Nordstrom, Inc. Equity Valuation
and Analysis
Valued at November 1, 2006
Carissa Laughlin: carissa.l.laughlin@ttu.edu
Adam Hix: ahix18@cox.net
Kristie Lee: kristie.lee@ttu.edu
Kirk Florez: kflo6216@aol.com
Zac Holley: zachary.s.holly@ttu.edu
Steven Kratzer: stkratzer@hotmail.com
Table of Contents
Nordstrom, Inc.
Table of Contents
2
Executive Summary
3
Business/Industry Analysis
5
Five Forces Model
8
Accounting Analysis
15
Ratio Analysis
22
Forecasting
37
Valuation Analysis
38
Appendices
Appendix A
45
Appendix B
50
Appendix C
55
Appendix D
59
References
2
66
Executive Summary
Nordstrom, Inc
Investment Recommendation: Overvalued, Sell
JWN-NYSE
52 Week Range
Revenue (2005)
Market Capitalization
$46.30
$31.77-50.79
$7.72B
$12.42B
Shares Outstanding
685,934,000
Dividend Yield
3-mo Avg Daily Trading Volume
Percent Institutional Ownership
.90%
2,735,950
96%
Book Value per Share
ROE
ROA
Est. 5-yr EPS Growth Rate
7.76
11%
26%
3%
Cost of Cap Est.
Ke Estimated
5-year
3-year
1-year
Published
Kd
WACC
R2
Beta
.1520
.1529
.1543
1.31
0.13
0.13
1.82
2005(A)
$2.03
Ratio Comparison
Trailing P/E
Forward P/E
Forward PEG
M/B
2006E
$2.09
2007E
$2.15
Nordstrom
22.81
22.15
7.38
.64
2008E
$2.22
Industry
48.24
28.55
3.94
.57
Valuation Estimates
Actual Current Price
Ke
7.69%
7.69%
5.01%
5.03%
5.29%
5.39%
3
EPS Forecast
FYE 1/28
EPS
Nov 1
$46.30
Ratio Based Valuations
P/E Trailing
P/E Forward
PEG Forward
Dividend Yield
M/B
Enterprise Value
22.81
22.15
7.38
.91
.64
3.65
Intrinsic Valuations
Discounted Dividends
Free Cash Flows
Residual Income
Abnormal Earnings Growth
Long Run Residual Perpetuity
$7.31
$3.47
$41.79
$19.92
$(3.60)
Nordstrom has established itself as a high-end apparel retailing company. It
derives its revenue from the sale of high-quality clothing, shoes, cosmetics, and
accessories. Nordstrom is one of the leading fashion specialty retailers in the United
States to date and has one hundred fifty-six stores spread out through twenty-seven
states and is continuing to expand. Although the majority of Nordstrom’s profits are
brought in by their retail stores they have also extended their business into a credit
segment, a direct internet sector, and multiple boutiques. Nordstrom has founded itself
upon excellent customer service and an unmatched reputation. Its main competitors are
Saks, Dillard’s, and Neiman Marcus.
Nordstrom’s accounting policies are moderate and very well disclosed; they leave
no room for any potential red flags to be raised. Nordstrom’s transparent accounting
policies show that the managers have confidence in the firm and its ability to perform.
No distortion is used in their statements proving the firms high integrity standards.
Upon completion of Nordstrom’s ratio analysis it is apparent that there should be
no concerns as to how Nordstrom compares to its competition.
In most cases Nordstrom was either average or stood above the competition. There
were very few cases where Nordstrom fell behind in its market.
After evaluating Nordstrom’s past performance we forecasted their financials for
the next ten years. We predicted that Nordstrom would grow at an average of six
percent per year. This is shown through increasing sales and expansion of new stores.
4
Business/Industry Analysis
Overview of Nordstrom, Inc.
Nordstrom was incorporated in 1946, but began its operations in 1901 as a shoe
store in downtown Seattle, Washington. Nordstrom generates revenues from its credit
segment, which consists of a wholly-owned federal savings bank that offers Nordstrom
VISA credit and debit cards and a private label card. Nordstrom also profits from its
Faconnable boutiques located in France, Portugal, Belgium and the U.S. The remaining
revenues are brought in by the retail store segment; the stores specialize in high quality
apparel, shoes, cosmetics, and accessories. Nordstrom also sells direct via the internet
at www.nordstrom.com. Though Nordstrom offers a variety of men and children’s
apparel, women’s fashion represents nearly one-third of total sales (Nordstrom 10-K).
Nordstrom’s corporate offices are located in Seattle, Washington. Their
distribution centers are located in Portland, Oregon; Dubuque, Iowa; Ontario,
California; Newark, California; Upper Marlboro, Maryland; and Gainesville, Florida. The
direct order center is located in Cedar Rapids, Iowa; and the Nordstrom Credit, Inc. and
Nordstrom Federal Savings Bank are located in a leased office building in Denver,
Colorado. Nordstrom maintains 156 retail stores in 27 states, and they plan to open
thirteen new stores and remodel or relocate 18 existing stores over the next three years
(Nordstrom 10-K).
The apparel industry is a highly competitive market; Nordstrom competes with
other national, regional, and local retail and departments stores. Nordstrom’s top
competition comes from retail stores that sell similar lines of apparel such as Neiman
Marcus, Saks Fifth Avenue, Dillard’s, and other high-end fashion retailers.
Nordstrom’s net sales, net earnings, total assets, and net income have been
vastly increasing over the past four years (from 2002-2005). As shown in table 1, net
sales have been increasing at an average of 8.52 percent; and total assets have been
increasing at an average of 4.82 percent over the past five years. Neiman Marcus’ net
assets have been increasing at a rate of 6.28 percent and total assets have increased
by 10.94 percent, as shown in table 2. As table 3 shows, Saks Fifth Avenue’s net sales
5
and total assets have been decreasing each year with the exception of 2004 at an
average of 2.31% percent and 6.19 percent, respectively. As illustrated in table 4,
Dillard’s net sales and total assets decreased at a rate of 1.86 percent and 6.29 percent,
respectively. With respect to net sales and total assets, on average, Nordstrom is
growing at a more rapid rate compared to its top competitors, as shown in tables 1
through 4.
Table 1: Nordstrom, Inc. Net Sales and Total Assets
Year
Net Sales
2001
2002
2003
2004
2005
$5,607,687,000
$5,944,656,000
$6,448,678,000
$7,131,388,000
$7,772,860,000
% Change in
Net Sales
--6.01%
8.48%
10.59%
9.00%
Total Assets
$4,084,356,000
$4,185,269,000
$4,569,233,000
$4,605,390,000
$4,921,349,000
% Change in
Total Assets
--2.47%
9.17%
0.79%
6.86%
Table 2: Neiman Marcus Net Sales and Total Assets
6
Year
Net Sales
2001
2002
2003
2004
2005
$3,015,534,000
$2,948,332,000
$3,080,353,000
$3,524,771,000
$3,821,924,000
% Change in
Net Sales
--(2.22%)
4.48%
14.43%
8.43%
Total Assets
$1,785,870,000
$1,907,546,000
$2,034,430,000
$2,617,648,000
$2,660,660,000
% Change in
Total Assets
--6.81%
6.65%
28.67%
1.64%
Table 3: Saks Fifth Avenue Net Sales and Total Assets
Year
Net Sales
2001
2002
2003
2004
2005
$6,581,236,000
$6,070,568,000
$6,055,055,000
$6,437,277,000
$5,953,352,000
% Change in
Net Sales
--(7.76%)
(0.26%)
6.31%
(7.52%)
Total Assets
$5,050,611,000
$4,595,521,000
$4,579,356,000
$4,709,014,000
$3,850,725,000
% Change in
Total Assets
--(9.01%)
(0.35%)
2.83%
(18.23%)
Table 4: Dillard’s Net Sales and Total Assets
7
Year
Net Sales
2001
2002
2003
2004
2005
$8,154,911,000
$7,910,996,000
$7,598,934,000
$7,528,572,000
$7,560,191,000
% Change in
Net Sales
--(3.00%)
(3.94%)
(0.93%)
0.42%
Total Assets
$7,199,309,000
$7,074,559,000
$6,675,932,000
$5,691,581,000
$5,516,919,000
% Change in
Total Assets
--(1.73%)
(5.63%)
(14.74%)
(3.07%)
Five Forces Model
For each industry there are competitive forces that, when analyzed, show the
profitability potential in that given industry. For firms to attempt to create profits in any
market, they must consider five main forces: rivalry among existing firms, threat of new
entrants, threat of substitute products, bargaining power of buyers, and bargaining
power of suppliers. Knowing where a particular company stands in relation to the
industry using these five forces is a valuable determinant of how profitable that
company will be.
Rivalry Among Existing Firms
Nordstrom, Inc. is a fashion specialty retailer that offers a selection of apparel,
shoes, cosmetics and accessories for women, men and children. This specialty fashion
industry has experienced steady growth over the past few years. The other directly
competitive firms in this industry are Bloomingdales, Macys, Dillard’s, Saks Fifth Avenue,
and Neiman Marcus. Nordstrom Inc. holds a fair market share in this industry at 12.95
Billion. The federated department stores inc. holds a 22.13B market share. This is a bit
misleading because the Federated Dept. Stores Inc is made up of many department
stores that are not highly competitive with Nordstrom (http://finance.yahoo.com). All
of the companies that are competitive in this industry have taken advantage of today’s
technological advances such as the internet for more marketing and sales growth.
Nordstrom is no different, in order to keep up with the ever changing fashion
environment Nordstrom has expanded their products online and through other retail
stores as well. The company offers its products through multiple retail channels,
including its Full-Line Nordstrom stores, its discount Nordstrom Rack stores, its
Faconnable boutiques, its catalogs, and on the Internet at www.nordstrom.com
(www.moneycentral.msn.com). Maintaining current stores and expanding into new
locations is important to Nordstrom’s future growth in order to help gain even more of a
position in this market. The high-end apparel and fashion industry is a highly
competitive market; and firms in this industry must be differentiated to distinguish
themselves.
8
Threat of New Entrants
The economies of scale in the specialty retail industry are quite large. The threat
of any new entrant competing in this industry is seemingly very low. All of the
companies in this industry have a very formidable first mover advantage. Many of the
competitors in this industry already have working relationships with many of their
suppliers and any new competitor will have a tough time cracking into the dealer
network in order to establish themselves as any sort of threat. For example, Nordstrom
is the exclusive retailer for the Facconable line of clothing and you can only purchase
their products at Facconable stores or Nordstrom. The other competitors in this industry
have similar relationships with other fashion specific designers and it would be hard for
new entrants to gain the licensing, and marketing to gain any sort of meaningful share
in this industry. The stores that are competing in this industry already have a high
reputation and steady customer base, therefore making it difficult for new entrants to
gain market share.
Threat of Substitute Products
Threat of substitution affects the marketing strategy of all companies involved in
this industry. The threat of substitution in this industry would be outlets malls or other
labels creating “off-brand” products that are seemingly the same but made of cheaper
materials therefore sold at a much cheaper price. Also with the advance of the internet,
shoppers can shop online and buy directly from certain designers that supply these
retailers instead of buying from Nordstrom, Bloomingdales or other retailers. Threat of
substitute products is high because many stores sell off-brand merchandise, therefore
making it cheaper and more appealing to the average consumer.
Bargaining Power of Buyers
Price sensitivity is a major factor when buyers purchase items in this industry.
Buyers in this industry have a very good idea of exactly what they want because they
only sell name-brand merchandise. In the high-end industry many consumers shop in
these stores solely based on certain brands, this makes the bargaining power of the
buyers relatively low. In other cases, many brands strive to sell their merchandise in
high-end stores making bargaining power of the buyers in this case moderately high.
9
Overall as an industry average bargaining power is moderate because of brand image
being a high influence.
Bargaining Power of Suppliers
Suppliers have a moderate amount of power over the buyers in this industry
because of the designer labels they carry. The department stores need to keep a solid
inventory of their major brands in order to meet customer demand. Suppliers know that
there are a limited number of stores that are able to carry and sell their brand at a
premium cost. In the apparel and high-end fashion industry the stores need to sell
certain brands. In the same sense, suppliers need their merchandise sold at a premium,
therefore they need high-end stores to buy their products. Since there are so few
retailers in this specialty retail industry suppliers hold a moderate amount of bargaining
power for their products and are able to set a reasonable price.
In the retail and apparel industry, after analyzing the five forces, the results can
be concluded as shown in table 5.
Table 5: Competitive Forces Analysis
Competitive Force
Conclusion
Rivalry Among Existing Firms
High
Threat of New Entrants
Low
Threat of Substitute Products
High
Bargaining Power of Buyers
Moderate
Bargaining Power of Suppliers
Moderate
As table five shows the retail industry is a low to moderate competitive market.
For this reason, Nordstrom has chosen a differentiated strategy to distinguish itself
within its market.
