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

For the quarterly period ended October 28, 2006

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

For the transition period from                      to                     

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer þ    Accelerated filer o    Non-accelerated filer o

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 December 1, 2006: 257,040 shares of common stock (in thousands).

 

 

NORDSTROM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

		Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings Quarter and Nine Months Ended October 28, 2006 and October 29, 2005			3
Condensed Consolidated Balance Sheets October 28, 2006, January 28, 2006, and October 29, 2005			4
Condensed Consolidated Statements of Shareholders’ Equity Nine Months Ended October 28, 2006 and October 29, 2005			5
Condensed Consolidated Statements of Cash Flows Nine Months Ended October 28, 2006 and October 29, 2005			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			23
Item 4. Controls and Procedures			23
PART II – OTHER INFORMATION
Item 1. Legal Proceedings			24
Item 1A. Risk Factors			25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			25
Item 6. Exhibits			25
SIGNATURES			26
INDEX TO EXHIBITS			27
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

NORDSTROM, INC. AND SUBSIDIARIES

(Amounts in thousands except per share amounts and percentages)

(Unaudited)

		Quarter Ended								Nine Months Ended
		October 28,				October 29,				October 28,				October 29,
		2006				2005				2006				2005
Net sales		$	1,872,103			$	1,666,130			$	5,929,794			$	5,427,042
Cost of sales and related buying and occupancy costs			(1,160,123	)			(1,058,452	)			(3,729,759	)			(3,452,132	)
Gross profit			711,980				607,678				2,200,035				1,974,910
Selling, general and administrative expenses			(538,210	)			(481,768	)			(1,611,982	)			(1,498,386	)
Operating income			173,770				125,910				588,053				476,524
Interest expense, net			(11,419	)			(10,248	)			(34,953	)			(33,791	)
Other income including finance charges, net			58,819				47,350				173,508				135,052
Earnings before income tax expense			221,170				163,012				726,608				577,785
Income tax expense			(85,497	)			(55,559	)			(280,950	)			(216,876	)
Net earnings		$	135,673			$	107,453			$	445,658			$	360,909
Basic earnings per share		$	0.53			$	0.40			$	1.70			$	1.32
Diluted earnings per share		$	0.52			$	0.39			$	1.67			$	1.30
Basic shares			256,757				271,599				261,920				272,683
Diluted shares			261,616				277,293				266,893				278,399

		Quarter Ended								Nine Months Ended
		October 28,				October 29,				October 28,				October 29,
(% of Net Sales)		2006				2005				2006				2005
Net sales			100.0%				100.0%				100.0%				100.0%
Cost of sales and related buying and occupancy costs			(62.0%	)			(63.5%	)			(62.9%	)			(63.6%	)
Gross profit			38.0%				36.5%				37.1%				36.4%
Selling, general and administrative expenses			(28.7%	)			(28.9%	)			(27.2%	)			(27.6%	)
Operating income			9.3%				7.6%				9.9%				8.8%
Interest expense, net			(0.6%	)			(0.6%	)			(0.6%	)			(0.6%	)
Other income including finance charges, net			3.1%				2.8%				2.9%				2.5%
Earnings before income tax expense			11.8%				9.8%				12.3%				10.6%
Income tax expense (as a % of earnings before income tax expense)			(38.7%	)			(34.1%	)			(38.7%	)			(37.5%	)
Net earnings			7.2%				6.4%				7.5%				6.7%

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

NORDSTROM, INC. AND SUBSIDIARIES

(Amounts in thousands)

(Unaudited)

		October 28, 2006				January 28, 2006				October 29, 2005
Assets
Current assets:
Cash and cash equivalents		$	208,715			$	462,656			$	205,943
Short-term investments			—				54,000				34,000
Accounts receivable, net			667,748				639,558				626,864
Investment in asset backed securities			313,656				561,136				509,759
Merchandise inventories			1,228,230				955,978				1,166,471
Current deferred tax assets, net			169,858				145,470				149,622
Prepaid expenses and other			65,711				55,359				53,451
Total current assets			2,653,918				2,874,157				2,746,110
Land, buildings and equipment (net of accumulated depreciation of $2,733,912, $2,549,559 and $2,500,228)			1,748,395				1,773,871				1,778,579
Goodwill			51,714				51,714				51,714
Acquired tradename			84,000				84,000				84,000
Other assets			170,355				137,607				129,130
Total assets		$	4,708,382			$	4,921,349			$	4,789,533
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	758,402			$	540,019			$	683,137
Accrued salaries, wages and related benefits			253,440				285,982				235,137
Other current liabilities			385,767				409,076				365,872
Income taxes payable			42,970				81,617				47,850
Current portion of long-term debt			106,572				306,618				306,967
Total current liabilities			1,547,151				1,623,312				1,638,963
Long-term debt, net			624,631				627,776				626,978
Deferred property incentives, net			351,733				364,382				367,511
Other liabilities			223,262				213,198				206,980
Shareholders’ equity:
Common stock, no par value: 1,000,000 shares authorized; 256,904, 269,549 and 269,690 shares issued and outstanding			791,678				685,934				663,810
Unearned stock compensation			—				(327	)			(438	)
Retained earnings			1,171,364				1,404,366				1,277,674
Accumulated other comprehensive (loss) earnings			(1,437	)			2,708				8,055
Total shareholders’ equity			1,961,605				2,092,681				1,949,101
Total liabilities and shareholders’ equity		$	4,708,382			$	4,921,349			$	4,789,533

