Topic:  Nordstrom Investment Funding Proposal

  1. Executive summary

The Nordstrom Investment Funding Proposal is useful in analyzing and evaluating an investment opportunity that if grabbed well could make Nordstrom grow and avoid the adverse effects of its declining profitability.  In this case, the available opportunity entails the expansion into Beijing. By projection, the regeneration may cause a boost in the number of visitors received yearly. For instance, the projection estimates the yearly number of visitors to be in terms of millions one the redevelopment gets completed.  The millions of visitors will be a number far much greater than the current number.  For a long time, Nordstrom has not expanded outside North America. Therefore, this will be a good springboard for the firm to internationally grow.  The redevelopment project will approximately cost $440 million and it will take about 14 months until completion. The analysis methods recommendable for use in this project encompass trend, horizontal, and vertical analysis. Moreover, debt ratio, current ration, and quick ration are other important methods of analysis in this project.  Other values and calculations to be used in this project are payback, NPV, and IRR.  In accompaniments to this will be detailed explanations within the report and appendices with summary tables and graphs.  Considering the results of the analyzed data, this project will be of benefit to Nordstrom since it will very significantly boost the company’s profitability.  The current report shows that the profitability of the company will increase if the project is implemented. Hence, it is recommendable for the committee to approve the funding request so that the company implements the redevelopment project.

  1. Investment Project

Nordstrom Inc. seeks to expand its operation to the Asian market by opening a retail shop in Beijing, China. The company has identified Beijing as the appropriate destination for its first shop in Asia due to the city’s huge potential. Beijing is the world’s largest city in terms of the population making it an ideal destination for fashion industry investment. China is opening up for global trade and the country’s population and increasing the growing middle present huge market for the company (Avery, 2005). Currently, the Chinese market consumes a third of global luxury products, making the market a vital investment opportunity for the company (Daxue Consulting, 2020). Further, reports indicate a drastic shift in Chinse consumers on American products (Daxue Consulting, 2020; Luan, et al., 2019). The growing number of educated middle-class in China are adopting western consumer behaviors which is a positive indicator for the market (Luan, et al., 2019). Nordstrom Inc. hopes to position itself to reap the benefits of the emerging market in China and use it as a launching pad to the Asian market.

The growing economic power of the Asian markets and their population makes the essential considerations for the development plan. Thus, the investment project seeks to help the company understand consumer behavior in these upcoming markets and develop appropriate strategies (Avery, 2005). China already hosts several American companies, especially tech firms, and the population has a positive attitude towards the country’s products. Nordstrom seeks to leverage the consumer’s perspective and to establish its presence in the Chinese market. Success in China presents a huge potential for the company to expand its presence in the market and expand to other cities like Guangzhou, and Shanghai.

Project Description

Nordstrom’s new investment involves building a 230, 000 square foot retail store in Beijing’s commercial center. The proposed store will house the company’s shopping area and offices as it will act as the organization’s regional headquarter for the Asia region. Nordstrom’s Beijing store is projected to be one of the company’s crucial milestones as it seeks to launch into the Asian Market. China is an important gateway into this emerging market due to the country’s huge population of middle-class, which are among the target consumers.

Nordstrom Inc. does not have a physical presence in China and only ships its products to the country based on orders. Thus, the proposed Beijing investment is a work from scratch that hopes to tap on the city’s appetite for American brands. The projected cost of setting up the new store is five hundred million dollars and will be funded by the company and its financial partners. Notably, the option of purchasing an existing building and renovating to meet required standards also remain open. The option is also applicable considering the prospects of getting a space in a strategic location in the city is likely to be a challenge. However, the decision will depend on the report of the feasibility study of the project. The cost will cover buying or leasing a new store, branding, marketing, and other overhead costs in the first year of operations. Beijing is one of the expensive cities and the cost of buildings likely to consume a significant amount of the proposed loan to facilitate the investment. Beijing is a lucrative market that the company needs to give a close consideration in terms of long-term investments.

Marketing is also a critical aspect of the project as it will play a key role in determining the success or failure of the project. China and Asian consumers have different consumer behavior compared to Americans and Europeans, hence the need for market analysis to determine appropriate strategies. A report by Daxue Consulting (2020) indicates that middle-class consumers have a positive attitude towards the American brand. Another report by McKinsey & Company (2019) further indicates the growing number of Chinese educated middle class are increasingly adopting western consumerism behavior. However, the investment requires in-depth market research to establish the consumption culture among the Chinese middle class. Nordstrom will create its marketing tools and product promotions based on the outcome of these market researches. Research on consumer behavior and culture are key components of the investment.

Nordstrom Inc. (Beijing) also needs resources to fund its functions in the first year of operations. Beijing shop is a virgin market and the investment is likely to take time before it breaks a profitable mark. The duration is projected to last for six to ten months. In other words, the investment will require resources from other areas to fund its operations in the first year. The proposed loan will help in covering the operational costs in the first six months as the shop stabilizes and realize sufficient cash flow to meet its short-term liabilities. Subsequently, the shop will finance its operations independently and establish appropriate measures to meets its long-term liabilities like loan repayment. Beijing is a viable market and the investment is likely to achieve stability in less than the projected six to ten months.

