our customers
	•		trends in personal bankruptcies and bad debt write-offs
	•		availability and cost of credit
	•		the impact of the current regulatory environment and financial system reforms
	•		changes in interest rates
	•		disruptions in our supply chain
	•		our ability to maintain our relationships with vendors and developers who may be experiencing economic difficulties
	•		the geographic location of our stores
	•		our ability to maintain our relationships with our employees and to effectively train and develop our future leaders
	•		our compliance with information security and privacy laws and regulations, employment laws and regulations and other laws and regulations applicable to the company
	•		successful execution of our technology strategy
	•		successful execution of our multi-channel strategy
	•		risks related to fluctuations in world currencies
	•		weather conditions and hazards of nature that affect consumer traffic and consumers’ purchasing patterns
	•		the effectiveness of planned advertising, marketing and promotional campaigns
	•		our ability to control costs
	•		timing and amounts of any share repurchases, if any, by the company

These and other factors, including those factors described in Part I, “Item 1A. Risk Factors” in our Form 10-K for the fiscal year ended January 31, 2009 and in Part II, “Item 1A. Risk Factors” on page 28 of this report, could affect our financial results and trends and cause actual results and trends to differ materially from those contained in any forward-looking statements we may provide. As a result, while we believe there is a reasonable basis for the forward-looking statements, you should not place undue reliance on those statements. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances. This discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share and per square foot amounts)

RESULTS OF OPERATIONS

Overview

		Quarter Ended								Six Months Ended
		August 1, 2009				August 2, 2008				August 1, 2009				August 2, 2008
Net earnings		$	105			$	143			$	186			$	262
Net earnings as a percentage of total revenues			4.7%				6.1%				4.6%				6.1%
Earnings per diluted share		$	0.48			$	0.65			$	0.86			$	1.19

Our second quarter typically is the second largest of the year in terms of net sales, containing three of our five annual sales events: Half-Yearly Sale for Women and Kids, Half-Yearly Sale for Men, and the Anniversary Sale. Although earnings per diluted share declined for the quarter and six months ended August 1, 2009 compared to the same periods in 2008 as a result of overall lower sales volume, solid execution of the Anniversary Sale combined with disciplined inventory and expense management allowed us to exceed our earnings plans for the first half of 2009. However, we still remain cautious about the general economic environment.

	•		Total net sales decreased 6.2% for the quarter and 7.6% for the six months ended August 1, 2009 compared to the same periods in 2008. Total company same-store sales decreased 9.8% for the quarter ended August 1, 2009 compared to a 6.0% same-store sales decrease for the same period in 2008. Same-store sales decreased 11.3% for the six months ended August 1, 2009, compared to a 6.2% decline for the same period last year. Same-store sales performance during the Anniversary event was negative 6.6% compared to last year, which was better than our plans for full-line stores.
	•		Consistent with the first quarter of 2009, inventory as of the end of the second quarter was aligned with current sales trends. While our gross profit as a percentage of net sales decreased 106 basis points for the quarter and 156 basis points for the six months ended August 1, 2009 compared to the same periods last year, our merchandise margin as a percentage of net sales was flat compared to last year’s second quarter and decreased only slightly year-to-date.
	•		During the second quarter of 2009, we completed an offering of $400 senior unsecured notes at 6.75%, due in June 2014. As a result of this transaction and our continued focus on working capital and expense management, our cash and cash equivalents increased by $447 for the six months ended August 1, 2009 compared to a decrease of $266 for the same period in 2008. We believe our strong cash position as of the end of the quarter, as well as our available short-term credit facilities, will give us adequate liquidity and flexibility over the next several years.
	•		For the 2009 fiscal year, we currently expect earnings per diluted share in the range of $1.50 to $1.65, increased from our previous guidance in the range of $1.25 to $1.50.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share and per square foot amounts)

Retail Stores, Direct and Other Segments

Summary

Our Retail Stores segment includes our full-line, Rack and Jeffrey stores; our Direct segment includes our online store; and our Other segment includes our product development group and corporate center operations. The following tables summarize the combined results of our Retail Stores, Direct and Other segments for the quarter and six months ended August 1, 2009 compared with the quarter and six months ended August 2, 2008:

		Quarter Ended
		August 1, 2009								August 2, 2008
		Amount				% of net sales2				Amount				% of net sales2
Net sales		$	2,145				100.0%			$	2,287				100.0%
Cost of sales and related buying and occupancy costs			(1,405	)			(65.5%	)			(1,473	)			(64.4%	)
Gross profit1			740				34.5%				814				35.6%
Credit card revenues			—				N/A				(1	)			N/A
Selling, general and administrative expenses			(531	)			(24.7%	)			(545	)			(23.9%	)
Earnings before interest and income taxes		$	209				9.8%			$	268				11.8%

