Nordstrom is aFashion Company specializing in retail business. It sells a range of fashion products through its online shops, stores and its distributors. The company is publicly traded company. This equity research report offers an in-depth analysis on business analysis, financial analysis, and firm valuation with sensitivity and policy.
Nordstrom is an emerging retailer in fashion products that is flourishing in the market because of the new strategies the company has employed that give it a competitive position among its competitors. The company released fiscal results indicate its performance is improving as compared to its previous results. The company is
Major value drivers
Major value drivers for Nordstrom are expansion to new markets by operating more stores and expanding its online shops. The company has increased the spending on marketing and advertising to reach more customers and improve its brand awareness. The company has also enhanced differentiability of its product by uniquely rebranding its products to edge out competition in the highly competitive fashion industry. The company strategies are based on unique branding that distinguishes its products from other competing products in the market. This uniqueness is a major value driver for Nordstrom in increasing its valuation. To defend its market share, Nordstrom has also maintained and improved customer loyalty regardless of the competitive threats from emerging brands and companies. The use of technology and improved innovation is another major value driver for Nordstrom. This is crucial in maintaining an unrivaled product quality in the market.
The major risks that are likely to affect Nordstrom include the increased restriction on importing fashion products that are likely to push its production higher affecting its products competitiveness in the market. Other risk is reduced market share because of lower price products that are entering the fashion market. All businesses face risks in their operations that can have significant impact to the financial operations leading to losses or profits.
Major corporate financial issues/challenges
The major cooperate issues faced by Nordstrom include the global financial crisis that are facing the entire world. The global economies are struggling making it hard for business to access capital financing to expand their operations. The global crises have forced Nordstrom to scale down its budget operations, which has significantly affected some of the operations like marketing and brand promotion. In addition, the crises have led to low investment as investors have withdrawn their investment amid fears of low return on shares and dividends. The other challenge that Nordstrom is facing is its expansion online. The recent increases in the cases of cyber-crime have forced the company to spend huge portions of its income to beef up its online security. Cyber insecurity has put the future of the internet at stake as the company is seeking to expand its online presence for its products through e-commerce.
Capital market imperfection
To understand the capital imperfections, the Merton miller theorem provided an important platform under which the capital market imperfections of the Nordstrom Inc. were evaluated. With The corporate financial systems, there are usually capital market imperfections. These imperfections included information asymmetry, corporate governance, cooperate control, market inefficiency among others. The real life capital markets as is not perfect hence the effect of market imperfections can be greatly offset partially or fully. Due to the easy of information sharing provided by the company, the company has left the company with the imperfections on asymmetric information. The company has been forced to engage additional fees in keeping up with the customers’ demands to remain competitive. The other imperfections include the financial distress as the company is struggling to pay its financiers due to the effects of inflation (Lensink, Robert, and Elmer Sterken, pg. 55, 56).
The financial analysis for Nordstrom Inc. is provides crucial platform to compare the company’s performance with that that of its competitors based. This is important in concluding the effectiveness of its strategies decision making for the company’s management. The financial analysis analyzed the balance sheets statements, statement of income and ratio analysis. The financial analysis is based on the information presented about Nordstrom Inc. (Yahoo finance, web) All the currency is in USD.
The firm characteristics are very significant in identifying the direction taken by the company. The financial ratios give the performance and the characters of the certain company. Below is an analysis of the Nordstrom’s financial ratios that can be used as performance indicators of the company as well as defining its characteristics.
Calculating the common size of the company helps in identifying the converting the information on financial statements for comparison between different companies or different periods. This is significant in comparing the cash position of a company as compared to the competitor. Common size ratios for Nordstrom are calculated based on the company’s balance sheet.
Common size ratio is given as a percentage each asset in relation to the total assets. For instance the common size ratio on plant and property is:
Common ratio= (3,735,000/7,698,000)*100
The common size ration gives the firms size in comparison to the other companies.
The liquidity ratio measures the company ability to cover its expenses. They are based on the company balances sheets. Liquidity ratios are either current ratio or quick ration. Based on Nordstrom data sheets for 2016, the current ratio is
Current ration= total value of current assets /total value of current liabilities
It implies that current assets for Nordstrom cover the liabilities by 1.04 times. The company therefore has enough current assets to meet its liabilities with a safe degree margin.
The quick ratio for the company is
Quick ration = (total current assets value less the total inventory value)/ total current liabilities
This is an indication that the company’s quick ratio is unsatisfactory. This is because it is below the safe threshold of 0.5. The ratio can also be used as an indicator on the on how the company uses its cash.
