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ANALYSIS REPORT

NOVEMBER 19, 2013

PREPARED BY: ELIZABETH VU

FOR: PROFESSOR LIVIA MARKOCZY

BPS 4305.006 – STRATEGIC MANAGEMENT

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TABLE OF CONTENTS:

EXECUTIVE SUMMARY ………………………………… PG 3

FINANCIAL ANALYSIS …………………………………. PG 3

EXTERNAL ANALYSISFIVE FORCES

………………………………….. PG 5

INTERNAL ANALYSISVALUE CHAIN ANALYSIS

………………………………… PG 7………………………………… PG 10

RECOMMENDATIONS ……………………………….. PG 12

EXHIBITS ………………………………… PG 14

REFERENCES ……………………………….. PG 17

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EXECUTIVE SUMMARY

The company being analyzed for this report is Nordstrom, Inc. Nordstrom is an upscale

American retailer that retails brand name and private label apparel. It was founded by John W.

Nordstrom in 1901. Nordstrom was initially a shoe store but grew tremendously since

establishment, and the company has expanded and now is offering more than just shoes. In

addition to shoes, Nordstrom offers a wide range of specialty clothing, handbags, accessories,

jewelry, cosmetics, and fragrances. They also include wedding and home furnishing departments

at some locations. Nordstrom currently operates 257 stores in 35 states in the United States,

which include their full-line department stores, Nordstrom Racks, and boutiques. Throughout

this report, Nordstrom’s financial status, internal company analysis, external company analysis,

the firm’s own business strategies, as well as compared to their competitors’ strategies will be

discussed. Finally, recommendations for Nordstrom will be provided at the end.

FINANCIAL ANALYSIS

Nordstrom is traded on the New York Stock Exchange under the symbol JWN which are

the initials of the firm’s founder John W. Nordstrom. Looking at the performance of the

company over time, based on its most recent data which is from year 2011 to 2012, Nordstrom

appears to be financially fairly healthy. If you refer to the exhibit section, Figure 1 shows the

change in financials for Nordstrom. Although the numbers in the balance sheet were decreasing

from year 2011 to year 2012, the figures in the income statement which includes the company’s

net income from their net sales and expenses, had increased.

Comparing the firm with its closest competitor, TJ Maxx, according to the common size

statements table of these two firms, which can be found in the exhibits Figure 2, the competitor

TJ Maxx seems to be doing better in that they have a higher figure for total shareholder’s equity

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as well as a higher net income rate than Nordstrom in 2012. The competing firm has a

competitive advantage over Nordstrom because of their sensitivity to price for the consumers

which can lead to the outcome of the figures from both firms in the table for common size

statements.

The last table provided in the exhibits section will be Figure 3 which is the table for

financial ratios of Nordstrom and its closest competitor, TJ Maxx. In the first two categories of

ratios, the figures determine the liquidity or short-term solvency of each firm’s assets. The

liquidity for Nordstrom is higher than that of TJ Maxx. That means Nordstrom can quickly

convert their assets to pay off their liabilities or short-term debt. Nordstrom excels over TJ Maxx

in that department which adds to the financial health for Nordstrom. The next types of ratios are

for long-term solvency or financial leverage. In this category, Nordstrom again receives a higher

figure than TJ Maxx so that means Nordstrom has strength when it comes to how much of its

total assests are financed by debt. Also it explains how much more Nordstrom is financed by its

equity over its debt which is also contributing to the firm’s financial health. After financial

leverage ratios there are the asset utilization or turnover ratios that measure how many times

each year Nordstrom and TJ Maxx sells its entire inventory and how much of sales is generated

for every dollar in assets. Since the numbers for Nordstrom is lower than that of TJ Maxx,

Nordstrom has a weakness in asset utilization when compared to TJ Maxx.

For the final financial ratios, profitability and market value for the firms are examined.

The profit margin, returns on assets, and return on equity ratios which are all part of profitability

ratios states that although both firms are profitable, TJ Maxx has a better performance in this

category since for that firm; their percentages are higher than Nordstrom. Finally the last ratio is

the earnings per share ratio which compares Nordstrom’s and TJ Maxx’s profitability.