The expansion project is ideal due to the availability of the grooving textile industry in Beijing. Furthermore, the Chinese government encourages foreign direct investments, and therefore, Nordstrom will be able to tap into a lucrative and inviting industry. Currently, the Chinese textile industry handles global companies including Adidas, Calvin Klein, Gucci, among others. Thus, as Nordstrom misses out on these benefits, the company needs to make strides to establish dominance for its high brand and high-end market.

Based on the inflation-adjusted figures, Nordstrom Inc. will require an estimated $2.5 million per each clothing store. The company wishes to have 10 stores spread throughout Beijing for convenience purposes as well as spreading the market. This makes it a total of $25 million in estimated projections. This amount covers the expenses that will be incurred including leasing and operating expenditures.

Resources for the Investment

The proposed investment requires resources ranging from finances, office space to human capital. Additionally, the company needs to register its trademark to protect it from unscrupulous business organizations likely to use its brand to market their products. The trademark registration process requires the company to contract a US law firm to fast-track the process. The registration will cover the whole country to avoid the repetition of the same process when the organization expands to other regions.

Additionally, the Beijing investment requires personnel to oversee its operations. The compensation for the workforce is among the projected overhead costs the loan will cover for the past six months. The CEO, Chief Finance Officer, Chief Operations Officer, and head of marketing will be current employees of the company in the United States. However, other cadres of the job will include Chinese nationals to help in creating a good rapport with the locals. Also, it helps in creating workplace diversity which plays a key role in helping the leadership to understand the culture of the target. The compensation rates and working hours for all Chinese nationals have to adhere to the country’s labor laws. Employees will be paid based on US rates regardless of their nationality. Nordstrom is committed to ethical practices and fair remuneration is part of the organizational practices.

Nordstrom will require a $25 million initial outlay that will be provided through the external funding from a bank loan. Furthermore, the company will also venture into the Chinese market through franchising or by adhering to the Companies Commission of China that regulates the registration of private limited companies. Nordstrom Inc. will also renovate the leased premises and customize them in accordance to the Chinese market as well as uphold the American brand. Also, the company will adhere to the country’s health and consumer acts.

Time Frame

The duration for the investment project from initiation to the official launch of the shop is estimated to last between twelve and fourteen months. However, the deadline depends on the availability of resources. For instance, delay in loan approval is likely to adversely impact the project implementation resulting in a late launch. Nonetheless, twelve months is long enough for the company to search for an appropriate location, lease/ buy a building, and rebrand it to meet the expected standards.

Nordstrom shop in Beijing is expected to become operational in August 2021. The success of the project will be measured using several metrics that capture various aspects of its profitability. For example, the profit margin is part of the evaluation metrics to determine the viability of the operations. The investment needs to have a net profit margin of at least five percent from the second year to achieve sustainability. The current ratio is also a metric essential in determining business performance. It is the ratio of current assets and current liabilities (Kelton, 2019). The metric helps in determining the investment’s ability to meet its short obligations. The projection is a 2:1 ratio by the end of the second year of operations. Finally, the growth of revenues and net incomes are vital in determining the investment’s performance. Essentially, growth in the revenues and net incomes depicts the viability and sustainability of the investment. Projections place the annual revenue growth rate at ten percent from the second year of the investment as the company establishes its footprints in the market.

However, there is no guaranteed success in any project. Therefore, in the case that the Beijing project does not come to fruition, Nordstrom has some exit strategies and timelines in place. For starters, the Small Business Association state that 30 percent of businesses usually fail within the initial two years. Also, 50 percent of these businesses fall within the five years and 66 percent fall within 10 years. Nordstrom will need 3 years to break even and start generating some revenue. Failure to this, the company will then sell its stores to the competitors and other willing investors. However, this will be only called for action when Nordstrom does not recoup the initial $25 million investment and also generate a 3 percent profit within the following year.

III. Justification

Why Now

Nordstrom Inc. seeks to expand its operation to the Asian market by opening a retail shop in Beijing, China. The company has identified Beijing as the appropriate destination for its first shop in Asia due to the city’s huge potential. Beijing is the world’s largest city in terms of the population making it an ideal destination for fashion industry investment. China is opening up for global trade and the country’s population and increasing the growing middle present huge market for the company. Currently, the Chinese market consumes a third of global luxury products, making the market a vital investment opportunity for the company (Daxue Consulting, 2020). Further, reports indicate a drastic shift in Chinese consumers on American products (Daxue Consulting, 2020; Luan, et al., 2019). The growing number of educated middle-class in China are adopting western consumer behaviors which is a positive indicator for the market (Luan, et al., 2019). Nordstrom Inc. hopes to position itself to reap the benefits of the emerging market in China and use it as a launching pad to the Asian market.

