Ben Gartmann

Edgar Torres
Garrett Norton
Nikhil Pochiraju
Vineeth Menon

Business Summary:
Nordstrom is an upscale retail store that was started in 1887, by John W.
Nordstrom. Nordstrom was originally started as a shoe store, but it is now one of the
largest shopping retailers in North America. Nordstroms inventory now includes not just
shoes but also, clothing, jewelry, handbags, fragrances, cosmetics, etc. Nordstrom
currently operates from a total of 299 stores across 38 states with 116 Full-line stores in
the United States and two in Canada, 173 Nordstrom Racks, two Jeffrey Boutiques, one
clearance store, and also offers a large selection from their online Nordstrom store.
(Nordstrom Annual Report 2014, 2014.) Nordstroms future plans include opening 5 new
Full-line stores in the United States, 6 more in Canada, and they expect to open 300 Rack
stores by 2020. (Nordstrom Annual Report 2014, 2014.) Nordstroms large selection of
luxury and designer merchandise, extensive range of services, and a fun, trendy
atmosphere make it an ideal place for upscale shopping. In 2014, Nordstrom achieved an
all-time record for total net sales at an impressive $13.1 billion dollars. (Nordstrom
Annual Report 2014, 2014.)
Markets/Products:
Nordstroms primary market is 20-40 year olds in the United States. Their
secondary target market is 20-40 year olds in Canada. They are planning to open a
Nordstrom Rack in Canada in 2017 in order to reach this secondary target market, and
theyve recently opened a store in Puerto Rico. (Nordstrom Annual Report 2014, 2014.)
Business Risks/Outstanding Litigation:
Nordstrom faces many risks while trying to maintain the high quality experience
customers receive, as well as their reputation as one of the most profitable high-end
department stores in North America. One of the risks Nordstrom faces is their stores are
primarily located in shopping malls. This means they rely on the malls foot traffic to
attract consumers. If the malls consumer traffic declines, Nordstroms performance may
be negatively affected. Another risk Nordstrom faces is outdated hardware/software
needed to conduct transactions/buying processes/systems. They must improve their
processing systems consistently to keep up with the modern technological needs of
consumers to prevent downtime and unnecessary maintenance. Nordstrom must also
assess and react to competitive market forces/changes in consumer behavior
appropriately and promptly. They may lose market share to their competitors if they are
unable to remain competitive in the key areas of price and value, fashion newness,
quality of products, depth of selection, convenience, fulfillment, service and the shopping
experience (Nordstrom Annual Report 2014, 2014). If they fail to understand the local
consumer climate, as well as any possible competitive entrants into their market, their
business could suffer.

SWOT Analysis:
Strengths
Nordstrom has a variety of strengths that has propelled the company to the level
of success it is at now. One of its strongest areas is its strategic alliances and partnerships
that Nordstrom has established throughout the years. From 2000 to 2007 it had a
partnership with an upscale European apparel named Faonnable. It has also purchased
two luxury fashion boutiques named Jeffrey. It has also purchased minority stakes in
Peek, a kids-wear company. Another one of Nordstroms strengths is that its currently
listed as #93 on Fortune Magazines best places to work for, which shows employee
retention and attractiveness is increasing with each passing year. (Nordstrom: Fortune
500, 2014.) Their reputation could play a part in attracting new employees, as well as
providing positive publicity that could attract new customers. Nordstrom establishes the
idea of creating a friendly atmosphere and a warm workplace dedicated to building
relationships, which enables employees to focus on customer satisfaction. It has created
the idea that the customer is the top priority, which ultimately gives their employees a
large amount of responsibility and provides high-performing employees with additional
rewards. Its revenue performance is strong, with new promotions in the works to push the
company past the competition. There are about 120 stores currently, and 110 Nordstrom
Racks, which sell clearance items at significantly lower prices from the parent store.
There are over 52,000 people employed, and their reputation is strong amongst
consumers. (Nordstrom Annual Report 2014, 2014.)
Weaknesses
Nordstrom falls short in global expansion. There are a limited number of stores in
other continents. There also many other companies doing similar things competing
against Nordstrom, such as JC Pennys, Dillards, and Macys, which means their market
share isnt propelling forward as fast as it should.
Opportunities
Americas economy is currently growing very well. As unemployment decreases,
more and more people are being employed with higher amounts of disposable income
available. Nordstrom can capitalize on this by increasing their visibility to the consumers,
as well as offering various promotions to capture each market. They can also expand in
other continents, to increase their global market share. They can also try opening smaller
retail stores dedicated for cheaper clothing, although this could prove to be harmful to
their reputation if not executed correctly.
Threats
There are many threats that Nordstrom has to overcome to become the leader in
high-end designer apparel. While Nordstrom offers discounted clothing at their other
chain Nordstrom Rack, Neiman Marcus offers Last Call, Saks Fifth Avenue offers
Off 5th, and Macys, Dillards, and JC Penny offer discounted clothing at every one of