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

NORDSTROM, INC. AND SUBSIDIARIES

(Amounts in thousands except per share amounts)

(Unaudited)

																		Accumulated
																		Other
										Unearned								Comprehensive
		Common Stock								Stock				Retained				(Loss)
		Shares				Amount				Compensation				Earnings				Earnings				Total
Balance at January 28, 2006			269,549			$	685,934			$	(327	)		$	1,404,366			$	2,708			$	2,092,681
Net earnings			—				—				—				445,658				—				445,658
Other comprehensive earnings:
Foreign currency translation adjustment			—				—				—				—				1,131				1,131
Fair value adjustment to investment in asset backed securities, net of tax of $3,253			—				—				—				—				(5,276	)			(5,276	)
Comprehensive net earnings			—				—				—				—				—				441,513
Cash dividends paid ($0.315 per share)			—				—				—				(83,139	)			—				(83,139	)
Issuance of common stock for:
Stock option plans			2,909				68,272				—				—				—				68,272
Employee stock purchase plan			446				16,635				—				—				—				16,635
Other			17				257				327				—				—				584
Stock-based compensation			—				20,580				—				—				—				20,580
Repurchase of common stock			(16,017	)			—				—				(595,521	)			—				(595,521	)
Balance at October 28, 2006			256,904			$	791,678				—			$	1,171,364			$	(1,437	)		$	1,961,605

																		Accumulated
										Unearned								Other
		Common Stock								Stock				Retained				Comprehensive
		Shares				Amount				Compensation				Earnings				Earnings				Total
Balance at January 29, 2005			271,331			$	552,655			$	(299	)		$	1,227,303			$	9,335			$	1,788,994
Net earnings			—				—				—				360,909				—				360,909
Other comprehensive earnings:
Foreign currency translation adjustment			—				—				—				—				(1,837	)			(1,837	)
Fair value adjustment to investment in asset backed securities, net of tax of $(356)			—				—				—				—				557				557
Comprehensive net earnings			—				—				—				—				—				359,629
Cash dividends paid ($0.235 per share)			—				—				—				(64,236	)			—				(64,236	)
Issuance of common stock for:
Stock option plans			4,870				91,327				—				—				—				91,327
Employee stock purchase plan			757				16,611				—				—				—				16,611
Other			127				3,217				(139	)			—				—				3,078
Repurchase of common stock			(7,395	)			—				—				(246,302	)			—				(246,302	)
Balance at October 29, 2005			269,690			$	663,810			$	(438	)		$	1,277,674			$	8,055			$	1,949,101

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

NORDSTROM, INC. AND SUBSIDIARIES

(Amounts in thousands)

(Unaudited)

		Nine Months Ended
		October 28, 2006				October 29, 2005
Operating Activities
Net earnings		$	445,658			$	360,909
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization of buildings and equipment			205,816				204,496
Amortization of deferred property incentives and other, net			(25,255	)			(24,331	)
Stock-based compensation expense			25,075				7,672
Deferred income taxes, net			(49,755	)			1,173
Tax benefit from stock-based payments			29,691				31,281
Excess tax benefit from stock-based payments			(25,384	)			—
Provision for bad debt expense			10,715				18,327
Change in operating assets and liabilities:
Accounts receivable			(38,652	)			(769	)
Investment in asset backed securities			242,204				(86,786	)
Merchandise inventories			(235,623	)			(250,441	)
Prepaid expenses			(10,092	)			855
Other assets			(4,203	)			(6,079	)
Accounts payable			213,294				190,601
Accrued salaries, wages and related benefits			(34,861	)			(56,758	)
Other current liabilities			(22,559	)			(2,099	)
Income taxes payable			(38,647	)			(67,705	)
Deferred property incentives			13,779				41,891
Other liabilities			11,328				14,209
Net cash provided by operating activities			712,529				376,446
Investing Activities
Capital expenditures			(187,748	)			(205,015	)
Purchases of short-term investments			(109,550	)			(397,500	)
Sales of short-term investments			163,550				405,325
Other, net			(6,380	)			(6,404	)
Net cash used in investing activities			(140,128	)			(203,594	)
Financing Activities
Proceeds from long-term borrowing			100,000				—
Principal payments on long-term debt			(306,465	)			(99,769	)
(Decrease) increase in cash book overdrafts			(21,511	)			4,720
Proceeds from exercise of stock options			38,917				61,057
Proceeds from employee stock purchase plan			16,300				15,600
Excess tax benefit from stock-based payments			25,384				—
Cash dividends paid			(83,139	)			(64,236	)
Repurchase of common stock			(595,521	)			(246,302	)
Other, net			(307	)			1,398
Net cash used in financing activities			(826,342	)			(327,532	)
Net decrease in cash and cash equivalents			(253,941	)			(154,680	)
Cash and cash equivalents at beginning of period			462,656				360,623
Cash and cash equivalents at end of period		$	208,715			$	205,943