The growing economic power of the Asian markets and their population makes the essential considerations for the development plan. Thus, the investment project seeks to help the company understand consumer behavior in these upcoming markets and develop appropriate strategies. China already hosts several American companies, especially tech firms, and the population has a positive attitude towards the country’s products. Nordstrom seeks to leverage the consumer’s perspective and to establish its presence in the Chinese market. Success in China presents a huge potential for the company to expand its presence in the market and expand to other cities like Guangzhou, and Shanghai.

Nordstrom Inc. has established a strong brand in the American market and is one of the visible brands in the fashion retail business. However, the Nordstrom brand is still invisible in the global market. Thus, it is appropriate for the company to adopt new strategies to increase its visibility in the global fashion industry. Further, the company needs to spread out its risks to increases the chances of remaining afloat in case of another economic recession in the country. In other words, the investment project aims at diversifying the company’s market portfolio by targeting virgin areas. China is the appropriate destination for this expansion drive due to the potential benefits in the market. Nordstrom stands to reap big from the investment if it adopts effective strategies to promote its products in the Chinese market.

Furthermore, Nordstrom can qualify for the Investment Tax allowance that will ensure that the company gets entitled to 60 percent of the qualifying capital expenditure. This includes the stores, machinery, and factories for development. Also, China allows companies to trade in the USD within the country. Additionally, China also offers pro-business government policies that aid in the development of many businesses. Thus, Nordstrom can gain a lot from investing at this time.

Strategic Fit: Priorities

The investment project targeting the Chinese market seeks to open a new chapter in the company’s history and position it as a global brand. Currently, Nordstrom is among the top three leading fashion brands in the United States. However, the company still lags in the global market compared to other international fashion brands. The luxury fashion retail business is dominated by the European companies and Nordstrom needs to develop a new approach if it hopes to rise to the top. The European market is already dominated by big brands like Inditex and H& M, making the Asian market a viable option as a ground to launch the brand to international consumers. Beijing investment is crucial for the company’s globalization strategy and increasing its competitiveness in the global market. Beijing offers Nordstrom with a ready market that will enhance the reputation of Nordstrom in new markets, particularly in the Asian market.

Global economics is experiencing a drastic shift as developing countries take various measures to improve their economies. The emerging markets like China, India, Singapore, Taiwan, and Hong Kong are key considerations in long-term investment planning. For example, China has one of the biggest populations of middle-class in the globe, making it an appropriate destination for an organization that offers luxurious fashion products. The investment in Beijing is part of the company’s strategy to take a vantage position in expanding its global brand visibility. China is the second-largest economy in the world with a growing population of middle-income earners (Silver, 2020). Thus, it is a viable investment for the company that deals with luxury brands like Nordstrom Inc. Particularly, the investment seeks to fill the western brand niche in the Chinese market considering the upper and middle-income earners in the country are increasingly embracing American products. More Chinese consumers tend towards American products as a result of western influence through pop culture, Hollywood, fashion, and other factors.

Strategic Fit: Microeconomic

The proposed investment offers unique opportunities and challenges to the company. However, it can leverage its strong brand in the US and developed online shopping to increase its market base in the host country. Currently, the company allows its clients to shop online and deliver the products at their steps. Also, it ships its products to various destinations across the globe. The existing e-commerce system is a leverage for the company to expand its operations in China by offering customized services and reaching a wide base across the city. Beijing has a developed e-commerce system and several delivery companies across the city. The existing e-commerce infrastructure in the city offers Nordstrom a competitive advantage compared to other industry players. Thus, Nordstrom will manage to navigate through the Chinese market using its e-commerce platform. Chinese consumers are heavily reliant on e-commerce. This is evident through the success of Alibaba. Partnering with Alibaba can help the company to expand its operations as well as become a strong brand in the Asian market.

The proposed investment in Beijing, China seeks to usher a new phase in the company’s expansion strategies. Currently, the company has limited operations in North America despite the existing opportunities in Asian and European markets. The investment proposal aligns with various economic projections that indicate positive prospects for China and other Asian markets. Nordstrom Inc. has to position itself to benefit from the growing economies in Asia and diversify its market portfolio. The investment is a great opportunity for the company to launch its globalization strategy and position itself as a key player in the world fashion industry. Nordstrom competes against global companies such as Nike and Adidas. Thus, the Beijing expansion project offers the company a chance to fend off the competition as well as improve the investment portfolio and competitive advantage.

Besides, in terms of finances, China fits in as the best investment priority. First, based on 2019 annual reports, both the cash and short-term investments grew by 12.4 percent and had a current ratio of 1. This shows that the company has enough liquidity that helps in meeting short-term obligations for the Chinese expansion project. Also, the company boasts of an asset base of $7.886 billion. This is more than enough to service the external funding that the company seeks without having to worry about solvency or financial constraints. Based on its impressive economies of scale, Nordstrom can manage to expand into new markets as well as diversify its products to meet different markets.

