TEXT-Fitch affirms Nordstrom IDR at 'A-', outlook is stable
Jan 30 - Fitch Ratings has affirmed its ratings on Nordstrom, Inc. (Nordstrom, NYSE: JWN), including the Issuer Default Rating (IDR) at 'A-'. The Rating Outlook is Stable. A full list of rating actions appears at the end of this press release. The ratings reflect Nordstrom's position as a market share consolidator in the department store sector, differentiated merchandise and a high level of customer service which have enabled the company to enjoy strong customer loyalty and high operating margins relative to its industry peers. Adjusted debt/EBITDAR for 2012 is expected to be around 2.3 times (x) and Fitch expects leverage to remain stable over the next 24 months. Fitch notes that Nordstrom owns its credit card receivables and the leverage metric is encumbered with the full amount of debt associated with the more highly leveraged credit card business. Assuming Nordstrom's credit card receivables are financed using a mix of 80% debt and 20% equity, core retail debt/EBITDAR is expected to be 1.5x in 2012. Fitch expects the company to manage its capital structure to its publicly stated target of 2.0x - 2.5x consolidated adjusted debt/EBITDAR leverage (using 8x rent expense net of property incentives). This roughly equates to a leverage target of 2.25x - 2.75x using Fitch's methodology of using 8x gross rent expense. At these levels, core retail credit metrics, excluding the more leveraged credit card business, would be between 1.5x to 1.8x which would be consistent with its current ratings based on peer comparisons. Nordstrom has benefited from the strong growth in upscale and luxury spending since 2010. Fitch expects upscale department stores to post comps growth in the mid-single-digit range in 2013, on top of 6% growth expected for 2012 and high single-digit growth in 2010 and 2011. Nordstrom's overall sales growth is expected to be in the mid- to high-single digit range over the next two to three years, including an estimated 4% contribution from new stores. As a result, it will continue to take market share as overall industry sales are expected to grow in the plus/minus 1% over the next two years. It should be noted that the potential impact of tax increases on aspirational luxury spending could potentially dampen top-line growth to the low single-digit range. Rack stores (20% of sales) and direct sales (13% of sales) have been important drivers of the strong growth, generating double-digit sales growth over the past four years. Nordstrom expects to grow the Rack store base to over 230 stores by 2016 from the current base of 122 units, or an average of 25-30 openings annually. Fitch expects overall Rack sales to grow in the high teens over the next two to three years, even if comps revert back to the low single-digit range (versus more than 8% expected for 2012). Nordstrom's direct channel is expected to grow by 15%-20%, given the company's investments in its online fulfillment capacity, increased product selection and free shipping/free returns policy. Nordstrom has industry-leading sales productivity and profitability among the major department stores. Its EBIT margin of 11% is highest among the rated department stores. Increased investments to support online sales growth and other business initiatives including its entry into Canada will likely cap further margin expansion in the near term. However, overall EBIT dollar growth and return on invested capital should remain at healthy and industry leading levels. Fitch expects Nordstrom to generate free cash flow (FCF; after dividends) of approximately $370 million in 2012 but be modest over the next two years, as capital expenditures will increase significantly relative to 2012 levels to support new store openings, remodelings and technology investments. The company plans to open its first four full-line stores in Canada in addition to opening five full-line stores and expanding Rack concept domestically. Fitch expects future share repurchases will be conducted within the context of maintaining the company's stated leverage target of 2.0x-2.5x. The company's liquidity is supported by a strong cash balance and a $600 million senior unsecured revolver that is scheduled to mature in June 2016. The company had no outstanding borrowings under the revolver, which is available for working capital, capital expenditures, and general corporate purposes, including liquidity support for Nordstrom's commercial paper program. The company also has a 364-day $200 million variable-funding facility due January 2014 backed by Nordstrom private-label card receivables and a 90% interest in the co-branded Nordstrom VISA credit card receivables. SENSITIVITY/RATING DRIVERS A positive rating action is unlikely at this time as Fitch anticipates Nordstrom will manage its capital structure to its publicly stated target of 2.0x-2.5x consolidated debt/EBITDAR leverage using 8.0x net rent expense. This roughly equates to a leverage target of 2.25x-2.75x using Fitch's methodology of 8.0x gross rent expense. A negative rating action could result if a more aggressive financial posture leads credit metrics to come in worse than targeted levels. Fitch has affirmed the following: --Long-term Issuer Default Rating (IDR) at 'A-'; --$600 million bank credit facility at 'A-'; --Senior unsecured notes at 'A-'; --Short-term IDR at 'F2'; --Commercial paper at 'F2'. The Rating Outlook is Stable. Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology
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