its stores. This means competition is fierce, and Nordstrom has to differentiate their
services in a major way to push themselves past other competing retailers.
Revenue Drivers:
Nordstroms largest revenue driver is their outlet store, Nordstrom Rack. In 2014
Nordstrom Rack attracted nearly 4 million new customers, while adding 27 new
storefronts totaling 167 stores in the United States. (Nordstrom Annual Report 2014,
2014.) A factor in the recent success of Nordstrom Rack is the increased merchandise
selection available at all Nordstrom Rack stores, the acquisition of online retailer
HauteLook in 2011, and an improved online store that offers a consistent merchandise
selection and frequent flash sales. Nordstrom.com makes up approximately 14% of the
revenue, with the storefronts producing 58% of Nordstroms revenue. Nordstrom Rack
storefronts produce 24% of all revenue, while the online store, as well as Hautelooks
website, creates 3% of all revenue. Lastly, Nordstroms recent acquisition of Trunk Club,
along with Jeffrey boutiques and Nordstrom full-line stores in Canada produce only 1%
of all revenue. (Nordstrom Annual Report 2014, 2014.)
Expense Drivers
The main expense driver that Nordstroms encounters is the cost of sales and related
buying and occupancy costs which accounts for 64.1% of net sale, with SG&A expenses
making up 27.4% of net sales. (Nordstrom Annual Report 2014, 2014.)
Gross Margin
Nordstroms gross margin is 37.7%, meaning for every dollar of revenue Nordstroms
would retain $0.377 cents. The retained percentage can then be used to pay off the 27.4%
SG&A expenses, any interest expenses and then finally distribute to its shareholders.
(Nordstrom Annual Report 2014, 2014.)
Recent Trends
Nordstrom has had a steady increase in revenue from 2011-2015. After a steady increase
in net income from 2011 to 2013, Nordstrom experienced a slight decrease in 2014 and
2015. (Nordstrom went from a net income of 735 million in 2013, to 734 million in 2014,
and 720 million in 2015). Their dividends per share decreased to .99 from a previous 1.20
in 2014. Nordstroms SG&A Expense has increased over $1 Billion from 2011-2015,
going from $2.69 Billion in 2011 to $3.79 Billion in 2015. Nordstroms Basic EPS has
increased from 2.8 to 3.79, showing shareholders an increase in profitability. In 2014 and
thus far in 2015, Nordstrom has seen small growth in EPS compared to 2012 and 2013.
This is largely due to the decision to expand into Canada, a venture that is extremely
risky and costly, but if handled correctly by Nordstrom will prove to be highly profitable
and increase revenue streams.

Major Trends:
Recent trends for Nordstrom have been fairly positive, in the past year sales have
increased by 7.70% and over the past five years (2011-2015), the sales growth has been
12.13%, 11.69% and 3.23%. This is where Nordstrom receive the largest part of their
revenue. Net income on the other hand has been declining in the past two years. The 5
year trend shows a Net Income growth of 11.42%, 7.61%, -0.14%, and -1.91% for (20112012, 2012-2013, 2013-2014 and 2014-2015) respectively.
Diluted EPS growth has also been fairly positive even though it has lowered in the
past two years. It has seen an increase of 14.18% for 2011-2012, 13.38% from 20122013, 4.21% for 2013-2014, and .027% for 2014-2015.

