Nordstrom, Inc., originally a retail shoe business started in 1901, is a fashion specialty retailer with an online and physical presence in the U.S. and Canada that has become known for customer service. The company and sources of revenue are divided into two segments: retail and credit. Retail includes full-price and discounted physical stores as well as full-price and discounted online stores while the credit segment is comprised of store credit cards. The brands Nordstrom, Nordstrom Rack, HauteLook, Trunk Club, Jeffrey boutiques, and Last Chance all operate under Nordstrom, Inc. Recent endeavors of the company include an expansion into Canada, a re-structured loyalty program, and further development of online and discount segments (Nordstrom, Inc., 2016).
The following is an evaluation of the company’s liquidity, solvency, and profitability as explained through various ratios calculated from Nordstrom Inc.’s 2016 and 2015 annual reports (Nordstrom, Inc., 2016; Nordstrom, Inc., 2015). All competitor information and calculated ratios are sourced from reports in the Burlington Stores, Inc. 2016 annual report (Burlington Stores, Inc., 2016). All industry average ratios are sourced from cnbc.com (CNBC, 2017). Specific ratio calculations can be found within the accompanying excel document.
Nordstrom, Inc.’s current ratio for fiscal year 2016 was 1.07 and similar in fiscal year 2015; this was slightly less than the industry average of 1.81. Because Nordstrom’s ratio is greater than one, the company has current assets enough to cover short-term obligations if need be. The company’s cash and cash equivalents increased by 69.24% from fiscal 2015 to 2016 while current liabilities remained approximately the same. This increase in cash and other assets readily converted to cash could be due to current activities such as significant support of its
online, discounted stores as well as improvements in its rewards program and mobile experience. Additionally, Nordstrom could be using some of those funds to further its expansion into Canada. It is important to note that Nordstrom, being a fashion retailer, has significant inventory comprising 24.13% of its current assets and resulting in a quick ratio of 0.40 in 2016. The potential impact of this is that if the company were ever unable to sell a major portion of its merchandise, much of its current assets would be tied up in inventory and not available for other purposes.
Of interest because operating cash flow indicates whether a company is able to be successful in its specific core business areas, Nordstrom’s cash flow from current operations to current liabilities ratio changed from 0.86 in fiscal 2015 to 0.55 in fiscal 2016. This decrease indicates a lesser ability to pay current debt from operating cash flows. The company’s net cash provided by operating activities decreased dramatically from 2015 (~$2.5 million) to 2016 (~$1.6 million) due to a significant drop in net earnings, $600 million in 2015 to $354 million in 2016, increased depreciation/amortization expenses, goodwill impairment and other current liabilities. Again, this is potentially due to the company’s expansion and efforts to strengthen business as some other retailers suffer. According to Nordstrom’s 2016 annual report, record revenue was generated in 2016 though net earnings suffered, and funds spent in those activities will serve to generate future success (Nordstrom, Inc., 2016).
Fortunately, Nordstrom’s inventory turnover seems to on par with its competitor, Burlington Stores, Inc. and similar to the industry average. Nordstrom’s inventory turnover ratio in 2015 was 4.99 times over the course of the year and 4.92 times within 2016; this is similar to Burlington’s inventory turnover ratio of 4.44 times in fiscal 2016 and the industry average of 5.27 times. No mention was made of whether the company uses FIFO or LIFO to account for
inventory, but being a clothing retailer with high-end fashion merchandise, it is imperative that the company turns over inventory fairly quickly and efficiently as items are in season or align with current trends. With Nordstrom’s inventory turnover being so similar to both its competitor and the industry average, it seems as though the company is effective in its order selections, quantities, and selling items in a timely manner. With inventory comprising approximately a quarter of the company’s current assets in recent years, this is imperative to Nordstrom’s success.
Nordstrom, Inc.’s debt-to-equity ratio for 2015 was 7.84 and was 8.03 in 2016 when factoring in all total liabilities. According to the same method of calculation for Burlington, Nordstrom’s competitor’s most recent debt-to-equity ratio was -52.08 with a loss of shareholders’ equity in 2016. Compared to this, Nordstrom’s debt-to-equity composition is obviously better than that of its competitor; comparing one year over another indicates that Nordstrom did have slightly more debt in 2016, likely relying on outside funds for its expansion and ongoing developments in mobile and off-price avenues of revenue. Its greatest sources of debt are identified as “other current liabilities” and “other liabilities” which both increased from 2015 to 2016 and include gift card liabilities as well as obligations associated with its loyalty program; however, the overall composition of the company’s liabilities remained about the same.
