1|VU

ANALYSIS REPORT NOVEMBER 19, 2013 PREPARED BY: ELIZABETH VU FOR: PROFESSOR LIVIA MARKOCZY BPS 4305.006 STRATEGIC MANAGEMENT

2|VU

TABLE OF CONTENTS:

EXECUTIVE SUMMARY FINANCIAL ANALYSIS

PG 3 . PG 3

EXTERNAL ANALYSIS .. PG 5 FIVE FORCES INTERNAL ANALYSIS

VALUE CHAIN ANALYSIS

PG 7 PG 10 .. PG 12

RECOMMENDATIONS

EXHIBITS PG 14 REFERENCES .. PG 17

3|VU 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, Nordstroms financial status, internal company analysis, external company analysis, the firms 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 firms 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 compan ys 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 shareholders equity

4|Vu 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 firms 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 firms 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 Nordstroms and TJ Maxxs profitability.

5|Vu Nordstrom has a higher ratio value than the competitor TJ Maxx by 1.02 so essentially, Nordstrom is fairly more profitable. EXTERNAL ANALYSIS Nordstroms general environment includes several segments. When looking into Nordstroms 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 firms 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 firms threat of new entrants. For Nordstrom, the companys 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 Nordstroms buyers are mainly interested in the brand name of the product they

6|Vu 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, Marshalls, 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, Bloomingdales, 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

7|Vu United States and carry the same high-end private label and brand name inventory. Another factor is that Nordstroms 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 companys 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 Nordstroms brand image to the market, the

8|Vu companys connection with specialty suppliers, loyalty of their customers, and also the firms diversity in different divisions throughout their entire company. One of Nordstroms greatest strengths is its public image. The brand is seen as a highend, 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 Nordstroms 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. Nordstroms loyal customers are almost guaranteed loyal to the firm because of Nordstroms strength in customer service. Nordstroms 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

9|Vu 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, caf, 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 firms weaknesses. A weakness for the firm would be the profit that isnt coming in from the middle-to-low class consumers which can contribute to the reason that the firms increasing sales growth is going up; however, is still lower than the industry average. Although Nordstrom has an established consumer base from the middle-toupper 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.

10 | V u 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.

11 | V u 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 companys 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. Nordstroms 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 Nordstroms 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:

12 | V u 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. Nordstroms 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 Nordstroms 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 Nordstroms 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;

13 | V u 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 cant 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 middleto-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.

14 | V u EXHIBITS Figure 1 Change in Financials for Nordstrom

2012 Balance Sheet Current Assets Total Assets Current Liabilities Total Liabilities Total Shareholders Equity Income Statement Net Sales Expenses Net Income 12,148,000 11,413,000 735,000 5,081,000 8,089,000 2,226,000 6,176,000 1,913,000

2011 5,560,000 8,491,000 2,575,000 6,535,000 1,956,000 10,877,000 10,194,000 683,000

% 2012 -8.62% -4.73% -13.55% -5.49% -2.20% 11.69% 11.96% 7.61%

Figure 2 Common Size Statements Table of Nordstrom & TJ Maxx

JWN (Nordstrom) Balance Sheet Current Assets Total Assests Current Liabilities Total Liabilities Total Shareholders Equity Income Statement Net Sales Expenses Net Income

2012 62.81% 100.00% 27.52% 76.35% 23.65%

TJX (TJ Maxx) Balance Sheet Current Assets Total Assets Current Liabilities Total Liabilities Total Shareholders Equity Income Statement

2012 60.05% 100.00% 39.54% 61.46% 38.54%

100.00% 93.95% 6.05%

Net Sales Expenses Net Income

100.00% 92.63% 7.37%

15 | V u Figure 3 Financial Ratios for Nordstrom & TJ Maxx for 2012

Ratio Short-Term Solvency/Liquidity Ratios Current Ratio Quick Ratio Long-Term Solvency/Financial Leverage Ratios Debt-to-Equity Ratio Debt-to-Total Assets Ratio Asset Utilization/Turnover Ratios Inventory Turnover Total Asset Turnover Profitability Ratios Gross Profit Margin Net Profit Margin Return on Assets Return on Equity Market Value Ratios Earnings Per Share

JWN (Nordstrom)

TJX (TJ Maxx)

2.28 1.53

1.52 0.60

1.64 0.39

0.21 0.08

5.93 1.47

6.21 2.91

38.82% 6.05% 8.87% 37.99%

28.43% 7.37% 21.43% 55.47%

3.62

2.60

16 | V u Figure 4 Five Forces Model of Nordstrom

17 | V u REFERENCES

Dess, Gregory G., Alan B. Eisner, Bongjin Kim, G. T. Lumpkin, and Gerry McNamara.Strategic Management: Creating Competitive Advantages. 6th ed. New York: McGraw-Hill, 2012. Print. Gustafson Barlette, Kristi. "TJ Maxx hit by the recession, or not?." timesunion.com. The Hearst Corporation, 15 Jan 2009. Web. 17 Nov 2013. <http://blog.timesunion.com/kristi/tj-maxx-hit-by-the-recession-or-not/5660/>. Hatch, David. "Nordstrom in Fashion with Social Media, Mobile Tech." Money. U.S. News and World Report, 15 May 2012. Web. 17 Nov 2013. <http://money.usnews.com/money/businesseconomy/articles/2012/05/15/nordstrom-in-fashion-with-social-media-mobiletech>. "Investopedia." Shareholders' Equity. Investopedia Inc., n.d. Web. 17 Nov 2013. <http://www.investopedia.com/terms/s/shareholdersequity.asp>. "Nordstrom Cares." Nordstrom. Nordstrom Inc, n.d. Web. 17 Nov 2013. <http://shop.nordstrom.com/c/nordstrom-cares-supplier-diversity>. "Nordstrom Inc.." n.pag. Mergent Online. Web. 17 Nov 2013. <http://www.mergentonline.com/companyfinancials.php?pagetype=ratios&co mpnumber=6068>. "Nordstrom SWOT Analysis." WikiWealth Collaborative Research. WikiWealth, n.d. Web. 17 Nov 2013. <http://www.wikiwealth.com/swot-analysis:nordstrom>. Spector, Robert, and Patrick D. McCarthy. The Nordstrom Way: The inside Story of America's #1 Customer Service Company. New York: Wiley, 2000. Print. 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/comparevs/nordstrom/>.