External Funding Proposal for Nordstrom Inc. to Expand in Dubai

This report presents an external funding proposal for Nordstrom Inc which is considering expanding in Dubai. The financial impact, startup expenses, and sources of capital are discussed. The report also suggests appropriate sources of finance for the expansion plan.

MBA 640 Final Project Milestone
1

Introduction
This report presents an external funding proposal for Nordstrom Inc which is a company
engaged in the business of retail sales. The company has been operating predominantly in
various states of the USA and now it is considering expanding in Dubai. There has been found a
lucrative opportunity to open retail stores in Dubai. However, the competition is stiff there in
Dubai but the company is confident of doing well in the market. The company has been
operating in the retails sales industry since a century over so it has a good backing of experience
and huge amount of resources.
Nordstrom was founded in the year 1901 and since then it has grown manifold reaching
today in 40 states of the USA with 120 full line stores, 239 rack stores, and some boutiques and
clearance stores. Currently, the company employs a workforce of 76,000 employees (Yahoo
finance, 2018). It operates with the net worth of $870 million which shows that the company has
a good backing of resources to successfully implement the expansion plan.
Justification
Financial Impact
In order to assess the financial impact of expansion of the business in Dubai, projections
for 10 years in regards to revenues, pre-tax income and operating cash flows have been made.
Further, the net benefits of the expansion project have also been computed to analyze whether
the expansion plan would be profitable or not.
Startup Expenses
Nordstorm Inc.
Sources of Capital $ million
2

Owner's Equity
Share capital 270.00
Bank Loans 70.00
Other loans 8.00
Total 348.00
Startup Expenses
Initial investment 348.00
(assumed 40% of current net worth)
NordStorm INC: Consolidated
financial projection without
proposed expansion
Base year 2017
$
Milli
on
Assumpti
ons
Revenues
147
57
Inflation rate in USA is 2%, so assumed growth rate
assumed for first 4 years 2% and after that 4%
Pre tax income 684
Pre tax income to revenue ratio
assumed to be same
Operating cash flows
165
8
Operating cash to revenues
ratio assumed to be same
Pre tax income to revenues
4.64
%
Operating cash flows to revenue
11.2
4%
Growth rate 1 2%
Growth rate 2 4%
201
8
201
9
202
0
202
1
202
2
202
3
202
4
202
5
202
6
202
7
Revenue
15,0
52.1
4
15,3
53.1
8
15,6
60.2
5
15,9
73.4
5
16,6
12.3
9
17,2
76.8
9
17,9
67.9
6
18,6
86.6
8
19,4
34.1
5
20,2
11.5
1
Pre tax income
697.
68
711.
63
725.
87
740.
38
770.
00
800.
80
832.
83
866.
14
900.
79
936.
82
Operating cash flows
1,69
1.16
1,72
4.98
1,75
9.48
1,79
4.67
1,86
6.46
1,94
1.12
2,01
8.76
2,09
9.51
2,18
3.49
2,27
0.83
3