		Six Months Ended
		August 1, 2009								August 2, 2008
		Amount				% of net sales2				Amount				% of net sales2
Net sales		$	3,851				100.0%			$	4,166				100.0%
Cost of sales and related buying and occupancy costs			(2,500	)			(64.9%	)			(2,643	)			(63.4%	)
Gross profit1			1,351				35.1%				1,523				36.6%
Credit card revenues			—				N/A				(1	)			N/A
Selling, general and administrative expenses			(978	)			(25.4%	)			(1,038	)			(24.9%	)
Earnings before interest and income taxes		$	373				9.7%			$	484				11.7%

¹Gross profit is calculated as net sales less Retail Stores, Direct and Other segments cost of sales and related buying and occupancy costs.

²Subtotals and totals may not foot due to rounding.

Net Sales

		Quarter Ended								Six Months Ended
		August 1, 2009				August 2, 2008				August 1, 2009				August 2, 2008
Net sales		$	2,145			$	2,287			$	3,851			$	4,166
Net sales decrease			(6.2%	)			(4.3%	)			(7.6%	)			(4.1%	)
Total company same-store sales decrease			(9.8%	)			(6.0%	)			(11.3%	)			(6.2%	)

Our second quarter sale events are important contributors to our annual results. During the quarter, our full-line stores hold clearance sales with our Half-Yearly Sale for Women & Kids and our Half-Yearly Sale for Men. Our Anniversary Sale, held in July, is historically the biggest event of the year, offering new merchandise at temporarily reduced prices. Sales results during these events exhibited improvements over trends in non-event periods during the quarter ended August 1, 2009.

Total net sales decreased 6.2% for the quarter and 7.6% for the six months ended August 1, 2009, compared with the same periods in the prior year as same-store sales declines for our full-line stores were partially offset by positive performance by our Direct segment and same-store sales increases at our Rack stores.

Same-store sales for our full-line stores decreased 12.3% for the quarter and 14.2% for the six months ended August 1, 2009 compared to the same periods in 2008. Merchandise categories with results above the same-store sales average for the quarter and six months ended August 1, 2009 included kids’ shoes & apparel and junior women’s apparel, while the largest decreases came in designer apparel and men’s wear. Our merchants continue to work with our vendors to provide a balanced and compelling merchandise offering to our customers.

Regionally, California, the Northwest and the Southwest continue to be challenging with same-store sales below the full-line store average for both the quarter and year-to-date.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share and per square foot amounts)

Our Rack channel delivered same-store sales increases of 0.8% for the quarter and 1.1% for the six months ended August 1, 2009 compared to the same periods last year. For both periods, these results were driven by growth in shoes and women’s apparel. Shoes benefited from the sale of junior women’s and women’s footwear, while women’s apparel was led by casual tops, blouses and denim.

Sales for our Direct channel grew 3.5% for the quarter and 1.8% for the six months ended August 1, 2009 compared with the same periods last year. For both periods, the increases were driven by dresses and women’s shoes. Dresses were led by special occasion while women’s shoes benefitted from casual and junior women’s footwear.

We expect full year 2009 same-store sales to decrease in the range of 9% to 12%.

Gross Profit

		Quarter Ended								Six Months Ended
		August 1, 2009				August 2, 2008				August 1, 2009				August 2, 2008
Gross profit		$	740			$	814			$	1,351			$	1,523
Gross profit rate1			34.5%				35.6%				35.1%				36.6%

¹Gross profit rate is calculated as gross profit divided by net sales.

		Four Quarters Ended
		August 1, 2009				August 2, 2008
Average inventory per square foot		$	46.72			$	51.90
Inventory turnover rate1			5.16				5.09

¹Inventory turnover rate is calculated as the trailing 12 months cost of sales and related buying and occupancy costs (for all segments) divided by 4-quarter average inventory.

Retail gross profit decreased $74 for the quarter and $172 for the six months ended August 1, 2009, compared with the same periods in 2008. Our retail gross profit rate deteriorated 108 basis points for the quarter and 150 basis points for the six months ended August 1, 2009 compared with the same periods in 2008. Retail gross profit rate is made up of merchandise margin offset by buying and occupancy costs. For both the quarter and six months ended August 1, 2009, the impact of our fixed buying and occupancy costs as a percentage of reduced sales primarily drove the decrease in our gross profit rate. Our merchandise margin rate was relatively flat for the quarter and declined slightly for the six months ended August 1, 2009.