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Nordstrom has a higher ratio value than the competitor TJ Maxx by 1.02 so essentially,

Nordstrom is fairly more profitable.

EXTERNAL ANALYSIS

Nordstrom’s general environment includes several segments. When looking into

Nordstrom’s demographics, the firm can be found in the main metropolitan centers of highly

populated cities with economic growth in the fashion retail industry. This is because men and

women in these areas are the firm’s main target. Locating Nordstrom stores in these locations

pose an opportunity for the firm because these individuals that populate this type of area are

affluent and age in the 20-40 year range and value the quality that comes from high fashion

apparel that Nordstrom can offer. Another segment is the sociocultural segment, where for

Nordstrom, when looking into the amount of women in the workforce; the firm creates a positive

affect for more employment opportunities for women in the clothing retail industry.

Moving forward into the external analysis of Nordstrom, the external five forces on the

firm will be reviewed. First is the firm’s threat of new entrants. For Nordstrom, the company’s

potential threat of new entrants is low. Nordstrom carries a range of merchandise that comes

from a network of suppliers in which they have built a relationship with and for a new entrant to

come in and bear a real threat to the firm, they would have to find a convincing way to persuade

the already connected suppliers to work with them instead of Nordstrom. Breaking a relationship

between the existing one between the established Nordstrom and its suppliers, to get their

suppliers to supply to a new firm is difficult to do, so that equates to the threat of new entrants

for Nordstrom to be low.

Second is the bargaining power of the buyers for the firm. This force on the firm is

moderate. Since Nordstrom’s buyers are mainly interested in the brand name of the product they

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are less sensitive to the price and so their bargaining power is relatively low, however some

brands that they carry prefer to only be sold at certain stores which makes the power of the

buyers higher, and because of these two factors, the bargaining power of buyers for Nordstrom is

considered to be moderate. The third force on the firm is the bargaining power of suppliers,

which like buyers, is also moderate. The suppliers have moderate power mainly because of the

image of the brand that they have to uphold. Since Nordstrom is viewed as a high-end fashion

retailer it is safe for suppliers to provide to this firm. Also, since Nordstrom needs their inventory

to be of a certain specialty fashion retail standard, they share the mutual need for superiority

class with their suppliers.

Fourth on the list of forces for Nordstrom is the threat of substitutes on the company.

This force is high when it comes to the substitutes that consumers can replace the products sold

at Nordstrom with. The company sells products mainly to affluent buyers as previously stated.

However, people that want the merchandise from Nordstrom cannot afford the price that these

items are sold at in a Nordstrom department store. When that happens, other firms such as TJ

Maxx, Marshall’s, and Ross offer substitute products similar to the ones sold at Nordstrom but

sells them at a much lower price for the consumers that are price sensitive. Also instead of

buying the products at Nordstrom the buyer can get the item directly from the designer now that

online shopping is booming. These substitutes pose a high threat on the firm because there are

many manufacturers in the industry that attract the profit from the price-sensitive consumers.

Finally for the last force of the five forces, is the threat of rivalry amongst existing firms

and Nordstrom. Some examples of established firms similar to Nordstrom would be Neiman

Marcus, Bloomingdale’s, and Saks Fifth Avenue. These rivalries all have their fair and

competitive share in the market with Nordstrom. All of these firms primarily operate in the

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United States and carry the same high-end private label and brand name inventory. Another

factor is that Nordstrom’s line of Nordstrom Racks, for consumers who cannot buy at full-line

department stores, are replicated in the competing firms. Neiman Marcus has their Last Call by

Neiman Marcus stores, and Saks Fifth Avenue has their line of Off Fifth by Saks Fifth Avenue

stores. This shows that the competition threat between Nordstrom and its rivals are tremendously

high and powerful. For a visual of the five forces model on the firm; please refer Figure 4 in the

exhibits section of the report.

To wrap up the external analysis of Nordstrom, the stakeholders for the company

previously explained above, included the suppliers of the firms which were discussed in the

bargaining power of suppliers section, the customers, explained in the bargaining power of

buyers section. However, another division of the stakeholders are in the company’s view on

social responsibility, which are their communities. Nordstrom has several projects that give back

to the community stakeholders in which they serve. The firm offers programs that sustain the

communities through scholarship programs, non-profit organizations that the company has

supported such as, Boys and Girls Club and American Red Cross, and also their focus on

supplier diversity.

