DBRS Assigns Rating of A (low) to Nordstrom, Stable Trend

DBRS has today assigned an Issuer Rating and Senior Unsecured Debt rating of A (low) and a Short-Term Rating of R-1 (low) to Nordstrom, Inc. (Nordstrom or the Company), all with Stable trends. The ratings are based on Nordstrom’s strong reputation for customer service and merchandising, its number one position in the U.S. luxury department store segment, a consistent record of financial discipline and an increasingly diverse customer base. The ratings also consider intense competition, exposure to economic cycles and changing consumer trends, as well as execution risks associated with an accelerated program of new store openings in the United States and Canada.

Nordstrom’s strong merchandising and service capabilities, as well as its careful management of fixed costs, have contributed to stronger-than-average sales per square foot, earnings margins and returns on capital on a through-the-cycle basis. The Company’s exposure to economic cycles is highlighted by negative same-store sales growth during the recession of 2008 and 2009 and a strong recovery since. Revenues increased by an average of 12% per year between 2010 and 2012 to reach $12.1 billion, driven by recovering consumer spending, improving market share and a 6% increase in selling space. During this period, margin pressure resulting from start-up costs with the expanding Nordstrom Rack business was partially offset by increased full-price selling at the department stores and lower bad debt provisions in the credit segment. As such, EBITDA margin decreased from14.9% in 2010 to 14.6% in 2012, yielding EBITDA of almost $1.8 billion.

Nordstrom’s same-store sales growth rate moderated to 2.5% in 2013, after three years of high single-digit growth. That said, DBRS believes Nordstrom’s same-store sales were in line with the U.S. industry average in 2013. Total revenue increased 3.4% to $12.5 billion in 2013 based on same-store sales growth and 20 net new Nordstrom Rack store openings. EBITDA margin decreased slightly to 14.4% due to costs associated with the Company’s e-commerce platform, Nordstrom Rack store openings and its planned entry into Canada. As such, EBITDA increased modestly to $1.8 billion in 2013.

Nordstrom’s financial profile is well placed in the current rating category, based on strong cash generating capacity and conservative and transparent financial management. Cash flow from operations tracked operating income after the economic crisis, growing from $936 million in 2009 to $1.3 billion in 2013. This was more than sufficient to fund an increasingly expansion-oriented capital expenditure (capex) budget, as well as growing dividends per share. As such, Nordstrom generated between $213 million and $512 million per year of free cash flow since 2009. The Company has used the bulk of its free cash flow to repurchase approximately $1.8 billion of shares over this period. Nordstrom maintains a consolidated leverage target of 1.5 times (x) to 2.5x debt-to-EBITDAR using an 8.0x multiple to capitalize operating lease expense net of property incentives (this equates to 1.3x to 2.3x using DBRS’s method of capitalizing gross operating leases at 6.0x). DBRS adjusts Nordstrom’s consolidated credit metrics to exclude assets, liabilities and income associated with the Company’s credit segment, and estimates lease-adjusted leverage attributable to the retail operations to be 1.4x in 2013, which is considered well placed for the rating category.

DBRS believes Nordstrom’s earnings profile will remain steady based primarily on increasing scale, sound merchandising and customer service excellence. Revenues are expected to increase by 8% or more per year, reaching at least $16.5 billion by 2016, driven by low single-digit comparable-store sales growth, strong growth of the direct (online) business and an accelerated program of new store openings in the United States and Canada. EBITDA margins are expected to continue to compress, averaging 13.5% to 14% through 2016 as increasing economies of scale are offset by administrative and distribution cost increases with expansion into Canada. As such, DBRS anticipates annual EBITDA will grow by more than 20% over the next three years to approximately $2.2 billion by 2016.

DBRS expects the Company’s financial profile will remain stable based on its free cash flow generating capacity and conservative financial policies. Cash flow from operations is expected to grow with operating income, approaching $1.6 billion in 2016. DBRS anticipates the Company will open up to 100 new Nordstrom Rack locations during this period (versus 52 new openings in the three years ended 2013), as well as up to 15 full-line department stores in the United States and Canada. DBRS forecasts total capex will range between $800 million and $1 billion per year, and dividends will increase with earnings to approach $300 million per year by 2016. As such, annual free cash flow is forecast to grow from approximately $150 million in 2014 to at least $400 million by 2016. DBRS expects that Nordstrom will continue to use its free cash flow and incremental balance sheet debt to repurchase shares through 2016. DBRS forecasts consolidated lease-adjusted debt-to-EBITDAR could widen to 2.3x by 2016, with retail segment leverage widening slightly to 1.5x and remaining well placed within the current rating category.

DBRS notes Nordstrom’s announcement to seek a financial partner for its credit card receivables. Any transaction in a form that allows the Company to retain the strategic benefits of and a reduced income stream from its credit card portfolio, would likely have a neutral impact on the rating.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.