Nordstrom-Fall2006

Nordstrom, Inc. Equity Valuation

and Analysis Valued at November 1, 2006

Carissa Laughlin: [email protected]

Adam Hix: [email protected] Kristie Lee: [email protected] Kirk Florez: [email protected]

Zac Holley: [email protected] Steven Kratzer: [email protected]

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Table of Contents

Nordstrom, Inc.

Table of Contents 2

Executive Summary 3

Business/Industry Analysis 5

Five Forces Model 8

Accounting Analysis 15

Ratio Analysis 22

Forecasting 37

Valuation Analysis 38

Appendices

Appendix A 45

Appendix B 50

Appendix C 55

Appendix D 59

References 66

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Executive Summary

Nordstrom, Inc

Investment Recommendation: Overvalued, Sell Nov 1

JWN-NYSE $46.30 52 Week Range $31.77-50.79 Revenue (2005) $7.72B Market Capitalization $12.42B Shares Outstanding 685,934,000 Dividend Yield .90% 3-mo Avg Daily Trading Volume 2,735,950 Percent Institutional Ownership 96% Book Value per Share 7.76 ROE 11% ROA 26% Est. 5-yr EPS Growth Rate 3% Cost of Cap Est. R2 Beta Ke Ke Estimated 7.69% 5-year .1520 1.31 7.69% 3-year .1529 0.13 5.01% 1-year .1543 0.13 5.03% Published 1.82 Kd 5.29%

WACC 5.39%

EPS Forecast FYE 1/28 2005(A) 2006E 2007E 2008EEPS $2.03 $2.09 $2.15 $2.22 Ratio Comparison Nordstrom Industry Trailing P/E 22.81 48.24 Forward P/E 22.15 28.55 Forward PEG 7.38 3.94 M/B .64 .57 Valuation Estimates Actual Current Price $46.30 Ratio Based Valuations P/E Trailing 22.81 P/E Forward 22.15 PEG Forward 7.38 Dividend Yield .91 M/B .64 Enterprise Value 3.65 Intrinsic Valuations Discounted Dividends $7.31 Free Cash Flows $3.47 Residual Income $41.79 Abnormal Earnings Growth $19.92 Long Run Residual Perpetuity $(3.60)

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Nordstrom has established itself as a high-end apparel retailing company. It

derives its revenue from the sale of high-quality clothing, shoes, cosmetics, and

accessories. Nordstrom is one of the leading fashion specialty retailers in the United

States to date and has one hundred fifty-six stores spread out through twenty-seven

states and is continuing to expand. Although the majority of Nordstrom’s profits are

brought in by their retail stores they have also extended their business into a credit

segment, a direct internet sector, and multiple boutiques. Nordstrom has founded itself

upon excellent customer service and an unmatched reputation. Its main competitors are

Saks, Dillard’s, and Neiman Marcus.

Nordstrom’s accounting policies are moderate and very well disclosed; they leave

no room for any potential red flags to be raised. Nordstrom’s transparent accounting

policies show that the managers have confidence in the firm and its ability to perform.

No distortion is used in their statements proving the firms high integrity standards.

Upon completion of Nordstrom’s ratio analysis it is apparent that there should be

no concerns as to how Nordstrom compares to its competition.

In most cases Nordstrom was either average or stood above the competition. There

were very few cases where Nordstrom fell behind in its market.

After evaluating Nordstrom’s past performance we forecasted their financials for

the next ten years. We predicted that Nordstrom would grow at an average of six

percent per year. This is shown through increasing sales and expansion of new stores.

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Business/Industry Analysis

Overview of Nordstrom, Inc.

Nordstrom was incorporated in 1946, but began its operations in 1901 as a shoe

store in downtown Seattle, Washington. Nordstrom generates revenues from its credit

segment, which consists of a wholly-owned federal savings bank that offers Nordstrom

VISA credit and debit cards and a private label card. Nordstrom also profits from its

Faconnable boutiques located in France, Portugal, Belgium and the U.S. The remaining

revenues are brought in by the retail store segment; the stores specialize in high quality

apparel, shoes, cosmetics, and accessories. Nordstrom also sells direct via the internet

at www.nordstrom.com. Though Nordstrom offers a variety of men and children’s

apparel, women’s fashion represents nearly one-third of total sales (Nordstrom 10-K).

Nordstrom’s corporate offices are located in Seattle, Washington. Their

distribution centers are located in Portland, Oregon; Dubuque, Iowa; Ontario,

California; Newark, California; Upper Marlboro, Maryland; and Gainesville, Florida. The

direct order center is located in Cedar Rapids, Iowa; and the Nordstrom Credit, Inc. and

Nordstrom Federal Savings Bank are located in a leased office building in Denver,

Colorado. Nordstrom maintains 156 retail stores in 27 states, and they plan to open

thirteen new stores and remodel or relocate 18 existing stores over the next three years

(Nordstrom 10-K).

The apparel industry is a highly competitive market; Nordstrom competes with

other national, regional, and local retail and departments stores. Nordstrom’s top

competition comes from retail stores that sell similar lines of apparel such as Neiman

Marcus, Saks Fifth Avenue, Dillard’s, and other high-end fashion retailers.

Nordstrom’s net sales, net earnings, total assets, and net income have been

vastly increasing over the past four years (from 2002-2005). As shown in table 1, net

sales have been increasing at an average of 8.52 percent; and total assets have been

increasing at an average of 4.82 percent over the past five years. Neiman Marcus’ net

assets have been increasing at a rate of 6.28 percent and total assets have increased

by 10.94 percent, as shown in table 2. As table 3 shows, Saks Fifth Avenue’s net sales

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and total assets have been decreasing each year with the exception of 2004 at an

average of 2.31% percent and 6.19 percent, respectively. As illustrated in table 4,

Dillard’s net sales and total assets decreased at a rate of 1.86 percent and 6.29 percent,

respectively. With respect to net sales and total assets, on average, Nordstrom is

growing at a more rapid rate compared to its top competitors, as shown in tables 1

through 4.

Table 1: Nordstrom, Inc. Net Sales and Total Assets

Year Net Sales % Change in Net Sales

Total Assets % Change in Total Assets

2001 $5,607,687,000 --- $4,084,356,000 --- 2002 $5,944,656,000 6.01% $4,185,269,000 2.47% 2003 $6,448,678,000 8.48% $4,569,233,000 9.17% 2004 $7,131,388,000 10.59% $4,605,390,000 0.79% 2005 $7,772,860,000 9.00% $4,921,349,000 6.86%

Table 2: Neiman Marcus Net Sales and Total Assets

Year Net Sales % Change in Net Sales

Total Assets % Change in Total Assets

2001 $3,015,534,000 --- $1,785,870,000 --- 2002 $2,948,332,000 (2.22%) $1,907,546,000 6.81% 2003 $3,080,353,000 4.48% $2,034,430,000 6.65% 2004 $3,524,771,000 14.43% $2,617,648,000 28.67% 2005 $3,821,924,000 8.43% $2,660,660,000 1.64%

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Table 3: Saks Fifth Avenue Net Sales and Total Assets

Year Net Sales % Change in Net Sales

Total Assets % Change in Total Assets

2001 $6,581,236,000 --- $5,050,611,000 --- 2002 $6,070,568,000 (7.76%) $4,595,521,000 (9.01%) 2003 $6,055,055,000 (0.26%) $4,579,356,000 (0.35%) 2004 $6,437,277,000 6.31% $4,709,014,000 2.83% 2005 $5,953,352,000 (7.52%) $3,850,725,000 (18.23%)

Table 4: Dillard’s Net Sales and Total Assets

Year Net Sales % Change in Net Sales

Total Assets % Change in Total Assets

2001 $8,154,911,000 --- $7,199,309,000 --- 2002 $7,910,996,000 (3.00%) $7,074,559,000 (1.73%) 2003 $7,598,934,000 (3.94%) $6,675,932,000 (5.63%) 2004 $7,528,572,000 (0.93%) $5,691,581,000 (14.74%) 2005 $7,560,191,000 0.42% $5,516,919,000 (3.07%)

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Five Forces Model For each industry there are competitive forces that, when analyzed, show the

profitability potential in that given industry. For firms to attempt to create profits in any

market, they must consider five main forces: rivalry among existing firms, threat of new

entrants, threat of substitute products, bargaining power of buyers, and bargaining

power of suppliers. Knowing where a particular company stands in relation to the

industry using these five forces is a valuable determinant of how profitable that

company will be.

Rivalry Among Existing Firms

Nordstrom, Inc. is a fashion specialty retailer that offers a selection of apparel,

shoes, cosmetics and accessories for women, men and children. This specialty fashion

industry has experienced steady growth over the past few years. The other directly

competitive firms in this industry are Bloomingdales, Macys, Dillard’s, Saks Fifth Avenue,

and Neiman Marcus. Nordstrom Inc. holds a fair market share in this industry at 12.95

Billion. The federated department stores inc. holds a 22.13B market share. This is a bit

misleading because the Federated Dept. Stores Inc is made up of many department

stores that are not highly competitive with Nordstrom (http://finance.yahoo.com). All

of the companies that are competitive in this industry have taken advantage of today’s

technological advances such as the internet for more marketing and sales growth.

Nordstrom is no different, in order to keep up with the ever changing fashion

environment Nordstrom has expanded their products online and through other retail

stores as well. The company offers its products through multiple retail channels,

including its Full-Line Nordstrom stores, its discount Nordstrom Rack stores, its

Faconnable boutiques, its catalogs, and on the Internet at www.nordstrom.com

(www.moneycentral.msn.com). Maintaining current stores and expanding into new

locations is important to Nordstrom’s future growth in order to help gain even more of a

position in this market. The high-end apparel and fashion industry is a highly

competitive market; and firms in this industry must be differentiated to distinguish

themselves.

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Threat of New Entrants

The economies of scale in the specialty retail industry are quite large. The threat

of any new entrant competing in this industry is seemingly very low. All of the

companies in this industry have a very formidable first mover advantage. Many of the

competitors in this industry already have working relationships with many of their

suppliers and any new competitor will have a tough time cracking into the dealer

network in order to establish themselves as any sort of threat. For example, Nordstrom

is the exclusive retailer for the Facconable line of clothing and you can only purchase

their products at Facconable stores or Nordstrom. The other competitors in this industry

have similar relationships with other fashion specific designers and it would be hard for

new entrants to gain the licensing, and marketing to gain any sort of meaningful share

in this industry. The stores that are competing in this industry already have a high

reputation and steady customer base, therefore making it difficult for new entrants to

gain market share.

Threat of Substitute Products

Threat of substitution affects the marketing strategy of all companies involved in

this industry. The threat of substitution in this industry would be outlets malls or other

labels creating “off-brand” products that are seemingly the same but made of cheaper

materials therefore sold at a much cheaper price. Also with the advance of the internet,

shoppers can shop online and buy directly from certain designers that supply these

retailers instead of buying from Nordstrom, Bloomingdales or other retailers. Threat of

substitute products is high because many stores sell off-brand merchandise, therefore

making it cheaper and more appealing to the average consumer.

Bargaining Power of Buyers

Price sensitivity is a major factor when buyers purchase items in this industry.

Buyers in this industry have a very good idea of exactly what they want because they

only sell name-brand merchandise. In the high-end industry many consumers shop in

these stores solely based on certain brands, this makes the bargaining power of the

buyers relatively low. In other cases, many brands strive to sell their merchandise in

high-end stores making bargaining power of the buyers in this case moderately high.

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Overall as an industry average bargaining power is moderate because of brand image

being a high influence.

Bargaining Power of Suppliers

Suppliers have a moderate amount of power over the buyers in this industry

because of the designer labels they carry. The department stores need to keep a solid

inventory of their major brands in order to meet customer demand. Suppliers know that

there are a limited number of stores that are able to carry and sell their brand at a

premium cost. In the apparel and high-end fashion industry the stores need to sell

certain brands. In the same sense, suppliers need their merchandise sold at a premium,

therefore they need high-end stores to buy their products. Since there are so few

retailers in this specialty retail industry suppliers hold a moderate amount of bargaining

power for their products and are able to set a reasonable price.

In the retail and apparel industry, after analyzing the five forces, the results can

be concluded as shown in table 5.

Table 5: Competitive Forces Analysis

Competitive Force Conclusion

Rivalry Among Existing Firms High

Threat of New Entrants Low

Threat of Substitute Products High

Bargaining Power of Buyers Moderate

Bargaining Power of Suppliers Moderate

As table five shows the retail industry is a low to moderate competitive market.

For this reason, Nordstrom has chosen a differentiated strategy to distinguish itself

within its market.