Strategic Fit: Comparative Advantage

The expansion project into Beijing will help to propel Nordstrom’s competitive advantage. The main aim of the company is to ensure that its customers are contented and satisfied. Thus, based on the market research in Beijing and the larger China, Nordstrom can roll out new clothing trends and designs that align with the local Chinese market in a bid to improve and deliver its objectives. Notably, the company is in a strong position financially and has a growing trend of accumulated profit reserves. Furthermore, Nordstrom conforms to the legal and ethical standard practices that result in a good working environment. This reduces the likelihood of lawsuits and ensures that the brand of the company remains untampered with. Also, Nordstrom enjoys a high-quality relationship with its customers, suppliers, employees, and other relevant stakeholders. Based on the protection of intellectual property, the company maintains a competitive advantage by reducing the chances of duplicated goods within the market.

  1. Risks

Internal Risks and Opportunities

Internal risks are those that Nordstrom deals with behind closed doors. The financial impact is based on financial estimates. Therefore, should thereby an error, then the financial estimates may be doom to the company. Conversely, the financial estimates could also be beneficial in influencing the expansion project and even fuel further expansion projects shortly. Notably, strategic opportunities and risks are a result of decisions from the organization’s management on how to carry out the company’s objectives. Alternatively, operational risks and opportunities rely on the internal resources of the company. Some of these resources include processes, employees, human resource management, and system.

Technology plays a key role in assessing brand loyalty and brand awareness in the United States and other overseas markets. Nonetheless, if not harnessed properly, technology may pose a great risk if the products and services are not satisfactory (Hu, Reardon, Rozelle, Timmer & Wang, 2004). Additionally, cybersecurity is a risk that the company needs to handle. The company needs to protect customer data obtained from both the retail stores and online stores. The risk of cybersecurity attacks may have adverse effects on customer relations, create a negative image of the company, and lose customer trust (Luan, Kim, Zipser, Lo, Su, Zhuang & Chen, 2019).

Additionally, finding the right manpower is a critical aspect of the project. Having the right workforce in overseas markets enhances the chances of success of the project. Alternatively, if the company fails to obtain the right workforce, it faces the risk of failing to execute its laid down strategies and thus, incur additional costs (Buzila, Costea, Dragota & Gordean, 2009).

Global expansion presents the company with an opportunity to gain access to new markets and new customers. This results in sales growth and increased revenue for the company. However, to harness these opportunities, the management team needs to mitigate any potential risks that the company may face (Buzila, Costea, Dragota & Gordean, 2009). By conducting intensive market research, the company gains in-depth insight into the customers’ preferences and wants.

External Risks

External risks are out of scope and control of the company. Some of these risks include political risks, climate risks, and cultural barriers. Notably, one of the biggest risks that Nordstrom’s faces include communication issues, resources, and public scrutiny.

Besides, Nordstrom’s main business operations could be adversely affected by natural calamities. The most vulnerable department would be the supply chain and logistics department since it would cause a delay in the manufacturing and delivery of products and services. Additionally, both artificial and natural calamities limit the amount of customer spending which will harm the sales and revenue.

Cultural risks are also a critical factor to consider when expanding to Beijing. Notably, In Beijing, consumers need to build trust before purchasing any product. Compared to the United States where consumers tend to be less focused on building business relationships and more focused on maximizing profits, Nordstrom ought to improve its consumer trust. Therefore, Nordstrom will have to improve its brand image and reputation and customize its relations with the Beijing people. Thus, understanding customer attitudes and behaviors will influence Nordstrom’s business expansion project. However, compared to other regions, Beijing offers the least amount of risk culturally. Both Beijing and the United States share many economic systems and the consumer culture is driven by the discount-driven culture (Hu, Reardon, Rozelle, Timmer & Wang, 2004). However, taking into account the different levels of trust between these two countries, Nordstrom will navigate the Beijing market with much ease. Thus, the company needs to conduct intensive local market research so as not to come up short.

Political climates are also a potential risk to Nordstrom’s expansion project. With the current Trump administration, there has been a lot of uncertainty about international relations with other countries, particularly China. Currently, the United States and China have a favorable political relation that reflects on the favorable trade agreements between them.

Microeconomic Factors

Competition

Competition is rife in Beijing. Setting up a retail presence in the country is tough since there are some of the world’s most renowned retail leaders. Notably, in the recent past, some of the leading global companies such as Nike and Adidas have become huge players in the Beijing market (Daxue Consulting, 2020). In addition to that, Woolworth’s and Coles are Beijing’s leading fashion companies. Thus, for effective market penetration into the country, Nordstrom will have to undertake intensive local market research and identify potential market niches and opportunities (Luan, Kim, Zipser, Lo, Su, Zhuang & Chen, 2019). Beijing’s recent trends indicate that consumers tend to prefer stories with modest square footage (Daxue Consulting, 2020).

Price Elasticity

Keeping with the foreign markets requires Nordstrom to keep up with the wall prices and ensuring that they are as close as they can be to the global prices. In Beijing, there are concerns over the price elasticity policies since they may increase the transfer of costs of shipping products to the final consumer. Therefore, to quell this, Nordstrom may have to create logistic distribution networks in a bid to reduce potential shipping costs.

Alternate Financial Risks

With any projection comes uncertainties and therefore, one must consider different possible scenarios. There are three possible scenarios to evaluate risk including the base case, best case, and worst case.

