the creation of an external capital funding proposal.

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SampleFinialPaperNordstoms.docx

Southern New Hampshire University – MBA 640

MBA – 640 Final Paper Submission

Rachael Markwell

Southern New Hampshire University

Executive Summary

The following report is to request funding for Nordstrom Inc. (JWN) to expand their business into the UK, specifically a new store front location in London. If Nordstrom’s wants to continue to be a competitive force in the marketplace, I believe this is a necessary next step.

With the style similarities of the UK fashion and American fashion, it feels endemically correct to look at this new marketplace. Nordstrom is already present here in terms of online capabilities but with their recent success of opening a new large store in New York City and many more across Canada – expanding to London fits.

Nordstrom is one of the top retail businesses in the U.S. and has been over the past decade or so. They have continuously shown great potential for growth by bringing in Nordstrom Rack and Nordstrom online services to the forefront of their retail business. Expanding into the UK will be the first step for a larger presence that Nordstrom can have all over the globe. With their dedication to quality products and their excellent customer service, I believe that this is a sound investment and will show profits in the short and long-term.

Below will discuss in details all of the thought process and financial analysis that shows why this is a sound choice for you to invest in.

Investment Project

Nordstrom Inc. was founded by John W. Nordstrom as a United States of America quality fashion department store over 100 years ago. The product list is massive but includes women’s & men’s clothing, shoes, and children’s apparel. They have expanded their presence to Canada as well as including an online platform where consumers can access their products from anywhere around the globe (Nordstrom Inc. (n.d.)). Currently they have 329 stores across the U.S. and Canada but their online services allow them to reach 96 countries.

Nordstrom Inc.’s first experience in international expansion was not too far from home but just a bit farther north to Canada. It was simple choice not only because of proximity but also due to research showing similarities between American shoppers and Canadian shoppers. They replicated the American store experience, optimized the store locations and allowed room for them to learn about the differences between the two shoppers (Levine-Weinberg, 2014). There was one fundamental difference is that Canadians focus more on the value that they get for the cost of the product. Paying attention to percent discounts was a huge win and lead to a lot of success while expanding into this country (Buxton, n.d.).

Nordstrom Inc. should consider the opportunity to expand to the United Kingdom. With the fear of the economy changing dramatically after the Brexit vote, the UK economy defied these declines and have seen a solid growth of 0.5% in Q4 of 2016 (Inman, 2016). The International Monetary Fund predicts that the UK will be the fastest growing countries in most of the global industries. A key aspect to expanding a company globally is to understand their culture, luckily for the UK and the US, they have fairly similar habits when it comes to shopping which will allow for an easier transition (Entrepreneur (n.d.)).

For the U.K. shoppers, Nordstrom’s is already available to them through online shopping so this recommendation is to put a brick and mortar store in the hub of the U.K. – London. This will allow for Nordstrom’s to fill a consumer need to be able to try on clothes and ensure that they are getting the best value for their dollar. It is recommended that Nordstrom open this new store front on Boxing Day due to the fact that UK shoppers spend over £55 million in retail stores alone and is considered an important day for most UK citizens (Topping, 2016). It will fill the need for consumers in this area, according to a 2017 study Nordstrom became the highest rank retail store above Dillard’s and T.J. Maxx – a dramatic 6% higher than 2016 which can be attributed to their customer service standards (Marketforce, 2017). Although this study was just done in the U.S., we can start to make assumptions and projections that Nordstrom Inc. will see something similar in the UK.

Furthermore, Nordstrom will need to think about how to measure success of this international expansion. Nordstrom needs to ensure that the criteria is measurable, note any exceptions during each step of the process, be consistent with the market maturity level and have a consistent mode of entry (Hickie, 2014). One avenue they may want to explore is a measurement method developed by Ogilvy & Mather called Velocity. This method focuses on the social/political factors that would drive opportunity for business. A more in depth look at the mechanics behind consumption habits. Utilizing the size and growth of middle-class spending they look at the share of middle class spending, the rate of growth and the adjusted purchasing power parity (PPP). This lead them down a path to find which markets (12) would be the best places for them to drive business decisions (Young, 2016). For this particular expansion it’s recommended that they look at these indicators to determine success (Community Futures, n.d.):

· UK pound (currency rate)

· Other competitors

· Customer demographics

· Supply chain dynamics

· World economy and geo-political elements

· GDP

· Employment/unemployment rates

· Retail sales figures

· Consumer price index (CPI)

The most important thing will be to be flexible in what is measure what is needed at each step during the expansion process.

There will be a lot of resources needed for an international expansion. There will be additional accounting work, a new payroll and taxes to think about. There will need to be a new relationship with a bank that can handle international affairs or one that is located in the UK. Nordstrom will have to work with a contractor to either build a new store front or repair/upgrade something existing. They also need to consider the cost of transporting products to the UK or if they need to create a factory to make the products there. There will be time needed to get this all set up to ensure they are following the government laws. We will begin by coming up with a 12-month business plan and a 3-year budget to accomplish everything soundly. There will be quarterly operating reviews to ensure that everything is still going to plan. Nordstrom is going to need a loan of $700 million. We determined this number based on the overall costs needed to build Nordstrom Inc.’s New York City location (367,000 square feet) that had to cover the costs of construction and staffing a new location along with the pound to dollar ratio (Moin, 2017). Luckily comparisons between NY and London are made often so it will be much easier to expand a business in a similar operating country.

As mentioned above, Nordstrom should consider opening this new location on the most important shopping day of the year – Boxing Day. It happens to fall right before all of the major holidays. Due to it already being the half way point in 2018, it’s recommended that they don’t attempt to open until the end of 2019. This will give them a year and half to build and ensure the building/products are all set before opening. Although most people would believe this is a long time to get a project completed this will mean every step of the way is expedited. Quarterly evaluations should be set in place to determine if the project is on track or if Nordstrom needs to decide a different route in this venture. When Nordstrom opened up the stores in Canada, they saw the first two years with huge operating losses - $32 million in 2014 and another $60 million in 2015, but the future projections were mostly pessimistic. Nordstrom’s has since seen 6% growth in sales year over year. So the decision for them to end this project should only come if they are seeing operating losses more extreme than they did for their Canadian expansion – which could take up to three years after opening the store (Levine-Weinberg, 2015).

