Nordstrom stores in new hampshire

Southern New Hampshire University – MBA 640

MBA – 640 Milestone Three

Rachael Markwell

Southern New Hampshire University

Abstract

This report will analyze the financial impact that Nordstrom could face over the next seven to ten years based on the expansion project to London (UK) will have on incremental, annual and cumulative cash benefits and outflows. It will consolidate the financial projections of revenue, pretax income, cash for Nordstrom’s business with and without the expansion. Then it will compare the proposed loan to alternative financing methods by weighing the pros and cons of raising money vs. seeking funding through global capital markets. It will also assess the viability of a business combination for expanding into this new market. Lastly it will persuade the loan company on how reliable Nordstrom’s is and why they are excellent candidates for this expansion loan. It will do so by showing the financial statements, ratios and other indicators of great financial health as well as use Nordstrom’s vision/mission of quality to prove they are willing to put their best foot forward to make this expansion project successful.

Financial Impact

To begin to look at financial projections for Nordstrom Inc.’s expansion into London, we first need to see where they are currently. Nordstrom reported on their first quarter earnings from 2018 that they were hitting $87 million in net earnings which is 5.8% from the previous year. Earnings before taxes were $153M or 4.4% of net sales which was fairly similar to the previous year. Overall, all of Nordstrom’s subsets aggregated to a 0.7% increase in sales. Nordstrom ended the first quarter in good inventory position with net sales growth exceeding a decline in inventory. Nordstrom’s did see a 21-point decrease in gross profit mainly due to opening new Rack locations as well as the NYC men’s store. It was also noted that sales from the rewards program represented 53% of the first quarter sales which was increased from 47% in the first quarter of 2017 (Business Wire, 2018).

Luckily, we can take a look at Nordstrom’s current expansion efforts as a base for this newly proposed expansion. So far in 2018, Nordstrom’s has opened eight new stores across the U.S. and Canada while only closing one (Appendix 1). With this in mind it does have a very profitable outlook for the remainder of the fiscal year. There will be a slight increase in EBIT as well as the earnings per diluted share with no change expected for net sales or comparable sales (Appendix 2). They also have made some assumptions on increased credit card growth (mid-teens) as well as shift the salve event into a different quarter should increase sales by ~150 basis points (Business Wire, 2018).

The UK is in a state of huge growth since they’ve made recent financial independence decisions and this is a huge opportunity for Nordstrom Inc. Forecasters are stating that due to the strength of the world economy the impact of Brexit didn’t have as big of a deficit as originally predicted. NIESR’s expectations is that the GDP will grow 1.89% in 2018 and 1.7% in 2019. Specifically, they are predicting improvements to begin in the fall, which aligns perfectly with when Nordstrom’s is recommended to open the store in London (Partington, 2018).

From these current financial projections, Nordstrom can start to make assumptions on demand, price, volume, capital purchase costs, incremental hiring, and so on based on the projected incremental, annual and cumulative cash benefits and outflows for the next 7 – 10 years for Nordstrom’s expansion to the UK. With the initial investment of $700 million, Nordstrom’s is a lucky enough that their current profit margins can afford to pay off the loan immediately so they will not see an offset cost. As the years go on, Nordstrom will continue to see about a 1.8% growth consistent with what they are predicting for 2019 (Appendix 3). By the next ten years, Nordstrom’s will start to see a 35% increase in revenue and an even higher percent increase in gross profit, even with the investment Nordstrom will still be more profitable by the end of ten years. The increase in 2019 of the operating costs to expand internationally will truly only effect that one year while they will see Revenue and Gross Profits continue to increase at the rate of 1.8% (Appendix 3). Of course, there will be an increase due to incremental hiring as well as capital purchase cost due to expanding a physical location and needing to ensure its staffed correctly and the building is all set. But they can also assume that demand will be very high for their products since this will be new to the market place as well as timed correctly around the holiday season where increased shopping is typical. Due to the nature of Nordstrom, the idea that price will take a hit or need to be readjusted is not necessary. Their values of quality products will need to shine through into this new market (Nordstrom Inc, n.d.).

The biggest risk of using these projections for the next seven to ten years is that Brexit impacts, although forecasted positively, are not truly defined yet in the marketplace. Nordstrom should continue to work on other expansion projects through their online programs in order to supplement this new location in London as a safety net for a downward economy.

Financing

Nordstrom Inc. will need to consider internal financing vs. global capital markets via loans, commercial paper, bonds or equity financing, etc. No matter which option they choose, Nordstrom much invest a significant amount of capital to expand internationally. Internal funding come from any additional cash after a business has paid all their expenses and is known as the simplest form of financing since no other firm has to be involved. It’s a huge benefit for a company because they can use the money they have to fund a new project but it also reduces the taxes with depreciation so that a company can continue to spend more on their business (Johnston, 2018). There are of course, disadvantages to internal funding. Capital needs are often reduced since any additional funds are going towards and expansion and aren’t available for daily expenses. If Nordstrom decides to use internal funds, they will lose out on external funding tax benefits which could impact their overall capital structure. There is also a lack of discipline that comes with internal financing due to low risk but also could cause major problems if not taken seriously or monitored as an external debt would require (O’Farrell, 2017). Typically, this type of financing is used for smaller short term projects so it doesn’t make sense for Nordstrom to consider internal financing for this project.

