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 Nordstrom’s Prospects .................................................................................................... 4 Financial Statement Analysis and Reformulation................................................................... 5 Accounting Analysis of Nordstrom’s 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. HOLD NYSE: JWN Intrinsic Value: $50.00 Industry: Department Stores Current Price: $47.17

Forecasted Financials Valuation 2010A 2011E 2012E Constant Perpetuity DDM $7.46 Sales $9,310 $10,520 $11,572 Gordon Growth Model DDM $18.46 NOPAT $720 $887 $959 Two Stage Gordon Growth Model DDM $14.84 NOA $5,520 $6,254 $7,396 EV / NOA Comparable Valuation $43.01 NOPM 7.23% 8.11% 7.98% P / BV Comparable Valuation $53.14 NOAT 2.00 1.86 1.84 P / Earnings Comparable Valuation $37.85 RNOA 14.46% 15.06% 14.72% Discounted Cash Flows Model $51.39 ROE 32.08% 36.25% 37.15% Residual Operating Income Model $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 company’s 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 Avenue1, 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 management’s 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 Nordstrom’s 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. Nordstrom’s 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 reach—hopefully in the opportunity of a recovering U.S. economy. Threats As Nordstrom depends on the U.S. market for its revenue, it increases the company’s 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 http://www.nasdaq.com/symbol/jwn/competitors 2 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 company’s operating costs and put pressure on the company’s 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 continue to improve from the 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. Nordstrom’s 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

3 http://clients.ibisworld.com/launch.aspx?show=1

Exhibit 1: University of Michigan Consumer Sentiment and Personal Disposable Income

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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% year-over-year in the third quarter of 2010. The major driver of sales growth for Nordstrom’s has been their online store, which has offered free shipping and returns for all online orders. Nordstrom’s 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 Nordstrom’s Financial Statements Earnings per Share There was nothing out of the ordinary for Nordstrom’s 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 Nordstrom’s 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 Baa1 Standard & Poor's A- These ratings impact the interest rate on Nordstrom’s borrowings. Nordstrom’s credit ratings are in good standing and are higher than Macy’s, 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 Nordstrom’s 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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Payment Year Cash Flow DiscountPV of Cash

Flow2011 $111 0.93458 $1042012 108 0.87344 942013 100 0.81630 822014 96 0.76290 732015 92 0.71299 66

Thereafter 524 300Total $1,031 $718

Years Thereafter 5.70Lease Discount Rate 7.00%

Supplemental Information:

Exhibit 2: Operating Lease Capitalization

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 analysis of the operating leases, we determined that Nordstrom needed to capitalize its operating leases to better reflect the financial situation of the company. To begin, we determined the discount rate to be 11.22 %, the remaining number of years to be 10.70 years, and the present value of the future operating lease payments to be $597 million. However, we did not think that 11.22% was a reasonable discount rate because Nordstrom’s interest expense is only 4.86% in 2010. To combat this, we capitalized 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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Therefore, we split ROE into operating and nonoperating returns and took a closer look at the operating returns. Return on net operating assets (RNOA) also increased from 2009 to 2010 and then when we adjusted the ratio to account for our financial statement adjustments. This increase was mainly driven by the net operating profit margin (NOPM) which actually decreased from 6.13% in 2009 to 5.80% in 2010 and then increased to 7.23% in 2010 after adjustments. This means that Nordstrom actually earned about 7.23 cents on every dollar of sales. The other component of RNOA is net operating asset turnover (NOAT) and it stayed relatively constant from 2009 to 2010, but dropped from 2.02 to 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. Nordstrom’s 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.) Nordstrom’s net operating asset turnover was in-line with JCPenney (2.12).

2010 (Unadjusted)

2010 (Adjusted) Difference

Return on Equity 34.12% 32.08% -5.99%

DuPont:Profit Margin 6.32% 5.94% -5.99%Asset Turnover 1.38 1.31 -4.87%Financial Leverage 3.91 4.11 5.12%

RNOA:Sales $9,700 $9,700 0.00%NOPAT $563 $702 24.69%NOA $4,802 $5,520 14.96%

NOPM 5.80% 7.23% 24.69%NOAT 2.02 1.76 -13.01%

RNOA 11.72% 12.71% 8.47%RNNOA 22.40% 19.37% -13.55%

Exhibit 3: ROE Disaggregation

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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 Nordstrom’s 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 pre-recession growth is not a realistic way to forecast. Cost of Sales and Related Buying and Occupancy Costs Nordstrom’s 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 season’s 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 asset’s 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 multi-channel 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 (2006’s 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 Nordstrom’s 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 Nordstrom’s 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 Nordstrom’s 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 Nordstrom’s 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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Company and Equity Valuation Cost of Capital Measures We estimate the cost of capital to be 9.36%, shown in Exhibit 4. The cost of equity is 12.33%, derived from CAPM. The inputs to CAPM are an equity risk premium of 6.49% (from Damodaran), a risk free rate of 1.97% (most recent 10-year Treasury yield), and an equity beta of 1.60 (average of beta estimates). The after-tax cost of debt is calculated to be 2.15% (4.16% before tax, with a 39.61% tax shield). The after-tax cost of operating leases is 4.23% (7% before tax, with a 39.61% tax shield). Thus, with market value capital structure of 69% equity, 26% debt, and 5% operating leases, the weighted average cost of capital (WACC) is 9.36%. We believe this is a very reasonable estimate for WACC, given the cyclical nature of the business and primary reliance on equity financing the firm's strategy. The elevated equity risk premium and low risk free rate also influence WACC, which reflect the underlying market conditions. Since the 10-year Treasury yield is at an all-time low and equity markets have been volatile, the uncertainty has increased the required return 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 company’s 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 Nordstrom’s intrinsic value is $37.85 per share.

Exhibit 4: Cost of Capital

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 $3,056Implied Cost of Debt 4.16%

Marginal Tax Rate 39.61%After-Tax Cost of Debt: 2.51%

Cost of Operating Leases:Discount Rate on Op. Leases 7.00%

Marginal Tax Rate 39.61%After-Tax Cost of Op. Leases: 4.23%

WACC: 9.36%Weighted Average Cost of Capital:

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Dividend per share T+1 $0.92Growth Rate of Dividend 0.00%

Cost of Equity 12.33%Implied price per share: $7.46

Dividend per share T+1 $0.98Growth Rate of Dividend 7.00%

Cost of Equity 12.33%Implied price per share: $18.46

Dividend per share T+1 $1.021st Stage Growth Rate 11.00%

1st Stage Length (Years) 5Perpetual Growth Rate 4.00%

Cost of Equity 12.33%Implied price per share: $14.84

Constant Perpetuity DDM:

Gordon Growth Model:

Two Stage Gordon Growth Model:

Exhibit 6: Dividend Discount Models 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.