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

NORDSTROM, INC. AND SUBSIDIARIES

(Dollar and share amounts in thousands except per share and per option amounts)

(Unaudited)

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 Annual Report on Form 10-K for the fiscal year ended January 28, 2006. 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 and the holidays in December 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.

Similar to many retailers, this fiscal year we will have an extra week – a 53^rd week that will be reported in the fourth quarter, which will have 14 weeks instead of the normal 13 weeks.

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. With the exception of our adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment in the beginning of the first quarter of 2006, our accounting policies and methodologies in 2006 are consistent with those discussed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2006.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes. FIN 48 requires that the tax effects of a position be recognized only if it is more likely than not to be sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. The provisions of FIN 48 are effective for us as of the beginning of our 2007 fiscal year. We are currently evaluating the impact of adopting FIN 48 on our financial statements.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007. We are assessing the potential impact on our financial statements.

Also in September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (FAS 158). FAS 158 addresses the accounting for defined benefit pension plans and other postretirement benefit plans. It will require the recognition of a plan’s overfunded or underfunded status as an asset or liability in the balance sheet and the recognition of changes in that funded status in the year in which the changes occur through comprehensive income. FAS 158 also requires the measurement date for plan assets and liabilities to coincide with the plan sponsor’s fiscal year end. This statement is effective for fiscal years ending after December 15, 2006, except the change in measurement date provisions, which is effective for fiscal years ending after December 15, 2008. We have two benefit plans that are impacted by this standard: our Supplemental Executive Retirement Plan (SERP) and our retiree medical plan. Based on recent valuations and projections of the funded status of these plans, we expect that the effect of the adoption of FAS 158 will be to increase total liabilities and to reduce shareholders’ equity by approximately $14 million. The actual impact of adopting FAS 158 will depend on the valuation of our plan obligations as of our 2006 measurement date.

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

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

Stock-Based Compensation

Prior to the adoption of SFAS No. 123(R), we applied Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, to measure compensation costs for our stock-based compensation programs. Under APB No. 25, we recorded no compensation expense for stock options granted to employees and directors because the options’ strike price was equal to the closing market price of our common stock on the grant date. Also, through 2005 we recorded no compensation expense in connection with our Employee Stock Purchase Plan (ESPP). Through 2005, we presented the effect on net earnings and earnings per share of the fair value provisions of SFAS No. 123, Accounting for Stock-Based Compensation in the Notes to Condensed Consolidated Financial Statements.

Effective January 29, 2006, we adopted SFAS No. 123(R), which requires us to measure the cost of employee and director services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The costs are recognized over the period during which an employee is required to provide services in exchange for the award.

We recognize stock-based compensation expense on a straight-line basis over the requisite service period. The following table summarizes our stock-based compensation expense (earnings):

		Quarter Ended								Nine Months Ended
		October 28,				October 29,				October 28,				October 29,
		2006				2005				2006				2005
Stock options		$	6,120				—			$	19,112				—
Employee Stock Purchase Plan			400				—				1,359				—
Performance share units			4,411			$	(110	)			3,696			$	6,460
Other			61				308				908				1,212
Total stock-based compensation expense before income tax benefit			10,992				198				25,075				7,672
Income tax benefit			(4,072	)			30				(9,140	)			(2,877	)
Total stock-based compensation expense, net of income tax benefit		$	6,920			$	228			$	15,935			$	4,795

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

		Quarter Ended								Nine Months Ended
		October 28,				October 29,				October 28,				October 29,
		2006				2005				2006				2005
Cost of sales and related buying and occupancy costs		$	2,908				—			$	8,259				—
Selling, general and administrative expenses			8,084			$	198				16,816			$	7,672
Total stock-based compensation expense before income tax benefit		$	10,992			$	198			$	25,075			$	7,672

