After looking at the risks to make the move from North America and expand or to remain because the risks are too great, the decision will need to be made. Whether moving forward or staying still for the time being, a final plan will need created and communicated.
The proposed expansion project is the first step in expanding Nordstrom beyond North America’s borders. The expansion would take Nordstrom to France and possibly open opportunities into other parts of Europe in the near future. Executives wish to make Nordstrom a twenty-billion-dollar company by 2020 base this proposal on the claim (Drain, 2015). This is a very ambitious goal, and based on the information we already have, Nordstrom needs to generate massive income to meet it. It will require more locations for the company make this goal possible. It is highly unlikely they will meet it in the timeframe suggested by executives. The goals set by Nordstrom executives did not take into account the slowing of the global economy, which is out of their control.
Nordstrom Rack stores have shown strong financial representation of low cost structures that maximize cash flow by offering excess inventory at deeply discounted prices (Bailey, 2017). During the last four years, Nordstrom Rack stores have expanded by approximately 80%. They have gone from 119 locations in 2013 to over 200 locations by 2016, leading to a sales growth by over 50 percent (Levine, 2017). This has put Nordstrom is a good position for considering global expansion. The free-cash-flow for Nordstrom increased to 1.1 billion dollars in 2017, and is a key measure of Nordstrom’s ability to generate cash in the future. The costs associated with a global expansion to France are likely to have nominal impact on future cash flow since it is a medium investment with challenges. The finances of a Nordstrom Rack expansion were analyzed using incremental, annual, and cumulative cash benefits and outflows over an eight-year period, both with and without the investment (Appendix I and Appendix II.). Though cash flows are often difficult to predict, an expected 200 million dollar investment would increase Nordstrom’s cash flow by 5% annually to about 65 million dollars within the first year of operation. Followed by a continual gradual increase annually resulting in a 92 million dollar increase by 2024 (Appendix II.).
Assuming that the expansion to France sees the same interest and success as the expansion in France, we can make certain assumptions about the results. Costs of goods sold, administration expenses, interest costs, and taxes can all lead us to have certain assumptions about how the first few years after the expansion takes place will go assuming that the expansion itself is successful. If we based it on the 1 billion dollar increase that was seen in the Canadian expansion in 2015, there should be a comparable 5% increase annually for the expansion in France.
Deciding to not move forward with the expansion would leave Nordstrom in financial difficulty overall. In the next five years there will be a need to explore closing some domestic stores to stay in business overall. Market Watch shows the overall decline of the company in the last five years very concisely. This trend is likely to continue without making some changes to the business by either exploring new opportunities or examining how the business is currently running.
There are many pros and cons to financing the money as opposed to using money the company has already earned. Internal financing would involve using surplus funds from capital investments. While there may be enough to start up another branch already, there is always the possibility of a bad year or couple of years that requires the company to be able to draw on savings to repay investors or keep stocks from plummeting so that the company does not go bankrupt. While taking out a loan requires a repayment period, the company will have money to draw on to repay the loan during that period as opposed to not having any savings.
This applies to most peoples everyday living situations as well. While there may be money in the bank to purchase the item, it often feels safer to put the large expense on the credit card or take out the loan and pay the interest and keep the cash in the bank. For example, the washing machine blows up. The decision must be made to spend the $800 in cash or put it on the credit card. If you spend the cash and the refrigerator breaks the next week, now you still have to put an appliance on the credit card and have no money in the bank to fall back on when something else happens.
The downfall to taking out the loan is the interest that is accrued on the loan amount. Overall, the amount repaid is higher than the amount that was needed to start the business in the first place. If the company is in a good position to pay to lease the property, build the building, and file all of the appropriate paperwork out of pocket, it will save them money in the end. Additionally, this process would be much simpler as applying for a loan out of the country would take more work and require additional persons.
Commercial loans are the most common source of unsecured debt, which make them highly attractive in business. The incentives of this option include flexible interest rates and shorter-term repayment periods (Investopedia, 2017). However, the drawbacks to this funding option are that they required credit, collateral, and financial statement detail needed to be approved. Credit rating is a key factor in any type of borrowings that involve a floating interest rate tied to the LIBOR that is also associated with this type of financing. Commercial paper is a likely source of alternative financing for the project since Nordstrom already utilizes this program. Nordstrom currently is part of an 800 million dollar paper program. Because it is overseas, it is safer that Nordstrom consider using a loan or paper program, partner, and lawyer to fund the expansion.
Viability of a Business Combination
In the expansion to France, an organic growth option is the best option. Nordstrom controlling and running their own buildings and businesses would lead to more successes overall. First, the cultural distaste in general toward foreigners will lead to problems for mergers when negotiating. The best option in being successful at all will be a partnership with a local when starting up and starting from scratch. There are many laws that allow majority shareholders to takeover and spin-offs. Secondly, business combinations are regulated under various bodies of laws and supervised by financial and other authorities leading to delays and additional funds going out that the company is not prepared for (Sousa & Ardaillou, 2017).
Nordstrom’s current financials show that the company is in a good position to consider global expansion. Nordstrom’s most recent quarter earnings excelled in sales at 14.5 billion and a net sales increase of 2.9% due to continuous improvements made to its operating model (Nordstrom, 2017). The company saw record sales from its growth to a new market into Canada (Nordstrom, 2017). Nordstrom Rack discount store sales also increased by 11%, to 4.5 billion dollars last year. This is from 21 new store openings and online growth (Nordstrom, 2017). Nordstrom’s reported 2016 fourth quarter net earnings in the amount of 201 million and earnings before interest and taxes (EBIT) in the amount of 324 million (Nordstrom, 2017). The company has had a total net sale of 4.2 billion, which increased from 4.1 billion during 2015 (Nordstrom, 2017).