INTERNAL ANALYSIS

When examining the condition of the firm from the inside, there are two factors that can

be determined as well as a few aspects such as the value, rarity, inimitability, and organization of

the internal environment within these factors. To start off on the internal analysis, the two factors

will be explained and they are the internal strengths and weaknesses of Nordstrom. Some

strength that Nordstrom possess is through Nordstrom’s brand image to the market, the

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company’s connection with specialty suppliers, loyalty of their customers, and also the firm’s

diversity in different divisions throughout their entire company.

One of Nordstrom’s greatest strengths is its public image. The brand is seen as a high-

end, designer label, specialty fashion department store which attracts buyers who will pay the

price asked for from the firm. The customers know the brand, they recognize the brand, and they

trust it. That is what gives Nordstrom added value and strength through their company name.

Another strength is Nordstrom’s connection with their variety of specialty high-end suppliers.

These suppliers are also called vendors. The relationship between the firm and its vendors are

valued entirely and in a reciprocal manner. Nordstrom wants complete involvement of their

vendors and knowledge of their product to shine through from the buying of the merchandise all

the way to the retailing made on the sales floor. Nordstrom aims to help vendors grow not only

within Nordstrom but within the industry which creates loyalty to the firm from each vendor that

they deal with.

Loyalty not only from vendors but also from customers is yet another strength for

Nordstrom that is worth recognizing. Nordstrom’s loyal customers are almost guaranteed loyal to

the firm because of Nordstrom’s strength in customer service. Nordstrom’s number one goal is to

provide outstanding customer service. The customers come for the name but they stay for the

unmatched excellent customer service. Employees at the firm are encouraged to make any

decision that is viewed necessary from that particular employee to give the customer an

experience that is focused on them because Nordstrom has a #1 rule that is to use good judgment

in all situations. There are no additional rules. By making it so that the customer deals with an

employee who is self-powered and are more on the one-on-one level of a small business than that

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of a big company that is Nordstrom, the customer views themselves valued to the firm and that

creates a loyalty that cannot be bought.

Finally, one last of many more strengths that Nordstrom has is its diversity amongst its

organization through different divisions. Nordstrom is mainly known for being a department

store that sells shoes, apparel, accessories, and cosmetics; however the firm also offers other

services. One example would be the dining services that they provide. Nordstrom realizes that

customers are shopping during lunch hours and they have children who get tired and need

something to eat. Customers are spending loads of time shopping and eventually get tired and

need a place to sit and relax with a coffee and/or food. Taking those factors into consideration,

Nordstrom also has a food business within their company. At every Nordstrom department store

location, there will either be a Nordstrom espresso bar, café, pub, or full on restaurant such as the

Bistro N at the Nordstrom location inside Northpark Mall in Dallas, Texas. Through this

division, the company is now not only reaching to the shopping customer but the husbands,

boyfriends, and/or children that may visit the store along with them.

The other factor for Nordstrom is the firm’s weaknesses. A weakness for the firm would

be the profit that isn’t coming in from the middle-to-low class consumers which can contribute to

the reason that the firm’s increasing sales growth is going up; however, is still lower than the

industry average. Although Nordstrom has an established consumer base from the middle-to-

upper class, the other half is not well reached. For that case, Nordstrom improves on that by

offering their Nordstrom Rack stores where they sell merchandise originally stocked at regular

Nordstrom stores as well as special purchases of end-of –the-season closeouts, or overrun

merchandise from other retailers, at 50 percent or more off the original price. This way, more

shoppers are reached and can still get Nordstrom high-end quality products as a discounted price.

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Value Chain Analysis

Primary Activities Analysis:

Inbound Logistics: Since Nordstrom receives inventory from multi-channel retailers,

they establish a strong relationship with each one. The vendors and Nordstrom both

follow strict requirements for getting the inventory into the stores and because of that the

operations are both efficient and effective.