Value Chain Analysis
The apparel and retail industries have a high level of competition; consequently
firms in this market need a successful strategy that allows them to create profit.
Nordstrom, Inc. competes with various other high-end retail and apparel stores as well
10
as common retail stores; therefore it must employ differentiated qualities to distinguish
itself from other stores. In the retail and apparel industry various firms have different
approaches to create profit. Some retail stores such as Macy’s and Dillard’s supply
similar products at a lower price than high-end retailers such as Nordstrom. Others,
such as Neiman Marcus and Saks Fifth Avenue, offer similar, if not the exact same,
products as Nordstrom at around the same cost. In the high-end retail market, firms
must use a differentiated strategy to create value within the industry. Customers in this
market are willing to pay a premium for the unique products these high-end retailers
provide. These stores are known for their superior customer service and overall betterquality in store shopping experience; they are much more elegant than other retail
stores. The brand names in these high-end stores are well known and have a premium
attached to them. The product quality and variety in this industry is outstanding and
differentiates these stores from others.
Nordstrom utilizes several strategies to create and maintain its value. Nordstrom
relies on its high quality products and superior customer service to attract and uphold
its customers. Nordstrom positions itself in the industry as a high end retailer by selling
top of the line products with an exceptional brand image that customers are willing to
pay extra for. After a product is sold, the employees of Nordstrom will do nearly
anything to satisfy customers after the actual point of sale. This is included in the
superior customer service that consumers have come to expect from the company.
Nordstrom creates value by the differentiation of its product compared to
competitor’s products by offering a unique and quality product while providing top of
the line service. In order for companies to sustain a profitable position in an industry,
they must differentiate themselves from competitors, and Nordstrom is successful in
doing so.
Nordstrom Competitive Advantage Analysis
The success of a financial entity is structured by an assortment of distinct
strategies and differentiations. Most notably, a firm’s competitive advantage
distinguishes an enterprise from contending firms within the industry. There exist two
basic components in which firms focus on to establish a competitive advantage over
11
competitors. Cost leadership and differentiation are two of the most generic approaches
towards obtaining market dominance. In our case, Nordstrom has utilized differentiation
in order to establish themselves as the front runner in their industry. Erik Nordstrom,
President of Stores, has illustrated this tactic by stating the following, “In simple terms,
fashion is what sells. With compelling merchandise and unyielding commitment to
customer service, we can be the retailer customer’s trust.” President Nordstrom clearly
demonstrates Nordstrom’s competitive advantage by focusing on customer service,
product quality, and continuous improvement. Nordstrom has maintained this unique
reputation from their establishment in 1901 to the present day and beyond. Nordstrom
developed a strong competitive advantage foundation in the early 20th century and has
adapted to changing environments and market conditions to sustain their success.
Nordstrom has set the bench mark in the retail sector through customer service and
product quality.
In the recent past, Nordstrom had been facing increasing challenges sustaining
their competitive advantage over significant competitors. Historically, Nordstrom’s
customer service driven approach accounted for earnings nearly double that of
competitors. On the other hand, recently competing specialty stores along with the
expanding online retailing sector have threatened Nordstrom’s sustained market
advantage. Nordstrom originally began to develop additional retail outlets to counter
emerging competitors which resulted in declining market value and share price. These
results prompted Nordstrom to return to their core competencies of superior customer
service and product quality.
Nordstrom re-committed their business approach to ensure that they were
second to none in terms of the service provided for customers and the quality of their
product offerings. Nordstrom possesses a distinct and reputable image that effectively
differentiates them from their competitors. Nordstrom is known throughout the retail
sector as the distant leader in customer service. Nordstrom regards their customers as
extended family and treats them as such. In addition, Nordstrom utilizes devoted sales
associates for serving customers in an array of fashions. They possess the most liberal
return policy that is highly regarded among customers. Also, sales associates will call in
12
orders for merchandize not on hand free of charge. Recently, Nordstrom has improved
their largest strength of customer service by implementing personal shopping sales
associates who research customers and personally assist with their shopping needs. In
comparison to its largest competitor, Macy’s, Nordstrom has implemented a distinct
shopping experience to once again separate themselves from competition. For example,
Nordstrom knows what clothes certain customers prefer when they walk through the
door. A sales associate will keep a list of customers along with their preferences in
order to lead them directly to the department that compliments their style. Nordstrom is
a leader in customer retention and ranks highest in shopping atmosphere. Nordstrom
represents the pinnacle in serving their largest asset, their customer base.
Secondly, Nordstrom prides itself in offering quality products to compliment their
highly regarded customer service approach. Nordstrom’s product offerings are not only
of the best quality available, but are also presented in a fashion appealing to customers.
The reputation Nordstrom has built in the industry has sustained their success for over
a century. Nordstrom’s further expects to enhance their company philosophy in the
future by implementing additional differentiation tactics that will continue their market
dominance in highly volatile economy.
In order to maintain their status in the retail industry, Nordstrom plans to
implement additional competitive advantage differentiation strategies. Nordstrom must
effectively respond to changes in the retail industry. To further enhance customer
service, Nordstrom has focused on direct retailing through their online shopping
experience. They strive to offer the most effective multi-channel relationship with their
customers by offering the same in store benefits through online and catalog shopping.
Nordstrom is exhausting substantial investment in their online business to reflect their
uncanny in-store customer service. In comparison, Nordstrom is also utilizing effective
strategy to maintain their high quality product offering by adapting to recent retail
fashion changes. Nordstrom strives to continually offer the largest assortment of high
quality products through market research and adaptation.
Nordstrom uses various key factors that enable the company to be a successful
retail chain. Using a differentiated strategy requires Nordstrom to compete based on
13
the high status level its customers expect. To measure their accounting policies,
evaluating the firm’s success factors, risks, and competitive strategy are highly
important. To do this the firm has to identify and evaluate the estimates and polices
they use. Nordstrom’s most essential accounting policies used to be successful as a
differentiated retail store involve: ability to respond to the business environment and
fashion trends, inventory management, impact of competitive market forces, multichannel integration, and designer.
14
Nordstrom Accounting Policies
Ability to Respond to the Business Environment and Fashion Trends
Nordstrom’s sales and operating results all depend on their ability to predict and
react to future changes in the fashion industry and consumer demands. Any delays in
realizing the most recent fashion trends and customer demands would cause Nordstrom
to lose a portion of its customer base. Maintaining today’s ever-changing fashion trends
is a must for any clothing retailer, not doing so can break a company. Customer
demands also influence the products that a store needs to carry. Not appealing to these
demands is also fatal to a company. Weather and other hazards, economic conditions
such as a recession, and consumer confidence are all factors that affect Nordstrom’s
customer spending. Nordstrom discloses the information about this key factor in the
footnotes and also in the description of business parts of the 10-K.
Inventory Management
Nordstrom maintains appealing, fresh merchandise for its consumers. They must
be able to predict demand on products to have the best merchandise inventory
possible. Having to much of a product can lead to over stock which eventually leads to
markdowns and a loss of profit. Having not enough of a product will lead to customers
having to go elsewhere to purchase a product and possibly causing a customer to lose
faith in the Nordstrom’s name losing their business for good. Nordstrom analyzes its
past demands to predict future demands, for this reason Nordstrom orders more
merchandise in the second quarter because of its annual sale and in the fourth quarter
because of holiday shopping. This ensures that a healthy inventory level is maintained.
Nordstrom uses the first-in, first-out (FIFO) method of inventory calculation. Inventory
management can be flexible because there are several different ways to report it and
also several ways to distort the accounting numbers when it comes to inventory.
Nordstrom discloses its inventory accounting policies very clearly in the footnotes of its
10-K and leaves no room for distortion possibilities. Nordstrom’s accounting policies
compared to its competitors in dealing with inventory are fairly similar. Information
15
about Nordstrom’s inventory can be found on the balance sheet and supplementary
information can be found in the description of business and footnotes.
Impact of Competitive Market Forces
With several retail stores consolidating, such as Foleys and Macy’s, changes have
occurred among venders as well as customers. This broadens Macy’s customer base
giving them an advantage. With such consolidating, the future venders might prefer to
partner up solely with a company that has such a large customer base. This causes
Nordstrom to have to respond to environmental changes in a timely manner to not loss
the edge. If they do not then they could lose customers to the competition, lose
venders, and lose profit because of higher markdowns, and declining same store sales.
This factor is flexible because firms in the industry could disclose as little or as much as
they deem necessary. Qualitative information can be found in the description of the
business.
Multi-Channel Integration
Nordstrom’s goal is to create a more integrated, consistent merchandise offering
for its customers. This can be done by shopping in the Full-line stores, on the internet,
or through Nordstrom’s catalogs. In 2005 Nordstrom initiated the integration and now
in 2006 they are starting to migrate the Direct inventory system into the Full-line stores.
This will create a “one-company view” of the inventory resulting a more seamless
merchandise offering and experience for the customer. This will allow one stop
shopping for the customers making it more convenient and efficient. This provides
superior customer service. This process will continue to be implemented through 2008.
This factor is found in the description of the business in the 10-K
Designer
Nordstrom’s women’s designer clothing is a strong seller and contributes to the
inspirational nature of Nordstrom’s brand. The goal is to offer a complete designer
selection in at least one store for every market that Nordstrom serves. Nordstrom is
enhancing and aligning its designer offering throughout all of the major merchandise
categories. Having these designers being offered at only particular high-end stores
16
gives Nordstrom an advantage. This allows Nordstrom to offer a superior product
variety and quality. Nordstrom discloses this factor in the description of the business.
Table 6: Key Success Factor Analysis
Key Success Factor
Ability to Respond to the
Business Environment
and Fashion Trends
Inventory Management
Impact of Competitive
Market Forces
Multi-Channel Integration
Designer
Quality of
Disclosure
High
Flexibility
Not Flexible
Aggressive/
Conservative
N/A
High
Moderate
Flexible
Flexible
Moderate
Moderate
Low
High
Not Flexible
Flexible
N/A
Moderate
Accounting Strategy Analysis
Nordstrom, Inc. has fairly moderate accounting standards that could be
somewhat distorted. Nordstrom’s net income is slightly higher relative to the industry,
although not enough to be alarming; this shows that Nordstrom uses a more moderate
strategy when it comes to its accounting policies. As far as accounting standards go,
Nordstrom uses similar basic standards as other firms in the industry.
Management and select employees of Nordstrom receive stock options which
may lead to intentional accounting distortion to increase these benefits. Also, top
managers receive bonuses based on how profitable the company is and how much
growth there is within the company from year to year which would be another incentive
to distort the numbers. Although distortion would be beneficial to management, the
standards used by Nordstrom to account for stock issued to employees seem well
disclosed and straight forward.
Compared to the accounting policies and estimates used in the past five years,
Nordstrom has not significantly changed any of its accounting standards, except the
few changes made to Nordstrom’s leasing accounting policies in 2004. Nordstrom’s
leasing policies were changed from recording net rent expense once operations started
17
to Nordstrom recording net lease expense once the property was leased. This change
in leasing policy resulted in a charge of $7,753 recorded in the fourth quarter of 2004.
Estimates such as returns are based on past returns and performance and have not
altered much in recent years.
Nordstrom’s uses its historical data to estimate future performance for the use of
the inventory account. Inventory is ordered on a larger scale for the second and fourth
quarter because these are two of Nordstrom’s reported busiest times due to their
Annual Sale and the holiday shopping season. Since the increase in inventory is based
on past sales, there have been no significant write offs of inventory. Other estimates
such as returns are also based on past returns and performance and have not altered
much in recent years. The estimates and assumptions used in Nordstrom’s financial
statements seem to be reasonably calculated and are not considered distortions.
There have been no noticeable forth quarter changes that would cause concern.
Nordstrom’s accounting policies and estimates seem to have no significant
distortions. The changes in policies are well recorded and explained in the footnotes,
leaving no concern about their accounting policies. The changes in policies, accounting
standards and estimates all seem to be legitimate. There are no major changes from
quarter to quarter in looking at the 2005 quarterly reports.
Quality of Disclosure
The manner in which Nordstrom discloses their financial information to the public is of
extremely high quality. Nordstrom exceeds their expectation of providing customers
and shareholders with an adequate explanation for nearly every element of their
finances. After the presentation of each financial statement, Nordstrom provides a
detailed clarification concerning each component listed in a manner that could be easily
interpreted by the common inquirer.
