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Nordstrom

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Austin Shide

on 3 October 2013

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Transcript of Nordstrom

Nordstrom Rack
Nordstrom
ROE and RNOA

Both are methods of measuring shareholder’s equity.

ROE relates net income to the average investment by shareholders as measured by total stockholder’s equity from the balance sheet.

It shows how a company skillfully manages its funds to product maximum interest and growth.
B. How do return on equity (ROE) and returnon net operating assets (RNOA) differ? Explain in your own words what the nonoperating portion of ROE represents.
RNOA measures a company’s capability to create profit from equity. It calculates the amount that a company earns for each dollar that it invests. It gives owners an idea of how the company is doing well based on their goals, competitors and the industry.

The nonoperating portion of ROE represents a company’s profits from financial activities or investment. Ex. retained earnings and accumulated other comprehensive income
C. In general, what is a company’s “marginal” tax rate? What is meant by the term “tax shield”? Explain the importance of considering the tax shield that arises from debt.
A company’s marginal tax rate is the amount of tax that is paid on an additional dollar of income.

Taxpayers are divided into groups that determine the rate that their taxable income is taxed at. As a taxpayer’s income increases, so does the tax rate.
The term tax shield refers to the taxes an organization saved by having tax deductible non-operating expenses.

Having a tax shield allows for companies to protect its cash flow adding additional value to the company.

Interest on debt is a tax deductible expense, so the more debt that is taken on by the company, the more they are able to deduct from their taxes.
D. Refer to Nordstrom’s balance sheets for fiscal 2007 through 2009. Calculate net operating assets for fiscal 2009, 2008 and 2007 using the chart below. Assume that Other assets, Other current liabilities, Deferred property incentives, and Other liabilities are operating items.
"Provide exceptional service, selection, quality and value."
E. Refer to Nordstrom’s statement of earnings for fiscal 2009 and 2008. Calculate net operating profit after tax (NOPAT) for fiscal 2009 and 2008. Assume that the company’s (as estimated by the combined federal and state statutory tax rates) is 38.5% for both years. What is the dollar amount of Nordstrom’s tax shield from nonopereating activities in fiscal 2009?
F. Compute return on net operating assets (RNOA) for fiscal 2009 and 2008. Be sure to use average net operating assets in the denominator.
RNOA= Net operating profit after tax (NOPAT) / Average net operating assets (NOA)
Fiscal 2009
$525.87 / ($4,185+$3,723)/2 = 13.3%
Fiscal 2008
$481.57 / ($3,723+$3,612)/2 = 13.13%
H. Compute and interpret return on equity (ROE) for fiscal 2009 and 2008. Be sure to use average equity in the denominator. Calculate the difference between ROE and RNOA. What inference do you draw from this comparison?
ROE = Net Income / Average Shareholder’s Equity
Fiscal ROE 2008: {[401 / [(1,210 + 1,115) / 2]} =
(401 / 1162.5) = 34.49%

Fiscal ROE 2009: {[441 / (1,572 + 1,210) / 2]} =
(401 / 1391) = 31.7%
Nonoperating return 2008:
(ROE-RNOA)= (34.49% - 13.13%) = 21.36%

Nonoperating return 2009:
(ROE - RNOA)= (31.7% - 13.3%) =18.4%
I. The nonoperating return portion of ROE can be calculated directly as shown below. Calculate and interpret financial leverage (FLEV) and Spread. Verify that the product of FLEV and Spread is equal to the nonoperating return you calculated in part h (that is, the difference between ROE and RNOA).
(Financial Leverage) FLEV =
Average net nonoperating obligations / Average shareholders’ equity
[($2,513 + $2,497) / 2] / $1,163 =
$2,505 / $1,163 = 2.15 = FLEV of 2008

