FINANCIAL STATEMENT ANALYSIS (FSA) BUAC 758Z GROUP PROJECT #3

PREPARED FOR Dr. Gary Bulmash, DBA, CPA Project Team:
Kriti Chadha_____________________________________/s/ Jeffrey Egerstrom________________________________/s/ Amanda Huff____________________________________/s/ Feng Li_________________________________________/s/

We hereby pledge on our honor that we have not given or received any unauthorized assistance on this project. http://www.studenthonorcouncil.umd.edu/code.html

.................................................. 5........... 3..... 9 2 .. Profitabillity Ratios .................................................................................................................................................................................... 14 References and Appendices .......................... 13 Conclusion ............................... 6 Assumptions ..................................................... Inc.......................................... 11 Inferences .................. Inc........................................................................................................................................................................................................................... 8 Exhibit 5 Nordstrom.... 9 Exhibit 6 Dillards Profitability Ratios ......................... 15 Exhibit 1 Nordstrom........... and Dillards Debt to Equity Ratio ........................................................................................................................ 2................. 9 Exhibit 7 Nordstrom s Cash Flow Ratios ............... Analysis Review .............. Key Financial Ratios ............................................... 3 1................................ 7 Exhibit 3 Dillards Key Financial Ratios .............. Key Financial Data ............... 7 Exhibit 4 Comparative Nordstrom................................................................................. 4 Evidential Matter ........................ 6... 10 Crucial Factors ......................................................................................... 4.................TABLE OF CONTENTS EXECUTIVE SUMMARY ........................................... 9 Exhibit 8 Dillards Cash Flow Ratios.... 6 Exhibit 2 Nordstrom..................................... Inc............ Inc.......................................................................................................................................................

comparisons to its largest market comparable competitor Dillards. The Crucial Factors section will address the strengths. we describe the implications of our review and analysis. In the Assumptions section. and threats for Nordstrom. and explain the key differences.EXECUTIVE SUMMARY The following research paper and analysis of Nordstrom. Inc. Nordstrom s key ratios are discussed and we compare these to Dillards. and provide a conclusion on Nordstrom s current and future outlook and state if we feel Nordstrom is a good investment. and its market focus of the company in its four primary segments. we present the current situations posed for Nordstrom and the possible strategies that could be implemented to improve their outlook. weaknesses. discuss operations. opportunities. 3 . Inferences. we analyze the financial statements for the prior three years. In the last section of the report. as well as. and what they mean. In the Evidential Matter section. after performing this analysis. (herein Nordstrom) will summarize the background of the company in the Analysis Review.

1. Nordstrom s key product focus is on offering a wide array of high-quality. Nordstrom offers a private label card from their owned federal savings bank [1]. Analysis Review Nordstrom is known as a leading fashion specialty retailer within the USA. but it generates sales from the online store [1]. and the company has deep market penetration along the west coast with a good presence throughout the Midwest and eastern States [1]. gifts. This segment generates revenue through 4 . accessories. cosmetics. fragrances. branded. bedding. fashion products [2]. 72 off-price stores Nordstrom Rack. apparel. Nordstrom s portfolio of product offerings include. apparel (men. Washington. The Retail segment receives the majority of their revenue from the sale of luxury & high quality items such as shoes. and children) shoes. 2010)[1]. There are 187 retail stores located in 28 states (as of March 19. and its auditors are Deloitte & Touché. Its fiscal year end is January 30. alternative revenue streams are derived from the various catalogs that are distributed to its target market. cosmetics. and accessories [1]. The retailer offers two Nordstrom visa cards and a debit card for Nordstrom purchases [1]. Nordstrom operates their business in four reportable segments: retail stores. Washington [1]. two Jeffrey boutiques. handbags. and one clearance store which operates under the name Last Chance [1]. and other [1]. direct. The Credit segment is involved in providing credit cards [2]. The Direct segment is very similar to the Retail segment in terms of products offered. The company was founded in 1901 in Seattle. Nordstrom s headquarters are based in Seattle. 2010. In addition. credit. Nordstrom receives the sales of these products from their approximate 112 Nordstrom full-line department stores. and other merchandise [1]. LLP [8]. woman.