Global capital market is a system in which companies, people or governments with excess funds can transfer funds to those who have a shortage. It’s an efficient way for borrowing money or investing money (International Business, n.d.). In a long term financing situation, similar to what Nordstrom needs for this expansion project, loans (syndicated or bilateral) are very common. They are hugely beneficial when it comes to needing a financial plan more tailored to a series of parameters. Things like repayment terms have great flexibility without the risk of being penalized. Also things like maturity, interest rate, and amortization calendars can all be renegotiated. This is obviously very appealing for Nordstrom’s due to the unexpected nature of the UK market after Brexit and knowing that they would have the opportunity to reevaluate this loan plan makes it the most appealing (Fernandez & Urraca, 2017). There is a risk due to the monetary policy implemented by the European Central Bank which has led to a three-year lending drought. Bank liquidity has made a comeback which predicts a huge improvement in bank loans.

Another option for Nordstrom’s are bonds. To create a bond, creditors or debt holders purchase securities and get future income or assets in return for the initial investment. Most of the time investors buy bonds to receive interest payments at a fixed rate for the lifetime of the bond and eventually receive the principal at expiration (International Business, n.d.). Due to the fact that Nordstrom is looking for a long-term financing plan, bonds could be a less burdensome financial options (Fernandez & Urraca, 2017). There are also international bonds that function a little bit different. Not all foreign countries or companies offer bonds so sometimes there needs to be a mutual fund that buy larger bonds but pay lower fees. Although this could mean better bonds it costs more in administrative fees. Often this is route for an individual. Foreign investment is typically appealing during decline in any market due the safety they hold even if they don’t offer the same returns. International bonds provide a layer of diversification which helps reduce the risk of substantial losses while limiting the investor’s potential return. The more bonds, the better chance they have to not lose money but it also makes it more complicated to keep track of finances (Motes, 2017). Due to the high risk that bonds create, especially for International bonds, the high rate of return is not worth it. It is advised that Nordstrom consider alternative options vs. investing in bonds.

When money markets are made of a fixed-income instrument that matures in 270 days or less, Nordstrom can consider commercial paper. They are considered when a short-term solution for funding is needed with a better rate of return on the initial investment. For a new project investment or a short-term receivable, a promissory note is highly recommended. It provides a convenient financing solution because it permits issuers to avoid the complications of continuously getting loans. One disadvantage or risk to utilizing a commercial paper is that they have a higher rate of interest and the rates tend to rise when the economy (Cussen, 2018). It also could be problematic for Nordstrom to have to pay back the $700M in that short of a timeframe. There is the case of Penn Central in 1970 that had to declare bankruptcy because they defaulted on their commercial paper obligations. It didn’t just impact Penn Central but the whole commercial paper market took a huge hit because all investors lost confidence in this method of funding (Cussen, 2018). With the short terms, it’s recommend that Nordstrom choose another alternative to funding their expansion to safe guard their ability to pay back this mass amount of funding.

Debt and Equity get thrown around very casually in the finance world but it’s worthwhile to dissect what they really mean and their impact on Nordstrom’s if they choose this path. Debt financing is when money is raised from a loan for one purpose of a set period of time and is typically secured by collateral. Equity on the other hand is when the founder’s money is invested in the business from angel investors, capital firms or sometimes government-backed community agencies all of whom get a portion of ownership and a share of the profits (Coplan, 2009). Deciding to use debt would force Nordstrom to manage for cash flow, while equity would require Nordstrom to put a priority on growth but it could mean that Nordstrom is limited in how much they can borrow depending on how much they raise their equity. “If a company is table and well-established, tipping towards debt financing makes sense, because the company has both assets to borrow against and the cash flow to service the loans” (Coplan, 2009). Based on this Bloomberg Businessweek article, it does appear that debt financing may be a great option for Nordstrom to consider for this expansion project.

A business combination is a central piece for Nordstrom to gain the competitive advantage, particularly in a new market. There are three laws that all businesses should follow when considering growth of any kind before they make the decision (Gomes-Casseres, 2015).

1. The combination must have the potential to create more value than the parties can alone. Think about how much more value can both companies create together and what resources must be put together to achieve this?

2. The combination must be designed and managed to realize the joint value. What partners are going to work best together to accomplish their goals. What are the risks and how can they be managed?

3. The value earned by the parties must motivate them to contribute to the combination. How is the value divided and shared over a long period of time?

Nordstrom will need to focus on the economic and competitive mechanism that will drive the best joint value for their company to concretely bring a strategic financial plan to the table. Nordstrom should consider applying its internal capital as well as their access in their home markets to make solid business arrangements for this expansion. Thinking about how successful their expansion into New York City with a big splash of opening the new store front shows that Nordstrom should enter the UK is a similar fashion. Making the statement that they are willing to put their money where their mouths are will give faith to financial corporations or banks that Nordstrom is an excellent investment.

