Executive Summary
Nordstrom will be required to have long-term financing basically to set up a logical network. In the UK, it is more probable that the company will enter a licensing agreement with one of the successful and well established retail trading corporation. The company will handle issues related to set up. Nordstrom will thus pay the firm to set up and operate its stores. UK expansion would begin around 2017 and have a continuous growth projection through the year 2024. The company’s long term plans are comprised of expanding the business by opening Rack stores in the UK. Sales growth and profitability are anticipated to be experienced within their first year of operation. Such information and expectation are based on the company’s sales performance from the year 2015 and 2016 when they opened new stores.
III. Justification for Global Expansion to UK
Arguably, Nordstrom seems to be well positioned to invest in the global market irrespective of few issues of foreign exchange rates in addition to the present state of the world economy (Wells Fargo, 2016). Studies have shown that global expansion is critical for long-term growth, especially in the emerging economies. The UK is a well-established market with higher prospects for a company to enter especially in the regions where both the nearby and neighboring cities have been argued to have a modern retail environment. The primary trend in 2017 is related to the development of the outlet malls that offers space for the new players to enter the economy while the fast-fashion seem to boom particularly in the UK. In addition to such a trend, Nordstrom Rack stores have been performing well as a result of consumer shifts towards the off-price sector which is expected to produce high returns for the global investment. Major direct rivals include TJX and Macy’s which began entry to the off-price market via Macy’s Backstage store (Bailey, 2015).
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It is true that the expansion strategy would require diverse resources including financing, human resource, marketing and IT. Based on the notion that Nordstrom will operate in the UK as a foreign firm, it has to be formally incorporated and registered in UK registry. In this case, financing resources in the capital expenditure are critical in sustaining the company’s profits and at the same time minimize the expansion costs (Wells Fargo, 2016). The firm would also be required to access numerous alternative financing methods through their revolving credit line and the commercial paper programs in case they would be needed for their expansion to the UK. Studies have shown that both rent and the real estate’s resources would form the largest costs and they need active management to reduce rent expense that would help in maintaining liquidity. Regarding the company’s future expenses, the firm projected a capital lease of about 2.8 billion from the year 2016 and 2020 were the rent expense was 136 in 1015, 137 in 2016 and 127 million in 2020 (Nordstrom, 2016). An average Rack store of Nordstrom is approximately 35,000 square feet or 10,668 square meters and should be considered as the costs of their leasing space.
Financial Impact
Investment in the off-price retail will significantly have a positive financial impact on the profits of Nordstrom hence contributing to their long-term growth strategies. According to Bailey (2015), Nordstrom Rack stores over the years have been reported to have high financial models in addition to low-cost structures that maximize the cash flow via a sale of excess inventory at attractive discounted prices. Within the last four years, the company’s Rack stores expanded by about 80 percent from 119 locations in 2013 to 215 in the year 2016 that grew their sales by about 50 percent (Levine-Weinberg, 2017). Based on this analysis, it can be said that Nordstrom seems to be in a better financial position to increase their cash flow that is required for their global expansion. By the end of the year 2015, cash flow had risen to 1.3 billion which is an excellent liquidity measure of Nordstrom capability to generate more cash in the future. The cost of UK expansion would have minimal impact on the company’s future cash flow because this is a small investment. Despite the fact that incremental cash flows might be hard to forecast, the management expects that a 200 million dollar investment would raise their cash flow by approximately 5 percent yearly (Appendix 1).
Arguably, Nordstrom’s projected cash outflows might remain below the amount of cash inflow a greater sign that the expenses are low and would not necessarily require additional financing. The cumulative cash flow and their payback period of investment would further occur between in the second and third years of the new store opening. Additionally, the payback period, in this case, was determined with the use of the net cash flow of the project for the forecasted year until the cumulative cash flow resulted in a positive cash flow. It is important to note that this calculation might be inaccurate if the cash inflow or the outflows change by the end of the project’s lifetime hence the need to apply a modified payback period algorithm (Boundless, 2016).
When it comes to projecting the cash flow benefits of the company’s investment, certain assumptions were made related to the project’s interest costs, the cost of goods sold, selling, general, administration expenses and taxes as a percentage of revenue. It is assumed a 1 billion dollar initial increase in the overall sales revenue based on the company’s 2015 net sales that were earned from a similar expansion strategy into Canada (Nordstrom, 2016). The assumption towards the company’s Rack store expansion in the UK is that their sales will increase at the similar rate of about 5 percent yearly.