Justification

Now is a great time to invest in this expansion given the global context and the growth that the UK is trying to instill themselves. UK shoppers have become less loyal to certain brands because they are looking for more value. For clothing they are purchasing on average 3.3 brands which makes the determination that there are new opportunities to grow Nordstrom’s business here (Webster, Dhiri, Frame & Dorsett, 2013). Recently, Brexit has been a point of contention for businesses within the UK. But Britain was proactive about setting up trade deals with the European Union, United States and lots of other countries that they had previous agreements with prior to these changes (New York Times, 2017). The cost of imported goods to Britain also increases, which would be good for a U.S.A company like Nordstrom. Most recently the pound was noted to have its best month, rising about 6% against the U.S. dollar which followed greater than expected employment rates in the UK (Partington, 2018). Although there are concerns about certain products not being able to hold their own with their economic change, all signs really point to positive growth for Britain in the next coming years, making this an ample time for Nordstrom to expand. Especially since unemployment is dropping and average wages are continuing to level out, Nordstrom can take advantage of helping this country get back on its feet by bringing in new jobs to the economy (Partington, 2018). Manufacturing growth has picked up, and the GDP has grown .1% in Q1 of 2018 already which is predicting 2.3% annual change from last year (Jackson, Tetlow, Bernard and Pearson, n.d.). It is predicted that the remainder of 2018 is forecasted negatively in one industry, with a rise in inflation due to depreciation of sterling. But predicted quarterly growth will be picking up in the second half of 2018 (Jackson, Tetlow, Bernard and Pearson, n.d.). Lastly, it was recorded that household spending rose at a faster pace than disposable income which was probably fueled by families using more credit cards or loans and are most likely in debt. This might not seem like a good thing for Nordstrom, but these consumers are truly looking for the best value for their earned income which presents Nordstrom a great opportunity to highlight their durable and fashionable products (Partington, 2016).

Strategically, this investment proposal makes sense for Nordstrom because they are dedicated to bring the best possible shopping experience to help their consumers express their style which is important for UK consumers (Nordstrom, n.d.). Shoppers don’t want just disposable clothing, they are looking for quality pieces that can reflect their personalities (Daneshkhu & Vandevelde, 2016).

This investment aligns with Nordstrom’s organizational and financial priorities. From an organizational standpoint, Nordstrom has stood apart from the pack continuously. In 2015 they say sales increase 9.2% which is over the industry benchmark 4.9%. They attribute all of this directly to their customer service ideals are part of their company culture. Their ability to transition their company to be what the consumer wants, more mobile and with new millennial inspired designs, and they are seeing the success of this with a 20% increase in online sales. From another perspective, Nordstrom’s organizational goals are lined up to open new stores, so expanding into the UK makes perfect sense with their overall growth plan. One last bit of information that will be useful is how Nordstrom’s is reducing their “sale” events by 25% year over year. This makes the consumer feel more ‘special” and also puts Nordstrom’s in a different category since they aren’t just following the pack in this matter (Loeb, 2015).

From a financial priority standpoint, they have continuously beat their expectations in terms of finance benefits. In 2016, their earnings per diluted share were $2.02 (including the goodwill impairment charge of $1.12) which exceeded their outlook of $1.70 – $1.80. Their results come from operational efficiencies and ended the year with a 2.9% increase in net sales (Nordstrom, 2016). Knowing that they are making strides to improve their operational performance makes the idea of opening a new store front location appealing because they’ve worked out the kinks and don’t need to start from scratch in terms of optimizing their store. As Greg Portell, consultant for A.T. Kearney’s retail practice, stated “Nordstrom has a clear brand, they addressed some weaknesses and are now driving results.” (Jones, 2017). The evidence points towards a positively alignment for global expansion.

The global expansion of Nordstrom Inc. into the UK fits very well within the global microeconomic environment. It has been previously stated that these consumers are looking for more value when considering buying their clothing and that they are increasingly less loyal to one brand. Nordstrom is filling the niche need for luxury modern shoppers, while still bringing convenience and high quality product right to their door. Their advancements allow for consumers to reserve a product online and then they can try it on in the store. Giving the consumer the ability to know that the product they want is waiting for them but allowing them the ability to test the product before purchase. Giving all control back to the consumers is uncommon in retailers but the key to Nordstrom’s success. 80% of the U.S. consumers who used this new service, continued to utilize the service – aka repeat visitors. This data shows that consumers had a need to be able to put everything in an online cart but then go and physically see the products before purchase. They’ve even included a curb-side pick up to enhance the overall convenience of shopping with Nordstrom. The UK consumers are also looking for a similar experience where they can save time but be in control of their shopping experience (Arthur, 2017). UK shoppers are craving the ability for personalization in retail more than they have ever before. 65% don’t really know who they are when they are walking in to find retail store products, which makes it more difficult for them to make a decision. 61% feel that their shopping experience is disconnected from the overall shopping in-store experience. This larger study done in 2018 shows that (Maldonado, 2018):

· 77% of shopper’s research products before purchasing from a physical stop

· 84% research products before buying online

· 23% of millennial shoppers will buy online while they are in the store

It aligns perfectly with what Nordstrom has already done with their whole shopping experience. Not only will they fit the needs of the consumer when it comes to the process of shopping but their products are also filling the need for a quality product at a value price.

Nordstrom Inc.’s UK expansion helps build on their core competencies and gives them a comparative advantage. It will come as no surprise that Nordstrom’s core competencies are quality and customer service (Basu, 2018). For quality it comes from the reliability and overall performance of the products that they choose to make/sell. They take great pride in the quality of their products as well as how fashionable they are. Nordstrom has a reputation for quality and it has proven successful for them. For customer service, it’s how Nordstrom has changed their whole company culture to be honed in on quality care for their consumers. Nordstrom is considered the industry leader when it comes to customer care mainly on how they treat consumers as extended family. Nordstrom has given distinct ways of implementing great customer service across the board (Solomon, 2016):

1. Hire the right people and them make sure they feel empowered

2. Make everything personal – employees are not robots and should strive for personal connections with customers.

3. Charge for the value of your products and don’t bring down the sale if you don’t think it’s necessary. The quality of their products are worth the price.

4. Use technology (cross channel) to enhance the experience for the shopper – it’s not an either or for digital shopping. It can be combined for a full pleasurable experience.

