Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. NORDSTROM INC (72333) 10-Q published on Jun 05, 2019 at 4:48 pm
Reporting Period: May 03, 2019
Upon adoption of the Lease Standard, we record leases, which consist primarily of operating leases, on the Condensed Consolidated Balance Sheet as operating lease ROU assets, current portion of operating lease liabilities and non-current operating lease liabilities. Operating lease liabilities are initially recognized based on the net present value of the fixed portion of our lease and common area maintenance payments from lease commencement through the lease term. To calculate the net present value, we apply an incremental borrowing rate. The incremental borrowing rate is determined using a portfolio approach based on the rate of interest that we would pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. We use quoted interest rates obtained from financial institutions as an input to derive our incremental borrowing rate as the discount rate for the lease. We recognize ROU assets based on operating lease liabilities reduced by property incentives. ROU assets are tested for impairment in the same manner as long-lived assets.
The majority of our fixed, non-cancellable lease terms are 15 to 30 years for Nordstrom FLS, 10 to 15 years for Nordstrom Rack stores and 5 to 20 years for office facilities and Supply Chain Network facilities. Many of our leases include options that allow us to extend the lease term beyond the initial commitment period up to 15 years for Nordstrom FLS and 10 years for Nordstrom Rack stores. At the commencement of a lease, we generally include only the initial lease term as we have determined that options to extend are not reasonably certain to occur. The exercise of lease renewal options is generally at our sole discretion. At the renewal of an expiring lease, we reassess our options in the agreement and include all reasonably certain extensions in the measurement of our lease term.
Most of our leases also provide for payment of operating expenses, such as common area maintenance charges, real estate taxes and other executory costs, the fixed portion of which is included in Operating Lease Cost. We recognize Operating Lease Cost on a straight-line basis over the lease term. Variable lease cost includes payments for variable common area maintenance charges and additional payments based on a percentage of sales, which are recognized when probable. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
While we believe our customer strategy and business model position us for long-term success, our first quarter top-line results were below our expectations. For the first quarter of 2019, total net sales decreased 3.5% and net earnings were $37, or $0.23 per diluted share.
Although we planned for a continuation of soft sales trends from the fourth quarter of 2018, we saw further deceleration in the first quarter of 2019. We ended the quarter with inventories in solid shape, and our financial position remains strong. The strength of our inventory and expense execution helped mitigate our sales miss. We continue to bend the expense curve, tracking ahead of our expense savings plan of $150 to $200 through our various efficiency initiatives this year.
Total company net sales decreased 3.5% for the first quarter of 2019, compared with the same period in 2018. Digital sales increased 7% in the first quarter of 2019, compared with the same period in 2018. To date in fiscal 2019, we opened three Nordstrom Rack stores and closed two FLS locations. While we expected softer trends from the fourth quarter to continue into the first quarter, we experienced further sales deceleration. Our results were impacted by three areas: loyalty, digital marketing and merchandise, across Full-Price and Off-Price, in both stores and online. We took action during the quarter and are taking further steps to address executional issues associated with the launch of our enhanced loyalty program, further investing in our digital marketing and re-balancing our merchandise offering to improve sales trends over the remainder of the year.
For 2019, income statement activity for adjusted EBITDAR is comprised of one quarter of activity under the Lease Standard for 2019, and the last three quarters of 2018 under the previous lease standard. Balance sheet amounts are as of the end of the quarter, and under the new Lease Standard for 2019 and the previous lease standard for 2018. Under the previous lease standard, we estimated the value of our operating leases as if they met the criteria for capital leases or we had purchased the properties. This provided additional supplemental information that estimated the investment in our operating leases. Estimated capitalized operating lease liability is not calculated in accordance with, nor an alternative for, GAAP and should not be considered in isolation or as a substitution of our results as reported under GAAP.