Nordstrom Written Report

Company Valuation Project Information

Alex McConaghy, Norma Tentori, Theresa Reinhard and Ayanna Rocker
MGMT 260: Principles of Finance
March 17, 2015

Table of Contents
I.

Executive Summary
II. Industry/ Firm Description
Industry Overview
Nordstrom and Competitors Overview
Key Value Drivers
SWOT Analysis
III. Financial Statement and Trend Analysis
Industry Benchmark
Trend Analysis
IV. Analysis of Firm Riskiness
Analysis
Beta and Industry
V. Firm Valuation
VI. Conclusion and Recommendations
VII. Appendix & Work Cited

I. Executive Summary
Nordstrom Corporation is a well-known, discount store with popular designer clothing,
accessories and shoes. John W. Nordstrom from Sweden founded the upscale American fashion
retailer in 1887 and now the corporation is based in Seattle, Washington.1 Their ticker symbol is
NYSE on the New York Stock Exchange. 2Their target market is middle-class Americans
selling products such as clothing, accessories, bedding, beauty products, houseware and shoes
from designer lines. Some of the designer brands are ALDO, Adidas, BCBGeneration, Dior,
Michael Kors and many more.3 With such a wide range of products from these tops lines they
have become a pretty prominent discount store for men and women.
Their widely known brand is located only in the United States and Canada; however, with
their great success of online shopping they have expanded their international shopping to the
following countries: Europe, Australia, France, Cambodia and many more locations overseas.
Being a global e-commerce provider allows customers, from all over the world to engage in their
simple online shopping. They also offer the ability to pay in 30 different kinds of currencies. For
example they accept the Euro (EUR) and Czech Koruna (CZK).4 Providing better services to
customers all over the globe. Starting off from a small shoe shop in Seattle they now have almost
119 full-line Nordstrom and 167 Nordstrom Rack stores throughout the U.S and Canada. In the
U.S alone they are located in 38 states. 5They also have their very own Nordstrom Restaurants
and Specialty Cafes, that offers various types of foods in 200 locations. Its Industry NAICS
codes include 448140 (Family Clothing Stores), 448110 (Mens Clothing Stores) and 452111
(Department Stores).6 Nordstrom, Inc. owns many product lines, with about 70% of their
merchandise in stores and the other 30% unique to each region and store. Their stores carry
private as well as exclusive labels. The bulk of their merchandise is comprised of designer lines.
Such popular and well-known featured lines include: Calvin Klein, Anne Klein, Versace,
Michael Kors, Kate Spade and many more. Nordstrom tries to stay on the changing of times and
1"Nordstrom History." Nordstrom and Company History. Nordstrom Inc, n.d. Web. 11 Mar. 2015.
<http://shop.nordstrom.com/c/company-history>.

2 "Nordstrom Inc." Yahoo! Finance. Yahoo, n.d. Web. 11 Mar. 2015. <http://finance.yahoo.com/q?s=JWN>.
3"Nordstrom: Free Shipping. Free Returns. All the Time." Nordstrom Brands List. Nordstrom Inc, n.d. Web. 11 Mar.
2015. <http://shop.nordstrom.com/c/brands-list>.

4 "Nordstrom Launches International Shopping in 30 Countries." Nordstrom Launches International Shopping in 30

Countries. BorderFree, n.d. Web. 12 Mar. 2015. <http://www.borderfree.com/press-events/nordstrom-launchesinternational-shopping-in-30-countries>.

5 "About Nordstrom." Nordstrom About Us. Nordstrom Inc, n.d. Web. 12 Mar. 2015.
<http://shop.nordstrom.com/c/about-us>.

6 "Nordstrom, Inc. Company Profile." Yahoo Finance. N.p., n.d. Web. 16 Mar. 2015.
<http://biz.yahoo.com/ic/14/14261.html>.