Our inventory turnover rate was approximately flat to last year. The decrease in average inventory per square foot of 10.0% was consistent with our total company same-store sales decrease of 11.3% for the six months ended August 1, 2009.

Based on our performance for the first half of 2009, we expect our retail gross profit rate for the full year 2009 to decrease 50 to 100 basis points from 2008 levels of 35.1%.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share and per square foot amounts)

Selling, General and Administrative Expenses

		Quarter Ended								Six Months Ended
		August 1, 2009				August 2, 2008				August 1, 2009				August 2, 2008
Selling, general and administrative expenses		$	531			$	545			$	978			$	1,038
Selling, general and administrative rate1			24.7%				23.9%				25.4%				24.9%

¹Selling, general and administrative rate is calculated as selling, general and administrative expenses for our Retail Stores, Direct and Other segments as a percentage of net sales.

Selling, general and administrative expenses for our Retail Stores, Direct and Other segments decreased 3%, or $14, compared with last year’s second quarter. Lower variable expenses as well as fixed cost savings, partially offset by incentives tied to company performance and new store expenses, drove the decrease. Variable expense dollars decreased consistent with the decrease in sales while fixed cost reductions were primarily in advertising, services purchased and insurance. During the second quarter, we increased our provision for performance related expense to reflect the improved performance of the overall business relative to our plans. The second quarter of 2009 also includes $15 in expenses for the six full-line and eleven Rack stores opened since the second quarter of 2008. Retail square footage increased 1.2, or 5.7% since the second quarter of 2008. The increase in our selling, general and administrative rate of 88 basis points is primarily attributable to the increase in performance based incentives, partially offset by improvement in our variable selling, general and administrative rate due to a decrease in our variable labor rate.

For the six months ended August 1, 2009, our selling, general and administrative dollars decreased $60 to $978 due primarily to lower variable expenses and fixed cost savings, partially offset by $32 of incremental expenses related to our new stores opened since July 2008 and performance-based incentives. Variable expenses decreased consistent with the decrease in sales, similar to the second quarter. Reductions in fixed costs encompassed many areas including advertising, services purchased, non-selling labor and depreciation. The increase in the performance-based incentives, which was a result of better performance versus plan for the six months ended August 1, 2009 compared with the same period in 2008, was the primary driver of the 44 basis point increase in our selling, general and administrative rate for the six months ended August 1, 2009.

We anticipate our retail selling, general and administrative expenses to decrease $100 to $150 for 2009.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share and per square foot amounts)

Credit Segment

The Nordstrom credit card products are designed to grow retail sales and customer relationships by providing superior payment products, services and loyalty benefits. We believe that owning our credit card business allows us to fully integrate our rewards program with our retail stores and provide superior service to our customers, thus deepening our relationship with them and driving higher levels of customer loyalty. Each card enables participation in the Nordstrom Fashion Rewards® program, through which customers accumulate points based on their level of spending (two points per dollar spent at Nordstrom and one point per dollar spent outside of Nordstrom stores). Upon reaching two thousand points, customers receive twenty dollars in Nordstrom Notes®, which can be redeemed for goods or services in our stores. As customers increase their level of spending they receive additional benefits, including rewards such as complimentary shipping and alterations in our retail stores. We believe the Fashion Rewards program, including these additional rewards, helps drive sales in our Retail Stores and Direct segments.

The table below illustrates a detailed view of the operational results of our Credit segment, consistent with the segment disclosure provided in the notes to the condensed consolidated financial statements. In order to view the total economic contribution of our credit card program, intercompany merchant fees are also included in the table below. Intercompany merchant fees represent the estimated intercompany income of our credit business from the usage of our cards in the Retail Stores and Direct segments. To encourage the use of Nordstrom cards in our stores, the Credit segment does not charge the Retail Stores and Direct segments an intercompany interchange merchant fee. On a consolidated basis, we avoid these costs which would be incurred if our customers used third-party cards.

Interest expense is assigned to the Credit segment in proportion to the amount of estimated capital needed to fund our credit card receivables, which assumes a mix of 80% debt and 20% equity. The average accounts receivable investment metric included in the following table represents our best estimate of the amount of capital for our credit card program that is financed by equity. As a means of assigning comparable cost of capital for our credit card business, we believe it is important to maintain a capital structure similar to other financial institutions. Based on our research, we have found that debt as a percentage of credit card receivables for other credit card companies ranges from 70% to 90%. We believe that debt equal to 80% of our credit card receivables is appropriate given our overall capital structure goals.