The letter to shareholders commences with multiple high points that had occurred in
2005 deemed as “good news.” Total sales increased 8.3% to $7.7 billion, resulting in a
focus to strategically exceed $8 billion in sales moving into 2006. The way the
company strives to achieve this is broken down in two sections: Maximizing women’s
apparel and a seamless shopping experience. The letter also goes in to great depth
18
concerning expansion opportunities, focusing on the fact that Boston is the last major
U.S. metropolitan market where Nordstrom is not present. Nordstrom will open four
stores in this area by 2010. Not only does it appear that Nordstrom reported all
relevant information in their 10 K annual report, they provide a detailed explanation for
the cause of the numbers disclosed. Nordstrom’s decrease in interest expense, net in
2004 “was due to the reduction in our average outstanding debt, partially offset by the
increase in the prepayment costs.” The fourth quarter report provides an in depth
account concerning net earnings. After stating an increase of $190.4 million, compared
with $140.0 million in 2004, it is justified by same-store sales increasing 5.8%.
Specifically the same-store sales of cosmetics, accessories, and men’s apparel
merchandise improved drastically. Nordstrom separates their Financing, Operating, and
Investing activities in to three different sections, as well. Inventory, revenue
recognition, allowance for doubtful accounts, and leases are all additional subheadings
detailing how each is recognized by the company. In addition, Nordstrom illustrates
how the majority of their numbers were calculated that are present on the various
financial statements. Overall, Nordstrom adequately discloses its accounting qualities
and financial statements in a manner that is easily understood and does not exclude
any relevant information to the outside user in their financial notes.
Potential Accounting Practice Red Flags
Nordstrom continues to thrive in the retail market due to their efforts in
sustaining competitive advantage and effective financial positioning. Nordstrom
represents the pinnacle in the retail fashion industry, and their accounting and financial
disclosure parallels this stellar image. Erik Nordstrom, President and CEO, has made a
strong effort to divulge in their yearly reports a consistent effort towards informing both
current and potential investors. Nordstrom presents their financial statements and
disclosures with full concern to the public and pays special attention towards corporate
integrity. Nordstrom goes the extra mile to inform investors and financial statement
viewers of additional financial information outlets including their own renovated web
page to www.sec.com where they may find additional financial filings. Nordstrom
emulates a disclosure transparency that is far above that of their competitors illustrating
19
their ethical business practices. Any questions or concerns raised by viewing
Nordstrom’s financials are addressed and discussed in the footnotes. Illustrated through
sales and core expense manipulation diagnostics, Nordstrom shows a minimal amount
of volatility in their primary ratio analysis. Nordstrom has experienced steady positive
growth over the past five years (2001-2005) due to continuing sales momentum and
ongoing operations improvements. In addition, Nordstrom is continually expanding
opening seven new major retail outlets in 2005 alone. These factors have all led to
consistent financial gains avoiding apparent abnormal peaks and troughs in their
financials. They’re accounting preference was consistent having Deloitte & Touche
L.L.P. audit their financial statements in recent years. The relationship between net
sales and accounts receivable steadily increased reflecting growth and an increase in
earnings. Additional sales and core expense manipulation diagnostics follow this trend.
One exception is when the cash flow from operations and operating income ration
increased by 62% from 2001 to 2002 (1.33-2.16); see tables 7-1 and 7-2. One note
described a portion of the blame on Nordstrom implementing a new perpetual inventory
system during 2002. In addition to these ratios, Nordstrom demonstrated a consistent
comparison between their reported income and tax income. Nordstrom chose to writeoff large assets using the straight-line depreciation method consistent throughout
recent financial statements. Nordstrom did not fail to once again reflect their industry
prestige in the manor they present their financial information. Nordstrom effectively
communicates their activities with their investors and are relatively free of unpredictable or unexplainable transactions.
Table 7-1: Sales and Core Expense Manipulation Diagnostics
Year
2001
2002
2003
2004
2005
20
Sales/AR
7.66
8.06
8.49
11.04
12.08
Sales/Inv
5.85
6.34
6.77
7.76
8.08
Sales/TA
1.53
1.39
1.57
1.55
1.57
CFFO/OI
1.33
2.16
1.19
1.1
1.06
PP&E/Pens
Exp
6.81
7.06
6.76
6.45
6.16
Table 7-2: Sales and Core Expense Manipulation Diagnostics
14
12
10
2001
8
2002
2003
6
2004
2005
4
2
0
Sales/AR
Sales/Inv
Sales/TA Ratio
CFFO/OI
PP&E/Pens Exp
Undo Accounting Distortions
After evaluating all relevant financial data for Nordstrom Inc, we have concluded
that the financial reports have displayed no apparent accounting distortions. After
reviewing the 10-k and 10-q it is very apparent that Nordstrom is very transparent with
their financial information and seem not to try to distort any of the information provided
in their financial reports. They provide all the information in a very clear manner and
adhere to all the current GAAP standards. Any irregularities that may appear on their
financial reports are clearly explained in all their footnotes which helps give you
knowledge on any questions you may have on their financial reporting. Therefore,
Nordstrom’s financial information does not need to be adjusted or corrected.
21
Ratio Analysis
There are several ratios that, when analyzed, can make reasonable estimates for
future performance of a company. These ratios can also show where a firm stands
within its industry by comparing them to competitors, calculating an industry average
and then comparing the firm to the industry. The ratios can be broken down into three
main groups: liquidity ratios, profitability ratios, and capital structure ratios. The
liquidity ratios refer to the company’s assets compared to its financial obligations and
the ability to sustain adequate resources for the near future. Overall with regards to
liquidity ratios, the higher the number the better; but a firm does not want the ratios to
be too high because that would mean they were not using their resources to their full
potential. The next set of ratios is profitability ratios that show the future profit
potential of a firm. The last set of ratios, capital structure ratios, is based on a firm’s
liabilities and equity. These ratios show how a firm’s assets are financed. Tables 8
through 12 show these ratios for Nordstrom, three of its top competitors, and for the
industry.
22
Table 8: Nordstrom Ratio Analysis (2001-2005)
Liquidity Ratios:
Current Ratio
Quick Asset Ratio
Inventory Turnover
Days Supply Inventory
Receivables Turnover
Days Sales Outstanding
OCF Ratio
Working Capital Turnover
Profitability Ratios:
Gross Profit Margin
Operating Expense Ratio
Net Profit Margin
Asset Turnover
Return on Assets
Return on Equity
Capital Structure Ratios:
Debt to Equity
Times Interest Earned
Debt Service Margin
Sustainable Growth Rate:
2001
2002
2003
2004
2005
1.91
0.91
3.86
94.56
7.66
47.65
0.48
6.41
2.17
1.23
4.24
86.08
8.01
45.57
0.45
5.09
2.36
1.28
4.42
82.58
10.08
36.21
0.68
5.36
1.92
1.23
4.97
73.44
11.05
33.03
0.44
5.79
1.77
1.18
5.11
71.42
12.08
28.51
0.19
6.17
0.34
0.32
0.02
1.53
0.03
0.08
0.33
0.31
0.02
1.39
0.03
0.09
0.35
0.29
0.04
1.57
0.06
0.18
0.36
0.28
0.05
1.55
0.08
0.22
0.37
0.27
0.07
1.57
0.11
0.26
1.93
2.1
3.02
4.50%
2.08
1.94
22.2
5.70%
1.99
1.57
1.35
3.67
7.12
16.2
1.94
5.51
2.66
14.40% 19.10% 23.40%
Nordstrom’s Liquidity
As table 8 shows, with regards to the liquidity ratios, Nordstrom is comfortable in
its near-cash assets when compared to its future obligations. Nordstrom has been able
to maintain a healthy overall liquidity in the past five years. One aspect that has been
steadily getting better each year is receivables turnover, which refers to how well the
firm manages its receivables; and therefore also day’s sales outstanding has been
steadily decreasing which means the firm is collecting receivables on a more timely
basis.
Nordstrom’s Profitability
Upon evaluation of the operating efficiency, which takes into consideration the
gross profit margin, the operating expense ratio, and the net profit margin, Nordstrom
did increasingly well. The gross profit margin is steadily increasing, which is a positive
23
effect; the operating expense ratio is steadily decreasing, which is also constructive;
and the net profit margin has been increasing, which also is a positive result. By
evaluating the rest of Nordstrom’s profitability ratios, the asset turnover, return on
assets, and return on equity, Nordstrom once again is upward looking. Nordstrom’s
asset turnover has stayed stable over the past five years; and its returns on assets and
equity have been greatly increasing in the past five years. Analyzing Nordstrom’s past
profitability ratios shows that in the future, Nordstrom should continue being profitably.
Nordstrom’s Capital Structure
Nordstrom’s capital structure ratios make it clear as to how they finance their
assets. Nordstrom’s average debt to equity ratio was 1.78 which means for every dollar
of owner’s equity, there is 1.78 dollars of liabilities; this number over the past five years
has fluctuated, but has somewhat increased. The times interest earned for Nordstrom
had high fluctuation, but the number increased over the past five years, which is a
positive result. This number is a coverage measure, and shows that Nordstrom has
been able to cover its interest expense with its operating income. The last capital
structure ratio, the debt service margin, measures how well the cash flows from
operations cover the installments due on long-term debt. As the table shows,
Nordstrom was able to cover its installments on long-term debt by at least 1.94 dollars
and by most 22.2 dollars. In general, Nordstrom’s capital structure ratios also proved
to be positive for Nordstrom from 2001-2005.
Tables 9 through 12 show Nordstrom’s top competitors and how they performed
from 2001-2005 based on the same ratios.
24
Table 9: Dillard’s Ratio Analysis (2001-2005)
Liquidity Ratios:
Current Ratio
Quick Asset Ratio
Inventory Turnover
Receivables Turnover
OCF Ratio
Working Capital Turnover
Profitability Ratios:
Gross Profit Margin
Operating Expense Ratio
Net Profit Margin
Asset Turnover
Return on Assets
Return on Equity
Capital Structure Ratios:
Debt to Equity
Times Interest Earned
Debt Service Margin
2001
2002
2003
2004
2005
3.24
4.34
2.91
6.21
0.91
6.10
3.03
4.20
2.95
6.10
0.66
7.21
3.53
4.22
2.85
5.09
0.49
6.89
2.19
4.05
2.89
5.18
0.53
7.48
1.87
3.51
2.78
5.4
0.32
7.54
1.04
0.26
0.005
1.19
0.001
0.02
1.05
0.28
0.02
1.17
0.01
0.03
1.06
0.27
0.003
1.13
0.001
0.004
1.08
0.28
0.03
1.32
0.02
0.05
1.03
0.26
0.02
1.36
0.02
0.05
1.77
0.06
2.11
1.62
0.51
1.53
1.91
1.83
1.59
1.47
0.93
2.66
1.40
1.28
2.31
Table 10: Saks Fifth Avenue Ratio Analysis (2001-2005)
Liquidity Ratios:
Current Ratio
Quick Asset Ratio
Inventory Turnover
Receivables Turnover
OCF Ratio
Working Capital Turnover
Profitability Ratios:
Gross Profit Margin
Operating Expense Ratio
Net Profit Margin
Asset Turnover
Return on Assets
Return on Equity
Capital Structure Ratios:
Debt to Equity
Times Interest Earned
Debt Service Margin
25
2001
2002
2003
2004
2005
2.24
0.61
3.04
1.42
0.48
6.17
2.41
0.77
2.84
1.37
0.35
5.26
2.11
0.61
2.59
1.25
0.49
5.62
2.15
0.58
2.64
1.23
0.37
5.77
1.95
0.99
4.64
1.24
0.22
7.45
0.35
0.23
0.0001
1.33
0.0001
0.001
0.37
0.23
0.005
1.28
0.005
0.01
0.38
0.25
0.01
1.30
0.016
0.03
0.38
0.25
0.01
1.36
0.013
0.03
0.37
0.25
0.01
1.55
0.005
0.01
1.04
0.77
0.88
1.04
1.84
9.33
1.02
1.83
5.10
1.30
1.73
2.25
0.95
2.22
0.31
Table 11: Neiman Marcus Ratio Analysis (2001-2005)
Liquidity Ratios:
Current Ratio
Quick Asset Ratio
Inventory Turnover
Receivables Turnover
OCF Ratio
Working Capital Turnover
Profitability Ratios:
Gross Profit Margin
Operating Expense Ratio
Net Profit Margin
Asset Turnover
Return on Assets
Return on Equity
Capital Structure Ratios:
Debt to Equity
Times Interest Earned
Debt Service Margin
2001
2002
2003
2004
2005
2.20
0.81
2.71
155
0.27
6.02
2.21
0.82
2.82
145.6
0.41
5.01
2.40
0.94
2.94
140.2
0.31
4.29
2.43
1.41
3.19
5.83
0.07
3.50
2.83
1.66
3.38
126.67
1.37
3.45
0.06
0.26
0.04
1.66
0.06
0.11
0.07
0.27
0.03
1.52
0.05
0.09
0.07
0.27
0.03
1.50
0.05
0.09
0.09
0.23
0.06
1.35
0.08
0.14
0.11
0.242
0.05
1.14
0.07
0.13
0.89
12.93
1.65
0.80
11.85
1.63
0.82
13.86
2.03
0.86
21.88
52.8
0.63
34.25
84.50
2003
2004
2005
2.68
1.92
2.79
48.85
0.43
5.60
2.26
2.01
2.91
4.08
0.32
5.58
2.22
2.05
3.60
44.44
0.64
6.15
0.50
0.26
0.01
1.31
0.02
0.04
0.52
0.25
0.03
1.34
0.04
0.07
0.50
0.25
0.03
1.44
0.03
0.06
1.25
5.84
2.91
1.21
8.18
19.24
0.99
12.58
29.04
Table 12: Industry Average (2001-2005)
2001
2002
Liquidity Ratios:
Current Ratio
2.56
2.55
Quick Asset Ratio
1.92
1.93
Inventory Turnover
2.89
2.87
Receivables Turnover
54.21
51.02
OCF Ratio
0.55
0.47
Working Capital Turnover
6.10
5.83
Profitability Ratios:
Gross Profit Margin
0.48
0.50
Operating Expense Ratio
0.25
0.26
Net Profit Margin
0.02
0.02
Asset Turnover
1.39
1.32
Return on Assets
0.02
0.02
Return on Equity
0.04
0.04
Capital Structure Ratios:
Debt to Equity
1.23
1.15
Times Interest Earned
4.59
4.73
Debt Service Margin
1.55
4.16
26
Upon completion of analysis concerning Nordstrom and its competitors, past
performance as well as future expectations can be derived. Through thorough ratio
analysis, it becomes visible that Nordstrom once again out performs its competitors in
liquidity and profitability and stands out above the industry average in many of the
valuation criteria. Nordstrom presents consistency and improvement over the past five
years, illustrated by smooth ratio increments, and possible most notably, in the
sustainable growth rate. Nordstrom has performed admirably when compared to their
direct competitors. With a consistently increasing sustainable growth rate from 20012005, we can conclude that volatility is not a concern for Nordstrom, rather increasing
growth and market share. Indices such as this will greatly influence our choice of
forecasting models as well as future predictions. Most importantly, no red flags were
detected that illustrated signs of business stress or recession. Nordstrom is clearing a
remarkable path with the future only looking brighter for this top notch company.