Value Chain Analysis

The apparel and retail industries have a high level of competition; consequently

firms in this market need a successful strategy that allows them to create profit.

Nordstrom, Inc. competes with various other high-end retail and apparel stores as well

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as common retail stores; therefore it must employ differentiated qualities to distinguish

itself from other stores. In the retail and apparel industry various firms have different

approaches to create profit. Some retail stores such as Macy’s and Dillard’s supply

similar products at a lower price than high-end retailers such as Nordstrom. Others,

such as Neiman Marcus and Saks Fifth Avenue, offer similar, if not the exact same,

products as Nordstrom at around the same cost. In the high-end retail market, firms

must use a differentiated strategy to create value within the industry. Customers in this

market are willing to pay a premium for the unique products these high-end retailers

provide. These stores are known for their superior customer service and overall better-

quality in store shopping experience; they are much more elegant than other retail

stores. The brand names in these high-end stores are well known and have a premium

attached to them. The product quality and variety in this industry is outstanding and

differentiates these stores from others.

Nordstrom utilizes several strategies to create and maintain its value. Nordstrom

relies on its high quality products and superior customer service to attract and uphold

its customers. Nordstrom positions itself in the industry as a high end retailer by selling

top of the line products with an exceptional brand image that customers are willing to

pay extra for. After a product is sold, the employees of Nordstrom will do nearly

anything to satisfy customers after the actual point of sale. This is included in the

superior customer service that consumers have come to expect from the company.

Nordstrom creates value by the differentiation of its product compared to

competitor’s products by offering a unique and quality product while providing top of

the line service. In order for companies to sustain a profitable position in an industry,

they must differentiate themselves from competitors, and Nordstrom is successful in

doing so.

Nordstrom Competitive Advantage Analysis

The success of a financial entity is structured by an assortment of distinct

strategies and differentiations. Most notably, a firm’s competitive advantage

distinguishes an enterprise from contending firms within the industry. There exist two

basic components in which firms focus on to establish a competitive advantage over

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competitors. Cost leadership and differentiation are two of the most generic approaches

towards obtaining market dominance. In our case, Nordstrom has utilized differentiation

in order to establish themselves as the front runner in their industry. Erik Nordstrom,

President of Stores, has illustrated this tactic by stating the following, “In simple terms,

fashion is what sells. With compelling merchandise and unyielding commitment to

customer service, we can be the retailer customer’s trust.” President Nordstrom clearly

demonstrates Nordstrom’s competitive advantage by focusing on customer service,

product quality, and continuous improvement. Nordstrom has maintained this unique

reputation from their establishment in 1901 to the present day and beyond. Nordstrom

developed a strong competitive advantage foundation in the early 20th century and has

adapted to changing environments and market conditions to sustain their success.

Nordstrom has set the bench mark in the retail sector through customer service and

product quality.

In the recent past, Nordstrom had been facing increasing challenges sustaining

their competitive advantage over significant competitors. Historically, Nordstrom’s

customer service driven approach accounted for earnings nearly double that of

competitors. On the other hand, recently competing specialty stores along with the

expanding online retailing sector have threatened Nordstrom’s sustained market

advantage. Nordstrom originally began to develop additional retail outlets to counter

emerging competitors which resulted in declining market value and share price. These

results prompted Nordstrom to return to their core competencies of superior customer

service and product quality.

Nordstrom re-committed their business approach to ensure that they were

second to none in terms of the service provided for customers and the quality of their

product offerings. Nordstrom possesses a distinct and reputable image that effectively

differentiates them from their competitors. Nordstrom is known throughout the retail

sector as the distant leader in customer service. Nordstrom regards their customers as

extended family and treats them as such. In addition, Nordstrom utilizes devoted sales

associates for serving customers in an array of fashions. They possess the most liberal

return policy that is highly regarded among customers. Also, sales associates will call in

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orders for merchandize not on hand free of charge. Recently, Nordstrom has improved

their largest strength of customer service by implementing personal shopping sales

associates who research customers and personally assist with their shopping needs. In

comparison to its largest competitor, Macy’s, Nordstrom has implemented a distinct

shopping experience to once again separate themselves from competition. For example,

Nordstrom knows what clothes certain customers prefer when they walk through the

door. A sales associate will keep a list of customers along with their preferences in

order to lead them directly to the department that compliments their style. Nordstrom is

a leader in customer retention and ranks highest in shopping atmosphere. Nordstrom

represents the pinnacle in serving their largest asset, their customer base.

Secondly, Nordstrom prides itself in offering quality products to compliment their

highly regarded customer service approach. Nordstrom’s product offerings are not only

of the best quality available, but are also presented in a fashion appealing to customers.

The reputation Nordstrom has built in the industry has sustained their success for over

a century. Nordstrom’s further expects to enhance their company philosophy in the

future by implementing additional differentiation tactics that will continue their market

dominance in highly volatile economy.

In order to maintain their status in the retail industry, Nordstrom plans to

implement additional competitive advantage differentiation strategies. Nordstrom must

effectively respond to changes in the retail industry. To further enhance customer

service, Nordstrom has focused on direct retailing through their online shopping

experience. They strive to offer the most effective multi-channel relationship with their

customers by offering the same in store benefits through online and catalog shopping.

Nordstrom is exhausting substantial investment in their online business to reflect their

uncanny in-store customer service. In comparison, Nordstrom is also utilizing effective

strategy to maintain their high quality product offering by adapting to recent retail

fashion changes. Nordstrom strives to continually offer the largest assortment of high

quality products through market research and adaptation.

Nordstrom uses various key factors that enable the company to be a successful

retail chain. Using a differentiated strategy requires Nordstrom to compete based on

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the high status level its customers expect. To measure their accounting policies,

evaluating the firm’s success factors, risks, and competitive strategy are highly

important. To do this the firm has to identify and evaluate the estimates and polices

they use. Nordstrom’s most essential accounting policies used to be successful as a

differentiated retail store involve: ability to respond to the business environment and

fashion trends, inventory management, impact of competitive market forces, multi-

channel integration, and designer.

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Nordstrom Accounting Policies Ability to Respond to the Business Environment and Fashion Trends

Nordstrom’s sales and operating results all depend on their ability to predict and

react to future changes in the fashion industry and consumer demands. Any delays in

realizing the most recent fashion trends and customer demands would cause Nordstrom

to lose a portion of its customer base. Maintaining today’s ever-changing fashion trends

is a must for any clothing retailer, not doing so can break a company. Customer

demands also influence the products that a store needs to carry. Not appealing to these

demands is also fatal to a company. Weather and other hazards, economic conditions

such as a recession, and consumer confidence are all factors that affect Nordstrom’s

customer spending. Nordstrom discloses the information about this key factor in the

footnotes and also in the description of business parts of the 10-K.

Inventory Management

Nordstrom maintains appealing, fresh merchandise for its consumers. They must

be able to predict demand on products to have the best merchandise inventory

possible. Having to much of a product can lead to over stock which eventually leads to

markdowns and a loss of profit. Having not enough of a product will lead to customers

having to go elsewhere to purchase a product and possibly causing a customer to lose

faith in the Nordstrom’s name losing their business for good. Nordstrom analyzes its

past demands to predict future demands, for this reason Nordstrom orders more

merchandise in the second quarter because of its annual sale and in the fourth quarter

because of holiday shopping. This ensures that a healthy inventory level is maintained.

Nordstrom uses the first-in, first-out (FIFO) method of inventory calculation. Inventory

management can be flexible because there are several different ways to report it and

also several ways to distort the accounting numbers when it comes to inventory.

Nordstrom discloses its inventory accounting policies very clearly in the footnotes of its

10-K and leaves no room for distortion possibilities. Nordstrom’s accounting policies

compared to its competitors in dealing with inventory are fairly similar. Information

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about Nordstrom’s inventory can be found on the balance sheet and supplementary

information can be found in the description of business and footnotes.

Impact of Competitive Market Forces

With several retail stores consolidating, such as Foleys and Macy’s, changes have

occurred among venders as well as customers. This broadens Macy’s customer base

giving them an advantage. With such consolidating, the future venders might prefer to

partner up solely with a company that has such a large customer base. This causes

Nordstrom to have to respond to environmental changes in a timely manner to not loss

the edge. If they do not then they could lose customers to the competition, lose

venders, and lose profit because of higher markdowns, and declining same store sales.

This factor is flexible because firms in the industry could disclose as little or as much as

they deem necessary. Qualitative information can be found in the description of the

business.

Multi-Channel Integration

Nordstrom’s goal is to create a more integrated, consistent merchandise offering

for its customers. This can be done by shopping in the Full-line stores, on the internet,

or through Nordstrom’s catalogs. In 2005 Nordstrom initiated the integration and now

in 2006 they are starting to migrate the Direct inventory system into the Full-line stores.

This will create a “one-company view” of the inventory resulting a more seamless

merchandise offering and experience for the customer. This will allow one stop

shopping for the customers making it more convenient and efficient. This provides

superior customer service. This process will continue to be implemented through 2008.

This factor is found in the description of the business in the 10-K

Designer

Nordstrom’s women’s designer clothing is a strong seller and contributes to the

inspirational nature of Nordstrom’s brand. The goal is to offer a complete designer

selection in at least one store for every market that Nordstrom serves. Nordstrom is

enhancing and aligning its designer offering throughout all of the major merchandise

categories. Having these designers being offered at only particular high-end stores

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gives Nordstrom an advantage. This allows Nordstrom to offer a superior product

variety and quality. Nordstrom discloses this factor in the description of the business.

Table 6: Key Success Factor Analysis

Key Success Factor Quality of Disclosure

Flexibility Aggressive/ Conservative

Ability to Respond to the Business Environment and Fashion Trends

High Not Flexible N/A

Inventory Management High Flexible Moderate Impact of Competitive Market Forces

Moderate Flexible Moderate

Multi-Channel Integration Low Not Flexible N/A Designer High Flexible Moderate

Accounting Strategy Analysis

Nordstrom, Inc. has fairly moderate accounting standards that could be

somewhat distorted. Nordstrom’s net income is slightly higher relative to the industry,

although not enough to be alarming; this shows that Nordstrom uses a more moderate

strategy when it comes to its accounting policies. As far as accounting standards go,

Nordstrom uses similar basic standards as other firms in the industry.

Management and select employees of Nordstrom receive stock options which

may lead to intentional accounting distortion to increase these benefits. Also, top

managers receive bonuses based on how profitable the company is and how much

growth there is within the company from year to year which would be another incentive

to distort the numbers. Although distortion would be beneficial to management, the

standards used by Nordstrom to account for stock issued to employees seem well

disclosed and straight forward.

Compared to the accounting policies and estimates used in the past five years,

Nordstrom has not significantly changed any of its accounting standards, except the

few changes made to Nordstrom’s leasing accounting policies in 2004. Nordstrom’s

leasing policies were changed from recording net rent expense once operations started

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to Nordstrom recording net lease expense once the property was leased. This change

in leasing policy resulted in a charge of $7,753 recorded in the fourth quarter of 2004.

Estimates such as returns are based on past returns and performance and have not

altered much in recent years.

Nordstrom’s uses its historical data to estimate future performance for the use of

the inventory account. Inventory is ordered on a larger scale for the second and fourth

quarter because these are two of Nordstrom’s reported busiest times due to their

Annual Sale and the holiday shopping season. Since the increase in inventory is based

on past sales, there have been no significant write offs of inventory. Other estimates

such as returns are also based on past returns and performance and have not altered

much in recent years. The estimates and assumptions used in Nordstrom’s financial

statements seem to be reasonably calculated and are not considered distortions.

There have been no noticeable forth quarter changes that would cause concern.

Nordstrom’s accounting policies and estimates seem to have no significant

distortions. The changes in policies are well recorded and explained in the footnotes,

leaving no concern about their accounting policies. The changes in policies, accounting

standards and estimates all seem to be legitimate. There are no major changes from

quarter to quarter in looking at the 2005 quarterly reports.

Quality of Disclosure

The manner in which Nordstrom discloses their financial information to the public is of

extremely high quality. Nordstrom exceeds their expectation of providing customers

and shareholders with an adequate explanation for nearly every element of their

finances. After the presentation of each financial statement, Nordstrom provides a

detailed clarification concerning each component listed in a manner that could be easily

interpreted by the common inquirer.

