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Case Analysis Project

Kelsey Brodbeck Kelsey Friederich Joseph French Stephanie Nelson Charles Selby Jingshu Zhu 12/5/2011

An in-depth analysis of Nordstrom, Inc.s 2010 financial statements. Adjustments were made to the 2010 financial statements and financial forecasts were created until 2020.

Table of Contents Executive Summary ..................................................................................................................2 Business and Strategy Analysis ..............................................................................................3 Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis ...........................3 Industry Prospects ...........................................................................................................4 Nordstroms Prospects ....................................................................................................4 Financial Statement Analysis and Reformulation...................................................................5 Accounting Analysis of Nordstroms Financial Statements...............................................5 Adjusted Financial Statements ........................................................................................7 ROE Analysis (with ROE Disaggregation) .......................................................................7 Relevant Financial Ratios ................................................................................................8 Common-size Financial Statements ................................................................................9 Forecasted Financial Statements ............................................................................................9 Forecast Analysis ............................................................................................................9 Forecasted Key Valuation Components.........................................................................13 Company and Equity Valuation..............................................................................................14 Cost of Capital Measures ..............................................................................................14 Comparable Market-Based Valuation ............................................................................14 Dividend Discount Model ...............................................................................................15 Discounted Cash Flow (DCF) Valuation Model ..............................................................16 Residual Operating Income (ROPI) Valuation Model .....................................................16 Sensitivity Analysis of DCF and ROPI ...........................................................................16 Intrinsic Value ................................................................................................................17 Appendix A: Company Facts .................................................................................................18 Appendix B: Accounting Basics ............................................................................................19 Appendix C: Adjusted Financial Statements, Exhibits, and Valuation................................ 22

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Nordstrom, Inc.
NYSE: JWN Industry: Department Stores

HOLD
Intrinsic Value: $50.00 Current Price: $47.17

Forecasted Financials
Sales NOPAT NOA NOPM NOAT RNOA ROE 2010A $9,310 $720 $5,520 7.23% 2.00 14.46% 32.08% 2011E $10,520 $887 $6,254 8.11% 1.86 15.06% 36.25% 2012E $11,572 $959 $7,396 7.98% 1.84 14.72% 37.15%

Valuation
Constant Perpetuity DDM Gordon Growth Model DDM Two Stage Gordon Growth Model DDM EV / NOA Comparable Valuation P / BV Comparable Valuation P / Earnings Comparable Valuation Discounted Cash Flows Model Residual Operating Income Model $7.46 $18.46 $14.84 $43.01 $53.14 $37.85 $51.39 $49.81

Executive Summary Nordstrom is a growing retailer, which is driven by several factors we have considered while evaluating the intrinsic value of the company. The Nordstrom Rack business is increasing total stores at a rapid pace, driving growth for the next 5 years. However, revenue growth in the department store industry is largely expected to slow, which could impact the companys same store sales growth, factored into our sales growth expectations. As a result, we expect total sales to grow 9% per year for the next 5 years, before slowing to 3% by the end of the decade. Also, the Gross Margin is a very sensitive component to the valuation of the company. We expect Gross Margin to improve from 39.2% in 2010, to 40.3% in 2012, after which will level off to 40.0%. Net Operating Profit Margin will improve to 8.0% in 2012. Lastly, we expect the Net Operating Asset Turnover to decline, from 2.00 in 2010 to 1.84 in 2012. The company will not be as efficient with their Net Operating Assets, because we expect the company to invest cash flow into less productive assets. Consequently, we believe the intrinsic value for Nordstrom is $50.00, based primarily on the FCFF and ROPI model prices, influenced by comparable valuation.

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Business and Strategy Analysis SWOT Analysis Since Nordstrom was founded in 1901 (IPO 1971) it has been competing in the Apparel Industry, a fragmented industry with high competition. Nordstrom operates as a high end department store selling clothes, accessories, jewelry, handbags, cosmetics, and fragrances offered through full-line stores, online stores, discount stores, Jeffrey' boutiques, and clearance stores. Nordstrom competes against major players such as Bloomingdales, Lord & Taylor, Von Maur, Macy's, Neiman Marcus, and Saks Fifth Avenue 1, though a number of niche stores and private companies also share this customer segment. The 2010 Annual Report only writes: our specific competitors vary from market to market. Besides the Retail segment, Nordstrom also operates a Credit segment. Strengths Improved profitability has been managements focus, and during the fiscal year ending January 29, 2011, the revenues increased by 12.4% in 2009 from $8,627 million to $9,700 million, and as a result, profitability increased 34.1%. Along with strengthened profitability, the liquidity position has also been improved, likely from an improved working capital position. More general strengths include Nordstroms large store network compared to competitors, wide range of products with the possibility of buying on credit, and a well-established brand with relationships to suppliers and customers. Weaknesses The economic downturn serves as a current weakness, especially when Nordstrom has a reputation of exclusivity and higher prices. Although clothing is a basic need, consumers have discretion as to when they update their wardrobes and how much they spend. The annual report states: The deterioration in economic conditions that began in 2007 affected our business in several ways... Further Nordstrom has been involved in recalling a range of products, which influences the brand image and puts consumers confidence at stake. Opportunities Nordstrom continues to open new stores, in particular outlet stores. They are opening 16 new outlet stores, which shows expansion into a less typical market segment (middle class and bargain hunters). Market research also indicates, that at the same time, buyers' habits might be changing, as they still demand the luxurious apparel that Nordstrom provides, but at a lower price.2 At the same time, Nordstrom has a focus on their green profile, as consumer's concern about the environment keeps growing. Increased online shopping also offers an opportunity for Nordstrom, who can use their brand to capture market share in a growing segment. Nordstroms online retail sales increased 11% in the fourth quarter of 2010 from the previous year. Nordstrom has also entered into some strategic agreements, which will help the company in expanding its reachhopefully in the opportunity of a recovering U.S. economy. Threats As Nordstrom depends on the U.S. market for its revenue, it increases the companys business risks especially if the U.S. economy does not recover. The Annual report states: A sluggish economic recovery or a renewed downturn could have a significant adverse effect on our business. Rapidly changing fashion trends is also a threat, in particular if Nordstrom does
1 2

http://www.nasdaq.com/symbol/jwn/competitors http://www.forbes.com/forbes/2010/0301/finance-housing-stocks-coach-financial-strategy.html?partner=alerts

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succeed in being a consumer driven company. Rising manpower costs could also increase the companys operating costs and put pressure on the companys profit margin. The competition is very tough for various players operating in the fashion apparel and accessories market. Industry Prospects The Department Store industry will Exhibit 1: University of Michigan Consumer Sentiment continue to improve from the and Personal Disposable Income recession of 2007-2009. According to IBISWorld, Department Store revenue should increase at an average annual rate of 0.5% over the next five years, to a total $192.1 billion. 3 As revenue continues to grow slightly, this should help companies improve their profit margins. Department Store revenue is very much dependent on consumer confidence, which has weakened considerably in 2011 due to contagion from the European debt crisis. In addition, consumer spending is dependent on personal disposable income, which has also weakened in 2011 after a major bounce in 2009 and 2010. Another trend that will affect the Department Store industry is the continued growth in competitive pressures from online retailers. Although many department stores have created their own online stores, the increase in competition has enabled smaller companies to compete directly with department stores, without requiring huge capital investments in a brick-and-mortar store. Thus, although revenue in the industry may grow, the growing competition of e-commerce may well take much of the new revenues and eat into the market shares of large department stores that derive most of their sales from their brick-and-mortar stores. Nordstroms Prospects Nordstrom continues to grow at a faster rate than the overall industry due to several factors that set it apart from the competition. First, Nordstrom Rack continues to be a major growth driver due to its smaller footprint that complements their Nordstrom Full-Line stores. Nordstrom Rack is focused on delivering a wide range of discounted brand-name merchandise. Since many consumers are looking to save money when they shop for apparel and shoes, Nordstrom Rack serves as a discounted retail segment in the business. Nordstrom Rack has consistently achieved 6 to 7% same store growth for the past few quarters, while total sales have been

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considerably strong, at 23% year-over-year in the third quarter 2010, due to adding 9 new stores in the past quarter alone. This continues to be a major growth driver for the company. Nordstrom is an upscale department store that sells many luxury products, such as clothing, handbags, jewelry, cosmetics, and fragrances. The luxury goods market has been particularly strong since the economic recovery, allowing the retailer to grow same store sales 8.5% yearover-year in the third quarter of 2010. The major driver of sales growth for Nordstroms has been their online store, which has offered free shipping and returns for all online orders. Nordstroms superior customer experience for an online retailer has allowed it to continue growing sales faster than the overall industry. Financial Statement Analysis and Reformulation Accounting Analysis of Nordstroms Financial Statements Earnings per Share There was nothing out of the ordinary for Nordstroms earnings per share. The diluted earnings per share is primarily caused by stock options but has not been significantly lower than earnings per share throughout the past five years. No adjustments were made to earnings per share. Foreign Currency Translation Nordstrom typically conducts business in U.S. dollars. Periodically, however, Nordstrom makes purchases denominated in Euros. In that instance, they sometimes use forward contracts to hedge against the U.S. dollar and Euro fluctuation. As of January 29, 2011, Nordstrom did not have any outstanding forward contracts. Therefore, no adjustments were necessary for foreign currency translation. Operating and Nonoperating Income Components Nordstrom has a relatively simple operating versus non-operating structure. As a part of the adjustment process, components of Nordstroms operating lease were added and subtracted from the income statement. Rent expense, an operating component, was taken off, and the operating lease depreciation expense, also an operating component, was added. Operating lease interest expense was also added as a non-operating component of income. In 2007, Nordstrom sold off a part of its Faconnable business, creating a non-operating gain. Also in 2007, Nordstrom had earnings on an investment they had in asset-backed securities, which was also a non-operating component. The only other non-operating component present for Nordstrom is interest expense. Allowance of Uncollectible Accounts Nordstrom records credit card receivables at the outstanding balance, net of an allowance for credit losses. They evaluate their credit quality based on two indicators: aging and delinquency, and FICO credit scores. Their delinquency rates and write-offs ran at elevated levels throughout 2009 as a result of economic conditions. Nordstrom increased their allowance for credit losses by $52 million, from $138 million to $190 million in 2009. During 2010, their delinquency and net write-off results improved. They reduced the allowance by $45 million during 2010, from $190 million to $145 million. Their allowance also decreased as a percentage of gross receivables, from 8.8% to 6.9%. As the level of uncollectible accounts decreases, Nordstrom recognized less bad debt provision. This means that the bad debt provision is keeping up with actual accounts that go bad; a cookie jar reserve is unlikely. Therefore, no adjustments were needed for allowance for credit losses account. Allowance of Inventory Accounts Nordstrom uses the weighted average cost method to value inventory. The weighted average cost is computed by dividing the cost of goods available for sale by the sum of the beginning