and produce greater margin [2]. Stein Mart Inc. The group creates and contracts to produce private (in-house) label merchandise for the Retail and Direct segment [1]. Or. Nordstrom s distinct and unique corporate strategy provides them with a unique loyalty from its customers. alternatively. To build greater loyalty. Nordstrom has introduced a new service. typically within one hour after purchase [2]. Similar features have been created within the full-line stores. Nordstrom s corporate strategy is best known for its hybrid quality and variety market share strategy [8]. In recent years Nordstrom has taken several steps to make the shopping experience easier and more enjoyable for their customers [1]. As a result. Both of the cards have a shopping-based loyalty program associated to it [1]. Nordstrom has several direct competitors including the following: Dillards. This program is a core reason for Nordstrom s strong market performance in allowing increased customer shopping visits and spending within the Retail and Direct segments.the finance charges and fees on the cards [1]. Nordstrom created a new shared inventory system linking its full-line stores and online store. The Other segment is comprised of the Nordstrom Product Group [1]. American Eagle Outfitters Inc. the segment includes Nordstrom s corporate center operations [2]. Saks Incorporated. In addition. which provide customers with 5 . However. inventory turns faster. enabling the salesperson to assist the customer in locating a specific item by accessing the company-wide inventory.a loyalty program for when customers use the Nordstrom credit or debit card. and Jones Apparel Group Inc [2]. Nordstrom utilizes Direct-to-Customer shipping (DTC). For example. Target Corporation. Fashion Rewards . Buy On-Line. Pick Up In-Store allows internet shoppers to pick up their merchandise at the full-line stores. Ann Taylor Stores Corporation.

92 Cash dividend per share $0.7% in 2009. Earnings per share reduced 36.4% and 9.272 $8. Nordstrom is an industry leader in its liberal return policy based on no-hassles [2].85 $2. Income before taxes and net income sharply decreased 44. this returns philosophy. Nordstrom promotes a high level of trust with its customers which correspond into strong sales. Evidential Matter Listed below are Nordstrom s financial statements from the prior last three years [8]: Exhibit 1: Nordstrom.9% in 2008.8% and 43. but rebounded 7.258 $8. Cash flow from operations in 2007 was $312 million. Cash flow from operations was impacted in 2007 by the securitization accounting change and.3% and 0.64 $0. competency. Inc. respectively. even though they do not sell car tires [10].6% in 2008. net sales decreased 6.9% in 2009 indicating management intervention as macroeconomic indicators did not improve greatly over this time period [2].2% in 2008 and in 2009. to 6 . but increased 9.828 Income before taxes (million) $696 $648 $1. 2.251 $848 $312 EPS $2. even in down markets.173 Net income (million) $441 $401 $715 Cash flow from operations (million) $1.64 $0.points for purchases [2]. in comparing Nordstrom with its market competitors see Exhibit 3. As a result. and policy. which is unusually low. Information technology and inventory management is a key Last. Key Financial Data [2] Year 2009 2008 2007 Net Sales (million) $8.54 As listed in exhibit 1.03 $1. Although an extreme. is available at both full-line and online stores [2]. For example. there is a famous story of Nordstrom returning a car tire.

