the creation of an external capital funding proposal.





Nordstrom’s Expansion into South Africa- Financing and Track Record

Carmen Hendrickson


Nordstrom Company started in 1901 as a shoe retail business in Seattle, Washington, Nordstrom later incorporated in the state of Washington and developed into one of the United State’s leading fashion retailers. The company provides clients with differentiated customer experiences through its robust e-commerce platform as well as high quality store portfolio in North America. As of March, 2018, Nordstrom operated 363 stores located in 40 states in the United States and 6 stores in Canada. The organization operates two segments: the retail and the credit segments. The company’s retail segment comprises of 117 company-branded full line stores in the United States and 6 Canada full line stores.

Others include full price company website and mobile application, 235 off price rack stores, off price company website and mobile application, 7 trunk club clubhouses, 2 “Last Chance” clearance stores and 2 Jeffrey boutiques. Through the credit segment, the company’s customers can access various types of payment products including Nordstrom branded visa credit cards, Nordstrom branded private credit card and a debit card (SEC, 2019). Apart from the United States and Canada, Nordstrom should expand its operations into the untapped South African market.

Description of the Project

The proposed investment is intended to expand Nordstrom’s global presence by opening a new Nordstrom rack store into the South African market. The store, to be located in Johannesburg, will target an untapped market segment in the region. The overall objective of the investment is to better serve the company’s customers by increasing its rack’s presence outside North America while at the same time competing against its rivals. According to Klepacki (2017) TJX, with a global presence of 3,785 stores in the United States, Canada, Australia and Europe, is the leading off price United States retailer and Nordstrom’s direct competitor. Establishing Nordstrom Rack in South Africa presents an opportunity for increasing the company’s market share and gaining competitive edge over its rivals. The United States Securities Exchange and Commission indicate that the company’s future plan is to increase capital expenditure to $4 billion through 2020 for investment in new and existing retail stores. It intends to spend 60 percent of its net capital expenditures to start new stores for increased profitability (SEC, 2016). In light of this, the initial capital outlay for the South Africa project is projected to be $200 million. The estimation is based on the assumption that the company will allocate 5 percent of its projected capital expenditure for the next 5 years on the South Africa project.

Time Frame for Expansion into South Africa

The time frame for South Africa expansion is expected to start in 2020 with the continued growth projected up to 2027. Overall, Nordstrom’s long term plan include expanding the company’s off price stores by introducing 25 Nordstrom Rack stores per year until they hit 300 operating units by 2020 in the United States. In addition, the company opened expected to open between 15 and 20 rack stores in Canada starting 2017 and 5 full time stores in the United States by 2018 (SEC, 2016). Accordingly, the company should anticipate a 1-year period to launch a Nordstrom Rack location in Johannesburg, South Africa, which should commence in 2020. Nordstrom should expect to record net revenue growth and profitability in the first year of operations in the country. This is based on the company’s historical sales performance from 2016 to 2017, when it opened new stores in the same time frame.

The Financial Impact

Projected Cumulative Cash Flows

This section discusses the likely financial implications of the proposed expansion project to South Africa. It also presents the consolidated financial projections of the company with and without the South Africa project. An analysis of the results indicate that an off price retail investment in South Africa would have a positive financial implications on the company’s profitability and long term strategies. Bailey (2016) asserts that Nordstrom has a reputation for recording strong financial results, low cost structures and maximization of cash flows by selling excess inventory at discounted prices. The United States Securities and Exchange Commission indicates that that Nordstrom’s off-price rack stores in the United States increased from 235 outlets to 239 between 2017 and 2018 (SEC, 2019).

As a result the company has a healthy financial position to raise the cash flow required for a global expansion initiative. In 2018, the United States Securities Exchange and Commission observe that Nordstrom’s free cash flows for 2018, 2017 and 2016 were $642 million, $630 million and $816 million, respectively. The free cash flow is an important liquidity measure of the company’s ability to generate adequate cash in the future (SEC, 2019). Given that the expansion into South Africa is a small investment, the costs associated with expansion will have minimal effect on the future cash flow. The financial implications of the South Africa expansion were analyzed using incremental cash flow benefits and outflow projections for the next 8 years.

Though it is difficult to forecast the incremental cash flows, it is expected that a $200 million investment would increase the company’s cash flow by about 4% each year to $668 million in 2020 and $879 by 2027.