Sales/Revenue
sales growth

2011
9.7B
-

2012
10.88B
12.13%

2013
12.15B
11.69%

2014
12.54B
3.23%

2015
13.51B
7.70%

Net Income
NI Growth

613M
-

683M
11.42%

735M
7.61%

734M
-0.14%

720M
-1.91%

Recent trends on the Balance sheet:

Recent trends on the balance sheet show a steady growth for Total Assets from 2011-2015
The Balance sheet shows Total Asset growth rates of, 13.79%, -4.73%, 6.00%, and
7.83%. The -4.73% in large part may be due to the new Nordstrom tower and also the
opening of new Nordstroms in Puerto Rico and Canada. As for Debt, Nordstrom has done
very well by keeping a steady amount of debt in the past four years at around 3.12B.
Liabilities have been quite stable for the past five years. It had a small increase from
2011-2012 and then been stable at an average of 60.5 billion for the years 2012-2015.
Shareholders Equity has also been pretty stable for the past five years with the largest
increase coming in last year, 2.08 billion to 2.44 billion.

Total Assets
Total Assets growth

2011
7.46B
-

2012
8.49B
13.79%

2013
8.09B
-4.73%

2014
8.57B
6.00%

2015
9.25B
7.83%

Total Liabilities

5.44B

6.54B

6.18B

6.49B

6.81B

Total Shareholder's
Equity

Nordstrom: Income Statement

2.02B

1.96B

1.91B

2.08B

2.44B

Nordstrom: Income Statement (cont.)

Nordstrom: Balance Sheet

Nordstrom: Balance Sheet (cont.)

Nordstrom: Cash Flow Statement

Nordstrom: Cash Flow Statement (cont.)

Comparative Data:
There is quite a slight product differentiation between Nordstrom and its competitors, JC
Penny, Dillard and Macys. A lot of the brands that are sold at these three retailers are also sold at
Nordstrom; the difference is that the products sold at Nordstrom are higher quality than the ones
sold at these three retailers. The most significant difference between Nordstrom and its
competitors is actually customer service and product presentation. Nordstroms customer service
is second to none. Nordstrom prides itself in giving customers an unforgettable shopping
experience that they wont forget. Product presentation also constitutes to Nordstroms success.
The emphasis they apply on their products for customer presentation is one of the drivers that lead
customers to purchase their products. Employees are trained to service their customers on a
personal level, which gives customers a feeling of comfort and trust. (Nordstrom Annual Report
2014, 2014.) Macys had the highest profit margin out of the 4 companies we analyzed, recorded
at 5.44%, while Nordstroms profit margin was 5.33% coming in at a close second. Third was
Dillards profit margin of 4.89%, and last was JC Pennys at -0.63%.(JWNs Competition by
Segment and Its Market Share, 2014.) Macys is the least volatile with a beta of .89, second is
Nordstrom with a beta of 1.25, third is Dillards with a beta of 1.39, and last is JC Penny with a
beta of 1.86. Macys has the highest market share of 9.75%, whereas Dillards had the lowest
market share at 3.36%. Nordstrom had a market share 4.86%, and JC Penny had a market share of
4.35%. (JWNs Competition by Segment and Its Market Share, 2014.)

Porters Five Forces Analysis:

Let us first take a look at the bargaining power of suppliers. Theres a low concentration
of suppliers, which actually helps Nordstrom. This means there are many suppliers with limited
bargaining power, which keeps Nordstroms costs relatively low. Theres also a high competition
amongst suppliers, which reduces prices to the producers. This will have long-term positive
impact for Nordstroms growth overall. Due to a large number of consumers, customers dont
have bargaining leverage, meaning the bargaining power of consumers is low, which helps
Nordstrom maintain their prices. The intensity of existing rivalry is relatively low because major
department stores competitions in the high-end fashion market are already established. This
allows Nordstrom to succeed because no other company has to fight for market share from each
other. Threat of substitutes is practically non-existent because as said above, competition is pretty
much established. The products that Nordstrom sells also dont have substitutes due to other
department stores selling the same brands. Nordstroms threat of new competitors is low because
customers are loyal to existing brands, which affect Nordstrom positively. Entry barriers are also
high, which means its difficult for new stores to enter the market. This can be attributed to the
reputation and service Nordstrom has provided since its inception. Nordstrom also offers strong
brand names (Gucci, Calvin Klein, Penguin, Ralph Lauren, Burberry, etc.), which customers have
come to show high loyalty towards. This means new competitors will have to improve their
brands value to attract new customers, which is unlikely to happen.