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

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

We adopted SFAS No. 123(R) using the modified prospective method. Under this transition method, the stock-based compensation expense recognized in the current period includes the expense for stock options granted after January 29, 2006. The stock-based compensation expense also includes the expense for options granted prior to, but not vested as of January 29, 2006 based on the grant-date fair value determined in accordance with the original provisions of SFAS No. 123. In addition, we recognized stock-based compensation expense for our ESPP, as our 10% purchase discount exceeds the amount allowed under SFAS No. 123(R) for non-compensatory treatment. As provided for under the modified prospective method, we have not restated our results for prior periods. Following the adoption of SFAS No. 123(R), we recorded incremental stock-based compensation expense of $6,520, ($4,161 net of tax), or $0.01 per basic and diluted share for the quarter ended October 28, 2006 and $20,471 ($13,105 net of tax), or $0.04 per basic and diluted share for the nine months ended October 28, 2006. We expect to record $27,103 ($17,364 net of tax) in incremental stock-based compensation expense for the year ended February 3, 2007, representing approximately $0.06 per diluted share.

Prior to the adoption of SFAS No. 123(R), we presented all tax benefits resulting from the exercise of stock options and ESPP as operating cash inflows. SFAS No. 123(R) requires the benefits of tax deductions in excess of the compensation cost recognized for those awards to be classified as financing cash inflows rather than operating cash inflows, on a prospective basis. This amount is shown as “Excess tax benefit from stock-based payments” in the condensed consolidated statement of cash flows and was $25,384 for the nine months ended October 28, 2006.

The following table illustrates the effect on net earnings and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 in 2005:

		Quarter Ended				Nine Months Ended
		October 29, 2005				October 29, 2005
Net earnings, as reported		$	107,453			$	360,909
Add: stock-based compensation expense included in reported net earnings, net of tax			228				4,795
Deduct: stock-based compensation expense determined under fair value, net of tax			(4,525	)			(18,153	)
Pro forma net earnings		$	103,156			$	347,551
Earnings per share:
Basic – as reported		$	0.40			$	1.32
Diluted – as reported		$	0.39			$	1.30
Basic – pro forma		$	0.38			$	1.27
Diluted – pro forma		$	0.37			$	1.25

In 2005, we used the Black-Scholes option valuation model to estimate the fair value of the stock options under SFAS No. 123. When we adopted SFAS No. 123(R), we elected to use the Binomial Lattice option valuation model. We believe that this model provides a better estimate of fair value than the Black-Scholes option valuation model, as it can accommodate variability in assumptions for expected volatility, dividends and risk-free interest rates. We used the following assumptions to estimate the fair value for stock options at grant date:

		2006				2005
Risk-free interest rate			4.9% - 5.1%				3.9%
Weighted average expected volatility			37.0%				44.3%
Weighted average expected dividend yield			1.0%				1.7%
Weighted average expected life in years			5.4				5.0

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

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

The weighted average fair value per option at the grant date was $16 and $10 in 2006 and 2005. The following describes the significant assumptions used to estimate the fair value of options granted:

	•		Risk-free interest rate: For 2006, the rate represents the yield on U.S. Treasury zero-coupon securities that mature over the 10-year life of the stock options. For 2005, the rate was the yield on the U.S. Treasury zero-coupon securities which matured near the end of the expected life of the stock options.
	•		Expected volatility: For 2006, the expected volatility was based on a combination of the historical volatility of our common stock and the implied volatility of exchange traded options for our common stock. In 2005, the expected volatility was estimated using the historical volatility of our common stock.
	•		Expected dividend yield: For 2006, the yield was our forecasted dividend yield for the next ten years. In 2005, the expected dividend yield was based on our historical dividend yield.
	•		Expected life in years: The expected life represents the estimated period of time until option exercise. In 2006, based on our historical exercise behavior and taking into consideration the contractual term of the option and our employees’ expected exercise and post-vesting employment termination behavior, the expected term of options granted was derived from the output of the Binomial Lattice option valuation model. In 2005, the expected life was determined based on our historical exercise behavior.