		Quarter Ended								Six Months Ended
		August 1, 2009				August 2, 2008				August 1, 2009				August 2, 2008
Finance charge revenue		$	63			$	51			$	127			$	102
Interchange — third party			19				18				35				34
Late fees and other revenue			5				4				11				7
Total credit card revenues			87				73				173				143
Interest expense			(10	)			(13	)			(20	)			(26	)
Net credit card income			77				60				153				117
Cost of sales and related buying and occupancy costs — loyalty program			(13	)			(15	)			(25	)			(24	)
Selling, general and administrative expenses			(77	)			(57	)			(169	)			(107	)
Total expense			(90	)			(72	)			(194	)			(131	)
Credit card charge to earnings before income taxes, as presented in segment disclosure			(13	)			(12	)			(41	)			(14	)
Intercompany merchant fees			14				15				24				25
Total credit card contribution (charge)		$	1			$	3			$	(17	)		$	11
Average accounts receivable investment (assuming 80% of accounts receivable is funded with debt)		$	419			$	381			$	414			$	373
Credit card contribution, net of tax, as a percentage of average accounts receivable investment1			0.8	%			2.1	%			(4.9	%)			3.7	%

¹Based on annualized credit card contribution (charge), net of tax for the quarter and six months ended August 1, 2009 and August 2, 2008.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share and per square foot amounts)

Net Credit Card Income

Credit card revenues include finance charges, interchange fees, late and other fees. The majority of our credit accounts have finance charge rates that vary with changes in the prime rate. Interchange fees are earned from the use of Nordstrom VISA credit cards at merchants outside of Nordstrom.

Credit card revenues increased to $87 and $173 for the quarter and six months ended August 1, 2009 compared with $73 and $143 for the quarter and six months ended August 2, 2008, as a result of an increase in our annual percentage rate terms implemented in the fourth quarter of 2008 and growth in our accounts receivable balance.

Based on results for the six months ended August 1, 2009 as well as the previously implemented and upcoming increases in annual percentage rate terms, we continue to expect our credit card revenues for 2009 to increase $75 to $80 compared to 2008.

Interest expense decreased from $13 and $26 for the quarter and six months ended August 2, 2008 to $10 and $20 for the quarter and six months ended August 1, 2009, due to declining variable interest rates, partially offset by higher average borrowings.

Cost of Sales

Cost of sales, which includes the estimated cost of Nordstrom Notes that will be issued and redeemed under our Fashion Rewards program, remained relatively constant at $13 and $25 for the quarter and six months ended August 1, 2009 compared with $15 and $24 for the quarter and six months ended August 2, 2008. The slight decrease in cost of sales expense for the second quarter of 2009 compared with the second quarter of 2008 was primarily due to a timing shift in Nordstrom Fashion Rewards events.

Credit Selling, General and Administrative Expenses

Selling, general and administrative expenses for our Credit segment are made up of operational and marketing expenses and bad debt. These expenses are summarized in the following table:

		Quarter Ended								Six Months Ended
		August 1, 2009				August 2, 2008				August 1, 2009				August 2, 2008
Operational and marketing expense		$	25			$	27			$	50			$	51
Bad debt expense			52				30				119				56
Total credit selling, general and administrative expense		$	77			$	57			$	169			$	107

Operational and marketing expenses, which are incurred to support and service our credit card products, remained relatively constant at $25 and $50 for the quarter and six months ended August 1, 2009 compared with $27 and $51 for the quarter and six months ended August 2, 2008. This reflects expenses that are relatively fixed when compared to portfolio growth and our continued focus on controlling expenses.

Bad debt expense increased to $52 and $119 for the quarter and six months ended August 1, 2009 from $30 and $56 for the quarter and six months ended August 2, 2008 due to increased delinquencies and write-offs reflecting current consumer credit trends, as well as reserves for higher projected losses inherent in the receivables portfolio as of August 1, 2009.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share and per square foot amounts)

The following table illustrates the activity in the allowance for doubtful accounts for the six months ended August 1, 2009 and August 2, 2008:

		Six Months Ended
		August 1, 2009				August 2, 2008
Allowance at beginning of period		$	138			$	73
Bad debt provision			119				56
Net write-offs			(93	)			(46	)
Allowance at end of period		$	164			$	83
		August 1, 2009				August 2, 2008
Allowance as a percentage of accounts receivable			7.5	%			4.1	%
Delinquent balances over thirty days as a percentage of accounts receivable			3.7	%			2.5	%
Bad debt provision as a percentage of average accounts receivable1			9.9	%			6.3	%
Net write-offs as a percentage of average accounts receivable2			9.4	%			4.9	%

¹Based upon annualized second quarter bad debt provision.

