Analysis of Nordstrom 2004 Annual Report   Term Paper ID:34086 Click to get this paper

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Paper Abstract: Analyzes the 2004 Annual Report from Nordstrom, Inc. Purposes of financial statements. Focus of the Annual Report to emphasize the good over bad news. Products and services company provides. Company's performance in 2004. Paper Introduction: Analysis of Nordstrom Annual Report Introduction Nearly all companies produce financial statements including incomestatements balance sheets and statements of cash flows These financialstatements help managers understand the company\'s position and how thecompany might take advantage of market opportunities When companies areprivately held these financial statements are likely to be produced inisolation without much attention to presentation Since managers are oftenowners in private companies there may be little incentive to distributethese financial statements outside the organization However federal lawmandates that publicly traded companies Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. As noted in this auditor'sreport, deliberate misstatements or fraud are still possible if the companyis intent on engaging in such illegal activity, but the expanded role ofthe auditor can help identify these problems in a timely fashion beforethey become material to the financial statements or change the actualfinancial picture of the company as presented in the annual report. The annual report notes that the company soldmore than 4.5 million lipsticks in 2 4, as well. When an auditor prepares a report stating that the financialstatements have been prepared in accordance with generally acceptedaccounting principles, the auditor is telling the company (and itsshareholders) that the financial statements are most likely an accuraterepresentation of the company's financial position. The company maintains that it was able to hold down its fixedcosts and thus improve its profitability (2 4 Nordstrom Annual Report 19). Prior to the accounting scandals at Enron and Worldcom,auditors merely verified that companies prepared their financial statementsin accordance with generally accepted accounting principles. As with the current ratio and the earnings pershare, this measure has greater meaning when compared with other companiesin the same industry, and when compared with Nordstrom's recentperformance. This ratio can be affected by changes in net income; ifthe number of shares remains steady and net income increases, earnings pershare will increase. This confidence may increase the likelihood thatshareholders will continue to hold the stock. More importantly, the external audit provides validityto the procedures that the company has in place internally, which supportsthe data gathering process in general (not just as it relates to thefinancial statements). At the sametime, the company is focused on shifting its catalog customers to Internetcustomers. This yields a return onassets of 8.5 percent. When companies areprivately held, these financial statements are likely to be produced inisolation without much attention to presentation. Vertical Analysis of Income Statements |Description |Current Year 2 4 |Prior Year 2 3 || |Amount |% |Amount |% ||Net sales |7,131,388 |1 . Income Statement [pic] Balance Sheet [pic] Cash Flow Statement [pic] Statement of Changes in Equity [pic] Independent Auditor's Report [pic] Work Cited 2 4 Nordstrom Annual Report. However, federal lawmandates that publicly traded companies publish their financial statements. These statements are filed with the Securities and Exchange Commission(SEC), but many companies use the requirement that these statements bedistributed to shareholders as an opportunity to communicate directly withtheir existing as well as potential shareholders. In this way, consumers who might not be able toafford Nordstrom prices but who are interested in the Nordstrom level ofquality can shop at Nordstrom for less money-and out-of-season goods-andtake advantage of the branding (2 4 Nordstrom Annual Report 15). When evaluating earningsper share, it is important to take into account historical performance atthis company, the performance of other companies in the same industry, andother factors-including new shares issued or a company buyback plan-thatmight affect the ratio itself. It is clearly meant to attract investors andto retain existing shareholders. The current ratiois calculated as CurrentAssets / CurrentLiabilities, both of which can befound on the balance sheet. In addition, comprehensive notes-typically many pages longer than the financial statements themselves-areincluded in the annual report. These financialstatements help managers understand the company's position, and how thecompany might take advantage of market opportunities. If, on the other hand, the company issues additionalshares, earnings will need to increase proportionately in order forearnings per share to remain at the same level. However, Nordstrom also has an online presence at Nordstrom.comas well as mail-order catalogs that it sends to select customers. The return on assets (ROA) ratio provides an indication of the fundsprovided by both owners and creditors, and is typically used to determinehow well the company manages all of its resources. Because of the tendency tofocus on the positive rather than the negative, auditors now providestatements indicating that the financial component of the annual reportmeets the standards of the auditors. Originally started as a shoe retailer, Nordstrom continues tosell shoes-more than 3 million pairs in 2 4-but it also sells clothingaccessories and cosmetics. Consumers