5. Stay modest and be future oriented in all things that you do.

Nordstrom’s success here can’t be attributed to luck at all. For years they have been investing into their quality products and customer service, their ability to be flexible when it comes to fashionable products gives them just another competitive advantage since they feel “fresh” to consumer’s eyes. It shows in their ability to drive growth in sales year over year (+7.2% from 2016 to 2017). They are able to accurately predict what their sales growth will be on a quarterly basis and then they adapt to ensure they hit their goals (Pasquarelli, 2017). Looking at Amazon, which is growing by 25% in apparel sales while Nordstrom is seeing growth closer to 4% could be a huge indicator for how they should adapt their business (Kolodny, 2017). While Macy’s is closing around 15% of their store locations, Nordstrom’s is able to increase the amount of stores they manage as well as the access points for consumers to find Nordstrom products (Kolodny, 2017). The risks that they are taking in their strategic direction are clearly paying off.

Internal Risks/Opportunities

Internal risks related to an expansion project, especially international expansion, can be detrimental to the success of an investment if they are not dealt with properly and early on. Internal risks are often considered preventable risks and are easy to control. Examples are unauthorized, illegal, unethical, incorrect or inappropriate actions typically done by an employee or manager. Mostly Nordstrom should be able to use a prevention method to avoid these risks such as monitoring operational processes and guiding behaviors/decisions towards the desired outcomes (Kaplan & Mikes, 2012).

Nordstrom has a high affinity towards being the best quality product and that idea should also drip down to the employees – having a high expectation of the quality of the employee’s work should help lower the risks of them doing anything “against the rules” or more importantly against Nordstrom’s policies. Luckily this expansion project is to a country that also considers quality and following the rules an important part of their lifestyles. Business culture in the UK is categorized by: business communication, business etiquette, meeting etiquette, internship and student placements, cost of living, work-life balance and social media guide (Passport to Trade, 2014). They also take punctuality very seriously and Nordstrom can take this a win when it comes to lowering employee issues as a risk. When it comes to issues of bribery and corruption, the British are an honest nation with very low levels of corruption. These two issues are taken very seriously and any chance of bribes being accepted by employees is very low. The risk for themselves are too high a price and that benefits Nordstrom’s immensely when it comes to internal risk factors they need to consider (Passport to Trade, 2014).

There are six other internal risk factors that can come into play while Nordstrom is looking for international expansion. First, stability of the overall business. Meaning how can Nordstrom meet its debt obligations while still returning capital to the investors. The better Nordstrom is about this process the more investors, lenders and employees are willing to interact/invest with Nordstrom. Also as we think about expansion, employee/management stability will be important since everyone wants to make sure this is a solid venture and expansion is enough risk that we don’t want to add to it with constant changeover. Second is the overall organizational structure of Nordstrom. The most successful companies have cohesion and efficiencies built into their function as a business. Thinking about expansion, Nordstrom needs to consider all job positions, the hierarchy and how lines of communication work so that there is little room for error or miscommunication. The third factor is Politics (mismanagement) specifically internally can be debilitating to a business’s future success. If Nordstrom happens to let internal politics get in the way of this expansion, it could leave a huge door open for their competitors and leave a large part of their finances, production, labor and marketing without proper control. This could increase overall costs for Nordstrom to expand and thus affecting their bottom line profits. The fourth factor is resources – financial and human. Nordstrom should ensure that they are able to harness both since this can impact the scope of the expansion as well as impact staff morale. Fifth is innovation across Nordstrom’s business. This can include product development, marketing, staff welfare and more. The ability for Nordstrom to remain on step ahead in their industry will be critical to set them apart from the competition. Sixth and last factor are the incentives that Nordstrom will need to bring to not only their employees but their customers. Nordstrom should consider the right incentives to give to UK employees seeing as in different cultures, they may expect different benefits. Using rewards to reinforce good behavior in staff has been proven successful for many companies, the important part will be determining which rewards the employees will find valuable (KPMG, 2013).

External Risks/Opportunities

External risks are vast and could be anything that happens outside of the company but impacts the functionality of the business. Typically, these are beyond the companies control or influence, like natural or political disasters or even macroeconomic shifts. Because these risks can’t be determined ahead of time, using a planning style based on categories will allow for the company to be prepared but also able to adapt the plan for each specific issue. Ensuring that these issues are dealt with in timely manners could be the deciding factor in long term success (Kaplan & Mikes, 2012).

There are five key risk factors when thinking about external business. First is the economy. Although this is uncontrollable for Nordstrom, they can evaluate the trends to determine future booms or busts. This will help them maximize their efforts during booms with new opportunities but also manage any threats when a bust is coming down the path. Next are any Political/legal factors that are determined by the government or difference in business legislation. Nordstrom will need to become very knowledgeable about the differences between UK business policies and that of the U.S.A. since there may need to be some large changes to the way they are allowed to run their branch in London. Changing of political parties or even the relationship between the UK and the U.S. will be very important to stay on top of so that Nordstrom can be proactive about updating their policies vs. reacting to any unpleasantness. The third factor is socio-cultural factors which should be avoided at all costs when it comes to changing Nordstrom’s business. Although it would seem that what is “trendy” from a consumer standpoint should be what drives their product line, Nordstrom is founded on the idea that they know what is fashionable and what is quality so they will sell that to their customers. Allowing for one minor trend to alter their business will be very detrimental to their image as not a great way to build the future of their business on. Fourth is going to be technology. Nordstrom cannot control the speed in which technology is growing or even how it is changing the way consumers buy products but they can be where the consumer is. If they can, once again, stay in the know of the new technology trends they will have a better chance of staying relevant (KPMG, 2013). Luckily, Nordstrom has already thought of this and has done most of its investing (growth) within the digital/online space. They are available all over the world in an online capacity which benefits them greatly in terms of access (Nordstrom, 2018). Monitoring technology developments and figuring out ways to integrate them into Nordstrom’s business should be a no brainer for them! Lastly, shareholders are a huge external risk because they cannot be controlled to determine what has value for them. Finding ways to bring value to these stakeholders that is more than just profitability will be important for long term growth because having the same values as their customers will keep them invested in the company and become cheerleaders for Nordstrom’s success (KPMG, 2013).

