Reuters logo
Fitch Rates Nordstrom's Senior Unsecured Notes 'BBB+'
March 7, 2017 / 2:57 PM / 9 months ago

Fitch Rates Nordstrom's Senior Unsecured Notes 'BBB+'

(The following statement was released by the rating agency) NEW YORK, March 07 (Fitch) Fitch Ratings has assigned a 'BBB+' rating to Nordstrom, Inc.'s new 4.00% $350 million senior unsecured notes due March 2027. The proceeds from these notes, as well as proceeds from an add-on of $300 million to the existing 5.00% senior unsecured notes outstanding due 2044, will be used to repay or retire all $650 million aggregate principal amount of outstanding 6.25% senior unsecured notes due January 2018. A full list of ratings follows at the end of this release. KEY RATING DRIVERS The ratings reflect Nordstrom's position as a market share consolidator in the apparel, footwear and accessories space, differentiated merchandise, and a high level of customer service which have enabled the company to enjoy strong customer loyalty. Nordstrom has a well-developed offering and footprint in the full-price, off-price and online channels which should enable the company to generate 2%-3% top line growth over the intermediate term. Nordstrom has industry-leading sales productivity, with EBITDA margins that are in line with other industry leaders in the department store space such as Macy's Inc. and Kohl's Corp. However, increased investments to support online sales growth as well as Nordstrom's other business initiatives, including its entry into Canada, will put pressure on EBITDA margin over the next 2 - 3 years, with margins expected to decline to the 10% - 11% range from 12% in 2016. EBITDA is expected to be around $1.6 billion over the next 24-36 months relative to $1.7 billion in 2016 and a peak of $1.9 billion in 2014. Nordstrom's comparable store sales (comps) declined 0.4% in 2016 compared to 2.7% in 2015, with comps declining to the negative low single-digit range in 1H16. Overall sales grew 2.9% given two full-line (including Canada) and 21 Nordstrom Rack (Rack) store openings, and strong performance from the online off-price channel. The performance is strong relative to Fitch-rated department stores, which saw comps decline approximately 3.5% in 2016, and the overall department store industry sales decline of 4.5%. Additionally, there has been a general slowdown in apparel and accessories sales, which Fitch projects will grow at around 1%, indicating share gains for Nordstrom. Fitch expects Nordstrom's comps to grow in the low single digits and overall top line to grow 2% to 3%, driven primarily by continued growth in its online sales and Rack businesses, with segment forecasts detailed below. Full-line stores (50% of total sales before intercompany eliminations; Fitch projects this at under 40% by 2020): Fitch expects full-line store comps to be in the negative mid-single-digit range in 2017, similar to the negative 6.4% in 2016, due to share shift to the off-price and ecommerce channels. Total sales growth for full-line stores is expected to be only modestly higher than comp trends, given minimal new full-line store openings over the next few years, including its expansion into Canada. Nordstrom Rack (26% of total sales; projected to increase modestly by 2020 mainly on new store openings): Fitch expects overall Rack sales to grow in the mid-single digits over the next two to three years, assuming 15 new store openings annually (from the current base of 215 units) contributing 4% - 6% to Rack's top line, and flat comps. Comps were flat in 2016 after declining to negative 1% in 2015 from 3.8% in 2014 and 2.7% in 2013 and Fitch attributes the decline to the heightened promotional activity in its full-line stores and overall department store and apparel sector. Direct Channel (17% of total sales; projected at >20%): The direct channel, Nordstrom.com, continued its strong growth in 2016 and ended the year with $2.5 billion in sales. Fitch expects Nordstrom's direct channel to grow by 10% annually as consumers continue to shift spending towards the online channel. Other (9% of total sales; projected at 10%): Nordstrom has also been growing its online presence through various channels including NordstromRack.com, Trunk Club (a subscription-based personalized clothing service for men acquired in 2014), and HauteLook (a flash discount sales Web site acquired in early 2011). Fitch expects Nordstrom's other online channels to grow by 15% - 20% annually. Positive sales growth projections for Nordstrom distinguish the company from most of its department store peers. Nordstrom's FCF increased to $546 million in 2016 from $184 million in 2015 on lower capex and a working capital benefit. FCF is expected to be around $150 million over the next two to three years assuming lower capex around the $750 million to $800 million level, or about 5% of sales. The company is moderating its investments in store openings and remodels following several years of heavy investment, but will continue to spend on technology initiatives. Fitch expects Nordstrom's adjusted leverage to remain around the mid-2.0x range over the next two to three years. KEY ASSUMPTIONS --Comps growth in the low-single-digit range with overall top line growth of 2% to 3% over the next two to three years, primarily driven by continued growth in the online and Rack businesses. Full-line store comps are expected to be in the negative low- to mid-single digits; Rack overall sales grow around 3% to 5% with square footage growth in the high single digits; and online revenue to grow around 10%. --EBITDA is expected to decline approximately 9% to about $1.6 billion in 2017 and remain around that level thereafter. This assumes modest gross margin pressure as a larger percent of the revenues are generated in the online segments as well as loss of about 50% of the credit card EBIT due to the sale of the receivables in 2015. SG&A is expected to grow in line with revenues. --FCF of about $150 million over the next two to three years, with capex in the $750 million to $800 million range to support moderating store openings, remodels and technology investments. --Total adjusted debt/EBITDAR is expected to remain around the mid-2x range over the next two to three years. RATING SENSITIVITIES A positive rating action is unlikely at this time as Fitch anticipates Nordstrom will manage its capital structure in the mid-range of its publicly stated target of 1.5x - 2.5x debt/EBITDAR leverage using 8.0x net rent expense. This roughly equates to a leverage target of 1.75x - 2.75x using Fitch's methodology of 8.0x gross rent expense or 2.3x at the mid-range. A negative rating action could result if operational weakness or a more aggressive financial posture leads credit metrics to come in worse than targeted levels with adjusted leverage above the mid-2x range on a prolonged basis. LIQUIDITY Nordstrom's liquidity is supported by a cash balance of $1 billion as of Jan. 28, 2017 and an $800 million senior unsecured revolver due April 2020. Post -refinancing of the $650 million senior unsecured notes due January 2018, the company's next maturity is 2020, when the revolver matures and the $30 million 7.68% mortgage payable bonds come due. Fitch expects FCF of about $150 million over the next two to three years, with capex in the $750 million to $800 million range to support moderating store openings, remodels and technology investments. FULL LIST OF RATING ACTIONS Fitch currently rates Nordstrom as follows: Nordstrom, Inc. --Long-Term Issuer Default Rating (IDR) 'BBB+'; --$800 million bank credit facility 'BBB+'; --Senior unsecured notes 'BBB+'; --Short-Term IDR 'F2'; --Commercial paper 'F2'. The Rating Outlook is Stable. Contact: Primary Analyst Monica Aggarwal, CFA Managing Director +1-212-908-0282 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst David Silverman, CFA Senior Director +1-212-908-0840 Committee Chairperson Steven Marks Managing Director +1-212-908-9161 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Date of Relevant Rating Committee: April 14, 2016 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and exclude impairment charges. For example, in 2016, Fitch added back $91 million in non-cash stock-based compensation to its EBITDA calculation. --Fitch has adjusted the historical and projected debt by adding 8x annual gross rent expense. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below