Industry: Apparel Stores

(in millions, except share amounts) NordstromLimited Brands Gap

Abercrombie & Fitch

Urban Outfitters

American Eagle

Net Operating Assets Multiple:Enterprise Value -- $13,919 $10,141 $3,418 $3,750 $1,996

Net Operating Assets $5,520 4,149 5,252 1,958 1,080 1,492NOA Market Multiple: 2.37 3.35 1.93 1.75 3.47 1.34

Company Intrinsic Value $13,073Shares Outstanding 222.6Equity Intrinsic Value $9,574

Equity Intrinsic Value per Share: $43.01

(in millions, except share amounts) NordstromLimited Brands Gap

Abercrombie & Fitch

Urban Outfitters

American Eagle

Book Value Multiple:Market Capitalization -- $11,430 $8,990 $3,880 $3,880 $2,510Book Value of Equity $2,021 625 2,659 1,931 1,034 1,367

Book Value Market Multiple: 5.85 18.29 3.38 2.01 3.75 1.84

Shares Outstanding 222.6Equity Intrinsic Value $11,830

Equity Intrinsic Value per Share $53.14

(in millions, except share amounts) NordstromLimited Brands Gap

Abercrombie & Fitch

Urban Outfitters

American Eagle

Net Income Multiple:Market Capitalization -- $11,430 $8,990 $3,880 $3,880 $2,510

Net Income: $576 943 980 201 221 168Net Income Multiple: 14.62 12.12 9.17 19.30 17.56 14.94

Shares Outstanding 222.6Equity Intrinsic Value $8,425

Equity Intrinsic Value per Share $37.85

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

Exhibit 5: Comparable Market-Based Implied Valuations

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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 company’s 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 Nordstrom’s 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 Nordstrom’s 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 company’s 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 Nordstrom’s 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 Nordstrom’s stock value.

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 market-based 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.

Exhibit 7: DCF Sensitivity Analysis

2.00% 2.50% 3.00% 3.50% 4.00%W 8.36% 60.21 63.05 66.38 70.37 75.25A 8.86% 53.50 55.68 58.22 61.20 64.77C 9.36% 47.74 49.44 51.39 53.64 56.29C 9.86% 42.74 44.06 45.56 47.28 49.27

10.36% 38.37 39.41 40.57 41.89 43.39

Sales Terminal Growth Rate

2.00% 2.50% 3.00% 3.50% 4.00%W 8.36% 58.64 61.61 65.13 69.37 74.59A 8.86% 51.80 54.10 56.80 60.00 63.85C 9.36% 45.92 47.73 49.81 52.26 55.15C 9.86% 40.79 42.21 43.84 45.72 47.92

10.36% 36.31 37.43 38.71 40.71 41.86

Sales Terminal Growth Rate

Exhibit 8: ROPI Sensitivity Analysis

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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 Nordstrom’s internal controls over financial reporting. In Deloitte’s report, they explain that they conduct their audit of Nordstrom’s 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 Nordstrom’s internal controls based on their audit. After explaining how Deloitte conducts their audit and what Nordstrom’s internal controls includes, Deloitte issued an unqualified opinion for Nordstrom’s internal controls H. Deloitte & Touche LLP (Deloitte) from Seattle, Washington is the independent auditor of Nordstrom’s financial statements. In Deloitte’s report, they explain that they conduct their audit of Nordstrom’s 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 Nordstrom’s 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, Nordstrom’s stock price is $ 45.19.

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Appendix B: Accounting Basics A. Nordstrom’s 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 Macy’s Inc., parent corporation of Macy’s and Bloomingdale’s 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, Macy’s also defers recognizing gift card revenue until redemption. Macy’s chooses not to disclose the time period an unused balance must exceed in order to be recognized as revenue. Nordstrom’s current 5 year policy seems to be quite conservative. The company’s credit card division revenues consist of finance charges (interest earned on unpaid balances), interchange fees, and late fees. Major expenses (Including Recognition policies) Nordstrom’s 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 Macy’s loyalty programs costs do not increase cost of sales expense, they directly decrease net sales, which creates the same effect on gross profits. Nordstrom’s 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. Nordstrom’s 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, Macy’s 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 Macy’s may use in order to delay expenses, once again giving indication that Nordstrom’s accounting policies may be more conservative. Nordstrom’s 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 Macy’s is consistent with this expense recognition. Both Nordstrom and Macy’s 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 Nordstrom’s merchandise inventories are stated at lower of cost or market value. Both

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Nordstrom and competitor Macy’s value inventories using the retail method which applies a cost-to-retail ratio to retail value of ending inventory. However, Macy’s uses LIFO retail method while Nordstrom applies a weighted average cost. Companies such as Nordstrom’s top competitor Macy’s 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, Nordstrom’s competitor Macy’s reduces gross margin at time of the decision to markdown. Nordstrom’s 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 Macy’s could potentially do. Property, Plant, and Equipment (Including Depreciation) Nordstrom’s land is recorded at historical cost and its buildings and equipment are recorded at cost less accumulated depreciation. Nordstrom’s uses a straight-line depreciation method over the asset’s 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 Macy’s PP&E accounting policies are basically identical to Nordstrom’s 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. Macy’s 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, Nordstrom’s 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 Nordstrom’s 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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Fiscal year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Terminal

Year

Net sales Annual % Growth 3.12% -6.30% -0.17% 12.74% 13.00% 10.00% 9.50% 9.50% 9.50% 8.00% 6.00% 6.00% 6.00% 3.00%

Credit card revenues Annual % Growth 140.00% 19.44% 22.59% 5.69% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%

