SEC Company Response from NORDSTROM INC (CIK 0000072333) — Apr 8, 2005
NORDSTROM INC (CIK 0000072333)
Date: April 8, 2005 · CIK: 0000072333 · Accession: 0000891020-05-000103
AI Filing Summary & Sentiment
Referenced dates: February 7, 2005, February 7, 2005, March 16, 2005
Letter
<PAGE> April 8, 2005 Securities and Exchange Commission Division of Corporate Finance 450 Fifth Street N.W. Washington, D.C. 20549 Attn: George F. Ohsiek, Jr., Branch Chief
Dear Mr. Ohsiek, Jr.,
This letter responds to the comments of the Staff set forth in your letter dated March 16, 2005, relating to the Nordstrom, Inc. Form 8-K filed on February 15, 2005. We have filed our Form 10-K and Annual Report for the fiscal year ended January 29, 2005, as you will see in the responses below, many of your questions have been addressed.
1. Please tell us supplementally and disclose the specific nature of the correction in your lease accounting policy.
(a) Based on your disclosure that you recorded a charge in the fourth quarter of 2004 relating to a correction in your lease accounting policy it appears that your historical accounting for leases may not have been in accordance with GAAP. As a result, we would expect you to restate your prior period financial statements unless the correction of the error is immaterial.
(b) If you are restating your historical financial statements, we would expect your disclosures to indicate that the restatement results from the correction of an error.
(c) If restatement is determined to be unnecessary, your disclosures should indicate that the errors were immaterial to prior periods.
(d) In this regard, please provide us supplementally your quantitative and qualitative assessment of the materiality of these errors for the fiscal years ended January 31, 2002, 2003 and 2004 as well as your quarterly periods ended May 1, 2004, July 31, 2004 and October 30, 2004. Please ensure your analysis addresses fully the considerations described in SAB 99 including the impact on income from operations, pretax income, net income, earnings per share, cash flows from operating, investing, and financing activities, and the balance sheet line items for all periods affected.
RESPONSE:
(a) We determined that our accounting for "rent holidays," as described in the SEC Staff's letter regarding lease accounting dated February 7, 2005, was not correct. We determined that the impact of this error is not material to our previously issued financial statements. Please see Attachments 1 and 2, which
<PAGE> describe our quantitative and qualitative assessments of the impact of this error.
(b) Since the impact of this error is not material, we have not restated our prior period financial statements.
(c) We disclosed that the impact of this error was not material to our prior period financial statements. The details of the correction to our lease accounting policy are fully disclosed in Note 1: Nature of Operations and Summary of Significant Accounting Policies in our 2004 Annual Report to Shareholders. An excerpt of that note is as follows:
"We recognize lease expense on a straight-line basis over the initial lease term. In 2004, we corrected our lease accounting policy to recognize lease expense, net of landlord reimbursements, from the time that we control the leased property. In the past, we recorded rent expense, net once lease payments or retail operations started. We recorded a charge of $7,753 ($4,729 net of tax) in the fourth quarter of 2004 to correct this accounting policy. The impact of this change was immaterial to prior periods."
(d) See Attachment 1 for our quantitative assessment of the materiality of the errors for the fiscal years ended January 31, 2002, 2003 and 2004 as well as the quarterly periods ended May 1, 2004, July 31, 2004 and October 30, 2004. See Attachment 2 for our qualitative assessment.
2. Please tell us supplementally and disclose in your next filing how your discovery of this error impacted your evaluation of the effectiveness of your disclosure controls and procedures. Also tell us and disclose whether you changed your disclosure controls and procedures or internal controls over financial reporting as a result of your discovery of this error.
RESPONSE: As described in response to the Staff's first comment above, we determined that the `rent holiday' error was not material to our prior period financial statements. As this error was not material, we will not discuss this error in relation to our evaluation of the effectiveness of our disclosure controls and procedures in our upcoming filings.