Figure 1: Incremental cash flows with South Africa project

Figure 2: Cumulative Cash Benefits with South Africa Project

It is assumed that the company’s cash outflows will be lower than the projected cash inflow, which is an indication that the company’s expenses will be low and not require additional funding. The cash flow benefit projections were also based on various assumptions toward sales, selling, general and administrative expenses and interest expenses as well as income tax as a percentage of net revenue. The project sales are expected to be $500 million in 2020, which represents 3.23 percent increase on the 2018’s net sales of $15.48 billion. The company’s selling, general and administrative expenses are expected to remain at 31.5% of net sales recorded in 2018. Selling, general and administrative expenses include the direct and indirect expenses incurred during the day to day operations of selling the company’s merchandise. It also covers overhead expenses associated with utilities, rent, personnel salaries plus insurance.

The company measures interest expenses and income taxes using a total company basis (SEC, 2019). Interest expenses are anticipated to include costs of borrowing funds and represent the interests paid on loans during a financial year. Interest expenses are assumed to be 5% for the investment. However, it may vary depending on economic performance and inflation. The income tax rate for the investment is assumed to be 23.1% based on the 2018’s effective tax rate (SEC, 2019).

Cumulative Financial Projections

Nordstrom’s financial projections are subject to 2018 annual year’s report. In 2018, the company’s net sales increased by 2.3% compared to 2017 financial results. During the year, the company opened men’s store in New York City, 6 stores in Canada, 6 Stores in the United States, two Nordstrom locals as well as 1 Jeffrey boutique. The company’s operating expenses for the year 2018 was 31.4% of the net sales and it is assumed to remain so up to 2027. Interest expense is assumed to remain at 0.66% of the total net sales. The effective income tax rate is assumed to remain at 23.1%. However, interest expenses and income tax rate may change depending on economic performance and inflation. Subsequently, it is assumed that the new store in South Africa will continue to increase the company’s profitability at a steady pace for the next 8 years.

Financing Options

Merits and Demerits of Financing Alternatives

Apart from loan borrowing, Nordstrom can raise the initial outlay from internal sources of finance. Hill, Kelly and Highfield (2010) indicate that internal financing involve utilizing operating activities’ surplus funds for capital investment. This method implies that the company would avoid the tedious process associated with loan applications and reduce interest expenses. The capital may also choose to finance the project by sale of assets. This option may, however, reduce shareholders’ value and result in additional tax expenses plus transactional costs. Internal funding would, therefore, keep all assets within the company apart from expansion expenses. Nonetheless, this option would leave the company with less cash required for the day to day operations. Hence, internal funding is only suitable for short term investment projects.

The company can also seek funding via global capital markets through commercial papers, equity financing, loans as well as bonds. Commercial loans, according to Arnaboldi, Azzone and Giorgino (2014), are the most commonly used utilized source of unsecured loans which make them very attractive. They are also associated with low flexible interest rates plus shorter repayment period. Nonetheless, a company must provide collateral and details of financial statements for loan approval. Credit rating is also another important issue with loan financing.

Commercial paper is the probable alternative source of funding since the company already uses the program. As of 2015, the company had $800 million commercial paper program, which enables the business to fund its operating cash obligations. Under this agreement, the company pays an interest rate that is based upon the maturity date of the facility and the current market conditions (SEC, 2016). The negative aspect of this type of financing is that it reduces a company’s liquidity under revolver when it is still outstanding. In addition, an organization must maintain profitability to remain eligible.

Viability of Combination when Expanding into South Africa

The most viable option for Nordstrom’s expansion into South Africa would is an organic growth strategy, where the company establishes multiples stores throughout the country. The option is, nonetheless, subject to some risks such as foreign regulations, supply chains, language differences, cultural practices as well as consumer preferences. . The main merit of organic growth strategy is that the company would maintain control over the business, hence limiting reputational risks due to poor decisions by foreign owners. On the downside, this strategy requires massive capital investment which can affect a company’s growth potential. Organic strategy is also slow because of zoning restrictions, development of premises, bureaucracy and trade regulations (Silverstein, Samuel & DeCarlo, 2013). Therefore, Nordstrom may change its strategy in case organic strategy is unsuccessful.

Mergers and acquisitions, joint ventures and franchising as well as licensing are the other alternatives available for Nordstrom to expand into South Africa. Business Wire (2015) indicates that off price retailer TJX used mergers and acquisition to enter the Australian market. The company entered the country by acquiring Trade Secret- a leading off price retailer in Australia. The United States Securities and Exchange Commission (2016) indicates that Nordstrom also used the same strategy to acquire Trunk Club, which is an online service that provides men with style advice. The acquisition enabled the company to improve customer service for its male customers by providing them with a personal online shopping experience.