Cost of sales and related buying and occupancy costs % of Net Sales 62.54% 62.60% 65.49% 64.52% 63.34% 62.00% 62.00% 62.00% 62.00% 62.00% 62.00% 62.00% 62.00% 62.00% 62.00%Retail stores, direct and other segments % of Net Sales 24.19% 24.48% 25.42% 25.54% 25.91% 26.00% 26.40% 26.40% 26.80% 26.80% 26.00% 26.00% 26.00% 26.00% 26.00%

Capital Lease Adjustment Adjustment 0 0 0 0 111 132 145 159 174 190 205 218 231 245 252

Credit segment % of Credit Card Rev 87.62% 78.57% 91.03% 96.48% 70.00% 84.00% 84.00% 84.00% 84.00% 84.00% 84.00% 84.00% 84.00% 84.00% 84.00%

Operating Lease Depr Expense Average Useful Life 0 0 0 0 10.70 10.70 10.70 10.70 10.70 10.70 10.70 10.70 10.70 10.70 10.70

Gain on sale of Façonnable Forecast 0 34 0 0 0 0 0 0 0 0 0 0 0 0 0

Interest expense Interest Rate on Debt 4.60% 11.73% 7.25% 5.49% 4.86% 4.45% 4.70% 4.95% 5.20% 5.45% 5.70% 5.95% 6.20% 6.45% 6.70%

Interest revenue Interest Rate 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00% 3.25%

Operating Lease Interest Expense Discount Rate on Leases 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%

Income tax expense Tax Rate 38.70% 39.05% 41.30% 36.64% 39.61% 36.00% 35.00% 32.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00%

Basic shares Shares OS 260.7 244.8 216.6 216.8 218.8 209.7 199.7 189.7 179.7 169.7 159.7 149.7 139.7 129.7 119.7

Diluted shares Shares OS 265.7 248.8 219.2 219.7 222.6 213.50 203.50 193.50 183.50 173.50 163.50 153.50 143.50 133.50 123.50

Cash and cash equivalents % of Total Rev 4.65% 3.94% 0.84% 9.22% 15.53% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%

Accounts receivable, net Days Sales Outstanding 28.22 51.10 82.29 87.89 79.61 80.00 80.00 80.00 80.00 80.00 80.00 80.00 80.00 80.00 80.00

Merchandise inventoriesDays Inventory Outstanding 66.57 64.50 62.53 61.59 58.03 57.00 55.00 53.00 51.00 49.00 49.00 49.00 49.00 49.00 49.00

Current deferred tax assets, net % of Total Rev 1.95% 1.99% 2.45% 2.76% 2.43% 2.32% 2.32% 2.32% 2.32% 2.32% 2.32% 2.32% 2.32% 2.32% 2.32%

Prepaid expenses and other % of Total Rev 5.64% 0.86% 1.08% 1.02% 0.81% 0.94% 0.94% 0.94% 0.94% 0.94% 0.94% 0.94% 0.94% 0.94% 0.94%

Land, buildings and equipment, net PPE Turnover 4.91 4.86 4.08 3.87 4.25 4.00 4.00 4.00 4.00 3.75 3.75 3.75 3.50 3.50 3.50

Leased buildings and equipment Lease PPE Turnover 0 0 0 0 13.51 13.51 13.51 13.51 13.51 13.51 13.51 13.51 13.51 13.51 13.51

Goodwill Forecasted 136 53 53 53 53 200 200 200 200 200 200 200 200 200 200

Other assets % of Total Rev 2.16% 2.24% 1.98% 2.67% 2.75% 2.75% 2.80% 2.80% 2.80% 2.80% 2.85% 2.85% 2.85% 2.85% 2.85%

Commercial paper % of Total Rev 0.00% 0.00% 3.21% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Accounts payable 38.08 37.42 37.70 44.15 48.65 43.06 43.06 43.06 43.06 43.06 43.06 43.06 43.06 43.06 43.06

Accrued salaries, wages and related benefits % of Total Rev 3.92% 2.95% 2.50% 3.89% 3.87% 3.40% 3.40% 3.40% 3.40% 3.40% 3.40% 3.40% 3.40% 3.40% 3.40%

Other current liabilities % of Total Rev 5.87% 6.06% 6.12% 6.91% 6.72% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50%

Current portion of long-term debt Forecasted 7 261 24 356 6 6 7 406 8 304 304 304 304 304 304

Days Payable OutstandingLong-term debt, net % of Total Rev 7.20% 24.63% 25.83% 26.16% 28.61% 29.00% 29.00% 29.00% 29.00% 29.00% 28.00% 27.00% 26.00% 25.00% 24.00%

Deferred property incentives, net % of Total Rev 4.11% 4.06% 5.07% 5.44% 5.10% 4.75% 4.75% 4.75% 4.75% 4.75% 4.75% 4.75% 4.75% 4.75% 4.75%

Other liabilities % of Total Rev 2.77% 2.70% 2.34% 3.09% 3.01% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%

Common stock Forecasted 827 936 997 1,066 1,168 1,168 1,168 1,168 1,168 1,168 1,168 1,168 1,168 1,168 1,168

Repurchase of Common Stock Forecasted 411 500 500 500 500 500 500 500 500 500

Accumulated other comprehensive loss Forecasted -9 -22 -10 -19 -29 0 0 0 0 0 0 0 0 0 0

Dividend Payout Ratio 16.22% 18.74% 39.32% 31.52% 28.98% 30.00% 35.00% 40.00% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00%

Nordstrom, Inc.

Forecasting Assumptions

HISTORICAL FORECASTED

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Nordstrom, Inc.

Adjusted Consolidated Balance Sheets

In millions

Fiscal year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Terminal

Year

Assets

Current assets:Cash and cash equivalents $463 $403 $358 $72 $795 $1,506 $1,229 $1,302 $1,470 $1,655 $1,857 $2,044 $2,197 $2,359 $2,530 $2,624

Excess Cash 0 0 0 0 0 0 0 0 35 0 0 0 0 0 0 0

Accounts receivable, net 640 684 1,788 1,942 2,035 2,026 2,306 2,536 2,777 3,041 3,330 3,597 3,812 4,041 4,284 4,412

Merchandise inventories 956 997 956 900 898 977 1,019 1,081 1,141 1,202 1,265 1,366 1,448 1,535 1,627 1,675

Current deferred tax assets, net 145 169 181 210 238 236 254 279 305 333 365 394 417 442 469 483

Prepaid expenses and other 670 489 78 93 88 79 103 113 123 135 148 159 169 179 190 196