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inventory and purchases. Since this measurement is fairly conservative and is used by many in the industry, no adjustments were needed to the ending inventory balance. Restructurings, Asset Sales, and Other Transitory Operating Components Nordstrom had no restructuring activities throughout the last five years. The company did sell a piece of its Faconnable business in 2007 for an $18 million gain. No adjustments were made for restructuring, asset sales, or transitory operating components. Intercorporate Investments Nordstrom does not possess any equity or held at fair-value investments. Intercompany transactions between subsidiaries are eliminated upon consolidation. No adjustments were necessary for intercorporate investments. Allowances on Other Key Accounting Accruals (Assets and Liabilities) Nordstrom recognizes revenue from sales at the point of sale, net of estimated returns and excluding sales taxes. They estimate customer merchandise returns based on historical return patterns and reduce sales and cost of sales accordingly. There is a possibility that actual returns could differ from recorded amounts. A 10% change in the sales return reserve would have had a $5 million impact on their net earnings for the year ended January 29, 2011. In the past three years, Nordstrom has made no material changes to their estimates included in the calculations of their sales return reserve. No adjustments were needed for the allowance for sales returns account. Deferred Tax Valuation Allowance Account Nordstrom regularly evaluates the likelihood that it will realize the benefits of its deferred tax assets. Only when substantial evidence is present that it will not be realized does Nordstrom record a valuation allowance. On the 2010 financial statements, there is no such allowance. No adjustments were necessary for the deferred tax valuation allowance. Debt Covenants and Credit Ratings Nordstrom holds a $650 million revolver which requires that they maintain a fixed charge coverage ratio of at least two times, and a leverage ratio of no greater than four times. Nordstrom has been in compliance and will continue to monitor this debt covenant in order to remain in compliance. In 2010, Nordstrom had the following long-term unsecured debt credit ratings: Moody's Standard & Poor's Baa1 A-

These ratings impact the interest rate on Nordstroms borrowings. Nordstroms credit ratings are in good standing and are higher than Macys, a competitor. No adjustments were necessary. Off-Balance-Sheet Financing (Postretirement Benefits and Leases) Even though there were no adjustments needed, we did look into Nordstroms Postretirement Benefits to ensure that everything was recorded properly. Nordstrom has an unfunded defined benefit Supplemental Executive Retirement Plan (SERP), which provides retirement benefits to certain officers and select employees. In 2009 and 2010, Nordstrom paid in $4 million to the benefit plan and also distributed $4 million to its retired employees. However, the plan remains underfunded, as it was $102 million short in 2009, and is now underfunded by $122 million in 2010.

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The only off-balance sheet financing that needed any adjustment was when Nordstrom entered into the operating leases constructed during the normal course of business during 2010. Exhibit 2 shows the operating leases obligations, as well as the calculations for the capitalization of the operating leases. Upon conducting an Exhibit 2: Operating Lease Capitalization analysis of the operating leases, we determined that Nordstrom needed to PV of Cash capitalize its operating leases to better Payment Year Cash Flow Discount Flow reflect the financial situation of the 2011 $111 0.93458 $104 company. To begin, we determined 2012 108 0.87344 94 the discount rate to be 11.22 %, the 2013 100 0.81630 82 remaining number of years to be 10.70 2014 96 0.76290 73 years, and the present value of the 2015 92 0.71299 66 future operating lease payments to be Thereafter 524 300 $597 million. However, we did not Total $1,031 $718 think that 11.22% was a reasonable discount rate because Nordstroms Supplemental Information: interest expense is only 4.86% in Years Thereafter 5.70 2010. To combat this, we capitalized Lease Discount Rate 7.00% the leases using an average industry discount rate of 7%. Therefore, our adjusted financial statements will reflect a present value of the future operating lease payments to be $718 million, with a remaining 10.70 years. We then adjusted the income statement, the balance sheet, and the financial ratios to reflect our calculations. We removed $111 million of rent expense from operating expenses, added depreciation of $67 million for the operating lease depreciation, and added interest expense of $81 million as a nonoperating expense on the income statement. Please see the Adjusted Income Statement in Appendix C, Part D for these adjustments. Next, we adjusted the balance sheet by adding $718 million to the leased building and equipment asset as well as to the capitalized operating leases liability. Please see the Adjusted Balance Sheet in Appendix C, Part B for these adjustments. Finally, we used our adjusted Income Statement and Balance Sheet to adjust our ROE and Disaggregation ratios. These adjustments will be discussed further in a later section: ROE Analysis (Including ROE Disaggregation). Please see the Ratio Analysis and ROE Disaggregation in Appendix C, Parts G & H, respectively, for our adjusted ratio calculations. Adjusted Financial Statements Our adjusted financial statements using our analysis from above can be found in Appendix C, Parts B & D. ROE Analysis (Including ROE Disaggregation) After adjusting our financial statements, we adjusted our Return on Equity (ROE) and Disaggregation ratios to reflect our previous changes. Exhibit 3 is the summary of our adjusted ratio calculations. As you can see from our calculations, ROE increased from 2009 to 2010 by about 2.5%, from 31.70% to 34.12%. However, after our adjustments, we found that ROE was actually 32.08%. Even though this is lower than the unadjusted ROE, it is still an increase from 2009. Generally this is a great sign for the company if ROE goes up. However, it could also mean the company is taking on more debt and that is the reason ROE is increasing.

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Exhibit 3: ROE Disaggregation Therefore, we split ROE into operating and nonoperating returns and took a closer look at 2010 2010 the operating returns. Return on Difference (Unadjusted) (Adjusted) net operating assets (RNOA) also increased from 2009 to 2010 and Return on Equity 34.12% 32.08% -5.99% then when we adjusted the ratio to account for our financial statement DuPont: adjustments. This increase was Profit Margin 6.32% 5.94% -5.99% mainly driven by the net operating Asset Turnover 1.38 1.31 -4.87% profit margin (NOPM) which Financial Leverage 3.91 4.11 5.12% actually decreased from 6.13% in 2009 to 5.80% in 2010 and then RNOA: increased to 7.23% in 2010 after Sales $9,700 $9,700 0.00% adjustments. This means that NOPAT $563 $702 24.69% Nordstrom actually earned about NOA $4,802 $5,520 14.96% 7.23 cents on every dollar of sales. The other component of NOPM 5.80% 7.23% 24.69% RNOA is net operating asset NOAT 2.02 1.76 -13.01% turnover (NOAT) and it stayed relatively constant from 2009 to RNOA 11.72% 12.71% 8.47% 2010, but dropped from 2.02 to RNNOA 22.40% 19.37% -13.55% 1.76 after the 2010 adjustments. This means that Nordstrom either decreased its sales or increased its amount of operating assets. After looking at their financial statements, we can see that Nordstrom did in fact increase its operating assets from 2009 to 2010, from $6,579 million to $8,180 million (after adjustments in 2010.) It can also be seen in the net operating assets (NOA) calculation where it was $4,185 million in 2009 and it increased to $5,520 million in 2010 after adjustments.

After reviewing our ROE and Disaggregation ratios, we concluded that Nordstrom has improved its financial position from 2009 to 2010 after considering our adjustments to their financial statements. Relevant Financial Ratios (Our calculations can be found in Appendix C, Part G) Liquidity and Efficiency Ratios Nordstrom has considerably improved their liquidity position in the past year. Nordstroms 2010 current ratio is 2.57 and 2010 quick ratio is 1.88. This liquidity position is better than JCPenney, who has a current ratio of 2.41 and quick ratio of 1.0. Nordstrom has also improved their asset efficiency in 2010 versus 2009. Day Sales Outstanding improved from 84.13 to 76.41, Days in Inventory improved to 58.03 and Days in Accounts Payable slightly regressed to 48.65 from 44.15. As a result, the Cash Conversion Cycle improved significantly to 85.78 from 101.57. This shows that the underlying liquidity of the continuing operations have required less working capital to run the business. The Net Operating Asset Turnover was slightly weaker at 2.00 from 2.18, which shows that the company is becoming less efficient. This is driven primarily by the increase in cash levels, which is generally an unproductive asset (net operating working capital turnover was 3.89 in 2010 versus 4.72 in 2009.) Nordstroms net operating asset turnover was in-line with JCPenney (2.12).

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Solvency Ratios Nordstrom currently has a Debt to Equity of 1.73 and Liabilities to Equity of 3.05. The Debt to Equity slightly increased, while Liabilities to Equity decreased from 2009. The solvency of the company is generally improving, with financial leverage down to 2.7 from 2.8 in 2009 and 3.2 in 2008. The Times Interest Earned ratio fell to 5.60 from 6.04. This represents a lower coverage on annual debt service, but is still at an adequate level to maintain or increase debt capacity. JCPenney has lower leverage (Liabilities to Equity of 1.39) and lower Times Interest Earned (3.60). Nordstrom also has improved their Total Debt to NOPAT and Net Debt to NOPAT decreased in 2010, which also evidences a credit profile that is deleveraging and could increase debt if the company chooses. Profitability Ratios Return on equity and return on net operating assets increased to 32.1% and 15.2%, from 31.7% and 13.4% in 2009. This is considerably better than JCPenney, which has a return on equity of 7.6% and return on net operating assets of 3.4%. Nordstrom has a significantly better performing operating business, and is using its leverage wisely to grow the company. The NOPM was 7.6% (6.1% in 2009) and NOAT was 2.0 in 2010, (2.2 in 2009). Despite a lower gross margin in 2010, EBIT and profit margins improved, which suggests the company has a strong degree of operating leverage and degree of total leverage. Nordstrom has a higher NOPM than JCPenney (1.6%) and slightly worse NOAT (2.1). Market Ratios Nordstrom currently has a Price to Book of 5.22, Price to Earnings of 15.3, and Enterprise Value to EBITDA of 7.4. JCPenney currently has a Price to Book of 1.51, Price to Earnings of 36.0, and Enterprise Value to EBITDA of 6.62. Nordstrom is currently trading at a large premium to book, but the company is trading at a lower price to earnings multiple. The EV to EBITDA suggests that JCPenney is trading at a slightly lower multiple. Although it appears Nordstrom is more expensive than JCPenney, the operations at Nordstrom are generally more profitable, more efficient, and less risky. The premium paid for Nordstrom versus JCPenney appears to be justified overall. Common-size Financial Statements The common-size adjusted income statement has only subtle changes that influence a steady increase of earnings divided by total revenues and can be seen in Appendix C, Part E. The common-size adjusted balance sheet shows various differences as time progresses and can be seen in Appendix C, Part C. Retained earnings, taken as a percentage of total assets, increases, which reflects our forecasted revenue growth. Common stock, taken as a percentage of total assets, decreases as we do not expect Nordstroms to issue more in the future. Excess debt increases substantially, primarily due to our forecasting of Nordstrom to buy back shares and issue more dividends. Minimal shifts in other accounts exist throughout the statement. Forecasted Financial Statements Forecast Analysis (Our calculations can be found in Appendix C, Part A) Net Sales The net sales assumptions were highly based upon the growth patterns within same store sales and new store sales. In 2010 total sales growth was about 22% with about 8% of that being from same store sales. This means that the majority of store sales were from new store sales, so as Nordstrom continues to open new stores in 2011, sales should continue to increase. Nordstrom has plans to open three new full line stores and 17 new Rack stores in 2011. We believe this will contribute to a slight increase in net sales for 2011.