Supplementally, we advise the Staff that we have updated our lease accounting checklist to determine the date that we have control of a leased asset in order to determine when the lease starts. And, we have discussed this change in our accounting policy with our finance and real estate leaders so they are aware of this accounting policy.
3. Please ensure your disclosures in future filings address the material terms of and accounting for leases.
(a) In this regard, we note there is no disclosure in your Form 10-K for the fiscal year ended January 31, 2004 or in your subsequent Form 10-Q filings, which addresses the existence of lease incentives other than developer reimbursements you receive as incentives to construct stores in certain developments.
<PAGE> (b) You say you capitalize property, plant and equipment for these stores during the construction period in accordance with EITF Issue No. 97-10 and at the end of the construction period, developer reimbursements in excess of construction costs are recorded as deferred lease credits and amortized as a reduction to rent expense, on a straight-line basis over the life of the applicable lease or operating covenant. Construction costs in excess of developer reimbursements are recorded as prepaid rent and amortized as rent expense on a straight-line basis over the life of the applicable lease or operating covenant. Please clarify your disclosure to explain how and why the guidance in EITF 97-10 is applicable to your lease transactions.
(c) In addition, your future disclosures should address the following, as noted in the SEC Staff letter dated February 7, 2005:
- Material lease agreements or arrangements;
- The essential provisions of material leases, including the
o original term,
o renewal periods,
o reasonably assured rent escalations,
o rent holidays,
o contingent rent,
o rent concessions,
o leasehold improvement incentives, and
o unusual provisions or conditions;
- The accounting policies for leases, including the treatment of each of the above components of lease agreements;
- The basis on which contingent rental payments are determined with specificity, not generality; and
- The amortization period of material leasehold improvements made either at the inception of the lease or during the lease term, and how the amortization period relates to the initial lease term
RESPONSE:
We have updated our disclosures in our Form 10-K for the fiscal year ended January 29, 2005 to provide more information. In our responses below we show excerpts from Note 1 in our consolidated financial statements for the fiscal year ended January 29, 2005.
(a) Our notes to the consolidated financial statements for the fiscal year ended January 29, 2005 discuss our incentives; below is an excerpt from Note 1:
"We also receive incentives based on a percentage of a store's net sales and recognize these amounts in the year that they are earned as a reduction to rent expense."
(b) Supplementally, we are providing the Staff with background on our development agreements. In some development opportunities, we
<PAGE> agree with the developer that we will control the development's construction phase for the store that we will lease from the developer; sometimes, we also control the construction of a portion of the developer's areas (e.g. parking structures) if the construction of that area is integral to our store's construction. Following the issuance of EITF 97-10, we recorded our construction expenditures for the leased stores that we controlled during the construction phase as fixed assets. If we meet the criteria for sales-leaseback (under SFAS 98), we record the developer's construction reimbursement payment as a sales-leaseback. If we do not meet the sales-leaseback criteria (under SFAS 98), we record the developer construction reimbursement payment as a property incentive and amortize the credit to earnings over the life of the lease.
In our notes to the consolidated financial statements for the fiscal year ended January 29, 2005, we describe our accounting policy for landlord incentives in Note 1. The following is the relevant section of that discussion:
"We receive incentives to construct stores in certain developments. These incentives are recorded as a deferred credit and recognized as a reduction to rent expense on a straight-line basis over the lease term as described above. At the end of 2004 and 2003, this deferred credit balance was $394,802 and $407,856."
We have removed the reference to EITF 97-10 from our disclosures as we believe that our updated discussion more clearly describes our accounting policy.
(c) Our Form 10-K for the fiscal year ended January 29, 2005 discloses the following:
- Material lease agreements: Excerpt from the notes to the consolidated financial statements for the fiscal year ended January 29, 2005, Note 1
"We lease the land or the land and building at many of our Full-Line stores, and we lease the building at many of our Rack stores. Additionally, we lease office facilities, warehouses and equipment. Most of these leases are classified as operating leases and they expire at various dates through 2080."
