DBRS Morningstar Downgrades Issuer Rating on Nordstrom, Inc. to BBB (low), Trend Remains Negative

DBRS Limited (DBRS Morningstar) downgraded Nordstrom, Inc.’s (Nordstrom or the Company) Issuer Rating to BBB (low) from BBB (high). DBRS Morningstar also downgraded its rating on the Company’s Senior Unsecured Debt to BB (high), one notch lower than the Issuer Rating. All trends remain Negative. Nordstrom issued secured first--lien notes in April 2020 and, in accordance with the hierarchy principle outlined in the DBRS Morningstar Credit Ratings Global Policy, where there are material amounts of secured debt relative to unsecured debt, DBRS Morningstar places the unsecured debt rating one notch lower than the Issuer Rating. The rating action reflects Nordstrom’s continued operational underperformance amid intense competitive pressures in an evolving retail environment, combined with store closures and a further weakened earnings outlook caused by the Coronavirus Disease (COVID-19) outbreak and its related macroeconomic effects.

On June 26, 2019, DBRS Morningstar changed the trend on the Company’s Issuer Rating and Senior Unsecured Debt rating to Negative and confirmed the ratings at BBB (high). The trend change reflected Nordstrom’s weaker-than-expected operating performance during F2018 and Q1 F2019 as well as DBRS Morningstar’s concern that near-term recovery may be difficult to achieve with intensifying competitive pressure and the Company’s executional challenges. At that time, DBRS Morningstar stated that, if key credit metrics remain pressured through the course of F2019 because of weaker-than-expected operating performance and/or more aggressive financial management such that lease-adjusted debt to EBITDAR rises above the range of 2.0 times (x) to 2.5x, which is considered appropriate for the current rating category, DBRS Morningstar could downgrade Nordstrom’s ratings.

Nordstrom’s earnings and financial profile continued to deteriorate during F2019 as a result of pressure on top-line growth and further deteriorated EBITDA margins. Intense competitive pressure from e-commerce, a continued sales mix shift to lower-margin off-price and online channels, and higher operational expenses related to the Company’s loyalty program and new store opening in New York City have driven Nordstrom’s weaker-than-expected operating performance. As such, revenues declined to $15.5 billion for the full-year F2019 compared with $15.9 billion for F2018, primarily because of a net sales decline of 3.5% in full-price stores. EBITDA margins continued to decline, falling to 9.4% in F2019 from 9.9% in F2018 and above 11.0% prior to F2017. As a result, EBITDA decreased by 7.8% to around $1.5 billion during F2019 from $1.6 billion in F2018. The Company’s lower operating income and increased capital expenditures related to the New York City store and supply-chain facilities have resulted in even weaker key credit metrics. Consequently, lease-adjusted debt to EBITDAR deteriorated to 2.8x during F2019 from 2.7x in F2018 (adjusted for the adoption of ASC 842 provisions).

DBRS Morningstar believes that, at least in the near term, Nordstrom’s increased digital sales volumes may only partially offset the declining revenues and operating income from temporary store closures. That said, DBRS Morningstar is more concerned about the potentially longer-lasting coronavirus-related effects on the economy and customer sentiment, particularly for the discretionary and premium products sold at Nordstrom’s full-price stores. The shifting consumer trends to digital platforms and reduced traffic at the malls/retail outlets would continue to place earnings pressure on Nordstrom’s retail stores. As such, DBRS Morningstar believes that the Company’s earnings and financial profile will deteriorate further in the near to medium term.

DBRS Morningstar maintained the Negative trend on the ratings based on its belief that the macroeconomic effects related to the coronavirus and the competitive pressures in today’s evolving retail environment could weaken the Company’s overall credit risk profile beyond what would be acceptable even for the BBB (low) rating category. DBRS Morningstar could change the trend to Stable with a meaningful recovery in Nordstrom’s key credit metrics resulting from an improvement in operating income rather than debt reduction.

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.

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 (August 15, 2019) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 29, 2019), 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 info@dbrsmorningstar.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 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 info@dbrsmorningstar.com.

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