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Because the retail industry as a whole is only predicted to have about 1% growth for the next few years as a result of the economy, our forecast for sales growth in 2012 is slightly lower. In order for Nordstrom to continue growing within the industry, it will have to gain more of the market share. The company is working on doing that with its Rack stores, which provide consumers with lower-cost merchandise. Nordstrom has 17 new Rack stores opening in 2011, which should continue to help sales into 2012. As Nordstrom continues to open Rack stores and maintain its full-line stores, we believe that the benefits of the Rack stores on growth will gradually decline. Although the Rack stores are a great way for Nordstrom to capture more of the market share, once they have done that, we will not see the high growth rates we saw when the Rack stores first started coming onto the market. Moving forward, we believe that sales growth will gradually decline until reaching at terminal growth rate of about 3%, which is just above the overall long-term growth rates of our economy. Credit Card Revenues Credit card revenues are expected to increase slightly as we move out of the recession and consumers start spending more on credit again. Credit card revenue growth dropped off significantly during the recession, so a slight increase should occur as consumers start spending again. We believe they will remain relatively stable going forward as the extreme prerecession growth is not a realistic way to forecast. Cost of Sales and Related Buying and Occupancy Costs Nordstroms cost of sales and related buying and occupancy costs have decreased as a percentage of net sales over the last three years. As more Rack stores begin to open up, this cost should decrease a bit in 2012. The Rack stores do not have the same high-end shopping experience that the full-line stores do, which allows the company to sell its merchandise without all of the added costs of the shopping experience. The merchandise sold in Rack stores is also last seasons merchandise and is a way for Nordstrom to get rid of unsold product. Moving forward, we believe costs will rise a little with economic growth and then remain stable into 2020. Retail Stores, Direct, and Other Segments Retail store, direct, and other segment costs have steadily risen as a percentage of net sales over the last five years. Nordstrom recently implemented a free return policy for its online orders, which has increased costs slightly according to the company. Going forward, we believe these costs will continue steadily increasing similar to the pattern from the last five years. Capital Lease Adjustment We expect the capital lease adjustment to increase through 2020 because Nordstrom has plans to increase the number of their stores, especially the Nordstrom Rack stores. The balance will increase because the operating lease depreciation expense and the operating lease interest expense will be increasing during this period. Credit Segment We expect credit segment costs to remain stable going forward to 2020. The forecasted estimate of 80.40% is an average from 2006-2010. The credit segment as a percentage of credit card revenues fluctuated quite a bit from 2006 to 2010, which is why an overall average was taken to determine the forecasts. It is not believed that Nordstrom will have any significant changes to its credit segment that will impact this stable rate.

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Operating Lease Depreciation Expense Nordstrom uses the straight-line method of depreciation over the assets estimated useful life to calculate the operating lease depreciation. We expect the operating lease depreciate expense to be about the same in the future as it was in 2010, so we have forecasted the same 10.70% forward until 2020. However, the account balance will increase over time because of the increase in the leased building and equipment account. Interest Expense We expect the interest expense to fall a little in 2011 to 4.45% before it increases by .25% each year as the economy grows and expands. Interest Revenue As Nordstrom accumulates excess cash, we expect them to make a small 1% return on their cash as interest revenue in 2011. As the economy begins to recover, we expect this to increase by .25% each year until 2020. Operating Lease Interest Expense We expect the interest expense on leases to stay about 7% until 2020. The expense will increase however, as Nordstrom expands and the leased buildings and equipment increase. Income Tax Expense We expect that corporate tax rates will decline in the next decade, as the federal government slowly shifts to an environment of low tax rates meant to encourage economic growth. Also, since the corporate sector is generally more healthy than the household sector and government sector, the tax rate will be lowered for the private sector to generate economic growth. Basic Shares In August 2010, our Board of Directors authorized a program to repurchase up to $500 million of our outstanding common stock, through January 28, 2012. Nine million dollars was repurchased in 2010, so we thus expect $411 million to be repurchased in 2011. Considering repurchase goals of the past and a projected excess of cash, we project Nordstrom to continue to buy back stock at a rate of $500 million per year. Assuming an average Nordstrom stock price to be $45 in 2011, this repurchase will decrease basic shares by 9.1 million. Assuming an average stock price of $50 in 2012 through the terminal year, basic shares will decrease by 10 million every year. Diluted Shares Using the same logic as for basic shares, we project diluted shares will decrease by 9.1 million in 2011 and by 10 thereafter. Cash and Cash Equivalents According to Nordstrom's 07/30/2011 10Q, their cash balance is $1,090 million which is a cash level similar as 2010. Percentage of total revenue is assumed to stay around 2010-level. Accounts Receivable Days of receivables outstanding have been steady since 2008 and we expect it to stay at this level. Merchandise Inventory Days inventory outstanding have been decreasing for the past five years because of their multichannel technology and increased online sales. Since the implementation in 2006, its inventory

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turnover has increased from 5.06 to 5.56. We have assumed this pattern will continue for the next five years, and stays the same thereafter. Days inventory outstanding is calculated using linear regression. Current Deferred Tax Assets There are no marked changes in the component accounts of Nordstrom's current deferred tax asset, or its percentage of total revenue. Percentage of total revenue is assumed to stay around the average of the past five years. Prepaid Expenses Nordstrom does not provide a breakdown of this account in its footnotes and does not discuss this line item in its MD&A. We have assumed the percentage of total revenue will stay around the average of the past four years (2006s level of 5.64% seemed to be an outlier). Land, Buildings, and Equipment, net We expect the land, buildings, and equipment turnover to decrease because we forecast Nordstroms to use their assets less efficiently in the future. This is because we project assets to increase due to future improvements and renovation versus opening new stores. Each incremental increase in total PP&E will have less effect on growing revenues. Leased Buildings and Equipment We expect the leased buildings and equipment account to grow because of their expansion plans. Currently, we are expecting the leased building and equipment to grow at the same rate proportionately to their total revenues. Goodwill Goodwill has increased by $147 million in 2011 because of the purchase of HauteLook Inc. in February 2011. Nordstrom does not have any future plans to purchase another retailer in the near future, as they are focusing more on internal growth. Therefore, goodwill will continue to be at $200 million until 2020. Other Assets We expect Nordstroms other assets to increase as the company expands by about the same amount in 2010 in proportion to their revenue. We expect this percentage to increase only slightly to 2.85% (from 2.75% in 2011) in 2020. Commercial Paper We have assumed that Nordstrom will continue the trend and will not issue commercial paper in the future. Accounts Payable The Days Payable Outstanding is assumed to decrease to a level of a weighted average of the past five years, with more weight to recent years. Accrued Salaries, Wages, and Related Benefits The percentage of total revenue is assumed to stay at a slightly higher level than the average given the general economic trend. Other Current Liabilities Based on prior year stability, we expect other current liabilities to maintain at a 6.5% of revenue.

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Current Portion of Long-term Debt This is given in Nordstroms annual 10-K filing until 2015 and then one lump sum for the remaining years. This lump sum amount has been spread between our remaining forecasted years. Long-term Debt, net We assume long-term debt to stay at the 2010 level until 2015, and then to decrease annually by 1% after 2015 to decrease idle cash. Deferred Property Incentives, net We expect Nordstroms net deferred property incentives to continue to increase at the average 4.75% from the previous 5 years in proportion to their revenue. Other Liabilities Based on prior year stability, we expect the other liabilities to remain at 3% as a percentage of total revenue. Common Stock We do not expect Nordstrom to issue more common stock. Repurchase of Common Stock In August 2010, our Board of Directors authorized a program to repurchase up to $500 million of our outstanding common stock, through January 28, 2012. Nine million dollars were repurchased in 2010, so we thus expect $411 million to be repurchased in 2011. Considering repurchase goals of the past and a projected excess of cash due to increasing revenue, we project Nordstrom to continue to buy back stock at a rate of $500 million per year. Accumulated Other Comprehensive Loss The accumulated other comprehensive loss cannot be forecasted due to the changes in asset values and management discretion to buy or sell securities. Since the company does not have material marketable securities, we estimate they will not have any balance in this account at any point in the future. Dividend Payout Ratio Since the company is generating cash flow at an increasing pace, the company will increase their dividend payout ratio to give this cash back to shareholders. Although we have built in some share buybacks, the dividend payout ratio could increase, which would have effectively the same result. There is definite capacity to increase the dividend payout ratio in the future and we have forecasted this as such. Forecasted Key Valuation Components Our forecasts assume that Nordstrom will continue to invest in the net operating assets of the firm, which results in a negative forecasted Free Cash Flow in 2011 and 2013. After this, the company will generate consistent free cash flows, increasing due to sales growth and a constant projected net operating asset turnover in the later years. The RNOA is expected to decline from 2010 levels of 14.5% to 12.6% in 2012 and then increase slightly to 13.8% by the terminal year.

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Exhibit 4: Cost of Capital Company and Equity Valuation Cost of Capital Measures Cost of Equity: We estimate the cost of capital to be 9.36%, shown in ERP (Damodaran) 6.49% Exhibit 4. The cost of equity is 12.33%, derived from Rf Rate (10-yr T-Note) 1.97% CAPM. The inputs to CAPM are an equity risk premium of Equity Beta 1.60 6.49% (from Damodaran), a risk free rate of 1.97% (most Cost of Equity: 12.33% recent 10-year Treasury yield), and an equity beta of 1.60 (average of beta estimates). The after-tax cost of debt is Cost of Debt: calculated to be 2.15% (4.16% before tax, with a 39.61% Interest Expense 2010 $127 tax shield). The after-tax cost of operating leases is 4.23% Average Debt 2010 $3,056 (7% before tax, with a 39.61% tax shield). Thus, with Implied Cost of Debt 4.16% market value capital structure of 69% equity, 26% debt, Marginal Tax Rate 39.61% and 5% operating leases, the weighted average cost of After-Tax Cost of Debt: 2.51% capital (WACC) is 9.36%. We believe this is a very reasonable estimate for WACC, given the cyclical nature Cost of Operating Leases: of the business and primary reliance on equity financing Discount Rate on Op. Leases 7.00% the firm's strategy. The elevated equity risk premium and Marginal Tax Rate 39.61% low risk free rate also influence WACC, which reflect the After-Tax Cost of Op. Leases: 4.23% underlying market conditions. Since the 10-year Treasury yield is at an all-time low and equity markets have been Weighted Average Cost of Capital: volatile, the uncertainty has increased the required return WACC: 9.36% on equities. This also illustrates the capacity of the company to increase debt and buy back shares, which would lower the WACC by changing the capital structure.

Comparable Market-Based Valuation The comparable market-based valuations were compared with several competitors in the Apparel Stores industry in Exhibit 5 below. These companies exhibit similar business strategies, operating profitability, and underlying growth expectations. We calculated a NOA Market Multiple of 2.37 for the industry. With Net Operating Assets of $5,520 million, the company is worth $13,073 million and after subtracting Net Non-operating Assets, we got an implied intrinsic value of $43.01 per share. For the Book Value Multiple, we calculated an industry average of 5.85. Thus, the companys implied intrinsic value of $53.14. And lastly for the Net Income Multiple, we calculated the industry average to be 14.62. This implies that Nordstroms intrinsic value is $37.85 per share.

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Exhibit 5: Comparable Market-Based Implied Valuations


Industry: Apparel Stores

(in millions, except share amounts) Net Operating Assets Multiple: Enterprise Value Net Operating Assets NOA Market Multiple: Company Intrinsic Value Shares Outstanding Equity Intrinsic Value Equity Intrinsic Value per Share:

Nordstrom -$5,520 2.37 $13,073 222.6 $9,574 $43.01

Limited Brands $13,919 4,149 3.35

Gap $10,141 5,252 1.93

Abercrombie & Fitch $3,418 1,958 1.75

Urban Outfitters $3,750 1,080 3.47

American Eagle $1,996 1,492 1.34

(in millions, except share amounts) Book Value Multiple: Market Capitalization Book Value of Equity Book Value Market Multiple: Shares Outstanding Equity Intrinsic Value Equity Intrinsic Value per Share

Nordstrom -$2,021 5.85 222.6 $11,830 $53.14

Limited Brands $11,430 625 18.29

Gap $8,990 2,659 3.38

Abercrombie & Fitch $3,880 1,931 2.01

Urban Outfitters $3,880 1,034 3.75

American Eagle $2,510 1,367 1.84

(in millions, except share amounts) Net Income Multiple: Market Capitalization Net Income: Net Income Multiple: Shares Outstanding Equity Intrinsic Value Equity Intrinsic Value per Share

Nordstrom -$576 14.62 222.6 $8,425 $37.85

Limited Brands $11,430 943 12.12

Gap $8,990 980 9.17

Abercrombie & Fitch $3,880 201 19.30

Urban Outfitters $3,880 221 17.56

American Eagle $2,510 168 14.94

Note: Market values are as of 11/25/2011 market close. Comparables financial information is based on last tw elve months data, w here Nordstrom is 2010 data.