Nordstrom is making every dollar work for them while improving their operating
efficiency in a manner that once again distinguishes Nordstrom amongst the ever
increasing market.
The following fifteen charts compare Nordstrom’s ratios to its three competitors
and to the industry average.
Liquidity Ratios:
Current Ratio
The current ratio shows how much assets a firm has to cover their liabilities and
evaluates liquidity. As shown in chart 1 below, Nordstrom is a slight amount below the
industry average. Although Nordstrom is below the industry average, its current ratio is
not the lowest in the industry. It is positive for the current ratio to grow, but it could
become a negative aspect if the current ratio was so high that not all current assets
were being used to their full potential to make future economic benefit.
27
Value
Chart 1: Current Ratio
4
3.5
3
2.5
2
1.5
1
0.5
0
Nordstrom
Dillard's
Saks
Neiman Marcus
Industry
2001
2002
2003
2004
2005
Yea
Quick Asset Ratio
The quick asset ratio is a measure of how cash and assets nearest to cash can
cover a firm’s liabilities. Nordstrom is again below the industry average line, but so is
every other firm other than Dillard’s. Without Dillard’s quick asset ratio in the mix, the
industry average would be more closely related to that of Nordstrom’s. As chart 2
shows, Nordstrom’s quick asset ratio is close to that of Saks Fifth Avenue and Neiman
Marcus.
Chart 2: Quick Asset Ratio
5
Nordstrom
Value
4
Dillard's
3
Saks
2
Neiman Marcus
1
Industry
0
2001
2002
2003
2004
2005
Year
Inventory Turnover
Inventory turnover shows how efficient a firm can keep its inventory turning at a
steady flow from the manufacturer to the store and out to the consumer. When it
comes to inventory turnover, the higher the better because this means the firm is
getting its inventory out to consumers at a more efficient pace. As chart 3 shows,
28
Nordstrom’s inventory turnover is far higher than all three competitors and the industry
average. This is an excellent position for Nordstrom to be in compared to its
competitors and the industry.
Chart 3: Inventory Turnover
Value
6
5
Nordstrom
4
Dillard's
3
Saks
2
Neiman Marcus
1
Industry
0
2001
2002
2003
2004
2005
Years
Receivables Turnover
A firm’s receivable turnover is the same type ratio as the inventory turnover,
except the receivable turnover ratio has to do with how efficient a firm is at collecting
its receivables. The faster a firm can collect its receivables, the better; and chart 4
shows that Nordstrom’s receivables turnover is well above that of Saks Fifth Avenue
and Dillard’s. Neiman Marcus’ receivables turnover was well outside any reasonable
average and therefore was left out of the chart; for the same reason, the industry
average was left out as well. Compared to Nordstrom’s other two reasonable
competitors, Nordstrom once again outperforms the competition.
Value
Chart 4: Receivables Turnover
14
12
10
8
6
4
2
0
Nordstrom
Dillard's
Saks
Neiman Marcus
Industry
2001
2002
2003
Years
29
2004
2005
The OCF ratio for the four stores and industry is all very similar. With regards to
this ratio value, Nordstrom is neither above nor below the industry.
Chart 5: OCF Ratio
1.5
Value
Nordstrom
1
Dillard's
Saks
0.5
Neiman Marcus
Industry
0
2001
2002
2003
2004
2005
Years
Working Capital Turnover
The working capital turnover of a firm refers to a firm’s sales compared to its
working capital (its current assets minus its current liabilities) and is the last measure of
liquidity. Nordstrom’s working capital turnover is similar to that of its competitors. For
this reason, the ratio is closely related to the industry average as shown below in chart
6.
Chart 6: Working Capital Turnover
8
Nordstrom
Value
6
Dillard's
4
Saks
Neiman Marcus
2
Industry
0
2001
2002
2003
Years
30
2004
2005
Profitability Ratios:
Gross Profit Margin
The gross profit margin is the first profitability ratio and measures gross profit as
a percentage of sales. This ratio is also a measure of a firm’s operating efficiency. For
the most part, the higher this number, the better. As chart 7 shows, the four stores all
have quite a different average ratio, but Nordstrom’s gross profit margin is very similar
to Saks Fifth Avenue’s. Neiman Marcus’ ratio is very low and Dillard’s ratio values are
extremely high, causing the industry’s average to be a slightly higher value than that of
Nordstrom’s. Nordstrom’s gross profit margin has been steady over the past five years,
and is average compared to the industry.
Chart 7: Gross Profit Margin
1.2
Nordstrom
Value
1
0.8
Dillard's
0.6
Saks
0.4
Neiman Marcus
0.2
Industry
0
2001
2002
2003
2004
2005
Years
Operating Expense Ratio
The operating expense ratio illustrates a firm’s selling and administrative
expenses compared to its sales. A decreasing ratio value has a positive impact on the
firm. As chart 8 shows, Nordstrom’s operating expense ratio has been steadily
decreasing over the past five years. The other three competing firms have similar ratio
values; therefore the industry average is in close proximity to the other values in the
chart. Nordstrom’s ratio value is not the best or lowest in the industry, but they are
showing positive change by decreasing this value.
31
Value
Chart 8: Operating Expense Ratio
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
Nordstrom
Dillard's
Saks
Neiman Marcus
Industry
2001
2002
2003
2004
2005
Years
Net Profit Margin
The net profit margin of a company measures its net income divided by its sales.
This is another operating efficiency ratio and an increasing ratio shows growth. As
chart 9 shows, Nordstrom’s net profit margin over the past five years has been steadily
growing, putting it well above the industry average. Neiman Marcus has a net profit
margin similar to Nordstrom’s, but the other two competitors are below Neiman Marcus
and Nordstrom, as well as the industry average. Any drop in the net profit margin is
significant considering that a one percent drop can mean a huge decrease in net
income when the numbers are in the multi-millions. In this category, Nordstrom
definitely outperformed its competition.
Chart 9: Net Profit Margin
0.08
Nordstrom
Value
0.06
Dillard's
0.04
Saks
Neiman Marcus
0.02
Industry
0
2001
2002
2003
2004
2005
Years
Asset Turnover
The asset turnover ratio is a measure of how well a company is utilizing it’s
assets to create future benefit and of how productive a firm’s assets are. Asset
32
turnover assesses asset utilization; therefore, bigger is better, meaning more utilization.
In the high-end apparel industry, as shown below, all of the firms and therefore the
industry average are all very similar in value. On average, Nordstrom’s asset turnover
value has been stable over the past five years.
Chart 10: Asset Turnover
2
Nordstrom
Value
1.5
Dillard's
1
Saks
Neiman Marcus
0.5
Industry
0
2001
2002
2003
2004
2005
Years
Return on Assets
The return on assets ratio is a comprehensive measure of profitability, taking into
account how a firm’s assets and profits are used to create future profit. This ratio is
also positive when increasing; and as chart 11 illustrates, Nordstrom has done an
extraordinary job at increasing its return on assets from 2001-2005. The ratio value of
Nordstrom is well above the industry average in every year and above every competitor
in years 2003-2005.
Chart 11: Return on Assets
0.12
Nordstrom
Value
0.1
0.08
Dillard's
0.06
Saks
0.04
Neiman Marcus
0.02
Industry
0
2001
2002
2003
Years
33
2004
2005
Return on Equity
The return on owner’s equity is a profitability measure and is influenced by the
affiliation between a firm’s debt and its owner’s equity. Return on equity is calculated
by dividing net income by owner’s equity. An increase in this ratio value would be
linked to an increase in profits. Nordstrom clearly has a higher return on equity than its
competitors in years 2002-2005. This shows that Nordstrom, with regards to this ratio,
is likely to be more profitable than its competitors, and the industry.
Chart 12: Return on Equity
0.3
Nordstrom
Value
0.25
0.2
Dillard's
0.15
Saks
0.1
Neiman Marcus
0.05
Industry
0
2001
2002
2003
2004
2005
Years
Capital Structure Ratios
Debt to Equity
The debt to equity ratio is the first of three capital structure ratios. This value is
derived by dividing a firm’s total liabilities by its total owner’s equity. As a firm’s debt
grows larger, this ratio value in turn increases. This ratio value is an important factor in
considering a firm’s credit risk. As this value decreases, there is less leverage within the
firm. As chart 13 shows, Nordstrom’s debt to equity ratio value starts out relatively
high compared to the industry and competition, but then steadily decreases after 2001
and is more in line with the industry for the remaining four years.
34
Chart 13: Debt to Equity
2.5
Nordstrom
Value
2
Dillard's
1.5
Saks
1
Neiman Marcus
0.5
Industry
0
2001
2002
2003
2004
2005
Years
Times Interest Earned
Times interest earned is calculated by dividing operating income by interest
expense. Because this ratio value is a coverage measure, an increase has a positive
impact on the firm. Nordstrom is similar to the industry average and its competition,
with the exception of Dillard’s. Nordstrom’s times interest earned has steadily increased
over the past five years (chart 14), which shows that their coverage of interest expense
is increasing.
Chart 14: Times Interest Earned
40
Nordstrom
Value
30
Dillard's
20
Saks
Neiman Marcus
10
Industry
0
2001
2002
2003
2004
2005
Years
Debt Service Margin
Finally, the debt service margin is a measure of how well a firm’s cash flow from
operations can cover its current portion of its long-term debt; therefore this ratio value
is also a coverage measure and has a positive impact when increased. With the
exception of Neiman Marcus’ unusually high results which should not be included in the
35
industry average, Nordstrom did relatively similar to its other competition. In 2002,
Nordstrom’s debt service margin was unusually high, but overall, it had around the
same coverage as the market.
Chart 15: Debt Service Margin
100
Nordstrom
Value
80
Dillard's
60
Saks
40
Neiman Marcus
20
Industry
0
2001
2002
2003
2004
2005
Years
After analyzing each individual ratio and comparing Nordstrom to three of its
competitors and the industry average, it is apparent that there are no concerns with the
accounting for the components of these ratios. Nordstrom was consistently somewhat
similar to its competitors and the industry average. In most of the above charts
comparing the ratios, Nordstrom outperformed the competition. In its industry
Nordstrom is apparently a leader in utilizing its capital to create value for the firm and
creating profits. (Numbers derived from Edgarscan.pwcglobal.com)
36
Forecasting
To accurately predict the future performance of a firm, the past financials must
be analyzed. Using the ratios and analysis examined in the last section, Nordstrom’s
financial statements can be forecasted quite accurately.
Financial Statement Forecasting Methodology
In order to predict an accurate forecast for Nordstrom’s Income Statement,
Statement of Cash Flows, and Balance sheet a sustainable growth rate is needed. After
examining Nordstrom’s past performance and computing past growth rates on
Nordstrom’s financial, we were able to come up with an average growth rate of six
percent. We used this six percent growth rate to calculate the financial statement line
items for the next fifteen years. Nordstrom is continually experiencing growth as a
company and although Nordstrom has been growing more rapidly than six percent per
year in the past five years, a six percent growth rate is reasonable because the industry
does not support a much higher growth rate.
