DBRS Morningstar Downgrades Issuer Rating on Nordstrom, Inc. to BB; Trend Remains Negative

DBRS Limited (DBRS Morningstar) downgraded Nordstrom, Inc.’s (Nordstrom or the Company) Issuer Rating to BB from BBB (low) and downgraded Nordstrom’s Senior Unsecured Debt rating to BB from BB (high), with a Recovery Rating of RR4. DBRS Morningstar also maintained the Negative trends on both of the ratings. Additionally, DBRS Morningstar assigned a rating of BB (high) with Negative trend to the Company’s Senior Secured Debt facility, with a Recovery Rating of RR1. The rating downgrade reflects a further significant weakening in the earnings profile outlook, This view and the Negative trend are based on the Company’s deteriorating operating performance in the first half of F2020 (H1 F2020) and uncertainty with respect to the economy going forward, as well as the acceleration of structural trends including evolving consumer buying behavior and an intensifying competitive environment. An unfavourable evolution of any of these factors that delays any meaningful recovery or further deteriorates earnings profile and key metrics could result in further downgrades.

On April 22, 2020, DBRS Morningstar downgraded both Nordstrom’s Issuer Rating to BBB (low) from BBB (high) and the rating of its Senior Unsecured Debt rating to BB (high) from BBB (high). At that time, DBRS Morningstar also maintained the Negative trend on both of the ratings due to Nordstrom’s weaker-than-expected operating performance during F2019 as well as DBRS Morningstar’s concern of potentially longer-lasting Coronavirus Disease (COVID-19) pandemic-related effects on the economy and expectation of weak customer sentiment, particularly for the discretionary and premium products sold at Nordstrom’s stores. At that time, DBRS Morningstar noted that that the macroeconomic effects related to the coronavirus pandemic and the competitive pressures in today’s evolving retail environment could weaken the Company’s overall credit risk profile beyond what would be acceptable for the BBB (low) rating category.

Since then, Nordstrom has reported its H1 F2020 results and earnings have deteriorated more than previously anticipated. Revenue losses due to temporary stores closures for roughly half of H1 F2020 in light of the coronavirus pandemic-related lockdowns, subdued demand for high-end fashion products, and, to a much lesser extent, the timing shift of Nordstrom’s anniversary sale event from Q2 2020 to Q3 2020 have driven material decline in Nordstrom’s revenues in H1 F2020, which declined by 45.6% year over year to around $4.0 billion. The Company resorted to planned markdowns to clear inventory during Q1 F2020, which, combined with operating deleverage, resulted in negative EBITDA margins of -17.4% for H1 F2020 (compared with positive 8.4% for H1 F2019). As such, EBITDA declined to negative $693 million in H1 F2020. With the decline in earnings, cash flow from operations (before any changes in working capital) was negative at approximately $338 million during H1 F2020. Though the Company took proactive measures to preserve capital by curtailing capital expenditure, permanently closing a number of less profitable stores, and suspending shareholder returns, the balance sheet debt increased by approximately $1 billion during H1 F2020 to meet these cashflow shortfalls .

DBRS Morningstar believes that, in the near term, Nordstrom’s earnings will remain pressured due to remote work and stay-at-home mandates, which have resulted in an accelerated casualization and less desire for high-end fashion clothing and accessories. Even after the restrictions are completely lifted, Nordstrom will be extremely challenged to return to pre-pandemic sales levels, at least in the near to medium term, due to a continued sales shift away from higher-end more discretionary product categories and brick and mortar channels amid a weaker macroeconomic environment. Although the Company had commenced optimizing its physical and digital assets by investing substantial amounts in improving its digital capabilities, DBRS Morningstar expects the increased digital sales volumes and earnings to be insufficient in offsetting the declining returns from brick-and-mortar stores. As such, sales and EBITDA levels are not expected to stabilize and increase meaningfully toward $12 billion and $1 billion, respectively, before F2023, levels that DBRS Morningstar considers integral ingredients for the credit risk profile to stabilize within the BB rating category.

DBRS Morningstar could change the trend to Stable if earnings improve meaningfully and/or rapidly, and if recovery in key credit metrics is on account of an improvement in the operating income rather than debt reduction. Ratings could be downgraded further if the recovery path to historic earnings levels is expected to be slower and prolonged, given a weaker macroeconomic environment and a structural shift in the consumer behavior.

The ratings continue to be supported by Nordstrom’s well-established reputation for customer service, size, and market position as well as its increasingly diverse customer base and retail channels. The ratings also consider Nordstrom’s exposure to intensifying competition, particularly from e-commerce, economic cycles, and shifting consumer trends. DBRS Morningstar also notes Nordstrom’s adequate liquidity position with access to $1.3 billion of cash and revolving credit facility should help the Company to navigate this period of uncertainty.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Merchandising Industry (July 30, 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Relationships (November 25, 2019), and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (August 24, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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 Morningstar 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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