Total current assets 2,874 2,742 3,361 3,217 4,054 4,824 4,910 5,311 5,852 6,367 6,964 7,560 8,043 8,556 9,099 9,391

Land, buildings and equipment, net 1,774 1,757 1,983 2,221 2,242 2,318 2,733 3,003 3,284 3,592 4,191 4,523 4,795 5,445 5,772 5,951

Leased buildings and equipment 718 810 889 973 1,064 1,164 1,256 1,331 1,411 1,496 1,542

Goodwill 136 136 53 53 53 53 200 200 200 200 200 200 200 200 200 200

Other assets 138 187 203 170 230 267 301 336 368 402 440 483 512 543 576 594

Total assets 4,921 4,822 5,600 5,661 6,579 8,180 8,954 9,739 10,677 11,625 12,959 14,022 14,882 16,156 17,143 17,677

Liabilities and Shareholders' Equity

Current liabilities:Commercial paper 0 0 0 275 0 0 0 0 0 0 0 0 0 0 0 0

Accounts payable 540 577 556 563 726 846 769 846 927 1,015 1,111 1,200 1,272 1,349 1,429 1,472

Accrued salaries, wages and related benefits 286 340 268 214 336 375 372 408 447 489 534 577 611 648 687 708

Other current liabilities 491 509 550 525 596 652 711 781 854 934 1,022 1,103 1,169 1,239 1,313 1,354

Current portion of long-term debt 307 7 261 24 356 6 6 7 406 8 304 304 304 304 304 304

Total current liabilities 1,623 1,433 1,635 1,601 2,014 1,879 1,858 2,042 2,633 2,445 2,971 3,183 3,356 3,539 3,734 3,838

Long-term debt, net 628 624 2,236 2,214 2,257 2,775 3,171 3,483 3,809 4,167 4,558 4,749 4,855 4,955 5,051 4,999

Deferred property incentives, net 364 356 369 435 469 495 519 571 624 682 746 806 854 905 960 989

Capitalized operating leases 718 810 889 973 1,064 1,164 1,256 1,331 1,411 1,496 1,542

Excess Debt 0 0 0 0 0 0 97 195 0 547 675 964 1,170 1,732 1,946 1,996

Other liabilities 213 240 245 201 267 292 328 360 394 431 471 509 539 572 606 625

Total liabilities 2,829 2,653 4,485 4,451 5,007 6,159 6,783 7,541 8,434 9,337 10,585 11,467 12,105 13,115 13,791 13,990

Shareholders' equity:Common stock, no par value: 1,000 shares authorized; 217.7 and 215.4 shares issued and outstanding 686 827 936 997 1,066 1,168 1,168 1,168 1,168 1,168 1,168 1,168 1,168 1,168 1,168 1,168

Retained earnings 1,404 1,351 201 223 525 882 1,003 1,030 1,075 1,120 1,206 1,387 1,608 1,873 2,184 2,520

Accumulated other comprehensive loss 2 -9 -22 -10 -19 -29 0 0 0 0 0 0 0 0 0 0

Total shareholders' equity 2,093 2,169 1,115 1,210 1,572 2,021 2,171 2,198 2,243 2,288 2,374 2,555 2,776 3,041 3,352 3,688

Total liabilities and shareholders' equity 4,921 4,822 5,600 5,661 6,579 8,180 8,954 9,739 10,677 11,625 12,959 14,022 14,882 16,156 17,143 17,677

Check 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Supplemental Information:

Net Operating Assets 3,027 2,800 3,612 3,723 4,185 5,520 6,254 6,773 7,396 8,074 9,074 9,828 10,436 11,443 12,148 12,529

Total Assets w/o Excess Cash 8,954 9,739 10,641 11,625 12,959 14,022 14,882 16,156 17,143 17,677

Total Liabilities w/o Excess Debt 8,856 9,544 10,677 11,078 12,284 13,058 13,712 14,424 15,197 15,681

Excess Cash / (Debt) -97 -195 35 -547 -675 -964 -1,170 -1,732 -1,946 -1,996

HISTORICAL FORECASTED

Page 24

Nordstrom, Inc.

Common Size Adjusted Consolidated Balance Sheets

Fiscal year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Terminal

Year

Assets

Current assets:Cash and cash equivalents 9.40% 8.36% 6.39% 1.27% 12.08% 18.41% 13.73% 13.36% 13.77% 14.24% 14.33% 14.58% 14.76% 14.60% 14.76% 14.85%

Excess Cash 0.00% 0.00% 0.00% 0.33% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Accounts receivable, net 13.00% 14.18% 31.93% 34.30% 30.93% 24.77% 25.75% 26.04% 26.01% 26.16% 25.70% 25.65% 25.62% 25.01% 24.99% 24.96%

Merchandise inventories 19.43% 20.68% 17.07% 15.90% 13.65% 11.94% 11.38% 11.10% 10.68% 10.34% 9.76% 9.74% 9.73% 9.50% 9.49% 9.48%

Current deferred tax assets, net 2.96% 3.50% 3.23% 3.71% 3.62% 2.89% 2.83% 2.86% 2.85% 2.87% 2.81% 2.81% 2.80% 2.74% 2.73% 2.73%

Prepaid expenses and other 13.62% 10.14% 1.39% 1.64% 1.34% 0.97% 1.15% 1.16% 1.16% 1.16% 1.14% 1.14% 1.14% 1.11% 1.11% 1.11%

Total current assets 58.40% 56.86% 60.02% 56.83% 61.62% 58.97% 54.84% 54.53% 54.81% 54.77% 53.74% 53.91% 54.05% 52.96% 53.08% 53.12%

Land, buildings and equipment, net 36.04% 36.44% 35.41% 39.23% 34.08% 28.34% 30.53% 30.83% 30.76% 30.90% 32.34% 32.26% 32.22% 33.71% 33.67% 33.66%

Leased buildings and equipment 8.78% 9.04% 9.13% 9.11% 9.15% 8.98% 8.96% 8.95% 8.73% 8.73% 8.72%

Goodwill 2.76% 2.82% 0.95% 0.94% 0.81% 0.65% 2.23% 2.05% 1.87% 1.72% 1.54% 1.43% 1.34% 1.24% 1.17% 1.13%