NOTE 2: POST-RETIREMENT BENEFITS

The expense components of our Supplemental Executive Retirement Plan, which provides retirement benefits to certain officers and select employees, are as follows:

		Quarter Ended								Nine Months Ended
		October 28,				October 29,				October 28,				October 29,
		2006				2005				2006				2005
Participant service cost		$	557			$	538			$	1,671			$	1,447
Interest cost			1,308				1,031				3,924				3,076
Amortization of net loss			724				412				2,172				1,239
Amortization of prior service cost			257				262				771				757
Total expense		$	2,846			$	2,243			$	8,538			$	6,519

NOTE 3: EARNINGS PER SHARE

The computation of earnings per share is as follows:

		Quarter Ended								Nine Months Ended
		October 28,				October 29,				October 28,				October 29,
		2006				2005				2006				2005
Net earnings		$	135,673			$	107,453			$	445,658			$	360,909
Basic shares			256,757				271,599				261,920				272,683
Dilutive effect of stock options and performance share units			4,859				5,694				4,973				5,716
Diluted shares			261,616				277,293				266,893				278,399
Basic earnings per share		$	0.53			$	0.40			$	1.70			$	1.32
Diluted earnings per share		$	0.52			$	0.39			$	1.67			$	1.30
Antidilutive stock options and other			1,825				—				1,788				—

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

NOTE 4: ACCOUNTS RECEIVABLE

The components of accounts receivable are as follows:

		October 28, 2006				January 28, 2006				October 29, 2005
Trade receivables
Unrestricted		$	39,208			$	32,070			$	31,127
Restricted			558,354				552,671				534,252
Allowance for doubtful accounts			(15,704	)			(17,926	)			(18,262	)
Trade receivables, net			581,858				566,815				547,117
Other			85,890				72,743				79,747
Accounts receivable, net		$	667,748			$	639,558			$	626,864

Our restricted trade receivables are comprised of our Nordstrom private label card receivables, which back the $100,000 variable funding note due in February 2007. The unrestricted trade receivables consist primarily of our Façonnable trade 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 rebates, which are believed to be fully realizable as they are collected soon after they are earned.

NOTE 5: INVESTMENT IN ASSET BACKED SECURITIES

Our investment in asset backed securities and the off-balance sheet financing are described in Notes 1 and 8 of our Annual Report on Form 10-K for the fiscal year ended January 28, 2006. The following table presents the co-branded Nordstrom VISA credit card balances and the estimated fair value of our investment in asset backed securities:

		October 28, 2006				January 28, 2006				October 29, 2005
Total face value of co-branded Nordstrom VISA credit card principal receivables		$	844,634			$	738,947			$	692,539
Debt securities issued by the VISA Trust:
Off-balance sheet (sold to third parties):
2002 Class A & B notes		$	200,000			$	200,000			$	200,000
2004-2 Variable funding notes			350,000				—				—
		$	550,000			$	200,000			$	200,000
Transferor Interest amount recorded on Nordstrom, Inc.’s balance sheet:
Investment in asset backed securities at fair value		$	313,656			$	561,136			$	509,759

In July 2006, the VISA Trust issued $300,000 for cash of variable funding notes at par; in September 2006, the VISA Trust issued $50,000 for cash of additional variable funding notes at par. The proceeds received by the VISA Trust were then sent to us in exchange for a reduction in the Transferor Interest in the VISA Trust held by Nordstrom, Inc. The reduction in the Transferor Interest was equal to a $350,000 reduction in our share of the principal balance of the underlying VISA credit card receivables since our last fiscal year end.

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

NOTE 5: INVESTMENT IN ASSET BACKED SECURITIES (CONT.)

The following table presents the key assumptions we use to value the investment in asset backed securities:

		October 28, 2006				January 28, 2006				October 29, 2005
Weighted average remaining life (in months)			7.0				7.6				7.7
Average annual credit losses			6.0%				4.7%				5.9%
Average gross yield			16.9%				17.1%				17.3%
Weighted average coupon on issued securities			5.2%				5.2%				5.1%
Average monthly payment rates			8.4%				8.2%				8.1%
Discount rate on investment in asset backed securities		7.7% to 11.4%				5.9% to 11.1%				5.7% to 10.9%

The following table summarizes the income earned by the investment in asset backed securities that is included in other income including finance charges, net on the condensed consolidated statements of earnings:

		Quarter Ended								Nine Months Ended
		October 28,				October 29,				October 28,				October 29,
		2006				2005				2006				2005
Interest income		$	20,899			$	15,461			$	65,599			$	48,028
Gain on sales of receivables and other income			7,744				8,678				23,775				22,022
		$	28,643			$	24,139			$	89,374			$	70,050

NOTE 6: DEBT

To manage our interest rate risk, we have an interest rate swap outstanding recorded in other liabilities. Our swap has a $250,000 notional amount, expires in January 2009 and is designated as a fully effective fair value hedge. Under the agreement, we receive a fixed rate of 5.63% and pay a variable rate based on LIBOR plus a margin of 2.3% set at six-month intervals (7.70% at October 28, 2006). The fair value of our interest rate swap is as follows:

		October 28, 2006				January 28, 2006				October 29, 2005
Interest rate swap fair value		$	(8,952	)		$	(11,050	)		$	(12,202	)

We retired the $300,000 Private Label Securitization debt when it matured in October 2006.