External risks come with danger signs due to the fact that Nordstrom has little to no control over how any of it can happen or even what impacts it will have on their business. Setting up template plans for how to deal with category risks in a compliance-based tactic allows them to avoid some of these issues. Nordstrom should be wary though to make too many broad plans since they will most likely have to be tailored to the specifics as time goes one. One thing can be said for sure is to handle these risks as far in advance as possible by looking for trends. Most business end up failing at expansion or growth because they are reacting to an issue instead of being proactive in their problem solving. Nordstrom has the benefit of being a successful company in its own right and should be doing these proactive problem solving scenarios for their current markets, meaning it won’t be a huge change for them to follow these practices in the UK when they expand.

Microeconomic Factors

There are three main microeconomic factors that can influence the success of Nordstrom’s expansion project. First is logical decisions that can be made from microeconomic data. For example, if Nordstrom sold 50,000 shirts for $20 last year, assuming that the economy (GNP, unemployment rates, interest rates, stock and bond markets) hasn’t changed, then Nordstrom would logically continue to make 50,000 shirts to sell this year (Davis, n.d.). Although this is logically the best decision to make, it doesn’t mean it’s the best choice since rarely do all of these elements stay exactly the same year over year anymore.

Second is to determine what the competition is doing and the impacts they will have on Nordstrom’s business. One of Nordstrom’s competitors in the UK will be John Lewis. Let’s say that John Lewis sells a similar shirt to Nordstrom’s in terms of style and quality. But they are selling the shirt at a $10% discount from Nordstrom’s pricing. The standard microeconomic theory dictates that demand will now increase so Nordstrom should lower their pricing to less than John Lewis – say 20% off – and they will be able to outsell their competition (Davis, n.d.). But there are bigger impacts for Nordstrom’s if they take this route, which goes against their mission/vision of their brand. Also lowering the price of Nordstrom’s product needs to take into account the interest and principal of debt. Would the reduction in price alter the ability to market/advertise the sale? Also would it bring down the sales of the stock because the share price could decline with shares of market? All these scenarios are possibilities for Nordstrom. Lowering the price of the product isn’t the only option for Nordstrom’s to deal with the completion. They could instead decide to increase their marketing budget by 5% in order to sell more of their product without having to affect their sales profits. There have been other studies from companies showing that increased marketing efforts have proven to drive a wide gap between the competition (Davis, n.d.).

Third, and probably the most difficult to forecast far out is the state of the economy. If the current economy is in a good place but economic indicators forecast a downturn nearing the winter holiday season it may make more sense for Nordstrom to hype their sales in third quarter and then lower their pricing during the holidays in order to be more appealing than the competition. Economic indicators can vary but in general they are consumer durables, net business formations and share pricing that would determine the movement of the economy for a certain period of time in the future (Davis, n.d.). Although macroeconomics often determines the changes in the economy, Nordstrom’s can’t deny that the impacts on microeconomics should be a key factor in their decision making process.

Lastly, there are plenty of variable factors that could play a huge role that unfortunately Nordstrom’s or other economic predictors cannot account for. Consumers may just all of a sudden get tired of a style or a color or the products that Nordstrom produce were such high quality that they are not worn out enough that consumers want a new one. One thing Nordstrom’s will want to be wary of is lowering their pricing if they fall into a situation of surplus products since that could damage their reputation or perception in the market (Davis, n.d.).

There is of course, the huge economic factor of Brexit that will be hanging over Nordstrom’s head in this venture since the implications on the market are still fluctuating. Right after this decision was made, Britain saw inflation surges, consumer spend declines, productivity in crisis levels and uncertainty across the country. Although analysts have started to see a flattening out of the market place, there is still a sense of challenge for inflation in the economy and most likely will continue as the market grows slowly over time. Other marketers and businesses have been looking at plans in the short term, so that they can react to the market accordingly, which is a similar recommendation put forward to Nordstrom in this venture (Martin, 2017).

Alternate Financial Scenarios

“Managers frequently perform scenario analysis, a variant of sensitivity analysis, to minimize this problem” (McGraw Hill, pg. 127). Nordstrom should continue to analyze gross profit margins whenever there is a possibility that sales won’t meet expectations including pessimistic, best case and optimistic situations. For Nordstrom, we will be analyzing two different projected financial performances; sales fall 20% and sale increase 20% based on the original assumptions. The asked budget for Nordstrom to expand a brick & mortar store into London was $700 million (USD). If Nordstrom sales fall 20% below the norm ($15M) they are looking at a decrease of $3.1M so they will be looking at a revenue of $11.9M for the year 2019. This dramatic drop in sales impacts Nordstrom’s ability to pay all of their loans and operational expenses. They will have to consider huge cuts to their employees and locations in order to make up for the $3.1M loss for this year but also under the assumption that 2020 will not bring them back to where they were. In terms of this expansion, it would mean cutting $140M from the expansion budget, if not more, to cover the costs of the overall business losses while still looking for new opportunities to grow their business (Appendix 1). On the other hand, if sales increase 20% the total revenue for Nordstrom’s in 2019 would increase to $19M and decrease the profit margin almost five percent. This is obviously ideal because it will allow for Nordstrom to cover all operating business costs as well as debt and taxes from their original loaned amount (Appendix 1 & 2).

Net Present Value (NPV) is used to determine which projects will be most lucrative for a company. For Nordstrom Inc. they want to look at the NPV that is positive which means profitability vs. one that is negative which will imply net loss. For Nordstrom’s we evaluated a pessimistic, best case and optimistic situation to determine what the differences and similarities are from a monthly basis and a yearly basis (Appendix 3). For both timeframes, it is very clear that the best case scenario of an increase of 10% from the previous year will be the best outcome for a NPV standpoint. Of course this doesn’t take into account many of the aforementioned factors like economy, politics, new competition, marketing decisions, etc. so this recommendation should be taken directionally.

As mentioned above the loan request for Nordstrom to expand their business to London in the UK will require $700 million. It is forecasted to generate an annual cash flow for the next three years at a rate of 5% equaling $350M per year. To look at the payback period, we need to see when this loan (investment) is going to be paid off by the cash inflow ($700M divided by $350M). For Nordstrom’s expansion we are looking at a payback period of 2 years. But this doesn’t take into account any time value of money true changes over the years. Assuming that money today will be capitalized in the future to generate more money and will also change the value of the dollar, it can be assumed that the time to pay back the loan will be less than this 2-year prediction. We’ve taken a stab at the three different scenarios to determine what other factors may intrude on Nordstrom’s business to push them off to a 20-year payback period (Appendix 4).