tastes for their products offered. If a line will serve the customer better than the existing line,
they will not hesitant to change. Looking ahead, the company plans to open five new full-line
stores in 2015, and will also be on the works for relocation of one full-line store. Nordstrom also
plans on opening their first Manhattan store in the year 2018 as well as reaching a total of 300
Nordstrom Rack stores by 2020.
According to Nordstrom associates, the company's mission statement is that, [Our] goal
is to provide outstanding service every day, one customer at a time and [we] work hard to
make decisions in the best interest of our customers and those serving them. 7
II. Industry/Firm Description
Apparel/Retail Industry Overview
Nordstrom, Inc. companies are part of the services sector and apparel stores industry. The
apparel industry refers to companies that may design or sell clothing, footwear and accessories.
Categories for such products may include basics, like socks and undergarments to luxury items
such as designer purses and clothing. Sales tend to be most lucrative in the womens wear
segments and vary highly by season, with the majority of revenue being during the holidays and
back to school periods. In 2013, the womens wear sector had a total revenue of $187.0bn,
which is equivalent to about 50.4% of the industrys overall value. Total apparel industry
revenues for 2013 were $371.2bn. 8
Nordstrom and Competitors Overview
Nordstroms main competitors are Bloomingdale's Inc, Neiman Marcus Group LTD LLC,
and Saks Fifth Avenue Inc.9 While further researching these companies we found most of the top
competitors were privately owned.Therefore, wc compared Nordstrom Inc to Macys Inc and
Target Corp because although they arent the main competitors of Nordstrom, they come fairly
close.

Nordstrom Inc

Macys Inc

Target Corp

5- year growth rate

16.27%

44.27%

24.32%

(From Bloomberg)10 11

Beta

1.25

0.8

.74

(From Yahoo)

Debt Ratio (2015)

73.61%

74.94%

66.19%

(Data from Hoovers)

To find 5-year growth rate for Nordstrom Inc, Macys Inc, and Target Corp, we went to
Bloomberg and the number was given. Additionally the beta for all three companies were given
7 Farfan, Barbara. "Nordstrom Mission Statement - Mission, Vision, Headquarters, Founders Facts and Trivia About
Nordstrom Department Stores Chain and Catalog." Nordstrom Stores Mission Statement. About Money, n.d. Web. 12
Mar. 2015. <http://retailindustry.about.com/od/retailbestpractices/ig/Company-Mission-Statements/NordstromStores-Mission-Statement.htm>.

8 "Apparel Retail in United States." Apparel Retail in United States. N.p., n.d. Web. 11 Mar. 2015.
<http://www.marketresearch.com/MarketLine-v3883/Apparel-Retail-United-States-8403992/>.
9 http://finance.yahoo.com/q/co?s=JWN+Competitors
10 Quotes & Info- Yahoo! Finance. (n.d.). Retrieved April 17, 2015, from
11 Macy's, Inc. (n.d.). Retrieved April 17, 2015, from http://finance.yahoo.com/q?s=M

on Yahoo Finance. To calculate the debt ratio for the companies, we went on Hoovers and found
the total debt in 2015, and divided by the total assets for the same year.
Key Value Drivers
There are several key value drivers that allow Nordstrom, Inc. to be successful and a
profitable business. They ranked 224th in Fortune 500 list as of June 2014. 12 One of their key
value drivers includes employee satisfaction and loyalty. Nordstrom offers high wages as they
believe it is an important factor that attracts, retains and motivates their employees. For
example, a top level employee at Nordstrom can make around $75,000 to $80,000 per year; they
also use monetary rewards and recognition to get employees at their highest potential and
confidence. Overall, their high compensation level and employee culture allows them to rank
high amongst other competing companies.13
A second key value driver that was previously touched upon is their excellence in
customer service. Nordstrom offers a very convenient return policy as well as personalization
with employee and consumer relationships with things such as thank-you notes. These qualities
may attract consumers that want a more personalized experience, which is crucial especially
since other competitors may be lacking in this area. Having more technology interaction or
improved efficiency rather than face-to-face interaction can further benefit Nordstrom in some
customer sectors.
A third key value driver for their success is location. Having stores in malls and in close
proximity became essential for consumers, whether its in a neighborhood, downtown or urban
area. Nordstrom was effective when expanding areas in prime locations to gain advantage over
competitors. Therefore, refocusing may be difficult for an already established and pre-existing
business, but Nordstrom has relocated stores as well as opening clearance stores such as their
Nordstrom Rack locations, which fit the change of consumer needs for more affordable and
accessible stores.
Overall, there are several strategies that can be used in the fashion apparel retail industry.
All of the mentioned values yield Nordstrom to be ahead of their competitors, as well as
maintaining happy employees, consumers and being a desirable investment for stockholders and
future investors. We will further go into detail to determine if these evaluations are accurate in
our current market.
SWOT
Strengths
In order to gain more customers Nordstroms opened up two very successful sub-brands:
Nordstrom Rack and HauteLook. Nordstrom Rack stores offer the same merchandise as the main
Nordstrom stores; however, the clothes they sell either have been pick-overs or may have a slight
damage or incorrect design. However, all the products are still in great condition upholding
Nordstroms quality standards. The bonus to this store has been the fact that you can still find
12 "NORDSTROM, INC. | Company Profile Report | Hoover's." Hoover's. N.p., n.d. Web. 11 Mar. 2015.
<http://www.hoovers.com/company-information/cs/companyreport.NORDSTROM_INC.35eb52df19e53315.html>.
13 "Company Research: Nordstrom's." Legacy Earlham. N.p., n.d. Web. 11 Mar. 2015.
<http://legacy.earlham.edu/~hendest/nordstrom.html>.