The letter to shareholders commences with multiple high points that had occurred in

2005 deemed as “good news.” Total sales increased 8.3% to $7.7 billion, resulting in a

focus to strategically exceed $8 billion in sales moving into 2006. The way the

company strives to achieve this is broken down in two sections: Maximizing women’s

apparel and a seamless shopping experience. The letter also goes in to great depth

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concerning expansion opportunities, focusing on the fact that Boston is the last major

U.S. metropolitan market where Nordstrom is not present. Nordstrom will open four

stores in this area by 2010. Not only does it appear that Nordstrom reported all

relevant information in their 10 K annual report, they provide a detailed explanation for

the cause of the numbers disclosed. Nordstrom’s decrease in interest expense, net in

2004 “was due to the reduction in our average outstanding debt, partially offset by the

increase in the prepayment costs.” The fourth quarter report provides an in depth

account concerning net earnings. After stating an increase of $190.4 million, compared

with $140.0 million in 2004, it is justified by same-store sales increasing 5.8%.

Specifically the same-store sales of cosmetics, accessories, and men’s apparel

merchandise improved drastically. Nordstrom separates their Financing, Operating, and

Investing activities in to three different sections, as well. Inventory, revenue

recognition, allowance for doubtful accounts, and leases are all additional subheadings

detailing how each is recognized by the company. In addition, Nordstrom illustrates

how the majority of their numbers were calculated that are present on the various

financial statements. Overall, Nordstrom adequately discloses its accounting qualities

and financial statements in a manner that is easily understood and does not exclude

any relevant information to the outside user in their financial notes.

Potential Accounting Practice Red Flags

Nordstrom continues to thrive in the retail market due to their efforts in

sustaining competitive advantage and effective financial positioning. Nordstrom

represents the pinnacle in the retail fashion industry, and their accounting and financial

disclosure parallels this stellar image. Erik Nordstrom, President and CEO, has made a

strong effort to divulge in their yearly reports a consistent effort towards informing both

current and potential investors. Nordstrom presents their financial statements and

disclosures with full concern to the public and pays special attention towards corporate

integrity. Nordstrom goes the extra mile to inform investors and financial statement

viewers of additional financial information outlets including their own renovated web

page to www.sec.com where they may find additional financial filings. Nordstrom

emulates a disclosure transparency that is far above that of their competitors illustrating

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their ethical business practices. Any questions or concerns raised by viewing

Nordstrom’s financials are addressed and discussed in the footnotes. Illustrated through

sales and core expense manipulation diagnostics, Nordstrom shows a minimal amount

of volatility in their primary ratio analysis. Nordstrom has experienced steady positive

growth over the past five years (2001-2005) due to continuing sales momentum and

ongoing operations improvements. In addition, Nordstrom is continually expanding

opening seven new major retail outlets in 2005 alone. These factors have all led to

consistent financial gains avoiding apparent abnormal peaks and troughs in their

financials. They’re accounting preference was consistent having Deloitte & Touche

L.L.P. audit their financial statements in recent years. The relationship between net

sales and accounts receivable steadily increased reflecting growth and an increase in

earnings. Additional sales and core expense manipulation diagnostics follow this trend.

One exception is when the cash flow from operations and operating income ration

increased by 62% from 2001 to 2002 (1.33-2.16); see tables 7-1 and 7-2. One note

described a portion of the blame on Nordstrom implementing a new perpetual inventory

system during 2002. In addition to these ratios, Nordstrom demonstrated a consistent

comparison between their reported income and tax income. Nordstrom chose to write-

off large assets using the straight-line depreciation method consistent throughout

recent financial statements. Nordstrom did not fail to once again reflect their industry

prestige in the manor they present their financial information. Nordstrom effectively

communicates their activities with their investors and are relatively free of un-

predictable or unexplainable transactions.

Table 7-1: Sales and Core Expense Manipulation Diagnostics

Year Sales/AR Sales/Inv Sales/TA CFFO/OI PP&E/Pens

Exp 2001 7.66 5.85 1.53 1.33 6.81 2002 8.06 6.34 1.39 2.16 7.06 2003 8.49 6.77 1.57 1.19 6.76 2004 11.04 7.76 1.55 1.1 6.45 2005 12.08 8.08 1.57 1.06 6.16

21

Table 7-2: Sales and Core Expense Manipulation Diagnostics

0

2

4

6

8

10

12

14

Sales/AR Sales/Inv Sales/TA Ratio CFFO/OI PP&E/Pens Exp

2001

2002

2003

2004

2005

Undo Accounting Distortions

After evaluating all relevant financial data for Nordstrom Inc, we have concluded

that the financial reports have displayed no apparent accounting distortions. After

reviewing the 10-k and 10-q it is very apparent that Nordstrom is very transparent with

their financial information and seem not to try to distort any of the information provided

in their financial reports. They provide all the information in a very clear manner and

adhere to all the current GAAP standards. Any irregularities that may appear on their

financial reports are clearly explained in all their footnotes which helps give you

knowledge on any questions you may have on their financial reporting. Therefore,

Nordstrom’s financial information does not need to be adjusted or corrected.

22

Ratio Analysis There are several ratios that, when analyzed, can make reasonable estimates for

future performance of a company. These ratios can also show where a firm stands

within its industry by comparing them to competitors, calculating an industry average

and then comparing the firm to the industry. The ratios can be broken down into three

main groups: liquidity ratios, profitability ratios, and capital structure ratios. The

liquidity ratios refer to the company’s assets compared to its financial obligations and

the ability to sustain adequate resources for the near future. Overall with regards to

liquidity ratios, the higher the number the better; but a firm does not want the ratios to

be too high because that would mean they were not using their resources to their full

potential. The next set of ratios is profitability ratios that show the future profit

potential of a firm. The last set of ratios, capital structure ratios, is based on a firm’s

liabilities and equity. These ratios show how a firm’s assets are financed. Tables 8

through 12 show these ratios for Nordstrom, three of its top competitors, and for the

industry.

23

Table 8: Nordstrom Ratio Analysis (2001-2005) 2001 2002 2003 2004 2005 Liquidity Ratios: Current Ratio 1.91 2.17 2.36 1.92 1.77 Quick Asset Ratio 0.91 1.23 1.28 1.23 1.18 Inventory Turnover 3.86 4.24 4.42 4.97 5.11 Days Supply Inventory 94.56 86.08 82.58 73.44 71.42 Receivables Turnover 7.66 8.01 10.08 11.05 12.08 Days Sales Outstanding 47.65 45.57 36.21 33.03 28.51 OCF Ratio 0.48 0.45 0.68 0.44 0.19 Working Capital Turnover 6.41 5.09 5.36 5.79 6.17 Profitability Ratios: Gross Profit Margin 0.34 0.33 0.35 0.36 0.37 Operating Expense Ratio 0.32 0.31 0.29 0.28 0.27 Net Profit Margin 0.02 0.02 0.04 0.05 0.07 Asset Turnover 1.53 1.39 1.57 1.55 1.57 Return on Assets 0.03 0.03 0.06 0.08 0.11 Return on Equity 0.08 0.09 0.18 0.22 0.26 Capital Structure Ratios: Debt to Equity 1.93 2.08 1.99 1.57 1.35 Times Interest Earned 2.1 1.94 3.67 7.12 16.2 Debt Service Margin 3.02 22.2 1.94 5.51 2.66 Sustainable Growth Rate: 4.50% 5.70% 14.40% 19.10% 23.40% Nordstrom’s Liquidity

As table 8 shows, with regards to the liquidity ratios, Nordstrom is comfortable in

its near-cash assets when compared to its future obligations. Nordstrom has been able

to maintain a healthy overall liquidity in the past five years. One aspect that has been

steadily getting better each year is receivables turnover, which refers to how well the

firm manages its receivables; and therefore also day’s sales outstanding has been

steadily decreasing which means the firm is collecting receivables on a more timely

basis.

Nordstrom’s Profitability

Upon evaluation of the operating efficiency, which takes into consideration the

gross profit margin, the operating expense ratio, and the net profit margin, Nordstrom

did increasingly well. The gross profit margin is steadily increasing, which is a positive

24

effect; the operating expense ratio is steadily decreasing, which is also constructive;

and the net profit margin has been increasing, which also is a positive result. By

evaluating the rest of Nordstrom’s profitability ratios, the asset turnover, return on

assets, and return on equity, Nordstrom once again is upward looking. Nordstrom’s

asset turnover has stayed stable over the past five years; and its returns on assets and

equity have been greatly increasing in the past five years. Analyzing Nordstrom’s past

profitability ratios shows that in the future, Nordstrom should continue being profitably.

Nordstrom’s Capital Structure

Nordstrom’s capital structure ratios make it clear as to how they finance their

assets. Nordstrom’s average debt to equity ratio was 1.78 which means for every dollar

of owner’s equity, there is 1.78 dollars of liabilities; this number over the past five years

has fluctuated, but has somewhat increased. The times interest earned for Nordstrom

had high fluctuation, but the number increased over the past five years, which is a

positive result. This number is a coverage measure, and shows that Nordstrom has

been able to cover its interest expense with its operating income. The last capital

structure ratio, the debt service margin, measures how well the cash flows from

operations cover the installments due on long-term debt. As the table shows,

Nordstrom was able to cover its installments on long-term debt by at least 1.94 dollars

and by most 22.2 dollars. In general, Nordstrom’s capital structure ratios also proved

to be positive for Nordstrom from 2001-2005.

Tables 9 through 12 show Nordstrom’s top competitors and how they performed

from 2001-2005 based on the same ratios.

25

Table 9: Dillard’s Ratio Analysis (2001-2005) 2001 2002 2003 2004 2005 Liquidity Ratios: Current Ratio 3.24 3.03 3.53 2.19 1.87 Quick Asset Ratio 4.34 4.20 4.22 4.05 3.51 Inventory Turnover 2.91 2.95 2.85 2.89 2.78 Receivables Turnover 6.21 6.10 5.09 5.18 5.4 OCF Ratio 0.91 0.66 0.49 0.53 0.32 Working Capital Turnover 6.10 7.21 6.89 7.48 7.54 Profitability Ratios: Gross Profit Margin 1.04 1.05 1.06 1.08 1.03 Operating Expense Ratio 0.26 0.28 0.27 0.28 0.26 Net Profit Margin 0.005 0.02 0.003 0.03 0.02 Asset Turnover 1.19 1.17 1.13 1.32 1.36 Return on Assets 0.001 0.01 0.001 0.02 0.02 Return on Equity 0.02 0.03 0.004 0.05 0.05 Capital Structure Ratios: Debt to Equity 1.77 1.62 1.91 1.47 1.40 Times Interest Earned 0.06 0.51 1.83 0.93 1.28 Debt Service Margin 2.11 1.53 1.59 2.66 2.31 Table 10: Saks Fifth Avenue Ratio Analysis (2001-2005) 2001 2002 2003 2004 2005 Liquidity Ratios: Current Ratio 2.24 2.41 2.11 2.15 1.95 Quick Asset Ratio 0.61 0.77 0.61 0.58 0.99 Inventory Turnover 3.04 2.84 2.59 2.64 4.64 Receivables Turnover 1.42 1.37 1.25 1.23 1.24 OCF Ratio 0.48 0.35 0.49 0.37 0.22 Working Capital Turnover 6.17 5.26 5.62 5.77 7.45 Profitability Ratios: Gross Profit Margin 0.35 0.37 0.38 0.38 0.37 Operating Expense Ratio 0.23 0.23 0.25 0.25 0.25 Net Profit Margin 0.0001 0.005 0.01 0.01 0.01 Asset Turnover 1.33 1.28 1.30 1.36 1.55 Return on Assets 0.0001 0.005 0.016 0.013 0.005 Return on Equity 0.001 0.01 0.03 0.03 0.01 Capital Structure Ratios: Debt to Equity 1.04 1.04 1.02 1.30 0.95 Times Interest Earned 0.77 1.84 1.83 1.73 2.22 Debt Service Margin 0.88 9.33 5.10 2.25 0.31