Sales Fall

In our case, should the sales fall 20 percent short of the projected numbers, then the management ought to go back and reevaluate the plan to determine the reason for this shortfall? Some of the biggest risks that Nordstrom is facing include competition and location. Therefore, if there is stiff competition, the company needs to come up with an aggressive marketing campaign (Edwards & Rigobon, 2009). Otherwise, if this will not work, then there is a bigger problem and the company needs to reevaluate its strategy. It is easier to make decisions if the sales are higher than projected.

In our case, should the sales fall 20 percent short of the projected numbers, then the management ought to go back and reevaluate the plan to determine the reason for this shortfall (Tong & Wei, 2011)? Notably, from the calculation, if the sales increase by 20 percent, then the net margins projections for 2020 all through to 2023 are expected to be 29.72 percent, 45.04 percent, 33.52 percent, and 38.21 percent respectively. Alternatively, in the unfortunate case that the net margins for the new investment should decrease by 20 percent, then the net margins for the investment from 2020 to 2023 project as follows; -5.42 percent, 17.56 percent, 0.28 percent, and 7.31 percent respectively. The unfortunate case will be worse than the financial dip that Nordstrom has incurred over the past few years.

Time Value of Money

If Nordstrom fails to generate the projected annual revenues, then it will lead to a decline in the expected growth levels as well as a negative net present value. This will fail the project to meet the funding criteria. The assumption for the time value of money is that the money currently available will be invested to earn an increasing interest in the future. Thus, for Nordstrom, the future value of the investment will be calculated using 3 different annual rates; 5 percent, 6 percent, and 7 percent. The future value of the expansion project reaches $35,063,793 by end of year 5. Since the estimated loan amount in the Beijing project is $25 million, the net present value is determined using the estimated projected cash flows, initial investment outlays, operating cash flows, and the terminal value of cash over the lifespan of the expansion project.

Nordstrom Inc. Time Value of Money
Present Value25,000,00025,000,00025,000,000
Years555
Annual Rate (%)567
Future Value31,907,03933,455,63935,063,793
Increase6,907,0398,455,63910,063,793

 

Also, Nordstrom can choose to assess the Chinese government and compare it to the United States government. Through this careful assessment, Nordstrom can make near to accurate predictions about which government will gain more in the future (Edwards & Rigobon, 2009). However, this is surmountable to gambling and can be erroneous. Alternatively, one of the most plausible ways would be to convert the investment amount into the Chinese currency and not have to worry about the ever-fluctuating exchange rates between the two currencies.

  1. Financing

Financial analysis is enough proof regarding justifying the project. Therefore, this section of the report will mainly focus on the forecasted incremental annual cash flows from the project. These projected annual cash flows will be highly beneficial to the company. The increase in net sales will result in a projected increase in net income. From the projections, it is clear that the net income will be higher than the current net income performance of 4 percent per year. The forecast attempts to show that demand will increase by 40 percent during the onset of the project. Later on, the demand will tend to decrease to approximately 22 percent during the fourth year, and then to 10 percent during the seventh year.

However, other financial expenditures including price, volume, and purchase costs among others are assumed to remain constant over the 10-year duration. Furthermore, during this duration, the financial projections indicate that the project will lead to $7,550 million in terms of increased sales, $2,715 million in terms of operating expenses, and lastly $435 million in tax expenditure.

Therefore, this will result in an increased cost of capital.

2020 2021 2022 2023
 Net Sales$300$420$440$530
Total Cost of Goods Sold$110$105$170$185
Gross Profit (Loss)$190$315$270$345
OPERATING EXPENSES
 Selling
 Salaries and wages$35$41$46$52
 Commissions12141618
 Advertising10121420
 Depreciation14151616
 Other5667
Total Selling Expenses$76$88$98$113
Total General/Administrative Expenses$45$52$57$67
Total Operating Expenses$121$140$155$180
Net Income Before Taxes$69$175$115$165
 Taxes on income22322628
Net Income After Taxes$47$143$89$137

 

The proforma above shows various assumptions.

  1. That the new investment in Beijing will result in $300 million in revenue in its first year.
  2. That the new investment will have an increasing yearly trend up to 2023.
  3. That the rate of growth is expected to stall slightly in 2022 before rising once again in the consequent year
  4. That the net margins for the new project in 2020, 2021, 2022, and 2023 are projected to be 15.66 percent, 34 percent, 20 percent, and 26 percent.

These assumptions are based on the fact that the number of sales and their margins will be more than enough to cater for the expenses that the company incurs in the Beijing project. Also, the level of sales and their resulting profit margins are expected to service the incurred debt for the investment.

Alternative Financial Scenarios

Notably, the new investment will require a minimum net disposable income that amounts to at least $1.5 million. This amount will be spent to fund the interest payments that are forecasted to rise to $32 million. The majority of the funding will be sourced from banks and their respective interest payment obligation will amount to $1,530,825.65 in terms of interest and the consequent principal amount repayments.