- Essential provisions of material leases: Excerpt from the notes to the consolidated financial statements for the fiscal year ended January 29, 2005, Note 1
"We have no significant individual or master lease agreements."
o Original term: Excerpt from the notes to the consolidated financial statements for the fiscal year ended January 29, 2005, Note 1
<PAGE> "Our fixed, non-cancelable terms of the lease generally are 20 to 30 years for Full Line stores and 10 to 15 years for Rack stores."
o Renewal periods: Excerpt from the notes to the consolidated financial statement for the fiscal year ended January 29, 2005s, Note 1
"Many of our leases include options that allow us to extend the lease term beyond the initial commitment period, subject to terms agreed to at lease inception."
o Rent escalations: Excerpt from the notes to the consolidated financial statements for the fiscal year ended January 29, 2005, Note 1
"For leases that contain predetermined, fixed escalations of the minimum rentals, we recognize the rent expense on a straight-line basis and record the difference between the rent expense and the rental amount payable under the leases in liabilities.
o Rent holiday: See excerpt above in 1(c).
o Contingent rent: Excerpt from the notes to the consolidated financial statements for the fiscal year ended January 29, 2005, Note 1
"Some of our leases require additional payments based on sales and are recorded in rent expense when the contingent rent is probable."
o Rent concessions: We do not have any rent concessions in our lease agreements.
o Leasehold improvement incentives: Excerpt from the notes to the consolidated financial statements for the fiscal year ended January 29, 2005, Note 1
"We receive incentives to construct stores in certain developments. These incentives are recorded as a deferred credit and recognized as a reduction to rent expense on a straight-line basis over the lease term as described above."
o Unusual provisions or conditions: We do not have any other unusual provisions or conditions that are predominate in our lease agreements.
- Accounting policies for leases: See the above
Show Raw Text
<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.txt
<TEXT>
<PAGE>
April 8, 2005
Securities and Exchange Commission
Division of Corporate Finance
450 Fifth Street N.W.
Washington, D.C. 20549
Attn: George F. Ohsiek, Jr., Branch Chief
Dear Mr. Ohsiek, Jr.,
This letter responds to the comments of the Staff set forth in your letter dated
March 16, 2005, relating to the Nordstrom, Inc. Form 8-K filed on February 15,
2005. We have filed our Form 10-K and Annual Report for the fiscal year ended
January 29, 2005, as you will see in the responses below, many of your questions
have been addressed.
1. Please tell us supplementally and disclose the specific nature of the
correction in your lease accounting policy.
(a) Based on your disclosure that you recorded a charge in the
fourth quarter of 2004 relating to a correction in your lease
accounting policy it appears that your historical accounting
for leases may not have been in accordance with GAAP. As a
result, we would expect you to restate your prior period
financial statements unless the correction of the error is
immaterial.
(b) If you are restating your historical financial statements, we
would expect your disclosures to indicate that the restatement
results from the correction of an error.
(c) If restatement is determined to be unnecessary, your
disclosures should indicate that the errors were immaterial to
prior periods.
(d) In this regard, please provide us supplementally your
quantitative and qualitative assessment of the materiality of
these errors for the fiscal years ended January 31, 2002, 2003
and 2004 as well as your quarterly periods ended May 1, 2004,
July 31, 2004 and October 30, 2004. Please ensure your
analysis addresses fully the considerations described in SAB
99 including the impact on income from operations, pretax
income, net income, earnings per share, cash flows from
operating, investing, and financing activities, and the
balance sheet line items for all periods affected.
RESPONSE:
(a) We determined that our accounting for "rent holidays," as described
in the SEC Staff's letter regarding lease accounting dated February
7, 2005, was not correct. We determined that the impact of this
error is not material to our previously issued financial statements.
