DBRS Morningstar Confirms Nordstrom’s Issuer Rating at BB, Changes Trend to Stable from Negative

DBRS Limited (DBRS Morningstar) confirmed Nordstrom, Inc.’s (Nordstrom or the Company) Issuer Rating at BB and changed the trend on the rating to Stable from Negative. DBRS Morningstar discontinued the ratings on Company’s Senior Secured Debt facility as the facility has been fully repaid. Additionally, DBRS Morningstar discontinued and withdrew Nordstrom’s Senior Unsecured Debt rating and notes that the discontinuation is not related to DBRS Morningstar’s view of the Company’s credit quality. The confirmation and trend change reflect DBRS Morningstar’s expectation that Nordstrom’s earnings will benefit from the gradual reopening of the economy through 2021, and while there is still considerable uncertainty around the pace and magnitude of recovery, Nordstrom’s credit metrics are expected to remain in a range acceptable for the BB rating over the near to medium term. Nordstrom’s ratings continue to be supported by its 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.

On October 21, 2020, DBRS Morningstar downgraded Nordstrom’s Issuer Rating to BB from BBB (low) and maintained the trend as Negative. The downgrade and Negative trend reflected a significant weakening in DBRS Morningstar’s outlook of Nordstrom’s earnings profile, 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. DBRS Morningstar noted that the trend could be changed to Stable if earnings improve meaningfully and/or rapidly, and recovery in key credit metrics is on account of an improvement in operating income rather than debt reduction.

For the full year ended January 30, 2021 (F2020), Nordstrom’s revenues declined by 31% year-over-year (YOY) to $10.7 billion from $15.5 billion in F2019, due to temporary stores closures mostly during H1 F2020 and subdued consumer demand for the Company’s product categories. While sales volume improved sequentially in H2 F2020 (i.e., 18% YOY decline in H2 F2020 versus a 45% YOY decline for H1 F2020) supported by a healthy 25% growth in digital sales, revenue continued to remain materially below prepandemic levels. As a result of operating deleverage and lower average merchandise margins, EBITDA margins deteriorated to negative 3.5% for F2020 as compared with positive 9.4% for F2019. As such, EBITDA declined to negative $372 million in F2020 compared with positive $1.45 billion for F2019. Cash flow from operations (before changes in working capital) tracked the decline in EBITDA and fell to $113 million in F2020 from $1.2 billion in F2019. Though the Company took proactive measures to preserve capital by curtailing capital expenditure and suspending shareholder returns, the Company was in a free cash flow deficit position of $790 million after changes in working capital and issued approximately $600 million of debt to fund this deficit.

Looking ahead, DBRS Morningstar expects a material recovery in the Company’s earnings through F2021 with a gradual containment of this pandemic and reopening of the economy. In fact DBRS Morningstar believes that continued progress in vaccine rollouts combined with ongoing government support could lead to a surge in consumer spending later this year. This view is further supported by an expected GDP growth of above 5% in the U.S. and Canada in 2021 (refer to DBRS Morningstar’s “Global Macroeconomic Scenarios: March 2021 Update”) and high consumer savings rate over the last year (19.8% in January 2021 compared with 7.6% in January 2020), which could accelerate an economic recovery. With travel relaxations and economic reopenings, consumer spending on apparel and more discretionary products is likely to increase as a larger percentage of the population prepares to return to office. While consumers are likely to feel more comfortable shopping at physical retail stores, reinforced by high vaccination rates in the U.S. and Canada, DBRS Morningstar expects the growth in digital sales to continue, reflecting a more structural shift in the consumer behavior. With the overall landscape continuing to be beneficial to e-commerce channels, Nordstrom’s investment in digital capabilities and omnichannel centers should support this transition and improve the pace of recovery in topline.

As such, DBRS Morningstar expects Nordstrom’s sale volumes to recover materially in 2021 and improve further in 2022. That said, DBRS Morningstar believes revenues will remain below prepandemic levels, at least over the near to medium term. However, DBRS Morningstar expects EBITDA margins to recover to high single digits by end of F2021, as a result of an improvement in merchandise margins, operating leverage gains, asset optimization, and ongoing cost-saving initiatives. Given the improvement in sales and EBITDA margins, operating cash flows are likely to improve towards $0.9 billion to $1.0 billion range by the end of F2021, sufficient to support historic capital intensity of 3% to 4% and modest debt reduction.

Should the operating results recovery be stronger than expected, combined with strong operational execution and prudent financial management, further positive rating actions could occur. Conversely, if the Company’s operating performance is weaker-than-expected and/or leverage ratio is expected to sustain above 4 times levels for a prolonged period, the ratings could be pressured.

ESG CONSIDERATIONS
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/373262.

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

The principal methodology is Rating Companies in the Merchandising Industry (July 30, 2020; https://www.dbrsmorningstar.com/research/364692), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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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