Financial Impact

To begin to look at financial projections for Nordstrom Inc.’s expansion into London, we first need to see where they are currently. Nordstrom reported on their first quarter earnings from 2018 that they were hitting $87 million in net earnings which is 5.8% from the previous year. Earnings before taxes were $153M or 4.4% of net sales which was fairly similar to the previous year. Overall, all of Nordstrom’s subsets aggregated to a 0.7% increase in sales. Nordstrom ended the first quarter in good inventory position with net sales growth exceeding a decline in inventory. Nordstrom’s did see a 21-point decrease in gross profit mainly due to opening new Rack locations as well as the NYC men’s store. It was also noted that sales from the rewards program represented 53% of the first quarter sales which was increased from 47% in the first quarter of 2017 (Business Wire, 2018).

Luckily, we can take a look at Nordstrom’s current expansion efforts as a base for this newly proposed expansion. So far in 2018, Nordstrom’s has opened eight new stores across the U.S. and Canada while only closing one (Appendix 5). With this in mind it does have a very profitable outlook for the remainder of the fiscal year. There will be a slight increase in EBIT as well as the earnings per diluted share with no change expected for net sales or comparable sales (Appendix 6). They also have made some assumptions on increased credit card growth (mid-teens) as well as shift the salve event into a different quarter should increase sales by ~150 basis points (Business Wire, 2018).

The UK is in a state of huge growth since they’ve made recent financial independence decisions and this is a huge opportunity for Nordstrom Inc. Forecasters are stating that due to the strength of the world economy the impact of Brexit didn’t have as big of a deficit as originally predicted. NIESR’s expectations is that the GDP will grow 1.89% in 2018 and 1.7% in 2019. Specifically, they are predicting improvements to begin in the fall, which aligns perfectly with when Nordstrom’s is recommended to open the store in London (Partington, 2018).

From these current financial projections, Nordstrom can start to make assumptions on demand, price, volume, capital purchase costs, incremental hiring, and so on based on the projected incremental, annual and cumulative cash benefits and outflows for the next 7 – 10 years for Nordstrom’s expansion to the UK. With the initial investment of $700 million, Nordstrom’s is a lucky enough that their current profit margins can afford to pay off the loan immediately so they will not see an offset cost. As the years go on, Nordstrom will continue to see about a 1.8% growth consistent with what they are predicting for 2019 (Appendix 7). By the next ten years, Nordstrom’s will start to see a 35% increase in revenue and an even higher percent increase in gross profit, even with the investment Nordstrom will still be more profitable by the end of ten years. The increase in 2019 of the operating costs to expand internationally will truly only effect that one year while they will see Revenue and Gross Profits continue to increase at the rate of 1.8% (Appendix 7). Of course, there will be an increase due to incremental hiring as well as capital purchase cost due to expanding a physical location and needing to ensure its staffed correctly and the building is all set. But they can also assume that demand will be very high for their products since this will be new to the market place as well as timed correctly around the holiday season where increased shopping is typical. Due to the nature of Nordstrom, the idea that price will take a hit or need to be readjusted is not necessary. Their values of quality products will need to shine through into this new market (Nordstrom Inc, n.d.).

The biggest risk of using these projections for the next seven to ten years is that Brexit impacts, although forecasted positively, are not truly defined yet in the marketplace. Nordstrom should continue to work on other expansion projects through their online programs in order to supplement this new location in London as a safety net for a downward economy.

Financing

Nordstrom Inc. will need to consider internal financing vs. global capital markets via loans, commercial paper, bonds or equity financing, etc. No matter which option they choose, Nordstrom much invest a significant amount of capital to expand internationally. Internal funding come from any additional cash after a business has paid all their expenses and is known as the simplest form of financing since no other firm has to be involved. It’s a huge benefit for a company because they can use the money they have to fund a new project but it also reduces the taxes with depreciation so that a company can continue to spend more on their business (Johnston, 2018). There are of course, disadvantages to internal funding. Capital needs are often reduced since any additional funds are going towards and expansion and aren’t available for daily expenses. If Nordstrom decides to use internal funds, they will lose out on external funding tax benefits which could impact their overall capital structure. There is also a lack of discipline that comes with internal financing due to low risk but also could cause major problems if not taken seriously or monitored as an external debt would require (O’Farrell, 2017). Typically, this type of financing is used for smaller short term projects so it doesn’t make sense for Nordstrom to consider internal financing for this project.

Global capital market is a system in which companies, people or governments with excess funds can transfer funds to those who have a shortage. It’s an efficient way for borrowing money or investing money (International Business, n.d.). In a long term financing situation, similar to what Nordstrom needs for this expansion project, loans (syndicated or bilateral) are very common. They are hugely beneficial when it comes to needing a financial plan more tailored to a series of parameters. Things like repayment terms have great flexibility without the risk of being penalized. Also things like maturity, interest rate, and amortization calendars can all be renegotiated. This is obviously very appealing for Nordstrom’s due to the unexpected nature of the UK market after Brexit and knowing that they would have the opportunity to reevaluate this loan plan makes it the most appealing (Fernandez & Urraca, 2017). There is a risk due to the monetary policy implemented by the European Central Bank which has led to a three-year lending drought. Bank liquidity has made a comeback which predicts a huge improvement in bank loans.

Another option for Nordstrom’s are bonds. To create a bond, creditors or debt holders purchase securities and get future income or assets in return for the initial investment. Most of the time investors buy bonds to receive interest payments at a fixed rate for the lifetime of the bond and eventually receive the principal at expiration (International Business, n.d.). Due to the fact that Nordstrom is looking for a long-term financing plan, bonds could be a less burdensome financial options (Fernandez & Urraca, 2017). There are also international bonds that function a little bit different. Not all foreign countries or companies offer bonds so sometimes there needs to be a mutual fund that buy larger bonds but pay lower fees. Although this could mean better bonds it costs more in administrative fees. Often this is route for an individual. Foreign investment is typically appealing during decline in any market due the safety they hold even if they don’t offer the same returns. International bonds provide a layer of diversification which helps reduce the risk of substantial losses while limiting the investor’s potential return. The more bonds, the better chance they have to not lose money but it also makes it more complicated to keep track of finances (Motes, 2017). Due to the high risk that bonds create, especially for International bonds, the high rate of return is not worth it. It is advised that Nordstrom consider alternative options vs. investing in bonds.