In October 2006, we amended our existing variable funding facility backed by Nordstrom private label card and VISA credit card receivables to increase the capacity of this facility from $450,000 to $600,000. Borrowings under the facility will incur interest based upon the actual cost of commercial paper plus specified fees ranging from 0.075% to 0.15%. As of October 28, 2006, the facility’s interest rate was 5.41%. We pay a commitment fee ranging from 0.125% to 0.15% for the note based on the amount of the commitment. Fee rates decrease if more than $50,000 is outstanding on the facility. The facility can be cancelled or not renewed if our debt ratings fall below Standard and Poor’s BB+ rating or Moody’s Ba1 rating. Our current rating by Standard and Poor’s is A, five grades above BB+, and by Moody’s is Baa1, three grades above Ba1.

In July 2006, the VISA Trust used this facility to issue $300,000 of Notes; in September 2006, the VISA Trust used this facility to issue an additional $50,000 of Notes. As the VISA Trust is a statutory business trust and the VISA credit card receivables transferred to it are accounted for as a sale under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, the obligations of the VISA Trust are not recorded in our financial statements. The VISA Trust sent the proceeds from this note issuance to us in return for a reduction in our interest in the VISA Trust equal to a $350,000 decrease in our share of the principal balance of VISA credit card receivables since our last fiscal year end.

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

NOTE 7: STOCK-BASED COMPENSATION

In 2004, our shareholders approved the 2004 Equity Incentive Plan. We currently grant stock options, performance share units and common shares under this plan.

Stock Options

As of October 28, 2006, we have options outstanding under three stock option plans (collectively, the “Nordstrom, Inc. Plans”). Options vest over periods ranging from four to eight years, and expire ten years after the date of grant. A summary of stock option activity under the Nordstrom, Inc. Plans is presented below:

		Nine Months Ended
		October 28, 2006								October 29, 2005
						Weighted								Weighted
						Average								Average
		Shares				Exercise Price				Shares				Exercise Price
Outstanding, beginning of year			14,344			$	15				18,320			$	13
Granted			1,940				40				2,564				26
Exercised			(2,909	)			13				(4,872	)			13
Cancelled			(518	)			26				(625	)			16
Outstanding, end of period			12,857			$	19				15,387			$	15

In 2005 and 2006, stock option awards to employees were approved by the Compensation Committee of the Company’s Board of Directors and their exercise price was set at the closing price of our common stock on the Committee meeting date. The stock option awards provide recipients with the opportunity for financial rewards when our stock price increases. The awards are determined based upon a percentage of the recipients’ base salary and the fair value of the stock options, which was estimated using an option pricing model. The fair value per stock option was $16 in 2006 (using a Binomial Lattice option valuation model) and $10 in 2005 (using the Black-Scholes option valuation model). For the nine months ended October 28, 2006, we awarded stock options to 1,235 employees compared to 1,207 employees in the same period in 2005.

The total intrinsic value of options exercised during the nine months ended October 28, 2006 and October 29, 2005 was $75,459 and $77,915. The total fair value of stock options vested during the nine months ended October 28, 2006 and October 29, 2005 was $30,087 and $26,519. As of October 28, 2006, the total unrecognized stock-based compensation expense related to nonvested stock options was $45,662, which is expected to be recognized over a weighted average period of 30 months. The aggregate intrinsic value of options outstanding as of October 28, 2006 was $357,713.

The following table summarizes information about stock options outstanding for the Nordstrom, Inc. Plans as of October 28, 2006:

		Options Outstanding												Options Exercisable
						Weighted-
						Average				Weighted-								Weighted-
						Remaining				Average								Average
						Contractual				Exercise								Exercise
Range of Exercise Prices		Shares				Life (Years)				Price				Shares				Price
$8.03 - $9.00			3,019				6			$	9				2,003			$	9
$9.01 - $13.00			2,742				5				12				2,705				12
$13.01 - $20.00			3,238				5				19				1,794				18
$20.01 - $40.27			3,859				9				33				424				26
			12,858				6			$	19				6,926			$	13

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

NOTE 7: STOCK-BASED COMPENSATION (CONT.)

Performance Share Units

We grant performance share units to align certain elements of our senior management compensation with our shareholder returns. Performance share units vest after a three-year performance period only when our total shareholder return (growth in stock price and reinvestment of dividends) is positive and outperforms companies in a defined peer group of direct competitors determined by the Compensation Committee of our Board of Directors. The percentage of units that vest depends on our relative position at the end of the performance period and can range from 0% to 125% of the number of units granted. As participants may elect to exchange each unit earned for one share of stock or the cash equivalent, these units are classified as a liability award.

