DBRS Morningstar Changes Trend on Nordstrom, Inc. to Stable from Positive, Confirms Issuer Rating at BB

DBRS Limited (DBRS Morningstar) changed the trend on Nordstrom, Inc.’s (Nordstrom or the Company) Issuer Rating to Stable from Positive and confirmed the Issuer Rating at BB. The trend change to Stable from Positive reflects Nordstrom’s softer-than-expected operating performance over the last two quarters, especially during the crucial holiday season, and DBRS Morningstar’s weakened earnings outlook amid a challenging macroeconomic backdrop because of decreased consumer purchasing power. That said, the rating confirmation at BB combined with the Stable trend reflects DBRS Morningstar’s expectation that the Company will be able to navigate this environment within the context of the current rating category. Nordstrom’s rating continues to be supported by its well-established reputation for customer service, size, market position, and leading digital capabilities as well as its increasingly diverse customer base and retail channels. The rating also considers Nordstrom’s exposure to intensifying competition, economic cycles shifting consumer trends, and operational execution risks.

On April 20, 2022, DBRS Morningstar confirmed the Company’s Issuer Rating at BB and changed the trend to Positive from Stable. The confirmation and trend change reflected the ongoing recovery in Nordstrom’s earnings as a result of the uptrend in consumer demand amid economic re-openings and were further supported by DBRS Morningstar’s expectation that Nordstrom’s operating margins will improve sequentially such that EBITDA moves toward $1.1 billion in F2022 and the debt-to-EBITDA leverage remains well within the 3.0 times (x) to 3.5x range on a normalized and sustained basis. DBRS Morningstar also noted in April 2022 that should credit metrics deteriorate (i.e., the debt-to-EBITDA ratio rises meaningfully above 3.5x on a sustained basis) as a result of weaker-than-expected operating performance, reinstated regulatory restrictions or substantial cost inflation, and/or more aggressive financial management, the trend could go back to Stable.

Nordstrom reported steady topline recovery as net sales increased 8.8% during the nine months ended October 29, 2022, to $11.2 billion compared with $10.3 billion during the same period in 2021. However, EBITDA margins, at 6.4%, continued to remain substantially below DBRS Morningstar’s expectations and were materially affected by higher markdowns and inflationary pressures on input cost and wages. Furthermore, on January 19, 2023, Nordstrom also provided an update on its holiday sales in advance of the release of its full fourth-quarter financials, disclosing significantly weaker-than-expected sales and margins for the nine-week holiday period ended December 31, 2022. Sales declined by 3.5% year over year during the period, and Nordstrom lowered its EBIT margin guidance for full-year F2022 to the 2.8% to 3.1% range from the 4.1% to 4.4% range, reflecting additional markdowns and margin pressures. As such, the Company now expects EBITDA for full-year F2022 to be approximately $1 billion, well below DBRS Morningstar’s expectations, and forecasts the debt-to-EBITDA leverage to remain well above 3.5x at the end of F2022.

Looking ahead, DBRS Morningstar believes Nordstrom’s earnings will continue to be affected by decreased consumer discretionary spending and persistent inflationary cost pressures over the near term. DBRS Morningstar expects overall revenue to remain relatively flat in F2023, benefitting from inflationary price increases in full-price stores but fully offset by volume moderation as well as higher markdowns in the off-price stores, and only increase modestly by the low- to mid-single digits in F2024, benefitting from some volume recovery. DBRS Morningstar also expects margin recovery will continue to be challenged in a weaker trading environment and believes margins will remain considerably below the historic levels of 9% to 10% as inflationary cost pressures are only partially offset by efficiency improvements and cost-saving initiatives. As such, DBRS Morningstar forecasts EBITDA to improve only marginally toward $1.1 billion in F2023 and F2024.

In terms of the Company’s financial profile, DBRS Morningstar expects earnings pressure to weigh on operating cash flows, which DBRS Morningstar forecasts to be in the $750 million to $800 million range in F2023 and F2024. DBRS Morningstar also forecasts capital expenditures of approximately $500 million annually and primarily focused on technology and supply chain investments, while the Company’s reinstated annualized dividend payments could grow toward $200 million by F2024. As such, DBRS Morningstar believes the Company will have limited free cash flow available for debt reduction and consequently forecasts the debt-to-EBITDA leverage to remain above 3.5x in F2023 and F2024.

A positive rating action could occur if Nordstrom’s operating performance is stronger than DBRS Morningstar’s expectations such that financial leverage returns to below 3.5x levels on a normalized and sustainable basis. Conversely, a negative rating action could occur should credit metrics deteriorate further (i.e., the debt-to-EBITDA ratio rises to above 4x on a sustained basis) as a result of weaker-than-expected operating performance and/or more aggressive financial management.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

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

The principal methodology applicable to the rating is Global Methodology for Rating Companies in the Merchandising Industry (https://www.dbrsmorningstar.com/research/402334; September 2, 2022).

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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.

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

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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