When money markets are made of a fixed-income instrument that matures in 270 days or less, Nordstrom can consider commercial paper. They are considered when a short-term solution for funding is needed with a better rate of return on the initial investment. For a new project investment or a short-term receivable, a promissory note is highly recommended. It provides a convenient financing solution because it permits issuers to avoid the complications of continuously getting loans. One disadvantage or risk to utilizing a commercial paper is that they have a higher rate of interest and the rates tend to rise when the economy (Cussen, 2018). It also could be problematic for Nordstrom to have to pay back the $700M in that short of a timeframe. There is the case of Penn Central in 1970 that had to declare bankruptcy because they defaulted on their commercial paper obligations. It didn’t just impact Penn Central but the whole commercial paper market took a huge hit because all investors lost confidence in this method of funding (Cussen, 2018). With the short terms, it’s recommend that Nordstrom choose another alternative to funding their expansion to safe guard their ability to pay back this mass amount of funding.

Debt and Equity get thrown around very casually in the finance world but it’s worthwhile to dissect what they really mean and their impact on Nordstrom’s if they choose this path. Debt financing is when money is raised from a loan for one purpose of a set period of time and is typically secured by collateral. Equity on the other hand is when the founder’s money is invested in the business from angel investors, capital firms or sometimes government-backed community agencies all of whom get a portion of ownership and a share of the profits (Coplan, 2009). Deciding to use debt would force Nordstrom to manage for cash flow, while equity would require Nordstrom to put a priority on growth but it could mean that Nordstrom is limited in how much they can borrow depending on how much they raise their equity. “If a company is table and well-established, tipping towards debt financing makes sense, because the company has both assets to borrow against and the cash flow to service the loans” (Coplan, 2009). Based on this Bloomberg Businessweek article, it does appear that debt financing may be a great option for Nordstrom to consider for this expansion project.

A business combination is a central piece for Nordstrom to gain the competitive advantage, particularly in a new market. There are three laws that all businesses should follow when considering growth of any kind before they make the decision (Gomes-Casseres, 2015).

1. The combination must have the potential to create more value than the parties can alone. Think about how much more value can both companies create together and what resources must be put together to achieve this?

2. The combination must be designed and managed to realize the joint value. What partners are going to work best together to accomplish their goals. What are the risks and how can they be managed?

3. The value earned by the parties must motivate them to contribute to the combination. How is the value divided and shared over a long period of time?

Nordstrom will need to focus on the economic and competitive mechanism that will drive the best joint value for their company to concretely bring a strategic financial plan to the table. Nordstrom should consider applying its internal capital as well as their access in their home markets to make solid business arrangements for this expansion. Thinking about how successful their expansion into New York City with a big splash of opening the new store front shows that Nordstrom should enter the UK is a similar fashion. Making the statement that they are willing to put their money where their mouths are will give faith to financial corporations or banks that Nordstrom is an excellent investment.

Track Record

Over the last couple of decades, Nordstrom continues to strengthen its position be expanding their business. Nordstrom has an excellent track record for solid financial footing and is a low risk for defaulting on a loan needed for their expansion into the UK. Looking as far back as 2015, when Nordstrom opened 27 new stores and they gained a 14% increase in sales (Nordstrom Annual Report, 2018). In 2016, Nordstrom saw almost a 3% increase in net sales (Annual Report, 2016). By 2017 Nordstrom’s net earnings were $437 and they reached a record sale of $15 billion. Overall they saw a net sales increase of 4.4% (Annual Report, 2017). Just based on these numbers, it’s clear that Nordstrom is a continuously growing company and their efforts are paying off.

Comparatively, Nordstrom’s is following a similar pattern of their competition which indicates that they are in good health (Appendix 8). Nordstrom Inc.’s current ratio is 1.09 with a median of 1.91 indicating not only short-term financial strength but long-term as well since they don’t vary too dramatically year over year (GuruFocus, 2018). With this current ratio it indicates that Nordstrom is able to pay off all obligations if they needed to and they would not be in risk of bankruptcy. Nordstrom has also seen a dramatic increase in business growth from their online division which increase 17% in ten years. With a company focused on growth as their number one priority, it comes as no surprise that they are able to continue to see their expansion efforts be successful.

Beyond being a financially stable organization, Nordstrom has a great reputation for being trustworthy with their top class customer care. They have even been nominated over 20 times as the top 25 places to work due to their ability to service all of the key stakeholders, not just the investors (Zaczkiewicz, 2017). In 2011, Nordstrom workers earned 60% higher than the industry average. Nordstrom’s biggest appeal for consumers is their high-quality products but also their sense of community and excellent customer service. Beyond all of this, Nordstrom pays attention to the communities that have helped make it a success and they pay extra attention to where they put a new store front. They donate time and money to countless charities committed to sustainable environment, human rights and community support. It’s definitely hard to find a company that will make all of these efforts towards their key stakeholders and still end up profitable at the end of the day (Caplinger, 2013).

Nordstrom has a very good credit rating and even in 2016 when they took a significant hit on a debt loan which was used for expansion purposes but they saw relief in 2017 when they refinanced to lower their interest rate (Levine-Weinberg, 2017). Although Nordstrom has been very charitable and conscious of their efforts, there is always more that they could do in terms supporting ethical behavior. With their high quality standards, they are fairly clean when it comes to lawsuits or anything that might damage their image in society.

Question and Answers

Q. Why London?

A. Lots of reasons went into picking this city. Not only is it a central hub for the world, but it is also thought of being THE global leader. London is a city where growth is not just happening but it’s necessary. The great relationship that London and the U.S. has been also a huge consideration for this expansion. It is very natural to consider the UK due to the per capita that European countries have.

Q. How realistic is the two-year timeline to get a store ready for customers?

A. We will admit that this is aggressive but based on Nordstrom’s learnings from open the NYC store, we believe that efficiencies can expedite this process.

Q. How much revenue did you generate last year?

A. $14.5M (Appendix 7)

Q. What other geographies do you currently cover?

A. For store front locations, Nordstrom’s is throughout the U.S. and Canada but their online availability has global reach.

Q. Why is Nordstrom’s asking for money now?

A. Nordstrom will need this cash on hand to begin building the new store front and they need this capital to prepare construction deals and leased property. Due to their newly finished NYC location, they are now able to focus all efforts on the London expansion.

