DBRS Confirms Nordstrom, Inc. at A (low), Stable Trend

DBRS Limited (DBRS) has confirmed the Issuer Rating and Senior Unsecured Debt rating of Nordstrom, Inc. (Nordstrom or the Company) at A (low) and the Short-Term Rating at R-1 (low), all with Stable trends. The rating confirmations reflect Nordstrom’s continued strong reputation for customer service and merchandising, a consistent record of financial discipline and an increasingly diverse customer base. The rating confirmations 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 earnings profile continues to be supported by its strong merchandising and service capabilities. The Company achieved 8% growth in revenues in F2014 over F2013, driven by strong sales growth in Nordstrom.com and new store openings (primarily Nordstrom Rack) while comparable sales attributable to full-line stores remained flat. The revenue growth benefitted from expanded merchandize selection, ongoing technology investments and flagship store remodels. Expenses related to opening new stores, launching Nordstromrack.com, acquiring Trunk Club and costs related to ongoing technology and fulfillment investments caused a decline in the EBITDA margin to 13.6% in F2014 from 14.4% in F2013.

Nordstrom’s financial profile remained steady, based on robust cash generating capacity and prudent financial management. Cash flow from operations was flat at $1.3 billion in F2014. That said, Nordstrom’s free cash flow (before working capital changes) declined to $154 million during F2014 from $213 million in the previous year largely because of higher capital expenditures (capex). DBRS estimates that, for Nordstrom’s retail operations in F2014, the lease-adjusted debt-to-EBITDAR was approximately 1.4 times (x), and lease-adjusted EBITDA interest coverage was 9.7x.

Going forward, DBRS expects Nordstrom’s sales to grow at 7% to 8% annually over the medium term, driven primarily by strong growth of the online business and accelerated program of new Rack store openings while full-line same-store sales are likely to remain flat. EBITDA margins over the medium term are expected to remain under pressure and are likely to range between 13% and 14% as administrative and distribution expenses of geographic expansion as well as costs related to technology and fulfillment investments will remain elevated.

DBRS forecasts that Nordstrom’s capex will increase to approximately $1.2 billion in F2015 (versus $751 million in F2014) primarily because of store remodeling and new store launches, and DBRS anticipates that the Company will maintain its 30% to 35% dividend payout practice through the medium term. As such, continued share repurchases are expected to be funded with incremental debt; that said, DBRS does not expect the magnitude of such to result in lease-adjusted leverage attributable to the retail operations to increase above 1.6x in the near to medium term.

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 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 (January 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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