Dividend Discount Model The Dividend Discount Models for Nordstrom do not correctly value the company in our opinion, as is demonstrated in Exhibit 6. None of the three models we created to model possible dividend payments derived an implied stock price that seems reasonable. There are several reasons for this: Market estimates significant expected earnings growth Continued positive economic profits on retained capital Lower cost of equity may be less than we estimate Overall, we expect the dividend payout ratio to increase substantially in our forecasts, which could lead to large increases in the growth of dividends. Our models in these dividend discount valuations are only assuming that dividends increase with the growth of earnings. As a result, the dividend discount model does not provide us much value in analyzing the intrinsic value of Nordstrom.

Exhibit 6: Dividend Discount Models


Constant Perpetuity DDM: Dividend per share T+1 Growth Rate of Dividend Cost of Equity Implied price per share: Gordon Growth Model: Dividend per share T+1 Growth Rate of Dividend Cost of Equity Implied price per share:

$0.92 0.00% 12.33% $7.46

$0.98 7.00% 12.33% $18.46

Two Stage Gordon Growth Model: Dividend per share T+1 $1.02 1st Stage Growth Rate 11.00% 1st Stage Length (Years) 5 Perpetual Growth Rate 4.00% Cost of Equity 12.33% Implied price per share: $14.84

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Discounted Cash Flow (DCF) Valuation Model As a starting point for valuing Nordstrom we built a discounted cash flow model that valued the company using the free cash flows through 2020 and can be seen in Appendix C, Part L. The free cash flow in this case is calculated as NOPAT minus the increase in NOA. Using the NOPAT allowed us to only look at the free cash flow from operating activities. Likewise, the subtraction of the increase in NOA showed us the cash flow that was left after accounting for money that was used to grow operating assets in the business. All of our forecasted years have positive free cash flows meaning that there will be funds available for distribution to creditors and shareholders. This is a positive sign for Nordstrom as any sort of negative free cash flow would not be sustainable if it continued for many years into the future. Two of the major factors that contribute heavily to our discounted cash flow model are the companys margins and its asset efficiency. At a discount rate of 9.36% and a terminal growth rate of 3%, we came up with a per share value for Nordstrom of $51.39. The current stock price is slightly below $50.00, so we think that Nordstrom stock is slightly undervalued. However, with the volatility of the retail industry, we believe it is not undervalued enough to warrant it a buy stock. For now, we believe it is a safe stock to hold on to. The stock price has been steadily increasing since it hit bottom in mid-2008, which is a good sign for Nordstroms future outlook and another reason why this stock is good to hold on to. We believe that, if anything, our higher stock price estimate may be due to an aggressive terminal growth rate. Residual Operating Income (ROPI) Valuation Model Another company valuation was performed using the Residual Operating Income (ROPI) model and can be seen in Appendix C, Part M. This model uses net operating assets as the basis for the ROPI cash flows. In this model, ROPI is what is earned above and beyond what is required by investors. An important aspect of this model is that if there is a constant negative ROPI into the future, it would be more beneficial for the company to liquidate because investors do not want to keep an investment that is not earning their required rate of return. Nordstrom had a positive ROPI throughout the forecasted years, which led to a stock price per share of $49.81. Similar to the discounted cash flow model, this estimate is just slightly above Nordstroms current stock price. This model reiterates our hold status conclusion for Nordstrom stock because our estimate is not that much higher than the actual stock value. For the most part, our estimates for both the discounted cash flow model and the residual operating income model are very in line with the companys actual stock value. The use of the forecasted financial statements to roll up NOPAT and NOA into the models was much more effective than using constant rates to calculate these numbers. We believe that our forecasts are very much in line with what the company is likely to expect in the future and because of that, we believe Nordstrom stock is a solid stock to hold on to. Sensitivity Analysis of DCF and ROPI We performed sensitivity analysis for both the discounted cash flow and residual operating income models. The results are presented in Exhibits 7 and 8 below. For both models, the analysis produced a range in stock price per share from mid-$30s to mid-$75s. The analysis shows a range of values for both WACC and the terminal sales growth rate and their respective effects on stock price per share. As is expected, the highest value in the range comes from a combination of the lowest WACC and the highest growth rate scenario. For DCF, this price was $75.25 or a 46% changed in value. This is a substantial increase in value from only slight changes in both the WACC and growth rate. The increase was even higher for the ROPI model.

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The highest value calculated for ROPI was $74.59, which was about a 50% increase. These large increases show that Nordstroms stock price per share is quite sensitive to changes in a combination of WACC and the terminal growth rate. The lowest values calculated from the sensitivity analysis also had a large impact on the value. The percent change was about 25% and 37% for DCF and ROPI, respectively. These large percentage changes show that the stock value is very sensitive to changes in these inputs and that there is about a $40 range for Nordstroms stock value.
Exhibit 7: DCF Sensitivity Analysis Sales Terminal Growth Rate 2.50% 3.00% 3.50% 63.05 66.38 70.37 55.68 58.22 61.20 49.44 51.39 53.64 44.06 45.56 47.28 39.41 40.57 41.89

W A C C

8.36% 8.86% 9.36% 9.86% 10.36%

2.00% 60.21 53.50 47.74 42.74 38.37

4.00% 75.25 64.77 56.29 49.27 43.39

Exhibit 8: ROPI Sensitivity Analysis Sales Terminal Growth Rate 2.50% 3.00% 3.50% 61.61 65.13 69.37 54.10 56.80 60.00 47.73 49.81 52.26 42.21 43.84 45.72 37.43 38.71 40.71

W A C C

8.36% 8.86% 9.36% 9.86% 10.36%

2.00% 58.64 51.80 45.92 40.79 36.31

4.00% 74.59 63.85 55.15 47.92 41.86

Intrinsic Value After analyzing each valuation model, we have determined that the underlying intrinsic value of Nordstrom is $50.00 per share. This intrinsic value is largely based on the DCF and ROPI model results, which value the company at $51.39 and $49.81 per share respectively. This valuation is also verified by comparable market-based valuation, suggesting a low valuation of $37 per share and a high of $53 per share. We tend to estimate that on average the marketbased multiples are pricing the company at $45 per share. Our valuation models suggest a valuation of $51 and $49, which is slightly more aggressive compared to the market. We believe the DCF and ROPI models more fully capture the underlying valuation of this firm. Therefore, we value the company at $50 and suggest a neutral positioning with the stock.

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Appendix A: Company Facts A. Nordstrom, Inc. was founded in 1901 and is located in Seattle, Washington. B. Standard Industrial Classification (SIC): 5651 Retail-Family Clothing Stores C. Chief Executive Officer: Blake W. Nordstrom Chairman of the Board: Enrique Hernandez, Jr. Chief Financial Officer: Michael G. Koppel D. Nordstrom has two reportable segments: Retail and Credit. The Retail segment includes 115 Nordstrom full-line stores, the Nordstrom online store, 89 Nordstrom Rack stores, 2 Jeffrey boutiques, and 1 clearance store named Last Chance. Through these stores, Nordstrom offers high-quality brand name and private label merchandise, which focuses on apparel, shoes, cosmetics, and accessories. The Credit segment includes a wholly owned federal savings bank, Nordstrom fsb, which provides Nordstrom with a private label credit card, 2 Nordstrom VISA credit cards, and a debit card which can be used for Nordstrom purchases. While the main purpose of these cards is to increase customer loyalty, visits, and spending at Nordstrom stores, they also generate revenue through finance charges and other fees. E. Nordstrom is located throughout the United States, with a larger presence on the east and west coasts. Its main business activities consist of retail and credit sales. F. Nordstrom employed approximately 52,000 employees on a full or part-time basis throughout 2010. Nordstrom experiences a seasonal nature within its industry, and increased its number of employees to about 55,000 in July 2010 and 54,000 in December 2010. G. Deloitte & Touche LLP (Deloitte) from Seattle, Washington is the independent auditor of Nordstroms internal controls over financial reporting. In Deloittes report, they explain that they conduct their audit of Nordstroms internal controls in accordance with the criteria established in the Internal Control Integrated Framework, issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Then they express an opinion on Nordstroms internal controls based on their audit. After explaining how Deloitte conducts their audit and what Nordstroms internal controls includes, Deloitte issued an unqualified opinion for Nordstroms internal controls H. Deloitte & Touche LLP (Deloitte) from Seattle, Washington is the independent auditor of Nordstroms financial statements. In Deloittes report, they explain that they conduct their audit of Nordstroms financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board (PCAOB). It also explains that the audit is performed to obtain reasonable assurance that the financial statements are free from material misstatements. Upon reviewing their audit, Deloitte issued an unqualified opinion for Nordstroms financial statements. I. Nordstrom is listed on the New York Stock Exchange and its stock ticker symbol is JWN. According to Yahoo! Finance as of Monday, November 28, 2011, Nordstroms stock price is $ 45.19.

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Appendix B: Accounting Basics A. Nordstroms Major Accounting Policies Revenues (Including Recognition Policies) Nordstrom recognizes revenue of sales for its retail stores at the point of sale, net of an allowance for estimated sales returns. Sales return allowance is estimated from historical return patterns and cost of goods is adjusted accordingly. Likewise, top competitor Macys Inc., parent corporation of Macys and Bloomingdales stores, also records sales of merchandise at time of delivery, net estimated returns. Gift card revenue is recognized at the time the customer redeems the card with merchandise, or when unredeemed balances exceed 5 years. Similarly, Macys also defers recognizing gift card revenue until redemption. Macys chooses not to disclose the time period an unused balance must exceed in order to be recognized as revenue. Nordstroms current 5 year policy seems to be quite conservative. The companys credit card division revenues consist of finance charges (interest earned on unpaid balances), interchange fees, and late fees. Major expenses (Including Recognition policies) Nordstroms major expenses consist of cost of sales, buying and occupancy costs, and selling, general and administrative expenses (SG&A). Cost of sales includes the purchase cost of inventory sold (net of vendor allowances), in-bound freight to distribution centers, and costs of loyalty program benefits. While Macys loyalty programs costs do not increase cost of sales expense, they directly decrease net sales, which creates the same effect on gross profits. Nordstroms buying costs are primarily compensation and other costs incurred by the merchandising and product development groups. Occupancy costs are defined as rent, depreciation, property taxes and facility operating costs of our retail, corporate center and distribution operations. And lastly, SG&A expenses include remaining compensation and benefits cost, advertising, shipping and handling costs, and bad debt expense pertaining to the credit card operations. Various vendor allowances exist that either reduce SG&A expense or in the case of purchase price adjustments, reduce cost of sales at the point related merchandise is sold. Nordstroms advertising costs are expensed the first time an advertisement is run, net of vendor allowance, and are included in selling, general and administrative expenses. Similarly, Macys expenses non-direct response advertising at first time of advertisement but expenses direct response advertising over the period sales are expected to occur. This is a policy Macys may use in order to delay expenses, once again giving indication that Nordstroms accounting policies may be more conservative. Nordstroms rent expense is recognized on a straight-line basis over the minimum operating lease term. Contingent rental payments, typically based on a percentage of sales, are recognized in rent expense when payment of the contingent rent is probable. Competitor Macys is consistent with this expense recognition. Both Nordstrom and Macys have operating leases, a strategic choice that allows assets to escape being reported in the balance sheet. Investments Nordstrom does not define its accounting policies for investments as it does not have any investments accounted by the equity method, trading securities, or available-for-sale securities. Inventories Nordstroms merchandise inventories are stated at lower of cost or market value. Both