Nordstrom’s Track Record

Nordstrom’s financial statements show that the organization has a healthy financial position to create new operating units in South Africa. The company’s net sales have increased significantly over the past three financial years 2018, 2017 and 2016. In particular, the net sales for 2018 were $15.48 million while those for 2017 and 2016 were $15.137 million and $14.498 million. The net sales increased by 2.3% between 2017 and 2018, by 4.4% between 2017 and 2016, as well as by 2.9% between 2016 and 2015. Earnings before interest and tax for the years 2018, 2017 and 2016 were $837 million, $926 million and $805 million, respectively. The earnings before interest and income tax expressed as a percentage of net sales were 5.4%, 6.1% and 5.6% for the years 2018, 2017 and 2016, respectively. The company’s return on assets for the years 2018, 2017, 2016, and 2015 were 6.8%, 5.4%, 4.5%, 6.6% and 8.1%, respectively. Debt to net earnings for the years 2018 and 2017, were 4.8 and 6.3, respectively.

With regards to credit ratings, the company has a stable outlook as evidenced by the Baa1 and BBB+ credit ratings by Moody’s and Standards & Poor’s, respectively. However, an improvement in the ratings assigned to the company’s long-term unsecured debt would lead to a decrease in the applicable margins associated with the borrowings, leading to lower borrowing costs. A worse credit rating to the long term unsecured loan may increase the applicable margins associated with the borrowings, leading to higher borrowing cost (Sec, 2019).

Nordstrom’s Legal and Ethical Behaviours

Nordstrom conducts its business to the highest ethical as well as legal standards, and has not been involved in major lawsuits apart from issues arising from the day-to-day course of business (SEC, 2019). Most recently, the company was involved in a decision to drop Ivanka Trump’s use of the company’s branded clothing line as well as shows which attracted negative political attention. The decision was made following a boycott organized by the “Grab Your Wallet”, which is an anti-president Trump movement group. However, the decision to drop Ivanka Trump’s products was due to low sales (Abrams, 2017). The recent lawsuit involving the company happened in 2016 when it was sued for misleading its clients about the originality or authenticity of Rolex watches. A lawsuit was filed at the United States District Court in California against the company and Hautelook for selling damaged Rolex damaged watches as well as watches with non Rolex components (The Fashion, 2016).

Nordstrom’s Code Ethics advocates for high standards of ethical practices and behaviours by its employees. It focuses on hiring great employees to provide high quality customer service. Every employee is expected to comply with the code of conduct and other applicable regulations and laws. Employees are expected to use good judgment when interacting with clients, vendors and colleagues. Also, they must treat customers in ethical ways in everyday business (Nordstrom, 2017). The company also engages in corporate social responsibility initiatives. In 2015, the company made an additional corporate social responsibility initiative toward human right, reduction of energy consumption, environmentally friendly packaging and philanthropic activities (SEC, 2016).


Abram, R. (2017, February 2). Nordstrom drops Ivanka Trump brand from its stores. New York Times. Retrieved from. ivanka-trump.html

Arnaboldi, M., Azzone, G., & Giorgino, M. (2014). Performance measurement and management for engineers. Cambridge, MA: Academic Press.

Bailey, S. (2016, June) Can off-price retailers sustain their strong sales growth?. Market Realist. Retrieved from. sales-growths/

Business Wire. (2015). The TJX companies, Inc to acquire off price Australian retailer Trade Secret. Press Release. Retrieved from.

Hill, M. D., Kelly, G. W., & Highfield, M. J. (2010). Net operating working capital behavior: a first look. Financial Management39(2), 783-805.

Klapacki, L. (2017). Why off price retail is rising as department stores are sinking. Retail Dive. Retrieved from. department-stores-are-sinking/434454/

Nordstrom. (2017). Corporate governance: Code of business code and ethics. Retrieved from.

Silverstein, D., Samuel, P., & DeCarlo, N. (2013). The innovator's toolkit: 50+ techniques for predictable and sustainable organic growth. Hoboken, NJ: John Wiley & Sons.

United States Securities and Exchange Commission. (2016). Form 10-k: Nordstrom, Inc. Washington, D.C. : U.S. Government Printing Office.

United States Securities and Exchange Commission. (2019). Form 10-k: Nordstrom, Inc. Washington, D.C. : U.S. Government Printing Office.

Annual Incremental Cash Flow

Incremental Cash Flow 2020 2021 2022 2023 2024 2025 2026 2027 25680000 26707200 27775488 28886507 30041968 31243647 32493392 33793128

Cumulative Cash Flow

Cumulative Cash Flow 2020 2021 2022 2023 2024 2025 2026 2027 667680000 694387200 722162688 751049195 781091163 812334810 844828202 878621330

Running head: NORDSTROM’S



Nordstrom’s Expansion into South Africa


Financing and Track Record

Carmen Hendrickson





Nordstrom’s Expansion into South Africa- Financing and Track Record

Carmen Hendrickson