Balance sheet
The balance sheet’s forecast supports the income statement in reinforcing
continuous growth. As Nordstrom expands through the years, assets will continue to
grow along with liabilities. This is so because of the cost of new stores and larger
inventories. (See appendix B-I)
Income Statement
Growth is apparent in the forecasted Income statement. The percentages in the
common size income statement show no obvious change. (See appendix B-III)
Cash Flows
The cash flows statement shows that net cash flow is slowly rises while net
income is increasing relatively well. Overall Nordstrom is gradually increasing in all
aspects. (See appendix B-V)
37
Valuations Analysis
This section explains how we used the various methods of valuation to value
Nordstrom. We will comparables method, discounted dividends, free cash flows,
abnormal earnings growth, long-run residual income perpetuity, and residual income
method to determine a value of the firm.
Cost of Capital
(See appendix C)
Cost of Equity
We calculated the cost of equity using the CAPM method, or capital asset pricing
model. The formula for CAPM is: Ke=Rf+β(rm-rf). In order to find beta for the firm,
we took the five year stock price history of Nordstrom and the S&P 500. We also found
the risk free returns from the St. Louis Federal Reserve website. We found the market
risk premium by subtracting the monthly S&P 500 returns by the risk free returns. We
then determined beta by taking slope of the firm’s returns and the market risk premium
and got a beta of 1.31. We then plugged all the values into the CAPM formula to come
up with a Ke of 7.69%. This value is somewhat low and will have an effect on the
valuation models.
Cost of Debt
The cost of debt was calculated by averaging the weighted averages of the long
term debt and the current debt. First, all long term debt items were assigned a
weighting based on each individual item’s percentage of the total long term debt. This
weighting was multiplied by each item’s interest rate listed in the 10-K or from the St.
Louis Fed. These weighted interest rates were totaled to get an average long term
debt rate of 5.931%. The same method was used to determine the average of each
item of current debt to come out to 5.914%. These to interest rates were averaged to
get a cost of debt (Kd) of 5.923%.
Weighted Average Cost of Capital
Using the cost of equity and cost of debt, we found the weighted average cost of
capital using the formula:
38
WACCBT=VD/VF (Kd) + VE/VF (Ke) and
WACCAT=VD/VF (Kd-T) + VE/VF (Ke)
Where: WACCBT= Weighted Average Cost of Capital before taxes
WACCAT= Weighted Average Cost of Capital after taxes
VD= Value of debt
VF= Value of firm
VE= Value of equity
Kd= Cost of debt
Ke= Cost of equity
T= Tax rate
Table 13: Weighted Average Cost of Capital
Weighted Average Cost of Capital
WACC Before Tax
2,828,668/4,921,349(.05923)
+2,092,681/4,921,349(.07694)=.0668
6.68%
WACC After Tax
2,828,668/4,921,349(.05923)(1-.377)
+2,092,681/4,921,349(.07694)=.0539
5.39%
Intrinsic Valuations
(Valuation Models Spreadsheets can be found in the Appendix)
Discounted Dividends
We calculated the Discounted Dividends valuation by first forecasting dividends
growth and the discounting them back to 2005 using the Ke. Nordstrom has paid
dividends around 30 cents per share for the last five years and have slowly grown every
year to 33 cents per share in 2005; therefore, we forecasted a dividend growth of 3%
per year. After all of these calculations we valued Nordstrom at $7.31 per share.
Nordstrom’s stock is currently trading at the price of $46.30. According to our valuation
Nordstrom is overvalued by a large margin. We think this method is not an accurate
way to value Nordstrom because the company pays low dividends.
39
Table 14: Discounted Dividends Sensitivity Analysis
Sensitivity Analysis
Ke
0
g
0.01
0.03
0.05
0.04
$10.74
$13.37
$34.45
($28.78)
0.05
$8.50
$9.95
$17.21
$0.00
0.06
$7.02
$7.91
$11.46
$29.22
0.07
$5.96
$6.55
$8.59
$14.71
0.08
$5.18
$5.58
$6.86
$9.87
As you can see from the sensitivity analysis, the cost of equity would have to fall below
4% in order to get close to Nordstrom’s actual trading price.
Discounted Free Cash Flows
The discounted free cash flows method is calculated similarly to discounted
dividends. We forecasted future free cash flows to the firm with a 6% growth rate and
discount them back using the weighted average cost of capital. We total the
discounted cash flows, then add a terminal perpetuity and discount it back to 2005.
This gives us the value of the firm; we then subtract the book value of debt in order to
get the value of equity. We take the value of equity and divide it by the total shares
outstanding to get a value of $3.47 per share. This value is also significantly lower than
the current trading price of $46.30. This method is also not a good method to value
Nordstrom because cash flows to the firm over the past five years have had
inconsistent changes making it hard to get an accurate growth rate. We chose 6%
growth rate because it was steady and consistent with average growth of net sales over
the past five years. Also the cost of equity maybe low, causing the weighted average
cost of capital to be low.
40
Table 15: Discounted Free Cash Flows Sensitivity Analysis
Sensitivity Analysis
g
WACC
0.01
0.03
0.06
0.1
0.02
$4.60
$4.85
$5.23
$5.74
0.04
$3.57
$3.79
$4.13
$4.58
0.0539
$2.95
$3.16
$3.47
$3.89
0.07
$2.33
$2.52
$2.80
$3.19
0.1
$1.36
$1.52
$1.77
$2.10
This sensitivity analysis supports the above statements. As the WACC decreases and
growth rate increases, the price increases closer to the actual trading price.
Residual Income
The residual income model uses the book value of equity per share, the
dividends per share, and the earnings per share to value the firm. We used the book
value of equity per share of 2005 and used that as the book value for 2006. We then
added the forecasted earnings per share and subtracted the forecasted dividends per
share to get the ending book value of equity for 2006. We then repeated the process
to forecast all the way out to 2015. Next, we took the ending book value of equity and
multiplied it by the Ke to get the normal income. We subtracted the normal income
from the earnings per share and came up with the residual income. The residual
income was then discounted back and totaled and then added to the book value of
equity per share and the present value of the perpetuity to get a value of $41.79. This
is the closest valuation to the actual price per share of $46.30.
Table 16: Residual Income Sensitivity Analysis
Sensitivity
Analysis
Ke
41
0.04
0.05
0.07
0.08
0.1
0
g
0.01
0.03
0.05
$55.10
$45.58
$34.59
$31.12
$26.21
$66.75
$52.26
$37.59
$33.33
$27.56
$155.86
$83.82
$47.30
$39.83
$31.10
($105.22)
$0.00
$74.10
$53.58
$36.75
This sensitivity analysis shows that lower cost of equity and higher growth rates
increase the value. The method seems to be the most accurate way to value
Nordstrom.
Long-run Residual Income Perpetuity
The long-run residual income perpetuity takes the book value of equity in year 0
added to the book value of equity in year 0 multiplied by the value of return on equity
subtracted by the Ke divided by Ke subtracted by the growth rate.
The formula looks like: P0=BVE0+ BVE0(ROE-Ke/Ke-g)
This was figured for every year for ten years and the amounts were averaged together.
Our cost of equity is 7.69%, book value of equity is 7.76, our average return on equity
came out to 15.27%, and our average growth came out to 12.86%. This method
valued Nordstrom at ($3.60). This value is well below the actual trading value of
$46.30. This method is not a good way to value this company. Again a low cost of
equity caused and undervalue of the actual price.
Table 17: Long-run Residual Income Perpetuity Sensitivity Analysis
Sensitivity Analysis
Ke
ROE
42
0.01
0.05
0.0769
0.12
0.14
0.1
($5.11)
($9.20)
($19.96)
$23.01
$11.50
g
0.12
($2.77)
($4.36)
($7.08)
$0.00
$15.25
0.1342
($1.57)
($2.31)
($3.40)
($13.72)
$33.58
0.15
($0.52)
($0.72)
($0.99)
($2.41)
($7.22)
0.1
0.12
0.1593
0.2
0.24
0.1
$0.00
($6.73)
($19.96)
($33.65)
($47.11)
g
0.12
$3.60
$0.00
($7.08)
($14.42)
($21.63)
0.1342
$4.63
$1.92
($3.40)
($8.92)
($14.34)
0.15
$5.31
$3.19
($0.99)
($5.31)
($9.56)
ROE
0.01
$2.14
$0.89
($1.57)
($4.11)
($6.61)
0.1
0.12
0.1593
0.2
0.24
Ke
0.05
$3.15
$1.31
($2.32)
($6.07)
($9.76)
0.0769
$4.63
$1.92
($3.40)
($8.93)
($14.35)
0.12
$18.72
$7.76
($13.77)
($36.06)
($57.97)
0.14
($45.45)
($18.84)
$33.70
$87.57
$140.77
This sensitivity analysis shows that higher cost equity creates a higher return on equity
and therefore bringing the value closer to the actual price.
Abnormal Earnings Growth
The abnormal earnings growth is based on the earnings per share and the
reinvested dividends. The forecasted earnings per share are added the to the
reinvested dividend which is the previous years dividends multiplied by the cost of
equity. This gets the cumulative dividends earnings. Then the earnings per share is
multiplied by one plus the cost of equity to get the normal earnings. The difference of
cumulative dividends earnings and the normal earnings equals the abnormal earnings
growth. The AEG are discounted back to 2005 and totaled and added to the base year
earnings per share to get the total average earnings per share perpetuity. This is then
divided by the cost of equity. Nordstrom’s came out the $19.92. This is also
significantly lower than the actual price of $46.30. This is caused by having negative
abnormal earnings growth each year.
Table 18: Abnormal Earnings Growth Sensitivity Analysis
Sensitivity Analysis
Ke
43
0
g
0.01
0.03
0.05
0.04
$37.00
$40.34
$47.84
$56.59
0.05
$27.49
$29.94
$35.45
$41.86
0.07
$17.03
$18.51
$21.84
$25.71
0.08
$13.93
$15.12
$17.79
$20.91
0.1
$9.78
$10.59
$12.42
$14.53
This sensitivity analysis shows that a higher growth rate gets the value closer to the
actual price. The method is better than discounted dividends, free cash flows, and long
run residual income perpetuity, but the residual income method seems to be the best
method of valuing Nordstrom.
Nordstrom Z-Score
A firm’s Z-score is a discriminate analysis model. This model can be valuated by
the formula:
Z-Score = 1.2 [Working Capital/Total Assets] + 1.4 [Retained Earnings/Total Assets]
+ 3.3 [Earnings Before Interest and Taxes] + 0.6 [Market Value of
Equity/Book Value of Liabilities] + 1.0 [Sales/Total Assets]
Nordstrom’s past five years z-scores are shown in table ***:
Table 19: Nordstrom’s Z-scores
Nordstrom z-score
2002
2.5798
2003
2.5220
2004
2.8311
2005
2.7029
2006
3.0566
If the z-score is below 1.81, it is considered a worse off company; a score
between 1.81 and 2.67 is moderate, and a z-score of above 2.67 is considerate a high
quality company. As table 19 shows, Nordstrom’s z-score has been well above the
healthy level of 2.67.