typically pay higher-than-average prices at Nordstrom-which tends to be the most expensive "anchor"in a mall-but are willing to pay those prices in exchange for the perceivedquality (2 4 Nordstrom Annual Report 15). This research considers the2 4 Annual Report from Nordstrom, Incorporated, including an analysis ofthe company's 2 4 and 2 3 income statement. More importantly,investors and creditors will immediately lose confidence in the company'sability to continue as a viable operation since its financial statementsmay well be inaccurate. Such research should focus on other company'swithin this industry and demographic, such as Macy's, and historicalanalysis of Nordstrom's own performance. Following reforms, however, auditors now play agreater role in the presentation of financial statements, and the auditor'sreport carries greater weight than it did previously. The management report focuses on the company's ability to manage itscosts from 2 3 to 2 4; this is obvious in the management discussion ofselling and general administrative expenses. The company transferred its co-branded creditcard receivables to a third-party; that third-party then issued securitiesbacked by the credit card receivables to yet other parties. The external audit verifies that the procedures used to developfinancial information issued by the company are valid and in keeping withstandard accounting and control practices. Perhaps because of the emphasis on off-balance sheet financing arisingfrom the Enron accounting scandal, Nordstrom is careful to report its off-balance sheet financing. In addition, the company improved its inventory managementas evidenced by an inventory turnover rate that increased from 4.1 to 4.5.Pre-tax earnings increased from 6.2 percent in 2 3 to 9.1 percent in 2 4,a substantial increase in a highly competitive industry and one whichmanagement uses to illustrate that the company is performing well (2 4Nordstrom Annual Report 17). In the case of Nordstrom,inventory at the end of fiscal 2 4 was 917,182. Earnings per share is calculated as net income / outstandingnumber of shares. Online sales and continued growth in same-store sales will becritical to the company's long-term success. External audits do not verify theaccuracy of the financial statements themselves, but merely validate thatthe procedures used to produce those statements are in keeping withstandard practice. This indicateshow solvent the company is without depending on selling inventory to meetits current obligations. Analysis of Auditor's Report Deloitte & Touche LLP performed the independent external audit of thefinancial statements presented in this annual report (2 4 Nordstrom AnnualReport 27). Not surprising, the company is highly dependent on women for itsrevenue. This will result in decreased costs to the company as catalogsales can be significantly more expensive than Internet sales due to thecost of printing and distributing the catalogs, and since catalogs arelimited in their reach to those on the mailing list with only marginal pass-along distribution. This is a hedging tool meant to protect the company fromundue swings in interest rates and minimize the company's exposure toincreased interest rates (2 4 Nordstrom Annual Report 23). The companyrecognizes that selling expenses increased, but presents these as avariable cost directly correlated to the company's increased sales ingeneral. External auditors look forirregularities in reporting practices or in the way in which inventory ishandled (for example) to determine that the information on financialstatements is fundamentally valid. This puts the companyin a less favorable financial position, but does not necessarily mean thecompany is troubled. Conclusion The annual report put forth by Nordstrom is part marketing documentand part accounting document. Sales exceeded $7 billion for the firsttime in the company's history, and same-store sales increased 8.5 percent.This is an important figure since it is indicative of customer loyalty.Gross profit increased by 1.5 percentage points from 2 3 to 2 4, a factthat management attributes to better merchandise management and increasedsales growth. By decreasing these expensesat the same time that the company realized greater sales levels than in thepast, the company was able to enjoy higher profitability. Since managers are oftenowners in private companies, there may be little incentive to distributethese financial statements outside the organization. Diluted earnings per share measure notonly the current number of shares outstanding, but also the shares thatcould enter the market through options, warrants and similar instruments.Diluted EPS is thus smaller than basic EPS. Nordstrom stores are large-exceeding 1 , square feet in most cases-and serve as the primary way in which consumers transact business with thecompany. A more thorough analysis, comparing these ratios toothers in the industry as well as to the company's previous ratios would behelpful. In both cases, earnings pershare indicate to shareholders a measure that is directly related to thenumber of shares outstanding in the market as well as the company'searnings. Typically, acurrent value of 2:1 is considered healthy for most companies, so Nordstromappears to be in good shape from a liquidity standpoint based on thissingle measure. Product and Services Provided by the Company Nordstrom defines itself as a fashion retailer and it is still headedby a member of the family that founded the company and whose name is alsoNordstrom. These securitiesare not included on the balance sheet, and management notes that theliability exposure is limited (2 4 Nordstrom Annual