Nordstrom’s debt service coverage ratio was 11.59 in 2016 as compared to 16.03 in 2015 and its competitor, Burlington’s, recent debt coverage ratio of 5.02. With a significantly higher ratio than its competitor, it seems Nordstrom is able to generate sufficient funds from operating activities to pay its interest due and principal payments. Though net cash flow from operating activities decreased from 2015 to 2016, cash paid for interest and principal payments on long- term borrowings remained approximately the same year over year and Nordstrom is still able to
meet its obligations from creditors which is a strength in a growing company that is likely to maintain or increase the borrowing of outside funds in the future.
Nordstrom, Inc.’s cash flow from operations to capital expenditures ratio changed from 1.17 in fiscal 2015 to 1.65 in fiscal 2016 while figures in Burlington’s 2016 10-K form indicate a ratio of 3.21. Of import because of Nordstrom’s recent expansion and its need to be able to finance long-term asset acquisitions with cash generated from operating activities, the ratio above one indicates an ability to do so but not an excess of available funds. Nordstrom’s operating cash flows did decrease from 2016 to 2015 but so did its capital expenditures. On Burlington’s part, cash flows from operations increased significantly from 2015 to 2016 while cash paid for long-term assets decreased contributing to its higher ratio.
The company’s profit margin ratio was 4.26% in fiscal 2015 and 2.44% in fiscal 2016 despite a 2.22% increase in total revenue from one year to the next. In that time, the cost of sales and related buying and occupancy costs increased by 2.97% and selling, general, and administrative expense increased by 3.53% in addition to goodwill impairment accounted for in 2016 that was nonexistent in 2015. According to Nordstrom’s annual report, this goodwill impairment comes from a valuation of the company’s Trunk Club resulting from changes in a long-term plan with lower than expected profitability (Nordstrom, Inc., 2016). Comparing the two years, the cost of sales and related buying and occupancy costs comprised between 63% and 64% of total revenue while selling, general, and administrative expenses comprised between 28% and 30% of total revenue for both years. The major difference came from $197 million in goodwill impairment. Compared to the industry average of a 6.10% profit margin, Nordstrom does not seem to be generating a large profit in recent years; if one looks back to 2014, the
company’s profit margin ratio was about 5.49% and thus closer to the industry average. The company has made note of its current struggles and reports that it is making plans to turn things around specifically with the help of its discount and online branches.
Nordstrom’s return on assets ratio was 7.99% in 2015 followed by 5.36% in 2016 as compared to an industry average of 15.11%. Based on this and compared to its industry, Nordstrom is able to earn a return for all providers of capital but success in this decreased from 2015 to 2016, and the company has not kept up with the industry in recent years. This has been affected by the aforementioned decrease in net earnings as well as a decrease in average total assets from 2015 to 2016. Performance in this regard reflects the company’s overall decrease in profitability in recent years.
The company’s dividend payout ratio was 45.96% in 2015 compared to 39.05% in 2014 (years are dated back based on available data for ratio calculations), reflecting an increase of 6.91%. However, actual common dividends per share were the same for each year, remaining at $1.48. The slight difference between the two stems from the decreased net earnings for the year carried through in earnings per share of $3.22 in 2015 down from $3.79 in 2014. Though the actual dividends are not terribly significant in value, as a potential investor, it is a show of good faith, as many companies, such as Nordstrom’s competitor, Burlington, do not pay out dividends at all. From this perspective, it reflects well on the company that it is willing to pay a percentage of earnings out as dividends and may be an extensive of the superior service for which the company has become known.
In conclusion, investing in Nordstrom, Inc. would be an option potentially considered based partially on the evaluation made here, information provided by the company on future
plans and direction, and personal experience. Nordstrom has suffered in recent years, which is reflected in a decrease in net earnings and comparable sales, defined by the company has earnings from stores open at least one year. However, the company did generate record revenue in fiscal 2016 and continues to expand and look to the future in its most profitable and revenue- generating segments. Overall, the company remains liquid, though to a lesser degree than the industry, and appears to be solvent when compared with its competitor, Burlington. Nordstrom is still profitable though overall profitability has decreased recently. On paper, investing may not seem like a wise decision, but the story behind the numbers of the company’s recent activities, the longevity of the business, and personal experience with Nordstrom, Inc.’s commitment to customer service – which is heavily involved in its competitive advantage – may serve to sway that perception.
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