Q. What additional opportunities can Nordstrom expect based on this expansion?

A. The new opportunities are almost endless as Nordstrom begins to bring their products to other parts of the world. It can of course lead to further expansion and giving them a much more positive global outlook when it comes to the impact of this new store. It will in turn bring opportunities to the ecommerce business side.

Appendix 1

Appendix 2

Appendix 3

Appendix 4

Appendix 5:

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Appendix 6: C:\Users\rae.markwell\Desktop\Nordstrom Forecast.PNG

Appendix 7

Appendix 8

https://mr-uploads.s3.amazonaws.com/uploads/2015/02/share-performance2.png

Appendix 9

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1

ScenarioCosts (monthly)NPV (monthly)Costs (yearly)NPV (yearly)

Pessimistic138,933,333.33$ 152,826,666.67$ 1,667,200,000.00$ 1,833,920,000.00$

Best Case191,033,333.33$ 210,136,666.67$ 752,400,000.00$ 2,521,640,000.00$

Optimistic208,400,000.00$ 229,240,000.00$ 2,500,800,000.00$ 2,750,880,000.00$

Best Case Scenario20182019 (+9%)2020 (+9%)2021 (+9%)2022 (+9%)

Fixed Costs/month116,666,666.67$ 116,666,666.67$ 116,666,666.67$ 116,666,666.67$ 116,666,666.67$

Variable Costs/month57,000,000.00$ 62,130,000.00$ 67,721,700.00$ 73,816,653.00$ 80,460,151.77$

Total Cost/month173,666,666.67$ 178,796,666.67$ 184,388,366.67$ 190,483,319.67$ 197,126,818.44$

Net Present Value of Monthly Costs191,033,333.33$ 196,676,333.33$ 202,827,203.33$ 209,531,651.63$ 216,839,500.28$

Price/Unit44.23$ 44.23$ 44.23$ 44.23$ 44.23$

Total Units/ month15,83817,26318,81720,51022,356

Monthly Sales700,500.00$ 763,545.00$ 832,264.05$ 907,167.81$ 988,812.92$

Fixed Costs/year1,400,000,000.00$ 1,400,000,000.00$ 1,400,000,000.00$ 1,400,000,000.00$ 1,400,000,000.00$

Variable Costs/year684,000,000.00$ 745,560,000.00$ 812,660,400.00$ 885,799,836.00$ 965,521,821.24$

Total Cost/year2,084,000,000.00$ 2,145,560,000.00$ 2,212,660,400.00$ 2,285,799,836.00$ 2,365,521,821.24$

Net Present Value of Yearly= Costs2,292,400,000.00$ 2,360,116,000.00$ 2,433,926,440.00$ 2,514,379,819.60$ 2,602,074,003.36$

Price/Unit44.23$ 44.23$ 44.23$ 44.23$ 44.23$

Total Units/year190,052207,157225,801246,123268,274

Yearly Sales8,406,000.00$ 9,162,540.00$ 9,987,168.60$ 10,886,013.77$ 11,865,755.01$

Pessimistic20182019 (+4.5%)2020 (+4.5%)2021 (+4.5%)2022 (+4.5%)

Fixed Costs/month116,666,666.67$ 116,666,666.67$ 116,666,666.67$ 116,666,666.67$ 116,666,666.67$

Variable Costs/month57,000,000.00$ 59,565,000.00$ 62,245,425.00$ 65,046,469.13$ 67,973,560.24$

Total Cost/month173,666,666.67$ 176,231,666.67$ 184,388,366.67$ 190,483,319.67$ 197,126,818.44$

Net Present Value of Monthly Costs191,033,333.33$ 193,854,833.33$ 202,827,203.33$ 209,531,651.63$ 216,839,500.28$

Price/Unit44.23$ 44.23$ 44.23$ 44.23$ 44.23$

Total Units/ month15,83816,55017,29518,07318,887

Monthly Sales700,500.00$ 732,022.50$ 764,963.51$ 799,386.87$ 835,359.28$

Fixed Costs/year1,400,000,000.00$ 1,400,000,000.00$ 1,400,000,000.00$ 1,400,000,000.00$ 1,400,000,000.00$

Variable Costs/year684,000,000.00$ 714,780,000.00$ 746,945,100.00$ 780,557,629.50$ 815,682,722.83$

Total Cost/year2,084,000,000.00$ 2,114,780,000.00$ 2,146,945,100.00$ 2,180,557,629.50$ 2,215,682,722.83$

Net Present Value of Yearly= Costs2,292,400,000.00$ 2,326,258,000.00$ 2,361,639,610.00$ 2,398,613,392.45$ 2,437,250,995.11$

Price/Unit44.23$ 44.23$ 44.23$ 44.23$ 44.23$

Total Units/year190,052198,604207,542216,881226,641

Yearly Sales8,406,000.00$ 8,784,270.00$ 9,179,562.15$ 9,592,642.45$ 10,024,311.36$

Optimistic20182019 (+20%)2020 (+20%)2021 (+20%)2022 (+20%)

Fixed Costs/month116,666,666.67$ 116,666,666.67$ 116,666,666.67$ 116,666,666.67$ 116,666,666.67$

Variable Costs/month57,000,000.00$ 68,400,000.00$ 82,080,000.00$ 98,496,000.00$ 118,195,200.00$

Total Cost/month173,666,666.67$ 185,066,666.67$ 184,388,366.67$ 190,483,319.67$ 197,126,818.44$

Net Present Value of Monthly Costs191,033,333.33$ 203,573,333.33$ 202,827,203.33$ 209,531,651.63$ 216,839,500.28$

Price/Unit44.23$ 44.23$ 44.23$ 44.23$ 44.23$

Total Units/ month15,83819,00522,80627,36732,841

Monthly Sales700,500.00$ 840,600.00$ 1,008,720.00$ 1,210,464.00$ 1,452,556.80$

Fixed Costs/year1,400,000,000.00$ 1,400,000,000.00$ 1,400,000,000.00$ 1,400,000,000.00$ 1,400,000,000.00$

Variable Costs/year684,000,000.00$ 820,800,000.00$ 984,960,000.00$ 1,181,952,000.00$ 1,418,342,400.00$

Total Cost/year2,084,000,000.00$ 2,220,800,000.00$ 2,384,960,000.00$ 2,581,952,000.00$ 2,818,342,400.00$