²Based upon annualized second quarter net write-offs.

We increased our allowance for doubtful accounts by $26 during the first six months of 2009 due to our expectations around future write-offs for losses inherent in our accounts receivable balance as of August 1, 2009. During the first quarter of 2009, we experienced an increase in delinquencies, which are a leading indicator of write-offs. Delinquency rates in the second quarter of 2009 improved slightly compared with the first quarter. Consistent with our first quarter 2009 expectations, we expect our credit selling, general and administrative expenses to increase $35 to $45 for 2009, due to rising unemployment rates, which we believe lead to higher delinquencies and ultimately higher write-offs. We continue to take actions to reduce our risk exposure by tightening underwriting and account management standards. However, additional deterioration in the overall economic environment, including continued deterioration in the labor market, could cause delinquencies to increase beyond our current expectations, resulting in additional bad debt expense.

Total Company Results

Interest Expense, net

Interest expense, net increased by $2 to $36 for the quarter ended August 1, 2009 compared to the same period in 2008. For the six months ended August 1, 2009, interest expense, net increased $2 to $67. The increases were driven by higher average debt levels resulting from our $400 debt offering during the second quarter of 2009, partially offset by the $250 senior notes which matured in January 2009 and the impact of declining variable interest rates.

Income Tax Expense

		Quarter Ended								Six Months Ended
		August 1, 2009				August 2, 2008				August 1, 2009				August 2, 2008
Income tax expense		$	65			$	92			$	99			$	169
Effective tax rate			38.2%				39.2%				34.7%				39.2%

Our effective tax rate decreased to 38.2% for the second quarter of 2009, from 39.2% in the same period of 2008, due to the impact of certain non-taxable investment income in 2009. Our effective tax rate decreased to 34.7% for the six months ended August 1, 2009 from 39.2% for the same period in 2008. The rate decrease was primarily due to a benefit of approximately $12 included in our 2009 first quarter results related to the closure of our 2007 federal tax return audit.

Including the impact of these items, we expect our effective tax rate to be between 36.5% and 37.0% for 2009.

Seasonality

Our business, like that of other retailers, is subject to seasonal fluctuations. Our Anniversary Sale in July, the holidays in December, and our Half-yearly sales events typically result in higher sales in the second and fourth quarters of our fiscal years. Accordingly, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Continued) (Amounts in millions except per share and per square foot amounts)

Return on Invested Capital (ROIC) (Non-GAAP financial measure)

We define Return on Invested Capital as follows:

ROIC =		Net Operating Profit after Taxes (NOPAT)
		Average Invested Capital

We believe that ROIC is a useful financial measure for investors in evaluating our operating performance for the periods presented. When read in conjunction with our net earnings and total assets and compared to return on assets, it provides investors with a useful tool to evaluate our ongoing operations and our management of assets from period to period. Over the past several years, we have incorporated ROIC into our key financial metrics, and since 2005 have used it as an executive incentive measure. Our research has shown historically that overall performance as measured by ROIC correlates directly to shareholders’ return over the long term. For the 12 fiscal months ended August 1, 2009, our ROIC decreased to 9.8% compared to 17.4% for the 12 fiscal months ended August 2, 2008. ROIC is not a measure of financial performance under United States GAAP and should not be considered a substitute for return on assets, net earnings or total assets as determined in accordance with GAAP and may not be comparable to similarly titled measures reported by other companies. See our ROIC reconciliation to GAAP below. The closest GAAP measure is return on assets, which decreased to 5.5% from 11.4% for the 12 fiscal months ended August 1, 2009 compared to the 12 fiscal months ended August 2, 2008. The following is a reconciliation of return on assets to ROIC:

		12 months ended
		August 1, 2009				August 2, 2008
Net earnings		$	325			$	640
Add: income tax expense			177				417
Add: interest expense, net			133				115
Earnings before interest and income taxes			635				1,172
Add: rent expense			38				39
Less: estimated depreciation on capitalized operating leases1			(20	)			(21	)
Net operating profit			653				1,190
Estimated income tax expense			(230	)			(471	)
Net operating profit after tax (NOPAT)		$	423			$	719
Average total assets2		$	5,920			$	5,622
Less: average non-interest-bearing current liabilities3			(1,454	)			(1,491	)
Less: average deferred property incentives2			(435	)			(370	)
Add: average estimated asset base of capitalized operating leases4			300				371
Average invested capital		$	4,331			$	4,132
Return on Assets			5.5	%			11.4	%
ROIC			9.8	%			17.4	%