NordStorm INC: Consolidated
financial projection with
proposed expansion
Base year 2017
$
Milli
on
Assumpti
ons
Revenues
147
57
Inflation rate in USA is 2%, so assumed growth rate
assumed for first 4 years 2% and after that 4%
Pre tax income 684
Pre tax income to revenue ratio
assumed to be same
Operating cash flows
165
8
Operating cash to revenues
ratio assumed to be same
Pre tax income to revenues
4.64
% As per Khaleej Times Industry growth rate in UAE is
4.89%, assumed that same with continue for next 4
years and then increase to 6%Operating cash flows to revenue
11.2
4%
Also assumed that expansion
will add 20% in revenues
Growth rate 1 2%
Growth rate 2 4%
Growth rate 1 Expansion
4.89
%
Growth rate 2 Expansion 6%
201
8
201
9
202
0
202
1
202
2
202
3
202
4
202
5
202
6
202
7
Revenue
15,0
52.1
4
15,3
53.1
8
15,6
60.2
5
15,9
73.4
5
16,6
12.3
9
17,2
76.8
9
17,9
67.9
6
18,6
86.6
8
19,4
34.1
5
20,2
11.5
1
Revenue from expansion
3,01
1.90
3,07
2.14
3,13
3.58
3,19
6.25
3,32
4.47
3,45
7.45
3,59
5.75
3,73
9.58
3,88
9.16
4,04
4.73
Total
18,0
64.0
4
18,4
25.3
2
18,7
93.8
3
19,1
69.7
0
19,9
36.8
6
20,7
34.3
4
21,5
63.7
1
22,4
26.2
6
23,3
23.3
1
24,2
56.2
4
Pre tax income
697.
68
711.
63
725.
87
740.
38
770.
00
800.
80
832.
83
866.
14
900.
79
936.
82
Pre tax income Expansion
139.
60
142.
40
145.
24
148.
15
154.
09
160.
26
166.
67
173.
33
180.
27
187.
48
Total
837.
28
854.
03
871.
11
888.
53
924.
09
961.
05
999.
50
1,03
9.48
1,08
1.06
1,12
4.30
Operating cash flows
1,69 1,72 1,75 1,79 1,86 1,94 2,01 2,09 2,18 2,27
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1.16 4.98 9.48 4.67 6.46 1.12 8.76 9.51 3.49 0.83
Operating cash flows Expansion
338.
40
345.
17
352.
07
359.
11
373.
52
388.
46
403.
99
420.
15
436.
96
454.
44
Total
2,02
9.56
2,07
0.15
2,11
1.55
2,15
3.78
2,23
9.98
2,32
9.57
2,42
2.76
2,51
9.67
2,62
0.45
2,72
5.27
Cash benefits and outflows associated with the proposed expansion
Years 201
8
201
9
202
0
202
1
202
2
202
3
202
4
202
5
202
6
202
7
Total
s
Operating Cash inflows
with expansion
2,02
9.56
2,07
0.15
2,11
1.55
2,15
3.78
2,23
9.98
2,32
9.57
2,42
2.76
2,51
9.67
2,62
0.45
2,72
5.27
23,2
22.7
4
Less: Operating Cash
inflows without
expansion
1,69
1.16
1,72
4.98
1,75
9.48
1,79
4.67
1,86
6.46
1,94
1.12
2,01
8.76
2,09
9.51
2,18
3.49
2,27
0.83
19,3
50.4
8
Incremental cash
inflows
338.
40
345.
17
352.
07
359.
11
373.
52
388.
46
403.
99
420.
15
436.
96
454.
44
3,87
2.26
Outflows associated
with expansion
Tax
13.9
6
14.2
4
14.5
2
14.8
1
15.4
1
16.0
3
16.6
7
17.3
3
18.0
3
18.7
5
159.
75
Finance charge
(miscellaneous) 1.4 1.40
Working capital
30.1
2
30.7
2
31.3
4
31.9
6
33.2
4
34.5
7
35.9
6
37.4
0
38.8
9
40.4
5
344.
65
Capital expenditure
60.2
4
61.4
4
62.6
7
63.9
3
66.4
9
69.1
5
71.9
1
74.7
9
77.7
8
80.8
9
689.
30
Total
105.
72
106.
40
108.
53
110.
70
115.
14
119.
75
124.
54
129.
52
134.
70
140.
09
1,19
5.10
Net benefits
232.
68
238.
76
243.
54
248.
41
258.
37
268.
71
279.
46
290.
63
302.
26
314.
35
2,67
7.16
Assumptions
It is assumed that business in Dubai will fall in lowest
tax slab of 10%
Initial finance charges for laon are assumed to be 2% of laon amount, assumed
that there will be no interest charge
Working capital assumed to be 1% of
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revenues of expansion
Capital expenditure is assumed to be 2% of
revenues of expansion
From the figures shown above it could be observed that the net cumulative benefits of
expanding in Dubai over the 10 years would be $2,677.16 million.
Financing
Raising Money Using Internal and External Sources
The selection of appropriate source of finance depends on various factors. There are multiple
sources of finance available in the market for the existing as well as new businesses. For the new
businesses it is generally difficult to generate funds from almost all the sources of finance they
do not have that a sound financial background to prove their creditworthiness and future
financial viability. However, each source has its own its pros and cons which are discussed
further. A business firm has to take into consideration various factors before selecting the most
appropriate source of finance. These factors are: the term for which funds are required, the
quantum of funds, type of security that it can give and so on.
Commercial papers:
Pros:
 Funding through the commercial papers allow the company to generate funds without
providing any type of asset security.
 The cost of generating funds through commercial papers is generally lower than the cost
of borrowing the bank loan or issue of bonds as higher interest rates are to be paid for the
latter sources.
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Cons:
 However, only those firms that have sound credit ratings can generate funds through the
use of commercial paper financing.
 Also, unlike any other source of finance such as equity financing, loans, bond financing,
funds can only be raised for shorter durations i.e. for 90 to 364 days (Carty, 2017).
Bank loans:
Pros:
 Bank loans can be taken for short term as well as long term periods.
 No control over the ownership of the business is required to be transferred as required in
equity financing.
 In case of bank loan financing, the tax benefits can be availed for the interest cost
incurred for the loans.
Cons:
 Bank loans generally require keeping of collateral securities for the amount borrowed by
the firm. Such security can be made in the form of business assets or other securities.
 Usually bank loans involve higher cost of borrowing as compared to other sources of
finance.
 Bank loans requires the firm to have sound credit ratings and strong financials which
might not be possible in case of new businesses
Bond financing:
Pros:
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 Easier and advantageous credit terms than bank loan can be availed in bond financing.
 The interest rate of bonds is generally lesser than the bank loan interest rate.
 Unlike equity financing, bonds does not result in loss of ownership over company.
Cons:
 Unlike bank loans, the terms of bonds cannot be easily modified.
 The involvement of fixed payments on regular basis makes bonds less suitable than
equity financing where there is no fixed payment involved at each regular interval.
Equity financing:
Pros:
 The risk of insolvency in case of debt financing is less in case of equity financing as
funds are generated from the internal sources and from the external sources.
 Comparatively lower cost of financing than the bonds or bank loans as dividends are to
be paid and the rate of dividend are lower than interest rate of bank loan (Liberis, 2017).
Cons:
 The company issuing equity shares has to lose control over the business as the
shareholders become the owners.
 Higher returns are expected from the investors (shareholders) of the company.
Viability of a Business Combination as a Mechanism for Expansion
Business combination takes place when two or more than two business corporations enter into an
agreement to work as a single entity for some common purposes. In the recent times the concept
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of business combination has become quite common because of intense competition in the
market. There can be various types of business combinations entered into by the entities such as
mergers and acquisition, joint venture, alliances etc. (Ahmed, 2017). Not merely to combat the
intense competitive forces of the market these combinations are entered into by the business
parties but to maximise the business profits by achieving the economies of scale, to widen the
pool of economic resources, to expand the business market and achieve monopoly, to make use
of improved methods and technologies of production and so on. In order to expand the business
in the new market, business combinations can be considered as the most viable option when the
company acquires or enter into joint venture or alliance agreement with such company that
already exists in the proposed market as it will provide them to achieve the benefits of well-
established market base (Casseres, 2015).
Track Record
Indicators of Financial Performance and Health
Nordstrom has been a highly successful company in the retail sales industry and the same
is evident from the growth being shown by the company in the past. The company started its
journey with a few small retails shops in the year 1901 and at present it owns 343 stores. The
company has been earning good amount of profits over the year however in the past recent few
years the profits have declined. The decline in profits has mainly been observed due stiff
competition in the USA in the retail sales industry. The competition in the retail sales industry is
not stiff in the USA alone but it has spread across the globe. The introduction of online sales has
made it easy for the companies to operate at the global level. The companies such as Amazon,
Snapdeal, Woolworths, and Alibaba have captured the market with their global presence in many
countries (Deliotte, 2018). However, it has been observed that the competition in the retail
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offline sales in Dubai is relatively low. There has been identified one main competitor of
Nordstrom i.e. Macy.
The selected financial data which supports the company’s financial footing and could be used to
argue the lenders to approve the loan is shown below:
(Annual Report, 2017)
It could be observe that the gross profit of the company has increased from $4,429
million in 2013 to $5,247 million in 2018. Further, despite increase in the competition at rapid
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pace, the company is able to sustain net sales increases of 4.4%. The other indicators like EBIT
to sales and return on assets show that financial has not been so good in the recent years but the
company is capable to swing back and perform. It is backed by experienced employees and good
market reputation of over a century. Further, the expansion program of the company to open
retail stores in Dubai is more likely to be succeeded. The company may operate in Dubai with
low cost of funding and it can also avail the advantages of low tax rates. The low finance cost
and tax rates would help the company significantly in improving its financial performance. It is
expected that the pre tax income of the company would reach $871.11 million by 2020 which is
at $684 million in 2017. The revenues are expected to reach to $18,793.83 by 2020. Therefore,
overall it appears that the expansion program of the company would be successful and the
financial performance of the company is going to improve in the upcoming years.
Legal and Ethical Financial Behavior
From the ethical and behavioral view points, there has not been observed any allegations
again the company. The company has been fulfilling its commitments with honesty. The
auditor’s report on the current financial statements of the company certifies that the company has
prepared the financial statements in conformity with the issued standards. Further, there is no
qualification or reservations being made by the auditor in regards to the non compliance with any
of applicable laws and regulations. So, the company is free of any sort of risk emanating from
the breach of laws of the regulations. This may boost up the confidence of the investors and push
them to invest in the company.
Conclusion
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Overall, it seems that Nordstrom has very high reputation in the market and it is backed
by experienced employees and huge amount of resources. However, financial performance of the
company has slightly been towards downside in the recent few years but the company is capable
of bouncing back and return to the track of growth. The expansion of the company in Dubai
would be a successful venture as suggested by the positive financial projections.
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References
Deliotte. 2018. 2018 retail, wholesale and distribution industry trends outlook. Retrieved 11
September 2018 from,
https://www2.deloitte.com/us/en/pages/consumer-business/articles/retail-distribution-
industry-outlook.html
Ahmed, J. (2017). Business Combination: Definition, Types, Forms, Causes.Retrieved from:
http://www.bm3school.com/2017/12/business-combination-forms-types-causes.html
Carty, S.L. (2017). Differences Between Commercial Loans & Commercial Papers.Retrieved
from: https://bizfluent.com/list-7186274-differences-commercial-loans-commercial-
papers.html
Casseres, B.G. (2015). Making Mergers, Acquisitions, and Other Business Combinations Work.
Retrieved from: https://hbr.org/2015/08/making-mergers-acquisitions-and-other-
business-combinations-work
Liberis. (2017). Sources of Business Finance. Retrieved from:
https://www.liberis.co.uk/blog/Sources-Of-Business-Finance
Annual Report. 2017. Annual report of Nordstrom. Retrieved 11 September 2018 from,
http://investor.nordstrom.com/phoenix.zhtml?c=93295&p=irol-reportsannual
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Yahoo finance. 2018. Company profile. Retrieved 11 September 2018 from,
https://finance.yahoo.com/quote/JWN/profile?p=JWN
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