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Nordstrom and competitor Macys value inventories using the retail method which applies a cost-to-retail ratio to retail value of ending inventory. However, Macys uses LIFO retail method while Nordstrom applies a weighted average cost. Companies such as Nordstroms top competitor Macys may use LIFO as a means to reach lower taxable income, assuming an increasing cost of goods. Nordstrom calculates an obsolescence reserve based on assumptions to the market conditions, selling environment, and historical patterns. Rather than employing a reserve, Nordstroms competitor Macys reduces gross margin at time of the decision to markdown. Nordstroms use of a reserve seems as the best standard because they cannot manipulate gross margin by choosing to make markdowns in a certain period as Macys could potentially do. Property, Plant, and Equipment (Including Depreciation) Nordstroms land is recorded at historical cost and its buildings and equipment are recorded at cost less accumulated depreciation. Nordstroms uses a straight-line depreciation method over the assets estimated useful life. They amortize leasehold improvements made at the inception of the lease by the shorter of the asset life or the initial lease term. They also capitalize interest on construction in progress and software projects during the period in which expenditures have been made, activities are in progress to prepare the asset for its intended use and actual interest costs are being incurred. Nordstrom routinely views the carrying value of long-lived assets to gauge for potential impairment loss. Likewise, competitor Macys PP&E accounting policies are basically identical to Nordstroms described above. Goodwill and Other Intangibles (Including Amortization) Nordstrom reviews goodwill annually for impairment on the first day of the first quarter or when circumstances indicate its carrying value may not be recoverable. They perform this evaluation at the reporting unit level, comprised of the principal business units within our Retail segment, through the application of the two-step fair value test defined by GAAP. Macys claims to test for goodwill impairment annually in May, and we can therefore assume that Nordstrom testing quarterly is a conservative industry practice. B. Headings of each Note in Financial Statements NOTE 1: Nature of Operations and Summary of Significant Accounting Policies NOTE 2: Accounts Receivable NOTE 3: Land, Buildings and Equipment NOTE 4: Self Insurance NOTE 5: 401(k) and Profit Sharing NOTE 6: Postretirement Benefits NOTE 7: Debt and Credit Facilities NOTE 8: Leases NOTE 9: Commitments and Contingent Liabilities NOTE 10: Shareholders Equity NOTE 11: Stock Compensation Plans NOTE 12: Income Taxes NOTE 13: Earnings per Share NOTE 14: Segment Reporting NOTE 15: Selected Quarterly Data (Unaudited) NOTE 16: Subsequent Event

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C. Risks and Importance of Commitments and Contingencies Discussed in Footnotes Nordstrom is subject to a variety of purchase obligations, capital expenditure contractual commitments and inventory purchase orders, which totaled $1,302 as of January 29, 2011. Said commitments are common in the retail industry and we do not identify them as a major risk for Nordstrom. Like any business, Nordstroms is also subject to claims and lawsuits arising in the ordinary course of business including lawsuits alleging violations of state and/or federal wage and hour laws. These suits may remain unresolved for several years, but the expected expenses are recorded in reserves that Nordstrom feels portray they have predicted outcome adequately. Litigation does not appear to be a high risk area of incorrect forecasting for Nordstrom. D. Impact of any Unrecorded Assets Nordstroms market value is far more than its book value, giving strong evidence that Nordstrom has several assets unrecorded on its balance sheet. The primary examples are intangibles that are not quantified easily, such as its strong brand image. Nordstrom offers a unique shopping experience because of its friendly, knowledgeable employees, and fun atmosphere. Nordstrom offers a superior customer service where employees are encouraged to go above and beyond, and motivated by commission compensation. Nordstrom also provides immeasurable benefit and value by having an integrated system of catalogs, ecommerce Web sites, and stores. Customers can easily shop from channel to channel without hitting roadblocks. Competing department stores have struggled in this area, adding to its value. Lastly, Nordstrom also has a strong company culture. In 2011, it was ranked as the #74 best place to work. Landing as a top place to work is invaluable for attracting and keeping outstanding employees that provide worth unaccountable on a balance sheet.

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Appendix C: Adjusted Financial Statements, Exhibits, and Valuation A. Forecasting Assumptions B. Adjusted Consolidated Balance Sheet C. Common Size Adjusted Consolidated Balance Sheet D. Adjusted Consolidated Statement of Earnings E. Common Size Adjusted Consolidated Statement of Earnings F. Capitalize Operating Leases G. Ratio Analysis H. ROE Disaggregation I. Dividend Discount Models

J. Market-Based Valuation K. Weighted Average Cost of Capital L. Discounted Cash Flows Model M. Residual Operating Income Model

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Nordstrom, Inc. Forecasting Assumptions HISTORICAL


Fiscal year Net sales Credit card revenues Cost of sales and related buying and occupancy costs Retail stores, direct and other segments Capital Lease Adjustment Credit segment Operating Lease Depr Expense Gain on sale of Faonnable Interest expense Interest revenue Operating Lease Interest Expense Income tax expense Basic shares Diluted shares 2006 2007 2008 2009 2010 2011 2012 2013 2014

FORECASTED
2015 2016 2017 2018 2019

Terminal Year

Annual % Growth Annual % Growth % of Net Sales % of Net Sales Adjustment % of Credit Card Rev Average Useful Life Forecast Interest Rate on Debt Interest Rate Discount Rate on Leases Tax Rate Shares OS Shares OS % of Total Rev Days Sales Outstanding Days Inventory Outstanding % of Total Rev % of Total Rev PPE Turnover Lease PPE Turnover Forecasted % of Total Rev % of Total Rev % of Total Rev % of Total Rev Forecasted Days Payable Outstanding % of Total Rev % of Total Rev % of Total Rev Forecasted Forecasted Forecasted 62.54% 24.19% 0 87.62% 0 0 4.60%

3.12% 140.00% 62.60% 24.48% 0 78.57% 0 34 11.73%

-6.30% 19.44% 65.49% 25.42% 0 91.03% 0 0 7.25%

-0.17% 22.59% 64.52% 25.54% 0 96.48% 0 0 5.49%

12.74% 5.69% 63.34% 25.91% 111 70.00% 10.70 0 4.86% 7.00%

13.00% 6.00%

10.00% 6.00%

9.50% 6.00%

9.50% 6.00%

9.50% 6.00%

8.00% 6.00%

6.00% 6.00%

6.00% 6.00%

6.00% 6.00%

3.00% 6.00%

62.00% 26.00% 132 84.00% 10.70 0 4.45% 1.00% 7.00% 36.00% 209.7 213.50 15.00% 80.00 57.00 2.32% 0.94%

62.00% 26.40% 145 84.00% 10.70 0 4.70% 1.25% 7.00% 35.00% 199.7 203.50 15.00% 80.00 55.00 2.32% 0.94%

62.00% 26.40% 159 84.00% 10.70 0 4.95% 1.50% 7.00% 32.00% 189.7 193.50 15.00% 80.00 53.00 2.32% 0.94%

62.00% 26.80% 174 84.00% 10.70 0 5.20% 1.75% 7.00% 30.00% 179.7 183.50 15.00% 80.00 51.00 2.32% 0.94%

62.00% 26.80% 190 84.00% 10.70 0 5.45% 2.00% 7.00% 30.00% 169.7 173.50 15.00% 80.00 49.00 2.32% 0.94%

62.00% 26.00% 205 84.00% 10.70 0 5.70% 2.25% 7.00% 30.00% 159.7 163.50 15.00% 80.00 49.00 2.32% 0.94%

62.00% 26.00% 218 84.00% 10.70 0 5.95% 2.50% 7.00% 30.00% 149.7 153.50 15.00% 80.00 49.00 2.32% 0.94%

62.00% 26.00% 231 84.00% 10.70 0 6.20% 2.75% 7.00% 30.00% 139.7 143.50 15.00% 80.00 49.00 2.32% 0.94%

62.00% 26.00% 245 84.00% 10.70 0 6.45% 3.00% 7.00% 30.00% 129.7 133.50 15.00% 80.00 49.00 2.32% 0.94%

62.00% 26.00% 252 84.00% 10.70 0 6.70% 3.25% 7.00% 30.00% 119.7 123.50 15.00% 80.00 49.00 2.32% 0.94%

38.70% 260.7 265.7 4.65% 28.22 66.57 1.95% 5.64% 4.91 0 136 2.16% 0.00% 38.08 3.92% 5.87% 7 7.20% 4.11% 2.77% 827 -9 16.22%

39.05% 244.8 248.8 3.94% 51.10 64.50 1.99% 0.86% 4.86 0 53 2.24% 0.00% 37.42 2.95% 6.06% 261 24.63% 4.06% 2.70% 936 -22 18.74%

41.30% 216.6 219.2 0.84% 82.29 62.53 2.45% 1.08% 4.08 0 53 1.98% 3.21% 37.70 2.50% 6.12% 24 25.83% 5.07% 2.34% 997 -10 39.32%

36.64% 216.8 219.7 9.22% 87.89 61.59 2.76% 1.02% 3.87 0 53 2.67% 0.00% 44.15 3.89% 6.91% 356 26.16% 5.44% 3.09% 1,066 -19 31.52%

39.61% 218.8 222.6 15.53% 79.61 58.03 2.43% 0.81% 4.25 13.51 53 2.75% 0.00% 48.65 3.87% 6.72% 6 28.61% 5.10% 3.01% 1,168 -29 28.98%

Cash and cash equivalents Accounts receivable, net Merchandise inventories Current deferred tax assets, net Prepaid expenses and other Land, buildings and equipment, net Leased buildings and equipment Goodwill Other assets Commercial paper Accounts payable Accrued salaries, wages and related benefits Other current liabilities Current portion of long-term debt Long-term debt, net Deferred property incentives, net Other liabilities Common stock Repurchase of Common Stock Accumulated other comprehensive loss Dividend Payout Ratio

4.00 13.51 200 2.75% 0.00% 43.06 3.40% 6.50% 6

4.00 13.51 200 2.80% 0.00% 43.06 3.40% 6.50% 7

4.00 13.51 200 2.80% 0.00% 43.06 3.40% 6.50% 406

4.00 13.51 200 2.80% 0.00% 43.06 3.40% 6.50% 8

3.75 13.51 200 2.80% 0.00% 43.06 3.40% 6.50% 304

3.75 13.51 200 2.85% 0.00% 43.06 3.40% 6.50% 304

3.75 13.51 200 2.85% 0.00% 43.06 3.40% 6.50% 304

3.50 13.51 200 2.85% 0.00% 43.06 3.40% 6.50% 304

3.50 13.51 200 2.85% 0.00% 43.06 3.40% 6.50% 304

3.50 13.51 200 2.85% 0.00% 43.06 3.40% 6.50% 304

29.00% 4.75% 3.00% 1,168 411 0 30.00%

29.00% 4.75% 3.00% 1,168 500 0 35.00%

29.00% 4.75% 3.00% 1,168 500 0 40.00%

29.00% 4.75% 3.00% 1,168 500 0 45.00%

29.00% 4.75% 3.00% 1,168 500 0 45.00%

28.00% 4.75% 3.00% 1,168 500 0 45.00%

27.00% 4.75% 3.00% 1,168 500 0 45.00%

26.00% 4.75% 3.00% 1,168 500 0 45.00%

25.00% 4.75% 3.00% 1,168 500 0 45.00%

24.00% 4.75% 3.00% 1,168 500 0 45.00%

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Nordstrom, Inc. Adjusted Consolidated Balance Sheets