Operations: The operations of Nordstrom are primarily on customer service provided by

the “Nordies” or employees. The concept that adds the most value to the company is their

pride in providing excellent customer service and operations is where this all takes place.

Outbound Logistics: Nordstrom has an inventory system where products are noted and

when a location needs a certain product but currently does not have that item in stock, the

closest location that does have that item will ship that product to the location that needs

it. On the consideration for their online purchases, Nordstrom will ship to the customer

from the closest location with their purchased item.

Marketing & Sales: Nordstrom promotes and advertises through several channels.

Whether it be through television commercials, ads in magazines or online via the internet,

catalogs that are mailed out, or word of mouth from loyal customers that are swayed by

the excellent shopping experience that Nordstrom provides through customer service.

Service: This category in the primary activities is the utmost important category for

Nordstrom. The company strives towards a goal of providing excellent customer service

through listening to the needs of the customer, knowing the products, and through

honesty and sincerity; it is the backbone of the company and everything that the firm is

about.

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Support Activities Analysis:

Firm Infrastructure: Nordstrom operates with a decentralized system. Managers from

each region know what the customers in their areas want so they can appropriately stock

the stores that they manage without jeopardizing the company’s bottom line. They

receive feedback from by being on the sales floor and listening to the salespeople and

customers. This plays a key role in being successful for the overall company.

Human Resources Management: Nordstrom aims to hire men and women who are

already nice and already motivated before they come to work for the company, they

provide very little in the way of a formalized training program. Nordstrom’s employee

compensation is based on sales commissions, they believe the best way to attract and

retain was by paying them to their ability. Outstanding sales performances from

employees are rewarded by Nordstrom with prizes and praise through their recognition

meetings. These meetings were meant to demonstrate sincere and authentic appreciation,

emphasize team spirit, teach people something new, and perpetuate the culture.

Technology Development: Along with customer service, Nordstrom stays on top of their

competition by providing service to their customers with the latest technology.

Nordstrom implements a mobile checkout system where they use iTouch devices to ring

up purchases on the spot. In addition to these iTouch devices, Nordstrom also uses iPads

to assist customers with their wardrobe to cosmetics selections.

Procurement: With Nordstrom’s upscale reputation, many firms wish to work with

Nordstrom which makes acquiring inputs fairly trouble-free. The main part in this

division is to decide with firms would work best with theirs.

Supplementary Value Chain Analysis:

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Competitor Analysis: The closest competitor for Nordstrom is their substitute firm, TJ

Maxx. When looking at the product quality and customer service between the two, TJ

Maxx is inferior to Nordstrom. Nordstrom’s main objective is to provide the customer

with quality service and quality products whereas TJ Maxx focuses more on the price

factor. Also in the aspect of return policies, and business credibility TJ Maxx is again

inferior to Nordstrom. Nordstrom has been known to accept returns beyond the usual 30

day that TJ Maxx offers. Nordstrom also has credibility in business through relation of

products to their firm in magazines where TJ Maxx does not do as well.

Temporal Comparison: On the view of the firms Nordstrom and TJ Maxx in the latest

recession, Nordstrom falls short in prevailing over the competitor. Since price sensitivity

is a strength for TJ Maxx their firm was not as negatively affected as that of Nordstrom.

RECOMMENDATIONS

Nordstrom’s core competency and what gives the firm its competitive advantage is their

value in outstanding customer service that they constantly strive to achieve. Through all the

information gathered, that is the one aspect of the firm that stands out above the rest. It cannot be

accentuated enough that Nordstrom’s entire success does not exist without their customer

service. Outreaching to the consumers and going above and beyond to sell a relationship with the

customer instead of just selling a product. Nordstrom uses a strategy where traditional hierarchy

is not implied. Instead, Nordstrom operates where top positions are occupied by the salespeople

and the customers. Every tier of the organization supports the sales staff. Nordstrom does not

limit their employees by putting barriers on departments in which they can sell merchandise;

instead they allow staff to strengthen relationships with customers throughout the entire store.