Other assets 2.80% 3.88% 3.63% 3.00% 3.50% 3.26% 3.36% 3.45% 3.44% 3.46% 3.40% 3.45% 3.44% 3.36% 3.36% 3.36%

Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Liabilities and Shareholders' Equity

Current liabilities:Commercial paper 0.00% 0.00% 0.00% 4.86% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Accounts payable 10.97% 11.97% 9.93% 9.95% 11.04% 10.34% 8.59% 8.69% 8.68% 8.73% 8.58% 8.56% 8.55% 8.35% 8.34% 8.33%

Accrued salaries, wages and related benefits 5.81% 7.05% 4.79% 3.78% 5.11% 4.58% 4.15% 4.19% 4.18% 4.20% 4.12% 4.11% 4.11% 4.01% 4.01% 4.01%

Other current liabilities 9.97% 10.56% 9.82% 9.27% 9.06% 7.97% 7.94% 8.02% 8.00% 8.03% 7.88% 7.86% 7.85% 7.67% 7.66% 7.66%

Current portion of long-term debt 6.23% 0.15% 4.66% 0.42% 5.41% 0.07% 0.07% 0.07% 3.80% 0.07% 2.35% 2.17% 2.04% 1.88% 1.77% 1.72%

Total current liabilities 32.99% 29.72% 29.20% 28.28% 30.61% 22.97% 20.75% 20.97% 24.66% 21.04% 22.93% 22.70% 22.55% 21.91% 21.78% 21.71%

Long-term debt, net 12.76% 12.94% 39.93% 39.11% 34.31% 33.92% 35.41% 35.76% 35.68% 35.84% 35.17% 33.87% 32.62% 30.67% 29.46% 28.28%

Deferred property incentives, net 7.40% 7.38% 6.59% 7.68% 7.13% 6.05% 5.80% 5.86% 5.84% 5.87% 5.76% 5.75% 5.74% 5.60% 5.60% 5.60%

Capitalized operating leases 8.78% 9.04% 9.13% 9.11% 9.15% 8.98% 8.96% 8.95% 8.73% 8.73% 8.72%

Excess Debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1.08% 2.00% 0.00% 4.71% 5.21% 6.87% 7.86% 10.72% 11.35% 11.29%

Other liabilities 4.33% 4.98% 4.38% 3.55% 4.06% 3.57% 3.66% 3.70% 3.69% 3.71% 3.64% 3.63% 3.62% 3.54% 3.54% 3.53%

Total liabilities 57.48% 55.02% 80.09% 78.63% 76.11% 75.29% 75.75% 77.43% 78.99% 80.32% 81.68% 81.78% 81.34% 81.18% 80.45% 79.14%

Shareholders' equity:Common stock, no par value: 1,000 shares authorized; 217.7 and 215.4 shares issued and outstanding 13.94% 17.15% 16.71% 17.61% 16.20% 14.28% 13.05% 11.99% 10.94% 10.05% 9.01% 8.33% 7.85% 7.23% 6.81% 6.61%

Retained earnings 28.54% 28.02% 3.59% 3.94% 7.98% 10.78% 11.20% 10.58% 10.07% 9.64% 9.30% 9.89% 10.81% 11.59% 12.74% 14.25%

Accumulated other comprehensive loss 0.05% -0.19% -0.39% -0.18% -0.29% -0.35% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total shareholders' equity 42.52% 44.98% 19.91% 21.37% 23.89% 24.71% 24.25% 22.57% 21.01% 19.68% 18.32% 18.22% 18.66% 18.82% 19.55% 20.86%

Total liabilities and shareholders' equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Supplemental Information:

Net Operating Assets 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%

HISTORICAL FORECASTED

Page 25

Nordstrom, Inc.

Adjusted Consolidated Statements of Earnings

In millions except per share amounts

Fiscal year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Terminal

Year

Net sales $8,561 $8,828 $8,272 $8,258 $9,310 $10,520 $11,572 $12,672 $13,876 $15,194 $16,409 $17,394 $18,437 $19,544 $20,130

Credit card revenues 105 252 301 369 390 413 438 464 492 522 553 586 622 659 698

Total revenues 8,666 9,080 8,573 8,627 9,700 10,934 12,011 13,136 14,368 15,716 16,962 17,980 19,059 20,202 20,828

Cost of sales and related buying and occupancy costs -5,354 -5,526 -5,417 -5,328 -5,897 -6,523 -7,175 -7,856 -8,603 -9,420 -10,174 -10,784 -11,431 -12,117 -12,481

Selling, general and administrative expenses:Retail stores, direct and other segments -2,071 -2,161 -2,103 -2,109 -2,412 -2,735 -3,055 -3,345 -3,719 -4,072 -4,266 -4,522 -4,794 -5,081 -5,234

Capital Lease Adjustment (Rent Expense) 111 132 145 159 174 190 205 218 231 245 252

Credit segment -92 -198 -274 -356 -273 -347 -368 -390 -414 -438 -465 -493 -522 -553 -587

Operating Lease Depr Expense -67 -76 -83 -91 -99 -109 -117 -124 -132 -140 -144

Gain on sale of Façonnable 0 34 0 0 0 0 0 0 0 0 0 0 0 0 0

Earnings on investment in asset-backed securities, net 0 18 0 0 0 0 0 0 0 0 0 0 0 0 0

Earnings before interest and income taxes 1,149 1,247 779 834 1,162 1,385 1,475 1,612 1,707 1,867 2,146 2,274 2,411 2,555 2,635

Interest expense, net -43 -74 -181 -138 -127 -141 -164 -209 -217 -265 -288 -307 -326 -345 -355

Operating Lease Interest Expense -81 -57 -62 -68 -74 -81 -88 -93 -99 -105 -108

Earnings before income taxes 1,106 1,173 598 696 954 1,187 1,248 1,336 1,416 1,520 1,770 1,874 1,986 2,105 2,172

Income tax expense -428 -458 -247 -255 -378 -427 -437 -427 -425 -456 -531 -562 -596 -632 -652

Operating (Income Tax Expense) -445 -494 -322 -306 -460 -499 -516 -516 -512 -560 -644 -682 -723 -767 -791 Non-Operating (Income Tax Expense) 17 36 75 51 82 71 79 89 87 104 113 120 127 135 139

Net earnings $678 $715 $351 $441 $576 $760 $812 $908 $991 $1,064 $1,239 $1,312 $1,390 $1,474 $1,520