Liquidity ratios include current ratios.84 Days' purchases in payables 72. However. Nordstrom s current ratios and days sales in inventory are very stable and moderate in last three years. and cash flow ratios.26 By comparing Nordstrom s debt to equity ratio with Dillards. Exhibit 2: Nordstrom.01 2.54 Days' purchases in payables 68. average collection period.68 Average collection period 3.85 1.03 When analyzing Nordstrom s financial status.52 60.10 51. We focused our attention on profitability.71 103. a focus on ratios is important. Key Financial Ratios [2] Year 2009 2008 2007 Current ratio 2.lesser extent. Nordstrom s main competitor Dillards has the following ratios: Exhibit 3: Dillards Key Financial Ratios [3] Year 2009 2008 2007 Current ratio 2.90 52. As listed in Exhibit 2.91 135.96 81.47 94. On the other hand.64 63. Nordstrom s average collection period is strongly higher than Dillards which could reflect superior credit management or administration. its days sales in inventory are about twice as fast as Dillards 7 . days sales in inventory.48 0.35 58. Cash dividends in 2008 and 2009 were higher while the earnings per share decreased. Inc. and days purchases in payables that reflect a company s ability to pay off short term debts obligations. leverage. liquidity.28 1.75 52. growth in credit accounts receivable [2].15 Average collection period 100.01 2.72 8. demonstrating a commitment to its shareholders. return.06 Days' sales in inventory 61.64 Days' sales in inventory 115.

reflecting rapid turns relative to Dillards.24 in 2007 to 1.66 2.448 0. Nordstrom has significant performance advantages. Also there is favorable evidence that suggests Nordstrom is controlling their total debt to equity ratio better . #5 and #6 are key profitability ratios of Nordstrom and its competitor Dillards. 8 . Generally. Two Exhibits below. and its management team is making better decisions.24 0. Nordstrom s performs great in its liquidity. Debt to equity reveals a company s ability to pay interest and principle while obtaining more funds . Nordstrom s last three years debt to equity ratios are compared to its competitor Dillards are in the following chart: Exhibit 4: Comparative Nordstrom and Dillards Debt to Equity Ratio [2][3] Nordstrom Dillards Debt to equity ratio 2009 2008 2007 1.335 0. and is not unacceptable in the retail industry [2]. but Dillards recognized a loss in 2008.08 2. Key ratios are comparatively stable and moderate. Nordstrom continues making money from 2007 to 2009.It goes down from 2.548 Nordstrom s total debt to equity ratio is much higher than Dillards. In all of those ratios. Nordstrom is more profitable.66 in 2009 [2].The higher the debt to equity ratio is the more risk of default for companies to pay off their debts. In conclusion.

45) 4.15 0.37 Net Profit Margin 0.07 0.84 2.10 0.07 0.05 0.03 0. See below for comparative cash flow ratios: Exhibit 7: Nordstrom s Cash Flow Ratios [2] Nordstrom 2009 2008 2007 2007* Cash flow yield 2.Exhibit 5: Nordstrom Profitability Ratios [2] Nordstrom 2009 2008 2007 Gross Margin 0.67 Effective tax rate 0. It is the study of movement of cash through the business.02 Effective tax rate 0.21 Cash flow analysis is mainly used to evaluate the source and uses of funds.37 Exhibit 6: Dillards Profitability Ratios [2] Dillards 2009 2008 2007 Gross Margin 0.40 0.05 0.08 (1.19 0.11 0.38 0.31 0.03 9 .01 0.15 0.35 Net Profit Margin 0.11 Exhibit 8: Dillards Cash Flow Ratios [3] Dillards 2009 2008 2007 Cash flow yield 8.04 0.35 0.44 1.13 ROE 0.05 Cash return on sales 0.07 0.36 Cash ROA 0.73 Cash ROA 0.37 0.01 ROA 0.06 0.01 0.28 0.09 0. and is a method of checking up a company s financial health [2].38 0.05 0.01 ROE 0.12 0.15 0.08 ROA 0.17 Cash return on sales 0.34 0.