These strategies have done well to place Nordstrom in the rank that it is in right now;

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however there is always room for improvement and more strategies that can add to the strength

and progression of the firm. Three potential strategies for suggestion to increase the growth of

this company are (1) expansion to international markets, (2) further the idea of discounted

merchandise from full-line to Rack stores even more, and (3) keep the existing strategy but in

addition to the already extensive selection of merchandise and dining and spa services, make

Nordstrom a place to meet for social meetings through common interests in vendors of their

customers.

All of these alternatives can help the growth of Nordstrom; however, the one that will be

focused on is the idea of discounted merchandise from full-line Nordstrom department stores to

Nordstrom Rack stores furthered even more. Although Nordstrom Rack stores offer discounted

designer labels from their full-line locations, the mark downs still can’t be matched to their

competitors in the threat of substitute force. Nordstrom Rack, although offers mark-downs is

comparable to being viewed as a high end TJ Maxx or likewise substitute. The items are marked

down but the mark-down is still considered high to the lower class market. To reach the middle-

to-lower class market even more, the idea to open up a new line where items in the often

crowded Rack stores can be transferred to. This will create a distinctive three level market aim

and each market will be targeted. The upper-to-middle class will be serviced at the full-line

department store, the middle class at the Rack stores, and the middle-to-lower class at the newly

implemented discounted-discount Nordstrom stores. These stores can be located in the opposite

demographics of the full-line stores. With this new strategy Nordstrom can still strive for

customer service through every outlet yet make more profit by selling to each demographic

through expansion and specification. The Nordstrom Racks will be less crowed and the new

discounted stores will open up new ways to further profitability through full diversification.

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EXHIBITS

Figure 1 – Change in Financials for Nordstrom

Figure 2 – Common Size Statements Table of Nordstrom & TJ Maxx

JWN (Nordstrom) 2012 TJX (TJ Maxx) 2012

Balance Sheet Balance Sheet

Current Assets 62.81% Current Assets 60.05%

Total Assests 100.00% Total Assets 100.00%

Current Liabilities 27.52% Current Liabilities 39.54%

Total Liabilities 76.35% Total Liabilities 61.46%

Total Shareholders’ Equity 23.65% Total Shareholders’ Equity 38.54%

Income Statement Income Statement

Net Sales 100.00% Net Sales 100.00%

Expenses 93.95% Expenses 92.63%

Net Income 6.05% Net Income 7.37%

2012 2011 % Δ 2012

Balance Sheet

Current Assets 5,081,000 5,560,000 -8.62%

Total Assets 8,089,000 8,491,000 -4.73%

Current Liabilities 2,226,000 2,575,000 -13.55%

Total Liabilities 6,176,000 6,535,000 -5.49%

Total Shareholders’ Equity 1,913,000 1,956,000 -2.20%

Income Statement

Net Sales 12,148,000 10,877,000 11.69%

Expenses 11,413,000 10,194,000 11.96%

Net Income 735,000 683,000 7.61%

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Figure 3 – Financial Ratios for Nordstrom & TJ Maxx for 2012

Ratio JWN (Nordstrom) TJX (TJ Maxx)

Short-Term Solvency/Liquidity Ratios

Current Ratio 2.28 1.52

Quick Ratio 1.53 0.60

Long-Term Solvency/Financial Leverage Ratios

Debt-to-Equity Ratio 1.64 0.21

Debt-to-Total Assets Ratio 0.39 0.08

Asset Utilization/Turnover Ratios

Inventory Turnover 5.93 6.21

Total Asset Turnover 1.47 2.91

Profitability Ratios

Gross Profit Margin 38.82% 28.43%

Net Profit Margin 6.05% 7.37%

Return on Assets 8.87% 21.43%

Return on Equity 37.99% 55.47%

Market Value Ratios

Earnings Per Share 3.62 2.60

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Figure 4 – Five Forces Model of Nordstrom

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Spector, Robert, and Patrick D. McCarthy. The Nordstrom Way to Customer Service Excellence: A Handbook for Implementing Great Service in Your Organization. Hoboken, NJ: John Wiley & Sons, 2005. Print.

"T.J. Maxx vs. Nordstrom: Side-by-side Comparison."Knoji: Consumer Knowledge. ZipfWorks LLC, n.d. Web. 17 Nov 2013.

<http://tjmaxx.knoji.com/compare- vs/nordstrom/>.