DBRS Confirms Nordstrom, Inc. at BBB (high) with Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Nordstrom, Inc. (Nordstrom or the Company) at BBB (high) and the Company’s Short-Term Issuer Rating at R-2 (high), all with Stable trends. The confirmations reflect a stabilization in Nordstrom’s earnings profile during the second half of F2016 (H2 2016) as well as DBRS’s expectation that credit metrics will remain in a range commensurate of a BBB (high) rating over the foreseeable future. The ratings continue to be supported by the Company’s robust reputation for customer service and merchandising, size, scale and market position as one of the largest retailers in the United States, as well as Nordstrom’s increasingly diverse customer base and retail channels. The ratings also continue to consider the Company’s exposure to intensifying competition particularly from e-commerce channels, economic cycles, shifting consumer trends and execution risk related to Nordstrom’s expansion.

The Company’s earnings profile deteriorated during F2015 and H1 2016, contributing to DBRS’s downgrade of Nordstrom last year (see DBRS’s press release “DBRS Downgrades Nordstrom, Inc. to BBB (high) from A (low) on Weaker-than-Expected Recovery in Operating Performance, Trend is Stable“, dated September 9, 2016). However, since then, the Company’s earnings profile has displayed signs of stabilization, including strengthened revenue growth and improved EBITDA margins. Revenues for F2016 grew by 2.2%, to $14.8 billion from F2015, driven by growth from Nordstrom’s e-commerce channels and new store openings, partially offset by negative comparable sales from U.S. full-line stores. EBITDA margins declined slightly to 11.2%, largely as a result of increased markdowns in H1 2016. Consequently, EBITDA decreased 1.8%, to $1.6 billion in F2016. As a result, lease-adjusted debt-to-EBITDAR, lease-adjusted EBITDA coverage and cash flow from operations (before changes in working capital) as a percentage of debt weakened to 2.33 times (x), 7.96x and 30.7%, respectively, from 2.27x, 8.04x and 34.4% at the end of F2015.

Nordstrom’s earnings and financial profiles should remain stable and appropriate for the current rating category in F2017. This view is supported by DBRS’s expectation of low single-digit revenue growth, underpinned by strong growth in the Company’s e-commerce channels and contribution from new store openings, more than offsetting a decline in comparable sales from Nordstrom’s full-line stores. EBITDA margins are expected to remain relatively stable and consequently EBITDA is expected to be approximately $1.6 billion in F2017. DBRS expects Nordstrom to use its free cash flow and potentially some cash on hand for share repurchases. As such, DBRS expects credit metrics should remain in a range commensurate for the BBB (high) rating (lease-adjusted debt to EBITDAR in a range from 2.0x to 2.5x) in F2017. DBRS believes that the appropriate leverage level for the current BBB (high) rating is now 2.0x to 2.5x versus the previously stated range of 2.0x to 2.75x, to reflect the increasing risks to the traditional retail sector from evolving consumer buying patterns and increasing competition from e-commerce channels.

Notes:
All figures are in U.S. 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 principal methodology is Rating Companies in the Merchandising Industry, which can be found on www.dbrs.com under Methodologies.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.