At the end of each period, we record the performance share unit liability based on the vesting factors described above. At the end of October 28, 2006 and October 29, 2005, our liabilities included $9,314 and $11,716 for the units. For the nine months ended October 28, 2006 and October 29, 2005, stock-based compensation expense was $3,696 and $6,460. As of October 28, 2006, the remaining unrecognized stock-based compensation expense related to nonvested performance share units was $4,160, which is expected to be recognized over a weighted average period of 18 months. At January 28, 2006, 412,648 units were unvested. During the nine months ended October 28, 2006, 68,092 units were granted, 216,865 units vested and 8,396 units cancelled, resulting in an ending balance of 255,479 unvested units as of October 28, 2006.

The following table summarizes the information for performance share units that vested during the period:

		Nine Months Ended
		October 28, 2006				October 29, 2005
Number of performance share units vested			216,865				336,892
Total fair value of performance share units vested		$	11,310			$	10,159
Total amount of performance share units settled for cash		$	5,982			$	1,836

Nonemployee Director Stock Incentive Plan

The Nonemployee Director Stock Incentive Plan authorizes the grant of stock awards to our nonemployee directors. These awards may be deferred or issued in the form of restricted or unrestricted stock, nonqualified stock options or stock appreciation rights. We issued 5 shares of unrestricted stock for a total expense of $169 in 2006. An additional 15 shares were deferred for a total expense of $514. As of October 28, 2006, we had 755 remaining shares available for issuance.

Employee Stock Purchase Plan

We offer an Employee Stock Purchase Plan as a benefit to our employees. Employees may make payroll deductions of up to ten percent of their base and bonus compensation. At the end of each six-month offering period, participants may purchase shares of our common stock at 90% of the fair market value on the last day of each offer period. We record compensation expense over the purchase period at the fair value of the ESPP at the end of each reporting period.

We issued 446 shares under the ESPP during the nine months ended October 28, 2006. As of October 28, 2006 and October 29, 2005, we had current liabilities of $1,543 and $1,407 for future purchase of shares under the ESPP.

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

NOTE 8: SEGMENT REPORTING

The following tables set forth the information for our reportable segments and a reconciliation to the consolidated totals:

Quarter ended		Retail
October 28, 2006		Stores				Credit				Direct				Other				Eliminations				Total
Net sales		$	1,712,061				—			$	131,367			$	28,675				—			$	1,872,103
Net sales increase (decrease)			11.0	%			N/A				28.2	%			31.4	%			N/A				12.4	%
Intersegment revenues			—			$	9,019				—				—			$	(9,019	)			—
Interest expense, net			—				(6,481	)			—				(4,938	)			—				(11,419	)
Other income including finance charges, net			(1,344	)			63,397				(197	)			(3,037	)			—				58,819
Earnings before income tax expense			254,258				15,627				32,238				(80,953	)			—				221,170
Earnings before income tax expense as a percentage of net sales			14.9	%			N/A				24.5	%			N/A				N/A				11.8	%

Quarter ended		Retail
October 29, 2005		Stores				Credit				Direct				Other				Eliminations				Total
Net sales		$	1,541,823				—			$	102,484			$	21,823				—			$	1,666,130
Net sales increase (decrease)			8.9	%			N/A				(3.6	%)			N/A				N/A				8.0	%
Intersegment revenues			—			$	7,836				—				—			$	(7,836	)			—
Interest expense, net			—				(6,270	)			—				(3,978	)			—				(10,248	)
Other income including finance charges, net			(2,003	)			54,065				102				(4,814	)			—				47,350
Earnings before income tax expense			189,423				8,753				22,144				(57,308	)			—				163,012
Earnings before income tax expense as a percentage of net sales			12.3	%			N/A				21.6	%			N/A				N/A				9.8	%

Nine months ended		Retail
October 28, 2006		Stores				Credit				Direct				Other				Eliminations				Total
Net sales		$	5,494,677				—			$	367,867			$	67,250				—			$	5,929,794
Net sales increase (decrease)			8.8	%			N/A				16.6	%			6.3	%			N/A				9.3	%
Intersegment revenues			—			$	30,069				—				—			$	(30,069	)			—
Interest expense, net			—				(20,665	)			—				(14,288	)			—				(34,953	)
Other income including finance charges, net			(6,953	)			188,122				(546	)			(7,115	)			—				173,508
Earnings before income tax expense			792,061				48,896				88,304				(202,653	)			—				726,608
Earnings before income tax expense as a percentage of net sales			14.4	%			N/A				24.0	%			N/A				N/A				12.3	%
Total assets			2,466,157				932,699				126,939				1,182,587				—				4,708,382