Ratio Analysis:
ROE (Return on Equity)
Of the four companies we analyzed in the peer group comparison, Nordstrom had the
highest ROE of 37.07%, while JC Penny had the lowest ROE of -49.31%. Dillards
recorded an ROE of 18.49%, and Macys recorded a ROE of 24.32%.
Retention Ratio
JC Penny recorded the highest retention ratio of 108.7%, whereas Nordstrom had the
lowest retention ratio out of the four at 68.12%. Macys recorded a retention ratio of
75.44%, and Dillards recorded a retention ratio of 97.73%.
ROA (Return on Assets)
Nordstrom had the highest ROA of the group at 8.75%, whereas JC Penny had the lowest
ROA of the group at -12.5%. Macys recorded an ROA of 6.97%, and Dillards recorded
an ROA of 7.73%.
P/TBV (Price to Tangible Book Value)
Macys had the highest P/TBV of the group at 16.90, while JC Penny recorded the lowest
P/TBV .0879. Dillards recorded a P/TBV of 2.272, and Nordstrom recorded a P/TBV of
6.607.
EPS (Earnings per Share)
Dillards had the highest EPS of $7.10, while JC Penny had the lowest EPS of the group
at $-5.57. Macys had an EPS of $3.93, and Nordstrom had an EPS of $3.77.
Avg. SHE/TA (Average Shareholders Equity to Total Assets)
Dillards had the highest Avg. SHE/TA of the group at 48.91%, whereas Nordstrom had
the lowest avg. SHE/TA at 23.96%. Macys had an avg. SHE/TA of 29.75%, and JC
Penny had an avg. SHE/TA of 26.38%.
Debt to Equity
JC Penny had the highest debt to equity out of the group at 2.83, while Dillards debt to
equity is .41. Macys had a debt to equity ratio of 1.365, and Nordstrom had a debt to
equity ratio of 1.28.
Interest Coverage (Leverage)

Nordstrom had the highest interest coverage ratio of the group at 8.803, while JC Penny
had the lowest interest coverage at 3.892. Macys had an interest coverage ratio of 6.78,
and Dillards had an interest coverage ratio of 4.603.
Analysis of Nordstroms Future Performance:
Various assumptions were made to forecast Nordstroms Income Statement, Balance
Sheet, and Statement of Cash Flows for the 2015-2019 fiscal years. First off, we
estimated the future growth rate of revenue to be 8%, based on the companys previous
average growth over the last 5 years being 9% and its maturity as a company. COGS and
expenses were estimated using a percentage of sales approach. The average COGS over
the last 5 years were 61% of sales. The balance sheet was also forecasted using the
percentage of sales approach. The retained earnings and dividend payouts were
determined using the dividend payout and retention ratio from 2014.

Analysis of Nordstroms Weighted Average Cost of Capital:

Common equity: $2,338,000,000
Long term debt (book): $3,123,000,000
3,123,000,000+2,338,000,000 = $5,461,000,000
Debt percentage: 3,123,000,000/5,461,000,000= 57.19%
Equity percentage: 2,338,000,000/5,461,000,000= 42.81%
Beta: 1.25
Rf (based on 1 year treasury bill as of 4/6/2013): .21%
Rm (S&P 500 1 year return): 12.54%
CAPM: .0021+1.25(.1254-.0021) = .1562 or 15.62%
3 year Nordstrom bond at 6.25% coupon: 1.61%
Nordstrom Tax Rate: 39.24%
WACC= (1-tax rate) (cost of debt*debt weight) + (cost of equity*equity weight)
WACC= (1-.3924)*(.0161*.5719) + (.1562*.4281)
WACC=7.25%
Nordstroms current capital structure leans a little more towards debt, which means that
their enterprise value is going to be more dependent on the market value of their debt.

Valuation of Nordstroms Common Shares:

Free Cash Flow to Equity:

Relative P/E to PEG:

P/E Ratios:
JC Penny had the highest price-to-earnings ratio at 51.07, whereas Dillards had the
lowest at 12.44. Macys had a price-to-earnings ratio of 14.96, and Nordstrom had a
price-to-earnings ratio of 16.50.

PEG:
Macys had the highest price-to-earnings-to-growth at 1.353, while Dillards had the
lowest at .469. JC Pennys price-to-earnings-to-growth is at .607, and Nordstroms priceto-earnings-to-growth is at 1.122.
Conclusion:
Based on our forecast, we estimate the target share price to be $96.18. Currently
Nordstrom (JWN) is trading at $79.86. We believe the value of the common stock is
moderately undervalued, but given the current situation, we believe it remains fairly
priced. Based on the validity of our assumptions, we have enough evidence to conclude
that the shares of common stock are moderately undervalued, and make a
recommendation to BUY.

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