Financial Impact & Financing: Expansion Of Nordstrom Inc In Dubai

Justification

Introduction

This report presents an external funding proposal for Nordstrom Inc which is a company engaged in the business of retail sales. The company has been operating predominantly in various states of the USA and now it is considering expanding in Dubai. There has been found a lucrative opportunity to open retail stores in Dubai. However, the competition is stiff there in Dubai but the company is confident of doing well in the market. The company has been operating in the retails sales industry since a century over so it has a good backing of experience and huge amount of resources.   

Nordstrom was founded in the year 1901 and since then it has grown manifold reaching today in 40 states of the USA with 120 full line stores, 239 rack stores, and some boutiques and clearance stores. Currently, the company employs a workforce of 76,000 employees (Yahoo finance, 2018). It operates with the net worth of $870 million which shows that the company has a good backing of resources to successfully implement the expansion plan.   

Justification

Financial Impact

In order to assess the financial impact of expansion of the business in Dubai, projections for 10 years in regards to revenues, pre-tax income and operating cash flows have been made. Further, the net benefits of the expansion project have also been computed to analyze whether the expansion plan would be profitable or not.

From the figures shown above it could be observed that the net cumulative benefits of expanding in Dubai over the 10 years would be $2,677.16 million.

Financing

Raising Money Using Internal and External Sources

The selection of appropriate source of finance depends on various factors. There are multiple sources of finance available in the market for the existing as well as new businesses. For the new businesses it is generally difficult to generate funds from almost all the sources of finance they do not have that a sound financial background to prove their creditworthiness and future financial viability. However, each source has its own its pros and cons which are discussed further. A business firm has to take into consideration various factors before selecting the most appropriate source of finance. These factors are: the term for which funds are required, the quantum of funds, type of security that it can give and so on.

Commercial papers:

Pros:  

• Funding through the commercial papers allow the company to generate funds without providing any type of asset security.
• The cost of generating funds through commercial papers is generally lower than the cost of borrowing the bank loan or issue of bonds as higher interest rates are to be paid for the latter sources.

Cons:

• However, only those firms that have sound credit ratings can generate funds through the use of commercial paper financing.
• Also, unlike any other source of finance such as equity financing, loans, bond financing, funds can only be raised for shorter durations i.e. for 90 to 364 days (Carty, 2017).

Bank loans:

Financial Impact

Pros:

• Bank loans can be taken for short term as well as long term periods.
• No control over the ownership of the business is required to be transferred as required in equity financing.
• In case of bank loan financing, the tax benefits can be availed for the interest cost incurred for the loans.

Cons:

• Bank loans generally require keeping of collateral securities for the amount borrowed by the firm. Such security can be made in the form of business assets or other securities.
• Usually bank loans involve higher cost of borrowing as compared to other sources of finance.
• Bank loans requires the firm to have sound credit ratings and strong financials which might not be possible in case of new businesses

Bond financing:

Pros:

• Easier and advantageous credit terms than bank loan can be availed in bond financing.
• The interest rate of bonds is generally lesser than the bank loan interest rate.
• Unlike equity financing, bonds does not result in loss of ownership over company.

Cons:

• Unlike bank loans, the terms of bonds cannot be easily modified.
• The involvement of fixed payments on regular basis makes bonds less suitable than equity financing where there is no fixed payment involved at each regular interval.

Equity financing:

Pros:

• The risk of insolvency in case of debt financing is less in case of equity financing as funds are generated from the internal sources and from the external sources.
• Comparatively lower cost of financing than the bonds or bank loans as dividends are to be paid and the rate of dividend are lower than interest rate of bank loan (Liberis, 2017).

Cons:

• The company issuing equity shares has to lose control over the business as the shareholders become the owners.
• Higher returns are expected from the investors (shareholders) of the company.

Viability of a Business Combination as a Mechanism for Expansion

Business combination takes place when two or more than two business corporations enter into an agreement to work as a single entity for some common purposes. In the recent times the concept of business combination has become quite common because of intense competition in the market. There can be various types of business combinations entered into by the entities such as mergers and acquisition, joint venture, alliances etc. (Ahmed, 2017).  Not merely to combat the intense competitive forces of the market these combinations are entered into by the business parties but to maximise the business profits by achieving the economies of scale, to widen the pool of economic resources, to expand the business market and achieve monopoly, to make use of improved methods and technologies of production and so on. In order to expand the business in the new market, business combinations can be considered as the most viable option when the company acquires or enter into joint venture or alliance agreement with such company that already exists in the proposed market as it will provide them to achieve the benefits of well-established market base (Casseres, 2015).