Net Present Value of Yearly= Costs2,292,400,000.00$ 2,442,880,000.00$ 2,623,456,000.00$ 2,840,147,200.00$ 3,100,176,640.00$

Price/Unit44.23$ 44.23$ 44.23$ 44.23$ 44.23$

Total Units/year190,052228,062273,675328,410394,092

Yearly Sales8,406,000.00$ 10,087,200.00$ 12,104,640.00$ 14,525,568.00$ 17,430,681.60$

Costs in Millions2016201720182019202020212022202320242025202620272028

Revenue$14,437$14,757$15,478$15,989$16,708$17,188$17,497$17,812$18,133$18,459$18,792$19,130$19,474

Gross profit$5,269$5,317$5,588$5,672$6,032$7,622$7,759$7,899$8,041$8,186$8,333$8,483$8,636

Total operating expenses$4,168$4,315$4,662$4,916$5,033$6,322$6,436$6,552$6,670$6,790$6,912$7,036$7,163

Profit Margin4.16%2.40%2.82%3.45%2.82%3.00%3.06%3.11%3.17%3.22%3.28%3.34%3.40%

Free Cash Flow $5,000$5,125$5,228$5,401$5,644$3,244$3,302$3,362$3,422$3,484$3,547$3,611$3,675

Costs in Millions2016201720182019202020212022202320242025202620272028

Revenue$14,437$14,757$15,478$15,989$16,708$17,188$17,497$17,812$18,133$18,459$18,792$19,130$19,474

Gross profit$5,269$5,317$5,588$5,672$6,032$7,622$7,759$7,899$8,041$8,186$8,333$8,483$8,636

Total operating expenses$4,168$4,315$4,662$5,616$5,033$6,322$6,436$6,552$6,670$6,790$6,912$7,036$7,163

Profit Margin4.16%2.40%2.82%3.45%2.82%3.00%3.06%3.11%3.17%3.22%3.28%3.34%3.40%

Free Cash Flow $5,000$5,125$5,228$4,701$5,644$3,244$3,302$3,362$3,422$3,484$3,547$3,611$3,675

JWN Spend WithOUT Investment

JWN Spend With Investment

Balance SheetProjected EOY 2018 Pessimistic Growth - 20%Expected growth 10%Optimistic Growth +20%

Assets

Current Assets:

Total Current Assets3,503,000.00$ 2,802,400.00$ 3,853,300.00$ 4,203,600.00$

Total Assets3,503,000.00$ 2,802,400.00$ 3,853,300.00$ 4,203,600.00$

Liabilities

Total Current Liabilities3,289,000.00$ 2,631,200.00$ 3,617,900.00$ 3,946,800.00$

Other Liabilities673,000.00$ 538,400.00$ 740,300.00$ 807,600.00$

Total Liabilities3,962,000.00$ 3,169,600.00$ 4,358,200.00$ 4,754,400.00$

total Shareholder's Equity977,000.00$ 781,600.00$ 1,074,700.00$ 1,172,400.00$

Total Liability & Equity8,115,000.00$ 6,492,000.00$ 8,926,500.00$ 9,738,000.00$

Income StatementProjected EOY 2018 Pessimistic Growth - 20%Expected growth 10%Optimistic Growth +20%

Sales/Revenue15,478,000.00$ 12,382,400.00$ 17,025,800.00$ 18,573,600.00$

Cost of Goods Sold9,890,000.00$ 7,912,000.00$ 10,879,000.00$ 11,868,000.00$

Gross Income5,588,000.00$ 4,470,400.00$ 6,146,800.00$ 6,705,600.00$

SG&A Expense4,662,000.00$ 3,729,600.00$ 5,128,200.00$ 5,594,400.00$

R&D-$ -$ -$ -$

Other SG&A-$ -$ -$ -$

Consolidated Net Income/(loss)437,000.00$ 349,600.00$ 480,700.00$ 524,400.00$

Cash Flow StatementProjected EOY 2018 Pessimistic Growth - 20%Expected growth 10%Optimistic Growth +20%

Net Operating Cash Flow1,400,000,000.00$ 1,120,000,000.00$ 1,540,000,000.00$ 1,680,000,000.00$

Net Investment Cash Flow684,000,000.00$ 547,200,000.00$ 752,400,000.00$ 820,800,000.00$

Net Financing Cash Flow 542,000,000.00$ 433,600,000.00$ 596,200,000.00$ 650,400,000.00$

Free Cash Flow669,000,000.00$ 535,200,000.00$ 735,900,000.00$ 802,800,000.00$

Fixed Costs/month116,666,666.67$ 93,333,333.33$ 128,333,333.33$ 140,000,000.00$

Variable Costs/month57,000,000.00$ 45,600,000.00$ 62,700,000.00$ 68,400,000.00$

Total Cost/month173,666,666.67$ 138,933,333.33$ 191,033,333.33$ 208,400,000.00$

Net Present Value of Monthly Costs191,033,333.33$ 152,826,666.67$ 210,136,666.67$ 229,240,000.00$

Price/Unit44.23$ 44.23$ 44.23$ 44.23$

Total Units/ month15,83812,67017,42119,005

Monthly Sales700,500.00$ 560,400.00$ 770,550.00$ 840,600.00$

Fixed Costs/year1,400,000,000.00$ 1,120,000,000.00$ 1,540,000,000.00$ 1,680,000,000.00$

Variable Costs/year684,000,000.00$ 547,200,000.00$ 752,400,000.00$ 820,800,000.00$

Total Cost/year2,084,000,000.00$ 1,667,200,000.00$ 2,292,400,000.00$ 2,500,800,000.00$

Net Present Value of Yearly= Costs2,292,400,000.00$ 1,833,920,000.00$ 2,521,640,000.00$ 2,750,880,000.00$

Price/Unit44.23$ 44.23$ 44.23$ 44.23$

Total Units/year190,052152,042209,057228,062

Yearly Sales8,406,000.00$ 6,724,800.00$ 9,246,600.00$ 10,087,200.00$

Southern New Hampshire University

MBA 640

1

MBA

640

Final Paper Submission

Rachael Markwell

Southern New Hampshire University

Southern New Hampshire University – MBA 640

1

MBA – 640 Final Paper Submission

Rachael Markwell

Southern New Hampshire University