26

Table 11: Neiman Marcus Ratio Analysis (2001-2005) 2001 2002 2003 2004 2005 Liquidity Ratios: Current Ratio 2.20 2.21 2.40 2.43 2.83 Quick Asset Ratio 0.81 0.82 0.94 1.41 1.66 Inventory Turnover 2.71 2.82 2.94 3.19 3.38 Receivables Turnover 155 145.6 140.2 5.83 126.67 OCF Ratio 0.27 0.41 0.31 0.07 1.37 Working Capital Turnover 6.02 5.01 4.29 3.50 3.45 Profitability Ratios: Gross Profit Margin 0.06 0.07 0.07 0.09 0.11 Operating Expense Ratio 0.26 0.27 0.27 0.23 0.242 Net Profit Margin 0.04 0.03 0.03 0.06 0.05 Asset Turnover 1.66 1.52 1.50 1.35 1.14 Return on Assets 0.06 0.05 0.05 0.08 0.07 Return on Equity 0.11 0.09 0.09 0.14 0.13 Capital Structure Ratios: Debt to Equity 0.89 0.80 0.82 0.86 0.63 Times Interest Earned 12.93 11.85 13.86 21.88 34.25 Debt Service Margin 1.65 1.63 2.03 52.8 84.50 Table 12: Industry Average (2001-2005) 2001 2002 2003 2004 2005 Liquidity Ratios: Current Ratio 2.56 2.55 2.68 2.26 2.22 Quick Asset Ratio 1.92 1.93 1.92 2.01 2.05 Inventory Turnover 2.89 2.87 2.79 2.91 3.60 Receivables Turnover 54.21 51.02 48.85 4.08 44.44 OCF Ratio 0.55 0.47 0.43 0.32 0.64 Working Capital Turnover 6.10 5.83 5.60 5.58 6.15 Profitability Ratios: Gross Profit Margin 0.48 0.50 0.50 0.52 0.50 Operating Expense Ratio 0.25 0.26 0.26 0.25 0.25 Net Profit Margin 0.02 0.02 0.01 0.03 0.03 Asset Turnover 1.39 1.32 1.31 1.34 1.44 Return on Assets 0.02 0.02 0.02 0.04 0.03 Return on Equity 0.04 0.04 0.04 0.07 0.06 Capital Structure Ratios: Debt to Equity 1.23 1.15 1.25 1.21 0.99 Times Interest Earned 4.59 4.73 5.84 8.18 12.58 Debt Service Margin 1.55 4.16 2.91 19.24 29.04

27

Upon completion of analysis concerning Nordstrom and its competitors, past

performance as well as future expectations can be derived. Through thorough ratio

analysis, it becomes visible that Nordstrom once again out performs its competitors in

liquidity and profitability and stands out above the industry average in many of the

valuation criteria. Nordstrom presents consistency and improvement over the past five

years, illustrated by smooth ratio increments, and possible most notably, in the

sustainable growth rate. Nordstrom has performed admirably when compared to their

direct competitors. With a consistently increasing sustainable growth rate from 2001-

2005, we can conclude that volatility is not a concern for Nordstrom, rather increasing

growth and market share. Indices such as this will greatly influence our choice of

forecasting models as well as future predictions. Most importantly, no red flags were

detected that illustrated signs of business stress or recession. Nordstrom is clearing a

remarkable path with the future only looking brighter for this top notch company.

Nordstrom is making every dollar work for them while improving their operating

efficiency in a manner that once again distinguishes Nordstrom amongst the ever

increasing market.

The following fifteen charts compare Nordstrom’s ratios to its three competitors

and to the industry average.

Liquidity Ratios:

Current Ratio

The current ratio shows how much assets a firm has to cover their liabilities and

evaluates liquidity. As shown in chart 1 below, Nordstrom is a slight amount below the

industry average. Although Nordstrom is below the industry average, its current ratio is

not the lowest in the industry. It is positive for the current ratio to grow, but it could

become a negative aspect if the current ratio was so high that not all current assets

were being used to their full potential to make future economic benefit.

28

Chart 1: Current Ratio

00.5

11.5

22.5

33.5

4

2001 2002 2003 2004 2005

Yea

Valu

e

NordstromDillard'sSaksNeiman MarcusIndustry

Quick Asset Ratio

The quick asset ratio is a measure of how cash and assets nearest to cash can

cover a firm’s liabilities. Nordstrom is again below the industry average line, but so is

every other firm other than Dillard’s. Without Dillard’s quick asset ratio in the mix, the

industry average would be more closely related to that of Nordstrom’s. As chart 2

shows, Nordstrom’s quick asset ratio is close to that of Saks Fifth Avenue and Neiman

Marcus.

Chart 2: Quick Asset Ratio

0

1

2

3

4

5

2001 2002 2003 2004 2005

Year

Valu

e

NordstromDillard'sSaksNeiman MarcusIndustry

Inventory Turnover

Inventory turnover shows how efficient a firm can keep its inventory turning at a

steady flow from the manufacturer to the store and out to the consumer. When it

comes to inventory turnover, the higher the better because this means the firm is

getting its inventory out to consumers at a more efficient pace. As chart 3 shows,

29

Nordstrom’s inventory turnover is far higher than all three competitors and the industry

average. This is an excellent position for Nordstrom to be in compared to its

competitors and the industry.

Chart 3: Inventory Turnover

0123456

2001 2002 2003 2004 2005

Years

Valu

e

NordstromDillard'sSaksNeiman MarcusIndustry

Receivables Turnover

A firm’s receivable turnover is the same type ratio as the inventory turnover,

except the receivable turnover ratio has to do with how efficient a firm is at collecting

its receivables. The faster a firm can collect its receivables, the better; and chart 4

shows that Nordstrom’s receivables turnover is well above that of Saks Fifth Avenue

and Dillard’s. Neiman Marcus’ receivables turnover was well outside any reasonable

average and therefore was left out of the chart; for the same reason, the industry

average was left out as well. Compared to Nordstrom’s other two reasonable

competitors, Nordstrom once again outperforms the competition.

Chart 4: Receivables Turnover

02468

101214

2001 2002 2003 2004 2005

Years

Valu

e

NordstromDillard'sSaksNeiman MarcusIndustry

30

The OCF ratio for the four stores and industry is all very similar. With regards to

this ratio value, Nordstrom is neither above nor below the industry.

Chart 5: OCF Ratio

0

0.5

1

1.5

2001 2002 2003 2004 2005

Years

Valu

e

NordstromDillard'sSaksNeiman MarcusIndustry

Working Capital Turnover

The working capital turnover of a firm refers to a firm’s sales compared to its

working capital (its current assets minus its current liabilities) and is the last measure of

liquidity. Nordstrom’s working capital turnover is similar to that of its competitors. For

this reason, the ratio is closely related to the industry average as shown below in chart

6.

Chart 6: Working Capital Turnover

0

2

4

6

8

2001 2002 2003 2004 2005

Years

Valu

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NordstromDillard'sSaksNeiman MarcusIndustry

31

Profitability Ratios:

Gross Profit Margin

The gross profit margin is the first profitability ratio and measures gross profit as

a percentage of sales. This ratio is also a measure of a firm’s operating efficiency. For

the most part, the higher this number, the better. As chart 7 shows, the four stores all

have quite a different average ratio, but Nordstrom’s gross profit margin is very similar

to Saks Fifth Avenue’s. Neiman Marcus’ ratio is very low and Dillard’s ratio values are

extremely high, causing the industry’s average to be a slightly higher value than that of

Nordstrom’s. Nordstrom’s gross profit margin has been steady over the past five years,

and is average compared to the industry.

Chart 7: Gross Profit Margin

00.20.40.60.8

11.2

2001 2002 2003 2004 2005

Years

Valu

e

NordstromDillard'sSaksNeiman MarcusIndustry

Operating Expense Ratio

The operating expense ratio illustrates a firm’s selling and administrative

expenses compared to its sales. A decreasing ratio value has a positive impact on the

firm. As chart 8 shows, Nordstrom’s operating expense ratio has been steadily

decreasing over the past five years. The other three competing firms have similar ratio

values; therefore the industry average is in close proximity to the other values in the

chart. Nordstrom’s ratio value is not the best or lowest in the industry, but they are

showing positive change by decreasing this value.

32

Chart 8: Operating Expense Ratio

00.050.1

0.150.2

0.250.3

0.35

2001 2002 2003 2004 2005

Years

Valu

e

NordstromDillard'sSaksNeiman MarcusIndustry

Net Profit Margin

The net profit margin of a company measures its net income divided by its sales.

This is another operating efficiency ratio and an increasing ratio shows growth. As

chart 9 shows, Nordstrom’s net profit margin over the past five years has been steadily

growing, putting it well above the industry average. Neiman Marcus has a net profit

margin similar to Nordstrom’s, but the other two competitors are below Neiman Marcus

and Nordstrom, as well as the industry average. Any drop in the net profit margin is

significant considering that a one percent drop can mean a huge decrease in net

income when the numbers are in the multi-millions. In this category, Nordstrom

definitely outperformed its competition.

Chart 9: Net Profit Margin

0

0.02

0.04

0.06

0.08

2001 2002 2003 2004 2005

Years

Valu

e

NordstromDillard'sSaksNeiman MarcusIndustry

Asset Turnover

The asset turnover ratio is a measure of how well a company is utilizing it’s

assets to create future benefit and of how productive a firm’s assets are. Asset

33

turnover assesses asset utilization; therefore, bigger is better, meaning more utilization.

In the high-end apparel industry, as shown below, all of the firms and therefore the

industry average are all very similar in value. On average, Nordstrom’s asset turnover

value has been stable over the past five years.

Chart 10: Asset Turnover

0

0.5

1

1.5

2

2001 2002 2003 2004 2005

Years

Valu

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NordstromDillard'sSaksNeiman MarcusIndustry

Return on Assets

The return on assets ratio is a comprehensive measure of profitability, taking into

account how a firm’s assets and profits are used to create future profit. This ratio is

also positive when increasing; and as chart 11 illustrates, Nordstrom has done an

extraordinary job at increasing its return on assets from 2001-2005. The ratio value of

Nordstrom is well above the industry average in every year and above every competitor

in years 2003-2005.

Chart 11: Return on Assets

00.020.040.060.080.1

0.12

2001 2002 2003 2004 2005

Years

Valu

e

NordstromDillard'sSaksNeiman MarcusIndustry

34

Return on Equity

The return on owner’s equity is a profitability measure and is influenced by the

affiliation between a firm’s debt and its owner’s equity. Return on equity is calculated

by dividing net income by owner’s equity. An increase in this ratio value would be

linked to an increase in profits. Nordstrom clearly has a higher return on equity than its

competitors in years 2002-2005. This shows that Nordstrom, with regards to this ratio,

is likely to be more profitable than its competitors, and the industry.

Chart 12: Return on Equity

00.050.1

0.150.2

0.250.3

2001 2002 2003 2004 2005

Years

Valu

e

NordstromDillard'sSaksNeiman MarcusIndustry

Capital Structure Ratios

Debt to Equity

The debt to equity ratio is the first of three capital structure ratios. This value is

derived by dividing a firm’s total liabilities by its total owner’s equity. As a firm’s debt

grows larger, this ratio value in turn increases. This ratio value is an important factor in

considering a firm’s credit risk. As this value decreases, there is less leverage within the

firm. As chart 13 shows, Nordstrom’s debt to equity ratio value starts out relatively

high compared to the industry and competition, but then steadily decreases after 2001

and is more in line with the industry for the remaining four years.

35

Chart 13: Debt to Equity

0

0.5

1

1.5

2

2.5

2001 2002 2003 2004 2005

Years

Valu

e

NordstromDillard'sSaksNeiman MarcusIndustry

Times Interest Earned

Times interest earned is calculated by dividing operating income by interest

expense. Because this ratio value is a coverage measure, an increase has a positive

impact on the firm. Nordstrom is similar to the industry average and its competition,

with the exception of Dillard’s. Nordstrom’s times interest earned has steadily increased

over the past five years (chart 14), which shows that their coverage of interest expense

is increasing.

Chart 14: Times Interest Earned

0

10

20

30

40

2001 2002 2003 2004 2005

Years

Valu

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NordstromDillard'sSaksNeiman MarcusIndustry

Debt Service Margin

Finally, the debt service margin is a measure of how well a firm’s cash flow from

operations can cover its current portion of its long-term debt; therefore this ratio value

is also a coverage measure and has a positive impact when increased. With the

exception of Neiman Marcus’ unusually high results which should not be included in the

36

industry average, Nordstrom did relatively similar to its other competition. In 2002,

Nordstrom’s debt service margin was unusually high, but overall, it had around the

same coverage as the market.

Chart 15: Debt Service Margin

0

20

40

60

80

100

2001 2002 2003 2004 2005

Years

Valu

e

NordstromDillard'sSaksNeiman MarcusIndustry

After analyzing each individual ratio and comparing Nordstrom to three of its

competitors and the industry average, it is apparent that there are no concerns with the

accounting for the components of these ratios. Nordstrom was consistently somewhat

similar to its competitors and the industry average. In most of the above charts

comparing the ratios, Nordstrom outperformed the competition. In its industry

Nordstrom is apparently a leader in utilizing its capital to create value for the firm and

creating profits. (Numbers derived from Edgarscan.pwcglobal.com)

37

Forecasting To accurately predict the future performance of a firm, the past financials must

be analyzed. Using the ratios and analysis examined in the last section, Nordstrom’s

financial statements can be forecasted quite accurately.