Track Record

Over the last couple of decades, Nordstrom continues to strengthen its position be expanding their business. Nordstrom has an excellent track record for solid financial footing and is a low risk for defaulting on a loan needed for their expansion into the UK. Looking as far back as 2015, when Nordstrom opened 27 new stores and they gained a 14% increase in sales (Nordstrom Annual Report, 2018). In 2016, Nordstrom saw almost a 3% increase in net sales (Annual Report, 2016). By 2017 Nordstrom’s net earnings were $437 and they reached a record sale of $15 billion. Overall they saw a net sales increase of 4.4% (Annual Report, 2017). Just based on these numbers, it’s clear that Nordstrom is a continuously growing company and their efforts are paying off.

Comparatively, Nordstrom’s is following a similar pattern of their competition which indicates that they are in good health (Appendix 4). Nordstrom Inc.’s current ratio is 1.09 with a median of 1.91 indicating not only short-term financial strength but long-term as well since they don’t vary too dramatically year over year (GuruFocus, 2018). With this current ratio it indicates that Nordstrom is able to pay off all obligations if they needed to and they would not be in risk of bankruptcy. Nordstrom has also seen a dramatic increase in business growth from their online division which increase 17% in ten years. With a company focused on growth as their number one priority, it comes as no surprise that they are able to continue to see their expansion efforts be successful.

Beyond being a financially stable organization, Nordstrom has a great reputation for being trustworthy with their top class customer care. They have even been nominated over 20 times as the top 25 places to work due to their ability to service all of the key stakeholders, not just the investors (Zaczkiewicz, 2017). In 2011, Nordstrom workers earned 60% higher than the industry average. Nordstrom’s biggest appeal for consumers is their high-quality products but also their sense of community and excellent customer service. Beyond all of this, Nordstrom pays attention to the communities that have helped make it a success and they pay extra attention to where they put a new store front. They donate time and money to countless charities committed to sustainable environment, human rights and community support. It’s definitely hard to find a company that will make all of these efforts towards their key stakeholders and still end up profitable at the end of the day (Caplinger, 2013).

Nordstrom has a very good credit rating and even in 2016 when they took a significant hit on a debt loan which was used for expansion purposes but they saw relief in 2017 when they refinanced to lower their interest rate (Levine-Weinberg, 2017). Although Nordstrom has been very charitable and conscious of their efforts, there is always more that they could do in terms supporting ethical behavior. With their high quality standards, they are fairly clean when it comes to lawsuits or anything that might damage their image in society.

Conclusion

In a short summary, Nordstrom Inc is a favorable choice for a financial loan to help them expand their business into the UK. Their growth in sales, their ability to think long term and their dedication to their mission of quality makes them an ideal candidate for financial support.

Appendix 1:

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Appendix 2: C:\Users\rae.markwell\Desktop\Nordstrom Forecast.PNG

Appendix 3

Appendix 4

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Appendix 5

Sources:

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Business Wire (May 17th, 2018). Nordstrom Reports Frist Quarter 2018 Earnings. Retrieved on June 11, 2018 from https://www.businesswire.com/news/home/20180517006099/en/Nordstrom-Reports-Quarter-2018-Earnings.

Caplinger, D. (February 27th, 2013). What Makes Nordstrom One of America’s Best Companies. Retrieved on June 13, 2018 from https://www.fool.com/investing/general/2013/02/27/what-makes-nordstrom-one-of-americas-best-companie.aspx.

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1

Costs in Millions2016201720182019202020212022202320242025202620272028

Revenue$14,437$14,757$15,478$15,989$16,708$17,188$17,497$17,812$18,133$18,459$18,792$19,130$19,474

Gross profit$5,269$5,317$5,588$5,672$6,032$7,622$7,759$7,899$8,041$8,186$8,333$8,483$8,636

Total operating expenses$4,168$4,315$4,662$4,916$5,033$6,322$6,436$6,552$6,670$6,790$6,912$7,036$7,163

Profit Margin4.16%2.40%2.82%3.45%2.82%3.00%3.06%3.11%3.17%3.22%3.28%3.34%3.40%

Free Cash Flow $5,000$5,125$5,228$5,401$5,644$3,244$3,302$3,362$3,422$3,484$3,547$3,611$3,675

Costs in Millions2016201720182019202020212022202320242025202620272028

Revenue$14,437$14,757$15,478$15,989$16,708$17,188$17,497$17,812$18,133$18,459$18,792$19,130$19,474

Gross profit$5,269$5,317$5,588$5,672$6,032$7,622$7,759$7,899$8,041$8,186$8,333$8,483$8,636

Total operating expenses$4,168$4,315$4,662$5,616$5,033$6,322$6,436$6,552$6,670$6,790$6,912$7,036$7,163

Profit Margin4.16%2.40%2.82%3.45%2.82%3.00%3.06%3.11%3.17%3.22%3.28%3.34%3.40%

Free Cash Flow $5,000$5,125$5,228$4,701$5,644$3,244$3,302$3,362$3,422$3,484$3,547$3,611$3,675