Track Record

Indicators of Financial Performance and Health

Nordstrom has been a highly successful company in the retail sales industry and the same is evident from the growth being shown by the company in the past. The company started its journey with a few small retails shops in the year 1901 and at present it owns 343 stores. The company has been earning good amount of profits over the year however in the past recent few years the profits have declined. The decline in profits has mainly been observed due stiff competition in the USA in the retail sales industry. The competition in the retail sales industry is not stiff in the USA alone but it has spread across the globe. The introduction of online sales has made it easy for the companies to operate at the global level. The companies such as Amazon, Snapdeal, Woolworths, and Alibaba have captured the market with their global presence in many countries (Deliotte, 2018). However, it has been observed that the competition in the retail offline sales in Dubai is relatively low. There has been identified one main competitor of Nordstrom i.e. Macy.

The selected financial data which supports the company’s financial footing and could be used to argue the lenders to approve the loan is shown below:

Sources of Capital

It could be observe that the gross profit of the company has increased from $4,429 million in 2013 to $5,247 million in 2018. Further, despite increase in the competition at rapid pace, the company is able to sustain net sales increases of 4.4%. The other indicators like EBIT to sales and return on assets show that financial has not been so good in the recent years but the company is capable to swing back and perform. It is backed by experienced employees and good market reputation of over a century. Further, the expansion program of the company to open retail stores in Dubai is more likely to be succeeded. The company may operate in Dubai with low cost of funding and it can also avail the advantages of low tax rates. The low finance cost and tax rates would help the company significantly in improving its financial performance. It is expected that the pre tax income of the company would reach $871.11 million by 2020 which is at $684 million in 2017. The revenues are expected to reach to $18,793.83 by 2020. Therefore, overall it appears that the expansion program of the company would be successful and the financial performance of the company is going to improve in the upcoming years.

From the ethical and behavioral view points, there has not been observed any allegations again the company. The company has been fulfilling its commitments with honesty. The auditor’s report on the current financial statements of the company certifies that the company has prepared the financial statements in conformity with the issued standards. Further, there is no qualification or reservations being made by the auditor in regards to the non compliance with any of applicable laws and regulations. So, the company is free of any sort of risk emanating from the breach of laws of the regulations. This may boost up the confidence of the investors and push them to invest in the company.    

Conclusion

Overall, it seems that Nordstrom has very high reputation in the market and it is backed by experienced employees and huge amount of resources. However, financial performance of the company has slightly been towards downside in the recent few years but the company is capable of bouncing back and return to the track of growth. The expansion of the company in Dubai would be a successful venture as suggested by the positive financial projections.

References

Deliotte. 2018. 2018 retail, wholesale and distribution industry trends outlook. Retrieved 11 September 2018 from, https://www2.deloitte.com/us/en/pages/consumer-business/articles/retail-distribution-industry-outlook.html

Ahmed, J. (2017). Business Combination: Definition, Types, Forms, Causes.Retrieved from: https://www.bm3school.com/2017/12/business-combination-forms-types-causes.html

Carty, S.L. (2017). Differences Between Commercial Loans & Commercial Papers.Retrieved from: https://bizfluent.com/list-7186274-differences-commercial-loans-commercial-papers.html

Casseres, B.G. (2015). Making Mergers, Acquisitions, and Other Business Combinations Work. Retrieved from: https://hbr.org/2015/08/making-mergers-acquisitions-and-other-business-combinations-work

Liberis. (2017). Sources of Business Finance. Retrieved from: https://www.liberis.co.uk/blog/Sources-Of-Business-Finance

Annual Report. 2017. Annual report of Nordstrom. Retrieved 11 September 2018 from, https://investor.nordstrom.com/phoenix.zhtml?c=93295&p=irol-reportsannual

Yahoo finance. 2018. Company profile. Retrieved 11 September 2018 from, https://finance.yahoo.com/quote/JWN/profile?p=JWN

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