Essay: Two Company's Financials in Evaluating a Job Offer

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Financials

Both Nordstrom and H&M are highly-respected, successful retailers. This paper will analyze the two on the basis of which one might be better to work for in the future. In the real world, both companies are going to survive over the long run, and will continue to be successful, so the decision will not come down to their financials. But for the purposes of this work, the financials will be given significant consideration.

H&M has the better financials of the two. Once the Swedish crowns are adjusted to USD, H&M's metrics are almost universally better than those of Nordstrom. In terms of liquidity, both companies have a healthy current ratio above 2, so neither is at any risk of short-term liquidity issues that might cause default or other financial strife. In terms of long-run solvency, however, there is a significant difference between the two. H&M has a debt ratio of 0.27, none of which is long-term debt. This compares with Nordstrom, which has a debt ratio of 0.76, which includes $3.1 billion in long-term debt (38% of the total capital structure). This ratio has remained consistent over the past five years, so is the result of deliberate strategy on the part of Nordstrom, which has had to take out increasing amounts of long-term debt in order to match the company's growth. Clearly, the two companies have significant differences with respect to their risk aversion, with Nordstrom more comfortable taking on debt.

In terms of profit margins, H&M has superior margins on its goods. This is an interesting point of comparison because the result is counterintuitive. H&M sells its goods at relatively low prices, which would imply low margins; Nordstrom courts a higher-end market. However, Nordstrom is predominantly an American retailer, where tight competition drives down margins, while the bulk of H&M's revenues come from Europe where competitive intensity is lower, supporting higher margins. Thus, H&M is able to carry a gross margin of 59% and a net margin of nearly 14%. Nordstrom's gross margin is just under 39% while its net margin is just 6%. While these margins are higher than those of discount stores like Wal-Mart and Target, they are not as high as one might expect from a retailer with premium positioning.

Nordstrom is the more efficient of the two companies. Its inventory turnover is 67 days, compared with 114 days for H&M. There is one possible explanation for this in that Europe's climate shows less distinct seasons that most of the U.S., so that there is no need to keep inventory turnover under 90 days in Europe, whereas in most of the U.S. It is critical to manage inventory on the basis of four seasons. That said, 114 days seems like far too high an inventory turnover in the clothing industry, and should raise a red flag. H&M has a much stronger receivables turnover, however. The company has an average collection period around 11 days, while Nordstrom has an average collection period around 64 days. The H&M figure is healthy, but the Nordstrom figure is not. Normally, 30 days would be the upper bound that one would want to allow customers to work with, so an average collection period double that is cause for concern. Nordstrom could find itself with cash flow problems having such a slow turnover cycle. The quick receivables turn for H&M helps to offset the sluggishness of its inventory turn, so that each company has roughly the same cash conversion cycle.

With respect to investment returns, there are distinct differences between the two companies. H&M has a much stronger return on total assets, which is a roughly comparable measure. H&M's ROTA is around 28%, while Nordstrom's is 9%. This is not surprising, given the differences in margins between the two firms. Both companies, however, have identical ROEs of 38.4%. This derives from Nordstrom's high degree of leverage, which allows it to enjoy high returns on equity. The Dupont analysis reveals however that the company is leaning on its leverage to earn these returns for its shareholders. In other words, while the shareholders of both companies earn the same ROE,… [END OF PREVIEW]

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