great designer clothes but at a cheaper clearance price. HauteLook is an e-commerce shopping
experience that is targeted to a younger crowd from ages 16-20 years old. They provide you with
designer items that are in style during the seasons and are also clearance items. They offer
extremely low prices for their products. These sub-brands have allowed Nordstrom to not only
grow but allowed customers to buy even cheaper products. This is one of their main strengths.
Another strength is the fact that they have such a vast amount of designer products. For
customers this guarantees great quality in their purchases at a low price.
Weaknesses
Nordstrom is a global e-commerce company. However, one of their main weaknesses is
that they only have stores located in the United States and Canada. Also, not all of their products
are sold on their online stores. Some of their best products are only sold in stores and only
customers who are able to shop in stores benefit from their best deals. These two things really
limit the international market. Additionally, people living overseas have to pay an expensive
International shipping charge. Most companies try to give a fair price on shipping no matter
where you live; however, Nordstrom has been unable to give this discount which has been a huge
weakness for them in terms of gaining loyal customers overseas.
Opportunities
A great opportunity Nordstrom should take advantage of is in the emerging markets of
today. These markets may be fast growing regions of the world that could enable Nordstrom to
expand quickly. Perhaps Nordstrom could delve into locating some physical store fronts outside
of the United States and Canada and into other countries in order to reach a new market and new
consumer segments. Consequently, another opportunity is the increase in technology and online
presence of the modern consumer. This gives Nordstrom an opportunity to reach consumers
internationally through their online website. Expansion could greatly benefit Nordstrom and
likely result in increased profits.14
Threats
One of Nordstroms biggest threats is the intense competition market. Other department
or similar stores can lower Nordstroms profits, because these competitors can entice consumers
away with superior products or with lower prices on merchandise. Similarly, another threat they
face is counterfeiting, which does not relate to their stores directly but rather to the merchandise
of some brands and products they sell. For example, particularly popular handbags such as the
Longchamp brand as well the Tory Burch shoes are often sold counterfeit.
III. Financial Statement Analysis
The following table shows ratios for the three most recent years of reported data for Nordstrom.
Industry data was gathered from the Family Clothing Store Industry, which is the industry in
which Nordstrom belongs (NAICS Code: 448140).15 This Industry information is later used in
14 "Nordstrom Analysis." Advisor Gate. N.p., n.d. Web. 11 Mar. 2015. <http://swot.advisorgate.com/swot-n/27577-swotanalysis-nordstrom.html>.

15 EDGAR. (2014, March 17). Retrieved March 14, 2015, from http://www.sec.gov/cgi-bin/browse-edgar?
CIK=JWN&Find=Search&owner=exclude&action=getcompany
EStatement Studies. (2015, January 1). Retrieved March 14, 2015, from
http://www.statementstudies.org/IndustryResources.aspx#

the benchmark analysis as it is the industry in which Nordstroms main competitors belong to as
well.
Ratio Analysis Table
Nordstrom
Liquidity

