Dupont Analysis On Jc Penney And Nordstrom

Dupont Analysis

J.C. Penney's, Inc. versus Nordstrom, Inc. | Fiscal years 2005 and 2004

Refer to Figure 1.

During fiscal year 2005, both J.C. Penney's Inc. ("Penney's) and Nordstrom, Inc.

("Nordstrom") provided similar and high returns on their shareholder investments, at

27% and 26%, respectively. Both companies' 2005 returns on equity ("ROE's") are up

from prior year. While Nordstrom posted a significant increase in ROE by 20% over

prior year, Penney's ROE is up 152% over its 2004 ROE.

While it is notable that both companies have strong 2005 ROE's and have increased their

ROE's since 2004, there is a very large variance in ROE growth between the two

companies. This suggests that although the 2005 ROE's are similar, the companies must

have taken different paths to achieve these returns. Overall differences in net income

reflect that Nordstrom saw its earnings driven by performance on continued operations,

while Penney's achieved its result by showing earnings from discontinued operations.

Also notable is that Penney's reduced its owners' equity from 2004 to 2005 while

Nordstrom increased its owners' equity.

Further analysis using the Dupont Model reveals that Nordstrom managed its assets more

efficiently than Penney's in 2005 and 2004 as shown by its higher return on assets

("ROA") (11.19% vs. 8.73% for 2005 | 8.56% vs. 3.71% for 2004). Penney's also relied

more heavily on leverage than did Nordstrom in both years, with a higher capitalization

ratio (3.11% vs. 2.35% for 2005 | 2.91 vs. 2.57 for 2004).

Nordstrom's advantage in ROA was driven primarily by its higher asset turnover when

compared to Penney's (1.57 times vs. 1.51 times in 2005 | 1.55 times vs. 1.28 times in

2004). Asset turn in general was driven in both years by Nordstrom's much higher

inventory turnover (5.11 times vs. 3.55 times for 2005 | 4.97 vs. 3.54 for 2004). The

effect on ROA was offset in 2005 by Penney's reduction of cash balances primarily to

repurchase common stock during 2005. Given the variances in cash, analysis reveals that

Nordstrom has a much lower investment in inventory necessary to generate sales than

does Penney's.

Additionally, Nordstrom has a stronger profit margin than Penney's (7.13% vs. 5.79% in

2005 | 5.53% vs. 2.9% in 2004) also driving ROA. Although Penney's enjoyed a more

favorable cost of sales than Nordstrom in both years, it is outweighed by Penney's higher

selling, general and administrative, interest and bond costs, as a percentage of sales.

Nordstrom also enjoyed higher income from its other activities in both years ("other

income and finance charges") than did Penney's.

Penney's higher reliance on leverage (higher capitalization ratio) is primarily driven by a

more clear reliance on debt. At the end of 2005 Penney's had a long-term debt to assets

ratio of .28 when compared to Nordstrom at .13. There was less of a variance between

the companies at the end of 2004, but Penney's still exceeded Nordstrom at .25 versus

.20. Penney's also had lower interest coverage in 2005 at 8.8 times when compared to

Nordstrom's 19.7 times. 2004 was similar with Penney's showing a lower interest

coverage ratio of 3.11 compared to Nordstrom's 8.42. The debt has allowed Penney's to

focus on increasing ROE by relying less on shareholder investments. In fact, Penney's

has been able to reduce its overall equity by repurchasing common stock shares. This has

required Penney's to maintain a higher solvency position than Nordstrom as evidenced by

Penney's higher current and quick ratios at the end of both years.

While both companies have strong and growing ROE's, Nordstrom demonstrates greater

efficiency in management of its assets and relies less on leverage than does Penney's.

We also notice a more drastic change in the ratios of Penney's from 2004 to 2005, and a

more consistent trend with Nordstrom for the same periods.

Figure 1.

Ratios for Dupont Analysis

Return on owners' equity

Net income 1 ,088 524 551 3 94

Owners' Equity 4 ,007 27.15% 4 ,856 10.79% 2 ,092 26.34% 1 ,789 22.02%

Return on total assets

Net income 1 ,088 524 551 3 94

Total assets 12,461 8.73% 1 4,127 3.71% 4 ,922 11.19% 4 ,605 8.56%

Capitalization Ratio (aka Capital structure leverage)

Total assets 1 2,461 3 .11 14,127 2.91 4,922 2.35 4 ,605 2.57

Owners' Equity 4 ,007 1 4 ,856 1 2,092 1 1,789 1

Asset turnover

Sales 1 8,781 1 .51 18,096 1.28 7,723 1.57 7 ,131 1.55

Total

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