Report 23). %||Cost of sales and related buying |(4,559,388)|(64) |(4,215,546)|(65) ||and occupancy costs | | | | ||Gross profit |2,572, |36 |2,233,132 |35 ||Selling, general and |(2, 2 ,233)|(28) |(1,899,129)|(29) ||administrative expenses | | | | ||Operating income |551,767 |8 |334, 3 |5 ||Interest expense, net |(77,428) |(1) |(9 ,952) |(1) ||Minority interest purchase and |--- |--- |--- |--- ||reintegration costs | | | | ||Other income including finance |172,942 |2 |155, 9 |2 ||charges, net | | | | ||Earnings before income taxes and |647,281 |9 |398,141 |6 ||cumulative effect of accounting | | | | ||change | | | | ||Income tax expense |(253,831) |(4) |(155,3 ) |(2) ||Earnings before cumulative effect |393,45 |6 |242,841 |4 ||of accounting change | | | | ||Cumulative effect of accounting |--- |--- |--- |--- ||change (net of tax of $8,541) | | | | ||Net earnings |393,45 |5.5% |242,841 |3.8% | 2 4 Ratio Analysis The current ratio is a measure of liquidity, and as such, illustratesthe company's ability to meet its current obligations as they become due.To some degree, the current ratio can be thought of as a way to measure thefirm's ability to finance its operations through its operations withoutrelying on long-term debt or the need to issue equity. The value ofthe credit card receivables exceeds the value of the securities, andNordstrom holds securities that represent their interest. The "acid-test" ratio uses the same components as thecurrent ratio, but subtracts inventory from the numerator. This can be critical in an industry such asretail where a troubled company might be forced to sell inventory at lessthan premium prices if a financial crisis arose. Given the wealth of information provided inthese reports, it is not surprising that their analysis can be critical tounderstanding a company's financial position. Moreover, today's auditors focus on the internal processes andcontrols that are in place and use the auditor's report as a place toindicate whether the auditors believe those controls to be satisfactory inorder to produce accurate financial statements. Certainly management could have omitted details suchas that, but providing them may give shareholders and prospectiveshareholders increased confidence that management is operating in atransparent manner. Analysis of Nordstrom 2 4 Annual Report Introduction Nearly all companies produce financial statements, including incomestatements, balance sheets and statements of cash flows. Inaddition, the company has its own off-price outlet, Nordstrom Rack, wheregoods that do not sell even after being discounted in the traditionalNordstrom stores are sent. Return on assets iscalculated as NetIncome / TotalAssets. If an audit reportstates that there are irregularities, the company cannot depend on itsfinancial statements to reflect accurately its position. There are, of course,many fashion retailers in the United States; Nordstrom has built areputation for providing a high-quality experience for shoppers. The company has focused on providing a high level of customer service,which has helped it build its strong sales performance, but maintainingthis level of service requires significant investment in individuals andtechnology. Bad news is avoided asmuch as possible in corporate annual reports. For 2 4, Nordstrom's net incomewas $393,45 and its total assets were $4,6 5,39 . For the corporation, an audit report that gives the opinion that thefinancial statements are an accurate representation of the business meansthat the company's personnel can use those financial statements in theircorporate planning. The company's earnings per share is $2.82 (basic) or $2.77 (diluted)(2 4 Nordstrom Annual Report 5 ). The document is carefully crafted, andcontains a level of candid discussion-such as the discussion about off-balance sheet financing-that may lend additional credibility to thecompany's management. Overall, the company has performed well from 2 3 to 2 4, butadditional research would be necessary to determine whether it is anattractive investment. Internet sales, on the other hand, are accessible toanyone with access to a computer and a credit card; this greatly opens upthe potential market for non-store sales (2 4 Nordstrom Annual Report 18). The auditorsdistanced themselves from the accuracy of the information included in thefinancial statements. The basic financialstatement has now become surrounded by additional information about thecompany, including a description of its operations, the successes thatmanagement observes, and areas for future growth. Management's Observations on 2 4 Operations The company's performance for 2 4 was impressive, with earnings pershare increasing 57.4 percent. Seattle, WA: Nordstrom, Inc., 2 5.Retrieved Jul 5, 2 5 from: <>. Management also explains an interest-rate swap in which Nordstromparticipates. At the end of fiscal 2 4, Nordstrom's currentassets were 2,572,444 and its current liabilities were 1,341,152, yieldinga current ratio of 1.9:1 (2 4 Nordstrom Annual Report 5 ). Thisincludes the environment of the stores, the knowledge of the employees, thedesigns of the goods that are carried and the variety of goods, and thequality of the goods themselves. Women's fashions (including apparel and accessories) andcosmetics together accounted for more than half of the company's sales.While it can be expected that men made some of these purchases, it islikely that women were making the majority of these purchases. This yields an acid-testratio of (2,572,444 - 917,182) / 1,341,152 or 1.2:1. %|6,448,678 |1 . If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.

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