It is true that the costs of goods sold will remain within the 64.3 percent of their annual sales revenues; however, inflation might influence such an assumption in the future. The firm’s COGS comprises of the costs of the merchandise sold to clients, and the costs from suppliers in addition to costs required to get the store into inventory and ready to be sold (Nordstrom, 2016). Selling, general and administrative expenses comprises of the firm’s both direct and indirect expenses occurring during their daily operations of selling merchandise. The firm measures interest expense and income taxes based on the total company basis. The interest expenses have thus been presumed to remain at about 4.3 percent, but the amount of the interest will vary based on the economic inflation and changes (Appendix 1). The income tax expense of the projects will thus be assumed to remain at approximately 38.6 percent based on the company’s historical data from prior tax years (Nordstrom, 2016). Based on research, tax expense might be influenced by various factors including tax adjustment, non-deductable items, effective tax rate changes and the income tax credits.
Alternative Financing Methods
For an efficient determination of optimal financing strategy, there is the need to assess several alternative financing options within the context of Nordstrom’s current borrowing costs. The internal financing options include the use of surplus funds from operating activities that are available for capital investment. According to Wells Fargo (2016), the option would arguably be less complicated for the company since it would be able to avoid the application process and at the same time reduce expenses paid in interest. Secondly, Nordstrom may also decide to fund their new capital expenditure through the sale of assets; however, this form of financing might reduce the shareholder value and at the same time lead to additional transaction costs and tax expenses.
It is true that the internal funding would help to keep all the assets within Nordstrom and further, no extra expense apart from the cost of expansion. The primary concern is that it might leave the firm with less cash required to manage their daily operations hence internal funding is suitable for short term and smaller investment projects. However, there are numerous forms of alternative funding that the company would pursue through global capital markets such as equity financing, commercial paper and loans (Bailey, 2015). Studies have pointed that commercial loans are an efficient source of the unsecured debt that makes them very attractive in business. Some of the major incentives of such an option are flexible interest rates and a shorter period of repayment. This form of financing is associated with certain drawbacks which include the required credit, financial statement detail to be approved and the collateral. Credit rating has been argued to be a primary factor in borrowing that involves the floating interest rates that are tied to the LIBOR which is associated with this type of financing (Nordstrom, 2017). Therefore, in an event where credit rating becomes worse than the current rating, the applicable margin would increase the cost of borrowing.
Commercial paper, on the other hand, can be argued to be a suitable alternative financing method for the Nordstrom since they currently use this program. Currently, the firm has about 800 million dollars commercial paper program that enables them to use the proceeds to fund their operating cash obligation (Nordstrom, 2016). Under the agreement, they pay interest according to the maturity date of the issuance and the current market condition. However, this type of financing has its negative side for instance; it reduces liquidity under the resolver while it is still outstanding. Another disadvantage of the commercial paper program is that the firm would be required to maintain profitability to remain eligible. According to Nordstrom (2016), Nordstrom did not report any issuances and borrowing outstanding under their current program as of January 30, 2016.
VI. Nordstrom, Inc. Financial Track Record
Financial Statements and Key Ratios Indicating Strong Performance
The present financial statement of Nordstrom shows that they are in a solid position to enter the UK market through global expansion. The company’s recent fourth quarter earnings in 2017 were reported to have exceeded the expectations with record sales of approximately 14.5 billion in addition to a net sales increase of about 2.9 percent as a result of the continued improvements made to their operating model (Nordstrom, 2017). Further, their earnings per diluted share in the fourth quarter were further reported to be about 1.15 dollars and adjusted earning per the diluted share was reported to be 1.37 dollars (Nordstrom, 2017). Nordstrom acquired a record sale because of their growth from the new market expansion to Canada. Reports have it that the company’s Rack sales rose by about 11 percent to 4.5 billion dollars as a result of the 21 stores that were opened and their online growth. In 2016, Nordstrom’s fourth quarter net earnings were at 201 million and earnings before the taxes and interests in the amount of 324 million (Nordstrom, 2017). Additionally, Nordstrom had a total net sale of about 4.2 billion that further rose from approximately 4.1 billion in the year 2015.
One of the direct rivals of Nordstrom is Macy’s (NYSE: M) because they all sell similar clothing brands and products in their stores and through their online websites. The balance sheet of Nordstrom offers a greater level of flexibility, especially when compared to Macy’s that allows for the capability to survive an adverse market condition (Boundless, 2016). Studies have further pointed that Nordstrom has a natural hedge through their Rack stores where they can quickly send excess inventory from their full line stores. It is true that the organic revenue growth of Nordstrom significantly outperformed that of Macy based on the recent reporting period (Bailey, 2015). The two companies tend to trade at the similar valuation, however; performance results indicate that Nordstrom store sales are higher than that of Macy by approximately 4.7 percent within the last nine quarters. The Rack store of Nordstrom has been shown to be highly comparable to that of Ross Stores (NASDAQ: ROST) and T.J. Maxx (NYSE: TJX) because they all offer a discounted designer accessories and clothing. Their stock of off-stock retail stores outperformed the department stores because their client's shopping habits shifted towards the retailers that offer the best price.