Please see Attachments 1 and 2, which
1
<PAGE>
describe our quantitative and qualitative assessments of the impact
of this error.
(b) Since the impact of this error is not material, we have not restated
our prior period financial statements.
(c) We disclosed that the impact of this error was not material to our
prior period financial statements. The details of the correction to
our lease accounting policy are fully disclosed in Note 1: Nature of
Operations and Summary of Significant Accounting Policies in our
2004 Annual Report to Shareholders. An excerpt of that note is as
follows:
"We recognize lease expense on a straight-line basis over the
initial lease term. In 2004, we corrected our lease accounting
policy to recognize lease expense, net of landlord
reimbursements, from the time that we control the leased
property. In the past, we recorded rent expense, net once
lease payments or retail operations started. We recorded a
charge of $7,753 ($4,729 net of tax) in the fourth quarter of
2004 to correct this accounting policy. The impact of this
change was immaterial to prior periods."
(d) See Attachment 1 for our quantitative assessment of the materiality
of the errors for the fiscal years ended January 31, 2002, 2003 and
2004 as well as the quarterly periods ended May 1, 2004, July 31,
2004 and October 30, 2004. See Attachment 2 for our qualitative
assessment.
2. Please tell us supplementally and disclose in your next filing how your
discovery of this error impacted your evaluation of the effectiveness of
your disclosure controls and procedures. Also tell us and disclose whether
you changed your disclosure controls and procedures or internal controls
over financial reporting as a result of your discovery of this error.
RESPONSE: As described in response to the Staff's first comment above, we
determined that the `rent holiday' error was not material to our prior
period financial statements. As this error was not material, we will not
discuss this error in relation to our evaluation of the effectiveness of
our disclosure controls and procedures in our upcoming filings.
Supplementally, we advise the Staff that we have updated our lease
accounting checklist to determine the date that we have control of a
leased asset in order to determine when the lease starts. And, we have
discussed this change in our accounting policy with our finance and real
estate leaders so they are aware of this accounting policy.
3. Please ensure your disclosures in future filings address the material
terms of and accounting for leases.
(a) In this regard, we note there is no disclosure in your Form
10-K for the fiscal year ended January 31, 2004 or in your
subsequent Form 10-Q filings, which addresses the existence of
lease incentives other than developer reimbursements you
receive as incentives to construct stores in certain
developments.
2
<PAGE>
(b) You say you capitalize property, plant and equipment for these
stores during the construction period in accordance with EITF
Issue No. 97-10 and at the end of the construction period,
developer reimbursements in excess of construction costs are
recorded as deferred lease credits and amortized as a
reduction to rent expense, on a straight-line basis over the
life of the applicable lease or operating covenant.
Construction costs in excess of developer reimbursements are
recorded as prepaid rent and amortized as rent expense on a
straight-line basis over the life of the applicable lease or
operating covenant. Please clarify your disclosure to explain
how and why the guidance in EITF 97-10 is applicable to your
lease transactions.
(c) In addition, your future disclosures should address the
following, as noted in the SEC Staff letter dated February 7,
2005:
- Material lease agreements or arrangements;
- The essential provisions of material leases,
including the
o original term,
o renewal periods,
o reasonably assured rent escalations,
o rent holidays,
o contingent rent,
o rent concessions,
o leasehold improvement incentives, and
o unusual provisions or conditions;
- The accounting policies for leases, including the
treatment of each of the above components of lease
agreements;
- The basis on which contingent rental payments are
determined with specificity, not generality; and
- The amortization period of material leasehold
improvements made either at the inception of the
lease or during the lease term, and how the
amortization period relates to the initial lease
term
RESPONSE:
We have updated our disclosures in our Form 10-K for the fiscal year ended
January 29, 2005 to provide more information. In our responses below we
show excerpts from Note 1 in our consolidated financial statements for the
fiscal year ended January 29, 2005.