Earnings per basic share $2.60 $2.92 $1.62 $2.03 $2.63 $3.62 $4.06 $4.79 $5.51 $6.27 $7.76 $8.76 $9.95 $11.36 $12.70

Earnings per diluted share $2.55 $2.87 $1.60 $2.01 $2.59 $3.56 $3.99 $4.69 $5.40 $6.13 $7.58 $8.55 $9.69 $11.04 $12.31

Basic shares 260.7 244.8 216.6 216.8 218.8 209.7 199.7 189.7 179.7 169.7 159.7 149.7 139.7 129.7 119.7

Diluted shares 265.7 248.8 219.2 219.7 222.6 213.5 203.5 193.5 183.5 173.5 163.5 153.5 143.5 133.5 123.5

Supplemental Information:

Net Operating Profit Less Adjusted Taxes 704 771 457 528 702 887 959 1,096 1,195 1,307 1,502 1,592 1,688 1,789 1,845Effective Tax Rate 38.70% 39.05% 41.30% 36.64% 39.61% 36.00% 35.00% 32.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00%

HISTORICAL FORECASTED

Page 26

Nordstrom, Inc.

Common Size Adjusted Statement of Earnings

Fiscal year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Terminal

Year

Net sales 98.79% 97.22% 96.49% 95.72% 95.98% 96.22% 96.35% 96.46% 96.57% 96.68% 96.74% 96.74% 96.74% 96.74% 96.65%

Credit card revenues 1.21% 2.78% 3.51% 4.28% 4.02% 3.78% 3.65% 3.54% 3.43% 3.32% 3.26% 3.26% 3.26% 3.26% 3.35%

Total revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of sales and related buying and occupancy costs -61.78% -60.86% -63.19% -61.76% -60.79% -59.66% -59.74% -59.81% -59.88% -59.94% -59.98% -59.98% -59.98% -59.98% -59.92%

Selling, general and administrative expenses:Retail stores, direct and other segments -23.90% -23.80% -24.53% -24.45% -24.87% -25.02% -25.44% -25.47% -25.88% -25.91% -25.15% -25.15% -25.15% -25.15% -25.13%

Capital Lease Adjustment (Rent Expense) 0.00% 0.00% 0.00% 0.00% 1.14% 1.21% 1.21% 1.21% 1.21% 1.21% 1.21% 1.21% 1.21% 1.21% 1.21%

Credit segment -1.06% -2.18% -3.20% -4.13% -2.81% -3.18% -3.06% -2.97% -2.88% -2.79% -2.74% -2.74% -2.74% -2.74% -2.82%

Operating Lease Depr Expense 0.00% 0.00% 0.00% 0.00% -0.69% -0.69% -0.69% -0.69% -0.69% -0.69% -0.69% -0.69% -0.69% -0.69% -0.69%

Gain on sale of Façonnable 0.00% 0.37% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Earnings on investment in asset-backed securities, net 0.00% 0.20% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Earnings before interest and income taxes 13.26% 13.73% 9.09% 9.67% 11.98% 12.67% 12.28% 12.27% 11.88% 11.88% 12.65% 12.65% 12.65% 12.65% 12.65%

Interest expense, net -0.50% -0.81% -2.11% -1.60% -1.31% -1.29% -1.37% -1.59% -1.51% -1.69% -1.70% -1.71% -1.71% -1.71% -1.71%

Operating Lease Interest Expense 0.00% 0.00% 0.00% 0.00% -0.83% -0.52% -0.52% -0.52% -0.52% -0.52% -0.52% -0.52% -0.52% -0.52% -0.52%

Earnings before income taxes 12.76% 12.92% 6.98% 8.07% 9.84% 10.86% 10.39% 10.17% 9.85% 9.67% 10.43% 10.42% 10.42% 10.42% 10.43%

Income tax expense -4.94% -5.04% -2.88% -2.96% -3.90% -3.91% -3.64% -3.25% -2.96% -2.90% -3.13% -3.13% -3.13% -3.13% -3.13%

Operating (Income Tax Expense) -5.13% -5.44% -3.75% -3.54% -4.74% -4.56% -4.30% -3.93% -3.56% -3.56% -3.79% -3.79% -3.79% -3.79% -3.80%

Non-Operating (Income Tax Expense) 0.19% 0.40% 0.87% 0.59% 0.85% 0.65% 0.66% 0.67% 0.61% 0.66% 0.66% 0.67% 0.67% 0.67% 0.67%

Net earnings 7.82% 7.87% 4.09% 5.11% 5.94% 6.95% 6.76% 6.91% 6.90% 6.77% 7.30% 7.30% 7.29% 7.29% 7.30%

Supplemental Information:

Net Operating Profit 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%

HISTORICAL FORECASTED

Page 27

Payment Year Cash Flow Discount

PV of Cash

Flow

2011 $111 0.93458 $1042012 108 0.87344 942013 100 0.81630 822014 96 0.76290 732015 92 0.71299 66

Thereafter 524 300Total $1,031 $718

Years Thereafter 5.70Lease Discount Rate 7.00%

Nordstrom, Inc.

Capitalize Operating Leases

Operating Lease Discounted Cash Flow Capitalization Schedule

Supplemental Information:

Page 28

Nordstrom, Inc.

Ratio Analysis

Fiscal Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Terminal

Year

Profitability Margins

Gross Margin 38.22% 39.14% 36.81% 38.24% 39.21% 40.34% 40.26% 40.19% 40.12% 40.06% 40.02% 40.02% 40.02% 40.02% 40.08%

EBIT Margin 13.26% 13.73% 9.09% 9.67% 11.98% 12.67% 12.28% 12.27% 11.88% 11.88% 12.65% 12.65% 12.65% 12.65% 12.65%

NOPAT Margin 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%

Net Income Margin 7.82% 7.87% 4.09% 5.11% 5.94% 6.95% 6.76% 6.91% 6.90% 6.77% 7.30% 7.30% 7.29% 7.29% 7.30%

Growth Rates

Revenue 1-Year Growth Rate 4.78% -5.58% 0.63% 12.44% 12.72% 9.85% 9.37% 9.38% 9.38% 7.93% 6.00% 6.00% 6.00% 3.10%