2012

2013

Family Clothing Store Industry

2014

2012

2013

2014

Current Ratio

2.16

2.28

2.06

2.00

1.70

1.70

Quick Ratio

1.52

1.53

1.33

.40

.40

.30

Asset Management

2012

2013

2014

2012

Inventory Turnover Ratio

6.20

5.93

5.35

Days Sales Outstanding

68.1

62.53

62.67

Fixed Asset Turnover Ratio

4.25

4.56

Total Assets Turnover

1.24

1.45

Debt Management
Total Debt Ratio

2012

3.40

3.00

4.13

28.50

29.30

28.20

1.42

2.90

3.20

2.70

2014

2012

76.35%

75.74%

8.61

7.41

7.39

2012

Profit Margin

2013

2014

3.20

76.96%

Time Interest Earned

Profitability

2013

2013

2014

2013

5.30

2012

2014

6.40

2013

4.30

2014

6.51%

6.25%

6.03%

4.30%

3.40%

4.40%

Return on Equity

35.01%

38.34%

35.28%

24.9%

28.5%

28.1%

Return on Assets

8.07%

9.07%

8.56%

8.60%

9.30%

7.10%

Market Value

2012

2013

2014

2012

Price/Earnings Ratio

16.13

16.38

16.50

Market/Book Ratio

5.35

5.64

5.89

2013

2014

Trend Analysis
Liquidity Ratios
In 2012, Nordstrom had a current ratio of 2.16. In the next two consecutive years, the
quick ratio remained fairly constant, being 2.28 in 2013 and 2.06 in 2014. Based on these values,
we can see that Nordstrom is able to cover its liabilities with its assets fairly well (See Appendix,
Exhibit D).
When looking at the quick ratio for Nordstrom in 2012, the ratio was 1.52. The quick
ratio also remained fairly constant in 2013 at 1.53 and in 2014 at 1.33. This ratio isnt drastically
different from the current ratios, therefore we can conclude that Nordstrom doesnt heavily rely
on its inventory to cover its liabilities (See Appendix, Exhibit D).
Asset Management

When looking at the inventory turnover ratio for Nordstrom, we can see a slight decrease
in the trend over the span of three years. In 2012 the ratio was 6.20, in 2013 it was 5.93, and in
2014 it was 5.35. This shows the company is slightly worsening over time, however it isnt
enough to be concerned about (See Appendix, Exhibit E).
In 2012, Nordstrom reported their days sales outstanding at 68.1. For the next two prior
years, the days sales outstanding was 62.53 in 2013, and 62.67 in 2014. Through these numbers,
we are able to conclude that Nordstrom is improving over time because it is taking them few
days to collect the money earned from sales (See Appendix, Exhibit E).
The fixed asset turnover ratio for Nordstrom remained constant for the three consecutive
years. In 2012, it was 4.25, in 2013 it was 4.56, and in 2014 it was 4.13. When comparing
Nordstrom to itself overtime, they appear to be pretty stable, neither worsening or improving
(See Appendix, Exhibit E).
When looking at the total assets turnover ratio for Nordstrom, again we can see a steady trend for
the duration of three years. In 2012 the ratio was 1.24, in 2013 it was 1.45, and in 2014 it was
1.42 (See Appendix, Exhibit E).
Debt Management
Nordstrom has a very high debt ratio. In 2012, their total debt ratio was 76.96%. This
percentage remained fairly consistent throughout the next two years. In 2013 it was 76.35%, and
in 2014 it was 75.74%. Until we further investigate why Nordstrom as high debt through the
DuPont analysis, we cannot determine if having this much debt is improving or worsening debt
management (See Appendix, Exhibit F).
Nordstrom reported their times interest earned in 2012 as 8.61. In 2013 it decreased
slightly to 7.41, and continued to decrease once more reaching 7.39 in 2014. These numbers
arent too alarming because there was only a slight decrease across the three year period (See
Appendix, Exhibit F).
Profitability
In 2012, Nordstrom reported a profit margin of 6.51%, while keeping a steady trend for
the next two consecutive years. In 2013, the profit margin was 6.25%, and in 2014 it was 6.03%.
Over time, Nordstrom has been able to keep its profit margin stable, showing no signs that they
are improving or worsening (See Appendix, Exhibit G).
Nordstrom reported its return on equity in 2012 as 35.01%, and in 2013 it slightly
peaked to 38.34%, later dropping back down to 35.28% in 2014. Despite the slight peak in 2013,
the ROE has remained fairly constant, showing stable levels of profitability (See Appendix,
Exhibit G).
When looking at the return on assets, in 2012 Nordstrom reported 8.07%. That ratio went
up by 1% in 2013 when it reached 9.07%, later decreasing to 8.56% in 2014. Although these
numbers fluctuate slightly, overall the ROA remained fairly stable over the three year period (See
Appendix, Exhibit G).
Market Value
The price/earnings ratio for Nordstrom in 2012 was 16.13, in 2013 it was 16.38, and in
2014 it was 16.50. That ratio remained constant throughout all three years, so we can conclude
that investors have been willing to pay about 16 dollars per one dollar of reported profits from
Nordstrom (See Appendix, Exhibit H).
Likewise by looking at the market/book ratio, we can see this same steady trend across
the three year period. The M/B ratio in 2012 was 5.35, in 2013 was 5.64, and in 2014 was 5.89.
Nordstrom has been about to to sustain this high level of growth opportunity for the past three