The efficiency ratio reflects the management of the firm’s assets. It is calculated on turnover of receivables. It also indicates the company’s ability to repay its liabilities as well as indicating the usage of equity and inventory general use and machinery. The limitations of the efficiency ratios include they do not factor out the effects of inflation as well as effects of deferent seasons influence. For instance, the performance over the festive seasons may be better than regular periods. In addition, different firms apply different accounting techniques, which, may not be reflected in the efficiency ratios (Pervan, Ivica, and Tamara Kuvek, pg. 187). Considering the basic accounting equation:
Assets=liabilities+ Equity+ revenue- expenses- dividends/draws
Hence revenues =assets-liabilities-equity+ expenses + dividends/draw
The accounts receivable are calculated as total Revenue/ (receivables accounts average). The turnover for the Inventory is calculated as Cost of sales/ average inventory. The turnover of the payable accounts is calculated as Cost of sales in total/ the average of the payable accounts. The Total assets turnover is calculated as total Revenue / total assets average lastly, fixed asset turnover on fixed assets is calculated as revenue/ fixed assets average.
The dividend ratio is calculated as a fraction of the total dividends in respect to the net income for a given particular period. They are significant in calculating the growth of the projected earnings in future for the company.
Dividend/ payout ratio= dividends/net income
Comparison of the rations
For the ratios have a meaning, they are to be compared with the similar ratios obtained for other companies in the sector. The low ratio indicates a problem in use of the working capital. For instance, low ratios signify the less use of resources. On the other hand, high ratios also do not give positive indications, high ratios may indicate that the company’s resources are being over used and they the business may be exposed be experiencing a drop in sales leading to a cash shortage. These ratios help the business to stay afloat and avoid being vulnerable to creditors. On average, Nordstrom values are on average as compared to the competitors in the fashion industry. The data obtained from the company’s balance sheet indicates a slight improvement in the liquidity ratios and the as compared to the previous years. Nordstrom also indicated as slight decrease in profitability in as compared to the previous years.
Firm valuation with sensitivity analysis
There are several methods used in evaluating the company valuation and the sensitivity analysis. The method used for Nordstrom is the discounted cash flows known as DCF. This method provides a definite picture on the company’s business situation in future. The discounted cash method is used by companies while placing IPO’s and determining the company’s assets (Luehrman, 1998, p. 51). The company value gives the owners and the potential investors the approximate worth of the company.
The firm evaluation is based on the enterprise value, equity value or the firm value. Evaluation of the company with DCF requires first to evaluate its enterprise value (EV) equity value (Eq- V) or firm value (FV)
Equity value (Eq.V) = EV- net debt- corporate adjustment
The net debt= total debts (long term short term) + capital lease + liability – cash assets
Evaluation can therefore be calculated as
EV/ sales or Eq.V/Net income
The discounted cash flow(DCF) method is used in estimating the of a company’s future discounts. This is known as the cost of capital. The lower the cost of capital, the higher its predictability and similarly, a risky company will have an higher cost of capital. These are the facts that distributers and company owners analyze before investing money in a certain company. On sensitivity analysis, the share prices are expressed as a percentage of the offset share base.
Sensitivity analysis can be obtained from the following formula (Steiger, pg.4)
??/ ?? = 1/( 1 + ?) −? ∗ ????/ (1 + ?) ? when the summation is obtained for ?=0.
Sensitivity growth rate is useful in estimating the impact of the company sales growth-rate for a given period. The increase in sales growth has an equal impact in the increase on sales prices. Investors therefore consider the sensitivity analysis for a company in making decisions to invest in a particular company. The sensitivity analysis is calculated under various assumption on market imperfections that are not easy to account. It assumes a perfect market that has no interference from the market factors like inflation and peak periods and their impact on sales growth-rate. Other assumptions are based on frictions in the market, assumption that the investors are rational and the market prices and information is accessed fairly and equally by all the companies analyzed.
In conclusion, the key findings from the equity research repost is that for Nordstrom Inc. an analysis on the company liquidity ratios and common size ratios indicate its performance is quite on average. The company’s assets are adequately cover its liabilities in 1.14, which is an indication it’s not quite vulnerable to creditors.
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Lensink, Robert, and Elmer Sterken. “Capital market imperfections, uncertainty and corporate investment in the Czech Republic.” Economics of Planning 33.1-2 (2000): 53-70.
Luehrmann, What’s it worth? Harvard Business Review .1997, 135
Pan, Julio. “Evaluating theories of capital structure in different financial systems: an empirical analysis.” (2013).
Pervan, Ivica, and Tamara Kuvek. “The relative importance of financial ratios and nonfinancial variables in predicting of insolvency.” Croatian Operational Research Review 4.1 (2013): 187-197.
Steiger, Florian. “The validity of company valuation using Discounted Cash Flow methods.” arXiv preprint arXiv:1003.4881 (2010).
Yahoo fianace. The Nordstrom JWC INC.: balance sheet. Web. 2016. Acced from https://finance.yahoo.com/q/bs?s=JWN+Balance+Sheet&annual on 18th may 2016.