44
Appendix
APPENDIX A:
Core Financial Ratios
Current
Ratio
2001
Nordstrom
1.91
Dillard’s
3.24
Saks
2.24
Neiman
Marcus
2.20
Industry
Average
2.56
2002
2.17
3.03
2.41
2.21
2.55
2003
2.36
3.53
2.11
2.40
2.68
2004
1.92
2.19
2.15
2.43
2.26
2005
1.77
1.87
1.95
2.83
2.22
Industry
Average
1.92
Quick
Asset
Ratio
2001
Nordstrom
0.91
Dillard’s
4.34
Saks
0.61
Neiman
Marcus
0.81
2002
1.23
4.20
0.77
0.82
1.93
2003
1.28
4.22
0.61
0.94
1.92
2004
1.23
4.05
0.58
1.41
2.01
2005
1.18
3.51
0.99
1.66
2.05
Inventory
Turnover
2001
Nordstrom
3.86
Dillards’s
2.91
Saks
3.04
Neiman
Marcus
2.71
Industry
Average
2.89
2002
4.24
2.95
2.84
2.82
2.87
2003
4.42
2.85
2.59
2.94
2.79
2004
4.97
2.89
2.64
3.19
2.91
2005
5.11
2.78
4.64
3.38
3.60
45
Receivables
Turnover
Nordstrom
2001
7.66
Dillards’s
6.21
Saks
1.42
Neiman
Marcus
N/A
Industry
Average
3.81
2002
8.01
6.10
1.37
N/A
3.73
2003
10.08
5.09
1.25
N/A
3.17
2004
11.05
5.18
1.23
N/A
3.21
2005
12.08
5.40
1.24
N/A
3.32
OCF Ratio
2001
Nordstrom
0.48
Dillards’s
0.91
Saks
0.48
Neiman
Marcus
0.27
Industry
Average
0.55
2002
0.45
0.66
0.35
0.41
0.47
2003
0.68
0.49
0.49
0.31
0.43
2004
0.44
0.53
0.37
0.07
0.32
2005
0.19
0.32
0.22
1.37
0.64
Industry
Average
6.10
Working
Capital
Turnover
2001
Nordstrom
6.41
Dillards’s
6.10
Saks
6.17
Neiman
Marcus
6.02
2002
5.09
7.21
5.26
5.01
5.83
2003
5.36
6.89
5.62
4.29
5.60
2004
5.79
7.48
5.77
3.50
5.58
2005
6.17
7.54
7.45
3.45
6.15
46
Gross
Profit
Margin
2001
Nordstrom
0.34
Dillards’s
0.32
Saks
0.35
Neiman
Marcus
0.33
Industry
Average
0.33
2002
0.33
0.32
0.37
0.32
0.34
2003
0.35
0.34
0.38
0.33
0.35
2004
0.36
0.32
0.38
0.34
0.35
2005
0.37
0.33
0.37
0.35
0.35
Industry
Average
0.25
Operating
Expense
Ratio
2001
Nordstrom
0.32
Dillards’s
0.26
Saks
0.23
Neiman
Marcus
0.26
2002
0.31
0.28
0.23
0.27
0.26
2003
0.29
0.27
0.25
0.27
0.26
2004
0.28
0.28
0.25
0.23
0.25
2005
0.27
0.26
0.25
0.24
0.25
Industry
Average
0.02
Net Profit
Margin
2001
Nordstrom
0.02
Dillards’s
0.005
Saks
0.0001
Neiman
Marcus
0.04
2002
0.02
0.02
0.005
0.03
0.02
2003
0.04
0.003
0.01
0.03
0.01
2004
0.05
0.03
0.01
0.06
0.03
2005
0.07
0.02
0.01
0.05
0.03
47
Asset
Turnover
2001
Saks
1.33
Neiman
Marcus
1.66
Industry
Average
1.39
Nordstrom
1.53
Dillards’s
1.19
2002
1.39
1.17
1.28
1.52
1.32
2003
1.57
1.13
1.30
1.50
1.31
2004
1.55
1.32
1.36
1.35
1.34
2005
1.57
1.36
1.55
1.41
1.44
Return on
Assets
2001
Nordstrom
0.03
Dillards’s
0.001
Saks
0.0001
Neiman
Marcus
0.06
Industry
Average
0.02
2002
0.03
0.01
0.005
0.05
0.02
2003
0.06
0.001
0.016
0.05
0.02
2004
0.08
0.02
0.013
0.08
0.04
2005
.011
0.02
0.005
0.07
0.03
Industry
Average
0.04
Return on
Equity
2001
Nordstrom
0.08
Dillards’s
0.02
Saks
0.001
Neiman
Marcus
0.11
2002
0.09
0.03
0.01
0.09
0.04
2003
0.18
0.004
0.03
0.09
0.04
2004
0.22
0.05
0.03
0.14
0.07
2005
0.26
0.05
0.01
0.13
0.06
48
Debt to
Equity
2001
Nordstrom
1.93
Dillards’s
1.77
Saks
1.04
Neiman
Marcus
0.89
Industry
Average
1.23
2002
2.08
1.62
1.04
0.80
1.15
2003
1.99
1.91
1.02
0.82
1.25
2004
1.57
1.47
1.30
0.86
1.21
2005
1.35
1.40
0.95
0.63
0.99
Times
Interest
Earned
2001
Nordstrom
2.10
Dillards’s
0.06
Saks
0.77
Neiman
Marcus
12.93
Industry
Average
4.59
2002
1.94
0.51
1.84
11.85
4.73
2003
3.67
1.83
1.83
13.86
5.84
2004
7.12
0.93
1.73
N/A
1.33
2005
16.2
1.28
2.22
N/A
1.75
Industry
Average
1.55
Debt
Service
Margin
2001
Nordstrom
3.02
Dillards’s
2.11
Saks
0.88
Neiman
Marcus
1.65
2002
22.2
1.53
9.33
1.63
4.16
2003
1.94
1.59
5.10
2.03
2.91
2004
5.51
2.66
2.25
N/A
2.46
2005
2.66
2.31
0.31
N/A
1.31
49
APPENDIX B:
Actual and Forecasted Financials
Actual Balance Sheet
Numbers in Thousands
2001
2002
2003
2004
2005
Total Current Assets
2,057,111
2,088,028
2,524,843
2,572,444
2,874,157
Total Noncurrent Assets
1,994,068
2,023,879
2,044,390
2,032,946
2,047,192
Total Assets
4,051,179
4,111,907
4,569,233
4,605,390
4,921,349
950,138
885,145
1,122,559
1,341,152
1,623,312
Total Liabilities
2,736,691
2,739,043
2,935,224
2,816,396
2,828,668
Total Shareholder's Equity
1,314,488
1,372,864
1,634,009
1,788,994
2,092,681
Total liabilities and Shareholder's Equity
4,051,179
4,111,907
4,569,233
4,605,390
4,921,349
Total Current Liabilities
I. Actual and Forecast Balance Sheet
Forecast Balance Sheet
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
3,046,606
3,229,403
3,423,167
3,628,557
3,846,270
4,077,047
4,321,669
4,580,970
4,855,828
5,147,177
2,170,024
2,300,225
2,438,238
2,584,533
2,739,605
2,903,981
3,078,220
3,262,913
3,458,688
3,666,209
5,216,630
5,529,628
5,861,405
6,213,090
6,585,875
6,981,028
7,399,889
7,843,883
8,314,516
8,813,387
1,720,711
1,823,953
1,933,391
2,049,394
2,172,358
2,302,699
2,440,861
2,587,313
2,742,551
2,907,105
2,998,388
3,178,291
3,368,989
3,571,128
3,785,396
4,012,520
4,253,271
4,508,467
4,778,975
5,065,714
2,218,242
2,351,336
2,492,417
2,641,962
2,800,479
2,968,508
3,146,618
3,335,416
3,535,541
3,747,673
5,216,630
5,529,628
5,861,405
6,213,090
6,585,875
6,981,028
7,399,889
7,843,883
8,314,516
8,813,387
50
II. Pro-Forma Actual and Forecast Balance Sheet
Pro-Forma Actual Balance Sheet
2001
2002
2003
2004
Total Current Assets
50.8
50.80%
55.30%
55.90%
58.4
Total noncurrent Assets
49.2
49.20%
44.70%
44.10%
41.60%
Total Assets
2005
100%
100%
100%
100%
100%
Total Current Liabilities
23.5
21.50%
24.60%
29.10%
33%
Total Liabilities
44.1
45.10%
39.70%
32.10%
24.50%
Total Shareholders Equity
32.4
33.40%
35.70%
38.80%
42.50%
100%
100%
100%
100%
100%
Total Liabilities and Shareholders Equity
Pro-Forma Forecast Balance Sheet
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
58.40%
58.40%
58.40%
58.40%
58.40%
58.40%
58.40%
58.40%
58.40%
58.40%
41.60%
41.60%
41.60%
41.60%
41.6
41.6
41.6
41.6
41.6
41.6
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
33%
33%
33%
33%
33%
33%
33%
33%
33%
33%
24.50%
24.50%
24.50%
24.50%
24.50%
24.50%
24.50%
24.50%
24.50%
24.50%
42.50%
42.50%
42.50%
42.50%
42.50%
42.50%
42.50%
42.50%
42.50%
42.50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
51
III. Actual and Forecasted Income Statement
Actual Income Statement
Amounts in thousands
2001
Net Sales
Cost of sales and related buying and occupancy costs
Gross profit
2002
2003
2004
2005
5,239,241
5,944,656
6,448,678
7,131,388
7,722,860
(3,836,961)
(3,970,022)
(4,215,446)
(4,559,388)
(4,888,023)
1,402,280
1,974,634
2,233,132
2,572,000
2,834,837
(1,399,568)
(1,783,210)
(1,899,129)
(2,020,233)
(2,100,666)
Operating Income
172,712
191,424
334,003
551,767
734,171
Interest expense, net
(79,258)
(81,921)
(90,952)
(77,428)
(45,300)
other income including finance charges, net
125,259
139,289
155,090
172,942
196,354
earnings before income tax expense
123,152
195,624
398,141
647,281
885,225
(123,489)
(141,548)
(155,300)
(253,831)
(333,886)
102,458
142,589
242,841
393,450
551,339
Selling, general and administrative expenses
income tax expense
net earnings
Forecast Income Statement
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
8,186,232
8,677,405
9,198,050
9,749,933
10,334,929
10,955,025
11,612,326
12,309,066
13,047,609
13,830,466
(5,181,304)
(5,492,183)
(5,821,714)
(6,171,016)
(6,541,277)
(6,933,754)
(7,349,779)
(7,790,766)
(8,258,212)
(8,753,705)
3,004,927
3,185,223
3,376,336
3,578,916
3,793,651
4,021,270
4,262,547
4,518,299
4,789,397
5,076,761
(2,226,706)
(2,360,308)
(2,501,927)
(2,652,042)
(2,811,165)
(2,979,835)
(3,158,625)
(3,348,142)
(3,549,031)
(3,761,973)
778,221
824,915
874,409
926,874
982,486
1,041,436
1,103,922
1,170,157
1,240,366
1,314,788
(48,017)
(50,899)
(53,953)
(57,190)
(60,622)
(64,259)
(68,114)
(72,201)
(76,533)
(81,125)
208,135
220,623
233,861
247,892
262,766
278,532
295,244
312,958
331,736
351,640
938,339
994,639
1,054,317
1,117,576
1,184,631
1,255,709
1,331,051
1,410,914
1,495,569
1,585,303
(353,919)
(375,154)
(397,664)
(421,523)
(446,815)
(473,624)
(502,041)
(532,164)
(564,093)
(597,939)
584,419
619,485
656,654
696,053
737,816
782,085
829,010
878,751
931,476
987,364
52
IV. Pro-Forma Income Statement
Actual Pro-Forma Income Statement
2001
2002
2003
2004
2005
100%
100%
100%
100%
100%
Cost of sales and related buying and occupancy costs
73.20%
67%
65.40%
63.90%
63.30%
Gross profit
26.80%
33%
34.60%
36.10%
36.70%
Selling, general and administrative expenses
26.70%
29.90%
29.40%
28.30%
27.20%
Operating Income
3.30%
3.20%
5.20%
7.70%
9.50%
Interest expense, net
1.50%
1.40%
1.40%
1.10%
0.59%
other income including finance charges, net
2.40%
2.30%
2.40%
2.40%
2.50%
earnings before income tax expense
2.40%
0.30%
6.20%
9.10%
11.50%
income tax expense
2.40%
2.40%
2.40%
3.60%
4.30%
net earnings
1.90%
2.40%
3.80%
5.50%
7.10%
Net Sales
Forecast Pro-Forma Income Statement
2006
2007
2008
2010
2011
2012
2013
2014
2015
100%
100%
100%
100%
100%
100%
100%