EBIT 1-Year Growth Rate 8.53% -37.53% 7.06% 39.31% 19.23% 6.46% 9.33% 5.89% 9.33% 14.94% 6.00% 6.00% 6.00% 3.13%

NOPAT 1-Year Growth Rate 9.47% -40.70% 15.57% 32.78% 26.36% 8.12% 14.37% 9.01% 9.33% 14.94% 6.00% 6.00% 6.00% 3.13%

Net Income 1-Year Growth Rate 5.46% -50.91% 25.64% 30.68% 31.84% 6.80% 11.91% 9.12% 7.38% 16.40% 5.91% 5.96% 6.01% 3.17%

Return on Investment

Return on Net Operating Assets 24.18% 24.05% 12.47% 13.36% 14.46% 15.06% 14.72% 15.48% 15.45% 15.24% 15.89% 15.71% 15.43% 15.16% 14.95%

Return on Nonopearating Assets 7.64% 19.49% 17.73% 18.34% 17.62% 21.19% 22.43% 25.42% 28.29% 30.41% 34.38% 33.50% 32.36% 30.94% 28.25%

Return on Equity 31.82% 43.54% 30.19% 31.70% 32.08% 36.25% 37.15% 40.89% 43.74% 45.65% 50.27% 49.21% 47.79% 46.11% 43.20%

Leverage

Liabilities-to-Equity 1.22 4.02 3.68 3.19 3.05 3.12 3.43 3.76 4.08 4.46 4.49 4.36 4.31 4.11 3.79

Debt-to-Equity 0.29 2.24 2.08 1.66 1.73 1.84 1.99 2.31 2.29 2.54 2.47 2.34 2.19 2.04 1.86

Long-term debt-to-Equity 0.29 2.01 1.83 1.44 1.73 1.83 1.99 2.13 2.29 2.41 2.35 2.23 2.09 1.95 1.77

Financial Leverage 1.37 1.95 3.15 2.84 2.70 2.81 2.98 3.19 3.41 3.68 3.84 3.80 3.76 3.69 3.51

Liquidity

Current Ratio 1.91 2.06 2.01 2.01 2.57 2.64 2.60 2.22 2.60 2.34 2.37 2.40 2.42 2.44 2.45

Quick Ratio 0.76 1.31 1.26 1.41 1.88 1.90 1.88 1.63 1.92 1.75 1.77 1.79 1.81 1.83 1.83

Coverage

Times Interest Earned (EBIT/Interest Exp) 26.72 16.85 4.30 6.04 5.60 6.99 6.52 5.83 5.86 5.39 5.71 5.68 5.67 5.68 5.69

Total Debt to NOPAT 0.90 3.24 5.50 4.94 4.99 4.50 4.57 4.73 4.38 4.61 4.20 4.08 3.95 3.83 3.71

Net Debt to NOPAT 0.32 2.77 5.34 3.44 2.84 3.11 3.21 3.36 3.00 3.19 2.84 2.70 2.56 2.42 2.29

Altman Z-Score

Z Score 3.74 2.87 2.41 2.32 2.34

Asset Efficiency & Quality

Accounts Receivable Turnover 13.10 7.35 4.60 4.34 4.78 5.05 4.96 4.94 4.94 4.93 4.90 4.85 4.85 4.85 4.79

Inventory Turnover 5.48 5.66 5.84 5.93 6.29 6.54 6.83 7.07 7.34 7.64 7.74 7.67 7.67 7.67 7.56

Accounts Payable Turnover 9.59 9.75 9.68 8.27 7.50 8.08 8.88 8.86 8.86 8.86 8.80 8.72 8.72 8.72 8.60

Days in Accounts Receivable 27.87 49.69 79.40 84.13 76.41 72.30 73.58 73.82 73.91 73.99 74.52 75.20 75.20 75.20 76.19

Days in Inventory 66.57 64.50 62.53 61.59 58.03 55.84 53.41 51.61 49.70 47.79 47.19 47.61 47.61 47.61 48.29

Days in Accounts Payable 38.08 37.42 37.70 44.15 48.65 45.20 41.10 41.19 41.19 41.19 41.47 41.84 41.84 41.84 42.43

Cash Conversion Cycle 56.37 76.77 104.23 101.57 85.78 82.94 85.88 84.25 82.42 80.58 80.24 80.97 80.97 80.97 82.04

Net Operating Asset Turnover 2.97 2.83 2.34 2.18 2.00 1.86 1.84 1.85 1.86 1.83 1.79 1.77 1.74 1.71 1.69

Net Operating Working Capital Turnover 6.77 5.98 5.13 4.72 3.89 3.65 3.80 4.05 4.02 3.97 4.05 3.97 3.93 3.89 3.82

Fixed Asset Turnover 4.91 4.86 4.08 3.87 4.25 4.33 4.19 4.18 4.18 4.04 3.89 3.86 3.72 3.60 3.55

Total Asset Turnover 1.78 1.74 1.52 1.41 1.31 1.28 1.29 1.29 1.29 1.28 1.26 1.24 1.23 1.21 1.20

HISTORICAL FORECASTED

Page 29

2010

(Unadjusted)

2010

(Adjusted) Difference

Return on Equity 34.12% 32.08% -5.99%

DuPont:

Profit Margin 6.32% 5.94% -5.99%Asset Turnover 1.38 1.31 -4.87%Financial Leverage 3.91 4.11 5.12%

RNOA:

Sales $9,700 $9,700 0.00%NOPAT $563 $702 24.69%NOA $4,802 $5,520 14.96%

NOPM 5.80% 7.23% 24.69%NOAT 2.02 1.76 -13.01%

RNOA 11.72% 12.71% 8.47%RNNOA 22.40% 19.37% -13.55%

Nordstrom, Inc.

ROE Disaggregation

ROE Disaggregation

Page 30

Nordstrom, Inc.

Dividend per share T+1 $0.92Growth Rate of Dividend 0.00%

Cost of Equity 12.33%Implied price per share: $7.46

Dividend per share T+1 $0.98Growth Rate of Dividend 7.00%

Cost of Equity 12.33%Implied price per share: $18.46

Dividend per share T+1 $1.021st Stage Growth Rate 11.00%

1st Stage Length (Years) 5Perpetual Growth Rate 4.00%

Cost of Equity 12.33%Implied price per share: $14.84

Dividend Discount Models

Constant Perpetuity DDM:

Gordon Growth Model:

Two Stage Gordon Growth Model:

Page 31

Nordstrom, Inc.