Financial Statement Forecasting Methodology

In order to predict an accurate forecast for Nordstrom’s Income Statement,

Statement of Cash Flows, and Balance sheet a sustainable growth rate is needed. After

examining Nordstrom’s past performance and computing past growth rates on

Nordstrom’s financial, we were able to come up with an average growth rate of six

percent. We used this six percent growth rate to calculate the financial statement line

items for the next fifteen years. Nordstrom is continually experiencing growth as a

company and although Nordstrom has been growing more rapidly than six percent per

year in the past five years, a six percent growth rate is reasonable because the industry

does not support a much higher growth rate.

Balance sheet

The balance sheet’s forecast supports the income statement in reinforcing

continuous growth. As Nordstrom expands through the years, assets will continue to

grow along with liabilities. This is so because of the cost of new stores and larger

inventories. (See appendix B-I)

Income Statement

Growth is apparent in the forecasted Income statement. The percentages in the

common size income statement show no obvious change. (See appendix B-III)

Cash Flows

The cash flows statement shows that net cash flow is slowly rises while net

income is increasing relatively well. Overall Nordstrom is gradually increasing in all

aspects. (See appendix B-V)

38

Valuations Analysis This section explains how we used the various methods of valuation to value

Nordstrom. We will comparables method, discounted dividends, free cash flows,

abnormal earnings growth, long-run residual income perpetuity, and residual income

method to determine a value of the firm.

Cost of Capital

(See appendix C)

Cost of Equity

We calculated the cost of equity using the CAPM method, or capital asset pricing

model. The formula for CAPM is: Ke=Rf+β(rm-rf). In order to find beta for the firm,

we took the five year stock price history of Nordstrom and the S&P 500. We also found

the risk free returns from the St. Louis Federal Reserve website. We found the market

risk premium by subtracting the monthly S&P 500 returns by the risk free returns. We

then determined beta by taking slope of the firm’s returns and the market risk premium

and got a beta of 1.31. We then plugged all the values into the CAPM formula to come

up with a Ke of 7.69%. This value is somewhat low and will have an effect on the

valuation models.

Cost of Debt

The cost of debt was calculated by averaging the weighted averages of the long

term debt and the current debt. First, all long term debt items were assigned a

weighting based on each individual item’s percentage of the total long term debt. This

weighting was multiplied by each item’s interest rate listed in the 10-K or from the St.

Louis Fed. These weighted interest rates were totaled to get an average long term

debt rate of 5.931%. The same method was used to determine the average of each

item of current debt to come out to 5.914%. These to interest rates were averaged to

get a cost of debt (Kd) of 5.923%.

Weighted Average Cost of Capital

Using the cost of equity and cost of debt, we found the weighted average cost of

capital using the formula:

39

WACCBT=VD/VF (Kd) + VE/VF (Ke) and WACCAT=VD/VF (Kd-T) + VE/VF (Ke)

Where: WACCBT= Weighted Average Cost of Capital before taxes

WACCAT= Weighted Average Cost of Capital after taxes

VD= Value of debt

VF= Value of firm

VE= Value of equity

Kd= Cost of debt

Ke= Cost of equity

T= Tax rate

Table 13: Weighted Average Cost of Capital

Weighted Average Cost of Capital

WACC Before Tax WACC After Tax 2,828,668/4,921,349(.05923) +2,092,681/4,921,349(.07694)=.0668

2,828,668/4,921,349(.05923)(1-.377) +2,092,681/4,921,349(.07694)=.0539

6.68% 5.39%

Intrinsic Valuations

(Valuation Models Spreadsheets can be found in the Appendix)

Discounted Dividends

We calculated the Discounted Dividends valuation by first forecasting dividends

growth and the discounting them back to 2005 using the Ke. Nordstrom has paid

dividends around 30 cents per share for the last five years and have slowly grown every

year to 33 cents per share in 2005; therefore, we forecasted a dividend growth of 3%

per year. After all of these calculations we valued Nordstrom at $7.31 per share.

Nordstrom’s stock is currently trading at the price of $46.30. According to our valuation

Nordstrom is overvalued by a large margin. We think this method is not an accurate

way to value Nordstrom because the company pays low dividends.

40

Table 14: Discounted Dividends Sensitivity Analysis

Sensitivity Analysis g 0 0.01 0.03 0.05

Ke 0.04 $10.74 $13.37 $34.45 ($28.78) 0.05 $8.50 $9.95 $17.21 $0.00 0.06 $7.02 $7.91 $11.46 $29.22 0.07 $5.96 $6.55 $8.59 $14.71 0.08 $5.18 $5.58 $6.86 $9.87

As you can see from the sensitivity analysis, the cost of equity would have to fall below

4% in order to get close to Nordstrom’s actual trading price.

Discounted Free Cash Flows

The discounted free cash flows method is calculated similarly to discounted

dividends. We forecasted future free cash flows to the firm with a 6% growth rate and

discount them back using the weighted average cost of capital. We total the

discounted cash flows, then add a terminal perpetuity and discount it back to 2005.

This gives us the value of the firm; we then subtract the book value of debt in order to

get the value of equity. We take the value of equity and divide it by the total shares

outstanding to get a value of $3.47 per share. This value is also significantly lower than

the current trading price of $46.30. This method is also not a good method to value

Nordstrom because cash flows to the firm over the past five years have had

inconsistent changes making it hard to get an accurate growth rate. We chose 6%

growth rate because it was steady and consistent with average growth of net sales over

the past five years. Also the cost of equity maybe low, causing the weighted average

cost of capital to be low.

41

Table 15: Discounted Free Cash Flows Sensitivity Analysis

Sensitivity Analysis g 0.01 0.03 0.06 0.1 WACC 0.02 $4.60 $4.85 $5.23 $5.74

0.04 $3.57 $3.79 $4.13 $4.58 0.0539 $2.95 $3.16 $3.47 $3.89 0.07 $2.33 $2.52 $2.80 $3.19 0.1 $1.36 $1.52 $1.77 $2.10

This sensitivity analysis supports the above statements. As the WACC decreases and

growth rate increases, the price increases closer to the actual trading price.

Residual Income

The residual income model uses the book value of equity per share, the

dividends per share, and the earnings per share to value the firm. We used the book

value of equity per share of 2005 and used that as the book value for 2006. We then

added the forecasted earnings per share and subtracted the forecasted dividends per

share to get the ending book value of equity for 2006. We then repeated the process

to forecast all the way out to 2015. Next, we took the ending book value of equity and

multiplied it by the Ke to get the normal income. We subtracted the normal income

from the earnings per share and came up with the residual income. The residual

income was then discounted back and totaled and then added to the book value of

equity per share and the present value of the perpetuity to get a value of $41.79. This

is the closest valuation to the actual price per share of $46.30.

Table 16: Residual Income Sensitivity Analysis

Sensitivity Analysis

g 0 0.01 0.03 0.05

Ke 0.04 $55.10 $66.75 $155.86 ($105.22) 0.05 $45.58 $52.26 $83.82 $0.00 0.07 $34.59 $37.59 $47.30 $74.10 0.08 $31.12 $33.33 $39.83 $53.58 0.1 $26.21 $27.56 $31.10 $36.75

42

This sensitivity analysis shows that lower cost of equity and higher growth rates

increase the value. The method seems to be the most accurate way to value

Nordstrom.

Long-run Residual Income Perpetuity

The long-run residual income perpetuity takes the book value of equity in year 0

added to the book value of equity in year 0 multiplied by the value of return on equity

subtracted by the Ke divided by Ke subtracted by the growth rate.

The formula looks like: P0=BVE0+ BVE0(ROE-Ke/Ke-g)

This was figured for every year for ten years and the amounts were averaged together.

Our cost of equity is 7.69%, book value of equity is 7.76, our average return on equity

came out to 15.27%, and our average growth came out to 12.86%. This method

valued Nordstrom at ($3.60). This value is well below the actual trading value of

$46.30. This method is not a good way to value this company. Again a low cost of

equity caused and undervalue of the actual price.

Table 17: Long-run Residual Income Perpetuity Sensitivity Analysis

Sensitivity Analysis

g 0.1 0.12 0.1342 0.15

Ke 0.01 ($5.11) ($2.77) ($1.57) ($0.52) 0.05 ($9.20) ($4.36) ($2.31) ($0.72) 0.0769 ($19.96) ($7.08) ($3.40) ($0.99) 0.12 $23.01 $0.00 ($13.72) ($2.41) 0.14 $11.50 $15.25 $33.58 ($7.22)

g 0.1 0.12 0.1342 0.15

ROE 0.1 $0.00 $3.60 $4.63 $5.31 0.12 ($6.73) $0.00 $1.92 $3.19 0.1593 ($19.96) ($7.08) ($3.40) ($0.99) 0.2 ($33.65) ($14.42) ($8.92) ($5.31) 0.24 ($47.11) ($21.63) ($14.34) ($9.56)

43

Ke 0.01 0.05 0.0769 0.12 0.14

ROE 0.1 $2.14 $3.15 $4.63 $18.72 ($45.45) 0.12 $0.89 $1.31 $1.92 $7.76 ($18.84) 0.1593 ($1.57) ($2.32) ($3.40) ($13.77) $33.70 0.2 ($4.11) ($6.07) ($8.93) ($36.06) $87.57 0.24 ($6.61) ($9.76) ($14.35) ($57.97) $140.77

This sensitivity analysis shows that higher cost equity creates a higher return on equity

and therefore bringing the value closer to the actual price.

Abnormal Earnings Growth

The abnormal earnings growth is based on the earnings per share and the

reinvested dividends. The forecasted earnings per share are added the to the

reinvested dividend which is the previous years dividends multiplied by the cost of

equity. This gets the cumulative dividends earnings. Then the earnings per share is

multiplied by one plus the cost of equity to get the normal earnings. The difference of

cumulative dividends earnings and the normal earnings equals the abnormal earnings

growth. The AEG are discounted back to 2005 and totaled and added to the base year

earnings per share to get the total average earnings per share perpetuity. This is then

divided by the cost of equity. Nordstrom’s came out the $19.92. This is also

significantly lower than the actual price of $46.30. This is caused by having negative

abnormal earnings growth each year.

Table 18: Abnormal Earnings Growth Sensitivity Analysis

Sensitivity Analysis g 0 0.01 0.03 0.05

Ke 0.04 $37.00 $40.34 $47.84 $56.59 0.05 $27.49 $29.94 $35.45 $41.86 0.07 $17.03 $18.51 $21.84 $25.71 0.08 $13.93 $15.12 $17.79 $20.91 0.1 $9.78 $10.59 $12.42 $14.53

44

This sensitivity analysis shows that a higher growth rate gets the value closer to the

actual price. The method is better than discounted dividends, free cash flows, and long

run residual income perpetuity, but the residual income method seems to be the best

method of valuing Nordstrom.

Nordstrom Z-Score

A firm’s Z-score is a discriminate analysis model. This model can be valuated by

the formula:

Z-Score = 1.2 [Working Capital/Total Assets] + 1.4 [Retained Earnings/Total Assets]

+ 3.3 [Earnings Before Interest and Taxes] + 0.6 [Market Value of

Equity/Book Value of Liabilities] + 1.0 [Sales/Total Assets]

Nordstrom’s past five years z-scores are shown in table ***:

Table 19: Nordstrom’s Z-scores 2002 2003 2004 2005 2006 Nordstrom z-score 2.5798 2.5220 2.8311 2.7029 3.0566 If the z-score is below 1.81, it is considered a worse off company; a score

between 1.81 and 2.67 is moderate, and a z-score of above 2.67 is considerate a high

quality company. As table 19 shows, Nordstrom’s z-score has been well above the

healthy level of 2.67.