100%
100%
63.30%
63.30%
63.30%
63.30%
63.30%
63.30%
63.30%
63.30%
63.30%
36.70%
36.70%
36.70%
36.70%
36.70%
36.70%
36.70%
36.70%
36.70%
27.70%
27.70%
27.70%
27.70%
27.70%
27.70%
27.70%
27.70%
27.70%
9.50%
9.50%
9.50%
9.50%
9.50%
9.50%
9.50%
9.50%
9.50%
0.59%
0.59%
0.59%
0.59%
0.59%
0.59%
0.59%
0.59%
0.59%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
11.50%
11.50%
11.50%
11.50%
11.50%
11.50%
11.50%
11.50%
11.50%
4.30%
4.30%
4.30%
4.30%
4.30%
4.30%
4.30%
4.30%
4.30%
7.10%
7.10%
7.10%
7.10%
7.10%
7.10%
7.10%
7.10%
7.10%
53
V. Actual and Forecasted Statement of Cash Flows
2001
$124,688
Actual Statement of Cash Flows
2002
2003
2004
$90,244
$242,841
$393,450
2005
$551,399
$488,510
$390,514
$599,282
$606,346
$776,232
($370,573)
$137,007
$254,944
($489,150)
($130,952)
($229,588)
($309,597)
($73,657)
$216,028
($110,033)
($475,971)
$20,342
($292,093)
($382,106)
$102,033
in thousands
Net Income
Cash from
Operations
Cash from
Investments
Cash from Financing
Net Cash Flow
2006
584,483
822,806
309,619)
405,032)
108,155
Forecasted Statement of Cash Flows
2007
2008
2009
2010
$619,552
$656,725
$696,129
$737,896
$872,174
$924,505
$979,975 $1,038,774
($328,196) ($347,887) ($368,761) ($390,886)
($429,334) ($455,094) ($482,400) ($511,344)
$114,644
$121,523
$128,814
$136,543
2011
$782,170
$1,101,100
($414,340)
($542,025)
$144,736
2012
$829,100
$1,167,166
($439,200)
($574,546)
$153,420
2013
$878,846
$1,237,196
($465,552)
($609,019)
$162,625
2014
$931,577
$1,311,428
($493,485)
($645,560)
$172,383
2015
$987,472
$1,390,113
($523,094)
($684,294)
$182,726
VI. Pro Forma Statement of Cash Flows
percentage of net income
Net Income
Cash from
Operations
Cash from
Investments
Cash from Financing
Net Cash Flow
2006
100.0%
140.8%
-53.0%
-69.3%
18.5%
2001
100.0%
2005
100.0%
391.8%
432.7%
246.8%
154.1%
140.8%
-297.2%
109.9%
204.5%
-542.0%
-145.1%
-254.4%
-127.5%
-30.3%
89.0%
-28.0%
-121.0%
5.2%
-53.0%
-69.3%
18.5%
Forecasted Statement of Cash Flows
2007
2008
2009
100.0%
100.0%
100.0%
140.8%
140.8%
140.8%
-53.0%
-53.0%
-53.0%
-69.3%
-69.3%
-69.3%
18.5%
18.5%
18.5%
54
Actual Statement of Cash Flows
2002
2003
2004
100.0%
100.0%
100.0%
2010
100.0%
140.8%
-53.0%
-69.3%
18.5%
2011
100.0%
140.8%
-53.0%
-69.3%
18.5%
2012
100.0%
140.8%
-53.0%
-69.3%
18.5%
2013
100.0%
140.8%
-53.0%
-69.3%
18.5%
2014
100.0%
140.8%
-53.0%
-69.3%
18.5%
2015
100.0%
140.8%
-53.0%
-69.3%
18.5%
55
APPENDIX C
Cost of Capital
I. Cost of Debt
Numbers in Thousands
Long Term Debt Schedule
Private Label Securitization, 4.82%, due 2006
Senior debentures, 6.95%, due 2028
Senior notes, 5.625%, due 2009
Notes payable, 6.7%, due 2005
Mortgage payable, 7.68%, due 2020
Other
Fair market value of interest rate swap
Total long-term debt
Less current portion
Total due beyond one year
2005
300,000
300,000
250,000
96,027
75,406
2006
300,000
300,000
250,000
16,495
(7,821)
1,030,107
(101,097)
929,010
22,811
(11,050)
934,394
(306,618)
627,776
2006
Percent of
total
32.11%
32.11%
26.76%
0.00%
7.77%
72,633
2.44%
-1.18%
100.00%
2006
Percent of
total
Current Liabilities
Rate
4.82%
6.95%
5.63%
6.70%
7.68%
4.80%
5.63%
Rate
Accounts payable
Accrued salaries, wages and related benefits
482,394
287,904
540,019
285,982
33.27%
17.62%
5.97%
6.08%
Other current liabilities
354,201
409,076
25.20%
5.84%
115,556
101,097
1,341,152
81,617
306,618
1,623,312
5.03%
18.89%
100.00%
5.28%
5.93%
Income taxes payable
Current portion of long term debt
Total current liabilities
Average interest rate on long term debt
Average interest rate on current debt
Average interest rate of debt (Kd)
5.931%
5.914%
5.923%
Tax rate
Effective tax rate
2003
39.00%
55
2004
39.20%
2005
37.70%
Source
10-K
10-K
10-K
10-K
10-K
St.Louis
Fed
10-K
Source
St. Louis
Fed
10-K
St. Louis
Fed
St. Louis
Fed
10-K
Weighted
Rate
1.55%
2.23%
1.50%
0.00%
0.60%
0.12%
-0.07%
5.93%
Weighted
Rate
1.99%
1.07%
1.47%
0.27%
1.12%
5.91%
56
II. Risk Free Return Data
Date
Close
2-Oct06
1-Sep06
1-Aug06
3-Jul-06
1-Jun06
1-May06
3-Apr06
1-Mar06
1-Feb06
3-Jan06
1-Dec05
1-Nov05
3-Oct05
1-Sep05
1-Aug05
1-Jul-05
1-Jun05
2-May05
1-Apr05
1-Mar05
1-Feb05
3-Jan05
1-Dec04
1-Nov04
1-Oct04
1-Sep04
47.35
42.3
56
JWN
Returns
Close
S&P
Returns
mkt
premium
Riskfree
annual
Monthly
Risk
Free
47.35
0.119385
1377.94
0.031508
0.0276
10/1/2006
4.69
0.00391
42.3
0.129355
1335.85
0.024566
0.0207
9/1/2006
4.67
0.00389
37.455
0.091983
1303.82
0.021274
0.0173
8/1/2006
4.82
0.00402
34.3
36.5
-0.06027
-0.01178
1276.66
1270.2
0.005086
8.66E-05
0.0009
-0.0041
7/1/2006
6/1/2006
5.04
5.07
0.00420
0.00423
36.935
-0.03639
1270.09
-0.03092
-0.0351
5/1/2006
5.00
0.00417
38.33
38.33
-0.02169
1310.61
0.012156
0.0081
4/1/2006
4.90
0.00408
39.18
39.18
0.028212
1294.87
0.011096
0.0072
3/1/2006
4.72
0.00393
38.105
-0.08665
1280.66
0.000453
-0.0034
2/1/2006
4.57
0.00381
41.72
41.72
0.115508
1280.08
0.025467
0.0218
1/1/2006
4.35
0.00363
37.4
37.4
0.011768
1248.29
-0.00095
-0.0046
12/1/2005
4.39
0.00366
36.965
0.066811
1249.48
0.035186
0.0315
11/1/2005
4.45
0.00371
34.65
34.65
0.009615
1207.01
-0.01774
-0.0213
10/1/2005
4.33
0.00361
34.32
34.32
0.019456
1228.81
0.006949
0.0036
9/1/2005
4.01
0.00334
33.665
-0.09038
1220.33
-0.01122
-0.0147
8/1/2005
4.12
0.00343
37.01
67.97
-0.4555
0.111984
1234.18
1191.33
0.035968
-0.00014
0.0327
-0.0033
7/1/2005
6/1/2005
3.98
3.77
0.00332
0.00314
61.125
0.202538
1191.5
0.029952
0.0267
5/1/2005
3.85
0.00321
50.83
50.83
-0.08216
1156.85
-0.02011
-0.0234
4/1/2005
4.00
0.00333
55.38
55.38
0.02889
1180.59
-0.01912
-0.0226
3/1/2005
4.17
0.00348
53.825
0.115544
1203.6
0.018903
0.0158
2/1/2005
3.77
0.00314
48.25
48.25
0.032527
1181.27
-0.02529
-0.0284
1/1/2005
3.71
0.00309
46.73
46.73
0.06653
1211.92
0.032458
0.0295
12/1/2004
3.60
0.00300
43.815
0.014706
1173.82
0.038595
0.0357
11/1/2004
3.53
0.00294
43.18
43.18
0.129184
1130.2
0.014014
0.0112
10/1/2004
3.35
0.00279
38.24
38.24
0.028095
1114.58
0.009364
0.0066
9/1/2004
3.36
0.00280
37.35
Dividends
0.105
34.3
36.5
36.83
38
36.88
33.58
0.105
0.105
0.085
0.085
37.01
67.97
61.04
53.76
43.75
0.085
0.065
0.065
2-Aug04
1-Jul-04
1-Jun04
3-May04
1-Apr04
1-Mar04
2-Feb04
2-Jan04
1-Dec03
3-Nov03
1-Oct03
2-Sep03
1-Aug03
1-Jul-03
2-Jun03
1-May03
1-Apr03
3-Mar03
3-Feb03
2-Jan03
2-Dec02
1-Nov02
1-Oct02
3-Sep02
1-Aug02
1-Jul-02
3-Jun02
1-May02
1-Apr-
57
37.13
0.065
37.195
-0.15273
1104.24
0.002287
-0.0006
8/1/2004
3.47
0.00289
43.9
42.61
0.030275
0.049378
1101.72
1140.84
-0.03429
0.017989
-0.0374
0.0147
7/1/2004
6/1/2004
3.69
3.93
0.00308
0.00328
40.605
0.13963
1120.68
0.012083
0.0089
5/1/2004
3.85
0.00321
35.63
35.63
-0.10702
1107.3
-0.01679
-0.0196
4/1/2004
3.39
0.00283
39.9
39.9
0.017987
1126.21
-0.01636
-0.0187
3/1/2004
2.79
0.00233
39.195
-0.00267
1144.94
0.012209
0.0097
2/1/2004
3.07
0.00256
39.3
39.3
0.145773
1131.13
0.017276
0.0147
1/1/2004
3.12
0.00260
34.3
34.3
-0.00738
1111.92
0.050765
0.0480
12/1/2003
3.27
0.00273
34.555
0.133322
1058.2
0.007129
0.0044
11/1/2003
3.29
0.00274
30.49
30.49
0.22894
1050.71
0.054961
0.0523
10/1/2003
3.19
0.00266
24.81
24.81
-0.05015
995.97
-0.01194
-0.0146
9/1/2003
3.18
0.00265
26.12
0.237328
1008.01
0.017873
0.0151
8/1/2003
3.37
0.00281
21.11
19.52
0.081455
0.04385
990.31
974.5
0.016224
0.011322
0.0138
0.0094
7/1/2003
6/1/2003
2.87
2.27
0.00239
0.00189
18.7
0.079054
963.59
0.050899
0.0488
5/1/2003
2.52
0.00210
17.33
17.33
0.069753
916.92
0.081044
0.0786
4/1/2003
2.93
0.00244
16.2
16.2
-0.05041
848.18
0.008358
0.0060
3/1/2003
2.78
0.00232
17.06
-0.05432
841.15
-0.017
-0.0194
2/1/2003
2.90
0.00242
18.04
18.04
-0.04902
855.7
-0.02741
-0.0300
1/1/2003
3.05
0.00254
18.97
18.97
-0.05387
879.82
-0.06033
-0.0629
12/1/2002
3.03
0.00253
20.05
0.006526
936.31
0.05707
0.0545
11/1/2002
3.05
0.00254
19.92
19.92
0.110368
885.76
0.086449
0.0840
10/1/2002
2.95
0.00246
17.94
17.94
-0.0743
815.28
-0.11002
-0.1125
9/1/2002
2.94
0.00245
19.38
0.025397
916.07
0.004881
0.0021
8/1/2002
3.29
0.00274
18.9
22.65
-0.16556
-0.08169
911.62
989.82
-0.079
-0.07246
-0.0822
-0.0759
7/1/2002
6/1/2002
3.81
4.19
0.00318
0.00349
24.665
0.051364
1067.14
-0.00908
-0.0128
5/1/2002
4.49
0.00374
23.46
-0.04245
1076.92
-0.06142
-0.0653
4/1/2002
4.65
0.00388
43.9
42.61
40.55
39.14
34.5
26.07
0.055
0.055
0.055
0.05
21.11
19.52
18.65
17.01
20
19.33
0.05
0.05
0.05
0.05
18.9
22.65
24.62
23.46
0.045
02
1-Mar02
1-Feb02
2-Jan02
3-Dec01
1-Nov01
1-Oct01
4-Sep01
1-Aug01
2-Jul-01
1-Jun01
1-May01
2-Apr01
1-Mar01
1-Feb01
2-Jan01
1-Dec00
1-Nov00
2-Oct00
1-Sep00
1-Aug00
3-Jul-00
1-Jun00
1-May00
3-Apr00
1-Mar00
1-Feb00
31-Jan00
58
24.5
24.5
-0.0394
1147.39
0.036739
0.0328
3/1/2002
4.74
0.00395
25.505
0.008103
1106.73
-0.02077
-0.0243
2/1/2002
4.30
0.00358
25.3
25.3
0.250618
1130.2
-0.01557
