A case of Nordstrom Strategic Financial Analysis

Document Type:Thesis

Subject Area:Finance

Document 1

Its product portfolio includes garb, shoes, add-ons purses, bathtub and splendor merchandise, and home accents, and other accessories for girls, men, teens, and children. Its leading services comprises stylists; alteration and tailoring; restaurants; spa; and gift cards. Nordstrom also provides a variety of payment merchandise and associated services. The corporation operates shops within the US and Canada. Nordstrom is situated in Seattle, Washington, USA (Nordstrom, 2018). The Retail segment incorporates Nordstrom Rack, HauteLook, Nordstrom full-line shops, Nordstrom. Com, and Jeffrey. The Credit segment offers clients several services and products on payment, such as Nordstrom VISA credit cards, Nordstrom non-public-label card and a debit card for Nordstrom purchases. The revenue on the Credit segment is generated from charging finance fees and other fees on those the cards.

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Retail section contributed the largest portion of the company’s revenue close to 98% of Nordstrom’s sales. 34 Pre-tax margin 4. 99 Net margin 2. 11 Investment returns   Return on average equity 40. 45 Return on-end-of period equity 40. 01 Return on average assets 4. 58 Table 1: Nordstrom’s financial ratios, Source; Nordstrom. Liquidity Nordstrom, Inc. ’s current ratio for the financial year 2017 was 1. 07 higher than that of the fiscal year 2016’s 1. 04; this was slightly less than the industry average of 1. 3 to 0. 2 to 0. 33 over the period against the industry average of 0. This decrease shows a lesser capability to pay the current debt from operating cash flows. However, Nordstrom’s stock turnover appears to on par with its competitors, Burlington Stores, Inc. Cost of sales increased by 2. 29%, selling and administrative expenses also rose by 3.

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53% over the period. Comparing the three years cost of sales and related buying and occupancy costs comprised between 63% and 64% of overall sales whilst promoting, general, and administrative expenses comprised among 28% and 30% of overall revenue for the three years. Compared to the industry average of a 3. The actual common dividends per share over the years remained relatively the same at $ 1. The slight difference observed in 2016 was a result of decreased net earnings recorded during the year. The company’s return on capital employed averaged 25. 57% for the three years under review compared to industry average of 12. Based on this ratio and in comparison to the industry, Nordstrom can easily earn a return for the shareholders, but the company performance has been decreasing from 2016 to 2017 and the company may not keep up with the industry in the coming years.

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The company’s profit margin has dropped in recent years compared to the industry average. The profit margin ratio was 2. 44% in 2017 compared to the industry’s 3. This has been attributed to the increasing cost of sales and other expenses including impairment and differentiation. The company management has however made note of the current poor run of results and indicates plans to turn things around through online branches and discounted stores. The sales will also be impacted positively by the rising demand from millennials and new store openings coupled with modest performance in the coming years. Cost of sales: As sales volume continues to increase, the COS is also expected to increase at the same rate of 3. 6% from M$ 9,440 in 2017 to M$ 10817 in 2020.

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The cost of production is not expected to drop in the coming years and therefore sales will be almost proportionate to their costs. However, as manufacturers continue to automate their production processes, in the long run, it is expected that they will spend relatively less to produce one unit of a product compared to the previous years. These are demonstrated in the chart below; Chart 1: Income statement projections for the next three years, source (NASDAQ, 2018) Valuation of company stock The dividend growth model was used to value the company stock. The DGM also knowns as the dividend discount model (DDM) is used to obtain the value of a stock price by use of estimated dividends at present value (Pagès, 1999). The stock is deemed undervalued if the value obtained from the calculation is higher than the current price of the shares as trading in the market.

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Value of stock = The DDM is primarily based on the concept that the intrinsic value of stock can be estimated by taking of the anticipated value of the cash flows it'll generate in the future. The riding principle behind the model is the net present value (NPV) of the cash flows, which comes from the idea of the time value of money (TVM). 75%   Average growth rate (3 years)         22% Table 3: Dividend growth rate estimate The dividend growth rate = Net income growth rate = 22% Required return is therefore, 25% and the dividend per share in 2017 was 1. Value of stock = 1. 49= $49 Base on the data obtained from 000, the closing value of Nordstrom’s stock closing price on 29th December, 2017 was $ 47. 38 and on 28th February, 2018 was $ 51. Investing in stocks has always been a risky business.

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Overall, the company remains liquid with a current ratio of 1. 33 on average, even though to a lesser degree than the industry average of 1. 81, and appears to be solvent whilst compared with some of its main competitor (Jasig, 2017). Nordstrom remains profitable even though typical profitability has decreased these days but with the continued expansion and growth of online business, profitability is expected to start improving. Profits are expected to increase significantly in 2018, but dip going forward as competition for online share increases. 99 Billion JC Penney co. 3 Billion Nordstrom 8% $ 9 Billion Target 5% $45. 17 Billion Walmart 0. 80 Billion Table 4: Market share and Market capitalization for Nordstrom and its main competitors. Source (NASDAQ, 2018) However, even with not so good financial performance in the last few years, Nordstrom future looks bright as the company has invested aggressively in e-commerce which is the future of retail business.

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Exp. 4315 4168 3777 3453 Research & Development 0 0 0 0 Other Operating Expenses 0 0 0 0 Total Operating Expenses 13952 13336 12182 11189 Income Before Tax 684 976 1185 1189 Income After Tax 354 600 720 734 Minority Interest 0 0 0 0 Net Income 354 600 720 734 Table 5: Income statement, source Nordstrom, 2018 Balance Sheet         (in millions of US$) 2017 2016 2015 2014 Cash and ST Investments 1007 595 827 1194 Total Receivables 199 196 2306 2177 Total Inventory 1896 1945 1733 1531 Total Current Assets 3242 3014 5224 5228 Property/Plant/Eqv (Gross) 9493 8843 8038 7344 Accumulated Depreciation -5596 -5108 -4698 -4395 Net Goodwill 238 435 435 175 Net Intangibles 0 0 0 0 Long Term Investments 0 0 0 0 Other Long Term Assets 481 514 246 222 Total Assets 7858 7698 9245 8574 Accounts Payable 1340 1324 1328 1263 Short Term Debt 0 0 0 0 Current Portion of LT Debt 11 10 8 7 Total Current Liabilities 3029 2911 2800 2541 Total Debt 2774 2805 3131 3113 Redeemable Preferred Stock 0 0 0 0 Non-Redeem. Pref. Stock 0 0 0 0 Total Equity 870 871 2440 2080 Common Shares (mln) 170 173. 2 Table 6: Nordstrom’s balance sheet, source Nordstrom, 2018 References About Nordstrom. Retrieved from http://mergent. firstresearch- learn. com. mutex. gmu. edu NASDAQ (2018). Retrieved from https://www. nasdaq. com/symbol/jwn/financials?query=ratios Pagès, H.

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