However, this point is amenable to discussion since gross profit gives the difference between the revenue received by a firm and the cost of producing products and or providing services before deducting costs such as overhead expenses, payroll, taxation, and interest (Neely, 2002). This means that whereas Nordstrom could have recorded high gross profit, high operational expenses incurred on the other hand could substantially bring down the net profit. In addition, gross profit is a percentage of sales, which does not necessarily take into account the level of customer satisfaction in the purchased goods.
SG&A expenses as a percentage of sales SG & A expenses incurred as a percentage of sales by Nordstrom declined from 31. 2 per cent to 28. 3 per cent between 2000 and 2004 (Figure3). Figure 3 shows a good result which indicates the company’s selling strategies are deviating from general to specific marketing it could increase sales without necessarily having to incur more expenses. This can be attributed to factors such as better advertising and promotion mechanisms, increased customer trust and loyalty in the company (Neely, 2002).
On the flipside, the decline in expenses with respect to sales may be an indication that the company did not venture into pay increments or recruitment of more staff to perform the increasing sales activities. If this is true, it indicates that the company may be paying too much attention to customers at the expense of the welfare of its own staff. 4. Earnings before income prior to deduction of taxes The value of Nordstrom’s income fluctuated sharply between 2000 and 2003 before rising sharply in 2004 (Figure 4).
Figure 3 Figure 4 Figures (1) SG & A expenses and (2) earnings before taxation Source: Nordstrom, Inc. Annual Report 2004 Although the high income in 2004 shows that the company’s revenue increased, this has not factored in the diseconomies of scale such as high taxation that is usually subjected to firms with a large capital base (Neely, 2002). Thus, the high-income results in a concomitant high rate of taxation (Spector, 2005), for which the revenue did not account. 5. Inventory Turn
Nordstrom’s inventory turn, which is calculated as the ratio of cost of sales and associated buying and occupancy to average inventory (McKeever, 2007), declined between 2000 and 2001 but rose sharply to a high of 4. 51 in 2004 (Figure 5). Although results indicate 2004 as the year with the best results, the fact that the inventory return does not give an account of returns on the cost of sales and the earlier fluctuating results make future results unpredictable. 6. Cash flows from operations The value of Nordstrom’s cash flows fluctuated between 2000 and 2002 and later rose steadily between 2003 and 2004 (Figure 6).
Cash flows refer to a firm’s financial health with particular reference to changes that occur in the firm’s cash account over time (McKeever, 2007). The changes in the cash account occur due to three activities namely financing, operations or investments. The high cash flows of $606. 3 million in 2004 indicate that at that time Nordstrom was in a good position to finance various activities and operations as well as invest in expansion or other related ventures. Given that the value grew from a low of $210. 4 in 2000, there is an indication that the firm witnessed good times particularly in 2003.
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