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Fitch Rates Nordstrom's Senior Unsecured Notes 'BBB+'
March 7, 2017 / 2:56 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,, 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, 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: 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. 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