(a) Our notes to the consolidated financial statements for the
fiscal year ended January 29, 2005 discuss our incentives;
below is an excerpt from Note 1:
"We also receive incentives based on a percentage of a store's
net sales and recognize these amounts in the year that they
are earned as a reduction to rent expense."
(b) Supplementally, we are providing the Staff with background on
our development agreements. In some development opportunities,
we
3
<PAGE>
agree with the developer that we will control the
development's construction phase for the store that we will
lease from the developer; sometimes, we also control the
construction of a portion of the developer's areas (e.g.
parking structures) if the construction of that area is
integral to our store's construction. Following the issuance
of EITF 97-10, we recorded our construction expenditures for
the leased stores that we controlled during the construction
phase as fixed assets. If we meet the criteria for
sales-leaseback (under SFAS 98), we record the developer's
construction reimbursement payment as a sales-leaseback. If we
do not meet the sales-leaseback criteria (under SFAS 98), we
record the developer construction reimbursement payment as a
property incentive and amortize the credit to earnings over
the life of the lease.
In our notes to the consolidated financial statements for the
fiscal year ended January 29, 2005, we describe our accounting
policy for landlord incentives in Note 1. The following is the
relevant section of that discussion:
"We receive incentives to construct stores in certain
developments. These incentives are recorded as a
deferred credit and recognized as a reduction to rent
expense on a straight-line basis over the lease term as
described above. At the end of 2004 and 2003, this
deferred credit balance was $394,802 and $407,856."
We have removed the reference to EITF 97-10 from our
disclosures as we believe that our updated discussion more
clearly describes our accounting policy.
(c) Our Form 10-K for the fiscal year ended January 29, 2005
discloses the following:
- Material lease agreements: Excerpt from the notes to the
consolidated financial statements for the fiscal year
ended January 29, 2005, Note 1
"We lease the land or the land and building at many of
our Full-Line stores, and we lease the building at many
of our Rack stores. Additionally, we lease office
facilities, warehouses and equipment. Most of these
leases are classified as operating leases and they
expire at various dates through 2080."
- Essential provisions of material leases: Excerpt from
the notes to the consolidated financial statements for
the fiscal year ended January 29, 2005, Note 1
"We have no significant individual or master lease
agreements."
o Original term: Excerpt from the notes to the
consolidated financial statements for the fiscal
year ended January 29, 2005, Note 1
4
<PAGE>
"Our fixed, non-cancelable terms of the lease generally
are 20 to 30 years for Full Line stores and 10 to 15
years for Rack stores."
o Renewal periods: Excerpt from the notes to the
consolidated financial statement for the fiscal
year ended January 29, 2005s, Note 1
"Many of our leases include options that allow us to
extend the lease term beyond the initial commitment
period, subject to terms agreed to at lease inception."
o Rent escalations: Excerpt from the notes to the
consolidated financial statements for the fiscal
year ended January 29, 2005, Note 1
"For leases that contain predetermined, fixed
escalations of the minimum rentals, we recognize the
rent expense on a straight-line basis and record the
difference between the rent expense and the rental
amount payable under the leases in liabilities.
o Rent holiday: See excerpt above in 1(c).
o Contingent rent: Excerpt from the notes to the
consolidated financial statements for the fiscal
year ended January 29, 2005, Note 1
"Some of our leases require additional payments based on
sales and are recorded in rent expense when the
contingent rent is probable."
o Rent concessions: We do not have any rent
concessions in our lease agreements.
o Leasehold improvement incentives: Excerpt from the
notes to the consolidated financial statements for
the fiscal year ended January 29, 2005, Note 1
"We receive incentives to construct stores in certain
developments. These incentives are recorded as a
deferred credit and recognized as a reduction to rent
expense on a straight-line basis over the lease term as
described above."
o Unusual provisions or conditions: We do not have
any other unusual provisions or conditions that
are predominate in our lease agreements.
- Accounting policies for leases: See the above