DBRS Changes Trend on Nordstrom, Inc. to Negative from Stable, Confirms Nordstrom’s Issuer Rating and Senior Unsecured Debt Rating and Discontinues Nordstrom’s Short-Term Issuer Rating

DBRS Limited (DBRS) changed the trend on Nordstrom, Inc.’s (Nordstrom or the Company) Issuer Rating and Senior Unsecured Debt rating to Negative from Stable and confirmed both ratings at BBB (high). DBRS also discontinued and withdrew Nordstrom’s Short-Term Issuer Rating. DBRS notes that the discontinuation is not related to DBRS’s view of the Company’s credit quality.

The trend changes reflect the Company’s weaker-than-expected operating performance in the last twelve months (LTM) ended May 5, 2019 (LTM F2019), and concern that near-term recovery may be difficult to achieve amid intensifying competitive pressure and the Company’s own executional challenges. The ratings continue to be supported by Nordstrom’s well-established reputation for customer service, size and market position as well as the Company’s increasingly diverse customer base and retail channels. The ratings also continue to consider Nordstrom’s exposure to intensifying competition, particularly from e-commerce, economic cycles and shifting consumer trends.

Nordstrom’s earnings and financial profile deteriorated during LTM 2019, as reflected by pressure on topline growth along with a material deterioration in EBITDA margins. This weaker-than-expected performance is the result of increasing competitive pressure from e-commerce, a continuing shift in mix to off-price and online channels and associated investments in technology and supply chain improvements. As such, Revenues remained flat at $15.7 billion for the LTM F2019 compared with the LTM F2018, affected by net sales decline in full-price stores, partially offset by growth in Nordstrom’s e-commerce channels and contributions from new store openings. EBITDA margins continued to decline, falling to 9.5% in the LTM F2019 from 10.2% in the LTM F2018 and above 11% levels prior to F2017. Consequently, EBITDA decreased by 6.4% to $1.5 billion during the LTM F2019 from $1.6 billion in the LTM F2018. That said, the Company remained free cash flow positive, resulting in lease-adjusted debt levels remaining relatively stable. As such, credit metrics deteriorated because of the reduction in operating income and lease-adjusted debt-to-EBITDAR fell to 2.55 times (x) during the LTM F2019 from 2.42x in the LTM F2018.

Going forward, DBRS believes that Nordstrom’s earnings profile will continue to weaken in the near to medium term as the Company will be challenged to achieve sales growth while maintaining operating margins in the face of intensifying competition from e-commerce. This view is supported by DBRS’s expectation of negative low single-digit revenue growth for F2019, despite relatively stable growth from the Company’s e-commerce channels. EBITDA margins will continue to be pressured, and as such, DBRS expects EBITDA to decrease to around $1.5 billion in F2019 and F2020. In terms of financial profile, DBRS expects cash flow from operations to decline in line with operating income and combined with elevated capex in technology and supply chain improvements in the near term, resulting in limited free cash flow generation for debt reduction. As such, DBRS expects lease-adjusted debt to EBITDAR to rise further above the range of 2.0x to 2.5x, appropriate for the current rating category. If key credit metrics remain pressured through the course of F2019 because of weaker-than-expected operating performance and/or more aggressive financial management, DBRS could downgrade Nordstrom’s ratings. Revision of the trend to Stable could be influenced by a meaningful recovery in the Company’s key credit metrics, which would result from improvement in operating income rather than debt reduction.

DBRS Morningstar notes that the above press release was amended on June 25, 2020, to reflect the rating's unsolicited status and to clarify that, while Nordstrom provided feedback on press release and rating report, DBRS Morningstar did not have access to any material non-public information.

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

The principal methodology is Rating Companies in the Merchandising Industry, which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

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

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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