Market-Based Valuation

Industry: Apparel Stores

(in millions, except share amounts)Nordstrom

Limited

Brands Gap

Abercrombie

& Fitch

Urban

Outfitters

American

Eagle

Net Operating Assets Multiple:

Enterprise Value -- $13,919 $10,141 $3,418 $3,750 $1,996Net Operating Assets $5,520 4,149 5,252 1,958 1,080 1,492NOA Market Multiple: 2.37 3.35 1.93 1.75 3.47 1.34

Company Intrinsic Value $13,073Shares Outstanding 222.6

Equity Intrinsic Value $9,574Equity Intrinsic Value per Share: $43.01

(in millions, except share amounts)Nordstrom

Limited

Brands Gap

Abercrombie

& Fitch

Urban

Outfitters

American

Eagle

Book Value Multiple:

Market Capitalization -- $11,430 $8,990 $3,880 $3,880 $2,510Book Value of Equity $2,021 625 2,659 1,931 1,034 1,367

Book Value Market Multiple: 5.85 18.29 3.38 2.01 3.75 1.84

Shares Outstanding 222.6Equity Intrinsic Value $11,830

Equity Intrinsic Value per Share $53.14

(in millions, except share amounts)Nordstrom

Limited

Brands Gap

Abercrombie

& Fitch

Urban

Outfitters

American

Eagle

Net Income Multiple:

Market Capitalization -- $11,430 $8,990 $3,880 $3,880 $2,510Net Income: $576 943 980 201 221 168

Net Income Multiple: 14.62 12.12 9.17 19.30 17.56 14.94

Shares Outstanding 222.6Equity Intrinsic Value $8,425

Equity Intrinsic Value per Share $37.85

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.

Page 32

Nordstrom, Inc.

Capital Structure: Cost of Equity:

Market Capitalization $9,300 ERP (Damodaran) 6.49%Book Value of Debt 3,499 Rf Rate (10-yr T-Note) 1.97%

PV of Operating Leases 718 Equity Beta 1.60Total Capital: $13,517 Cost of Equity: 12.33%

Equity Beta: Cost of Debt:

Yahoo! Finance 1.57 Interest Expense 2010 $127MSN Money 1.61 Average Debt 2010 $3,056

Reuters 1.61 Implied Cost of Debt 4.16%Average: 1.60 Marginal Tax Rate 39.61%

After-Tax Cost of Debt: 2.51%

Cost of Operating Leases:

Discount Rate on Op. Leases 7.00%Marginal Tax Rate 39.61%

After-Tax Cost of Op. Leases: 4.23%

WACC: 9.36%

Weighted Average Cost of Capital

Weighted Average Cost of Capital:

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

Page 33

Nordstrom, Inc.

In millions

Fiscal year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Terminal

Year

Period 0 0.08 1.08 2.08 3.08 4.08 5.08 6.08 7.08 8.08

Sales 8,561 8,828 8,272 8,258 9,310 10,520 11,572 12,672 13,876 15,194 16,409 17,394 18,437 19,544 20,130

NOPAT 704 753 457 528 702 887 959 1,096 1,195 1,307 1,502 1,592 1,688 1,789 1,845

NOA 2,800 3,612 3,723 4,185 5,520 6,254 6,773 7,431 8,074 9,074 9,828 10,436 11,443 12,148 12,529

Increase in NOA 812 111 462 1,335 734 518 659 643 1,000 754 608 1,007 705 381

FCFF -59 346 66 -634 152 440 438 552 307 747 984 680 1,084 1,463

Discount factor 0.99257 0.90763 0.82995 0.75893 0.69398 0.63459 0.58028 0.53062 0.48521

PV of horizon FCFF 151 400 363 419 213 474 571 361 526

Cumulative PV of horizon FCFF 3,479PV of terminal FCFF 11,208Total firm value 14,687Less NNO 3,499Firm equity value 11,187

Shares outstanding 217.7Stock price per share $51.39

Supplemental Inputs:

WACC 9.36%Terminal Growth Rate 3.00%

2.00% 2.50% 3.00% 3.50% 4.00%

W 8.36% 60.21 63.05 66.38 70.37 75.25A 8.86% 53.50 55.68 58.22 61.20 64.77C 9.36% 47.74 49.44 51.39 53.64 56.29C 9.86% 42.74 44.06 45.56 47.28 49.27

10.36% 38.37 39.41 40.57 41.89 43.39

HISTORICAL FORECASTED

Sales Terminal Growth Rate

Discounted Cash Flows Model

Page 34

Nordstrom, Inc.

In millions

Fiscal year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Terminal

Year

Period 0 0.08 1.08 2.08 3.08 4.08 5.08 6.08 7.08 8.08

Sales 8,561 8,828 8,272 8,258 9,310 10,520 11,572 12,672 13,876 15,194 16,409 17,394 18,437 19,544 20,130

NOPAT 704 753 457 528 702 887 959 1,096 1,195 1,307 1,502 1,592 1,688 1,789 1,845

NOA 2,800 3,612 3,723 4,185 5,520 6,254 6,773 7,431 8,074 9,074 9,828 10,436 11,443 12,148 12,529

ROPI 370 373 463 500 551 653 672 711 718 708

Discount factor 0.99257 0.90763 0.82995 0.75893 0.69398 0.63459 0.58028 0.53062 0.48521

PV of horizon ROPI 367 339 384 379 382 414 390 377 348

Cumulative PV of horizon ROPI 3,381PV of terminal ROPI 5,401NOA 5,562Total firm value 14,343Less NNO 3,499Firm Equity Value 10,844Shares outstanding 217.7Stock price per share $49.81

Supplemental Inputs

WACC 9.36%Terminal Growth Rate 3.00%

2.00% 2.50% 3.00% 3.50% 4.00%

W 8.36% 58.64 61.61 65.13 69.37 74.59A 8.86% 51.80 54.10 56.80 60.00 63.85C 9.36% 45.92 47.73 49.81 52.26 55.15C 9.86% 40.79 42.21 43.84 45.72 47.92

10.36% 36.31 37.43 38.71 40.71 41.86

HISTORICAL FORECASTED

Sales Terminal Growth Rate

Residual Operating Income Model

Page 35