[($2,613 + 2513) / 2] / $1,391 =
$2,563 / $1,391 = 1.84 = FLEV of 2009
Spread = RNOA - Net nonoperating expense / Average net nonoperating obligations
[13.1% - ($81 / $2,505) =
13.1% - 3.2% = 9.9% = Spread of 2008

[13.3% - ($85 / $2,563) =
13.3% - 3.3% = 10% = Spread of 2009
Nonoperating return = FLEV x Spread
2.15 x 9.9% = 21.285% = 2008
1.84 x 10% = 18.4% = 2009
Nonoperating return 2008:(ROE-RNOA)=
(34.49% - 13.13%) = 21.36%

Nonoperating return 2009: (ROE - RNOA)=
( 31.7% - 13.3%) =18.4%
J. TJX, Inc., operates several off-price apparel and home-fashion chains in the United States and worldwide, including TJ Maxx and Marshalls. The company has over 2,700 stores that sell brand name and designer merchandise at prices that are 20% to 60% below regular department-store prices. Below are data for the company’s fiscal year ended January 30, 2010.
For the year ended January 30, 2010
Sales $20,288,444
Net Income $1,213,572
Net Operating Expense $24,298
Average for fiscal 2009
Net Operating Assets $3,232,265
Net Nonoperating Obligations $720,349
Shareholders’ Equity $2,511,917
ROE= (NOPM X NOAT) + (FLEV+Spread)
Use this ROE disaggregation to complete the table below. Compare and contrast the performance of TJX and Nordstrom for fiscal 2009 using the overall ROE and its components.
A. What does return on equity measure? Why is it important to conider ROE and not just net income in dollar terms?
ROE measures corporate profitability. It is the amount of net income returned as a percentage of shareholder’s equity

Ratios vs. Dollars
NOPAT = NOPBT - [tax expense + (pre-tax net non-operating expense * tax rate)]
NOPAT for 2008 = 779 - [247 + ((131) * 0.385)] = $481.57

NOPAT for 2009 = 834 - [255 + ((138) * 0.385)] = $525.87

Tax shield from non-operating activities in fiscal 2009 = (138) * 38.5% = $53.13
TJ Maxx
G. Has the company’s RNOA improved or worsened over the two years? Explain why
NOPM = NOPAT / Revenues
-Fiscal year 2008 = 481.57/8,573 = 5.62%
(For each dollar sale the company earns 5.62 cents)
-Fiscal year 2009 = 525.87/8,627 = 6.09%
(For each dollar sale the company earns 6.09 cents)
NOAT = Revenues / Average NOA
-Fiscal year 2009 = 8,627 / (4,185+3,723)/2 = 2.18
(For each dollar of NOA, company realizes $2.18 in sales)
-Fiscal year 2008 = 8,573 / (3,723+3,612)/2 = 2.34
(For each dollar of NOA, company realizes $2.34 in sales)
Both TJ Maxx and Nordstrom have higher return on operating equity from different strategies to maximize the return.

RNOA: TJX earns much of its return from stockholders’ equity and less leverage while Nordstrom does from financial leverages.

NOPM: Both companies have 6.1 % of net operating profit margins. It states that they make 6.1 cents for every dollar sale.

NOAT: TJ Maxx has three times more faster turnover between operating assets and cash than Nordstrom.

Nonoperating Return: Nordstrom uses financial leverage to increase return on net operating assets.

FLEV: Nordstrom has more short-term and long-term debts than TJ Maxx does.
Spread: RNOA - (Net Nonoperating Expense / Average Net Nonoperating Obligations)

TJ Maxx’s spread is three times higher than Nordstrom. It means that TJ Maxx has higher RNOA than Nordstrom does. Also, both companies has the same level of net nonoperating expense to average net nonoperating obligations.

K. Assume that you have been hired by Nordstrom to help the company improve RNOA in 2010. Suggest ways to accomplish this goal. Be specific about the components of ROE on which you would focus.
Questions?
In order to increase RNOA, we must increase NOPM and NOAT
IRS Publication 542
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