Further, their financial ratios have been argued to be additional indicators that Nordstrom is currently in a healthy financial position and able to undertake new investment. This retail industry has further been shown to make use of numerous types of key ratios including inventory turnover ratio, quick ratio, and asset turnover ratio in addition to gross profit margin (Nordstrom, 2017). Further, the company has a current ratio of approximately 1.87 which is a clear indicator that Nordstrom has the capability to cover a short term debt with a liquid asset. Their quick ratio excluding the inventory from the current assets stands at about 0.33 percent which is also a clear sign that the company might require significant improvement in covering their short term cash needs.
In addition to this, Nordstrom was further reported to have a gross profit margin of about 37.66 an indication that the company is in a healthy condition and operates within the industry norm (Appendix 2). Their inventory turnover ratio in addition to the asset turnover ratio was approximately 4.99 and 1.70 respectively. According to Nordstrom (2017), Nordstrom inventory turnover rate is highly one of the positive indicators that the company is in a better position to sell their inventory within a short number of days. The company’s asset turnover ratio has been shown to be within the industry range which is also a clear indicator that Nordstrom can utilize their assets to generate revenue.
Legal and Ethical Financial Behavior
Financial Performance – Nordstrom over the past five years has had a consistent growth, and since 2016 they have been able to avoid possible key sale’s slowdown. Despite the fact that the company experienced significant sales’ slowdown, sales efficiencies in addition to the reduction in the inventory cost have ensured that the firm continues to experience a significant level of profitability (Nordstrom, 2017). The company’s executives implemented Omni-channel concepts which have enabled them to plan for E-commerce channel’s expansion of the business operation with anticipation that electronic commerce will expand to 6 billion by the end of 2020. The company further proposes to agree with other retailing groups in the local economies in the foreign countries (Levine-Weinberg, 2017). The retail groups will eventual establishes the joint venture or pure licenses, but this will entirely depend on negotiating procedure according to what fits the involved groups. With this information, through setting up an agreement with other retail groups will offer initial extra cash flow that will be used to pay for financing installment throughout the agreements’ term.
Ethical Behavior – the company often give all of their staff's essential books which describe policies and ethics with regards to their conduct and ways to deal with others within the firm. The book covers the company privacy, sexual harassment and racial profiling (Nordstrom, 2016). Presently, Nordstrom has only one filed the lawsuit which is related to the product infringement over private label handbag design. It is important for the firm to take an active role in becoming socially responsible with all the stakeholders affected by the business operation. The company’s Code of Ethics is evident in the reasonable and candid handling of clients, competitors, colleagues and their suppliers. According to Nordstrom (2016), Nordstrom will continue to adopt the aspect of confidentiality and fair dealing with all the businesses which will enhance their ethical philosophy.
Legal Behavior- There has been some cases where the firm and other corporations had to resolve cases related to materials claim, pricing claim and labour issues. Nordstrom tends to perform to the ethical standards set in the company’s employee handbook and the code of ethics (Nordstrom, 2016). Nordstrom was involved in a case that argued that they had violated pricing laws in the year 2015; however, the management maintained that they did not violate the pricing laws, however; they altered their “compare at” pricing promotion they decided to offer the class action lawsuit’s participants about $20.00 discount.
References
Bailey, S. (2015). Nordstrom Announces Plan for 6 Canadian Stores. Market Realist. Retrieved from: http://marketrealist.com/2015/05/will-nordstroms-international- expansion- expedite-sales-growth/
Boundless. (2016). Long-Term vs. Short-Term Financing. Boundless. Retrieved from: https://www.boundless.com/finance/textbooks/boundless-finance- textbook/capital- budgeting-11/introduction-to-capital-budgeting-91/long-term- vs-short-term-financing- 395-8296
Levine-Weinberg, A. (2017). Investors Are Seriously Undervaluing Nordstrom Rack. The Motley Fool. Retrieved from: https://www.fool.com/investing/2017/02/08/investors-are- seriously- undervaluing-nordstrom-rac.aspx
Nordstrom (2016). Company Review. Seattle, Nordstrom. Retrieved from http://shop.nordstrom.com/c/nordstrom-company-review?origin=leftnav
Nordstrom. (2017). Announced Store Openings and Growth. Retrieved from: file:///C:/Users/kelly/Downloads/Openings%20Growth%202017%20 (1).pdf Nordstom.
Wells Fargo. (2016). Despite Weak Global Economy, U.S. Companies Still Turning to International Markets for Growth. Retrieved from: https://www.wellsfargo.com/about/press/2016/international-business- indicator_0425/
Appendix 1
Appendix 2