-0.0192
1/1/2002
4.34
0.00362
20.23
20.23
0.06614
1148.08
0.007574
0.0039
12/1/2001
4.39
0.00366
18.975
0.345745
1139.45
0.075176
0.0719
11/1/2001
3.97
0.00331
14.1
14.1
-0.02422
1059.78
0.018099
0.0148
10/1/2001
3.91
0.00326
14.45
14.45
-0.28092
1040.94
-0.08172
-0.0852
9/1/2001
4.12
0.00343
20.095
-0.10689
1133.58
-0.06411
-0.0679
8/1/2001
4.57
0.00381
22.5
18.55
0.212938
-0.00135
1211.23
1224.38
-0.01074
-0.02504
-0.0147
-0.0290
7/1/2001
6/1/2001
4.76
4.81
0.00397
0.00401
18.575
0.01006
1255.82
0.00509
0.0010
5/1/2001
4.93
0.00411
18.39
18.39
0.129607
1249.46
0.076814
0.0728
4/1/2001
4.76
0.00397
16.28
16.28
-0.11976
1160.33
-0.0642
-0.0681
3/1/2001
4.64
0.00387
18.495
-0.09294
1239.94
-0.09229
-0.0964
2/1/2001
4.89
0.00408
20.39
20.39
0.120946
1366.01
0.034637
0.0306
1/1/2001
4.86
0.00405
18.19
18.19
0.129463
1320.28
0.004053
-0.0003
12/1/2000
5.17
0.00431
16.105
-0.02038
1314.95
-0.08007
-0.0848
11/1/2000
5.70
0.00475
16.44
16.44
0.056555
1429.4
-0.00495
-0.0098
10/1/2000
5.78
0.00482
15.56
15.56
-0.13771
1436.51
-0.05348
-0.0584
9/1/2000
5.93
0.00494
18.045
0.031143
1517.68
0.060699
0.0556
8/1/2000
6.06
0.00505
17.5
24.12
-0.27446
-0.04153
1430.83
1454.6
-0.01634
0.023934
-0.0215
0.0187
7/1/2000
6/1/2000
6.18
6.30
0.00515
0.00525
25.165
-0.09511
1420.6
-0.02191
-0.0275
5/1/2000
6.69
0.00558
27.81
27.81
-0.05729
1452.43
-0.0308
-0.0360
4/1/2000
6.26
0.00522
29.5
29.5
0.381733
1498.58
0.09672
0.0913
3/1/2000
6.50
0.00542
21.35
-0.02955
1366.42
-0.02011
-0.0257
2/1/2000
6.68
0.00557
1/1/2000
6.58
0.00548
25.46
18.93
20.05
0.045
0.045
0.045
22.5
18.55
18.53
18.45
16.06
18
0.045
0.045
0.045
0.045
17.5
24.12
25.12
21.31
22
0.045
0.04
22
1394.46
59
APPENDIX D
Valuation Models
I. Discounted Dividends
Discounted Dividends Evaluation
Years from valuation date
Dividends per share
Present value factor
2005
0.33
Present value of future dividends
Total present value of forecast future
dividends
Continuing (Terminal) value (assume no
growth)
Present value of continuing (terminal) value
Estimated value per share
1
2006
0.34
0.929
2
2007
0.35
0.862
3
2008
0.36
0.801
4
2009
0.37
0.743
5
2010
0.38
0.690
6
2011
0.39
0.641
7
2012
0.41
0.595
8
2013
0.42
0.553
9
2014
0.43
0.513
10
2015
0.44
0.477
0.316
0.302
0.289
0.276
0.264
0.253
0.242
0.231
0.221
Terminal
0.211
2.393
0.45
0.45
9.58671
Sensitivity Analysis
4.920
0
g
0.01
0.03
0.05
0.04
$10.74
$13.37
$34.45
($28.78)
7.312
Ke
Actual price per share
$46.30
0.05
$8.50
$9.95
$17.21
$0.00
Cost of equity
7.69%
0.06
$7.02
$7.91
$11.46
$29.22
0.03
0.07
$5.96
$6.55
$8.59
$14.71
0.08
$5.18
$5.58
$6.86
$9.87
Growth rate
59
Termina
0.45
II. Discounted Free Cash Flows
Cash Flow from Operations
Cash Provided (Used) by Investing
Activities
Free Cash Flow (to firm)
discount rate (5.39% WACC)
Present Value of Free Cash Flows
Total Present Value of Annual Cash Flows
Continuing (Terminal) Value (assume no
growth)
Present Value of Continuing (Terminal)
Value
Value of the Firm (end of 2005)
2005
$776,232
($292,093)
(Amounts in thousands of dollars except per share data)
2006
2007
2008
2009
2010
$822,806
$863,946
$907,144
$952,501 $1,000,126
2011
$1,050,132
2012
$1,102,639
($306,698)
516,108
0.949
489712.8
($391,433)
658,699
0.730
480718.6
($411,004)
691,634
0.692
478939.6
($322,033)
541,914
0.900
487900.6
($338,134)
569,009
0.854
486095.1
($355,041)
597,460
0.811
484296.2
($372,793)
627,333
0.769
482504.1
4,743,437
Sensitivity Analysis
828,042
464,792
5,208,229
g
0.03
0.06
0.1
0.02
$4.60
$4.85
$5.23
$5.74
Book Value of Debt and Preferred Stock
2,828,668
Value of Equity (end of 2005)
2,379,561
0.04
$3.57
$3.79
$4.13
$4.58
$3.47
0.0539
$2.95
$3.16
$3.47
$3.89
0.07
$2.33
$2.52
$2.80
$3.19
0.1
$1.36
$1.52
$1.77
$2.10
Estimated Value per Share
Earnings Per Share
Dividends per share
Book Value Per Share
2.03
0.32
7.76
Actual Price per share
$46.30
WACC after tax
Growth Rate
5.39%
6.00%
60
WACC
0.01
Terminal
2014
2015
2016
$1,157,771 $1,215,659 $1,276,442
($431,554) ($453,132) ($475,789)
726,216
762,527
800,653
828,042
III. Residual Income
Residual Income
2005
Beginning BE (per share)
Earnings Per Share
Dividends per share
Ending BE (per share)
Ke
"Normal" Income
Residual Income (RI)
Discount Factor
Present Value of RI
BV Equity (per share) 2005
Total PV of RI (end 2005)
Continuation (Terminal) Value
PV of Terminal Value (end 2005)
Estimated Value (2005)
2.03
0.32
7.76
7.69%
7.76
13.59
2.45
20.44
$41.79
1
2
3
2006
7.76
$2.09
$0.33
9.52
2007
9.5213
$2.15
$0.34
11.34
2008
11.3354
$2.22
$0.35
13.20
0.16
0.17
1.93
1.99
0.929
0.862
1.79
1.71
ValuePercent
18.57%
32.51%
0.17
2.05
0.801
1.64
61
$46.30
3%
0.18
2.11
0.743
1.57
6
7
8
9
10
2011
17.111
$2.42
$0.38
19.15
2012
19.1528
$2.50
$0.39
21.26
2013
21.256
$2.57
$0.41
23.42
2014
23.4221
$2.65
$0.42
25.65
2015
25.653
$2.73
$0.43
27.95
0.19
2.24
0.641
1.43
0.19
2.30
0.595
1.37
0.20
2.37
0.553
1.31
0.20
2.44
0.513
1.25
0.21
2.52
0.477
1.20
0.18
2.17
0.690
1.50
Sensitivity Analysis
g
0
0.01
48.92%
100.00%
Ke
Actual Price per share
Growth
4
5
Forecast Years
2009
2010
13.204 15.1286
$2.28
$2.35
$0.36
$0.37
15.13
17.11
0.04
0.05
0.07
0.08
0.1
$55.10
$45.58
$34.59
$31.12
$26.21
$66.75
$52.26
$37.59
$33.33
$27.56
39.84
0.03
0.05
$155.86
$83.82
$47.30
$39.83
$31.10
#######
$0.00
$74.10
$53.58
$36.75
IV. Long Run Residual Income Perpetuity
Long Run Residual Income Perpituity
1
(0.05)
2
(0.03)
3
2006
7.76
$2.05
$0.32
9.49
2007
9.4871
$2.07
$0.33
11.23
2008
11.231
$2.09
$0.33
12.99
26.42%
22.26%
21.83%
18.39%
18.62%
15.69%
change In RI
2005
Beginning BE (per share)
2.03
Earnings Per Share
0.32
Dividends per share
7.76
Ending BE (per share)
7.69%
Ke
1%
Forecast Growth Rate
ROE
Growth in BE
Actual Price per share
$46.30
Average ROE
Average Growth in
BVE
15.27%
LR Res Inc Perp Value
($3.61)
62
12.86%
(0.02)
(0.02)
4
5
Forecast Years
2009
2010
12.9933 14.7727
$2.11
$2.13
$0.33
$0.34
14.77
16.57
16.26%
13.70%
14.44%
12.17%
(0.01)
6
(0.01)
7
(0.01)
8
(0.01)
9
(0.01)
10
2011
16.57
$2.15
$0.34
18.39
2012
18.3851
$2.18
$0.34
20.22
2013
20.2185
$2.20
$0.35
22.07
2014
22.07
$2.22
$0.35
23.94
2015
23.94
$2.24
$0.35
25.83
13.00%
10.95%
11.84%
9.97%
10.87%
9.16%
10.06%
8.47%
9.37%
7.89%
Sensitivity Analysis
Ke
0.01
0.05
0.0769
0.12
0.14
0.1
($5.11)
($9.20)
($19.96)
$23.01
$11.50
ROE
0.1
0.12
0.1593
0.2
0.24
0.01
$2.14
$0.89
($1.57)
($4.11)
($6.61)
63
g
0.12
($2.77)
($4.36)
($7.08)
$0.00
$15.25
Ke
0.05
$3.15
$1.31
($2.32)
($6.07)
($9.76)
0.1342
($1.57)
($2.31)
($3.40)
($13.72)
$33.58
0.15
($0.52)
($0.72)
($0.99)
($2.41)
($7.22)
0.0769
$4.63
$1.92
($3.40)
($8.93)
($14.35)
0.12
$18.72
$7.76
($13.77)
($36.06)
($57.97)
ROE
0.14
($45.45)
($18.84)
$33.70
$87.57
$140.77
0.1
0.12
0.1593
0.2
0.24
0.1
$0.00
($6.73)
($19.96)
($33.65)
($47.11)
g
0.12
$3.60
$0.00
($7.08)
($14.42)
($21.63)
0.1342
$4.63
$1.92
($3.40)
($8.92)
($14.34)
0.15
$5.31
$3.19
($0.99)
($5.31)
($9.56)
64
V. Abnormal Earnings Growth
EPS
DPS
DPS invested at Ke (Drip)
Cum-Dividend Earnings
Normal Earnings
Abnormal Earning Growth
(AEG)
PV Factor
PV of AEG
Core EPS
2001
0.78
0.18
2.03
(0.541)
Total PV of AEG
Continuing (Terminal) Value
PV of Terminal Value
Total PV of AEG
Total Average EPS Perp (t+1)
Capitalization Rate
(perpetuity)
0.07694
Value
$19.35
Ke
g
Actual Share Price - Nov 1,
2006
64
(0.541)
1.489
7.69%
0.03
$46.30
2002
0.93
0.10
0.014
0.94
0.84
2003
0.89
0.205
0.008
0.90
1.00
2004
1.41
0.24
0.016
1.43
0.96
2005
2.03
0.32
0.018
2.05
1.52
0.10
(0.10)
0.47
0.53
1
2
3
2006
2.09
0.33
0.025
2.12
2.19
(0.07)
0.929
(0.066)
2007
2.15
0.34
0.025
2.18
2.25
(0.07)
0.862
(0.063)
2008
2.22
0.35
0.026
2.24
2.32
(0.07)
0.801
(0.060)
4
5
Forecast Years
2009
2010
2.28
2.35
0.36
0.37
0.027
0.028
2.31
2.38
2.39
2.46
(0.08)
(0.08)
0.743
0.690
(0.057) (0.055)
6
7
8
9
10
2011
2.42
0.38
0.029
2.45
2.53
(0.08)
0.641
(0.053)
2012
2.50
0.39
0.029
2.53
2.61
(0.08)
0.595
(0.050)
2013
2.57
0.41
0.030
2.60
2.69
(0.09)
0.553
(0.048)
2014
2.65
0.42
0.031
2.68
2.77
(0.09)
0.513
(0.046)
2015
2.73
0.43
0.032
2.76
2.85
(0.09)
0.477
(0.044)
Sensitivity Analysis
Ke
65
0
g
0.01
0.03
0.05
0.04
$37.00
$40.34
$47.84
$56.59
0.05
$27.49
$29.94
$35.45
$41.86
0.07
$17.03
$18.51
$21.84
$25.71
0.08
$13.93
$15.12
$17.79
$20.91
0.1
$9.78
$10.59
$12.42
$14.53
Works Cited
1. “Nordstroms Inc. 10-K”. PriceWaterhouseCoopers Technology
Center. 29th January 2005. PriceWaterhouseCoopers. November 2006.
http://edgarscan.pwcglobal.com
2. “Investor Relations”. Nordstrom Inc 2006. November 2006.
www.Nordstrom.com
3. “Industries”. Yahoo Finance 2006.
http://finance.yahoo.com
4. Bernard; Healy; Palepu. (2004). Business Analysis & Valuation:
Using Financial Statements, Third Edition. Ohio: Southwestern.
66