Nordstrom Inc Analyzing Financial Performance

Summary

Nordstrom is one of the oldest retail companies in the United States. It started from 1901 in Seattle and has been grown to a powerful retailer in national area. Selling high quality products is the most important method for Nordstrom to collect its revenue. At the same time, Nordstrom also offers credits and debts to customers by his banks. In this case, we are trying to analysis Nordstrom’s financial statements and calculate few simple ratios to approach the performance of this company.

The main point in our analysis is to figure out how Nordstrom is using its operating assets to get returning.

a). ROE is used to measure the net profit in a period as a percentage of shareholder’s equity. In other word, ROE means how much net income we can get by using shareholders’ investment. ROE is more important than net income in dollar terms because ROE is a ratio. Ratio allowed analysts to compare companies’ performance over the period. In fact, the ratio can also help us compare companies in a different size or different industry. Net income in dollar terms is not widely used because this method is limited by companies’ different situations.

b). ROE and RONA are both useful methods to determine a company’s performance. However, ROE and RONA measure a company’s performance in a different way. ROE considers entire company’s income, expenses and gain/loss of a company’s profit; RONA only consider a company’s net profit from operating activities. On the other hand, ROE calculates all returns which come from shareholder’s building of equity; RONA only calculates the operating assets and liabilities which don’t include the financing activities. The non-operating portion of ROE represents is that a company captures profit from financing activities and investing activities (both of them are not operating activities).

c). Marginal tax rate means a rate of tax that one company needs to pay on its next dollar of taxable income. Marginal tax rate will affect company’s future economic decisions because this tax rate is related to the economic situation. So, companies not only need to consider federal income tax but also need to consider state income tax. Tax shield is the tax reduction, which is created by items that are allowed to take deduction from tax income.

For instance, interest on debt is tax-deductible, taking on debt makes tax shield. Tax shield is an important method to saving cash flow and it is a significant part of companies’ business valuation (Wikipedia, 2012).

d). (in millions)

| Fiscal 2009| Fiscal 2008| Fiscal 2007| Operating assets| 6,579| 5,661| 5,600| Operating liabilities| 2,394| 1,938| 1,988| Net operating assets| 4,185| 3,723| 3,612|

e). 2009 NOPAT= 441 + [(138? (1- 38. 5%)] = 526 2008 NOPAT= 401 + [(131? (1-38. 5%)] =482

The dollar amount of Nordstrom’s tax shield from nonoperation activities in fiscal 2009 is $53 ( $ 138 x 38. 5 % ).

f). 009 RNOA = $526 /[($4,185 + $3,723)/2] = $526 / $3,954 = 13. 3% 2008 RNOA = $482 /[($3,723 + $3,612)/2] = $482 / $3,668 = 13. 1%

g). RNOA is improved over the two years. In order to understand the increase, we can examine NOPM and NOAT. NOPM is 6. 1 % ( $ 526 / $ 8, 627) in 2009 and 5. 6 % ( $ 482 / 8, 573) in 2008. NOPM analyzes the amount of net operating profit after tax for each dollar that is been earned by sales. The increase in NOPM may be seen a small increase but if the volume of the sales is considered, the increase would have huge impact on a increase in net income. NOAT is 2. 18 % ($ 8, 627 / 3,954) in 2009 and 2. 4 % ($ 8, 573 / 3, 688) in 2008. The decrease in NOAT shows that the company is less efficient and effective in terms of generating sales by use of assets. To conclude, it could be said that the company achieved better probability by a worse use of operating assets. However, the stance of the company is good and becoming better if we emphasize the increase in RNOA over the two years.

h). 2009 ROE = $441 /[($1,572+ $1,210)/2] = 31. 7 % Non operating return: ROE – RNOA = 31. 7 % – 13. 3 % = 18. 4 % 2008 ROE = $401 /[($1, 210 + $ 1,115)/2] = 34. 5 % Non operating return: ROE – RNOA = 34. 5 % – 13. 1 % = 21. 4 % The ROE is decreased from 34. % to 31. 7 % over the two years.