To drive bottom line growth. compared to $369 in 2004 [8]. except in 2008 when Dillards recognized a loss. due to the securitization accounting change and. and they performed extraordinarily in 2009. Nordstrom s cash ROA and cash return on sales is higher. Nordstrom s management describes its business model as focused on controlling our fixed expenses. which means they are healthier. The financial status of Nordstrom is very healthy. driven by increased consumer sentiment in an improving economy with a stronger jobs outlook for the nation s citizens. Moreover. In 2009. Nordstrom generated copious cash flows. especially when Dillards met a negative cash flow in 2008. Nordstrom s key top line financial performance metric. However. Compared to Dillards. to lesser extent. general and administrative expenses per square foot. is key to seeing the apparel 10 . This implies a variable cost model and strict measurement of fixed costs. The column of 2007* in the chart includes ratios calculated by using the adjusted amount [2]. or its break-even point.Based on the above. from $100 in 2004. and the adjusted CFOA was 975 million [2]. 3. Discretionary spending. sales per square foot in 2009 was $368. Nordstrom s management team engaged in draconian cost cutting bringing its selling. to $94 in 2009 [8]. Nordstrom s cash flow yield is lower. According to Nordstrom executives. cash flow from operations was lower. growth in credit accounts receivable. This flexibility in managing our business and the ability to adjust quickly to changes in trends have put us in a healthy position heading into 2010 [8]. while flexing our variable and performance-related expenses with our sales and earnings results [8]. Assumptions Nordstrom is poised to outperform its market sector if macroeconomic indicators improve. in 2007.

management is highly efficient in driving profits from its shareholder capital [11]. Moreover. As inventories increased on store shelves. Nordstrom s greatest competitive advantage is its ability to organize itself in a way to best understand multiple consumer classes at all points along the economic curve. Nordstrom 11 . Nordstrom s continued success. Crucial Factors Nordstrom operates with a wholly owned federal savings bank. and Asia as those market economies outperform the USA and Europe [6].sector continue to grow [6][7]. 4. Implications include fewer dollars chasing more retail goods along with margin erosion as retailers cut prices to drive demand.1% which is greater than 65% of its market peers in the sector [11]. which started in December 2007. and growth. and industry players compete over fewer shoppers. to underscore this point. In the event of a double-dip recession. but rather essentials. Nordstrom s sales are growing at 10. has negatively affected retailers around the world [9]. given Nordstrom lack of international exposure [6]. consumers will not feel comfortable spending discretionary dollars on luxury goods. with a return on equity of nearly 33%.1% and its EPS is growing at 56. prices declined. fsb. to provide credit to customers to buy its apparel goods [7]. Many competitors do not have credit facilities in-house and must sell receivables to third parties at a discount to raise capital (cash flow). Nordstrom. The global economic crises. If Nordstrom could parley this understanding to foreign markets it could see brighter prospects for growth in MENA. Also. Latin American. will be based on an improving USA economic climate. and produce apparel that those consumers want to buy.

retailers. the bargaining power of suppliers is low. For example. In a zero sum market. Industry consolidation has increased competitive pressure within the industry as larger established market players have acquired smaller. which could bode well for Nordstrom s online business. are increasing. This was below the S&P 500 company s average of 18. As aggregate demand decreased. the demand for western goods. however. Also. In developing countries. The global economic crisis has forced many customers to delay or eliminate discretionary shopping [6]. Nordstrom is well positioned with a stratified portfolio of products it sells. Technology has played an important role in Nordstrom s growth [2].04 at the end of fiscal year 2010. like Nordstrom. niche apparel players. Inc. dollars lost to competitors are felt in the bottom line and the company stock price and consumer sentiment fluctuates. have had to lower prices. strong brand awareness. Nordstrom has underperformed over the past 12 . and roll out more promotions of its goods [4]. a focus on quality and service to its customers. The threat of new entrants holds medium intensity.was trading at a price/earnings (P/E) ratio of 16. include heavy penetration in key markets. There is strong rivalry among competing firms for Nordstrom. As suppliers have reduced output to align themselves with demand for their goods.19 [6]. aggregate supply increased around the world driving down prices and better deals for those customers buying goods [6]. This shows the bargaining power of buyers is high. Socio-cultural factors affecting Nordstrom. the threat of substitutes is high. Strong investment in IT infrastructure has powered strong business analytics to spot trends and increase sales return [10]. extend credit and risk of collection.