In millions

HISTORICAL
Fiscal year Assets Current assets: Cash and cash equivalents Excess Cash Accounts receivable, net Merchandise inventories Current deferred tax assets, net Prepaid expenses and other Total current assets Land, buildings and equipment, net Leased buildings and equipment Goodwill Other assets Total assets 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

FORECASTED
2015 2016 2017 2018 2019 Terminal Year

$463 0 640 956 145 670 2,874 1,774 136 138 4,921

$403 0 684 997 169 489 2,742 1,757 136 187 4,822

$358 0 1,788 956 181 78 3,361 1,983 53 203 5,600

$72 0 1,942 900 210 93 3,217 2,221 53 170 5,661

$795 0 2,035 898 238 88 4,054 2,242 53 230 6,579

$1,506 0 2,026 977 236 79 4,824 2,318 718 53 267 8,180

$1,229 0 2,306 1,019 254 103 4,910 2,733 810 200 301 8,954

$1,302 0 2,536 1,081 279 113 5,311 3,003 889 200 336 9,739

$1,470 35 2,777 1,141 305 123 5,852 3,284 973 200 368 10,677

$1,655 0 3,041 1,202 333 135 6,367 3,592 1,064 200 402 11,625

$1,857 0 3,330 1,265 365 148 6,964 4,191 1,164 200 440 12,959

$2,044 0 3,597 1,366 394 159 7,560 4,523 1,256 200 483 14,022

$2,197 0 3,812 1,448 417 169 8,043 4,795 1,331 200 512 14,882

$2,359 0 4,041 1,535 442 179 8,556 5,445 1,411 200 543 16,156

$2,530 0 4,284 1,627 469 190 9,099 5,772 1,496 200 576 17,143

$2,624 0 4,412 1,675 483 196 9,391 5,951 1,542 200 594 17,677

Liabilities and Shareholders' Equity Current liabilities: Commercial paper Accounts payable Accrued salaries, wages and related benefits Other current liabilities Current portion of long-term debt Total current liabilities Long-term debt, net Deferred property incentives, net Capitalized operating leases Excess Debt Other liabilities Total liabilities Shareholders' equity: Common stock, no par value: 1,000 shares authorized; 217.7 and 215.4 shares issued and outstanding Retained earnings Accumulated other comprehensive loss Total shareholders' equity Total liabilities and shareholders' equity Check Supplemental Information: Net Operating Assets Total Assets w/o Excess Cash Total Liabilities w/o Excess Debt Excess Cash / (Debt)

0 540 286 491 307 1,623 628 364

0 577 340 509 7 1,433 624 356

0 556 268 550 261 1,635 2,236 369

275 563 214 525 24 1,601 2,214 435

0 726 336 596 356 2,014 2,257 469

0 846 375 652 6 1,879 2,775 495 718 0 292 6,159

0 769 372 711 6 1,858 3,171 519 810 97 328 6,783

0 846 408 781 7 2,042 3,483 571 889 195 360 7,541

0 927 447 854 406 2,633 3,809 624 973 0 394 8,434

0 1,015 489 934 8 2,445 4,167 682 1,064 547 431 9,337

0 1,111 534 1,022 304 2,971 4,558 746 1,164 675 471 10,585

0 1,200 577 1,103 304 3,183 4,749 806 1,256 964 509 11,467

0 1,272 611 1,169 304 3,356 4,855 854 1,331 1,170 539 12,105

0 1,349 648 1,239 304 3,539 4,955 905 1,411 1,732 572 13,115

0 1,429 687 1,313 304 3,734 5,051 960 1,496 1,946 606 13,791

0 1,472 708 1,354 304 3,838 4,999 989 1,542 1,996 625 13,990

213 2,829

240 2,653

245 4,485

201 4,451

267 5,007

686 1,404 2 2,093 4,921

827 1,351 -9 2,169 4,822

936 201 -22 1,115 5,600

997 223 -10 1,210 5,661

1,066 525 -19 1,572 6,579

1,168 882 -29 2,021 8,180

1,168

1,168

1,168

1,168

1,168

1,168

1,168

1,168

1,168

1,168

1,003
0 2,171 8,954

1,030
0 2,198 9,739

1,075
0 2,243 10,677

1,120
0 2,288 11,625

1,206
0 2,374 12,959

1,387
0 2,555 14,022

1,608
0 2,776 14,882

1,873
0 3,041 16,156

2,184
0 3,352 17,143

2,520
0 3,688 17,677

0 3,027

0 2,800

0 3,612

0 3,723

0 4,185

0 5,520

6,254 8,954 8,856 -97

6,773 9,739 9,544 -195

7,396 10,641 10,677 35

8,074 11,625 11,078 -547

9,074 12,959 12,284 -675

9,828 14,022 13,058 -964

10,436 14,882 13,712 -1,170

11,443 16,156 14,424 -1,732

12,148 17,143 15,197 -1,946

12,529 17,677 15,681 -1,996

Page 24

Nordstrom, Inc. Common Size Adjusted Consolidated Balance Sheets HISTORICAL


Fiscal year Assets Current assets: Cash and cash equivalents Excess Cash Accounts receivable, net Merchandise inventories Current deferred tax assets, net Prepaid expenses and other Total current assets Land, buildings and equipment, net Leased buildings and equipment Goodwill Other assets Total assets 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

FORECASTED
2015 2016 2017 2018 2019 Terminal Year

9.40% 13.00% 19.43% 2.96% 13.62% 58.40% 36.04% 2.76% 2.80% 100.00%

8.36% 14.18% 20.68% 3.50% 10.14% 56.86% 36.44% 2.82% 3.88% 100.00%

6.39% 31.93% 17.07% 3.23% 1.39% 60.02% 35.41% 0.95% 3.63% 100.00%

1.27% 34.30% 15.90% 3.71% 1.64% 56.83% 39.23% 0.94% 3.00% 100.00%

12.08% 30.93% 13.65% 3.62% 1.34% 61.62% 34.08% 0.81% 3.50% 100.00%

18.41% 24.77% 11.94% 2.89% 0.97% 58.97% 28.34% 8.78% 0.65% 3.26% 100.00%

13.73% 0.00% 25.75% 11.38% 2.83% 1.15% 54.84% 30.53% 9.04% 2.23% 3.36% 100.00%

13.36% 0.00% 26.04% 11.10% 2.86% 1.16% 54.53% 30.83% 9.13% 2.05% 3.45% 100.00%

13.77% 0.00% 26.01% 10.68% 2.85% 1.16% 54.81% 30.76% 9.11% 1.87% 3.44% 100.00%

14.24% 0.33% 26.16% 10.34% 2.87% 1.16% 54.77% 30.90% 9.15% 1.72% 3.46% 100.00%

14.33% 0.00% 25.70% 9.76% 2.81% 1.14% 53.74% 32.34% 8.98% 1.54% 3.40% 100.00%

14.58% 0.00% 25.65% 9.74% 2.81% 1.14% 53.91% 32.26% 8.96% 1.43% 3.45% 100.00%

14.76% 0.00% 25.62% 9.73% 2.80% 1.14% 54.05% 32.22% 8.95% 1.34% 3.44% 100.00%

14.60% 0.00% 25.01% 9.50% 2.74% 1.11% 52.96% 33.71% 8.73% 1.24% 3.36% 100.00%

14.76% 0.00% 24.99% 9.49% 2.73% 1.11% 53.08% 33.67% 8.73% 1.17% 3.36% 100.00%

14.85% 0.00% 24.96% 9.48% 2.73% 1.11% 53.12% 33.66% 8.72% 1.13% 3.36% 100.00%

Liabilities and Shareholders' Equity Current liabilities: Commercial paper Accounts payable Accrued salaries, wages and related benefits Other current liabilities Current portion of long-term debt Total current liabilities Long-term debt, net Deferred property incentives, net Capitalized operating leases Excess Debt Other liabilities Total liabilities Shareholders' equity: Common stock, no par value: 1,000 shares authorized; 217.7 and 215.4 shares issued and outstanding Retained earnings Accumulated other comprehensive loss Total shareholders' equity Total liabilities and shareholders' equity Supplemental Information: Net Operating Assets