Nine months ended		Retail
October 29, 2005		Stores				Credit				Direct				Other				Eliminations				Total
Net sales		$	5,048,371				—			$	315,404			$	63,267				—			$	5,427,042
Net sales increase			7.8	%			N/A				4.8	%			N/A				N/A				7.9	%
Intersegment revenues			—			$	27,556				—				—			$	(27,556	)			—
Interest expense, net			—				(18,818	)			—				(14,973	)			—				(33,791	)
Other income including finance charges, net			(6,609	)			162,800				66				(21,205	)			—				135,052
Earnings before income tax expense			666,186				33,754				61,346				(183,501	)			—				577,785
Earnings before income tax expense as a percentage of net sales			13.2	%			N/A				19.4	%			N/A				N/A				10.6	%
Total assets			2,509,339				1,089,054				119,453				1,071,687				—				4,789,533

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

NOTE 8: SEGMENT REPORTING (CONT.)

The segment information for the quarter and the nine months ended October 29, 2005 has been adjusted from our 2005 Form 10-Q disclosures as we now reflect Façonnable, Nordstrom Product Group and the distribution network in Other. Also, beginning in September 2005, we changed our internal method for recognizing returns of Direct sales at Retail Stores. Previously, these returns were recognized in the Direct segment and now they are recognized in the Retail Stores segment.

NOTE 9: SUPPLEMENTARY CASH FLOW INFORMATION

		Nine Months Ended
		October 28, 2006				October 29, 2005
Cash paid during the year for:
Interest (net of capitalized interest)		$	44,593			$	43,825
Income taxes		$	336,357			$	287,362

NOTE 10: CONTINGENCIES

Gain Contingencies

In July 2006, we received $5,586 of proceeds from the VISA Check/Master Money Antitrust Litigation. These proceeds were recorded as a gain in the second quarter of 2006 in other income including finance charges, net.

Loss Contingencies

We are involved in routine claims, proceedings, and litigation arising from the normal course of our business. 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 liquidity.

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations (Dollar amounts in millions except per share amounts)

The following discussion should be read in conjunction with the Management’s Discussion and Analysis section of our Annual Report on Form 10-K for the fiscal year ended January 28, 2006.

RESULTS OF OPERATIONS

Overview

		Third Quarter								Nine Months
		2006				2005				2006				2005
Net earnings		$	135.7			$	107.5			$	445.7			$	360.9
Net earnings as a percentage of net sales			7.2%				6.4%				7.5%				6.7%
Diluted earnings per share		$	0.52			$	0.39			$	1.67			$	1.30

Net earnings as a percentage of net sales improved 80 basis points for the quarter and 87 basis points for the nine months ended October 28, 2006 compared to the same periods last year. These results were driven by the combination of continued sales growth, merchandise margin rate expansion, stable selling cost rates, and leverage of general and administrative costs. Key highlights include:

	•		Net sales increased 12.4% in the third quarter and 9.3% in the nine months ended October 28, 2006. Third quarter same-store sales increased 10.7%, our largest increase in the past ten quarters. For the nine months ended October 28, 2006, same-store sales increased 7.2%. For both periods all of our retail sales channels and geographic regions delivered positive same-store sales increases.
	•		Gross profit as a percentage of net sales (gross profit rate) increased 156 basis points for the quarter and 71 basis points for the nine months ended October 28, 2006, delivered by merchandise margin improvement and leverage on our buying and occupancy costs.
	•		Sales leverage on expenses resulted in a 17 basis point reduction in selling, general and administrative expenses as a percentage of net sales (SG&A rate) for the quarter and a 43 basis point reduction for the nine months ended October 28, 2006.
	•		We repurchased 0.9 million shares of our common stock for $32.6 during the third quarter and 16.0 million shares for $595.5 during the first nine months of 2006. The resulting reduction in weighted-average shares outstanding had no material impact on diluted earnings per share for the quarter and a $0.06 impact for the nine months ended October 28, 2006.

Net Sales

		Third Quarter								Nine Months
		2006				2005				2006				2005
Net sales		$	1,872.1			$	1,666.1			$	5,929.8			$	5,427.0
Net sales increase			12.4%				8.0%				9.3%				7.9%
Retail segment net sales increase			11.0%				8.9%				8.8%				7.8%
Direct segment net sales increase			28.2%				(3.6%	)			16.6%				4.8%
Total company same-store sales increase			10.7%				5.9%				7.2%				6.1%