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

DBRS Limited (DBRS) has today 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 confirmation acknowledges the recent weaker than expected operating results; however, the trend remains Stable, as DBRS expects an adequate recovery in credit metrics over a reasonable period. The ratings continue to reflect Nordstrom’s scale and market position as one of the largest department store chains in the United States, and its robust reputation for customer service and merchandising. The ratings also continue to consider intense competition and the Company’s exposure to shifting consumer trends.

DBRS believes that fashion specialty retailers such as Nordstrom experienced a challenging environment in the latter half of F2015, as consumers may have temporarily reduced their spending on discretionary apparel in favour of other retail segments, such as home improvement, auto, etc., incident to unusually warm weather. In this backdrop, the Company’s revenue grew 7.0% year over year in F2015, while EBITDA margin declined notably to 11.6% from 13.6% in F2014.

Previously, on October 2, 2015, DBRS confirmed Nordstrom’s ratings following the Company’s sale of its credit card portfolio to TD Bank USA, NA (TD) for $2.2 billion. At the time, DBRS forecast that the Company’s intended use of transaction proceeds for shareholder returns would result in an increase in lease-adjusted debt-to-EBITDAR (for retail operations only) to approximately 1.8 times (x) to 1.9x on a pro forma basis, from approximately 1.4x at the end of FY2014. However, use of the transaction proceeds for shareholder returns, combined with a weaker than expected EBITDA, resulted in a noteworthy weakening of lease-adjusted debt-to-EBITDAR to approximately 2.3 times (x) in F2015.

Going forward, DBRS expects that consumer spending on fashion apparel will gradually recover over the short to medium term. As such, the Company will return to the high-single-digit sales growth rates it experienced prior to F2015, albeit only after F2016. That said, DBRS forecasts that Nordstrom’s revenues in F2016 will grow in the mid-single-digits, mainly driven by the continuing strong growth of online sales across banners and steady growth of Nordstrom Rack, while Nordstrom full-price same-store sales are expected to remain flat. EBITDA in F2016 is expected to range between $1.6 billion and $1.8 billion.

DBRS believes Nordstrom’s capex in F2016 will moderate to approximately $900 million (versus $1.0 billion in F2015). DBRS expects free cash flow after capex and dividends to be marginally positive in F2016. DBRS does not expect the magnitude of any share repurchases to require incremental debt in F2016. Consequently, the Company’s lease-adjusted debt-to-EBITDAR is likely to only improve to about 2.20x by the end of F2016, but expected by DBRS to improve towards 2.0x by the end of F2017, primarily as a result of growth in EBITDA. That said, weaker than expected growth in same-store sales and operating income, and/or improvement in financial leverage that is not supportive of the aforementioned pace, could result in a negative rating action over the course of F2016.

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.

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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