years. The total market value of Nordstrom has been steady, neither worsening or improving (See
Appendix, Exhibit H).
Benchmark Analysis
Liquidity Ratios
Compared to the industry, Nordstrom is doing much better because for the years 2012,
2013, and 2014 for the current ratio. The industry had current ratios of 2.0, 1.7, and 1.7
respectively.
When compared to the industry, Nordstrom is doing tremendously better than most
competitors because the family clothing industry had a quick ratio of 0.40 for both 2012 and
2013, and decreased to 0.30 in 2014.
Asset Management
In comparison to the industry, Nordstrom is doing exceptionally well because their
inventory turnover is almost twice that of the industry. In 2012 the family clothing industry only
had an inventory turnover ratio of 3.20, in 2013 it was 3.40, and in 2014 it was 3.00.
However, when we compare Nordstrom to the family clothing store industry, Nordstrom
is shown to be doing tremendously worse than its competitors for fixed asset turnover. The fixed
asset turnover ratio for the industry in 2012 was 28.50, in 2013 was 29.30, and in 2014 was
28.20.
The total assets turnover ratio for the industry in 2012 was 2.90, in 2013 was 3.20, and in
2014 was 2.70. Just like Nordstrom, these numbers remained fairly constant over three years.
Nordstrom at 1.24 for 2012, 1.45 for 2013, and 1.42 for 2014 is doing better than the industry.
Debt Management
The industry reported 5.30 as their times interest earned ratio is 2012. It increased to 6.40
in 2013, and dropped to 4.30 in 2014. Based on this data, Nordstrom is proving to be able to
meet debt obligations better than the industry.
Profitability
The profit margin for the industry shows a steady trend. In 2012 the industrys profit
margin was 4.30%, in 2013 it was 3.40%, and in 2014 it was 4.40%. When we compare
Nordstrom to the industry, Nordstrom proves to be doing better than the industry, thus showing
higher levels of profitability than competitors.
When looking at the industrys return on equity in 2012, it was 24.9%. The following
year in 2013 it was 28.5%, and in 2014 it was 28.1%. Compared to the industry, Nordstrom is
doing much better because they are generating more profits with the money shareholders have
invested.
When looking at the return on assets in the industry, in 2012, the industry reported the
return on assets as 8.60%, in 2013 it was 9.30%, and in 2014 it was 7.10%. Based on these
numbers, its hard to distinguish if Nordstrom is doing better or worse than the industry because
the ratios are closely related. We can conclude that Nordstrom is using its assets to generate
profits equally effective as the industry.
DuPont Analysis
Return on equity can be broken down into the product of: return on assets X equity
multiplier. (profit margin X total assets turnover= return on assets). Return on assets and the
equity multiplier are relatively stable. Return on assets remaining relatively stable is directly
related to the stability of of both the profit margin and the total assets turnover for the three
consecutive years. With this, it is clear that the return on equity (ROE) is also fairly constant,
showing stable levels of profitability. Again, Nordstrom is doing much better than the industry

with these ROE percentages because they are have higher values (or generate more profit with
the money shareholders have invested).
Dupont Equation-ROE Decomposition
2014

2013

2012

ROE

Profit Margin

TATO

Equity Multiplier

35.28%

6.03%

1.42

4.12

ROE

Profit Margin

TATO

Equity Multiplier

38.34%

6.25%

1.45

4.23

ROE

Profit Margin

TATO

Equity Multiplier

35.01%

6.51%

1.24

4.34

IV. Analysis of Firm Riskiness

Nordstrom has a few risk factors that we need to acknowledge in this evaluation.
Nordstrom faces stiff competition in the Apparel and Retail Industry. As previously mentioned,
they compete against other department stores such as Bloomingdales, Neiman Marcus and Saks
Fifth Avenue respectively for a very similar target market and consumer base. 16 Nordstrom has
excelled in their customer service which has helped them differentiate from their competitors.
However, the continuous increase of competition now requires them to expand into also having
great customer service not just in person but also online, which is something they have but could
greatly expand into a bigger segment of their company.
The U.S economy is becoming very reliant on e-commerce companies. Nordstrom has made to
sure to keep up with their online stores and has even expanded their reach overseas. They allow
customers to pay in many different currencies and even offers overseas shipping but at a price.
Online shopping is very beneficial to Nordstrom as they can be more profitable as there are less
expenses when it comes to running an online store such as storefront costs and employees.
However, their online stores have limited products and their well known customer service cannot
currently be translated through technology.
Expanding into the International market is a step many companies in the Retail industry are
taking, but it could pose to be a risk for Nordstrom. Not only could this be very costly in terms of
location and storefront expenses but also in appealing to the new customer segment they will
face internationally. Currently, all international consumers see is their limited online merchandise
selection and their expensive shipping rates so their reputation with these consumers may not be
the best. Therefore, Nordstrom must learn how to adapt to appeal and interest these international
16 "Nordstrom, Inc. Company Profile." Yahoo Finance. N.p., n.d. Web. 15 Mar. 2015.
<http://biz.yahoo.com/ic/14/14261.html>.

