Capital Funding process
To develop an efficient financial strategy, it is imperative to assess some of the financing options available concerning Nordstrom’s borrowing costs. The use of surplus funds from Nordstrom’s operating activities is one way to raise funds internally. Using these surplus funds would be convenient for Nordstrom because it would avoid a long application process and also reduce expenses associated with paying interest on a loan. Nordstrom also have the option of funding their new capital expenditures through the sale of assets (Rokhmawati, 2017)
However, considering that shares’ value has significantly reduced since the COVID-19 pandemic, the sale of assets would probably reduce shareholder value further and increase tax expenses and transactional costs. The main advantage of using internal finances is that Nordstrom would get to keep all its assets without incurring additional costs except costs associated with expansion costs. However, if Nordstrom chooses to take internal financing, it is imperative that they recognize that the use of internal finances may leave them with less cash to handle their daily operations. Therefore, using internal finances is only preferable for short term investment projects.
However, Nordstrom may also consider alternative means of funding through global markets like commercial paper, loans, company bonds, and equity finances. Most companies use commercial loans because of the incentives associated with this method (Sagi & Juhasz, 2019). Commercial loans are known to have flexible interest rates, and they possess short term repayment periods. However, one of the main disadvantages of using commercial loans is that it has several requirements in terms of collateral, credit, and financial statements needed for approval. Credit rating is quite essential in this type of funding. If the company’s credit ratings were to become worse, the borrowing cost would significantly increase.
Considering Nordstrom’s expansion intentions, commercial paper is the most preferable method of financing. Currently, Nordstrom has approximately 800 million dollars in commercial paper. These proceeds allow the business to facilitate operating cash obligations. Nordstrom usually pays interest upon the maturity date and current market conditions. However, the use of commercial paper has several drawbacks. The use of commercial paper reduces a company’s liquidity. Another disadvantage of commercial paper is that Nordstrom would need to remain profitable to remain eligible (Rokhmawati, 2017).
Nordstrom’s expansion into the United Arab Emirates would involve implementing an organic growth strategy by establishing multiple retail stores throughout the country. However, venturing into a new market may involve several risks due to cultural practices, foreign regulation, consumer preference, supply chains, and languages. However, applying an organic strategy will ensure that Nordstrom maintains complete control of its business, thus preventing any reputational risk that may arise from foreign leaders. Many companies in various global markets experience slow organic growth due to bureaucracy, regulations, and the time is taken to search and develop premises.
If organic growth strategy is not successful in the United Arab Emirates, Nordstrom may consider transforming its strategy into a business combination. Many companies have turned to inorganic growth strategies such as joint ventures, mergers, acquisitions, licensing, and franchising whenever they venture into unfamiliar territory (Sagi & Juhasz, 2019). For instance, in 2014, Nordstrom acquired Trunk Club. This acquisition was a way for Nordstrom to improve their male customers’ customer experience by offering a platform that facilitated an efficient online shopping experience.
Although many companies have suffered financially due to the covid-19 pandemic, Nordstrom’s current financial statements depict that the company is in a solid position. Like most departmental stores worldwide, Nordstrom had to shut down stores due to the pandemic temporarily. As a result, the company experienced a 53% decline in sales. Nordstrom’s stock has fallen short by 50% this year, which has put significant stress on their finances. Most of Nordstrom’s have now reopened. Nordstrom has since improved its balance sheet with the liquidity of about $1.3 billion. The company is focused on increasing its market share and having profitable growth (Team, 2020). Since the onset of the pandemic, most companies like Neiman Marcus filed for bankruptcy. However, Nordstrom is intent on improving their financial status despite the challenges brought about by the pandemic. Currently, Nordstrom has a quick ratio of 0.53. This ratio reveals that the company is not able to meet its current liabilities comfortably. The company also has a current ratio of 0.93. This depicts that the company may experience difficulties meeting its obligations. However, these ratio values do not signify a serious problem. Considering that Nordstrom has good long-term prospects, it is capable of borrowing against those prospects to comfortably meet its current obligations (“JWN Current Ratio | Nordstrom – GuruFocus.com”, 2020).
Without an iota of doubt, Nordstrom possesses the highest ethical and legal standards. The company has been involved in very few lawsuits except those that normally occur in the course of business. For instance, in 2016, Nordstrom was accused of selling defective Rolex watches. Such lawsuits either lead to severe losses or damage the company’s reputation. Currently, Nordstrom’s code of business ethics is focused on hiring superb people to make sure customers have the best experience. Nordstrom is actively involved in corporate social responsibility. The company usually publishes its annual CSR report to show accomplished goals and areas needing improvement (“Corporate Governance | Nordstrom”, 2020).
References
Corporate Governance | Nordstrom. Nordstrom. (2020). Retrieved 17 November 2020, from https://investor.nordstrom.com/corporate-governance/governance-overview.
JWN Current Ratio | Nordstrom – GuruFocus.com. Gurufocus.com. (2020). Retrieved 17 November 2020, from https://www.gurufocus.com/term/current_ratio/NYSE:JWN/Current-Ratio/Nordstrom.
Rokhmawati, A. (2017). Do Financial Constraints Moderate the Impact of Financing Decisions From Internal-financing Sources on Investment?. Jurnal Keuangan Dan Perbankan, 21(3). https://doi.org/10.26905/jkdp.v21i3.1357
Sági, J., & Juhász, P. (2019). Funding alternatives and business planning in family businesses. Prosperitas, 6(1), 35-53. https://doi.org/10.31570/prosp_2019_01_2
Team, T. (2020). How Are Nordstrom’s Finances Looking As Retail Demand Dips?. Forbes. Retrieved 17 November 2020, from https://www.forbes.com/sites/greatspeculations/2020/06/09/how-are-nordstroms-finances-looking-as-retail-demand-dips/?sh=795b70475619.