0.00% 10.97% 5.81% 9.97% 6.23% 32.99% 12.76% 7.40% 0.00% 4.33% 57.48%

0.00% 11.97% 7.05% 10.56% 0.15% 29.72% 12.94% 7.38% 0.00% 4.98% 55.02%

0.00% 9.93% 4.79% 9.82% 4.66% 29.20% 39.93% 6.59% 0.00% 4.38% 80.09%

4.86% 9.95% 3.78% 9.27% 0.42% 28.28% 39.11% 7.68% 0.00% 3.55% 78.63%

0.00% 11.04% 5.11% 9.06% 5.41% 30.61% 34.31% 7.13% 0.00% 4.06% 76.11%

0.00% 10.34% 4.58% 7.97% 0.07% 22.97% 33.92% 6.05% 8.78% 0.00% 3.57% 75.29%

0.00% 8.59% 4.15% 7.94% 0.07% 20.75% 35.41% 5.80% 9.04% 1.08% 3.66% 75.75%

0.00% 8.69% 4.19% 8.02% 0.07% 20.97% 35.76% 5.86% 9.13% 2.00% 3.70% 77.43%

0.00% 8.68% 4.18% 8.00% 3.80% 24.66% 35.68% 5.84% 9.11% 0.00% 3.69% 78.99%

0.00% 8.73% 4.20% 8.03% 0.07% 21.04% 35.84% 5.87% 9.15% 4.71% 3.71% 80.32%

0.00% 8.58% 4.12% 7.88% 2.35% 22.93% 35.17% 5.76% 8.98% 5.21% 3.64% 81.68%

0.00% 8.56% 4.11% 7.86% 2.17% 22.70% 33.87% 5.75% 8.96% 6.87% 3.63% 81.78%

0.00% 8.55% 4.11% 7.85% 2.04% 22.55% 32.62% 5.74% 8.95% 7.86% 3.62% 81.34%

0.00% 8.35% 4.01% 7.67% 1.88% 21.91% 30.67% 5.60% 8.73% 10.72% 3.54% 81.18%

0.00% 8.34% 4.01% 7.66% 1.77% 21.78% 29.46% 5.60% 8.73% 11.35% 3.54% 80.45%

0.00% 8.33% 4.01% 7.66% 1.72% 21.71% 28.28% 5.60% 8.72% 11.29% 3.53% 79.14%

13.94% 28.54% 0.05% 42.52% 100.00%

17.15% 28.02% -0.19% 44.98% 100.00%

16.71% 3.59% -0.39% 19.91% 100.00%

17.61% 3.94% -0.18% 21.37% 100.00%

16.20% 7.98% -0.29% 23.89% 100.00%

14.28% 10.78% -0.35% 24.71% 100.00%

13.05% 11.20% 0.00% 24.25% 100.00%

11.99% 10.58% 0.00% 22.57% 100.00%

10.94% 10.07% 0.00% 21.01% 100.00%

10.05% 9.64% 0.00% 19.68% 100.00%

9.01% 9.30% 0.00% 18.32% 100.00%

8.33% 9.89% 0.00% 18.22% 100.00%

7.85% 10.81% 0.00% 18.66% 100.00%

7.23% 11.59% 0.00% 18.82% 100.00%

6.81% 12.74% 0.00% 19.55% 100.00%

6.61% 14.25% 0.00% 20.86% 100.00%

61.51%

58.07%

64.50%

65.77%

63.61%

67.48%

69.85%

69.54%

69.27%

69.46%

70.02%

70.09%

70.13%

70.83%

70.86%

70.88%

Page 25

Nordstrom, Inc. Adjusted Consolidated Statements of Earnings


In millions except per share amounts

HISTORICAL
Fiscal year Net sales Credit card revenues Total revenues Cost of sales and related buying and occupancy costs Selling, general and administrative expenses: Retail stores, direct and other segments Capital Lease Adjustment (Rent Expense) Credit segment Operating Lease Depr Expense Gain on sale of Faonnable Earnings on investment in asset-backed securities, net Earnings before interest and income taxes Interest expense, net Operating Lease Interest Expense Earnings before income taxes Income tax expense Operating (Income Tax Expense) Non-Operating (Income Tax Expense) Net earnings 2006 $8,561 105 8,666 -5,354 -2,071 -92 0 0 1,149 -43 2007 $8,828 252 9,080 -5,526 -2,161 -198 34 18 1,247 -74 2008 $8,272 301 8,573 -5,417 -2,103 -274 0 0 779 -181 2009 $8,258 369 8,627 -5,328 -2,109 -356 0 0 834 -138 2010 $9,310 390 9,700 -5,897 -2,412 111 -273 -67 0 0 1,162 -127 2011 $10,520 413 10,934 -6,523 -2,735 132 -347 -76 0 0 1,385 -141 2012 $11,572 438 12,011 -7,175 -3,055 145 -368 -83 0 0 1,475 -164 2013 $12,672 464 13,136 -7,856 -3,345 159 -390 -91 0 0 1,612 -209 2014 $13,876 492 14,368 -8,603 -3,719 174 -414 -99 0 0 1,707 -217

FORECASTED
2015 $15,194 522 15,716 -9,420 -4,072 190 -438 -109 0 0 1,867 -265 2016 $16,409 553 16,962 -10,174 -4,266 205 -465 -117 0 0 2,146 -288 2017 $17,394 586 17,980 -10,784 -4,522 218 -493 -124 0 0 2,274 -307 2018 $18,437 622 19,059 -11,431 -4,794 231 -522 -132 0 0 2,411 -326 2019 $19,544 659 20,202 -12,117 -5,081 245 -553 -140 0 0 2,555 -345 Terminal Year $20,130 698 20,828 -12,481 -5,234 252 -587 -144 0 0 2,635 -355

-81

-57
1,187 -427 -499 71 $760

-62
1,248 -437 -516 79 $812

-68
1,336 -427 -516 89 $908

-74
1,416 -425 -512 87 $991

-81
1,520 -456 -560 104 $1,064

-88
1,770 -531 -644 113 $1,239

-93
1,874 -562 -682 120 $1,312

-99
1,986 -596 -723 127 $1,390

-105
2,105 -632 -767 135 $1,474

-108
2,172 -652 -791 139 $1,520

1,106 -428 -445 17 $678

1,173 -458 -494 36 $715

598 -247 -322 75 $351

696 -255 -306 51 $441

954 -378 -460 82 $576

Earnings per basic share Earnings per diluted share

$2.60 $2.55

$2.92 $2.87

$1.62 $1.60

$2.03 $2.01

$2.63 $2.59

$3.62 $3.56

$4.06 $3.99

$4.79 $4.69

$5.51 $5.40

$6.27 $6.13

$7.76 $7.58

$8.76 $8.55

$9.95 $9.69

$11.36 $11.04

$12.70 $12.31

Basic shares Diluted shares Supplemental Information: Net Operating Profit Less Adjusted Taxes Effective Tax Rate

260.7 265.7

244.8 248.8

216.6 219.2

216.8 219.7

218.8 222.6

209.7 213.5

199.7 203.5

189.7 193.5

179.7 183.5

169.7 173.5

159.7 163.5

149.7 153.5

139.7 143.5

129.7 133.5

119.7 123.5

704 38.70%

771 39.05%

457 41.30%

528 36.64%

702 39.61%

887 36.00%

959 35.00%

1,096 32.00%

1,195 30.00%

1,307 30.00%

1,502 30.00%

1,592 30.00%

1,688 30.00%

1,789 30.00%

1,845 30.00%

Page 26

Nordstrom, Inc. Common Size Adjusted Statement of Earnings HISTORICAL


Fiscal year Net sales Credit card revenues Total revenues Cost of sales and related buying and occupancy costs Selling, general and administrative expenses: Retail stores, direct and other segments Capital Lease Adjustment (Rent Expense) Credit segment Operating Lease Depr Expense Gain on sale of Faonnable Earnings on investment in asset-backed securities, net Earnings before interest and income taxes Interest expense, net Operating Lease Interest Expense Earnings before income taxes Income tax expense Operating (Income Tax Expense) Non-Operating (Income Tax Expense) Net earnings Supplemental Information: Net Operating Profit 2006 98.79% 1.21% 100.00% -61.78% -23.90% 0.00% -1.06% 0.00% 0.00% 0.00% 13.26% -0.50% 0.00% 12.76% -4.94% -5.13% 0.19% 7.82% 2007 97.22% 2.78% 100.00% -60.86% -23.80% 0.00% -2.18% 0.00% 0.37% 0.20% 13.73% -0.81% 0.00% 12.92% -5.04% -5.44% 0.40% 7.87% 2008 96.49% 3.51% 100.00% -63.19% -24.53% 0.00% -3.20% 0.00% 0.00% 0.00% 9.09% -2.11% 0.00% 6.98% -2.88% -3.75% 0.87% 4.09% 2009 95.72% 4.28% 100.00% -61.76% -24.45% 0.00% -4.13% 0.00% 0.00% 0.00% 9.67% -1.60% 0.00% 8.07% -2.96% -3.54% 0.59% 5.11% 2010 95.98% 4.02% 100.00% -60.79% -24.87% 1.14% -2.81% -0.69% 0.00% 0.00% 11.98% -1.31% -0.83% 9.84% -3.90% -4.74% 0.85% 5.94% 2011 96.22% 3.78% 100.00% -59.66% -25.02% 1.21% -3.18% -0.69% 0.00% 0.00% 12.67% -1.29% -0.52% 10.86% -3.91% -4.56% 0.65% 6.95% 2012 96.35% 3.65% 100.00% -59.74% -25.44% 1.21% -3.06% -0.69% 0.00% 0.00% 12.28% -1.37% -0.52% 10.39% -3.64% -4.30% 0.66% 6.76% 2013 96.46% 3.54% 100.00% -59.81% -25.47% 1.21% -2.97% -0.69% 0.00% 0.00% 12.27% -1.59% -0.52% 10.17% -3.25% -3.93% 0.67% 6.91% 2014 96.57% 3.43% 100.00% -59.88% -25.88% 1.21% -2.88% -0.69% 0.00% 0.00% 11.88% -1.51% -0.52% 9.85% -2.96% -3.56% 0.61% 6.90%

FORECASTED
2015 96.68% 3.32% 100.00% -59.94% -25.91% 1.21% -2.79% -0.69% 0.00% 0.00% 11.88% -1.69% -0.52% 9.67% -2.90% -3.56% 0.66% 6.77% 2016 96.74% 3.26% 100.00% -59.98% -25.15% 1.21% -2.74% -0.69% 0.00% 0.00% 12.65% -1.70% -0.52% 10.43% -3.13% -3.79% 0.66% 7.30% 2017 96.74% 3.26% 100.00% -59.98% -25.15% 1.21% -2.74% -0.69% 0.00% 0.00% 12.65% -1.71% -0.52% 10.42% -3.13% -3.79% 0.67% 7.30% 2018 96.74% 3.26% 100.00% -59.98% -25.15% 1.21% -2.74% -0.69% 0.00% 0.00% 12.65% -1.71% -0.52% 10.42% -3.13% -3.79% 0.67% 7.29% 2019 96.74% 3.26% 100.00% -59.98% -25.15% 1.21% -2.74% -0.69% 0.00% 0.00% 12.65% -1.71% -0.52% 10.42% -3.13% -3.79% 0.67% 7.29% Terminal Year 96.65% 3.35% 100.00% -59.92% -25.13% 1.21% -2.82% -0.69% 0.00% 0.00% 12.65% -1.71% -0.52% 10.43% -3.13% -3.80% 0.67% 7.30%

8.13%

8.49%

5.33%

6.13%

7.23%

8.11%

7.98%

8.35%

8.32%

8.31%

8.85%

8.85%

8.85%

8.85%

8.86%

Page 27

Nordstrom, Inc. Capitalize Operating Leases

Operating Lease Discounted Cash Flow Capitalization Schedule PV of Cash Flow $104 94 82 73 66 300 $718

Payment Year 2011 2012 2013 2014 2015 Thereafter Total

Cash Flow $111 108 100 96 92 524 $1,031

Discount 0.93458 0.87344 0.81630 0.76290 0.71299

Supplemental Information: Years Thereafter 5.70 Lease Discount Rate 7.00%

Page 28

Nordstrom, Inc. Ratio Analysis HISTORICAL


Fiscal Year Profitability Margins Gross Margin EBIT Margin NOPAT Margin Net Income Margin Growth Rates Revenue 1-Year Growth Rate EBIT 1-Year Growth Rate NOPAT 1-Year Growth Rate Net Income 1-Year Growth Rate Return on Investment Return on Net Operating Assets Return on Nonopearating Assets Return on Equity Leverage Liabilities-to-Equity Debt-to-Equity Long-term debt-to-Equity Financial Leverage Liquidity Current Ratio Quick Ratio Coverage Times Interest Earned (EBIT/Interest Exp) Total Debt to NOPAT Net Debt to NOPAT Altman Z-Score Z Score Asset Efficiency & Quality Accounts Receivable Turnover Inventory Turnover Accounts Payable Turnover Days in Accounts Receivable Days in Inventory Days in Accounts Payable Cash Conversion Cycle Net Operating Asset Turnover Net Operating Working Capital Turnover Fixed Asset Turnover Total Asset Turnover 3.74 2.87 2.41 2.32 2.34 1.91 0.76 2.06 1.31 2.01 1.26 2.01 1.41 2.57 1.88 2.64 1.90 2.60 1.88 2.22 1.63 2.60 1.92 2.34 1.75 2.37 1.77 2.40 1.79 2.42 1.81 2.44 1.83 2.45 1.83 2006 2007 2008 2009 2010 2011 2012 2013 2014