while analysts expect a 5. and margin.74 [6]. implying the company will continue to display strong liquidity [6]. and borrow money from the US Federal Reserve at low money rates suggests it can earn a high yield on its receivables (financing) [7]. The accounts receivable turnover should steadily increase for Nordstrom considering their strong position with credit distribution to customers. the economy has played a major role in the external environment. Inc. Nordstrom has invested in IT systems to allow its managers to gain valuable intelligence on product sales. Additionally. 5. Inferences Due to the instability of the economy. Nordstrom.three years. Macroeconomic concerns by consumers have led to a 4% decline in same store sales in 2010. This will assist in its efforts to move merchandise where it is selling and hold prices at or near full price.81% during 2006-2010 [6]. Even though the company has a higher debt to equity ratio than the competition (and tends to pay off debt slower).5% increase in 2011 [5]. it is not expected that Nordstrom will have a significant increase in sales for 2010. 2011 is anticipated to be a better year [8]. 13 . In summary. Even if its net sales are indeed lower for 2010. past performance has indicated their net income and cash flow is stable enough to continually increase. This was below the S&P 500 companies average of 12. which ultimately benefits the company and drives return on equity. as with the last 3 years. Nordstrom competes in a market space with many high intensity forces. s ability to manage and control its supply of credit to customers. the large amount of assets financed by debt provides tax savings. The company's compounded annual growth rate (CAGR) for revenue was 2. However.

this should not defer many from continuing their loyalty. valuation (above 65% percentile in industry sector). and turn inventories rapidly each year while generating strong cash flows. and should be investigated by management. while one can only be hopeful that the economy will improve as anticipated. growth rate (above 65% percentile in industry sector). Considering their focus on continually developing incentives to make customers satisfied. Nordstrom s strong 14 . and profits (above 80% percentile in industry sector) [11]. the situation is unpredictable. management effectiveness (above 85% percentile in industry sector).While Nordstrom s financial position looks promising. Due to the increasing performance of international economies. However. drive traffic to its stores. These financial indicators taken together suggest Nordstrom has maneuvered through a precarious economic climate with a unique ability to introduce new products. even if it does attract customers. Additionally. there are the inevitable areas the company will need to focus on improving in future years [6]. they should be able to stay ahead of major competitors and keep their market position ahead of competitors. because of the declining net sales and current economic conditions. 6. If Nordstrom continues to quickly adapt to changes within the market by implementing their new IT systems. this could be a beneficial strategic move for the company. Nordstrom may want to tighten their return policy requirements. Conclusions Overall Nordstrom has performed ahead of its peer group in financial strength (above 82% percentile in industry sector). Nordstrom is also in need of a stronger position in foreign markets. The ability for Nordstrom to pay their debts in comparison to competitors (as shown in the debt to equity ratio) is a source of concern.

www.etrade. Structure adopted by Association of Professionals in Business Management: CBM Study Materials. and achieving maximum efficiency and effectiveness from its people). '07.com 4.Financial and Strategic Analysis Review. www. that our project team gives Nordstrom a moderate Buy recommendation.apbm. www. www.com 6. and dedicated employees have been key components to this strong performance during a global economic crisis. Nordstrom. All rights reserved 7. www. Inc.com 15 .com 2. Dillards (DDS) . One would suggest it s the family background which provides Nordstrom with great operational flexibility in a decentralized organization where trust is high relative to its peers (thereby eliminating unnecessary layers of middle management. management team.etrade. Inc. September 2010. courtesy of www. by © 2010 Factiva. Inc (JWN) Financial and Strategic Analysis Review. Inc. Reuters ProVestor Plus Company Report.com 8. By Chris Isidore.com 11. Nordstrom. It is for all of these reasons. www.org 5. Standard & Poor s Stock Report September 2010. www. It's official: Recession since Dec.nordstrom.globalcompanyintelligence.nordstrom. 2008 & 2009 Nordstrom. Nordstrom Investor Relations: News Release. Annual Report. References & Appendices 1.etrade. Form 10K. 1/30/2010.globalcompanyintelligence.gov/edgar 9.com 3.sec.com 10.culture. GlobalData. courtesy of www. CNNMoney.

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