This investment will be evaluated using the internal rate of return. As things currently stand, the structure of Nordstrom Inc. is 70 percent equity and 30 percent debt. Furthermore, the weighted average cost of capital of the company is 4 percent. The internal rate of return indicates the profitability of any given investment. Also, the internal rate of return includes the time value of money in its calculation and provides a more comprehensive report (Edwards & Rigobon, 2009). Since this project will include debt finances, it will impact the capital and debt structure down from 70 percent and 30 percent to 68 percent and 32 percent respectively (SEC, 2018).

Pros and Cons of Internal Financing Compared to Global Capital Markets

Comparing internal financing and global capital markets would particularly be helpful to Nordstrom to assess the best option. First, through using internal financing methods, the company would have to use surplus funds from its internal operations. Therefore, the company would simply use the capital it has to fund its project. This would be the best option since it does not involve external third parties that might cause hindrances in the project. furthermore, internal financing eliminates a lot of dilemmas and greatly reduces any expenses incurred that would otherwise be paid inclusive of interest. Also, the company might opt to go for new capital expenditure through the sale of assets. However, this might not be the best viable way since it might result in a decreased shareholder value. Also, it will incur additional transaction costs as well as attract more tax expenses. Notably, by choosing to use internal financing, the company saves itself a lot of trouble and everything is dealt from within. Factors such as tax expense and interest rates would be practically nonexistent.

However, there are several other alternative funding through global capital markets. These include loans, corporate bonds, and equity financing. First, commercial loans are the most common form of funding. They are very attractive for businesses and their flexible interest rates as well as attractive repayment periods add up to be key incentives in choosing this mode (Buzila, Costea, Dragota, and Gordean, 2009). However, commercial loans require credit, collateral, and other statement details that require approval. Nordstrom would make the best use of commercial loans as they are easy to acquire and have minimal requirements compared to other forms of financing.

Likewise, commercial paper is the best alternative source of funding for this expansion project. This mode will allow Nordstrom to use proceeds that will fund operating cash obligations. Adhering to this agreement, Nordstrom pays an agreed-upon interest rate following the given interest rate and market. However, this mode is risky due to the reduction in liquidity. Also, this mode requires the company to remain profitable to maintain its eligibility. Due to the dynamic nature of the business world, such as the current Covid-19 pandemic, many businesses have experienced a decline in profits with some even reporting losses. Therefore, Nordstrom needs to avoid commercial paper due to occurrences such as natural calamities and external business risks.

Viability of the Business Combination in the Beijing Expansion Project

Perhaps it would be prudent enough for Nordstrom to exercise an organic growth strategy by entering the market by establishing various stores all over the country. However, due to various factors, this would prove practically impossible and highly risky. For instance, foreign regulations might control this, consumer preferences and cultural practices are just but a few examples (Miller, 2008). However, organic growth would catapult Nordstrom into having full control of the operations and reducing any foreign leadership chances. Organic growth involves taking the long route to growth and this might tend to be slow and also requires significant capital investment. The growth is usually slow since it requires adherence to regulations, bureaucracy, development of sites, and zoning restrictions.

Also, the company might opt for mergers and acquisitions, joint ventures, or franchising. These methods reduce the control that Nordstrom has over the project. However, it might be useful since the company has a lot of other stores to deal with. Furthermore, when undertaking either of these business combination methods, the company will have an easier market entry and reduced risk (Buzila, Costea, Dragota, and Gordean, 2009). However, it will not offer the customers the Nordstrom experience.

  1. Track Record

Nordstrom is in a financially strong position currently. Therefore, this means that the company has minimal chance of defaulting the acquired loans. Also, over time, Nordstrom has tended towards preferring to use a capital structure as opposed to debt finance. This explains why the company’s composition is over 70 percent equity and less than 30 percent debt. Also, compared to other players within the fashion industry in the North American region, Nordstrom has one of the lowest weighted average cost of capital. Therefore, by venturing into the Beijing market, the company will carry along with it these benefits and a sufficient track record to have an easier market penetration.

Nordstrom has managed to increase its revenue and earnings per share over the past 5 years. Compared to its closest competitors, Macy’s (NYSE: M) Nordstrom has a healthier balance sheet and thus, greater flexibility that ensures that the company can survive in harsh economic and market conditions. Furthermore, Nordstrom boasts of a natural hedge through which they can store any excess inventory. The organic revenue of the company has outperformed Macy’s in the 2019 annual report. Furthermore, even though Macy’s and Nordstrom have a similar trade valuation, the performance results indicate that Nordstrom is outperforming Macy’s by about 4.7 percent in the previous 10 quarterly reports.

Nordstrom uses a couple of financial ratios to indicate their financial health. These include the current ratio, quick ratio, inventory turnover ratio, and gross profit margin among others. In the 2019 annual financial report, the performance metrics were as follows;

  • Net sales declined by 2.2 percent
  • Digital sales as a percentage of net sales increased to 33 percent up from 30 percent in the previous year.
  • Earnings before interest and taxes as a percentage of the net sales declined to 5.2 percent
  • Capital expenditure as a percentage of net sales also increased to 6.2 percent up from 4.2 percent in 2018
  • Return on assets declined to 5.1 percent from 6.8 percent in 2018
  • Adjusted return on invested capital was 10.8 percent down from 12 percent
  • The earnings per share were $3.18 down from $3.32 in 2018
  • Dividends declared per share were 1.48 and this has remained constant.