45

Appendix

APPENDIX A: Core Financial Ratios

Current Ratio

Nordstrom

Dillard’s

Saks

Neiman Marcus

Industry Average

2001 1.91 3.24 2.24 2.20 2.56

2002 2.17 3.03 2.41 2.21 2.55

2003 2.36 3.53 2.11 2.40 2.68

2004 1.92 2.19 2.15 2.43 2.26

2005 1.77 1.87 1.95 2.83 2.22

Quick Asset Ratio

Nordstrom

Dillard’s

Saks

Neiman Marcus

Industry Average

2001 0.91 4.34 0.61 0.81 1.92

2002 1.23 4.20 0.77 0.82 1.93

2003 1.28 4.22 0.61 0.94 1.92

2004 1.23 4.05 0.58 1.41 2.01

2005 1.18 3.51 0.99 1.66 2.05

Inventory Turnover

Nordstrom

Dillards’s

Saks

Neiman Marcus

Industry Average

2001 3.86 2.91 3.04 2.71 2.89

2002 4.24 2.95 2.84 2.82 2.87

2003 4.42 2.85 2.59 2.94 2.79

2004 4.97 2.89 2.64 3.19 2.91

2005 5.11 2.78 4.64 3.38 3.60

46

Receivables

Turnover

Nordstrom

Dillards’s

Saks Neiman Marcus

Industry Average

2001 7.66 6.21 1.42 N/A 3.81

2002 8.01 6.10 1.37 N/A 3.73

2003 10.08 5.09 1.25 N/A 3.17

2004 11.05 5.18 1.23 N/A 3.21

2005 12.08 5.40 1.24 N/A 3.32

OCF Ratio

Nordstrom

Dillards’s

Saks

Neiman Marcus

Industry Average

2001 0.48 0.91 0.48 0.27 0.55

2002 0.45 0.66 0.35 0.41 0.47

2003 0.68 0.49 0.49 0.31 0.43

2004 0.44 0.53 0.37 0.07 0.32

2005 0.19 0.32 0.22 1.37 0.64

Working Capital

Turnover

Nordstrom

Dillards’s

Saks

Neiman Marcus

Industry Average

2001 6.41 6.10 6.17 6.02 6.10

2002 5.09 7.21 5.26 5.01 5.83

2003 5.36 6.89 5.62 4.29 5.60

2004 5.79 7.48 5.77 3.50 5.58

2005 6.17 7.54 7.45 3.45 6.15

47

Gross Profit

Margin

Nordstrom

Dillards’s

Saks

Neiman Marcus

Industry Average

2001 0.34 0.32 0.35 0.33 0.33

2002 0.33 0.32 0.37 0.32 0.34

2003 0.35 0.34 0.38 0.33 0.35

2004 0.36 0.32 0.38 0.34 0.35

2005 0.37 0.33 0.37 0.35 0.35

Operating Expense

Ratio

Nordstrom

Dillards’s

Saks

Neiman Marcus

Industry Average

2001 0.32 0.26 0.23 0.26 0.25

2002 0.31 0.28 0.23 0.27 0.26

2003 0.29 0.27 0.25 0.27 0.26

2004 0.28 0.28 0.25 0.23 0.25

2005 0.27 0.26 0.25 0.24 0.25

Net Profit

Margin

Nordstrom

Dillards’s

Saks Neiman Marcus

Industry Average

2001 0.02 0.005 0.0001 0.04 0.02

2002 0.02 0.02 0.005 0.03 0.02

2003 0.04 0.003 0.01 0.03 0.01

2004 0.05 0.03 0.01 0.06 0.03

2005 0.07 0.02 0.01 0.05 0.03

48

Asset

Turnover

Nordstrom

Dillards’s

Saks Neiman Marcus

Industry Average

2001 1.53 1.19 1.33 1.66 1.39

2002 1.39 1.17 1.28 1.52 1.32

2003 1.57 1.13 1.30 1.50 1.31

2004 1.55 1.32 1.36 1.35 1.34

2005 1.57 1.36 1.55 1.41 1.44

Return on

Assets

Nordstrom

Dillards’s

Saks Neiman Marcus

Industry Average

2001 0.03 0.001 0.0001 0.06 0.02

2002 0.03 0.01 0.005 0.05 0.02

2003 0.06 0.001 0.016 0.05 0.02

2004 0.08 0.02 0.013 0.08 0.04

2005 .011 0.02 0.005 0.07 0.03

Return on

Equity

Nordstrom

Dillards’s

Saks Neiman Marcus

Industry Average

2001 0.08 0.02 0.001 0.11 0.04

2002 0.09 0.03 0.01 0.09 0.04

2003 0.18 0.004 0.03 0.09 0.04

2004 0.22 0.05 0.03 0.14 0.07

2005 0.26 0.05 0.01 0.13 0.06

49

Debt to Equity

Nordstrom

Dillards’s

Saks

Neiman Marcus

Industry Average

2001 1.93 1.77 1.04 0.89 1.23

2002 2.08 1.62 1.04 0.80 1.15

2003 1.99 1.91 1.02 0.82 1.25

2004 1.57 1.47 1.30 0.86 1.21

2005 1.35 1.40 0.95 0.63 0.99

Times

Interest Earned

Nordstrom

Dillards’s

Saks

Neiman Marcus

Industry Average

2001 2.10 0.06 0.77 12.93 4.59

2002 1.94 0.51 1.84 11.85 4.73

2003 3.67 1.83 1.83 13.86 5.84

2004 7.12 0.93 1.73 N/A 1.33

2005 16.2 1.28 2.22 N/A 1.75

Debt

Service Margin

Nordstrom

Dillards’s

Saks

Neiman Marcus

Industry Average

2001 3.02 2.11 0.88 1.65 1.55

2002 22.2 1.53 9.33 1.63 4.16

2003 1.94 1.59 5.10 2.03 2.91

2004 5.51 2.66 2.25 N/A 2.46

2005 2.66 2.31 0.31 N/A 1.31

50

APPENDIX B: Actual and Forecasted Financials

I. Actual and Forecast Balance Sheet

Forecast Balance Sheet 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

3,046,606 3,229,403 3,423,167 3,628,557 3,846,270 4,077,047 4,321,669 4,580,970 4,855,828 5,147,177

2,170,024 2,300,225 2,438,238 2,584,533 2,739,605 2,903,981 3,078,220 3,262,913 3,458,688 3,666,209

5,216,630 5,529,628 5,861,405 6,213,090 6,585,875 6,981,028 7,399,889 7,843,883 8,314,516 8,813,387

1,720,711 1,823,953 1,933,391 2,049,394 2,172,358 2,302,699 2,440,861 2,587,313 2,742,551 2,907,105

2,998,388 3,178,291 3,368,989 3,571,128 3,785,396 4,012,520 4,253,271 4,508,467 4,778,975 5,065,714

2,218,242 2,351,336 2,492,417 2,641,962 2,800,479 2,968,508 3,146,618 3,335,416 3,535,541 3,747,673

5,216,630 5,529,628 5,861,405 6,213,090 6,585,875 6,981,028 7,399,889 7,843,883 8,314,516 8,813,387

Numbers in Thousands Actual Balance Sheet 2001 2002 2003 2004 2005

Total Current Assets 2,057,111 2,088,028 2,524,843 2,572,444 2,874,157

Total Noncurrent Assets 1,994,068 2,023,879 2,044,390 2,032,946 2,047,192

Total Assets 4,051,179 4,111,907 4,569,233 4,605,390 4,921,349

Total Current Liabilities 950,138 885,145 1,122,559 1,341,152 1,623,312

Total Liabilities 2,736,691 2,739,043 2,935,224 2,816,396 2,828,668

Total Shareholder's Equity 1,314,488 1,372,864 1,634,009 1,788,994 2,092,681

Total liabilities and Shareholder's Equity 4,051,179 4,111,907 4,569,233 4,605,390 4,921,349

51

II. Pro-Forma Actual and Forecast Balance Sheet Pro-Forma Actual Balance Sheet

2001 2002 2003 2004 2005

Total Current Assets 50.8 50.80% 55.30% 55.90% 58.4

Total noncurrent Assets 49.2 49.20% 44.70% 44.10% 41.60%

Total Assets 100% 100% 100% 100% 100%

Total Current Liabilities 23.5 21.50% 24.60% 29.10% 33%

Total Liabilities 44.1 45.10% 39.70% 32.10% 24.50%

Total Shareholders Equity 32.4 33.40% 35.70% 38.80% 42.50%

Total Liabilities and Shareholders Equity 100% 100% 100% 100% 100%

Pro-Forma Forecast Balance Sheet 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

58.40% 58.40% 58.40% 58.40% 58.40% 58.40% 58.40% 58.40% 58.40% 58.40%

41.60% 41.60% 41.60% 41.60% 41.6 41.6 41.6 41.6 41.6 41.6

100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

33% 33% 33% 33% 33% 33% 33% 33% 33% 33%

24.50% 24.50% 24.50% 24.50% 24.50% 24.50% 24.50% 24.50% 24.50% 24.50%

42.50% 42.50% 42.50% 42.50% 42.50% 42.50% 42.50% 42.50% 42.50% 42.50%

100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

52

III. Actual and Forecasted Income Statement

Amounts in thousands Actual Income Statement 2001 2002 2003 2004 2005

Net Sales 5,239,241 5,944,656 6,448,678 7,131,388 7,722,860

Cost of sales and related buying and occupancy costs (3,836,961) (3,970,022) (4,215,446) (4,559,388) (4,888,023)

Gross profit 1,402,280 1,974,634 2,233,132 2,572,000 2,834,837

Selling, general and administrative expenses (1,399,568) (1,783,210) (1,899,129) (2,020,233) (2,100,666)

Operating Income 172,712 191,424 334,003 551,767 734,171

Interest expense, net (79,258) (81,921) (90,952) (77,428) (45,300)

other income including finance charges, net 125,259 139,289 155,090 172,942 196,354

earnings before income tax expense 123,152 195,624 398,141 647,281 885,225

income tax expense (123,489) (141,548) (155,300) (253,831) (333,886)

net earnings 102,458 142,589 242,841 393,450 551,339

Forecast Income Statement 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

8,186,232 8,677,405 9,198,050 9,749,933 10,334,929 10,955,025 11,612,326 12,309,066 13,047,609 13,830,466

(5,181,304) (5,492,183) (5,821,714) (6,171,016) (6,541,277) (6,933,754) (7,349,779) (7,790,766) (8,258,212) (8,753,705)

3,004,927 3,185,223 3,376,336 3,578,916 3,793,651 4,021,270 4,262,547 4,518,299 4,789,397 5,076,761

(2,226,706) (2,360,308) (2,501,927) (2,652,042) (2,811,165) (2,979,835) (3,158,625) (3,348,142) (3,549,031) (3,761,973)

778,221 824,915 874,409 926,874 982,486 1,041,436 1,103,922 1,170,157 1,240,366 1,314,788

(48,017) (50,899) (53,953) (57,190) (60,622) (64,259) (68,114) (72,201) (76,533) (81,125)

208,135 220,623 233,861 247,892 262,766 278,532 295,244 312,958 331,736 351,640

938,339 994,639 1,054,317 1,117,576 1,184,631 1,255,709 1,331,051 1,410,914 1,495,569 1,585,303

(353,919) (375,154) (397,664) (421,523) (446,815) (473,624) (502,041) (532,164) (564,093) (597,939)

584,419 619,485 656,654 696,053 737,816 782,085 829,010 878,751 931,476 987,364

53

IV. Pro-Forma Income Statement

Actual Pro-Forma Income Statement 2001 2002 2003 2004 2005

Net Sales 100% 100% 100% 100% 100%

Cost of sales and related buying and occupancy costs 73.20% 67% 65.40% 63.90% 63.30%

Gross profit 26.80% 33% 34.60% 36.10% 36.70%

Selling, general and administrative expenses 26.70% 29.90% 29.40% 28.30% 27.20%

Operating Income 3.30% 3.20% 5.20% 7.70% 9.50%

Interest expense, net 1.50% 1.40% 1.40% 1.10% 0.59%

other income including finance charges, net 2.40% 2.30% 2.40% 2.40% 2.50%

earnings before income tax expense 2.40% 0.30% 6.20% 9.10% 11.50%

income tax expense 2.40% 2.40% 2.40% 3.60% 4.30%

net earnings 1.90% 2.40% 3.80% 5.50% 7.10%

Forecast Pro-Forma Income Statement 2006 2007 2008 2010 2011 2012 2013 2014 2015

100% 100% 100% 100% 100% 100% 100% 100% 100%

63.30% 63.30% 63.30% 63.30% 63.30% 63.30% 63.30% 63.30% 63.30%

36.70% 36.70% 36.70% 36.70% 36.70% 36.70% 36.70% 36.70% 36.70%

27.70% 27.70% 27.70% 27.70% 27.70% 27.70% 27.70% 27.70% 27.70%

9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50%

0.59% 0.59% 0.59% 0.59% 0.59% 0.59% 0.59% 0.59% 0.59%

2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%

11.50% 11.50% 11.50% 11.50% 11.50% 11.50% 11.50% 11.50% 11.50%

4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30%

7.10% 7.10% 7.10% 7.10% 7.10% 7.10% 7.10% 7.10% 7.10%

54

V. Actual and Forecasted Statement of Cash Flows

in thousands Actual Statement of Cash Flows 2001 2002 2003 2004 2005 Net Income $124,688 $90,244 $242,841 $393,450 $551,399 Cash from Operations $488,510 $390,514 $599,282 $606,346 $776,232 Cash from Investments ($370,573) ($489,150) ($309,597) ($110,033) ($292,093) Cash from Financing $137,007 ($130,952) ($73,657) ($475,971) ($382,106) Net Cash Flow $254,944 ($229,588) $216,028 $20,342 $102,033