markets, by slightly altering their merchandise offerings or image conveyed to ensure popularity
and overall profitability success in international markets.
Nordstrom has their retail credit card that allows customers to enjoy spending money through a
credit process while enjoying rewards they are granted while using the card. In the past
customers who have the card come into the store more often and may also spend more, as it
provides an incentive to gain rewards granted. However, major department stores have given up
their personal retail cards due to the risk of major fraud and the risk of late payments from
customers. This can be a risk for Nordstrom as they may lose profit of some of their sales and
possible problems with defaults from customers. 17
Many people shop at retail stores in order to buy high-quality brands at a cheaper prices.
Nordstrom has a long list of designer brands they have partnered with. While they have been able
to keep their prices relatively low for such products, there has been an increase in counterfeiting
popular designer products. This could pose as a risk for Nordstrom as consumers may reach out
to these online retailers for extremely low prices for products that while fake, that may appear
very similar. In order to counter this, Nordstrom is not allowed to lower prices as low as some of
these counterfeit products are offered so they should enable more advertising and marketing for
their products focusing on the quality and durability that comes with the higher price tag.
Beta and Industry
Evaluating Nordstroms Beta, we were able to to find various reports on Yahoo Finance, Reuters
and MacroAxis. A Beta of about 1 indicates that an asset and market will be generating similar
returns over time, and in our findings we found that Nordstrom ranks relatively higher than their
industry: 1.2518, 1.2719, 1.2520. In order to understand the market risk for potential investors we
used the linear regression on Excel. Looking at the monthly prices over a five-year period, using
S&P 500 we calculated that Nordstroms beta is 1.25 (See Appendix, Exhibit I). This beta
indicates that Nordstrom is more risky than the general market. However, with this scale they
still rank second overall in beta category among related companies.
Firm Valuation
Dividend Discount Model (DDM)
In order to calculate Nordstroms current
stock price we used the Dividend Discount Model
(DDM). For this calculation of a non-constant
growth, we need to complete the following steps:
value dividends over time of rapid growth, estimate
stock price at horizon year when growth should
have settled down, and calculate present value of
17 Engleman, Eric. "Why Nordstrom Runs Its Own Credit-card Program." Puget Sound Business Journal. Puget
Sound, n.d. Web. 4 Apr. 2010. <http%3A%2F%2Fwww.bizjournals.com%2Fseattle%2Fstories
%2F2010%2F04%2F05%2Fstory2.html%3Fpage%3Dall>.
18 "Nordstrom Inc." Yahoo! Finance. Yahoo, 07 Apr. 2015. Web. <http://finance.yahoo.com/q?s=JWN>.
19 "Nordstrom Inc (JWN.N) Quote| Reuters.com." Reuters. Thomson Reuters, 07 Apr. 2015. Web.
<http://www.reuters.com/finance/stocks/overview?symbol=JWN.N>.
20 "Nordstrom Beta JWN NYSE." Macroaxis. N.p., 07 Apr. 2015. Web.
<http://www.macroaxis.com/invest/ratio/JWN--Beta>.