Therefore, Nordstrom urgently requires a new investment platform that will improve these critical indicators. The expansion project to Beijing might serve these purposes.

Legal and Ethical Financial Behavior

Nordstrom holds the reputation for having one of the strictest legal and ethical standards in the fashion industry. The company has had minimal lawsuits compared to its competitors. These minimum lawsuits arise from the usual business undertakings. One of the most recent reasons as to why Nordstrom was a topic within the media circles was due to a political stance by Ivanka Trump after the company decided to drop her brand. Notably, this decision was due to the poor sales from Ivanka’s name-branded clothing. However, the public deemed it as a political stance, hence all the attention.

But aside from that, another instance of the company being in court was due to misleading adverts involving questions surrounding the authenticity of Rolex watches. This case is in court and it could result in Nordstrom losing 5 million. Afterward, it would take a great deal of marketing and public relations to reassure the public of the authenticity of conducting business.

Nordstrom has built its existence on the Code of Business Ethics that is based on ensuring high standards of legal and ethical behavior. This is evident in the hiring process where Nordstrom offers equal opportunities, excellent customer service, and great CSR methodologies (Way & Garrison, 2011). Nordstrom will carry along with these CSR approaches that focus on sustainable development, human rights, reduced energy consumption, and environmentally friendly modes of production and packaging into the Beijing project.

VII. Questions and answers

Why is this investment needed?

There exist two major reasons leading to the need for investment. Firstly, the investment will cause a boost in the Nordstrom’s presence or existence. The increased presence is due to the expansion of the company and the strength the company gets after acquiring the funds because of the increase in the capital. Secondly, the investment is of importance since it makes the company expand its operations internationally. In that regard, additional investments are very key to open new branches in different parts of the world. Therefore, the firm needs investment in a bid to extend its market share to counter stiff competition in the domestic market.  The company international expansion provides a good roadmap for countering domestic competition (Avery, 2005).

Why choose Beijing as a location?

Firstly, Beijing is among the biggest cities in Mainland China. It is the largest financial capital in China and its status attracts a very large number of visitors, 30 million or more, every year. Therefore, the firm expects success once the investment project is completed since expected profits increases with an increase in potential customers. The high number of visitors makes a good number of potential customers. Moreover, the chosen location is characterized by an existing redevelopment project worth a huge amount of money, approximately $18 billion, estimated for completion in 2025. The redevelopment project is a clear indication of the good potential of success for any business located in Beijing. Therefore, the location is a good site for investment considering that the U.S embassy saw is a potential place too (Kitching, Smallbone, & Athayde, 2009).

What will be the financial implications of the loan?

Usually, any company should pay a loan, both principal and interest earned. For this project, the principal and interest payments expected are $1,530,825.65 monthly. Moreover, the loan alters the capital mix of Nordstrom by increasing the long-term liabilities as the loan is to be paid over a long period. Resultantly, the change in the capital mix increases the overall cost of financing since the funding adversely impacts the current capital structure (Way, & Garrison, 2011). However, the large market share and added cash inflows play a big role in offsetting the adverse impacts on the cost of financing.

Why would the loan be attractive to the bank?

Every lending institution yearns to lend to a very financially stable firm like Nordstrom.  Since the company is extremely stable in terms of finance, there is an expectation of the least possible risk compared to other unstable firms in the industry. Again, the WACC for Nordstrom is lower relative to its competitors hence being able to meet its financial obligations. Therefore, the loan is attractive to the bank due to the company’s ability to meet its financial obligations, the long-term loan is among the obligations. Currently, the company can make interest payments seven times over by use of its operating income (Eldem, 2005). Hence, Nordstrom will be able to pay interest and the principal for the requested loan in the long run.

Reference

Avery, G. (2005). Leadership for sustainable futures: Achieving success in a competitive world. Edward Elgar Publishing.

Buzilă, N., Costea, S. C., Dragotă, G. V., & Gordean, R. S. (2009). Trends in global retailing. Agricultural Management/Lucrari Stiintifice Seria I, Management Agricol11(2).

Daxue Consulting. (2020). Facts you need to know about the Luxury and Fashion industry in China. Retrieved from Daxue Consulting: https://daxueconsulting.com/luxury-and-fashion-industry-in-china/

Edwards, S., & Rigobon, R. (2009). Capital controls on inflows, exchange rate volatility, and external vulnerability. Journal of International Economics78(2), 256-267.

Eldem, E. (2005). Ottoman financial integration with Europe: foreign loans, the Ottoman Bank    and the Ottoman public debt. European Review, 13(3), 431-445.

Elejalde-Ruiz, A. (n.d.) Nordstrom paying $350 million for Chicago’s Trunk Club. Chicago Tribune. Retrieved from: http://www.chicagotribune.com/business/chi-nordstrom-trunk-club-20140814-story.html

Hu, D., Reardon, T., Rozelle, S., Timmer, P., & Wang, H. (2004). The emergence of supermarkets with Chinese characteristics: challenges and opportunities for China’s agricultural development. Development policy review22(5), 557-586.