Forecasted Statement of Cash Flows

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015584,483 $619,552 $656,725 $696,129 $737,896 $782,170 $829,100 $878,846 $931,577 $987,472 822,806 $872,174 $924,505 $979,975 $1,038,774 $1,101,100 $1,167,166 $1,237,196 $1,311,428 $1,390,113

309,619) ($328,196) ($347,887) ($368,761) ($390,886) ($414,340) ($439,200) ($465,552) ($493,485) ($523,094)405,032) ($429,334) ($455,094) ($482,400) ($511,344) ($542,025) ($574,546) ($609,019) ($645,560) ($684,294)108,155 $114,644 $121,523 $128,814 $136,543 $144,736 $153,420 $162,625 $172,383 $182,726

VI. Pro Forma Statement of Cash Flows

percentage of net income Actual Statement of Cash Flows 2001 2002 2003 2004 2005 Net Income 100.0% 100.0% 100.0% 100.0% 100.0% Cash from Operations 391.8% 432.7% 246.8% 154.1% 140.8% Cash from Investments -297.2% -542.0% -127.5% -28.0% -53.0% Cash from Financing 109.9% -145.1% -30.3% -121.0% -69.3% Net Cash Flow 204.5% -254.4% 89.0% 5.2% 18.5%

Forecasted Statement of Cash Flows

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%140.8% 140.8% 140.8% 140.8% 140.8% 140.8% 140.8% 140.8% 140.8% 140.8%-53.0% -53.0% -53.0% -53.0% -53.0% -53.0% -53.0% -53.0% -53.0% -53.0%-69.3% -69.3% -69.3% -69.3% -69.3% -69.3% -69.3% -69.3% -69.3% -69.3%18.5% 18.5% 18.5% 18.5% 18.5% 18.5% 18.5% 18.5% 18.5% 18.5%

55

55

APPENDIX C Cost of Capital

I. Cost of Debt Numbers in Thousands Long Term Debt Schedule 2006

2005 2006 Percent of

total Rate Source Weighted

Rate Private Label Securitization, 4.82%, due 2006 300,000 300,000 32.11% 4.82% 10-K 1.55% Senior debentures, 6.95%, due 2028 300,000 300,000 32.11% 6.95% 10-K 2.23% Senior notes, 5.625%, due 2009 250,000 250,000 26.76% 5.63% 10-K 1.50% Notes payable, 6.7%, due 2005 96,027 0.00% 6.70% 10-K 0.00% Mortgage payable, 7.68%, due 2020 75,406 72,633 7.77% 7.68% 10-K 0.60%

Other 16,495 22,811 2.44% 4.80% St.Louis Fed 0.12%

Fair market value of interest rate swap (7,821) (11,050) -1.18% 5.63% 10-K -0.07% Total long-term debt 1,030,107 934,394 100.00% 5.93% Less current portion (101,097) (306,618) Total due beyond one year 929,010 627,776 2006

Current Liabilities Percent of

total Rate Source Weighted

Rate

Accounts payable 482,394 540,019 33.27% 5.97% St. Louis Fed 1.99%

Accrued salaries, wages and related benefits 287,904 285,982 17.62% 6.08% 10-K 1.07%

Other current liabilities 354,201 409,076 25.20% 5.84% St. Louis Fed 1.47%

Income taxes payable 115,556 81,617 5.03% 5.28% St. Louis Fed 0.27%

Current portion of long term debt 101,097 306,618 18.89% 5.93% 10-K 1.12% Total current liabilities 1,341,152 1,623,312 100.00% 5.91% Average interest rate on long term debt 5.931% Average interest rate on current debt 5.914% Average interest rate of debt (Kd) 5.923% Tax rate 2003 2004 2005 Effective tax rate 39.00% 39.20% 37.70%

56

56

II. Risk Free Return Data Date Close Dividends JWN

Returns Close S&P

Returns mkt premium

Riskfree annual Monthly Risk Free

2-Oct-06

47.35 47.35 0.119385 1377.94 0.031508 0.0276 10/1/2006 4.69 0.00391

1-Sep-06

42.3 42.3 0.129355 1335.85 0.024566 0.0207 9/1/2006 4.67 0.00389

1-Aug-06

37.35 0.105 37.455 0.091983 1303.82 0.021274 0.0173 8/1/2006 4.82 0.00402

3-Jul-06 34.3 34.3 -0.06027 1276.66 0.005086 0.0009 7/1/2006 5.04 0.00420 1-Jun-06

36.5 36.5 -0.01178 1270.2 8.66E-05 -0.0041 6/1/2006 5.07 0.00423

1-May-06

36.83 0.105 36.935 -0.03639 1270.09 -0.03092 -0.0351 5/1/2006 5.00 0.00417

3-Apr-06

38.33 38.33 -0.02169 1310.61 0.012156 0.0081 4/1/2006 4.90 0.00408

1-Mar-06

39.18 39.18 0.028212 1294.87 0.011096 0.0072 3/1/2006 4.72 0.00393

1-Feb-06

38 0.105 38.105 -0.08665 1280.66 0.000453 -0.0034 2/1/2006 4.57 0.00381

3-Jan-06

41.72 41.72 0.115508 1280.08 0.025467 0.0218 1/1/2006 4.35 0.00363

1-Dec-05

37.4 37.4 0.011768 1248.29 -0.00095 -0.0046 12/1/2005 4.39 0.00366

1-Nov-05

36.88 0.085 36.965 0.066811 1249.48 0.035186 0.0315 11/1/2005 4.45 0.00371

3-Oct-05

34.65 34.65 0.009615 1207.01 -0.01774 -0.0213 10/1/2005 4.33 0.00361

1-Sep-05

34.32 34.32 0.019456 1228.81 0.006949 0.0036 9/1/2005 4.01 0.00334

1-Aug-05

33.58 0.085 33.665 -0.09038 1220.33 -0.01122 -0.0147 8/1/2005 4.12 0.00343

1-Jul-05 37.01 37.01 -0.4555 1234.18 0.035968 0.0327 7/1/2005 3.98 0.00332 1-Jun-05

67.97 67.97 0.111984 1191.33 -0.00014 -0.0033 6/1/2005 3.77 0.00314

2-May-05

61.04 0.085 61.125 0.202538 1191.5 0.029952 0.0267 5/1/2005 3.85 0.00321

1-Apr-05

50.83 50.83 -0.08216 1156.85 -0.02011 -0.0234 4/1/2005 4.00 0.00333

1-Mar-05

55.38 55.38 0.02889 1180.59 -0.01912 -0.0226 3/1/2005 4.17 0.00348

1-Feb-05

53.76 0.065 53.825 0.115544 1203.6 0.018903 0.0158 2/1/2005 3.77 0.00314

3-Jan-05

48.25 48.25 0.032527 1181.27 -0.02529 -0.0284 1/1/2005 3.71 0.00309

1-Dec-04

46.73 46.73 0.06653 1211.92 0.032458 0.0295 12/1/2004 3.60 0.00300

1-Nov-04

43.75 0.065 43.815 0.014706 1173.82 0.038595 0.0357 11/1/2004 3.53 0.00294

1-Oct-04

43.18 43.18 0.129184 1130.2 0.014014 0.0112 10/1/2004 3.35 0.00279

1-Sep-04

38.24 38.24 0.028095 1114.58 0.009364 0.0066 9/1/2004 3.36 0.00280

57

2-Aug-04

37.13 0.065 37.195 -0.15273 1104.24 0.002287 -0.0006 8/1/2004 3.47 0.00289

1-Jul-04 43.9 43.9 0.030275 1101.72 -0.03429 -0.0374 7/1/2004 3.69 0.00308 1-Jun-04

42.61 42.61 0.049378 1140.84 0.017989 0.0147 6/1/2004 3.93 0.00328

3-May-04

40.55 0.055 40.605 0.13963 1120.68 0.012083 0.0089 5/1/2004 3.85 0.00321

1-Apr-04

35.63 35.63 -0.10702 1107.3 -0.01679 -0.0196 4/1/2004 3.39 0.00283

1-Mar-04

39.9 39.9 0.017987 1126.21 -0.01636 -0.0187 3/1/2004 2.79 0.00233

2-Feb-04

39.14 0.055 39.195 -0.00267 1144.94 0.012209 0.0097 2/1/2004 3.07 0.00256

2-Jan-04

39.3 39.3 0.145773 1131.13 0.017276 0.0147 1/1/2004 3.12 0.00260

1-Dec-03

34.3 34.3 -0.00738 1111.92 0.050765 0.0480 12/1/2003 3.27 0.00273

3-Nov-03

34.5 0.055 34.555 0.133322 1058.2 0.007129 0.0044 11/1/2003 3.29 0.00274

1-Oct-03

30.49 30.49 0.22894 1050.71 0.054961 0.0523 10/1/2003 3.19 0.00266

2-Sep-03

24.81 24.81 -0.05015 995.97 -0.01194 -0.0146 9/1/2003 3.18 0.00265

1-Aug-03

26.07 0.05 26.12 0.237328 1008.01 0.017873 0.0151 8/1/2003 3.37 0.00281

1-Jul-03 21.11 21.11 0.081455 990.31 0.016224 0.0138 7/1/2003 2.87 0.00239 2-Jun-03

19.52 19.52 0.04385 974.5 0.011322 0.0094 6/1/2003 2.27 0.00189

1-May-03

18.65 0.05 18.7 0.079054 963.59 0.050899 0.0488 5/1/2003 2.52 0.00210

1-Apr-03

17.33 17.33 0.069753 916.92 0.081044 0.0786 4/1/2003 2.93 0.00244

3-Mar-03

16.2 16.2 -0.05041 848.18 0.008358 0.0060 3/1/2003 2.78 0.00232

3-Feb-03

17.01 0.05 17.06 -0.05432 841.15 -0.017 -0.0194 2/1/2003 2.90 0.00242

2-Jan-03

18.04 18.04 -0.04902 855.7 -0.02741 -0.0300 1/1/2003 3.05 0.00254

2-Dec-02

18.97 18.97 -0.05387 879.82 -0.06033 -0.0629 12/1/2002 3.03 0.00253

1-Nov-02

20 0.05 20.05 0.006526 936.31 0.05707 0.0545 11/1/2002 3.05 0.00254

1-Oct-02

19.92 19.92 0.110368 885.76 0.086449 0.0840 10/1/2002 2.95 0.00246

3-Sep-02

17.94 17.94 -0.0743 815.28 -0.11002 -0.1125 9/1/2002 2.94 0.00245

1-Aug-02

19.33 0.05 19.38 0.025397 916.07 0.004881 0.0021 8/1/2002 3.29 0.00274

1-Jul-02 18.9 18.9 -0.16556 911.62 -0.079 -0.0822 7/1/2002 3.81 0.00318 3-Jun-02

22.65 22.65 -0.08169 989.82 -0.07246 -0.0759 6/1/2002 4.19 0.00349

1-May-02

24.62 0.045 24.665 0.051364 1067.14 -0.00908 -0.0128 5/1/2002 4.49 0.00374

1-Apr- 23.46 23.46 -0.04245 1076.92 -0.06142 -0.0653 4/1/2002 4.65 0.00388

58

02 1-Mar-02

24.5 24.5 -0.0394 1147.39 0.036739 0.0328 3/1/2002 4.74 0.00395

1-Feb-02

25.46 0.045 25.505 0.008103 1106.73 -0.02077 -0.0243 2/1/2002 4.30 0.00358

2-Jan-02

25.3 25.3 0.250618 1130.2 -0.01557 -0.0192 1/1/2002 4.34 0.00362

3-Dec-01

20.23 20.23 0.06614 1148.08 0.007574 0.0039 12/1/2001 4.39 0.00366

1-Nov-01

18.93 0.045 18.975 0.345745 1139.45 0.075176 0.0719 11/1/2001 3.97 0.00331

1-Oct-01

14.1 14.1 -0.02422 1059.78 0.018099 0.0148 10/1/2001 3.91 0.00326

4-Sep-01

14.45 14.45 -0.28092 1040.94 -0.08172 -0.0852 9/1/2001 4.12 0.00343

1-Aug-01

20.05 0.045 20.095 -0.10689 1133.58 -0.06411 -0.0679 8/1/2001 4.57 0.00381

2-Jul-01 22.5 22.5 0.212938 1211.23 -0.01074 -0.0147 7/1/2001 4.76 0.00397 1-Jun-01