FORECASTED
2015 2016 2017 2018 2019 Terminal Year

38.22% 13.26% 8.13% 7.82%

39.14% 13.73% 8.49% 7.87%

36.81% 9.09% 5.33% 4.09%

38.24% 9.67% 6.13% 5.11%

39.21% 11.98% 7.23% 5.94%

40.34% 12.67% 8.11% 6.95%

40.26% 12.28% 7.98% 6.76%

40.19% 12.27% 8.35% 6.91%

40.12% 11.88% 8.32% 6.90%

40.06% 11.88% 8.31% 6.77%

40.02% 12.65% 8.85% 7.30%

40.02% 12.65% 8.85% 7.30%

40.02% 12.65% 8.85% 7.29%

40.02% 12.65% 8.85% 7.29%

40.08% 12.65% 8.86% 7.30%

4.78% 8.53% 9.47% 5.46%

-5.58% -37.53% -40.70% -50.91%

0.63% 7.06% 15.57% 25.64%

12.44% 39.31% 32.78% 30.68%

12.72% 19.23% 26.36% 31.84%

9.85% 6.46% 8.12% 6.80%

9.37% 9.33% 14.37% 11.91%

9.38% 5.89% 9.01% 9.12%

9.38% 9.33% 9.33% 7.38%

7.93% 14.94% 14.94% 16.40%

6.00% 6.00% 6.00% 5.91%

6.00% 6.00% 6.00% 5.96%

6.00% 6.00% 6.00% 6.01%

3.10% 3.13% 3.13% 3.17%

24.18% 7.64% 31.82%

24.05% 19.49% 43.54%

12.47% 17.73% 30.19%

13.36% 18.34% 31.70%

14.46% 17.62% 32.08%

15.06% 21.19% 36.25%

14.72% 22.43% 37.15%

15.48% 25.42% 40.89%

15.45% 28.29% 43.74%

15.24% 30.41% 45.65%

15.89% 34.38% 50.27%

15.71% 33.50% 49.21%

15.43% 32.36% 47.79%

15.16% 30.94% 46.11%

14.95% 28.25% 43.20%

1.22 0.29 0.29 1.37

4.02 2.24 2.01 1.95

3.68 2.08 1.83 3.15

3.19 1.66 1.44 2.84

3.05 1.73 1.73 2.70

3.12 1.84 1.83 2.81

3.43 1.99 1.99 2.98

3.76 2.31 2.13 3.19

4.08 2.29 2.29 3.41

4.46 2.54 2.41 3.68

4.49 2.47 2.35 3.84

4.36 2.34 2.23 3.80

4.31 2.19 2.09 3.76

4.11 2.04 1.95 3.69

3.79 1.86 1.77 3.51

26.72 0.90 0.32

16.85 3.24 2.77

4.30 5.50 5.34

6.04 4.94 3.44

5.60 4.99 2.84

6.99 4.50 3.11

6.52 4.57 3.21

5.83 4.73 3.36

5.86 4.38 3.00

5.39 4.61 3.19

5.71 4.20 2.84

5.68 4.08 2.70

5.67 3.95 2.56

5.68 3.83 2.42

5.69 3.71 2.29

13.10 5.48 9.59 27.87 66.57 38.08 56.37 2.97 6.77 4.91 1.78

7.35 5.66 9.75 49.69 64.50 37.42 76.77 2.83 5.98 4.86 1.74

4.60 5.84 9.68 79.40 62.53 37.70 104.23 2.34 5.13 4.08 1.52

4.34 5.93 8.27 84.13 61.59 44.15 101.57 2.18 4.72 3.87 1.41

4.78 6.29 7.50 76.41 58.03 48.65 85.78 2.00 3.89 4.25 1.31

5.05 6.54 8.08 72.30 55.84 45.20 82.94 1.86 3.65 4.33 1.28

4.96 6.83 8.88 73.58 53.41 41.10 85.88 1.84 3.80 4.19 1.29

4.94 7.07 8.86 73.82 51.61 41.19 84.25 1.85 4.05 4.18 1.29

4.94 7.34 8.86 73.91 49.70 41.19 82.42 1.86 4.02 4.18 1.29

4.93 7.64 8.86 73.99 47.79 41.19 80.58 1.83 3.97 4.04 1.28

4.90 7.74 8.80 74.52 47.19 41.47 80.24 1.79 4.05 3.89 1.26

4.85 7.67 8.72 75.20 47.61 41.84 80.97 1.77 3.97 3.86 1.24

4.85 7.67 8.72 75.20 47.61 41.84 80.97 1.74 3.93 3.72 1.23

4.85 7.67 8.72 75.20 47.61 41.84 80.97 1.71 3.89 3.60 1.21

4.79 7.56 8.60 76.19 48.29 42.43 82.04 1.69 3.82 3.55 1.20

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Nordstrom, Inc. ROE Disaggregation

ROE Disaggregation 2010 (Unadjusted) Return on Equity DuPont: Profit Margin Asset Turnover Financial Leverage RNOA: Sales NOPAT NOA NOPM NOAT RNOA RNNOA 34.12% 6.32% 1.38 3.91 $9,700 $563 $4,802 5.80% 2.02 11.72% 22.40% 2010 (Adjusted) 32.08% 5.94% 1.31 4.11 $9,700 $702 $5,520 7.23% 1.76 12.71% 19.37%

Difference -5.99% -5.99% -4.87% 5.12% 0.00% 24.69% 14.96% 24.69% -13.01% 8.47% -13.55%

Page 30

Nordstrom, Inc. Dividend Discount Models


Constant Perpetuity DDM: Dividend per share T+1 Growth Rate of Dividend Cost of Equity Implied price per share: Gordon Growth Model: Dividend per share T+1 Growth Rate of Dividend Cost of Equity Implied price per share:

$0.92 0.00% 12.33% $7.46 $0.98 7.00% 12.33% $18.46

Two Stage Gordon Growth Model: Dividend per share T+1 $1.02 1st Stage Growth Rate 11.00% 1st Stage Length (Years) 5 Perpetual Growth Rate 4.00% Cost of Equity 12.33% Implied price per share: $14.84

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Nordstrom, Inc. Market-Based Valuation


Industry: Apparel Stores (in millions, except share amounts) Net Operating Assets Multiple: Enterprise Value Net Operating Assets NOA Market Multiple: Company Intrinsic Value Shares Outstanding Equity Intrinsic Value Equity Intrinsic Value per Share:

Nordstrom -$5,520 2.37 $13,073 222.6 $9,574 $43.01

Limited Brands $13,919 4,149 3.35

Gap $10,141 5,252 1.93

Abercrombie & Fitch $3,418 1,958 1.75

Urban Outfitters $3,750 1,080 3.47

American Eagle $1,996 1,492 1.34

(in millions, except share amounts) Book Value Multiple: Market Capitalization Book Value of Equity Book Value Market Multiple: Shares Outstanding Equity Intrinsic Value Equity Intrinsic Value per Share

Nordstrom -$2,021 5.85 222.6 $11,830 $53.14

Limited Brands $11,430 625 18.29

Gap $8,990 2,659 3.38

Abercrombie & Fitch $3,880 1,931 2.01

Urban Outfitters $3,880 1,034 3.75

American Eagle $2,510 1,367 1.84

(in millions, except share amounts) Net Income Multiple: Market Capitalization Net Income: Net Income Multiple: Shares Outstanding Equity Intrinsic Value Equity Intrinsic Value per Share

Nordstrom -$576 14.62 222.6 $8,425 $37.85

Limited Brands $11,430 943 12.12

Gap $8,990 980 9.17

Abercrombie & Fitch $3,880 201 19.30

Urban Outfitters $3,880 221 17.56

American Eagle $2,510 168 14.94

Note: Market values are as of 11/25/2011 market close. Comparables financial information is based on last twelve months data, where Nordstrom is 2010 data.

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Nordstrom, Inc. Weighted Average Cost of Capital


Capital Structure: Market Capitalization Book Value of Debt PV of Operating Leases

$9,300 3,499 718 Total Capital: $13,517 1.57 1.61 1.61 1.60

Cost of Equity: ERP (Damodaran) 6.49% Rf Rate (10-yr T-Note) 1.97% Equity Beta 1.60 Cost of Equity: 12.33% Cost of Debt: Interest Expense 2010 $127 Average Debt 2010 $3,056 Implied Cost of Debt 4.16% Marginal Tax Rate 39.61% 2.51% After-Tax Cost of Debt: Cost of Operating Leases: Discount Rate on Op. Leases 7.00% Marginal Tax Rate 39.61% After-Tax Cost of Op. Leases: 4.23%

Equity Beta: Yahoo! Finance MSN Money Reuters Average:

Weighted Average Cost of Capital: 9.36% WACC:


Note: Market data is based on November 25, 2011 at market close

Page 33

Nordstrom, Inc. Discounted Cash Flows Model


In millions

HISTORICAL
Fiscal year Sales NOPAT NOA Increase in NOA FCFF Discount factor PV of horizon FCFF Cumulative PV of horizon FCFF PV of terminal FCFF Total firm value Less NNO Firm equity value Shares outstanding Stock price per share 2006 2007 2008 2009 2010 2011 2012 2013 2014

FORECASTED
2015 2016 2017 2018 2019 Terminal Year

Period

8,561 704 2,800

8,828 753 3,612 812 -59

8,272 457 3,723 111 346

8,258 528 4,185 462 66

0 9,310 702 5,520 1,335 -634 3,479 11,208 14,687 3,499 11,187 217.7 $51.39

0.08 10,520 887 6,254 734 152 0.99257 151

1.08 11,572 959 6,773 518 440 0.90763 400

2.08 12,672 1,096 7,431 659 438 0.82995 363

3.08 13,876 1,195 8,074 643 552 0.75893 419

4.08 15,194 1,307 9,074 1,000 307 0.69398 213

5.08 16,409 1,502 9,828 754 747 0.63459 474

6.08 17,394 1,592 10,436 608 984 0.58028 571

7.08 18,437 1,688 11,443 1,007 680 0.53062 361

8.08 19,544 1,789 12,148 705 1,084 0.48521 526

20,130 1,845 12,529 381 1,463

Supplemental Inputs: WACC Terminal Growth Rate

9.36% 3.00% Sales Terminal Growth Rate 2.50% 3.00% 3.50% 63.05 66.38 70.37 55.68 58.22 61.20 49.44 51.39 53.64 44.06 45.56 47.28 39.41 40.57 41.89

W A C C

8.36% 8.86% 9.36% 9.86% 10.36%

2.00% 60.21 53.50 47.74 42.74 38.37

4.00% 75.25 64.77 56.29 49.27 43.39

Page 34

Nordstrom, Inc. Residual Operating Income Model


In millions

HISTORICAL
Fiscal year Sales NOPAT NOA ROPI Discount factor PV of horizon ROPI Cumulative PV of horizon ROPI PV of terminal ROPI NOA Total firm value Less NNO Firm Equity Value Shares outstanding Stock price per share 2006 2007 2008 2009 2010 2011 2012 2013 2014

FORECASTED
2015 2016 2017 2018 2019 Terminal Year

Period

8,561 704 2,800

8,828 753 3,612

8,272 457 3,723

8,258 528 4,185

0 9,310 702 5,520

0.08 10,520 887 6,254 370 0.99257 367

1.08 11,572 959 6,773 373 0.90763 339

2.08 12,672 1,096 7,431 463 0.82995 384

3.08 13,876 1,195 8,074 500 0.75893 379

4.08 15,194 1,307 9,074 551 0.69398 382

5.08 16,409 1,502 9,828 653 0.63459 414

6.08 17,394 1,592 10,436 672 0.58028 390

7.08 18,437 1,688 11,443 711 0.53062 377

8.08 19,544 1,789 12,148 718 0.48521 348

20,130 1,845 12,529 708

3,381 5,401 5,562 14,343 3,499 10,844 217.7 $49.81 9.36% 3.00%

Supplemental Inputs WACC Terminal Growth Rate

W A C C

8.36% 8.86% 9.36% 9.86% 10.36%

2.00% 58.64 51.80 45.92 40.79 36.31

Sales Terminal Growth Rate 2.50% 3.00% 3.50% 61.61 65.13 69.37 54.10 56.80 60.00 47.73 49.81 52.26 42.21 43.84 45.72 37.43 38.71 40.71

4.00% 74.59 63.85 55.15 47.92 41.86

Page 35

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