Kelton, W. (2019, May 30). Current Ratio. Retrieved from Investopedia: https://www.investopedia.com/terms/c/currentratio.asp

Kitching, J., Smallbone, D., & Athayde, R. (2009). Ethnic diasporas and business competitiveness: Minority-owned enterprises in London. Journal of ethnic and migration        studies, 35(4), 689-705.

Lockshin, L., Quester, P., & Spawton, T. (2001). Segmentation by involvement or nationality for global retailing: A cross-national comparative study of wine shopping behaviours. Journal of Wine Research12(3), 223-236.

Luan, L., Kim, A., Zipser, D., Lo, A., Su, M., Zhang, C., & Chen, C. (2019). China Luxury Report 2019. McKinsey & Company. Retrieved April 19, 2020, from https://www.mckinsey.com/~/media/mckinsey/featured%20insights/china/how%20young%20chinese%20consumers%20are%20reshaping%20global%20luxury/mckinsey-china-luxury-report-2019-how-young-chinese-consumers-are-reshaping-global-luxury.ashx

Miller, R. T. (2008). The Economics of Deal Risk: Allocating Risk through Mac Clauses in Business Combination. Wm. & Mary L. Rev.50, 2007.

Morrison, R. (Ed.). (2016). The principles of project finance. Routledge.

Nordstrom. (2020). Company History. Retrieved from Nordstrom: https://shop.nordstrom.com/c/company-history

Neslin, S. A., Grewal, D., Leghorn, R., Shankar, V., Teerling, M. L., Thomas, J. S., & Verhoef, P. C. (2006). Challenges and opportunities in multichannel customer management. Journal of service research9(2), 95-112.

Nordstrom, D., Dickens, S., & Brown, M. (2016). Multisource Project Financing. In The Principles of Project Finance (pp. 59-80). Routledge.

Nordstrom. (n.d.). Nordstrom Investor Relations. Retrieved April 18, 2019, from https://investor.nordstrom.com/investor-relations

Nordstrom. (n.d.). Nordstrom Investor Relations. Retrieved March Shocker, A. D., Srivastava, R. K., & Ruekert, R. W. (1994). Challenges and opportunities facing brand management: An introduction to the special issue. Journal of marketing research31(2), 149-158.

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Shocker, A. D., Srivastava, R. K., & Ruekert, R. W. (1994). Challenges and opportunities facing brand management: An introduction to the special issue. Journal of marketing research31(2), 149-158.

Silver, C. (2020, March 18). The Top 20 Economies in the World. Retrieved from Investopedia: https://www.investopedia.com/insights/worlds-top-economies/

Tong, H., & Wei, S. J. (2011). The composition matters: capital inflows and liquidity crunch during a global economic crisis. The Review of Financial Studies24(6), 2023-2052.

Tu, J. L. (2017, June 30). Nordstrom family weighs buyout for Seattle retailer, with its legacy — and billions — on the line. Retrieved from The Seattle Time: https://www.seattletimes.com/business/retail/nordstrom-family-may-take-the-company-private/

Way, D., & Garrison, J. (2011). Financial implications of demand-driven acquisitions: A case      study of the value of short-term loans. Patron-driven acquisitions: History and best      practices, 137-56.

Sample 2

Topic: What I Hope to Learn in this Course

According to the themes, the course is centered on inspiration, navigation of change, and how the minds of the audience can be changed. In administration, the audience entails junior, equals, and senior employees or citizens. Therefore, hope to learn ways of inspiring, navigating change, and changing the audiences’ minds through writing or speech. For that matter, I expect to learn much of rhetoric tools for influential communication purposes. Rhetoric tools or strategies are both words and phrases that significant in conveying meaning, provoking audiences’ responses, and persuading during communication activities. I hope to learn the devices since I expect that communication needs will frequently arise in my future career as an administrator or in my personal life. By use of the tools, I will be able to maintain a good relationship with fellow workers and family members. In addition, I will also be able to influence and resolve conflicts in case they occur at work using rhetorical tools.
Rhetorical Tools I Hope to learn
Regarding rhetorical devices, I expect to learn amplification, anacoluthon, anadiplosis, antanagoge, apophasis, assonance and alliteration, asterismos, dysphemism and euphemism, epilogue, eutrepismus, hypophora, litotes, onomatopoeia, parallelism, personification, and procataleptic among many others. The tools will be for sharpening the learners regarding explaining themselves and communicating suitably according to the need at hand in every particular situation.

My Writing strengths and weaknesses
According to the themes, I have noticed that I am neither a good inspirational speaker nor a good mind changer. I have discovered this after discovering that I only use metaphors while ignoring many other devices. So my strength is only in metaphors use but not in any of the above-listed devices. Therefore I will need to be attentive to improve my knowledge regarding rhetorical devices and strategies.

Reference
Høgenhaven, Jasper. “Rhetorical Devices in 4QMMT.” Dead Sea Discoveries 10.2 (2003): 187- 204.