18.55 18.55 -0.00135 1224.38 -0.02504 -0.0290 6/1/2001 4.81 0.00401

1-May-01

18.53 0.045 18.575 0.01006 1255.82 0.00509 0.0010 5/1/2001 4.93 0.00411

2-Apr-01

18.39 18.39 0.129607 1249.46 0.076814 0.0728 4/1/2001 4.76 0.00397

1-Mar-01

16.28 16.28 -0.11976 1160.33 -0.0642 -0.0681 3/1/2001 4.64 0.00387

1-Feb-01

18.45 0.045 18.495 -0.09294 1239.94 -0.09229 -0.0964 2/1/2001 4.89 0.00408

2-Jan-01

20.39 20.39 0.120946 1366.01 0.034637 0.0306 1/1/2001 4.86 0.00405

1-Dec-00

18.19 18.19 0.129463 1320.28 0.004053 -0.0003 12/1/2000 5.17 0.00431

1-Nov-00

16.06 0.045 16.105 -0.02038 1314.95 -0.08007 -0.0848 11/1/2000 5.70 0.00475

2-Oct-00

16.44 16.44 0.056555 1429.4 -0.00495 -0.0098 10/1/2000 5.78 0.00482

1-Sep-00

15.56 15.56 -0.13771 1436.51 -0.05348 -0.0584 9/1/2000 5.93 0.00494

1-Aug-00

18 0.045 18.045 0.031143 1517.68 0.060699 0.0556 8/1/2000 6.06 0.00505

3-Jul-00 17.5 17.5 -0.27446 1430.83 -0.01634 -0.0215 7/1/2000 6.18 0.00515 1-Jun-00

24.12 24.12 -0.04153 1454.6 0.023934 0.0187 6/1/2000 6.30 0.00525

1-May-00

25.12 0.045 25.165 -0.09511 1420.6 -0.02191 -0.0275 5/1/2000 6.69 0.00558

3-Apr-00

27.81 27.81 -0.05729 1452.43 -0.0308 -0.0360 4/1/2000 6.26 0.00522

1-Mar-00

29.5 29.5 0.381733 1498.58 0.09672 0.0913 3/1/2000 6.50 0.00542

1-Feb-00

21.31 0.04 21.35 -0.02955 1366.42 -0.02011 -0.0257 2/1/2000 6.68 0.00557

31-Jan-00

22 22 1394.46 1/1/2000 6.58 0.00548

59

59

APPENDIX D Valuation Models

I. Discounted Dividends

Discounted Dividends Evaluation Years from valuation date 1 2 3 4 5 6 7 8 9 10 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 TerminaDividends per share 0.33 0.34 0.35 0.36 0.37 0.38 0.39 0.41 0.42 0.43 0.44 0.45Present value factor 0.929 0.862 0.801 0.743 0.690 0.641 0.595 0.553 0.513 0.477 Present value of future dividends 0.316 0.302 0.289 0.276 0.264 0.253 0.242 0.231 0.221 0.211 Terminal Total present value of forecast future dividends 2.393 0.45 Continuing (Terminal) value (assume no growth) 0.45 9.58671

Present value of continuing (terminal) value 4.920 Sensitivity Analysis g Estimated value per share 7.312 0 0.01 0.03 0.05 Ke 0.04 $10.74 $13.37 $34.45 ($28.78) Actual price per share $46.30 0.05 $8.50 $9.95 $17.21 $0.00 Cost of equity 7.69% 0.06 $7.02 $7.91 $11.46 $29.22 Growth rate 0.03 0.07 $5.96 $6.55 $8.59 $14.71 0.08 $5.18 $5.58 $6.86 $9.87

60

II. Discounted Free Cash Flows (Amounts in thousands of dollars except per share data) 2005 2006 2007 2008 2009 2010 2011 2012 Cash Flow from Operations $776,232 $822,806 $863,946 $907,144 $952,501 $1,000,126 $1,050,132 $1,102,639 Cash Provided (Used) by Investing Activities ($292,093) ($306,698) ($322,033) ($338,134) ($355,041) ($372,793) ($391,433) ($411,004) Free Cash Flow (to firm) 516,108 541,914 569,009 597,460 627,333 658,699 691,634 discount rate (5.39% WACC) 0.949 0.900 0.854 0.811 0.769 0.730 0.692 Present Value of Free Cash Flows 489712.8 487900.6 486095.1 484296.2 482504.1 480718.6 478939.6 Total Present Value of Annual Cash Flows 4,743,437 Continuing (Terminal) Value (assume no growth) 828,042 Sensitivity Analysis Present Value of Continuing (Terminal) Value 464,792 g Value of the Firm (end of 2005) 5,208,229 0.01 0.03 0.06 0.1 Book Value of Debt and Preferred Stock 2,828,668 WACC 0.02 $4.60 $4.85 $5.23 $5.74 Value of Equity (end of 2005) 2,379,561 0.04 $3.57 $3.79 $4.13 $4.58 Estimated Value per Share $3.47 0.0539 $2.95 $3.16 $3.47 $3.89 0.07 $2.33 $2.52 $2.80 $3.19 Earnings Per Share 2.03 0.1 $1.36 $1.52 $1.77 $2.10 Dividends per share 0.32 Book Value Per Share 7.76 2014 2015 2016 Terminal $1,157,771 $1,215,659 $1,276,442 Actual Price per share $46.30 ($431,554) ($453,132) ($475,789) 726,216 762,527 800,653 828,042 WACC after tax 5.39% Growth Rate 6.00%

61

III. Residual Income

Residual Income 1 2 3 4 5 6 7 8 9 10 Forecast Years 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Beginning BE (per share) 7.76 9.5213 11.3354 13.204 15.1286 17.111 19.1528 21.256 23.4221 25.653Earnings Per Share 2.03 $2.09 $2.15 $2.22 $2.28 $2.35 $2.42 $2.50 $2.57 $2.65 $2.73 Dividends per share 0.32 $0.33 $0.34 $0.35 $0.36 $0.37 $0.38 $0.39 $0.41 $0.42 $0.43 Ending BE (per share) 7.76 9.52 11.34 13.20 15.13 17.11 19.15 21.26 23.42 25.65 27.95 Ke 7.69% "Normal" Income 0.16 0.17 0.17 0.18 0.18 0.19 0.19 0.20 0.20 0.21 Residual Income (RI) 1.93 1.99 2.05 2.11 2.17 2.24 2.30 2.37 2.44 2.52 Discount Factor 0.929 0.862 0.801 0.743 0.690 0.641 0.595 0.553 0.513 0.477 Present Value of RI 1.79 1.71 1.64 1.57 1.50 1.43 1.37 1.31 1.25 1.20 ValuePercent BV Equity (per share) 2005 7.76 18.57% Total PV of RI (end 2005) 13.59 32.51% Continuation (Terminal) Value 2.45 Sensitivity Analysis 39.84 PV of Terminal Value (end 2005) 20.44 48.92% g Estimated Value (2005) $41.79 100.00% 0 0.01 0.03 0.05 Ke 0.04 $55.10 $66.75 $155.86 ####### 0.05 $45.58 $52.26 $83.82 $0.00 0.07 $34.59 $37.59 $47.30 $74.10 Actual Price per share $46.30 0.08 $31.12 $33.33 $39.83 $53.58 Growth 3% 0.1 $26.21 $27.56 $31.10 $36.75

62

IV. Long Run Residual Income Perpetuity

Long Run Residual Income Perpituity change In RI (0.05) (0.03) (0.02) (0.02) (0.01) (0.01) (0.01) (0.01) (0.01) 1 2 3 4 5 6 7 8 9 10 Forecast Years 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Beginning BE (per share) 7.76 9.4871 11.231 12.9933 14.7727 16.57 18.3851 20.2185 22.07 23.94Earnings Per Share 2.03 $2.05 $2.07 $2.09 $2.11 $2.13 $2.15 $2.18 $2.20 $2.22 $2.24 Dividends per share 0.32 $0.32 $0.33 $0.33 $0.33 $0.34 $0.34 $0.34 $0.35 $0.35 $0.35 Ending BE (per share) 7.76 9.49 11.23 12.99 14.77 16.57 18.39 20.22 22.07 23.94 25.83 Ke 7.69% Forecast Growth Rate 1% ROE 26.42% 21.83% 18.62% 16.26% 14.44% 13.00% 11.84% 10.87% 10.06% 9.37%Growth in BE 22.26% 18.39% 15.69% 13.70% 12.17% 10.95% 9.97% 9.16% 8.47% 7.89%

Actual Price per share $46.30 Average ROE 15.27% Average Growth in BVE 12.86% LR Res Inc Perp Value ($3.61)

63

Sensitivity Analysis g g 0.1 0.12 0.1342 0.15 0.1 0.12 0.1342 0.15Ke 0.01 ($5.11) ($2.77) ($1.57) ($0.52) ROE 0.1 $0.00 $3.60 $4.63 $5.31

0.05 ($9.20) ($4.36) ($2.31) ($0.72) 0.12 ($6.73) $0.00 $1.92 $3.19 0.0769 ($19.96) ($7.08) ($3.40) ($0.99) 0.1593 ($19.96) ($7.08) ($3.40) ($0.99) 0.12 $23.01 $0.00 ($13.72) ($2.41) 0.2 ($33.65) ($14.42) ($8.92) ($5.31) 0.14 $11.50 $15.25 $33.58 ($7.22) 0.24 ($47.11) ($21.63) ($14.34) ($9.56) Ke 0.01 0.05 0.0769 0.12 0.14 ROE 0.1 $2.14 $3.15 $4.63 $18.72 ($45.45) 0.12 $0.89 $1.31 $1.92 $7.76 ($18.84) 0.1593 ($1.57) ($2.32) ($3.40) ($13.77) $33.70 0.2 ($4.11) ($6.07) ($8.93) ($36.06) $87.57 0.24 ($6.61) ($9.76) ($14.35) ($57.97) $140.77

64

64

V. Abnormal Earnings Growth 2001 2002 2003 2004 2005 EPS 0.78 0.93 0.89 1.41 2.03 DPS 0.18 0.10 0.205 0.24 0.32 DPS invested at Ke (Drip) 0.014 0.008 0.016 0.018 Cum-Dividend Earnings 0.94 0.90 1.43 2.05 Normal Earnings 0.84 1.00 0.96 1.52 Abnormal Earning Growth (AEG) 0.10 (0.10) 0.47 0.53 PV Factor PV of AEG Core EPS 2.03

Total PV of AEG (0.541) Continuing (Terminal) Value PV of Terminal Value Total PV of AEG (0.541) Total Average EPS Perp (t+1) 1.489 Capitalization Rate (perpetuity) 0.07694 Value $19.35 Ke 7.69% g 0.03 Actual Share Price - Nov 1, 2006 $46.30

65

1 2 3 4 5 6 7 8 9 10

Forecast Years 2006 2007 2008 2009 2010 2011 2012 2013 2014 20152.09 2.15 2.22 2.28 2.35 2.42 2.50 2.57 2.65 2.730.33 0.34 0.35 0.36 0.37 0.38 0.39 0.41 0.42 0.43

0.025 0.025 0.026 0.027 0.028 0.029 0.029 0.030 0.031 0.0322.12 2.18 2.24 2.31 2.38 2.45 2.53 2.60 2.68 2.762.19 2.25 2.32 2.39 2.46 2.53 2.61 2.69 2.77 2.85

(0.07) (0.07) (0.07) (0.08) (0.08) (0.08) (0.08) (0.09) (0.09) (0.09)0.929 0.862 0.801 0.743 0.690 0.641 0.595 0.553 0.513 0.477

(0.066) (0.063) (0.060) (0.057) (0.055) (0.053) (0.050) (0.048) (0.046) (0.044)

Sensitivity Analysis g 0 0.01 0.03 0.05

Ke 0.04 $37.00 $40.34 $47.84 $56.59 0.05 $27.49 $29.94 $35.45 $41.86 0.07 $17.03 $18.51 $21.84 $25.71 0.08 $13.93 $15.12 $17.79 $20.91 0.1 $9.78 $10.59 $12.42 $14.53

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Works Cited

1. “Nordstroms Inc. 10-K”. PriceWaterhouseCoopers Technology

Center. 29th January 2005. PriceWaterhouseCoopers. November 2006.

http://edgarscan.pwcglobal.com

2. “Investor Relations”. Nordstrom Inc 2006. November 2006.

www.Nordstrom.com

3. “Industries”. Yahoo Finance 2006.

http://finance.yahoo.com

4. Bernard; Healy; Palepu. (2004). Business Analysis & Valuation:

Using Financial Statements, Third Edition. Ohio: Southwestern.