the stock by summing. To calculate DDM overall, we had to first find the variables: D1, Re and
g. Our first step was to calculate Re, we can find using the CAPM model: rn= rf + (rm - rf) Bn.
We were able to find the risk-free rate of return (rf) by using the rate of return on a 30-year U.S
Treasury Bond. The rate we found was 2.56%, as of April 7th, 201521. As for the risk premium,
we decided to estimate 5% based off the discussion we had in class. With this, we hoped to
achieve a positive stock price. Using the CAPM model, we found that rn= 8.81%. (0.0256 +
(.05) 1.25)) = .0881 = 8.81%). This is finding the rate of return, the variable r.
In order to find the companys dividend growth rate, or g, we will need to complete
three methods of finding g. First, we looked at Nordstroms historical growth rates from years
2011 to 2015 and found that they were 15% , 17.39%, 11.11% , 10% , 12.12%. We took the
average growth rate over those years and found it was 13.12%. The following chart below shows
our steps. To check this information we looked at Nasdaq to clarify our numbers.22
The second step to find the dividend growth rates for
Nordstrom was to look at online data that is comprised of
analysts predictions. When looking at various websites we
were able to find a few different estimated growth rates. On
Bloomberg.com they had an expected 5 year divided growth
rate of 16.27%23. The third step we used was utilizing the formula g=ROE x (1-dividend per
share/EPS)), which calculated out is 35.28 x (1 - 0.3/0.73) = 20.78%24. When looking at all three
methods, our group determined it would be best to use the analytic data method of a 16.27%
growth. We decided to use the higher analyst predicted growth percentage as it was in between
our other two growths, and due to it having increased possible accuracy due to the several
analyst predictions versus an averaged or calculated growth.
We can now use the variables we have calculated (g and r) to plug into the DDM. Again,
g=16.27% (the analyst estimate we chose) and r=8.81%. We also found the expected growth rate
of the U.S. economy, which is 2.2%.25 First, we are able to calculate D1, which is the expected
annual dividend rate for 2015. D1 = Do (1 + g), where Do is equal to to the annual dividend rate
for 2014. The 2014 annual dividend rate, which we found earlier, is 0.33. Therefore when we
plug in g and Do , D1 = 0.33 (1 + .1627). D1= 0.38 so the expected annual dividend return
for 2015 is 0.38. For the next step, since we have now calculated D1, we can calculate Po. Po, or
the price of the stock = D1 / (r - g) We can now use the expected growth rate of the U.S.
economy, for g, which is 2.2%. We can also now use r from the CAPM model, which is 8.81.
Therefore Po = 0.38 / (0.0881 - 0.022). Po = $5.75.

21 "US Generic Govt 30 Year Yield Analysis." Bloomberg.com. Bloomberg, 10 Apr. 2015. Web.
<http://www.bloomberg.com/quote/USGG30YR:IND>.
22 "Dividend History." NASDAQ.com. N.p., n.d. Web. 16 Apr. 2015.
<http://www.nasdaq.com/symbol/jwn/dividend-history>.
23 "JWN:New York Stock Quote." Bloomberg.com. Bloomberg, 10 Apr. 2015. Web.
<http://www.bloomberg.com/quote/jwn:us>.
24 "Revenue, EPS, & Dividend - Nordstrom, Inc. (JWN) - NASDAQ.com." NASDAQ.com. Nasdaq, 10 Apr. 2015.
Web. <http://www.nasdaq.com/symbol/jwn/revenue-eps>.
25 "United States GDP Growth Rate | 1947-2015 | Data | Chart | Calendar."Trading Economics. N.p., n.d. Web. 17
Apr. 2015. <http://www.tradingeconomics.com/united-states/gdp-growth>.

Because the analyst estimate for g (16.27%) was a 5-year estimate, we also wanted to
calculated the price of the stock after 5 years (P5). We felt that calculating P5 and finding the net
present value (NPV) may give us a more accurate stock price. The horizon year for the DDM is
at year 5 (because it was a 5 year estimate). After year 5, the expected growth rate of the U.S.
economy, which is 2.2%, is used. So, after calculating D1, D2, D3.etc. , we were finally able
to calculate D6 (this is where we used the expected growth rate of the U.S. economy). D6 = 0.71.
So we know that P5, the price of the stock at the horizon year 5, is P5= D6 / (r -g). So, P5 =
$10.74. We determined NPV from the series of six cash flows using the financial calculator.
After plugging in the cashflows, the current stock price came out to be $9.03 (See Appendix,
Exhibit J).
DDM Illustration:

Valuation Using Multiples

Another way to calculate the intrinsic stock price is by using multiples in our valuation.
The intrinsic stock price determines the weighted average for Nordstrom using the current value
of their share. In order to do so, we multiplied the industries P/E by Nordstroms most recent
EPS. Our most recent EPS for Nordstrom is 3.72.26 Looking at the Apparel Stores Industry, we
found that the industry P/E ratio is 24.8027 When we plugged these numbers into the equation ;
P= Industry P/E x EPS = 24.80 x 3.72 = $92.26. Valuation using multiples has determined that
the current intrinsic value of Nordstrom stock to be $92.26 per share.
Calculation of Intrinsic Stock Price
After finding both current stock prices using the DDM and valuation using multiples, we
can calculate a weighted average of the current intrinsic value of Nordstroms stock price.
Because our DDM calculation was significantly lower than what the current market price of
Nordstrom was (which was $77.06 as of April 17, 2015)28 we chose to only weight the DDM
value at 20%. We believe this extremely low value was possibly a result of Nordstrom's lower
dividend values. We also believed that the multiple estimations taken for the DDM (estimation of
g, estimation of risk premium, etc.), may have skewed the accuracy of our final calculation.
Whereas for the valuation using multiples was significantly closer to Nordstroms market value,
we chose to value the valuation using multiples at 80%. The valuations using multiples method
made up for DDMs low value, which is also why we weighed it higher. We also made no
estimations to reach our value, which made this method more attractive. When finally calculating
the weighted average of these two methods, we found that the intrinsic stock price, or Po, is =
(0.2 x 9.03) + (0.8 x 92.26). Therefore, the intrinsic stock price is $75.61.
VI. Conclusion and Recommendations
When conducting a full analysis on Nordstrom's firm, competitors, industry, financial
statements, riskiness and valuation we were able to determine that Nordstrom is slightly
overvalued. When looking at historical financial statements, we found that Nordstrom is
26 "Revenue, EPS, & Dividend - Nordstrom, Inc. (JWN) - NASDAQ.com." NASDAQ.com. N.p., n.d. Web. 16 Apr.
2015. <http://www.nasdaq.com/symbol/jwn/revenue-eps>.
27 "Industry Browser - Services - Apparel Stores Industry - Company List."Industry Browser - Services - Apparel
Stores Industry - Company List. N.p., n.d. Web. 16 Apr. 2015. <http://biz.yahoo.com/p/730conameu.html>.
28 "Nordstrom Inc." Yahoo! Finance. N.p., n.d. Web. 20 Apr. 2015. <http://finance.yahoo.com/q?s=JWN>.

improving over the past 3 years based on their trend analysis and are doing better overall
compared to their competitors based on their benchmark analysis. However, we determined that
they are overvalued by looking at both the DDM and valuation using multiples. Through the
identification of multiple variables, we found Nordstrom to have an intrinsic price of $75.61,
while its current market price is at $77.06. Looking at Nordstroms competitors we found they
are the riskiest company in the their industry among similar competitors such as Macy's and
Target. This is based off of a comparison using Beta, where Nordstroms Beta was 1.25.
Additionally, Nordstrom has the lowest growth rate of 16.27% compared to these competitors.
In Nordstroms DDM, we found the r variable to be 8.81% and the g to be 16.27%. When
plugging these variable in appropriately, we found that the intrinsic stock price to be $9.03. We
also sought the intrinsic stock price through valuation using multiples where we found it to be
$92.26. Furthermore, we then conducted a weighted average calculation (using DDM and
valuation using multiples) to find the final intrinsic stock price to be $75.61. Based on all of our
findings, Nordstroms may face some significant issues. For instance, they may face the
following problems: competitors may develop an advantage over Nordstrom due to the fact they
are less risky to invest in and Nordstrom being overvalued could lead to unhappy stockholders.
The expensive international shipping, limited stores in the United States and Canada, and limited
merchandise available on their online store may further decrease Nordstrom's value. However,
we feel that Nordstroms key value drivers with customer service, success in multiple locations
and areas, employee satisfaction and loyalty are great areas they should expand in.
With these recommendations, we feel that they can increase in value and be able to keep up with
the upcoming competitors in the industry, if they expand and learn to grow above their
competitors. Being an overvalued company, we would recommend that investors should hold
their stock in Nordstrom and not buy new shares due to their slight overvaluation.

Appendix
Exhibit A: SWOT Chart

Strengths

Weaknesses

Global e-commerce company

Stores only in the United States & Canada

Accepts 30 different currencies

Not all the products are sold online

Has vast amounts of designer products

Expensive International Shipping charge

Multi- Channel Growth through SubBrands (Nordstrom Rack & HauteLook)

Many product lines
Strong Brand name in the U.S.
Good quality items
Discounted prices
Offers a Nordstrom rewards program
Nordstrom credit card
Great exchange policy
Nordstrom cafe
Nordstrom Cares Program:
(http://i.nordstromimage.com/images/defau
lt/shop/image/shops/cares/2014/1006/SOP
_2013_FINAL.pdf)
Great Media Coverage
Nordstrom shopping app
True Fit program
Personal Stylist

Opportunities

Threats

Emerging Markets (Global markets)

More affordable department stores

Increasing income levels

Increasing costs

Growing economy

Price changes

Online access to merchandise 24/7

Financial capacity

Innovation (New products)

Intense competition

Technology/fast paced driven consumer

Brand Merchandise counterfeiting

Exhibit
B:
Nordstrom Current Ratios (P/E, ROE, etc.)

Exhibit C: Apparel Store Industry Ratios

Exhibit D: Liquidity

Exhibit E: Asset Management

Exhibit F: Debt Management

Exhibit G: Profitability

Exhibit H: Market Value

Exhibit I : Linear Regression Output

Exhibit J: DDM Time Line and Calculations

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