The difference between ROE and RNOA shows that there is non-operating return. Non-operating returns shows the effect of debt to finance operating assets. Moreover, it shows that Nordstrom uses liabilities or debt to increase operating assets and earnings. Nordstrom uses debt and the cost of the debt is less than the earnings, therefore it is beneficial for the company.

i). Net non-operating obligations 2007: $261+ $2,236 = $2,497 2008: $275+$24+$$2,214 = $2,513 2009: $356+2,257= $2,613 FLEV 2009: [($2,613+$2,513)/2]/$1,390 = 1. 84 2008: [$2,523+$2,497)/2]/$1,163 = 2. 15 It shows that Nordstrom has $1. 4 of non-operating liabilities for every dollar of shareholder’s equity. The company has less financial leverage compare to year 2008. Additionally, the company does not have non-operating assets; FLEV measure can be used as company’s debt-to-equity ratio too. Spread 2009: 13. 3% – ($85/$2,563) = 10. 0% 2008: 13. 1% – ($81/$2,505) = 9. 9% Nordstrom’s RNOA earned 13. 3% and 13. 1% in 2008 and 2009, while the company paying only 3. 3% and 3. 2% for its debt. Therefore, it means that the company operating return exceeds the cost of borrowing. Non-operating return 2009: 1. 84 x 10. 0% = 18. 4% 2008: 2. 15 x 9. 9% 21. 3%

j). Nordstrom| TJX| Return on equity| 31. 7%| 48. 3%| RNOA| 13. 3%| 38. 3%| NOPM| 6. 1%| 6. 1%| NOAT| 2. 1%| 6. 28%| Non operating return| 18. 4%| 10. 1%| FLEV| 1. 84| 0. 29| Spread| 10. 0%| 34. 9%|

The ROE of Nordstrom is 31. 7% and TJX 48. 3% show that both of the companies are very profitable. The companies are very different than each other in terms of strategies. Nordstrom mostly uses leverage in order to increase the returns; on the other hand, TJX uses mostly stockholders equity and less leverage. Both of the companies have the same NOPM at 6. 1% that states that both companies make 6. 1 cents after tax for every dollar of sale.

Furthermore, TJX has better operating asset turnover (NOAT) than Nordstrom, which shows that TJX is converting its operating assets to cash three times faster than Nordstrom. RNOA is calculated by multiplying NOAT and NOPM that is 13. 3 % for Nordstrom and 38. 4 % for TJX. The non-operating return is different for companies. The numbers are 18. 4 % for Nordstrom and 10. 1 % for TJX. The numbers show that Nordstrom has more leverage than TJX. Nordstrom’s FLEV is much higher than TJX which shows that TJX has less obligations and leverage than Nordstrom with regarding to equity. TJX’s spread is 3 times higher than Nordstrom.

Although both companies have relatively close non-operating expenses to non-operating obligations number ( cost of debt ), the difference in Spread is related to RNOA numbers. Additionally, TJX does not have many obligations, which lead to low non-operating return.

k). In order to improve RNOA in 2010, the company can improve its NOPM or its NOAT. Nordstrom managements have to improve their sales and reduce the expenses so as to improve NOPM. Decreasing the amount of operating assets such as long-term fixed assets can increase NOAT. Additionally, they can try some ways to collect account receivable quickly, sell inventories quickly nd sell some property or equipment. In terms of liabilities, Nordstrom managements can defer to pay bill in account payable and income tax liabilities. These methods may improve Nordstrom’s RNOA. Conclusion Nordstrom Inc. ’s RNOA ratio shows that the company’s financial performance in 2009 is slightly better than in 2008. More specifically, the RNOA is increased from 13. 3% to 13. 1 % over the two years but its ROE is decreased. The difference between ROE and RNOA shows that there is non-operating return. Non-operating returns shows the effect of debt to finance operating assets.

Moreover, it shows that Nordstrom uses liabilities or debt to increase operating assets and earnings. Nordstrom uses debt and the cost of the debt is less than the earnings, therefore it is beneficial for the company. Based on the data from balance sheet, on the other hand, the managements utilized more liabilities in 2009 than 2008 to increase the returns.. That means Nordstrom’s managers did good jobs in financial performance in 2009. However, compared with others more successful companies in the same industry, such as TJX, Nordstrom managements should try others effective methods to improve their returns.