Jan 29 (The following statement was released by the rating agency)
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.
KEY RATING DRIVERS
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.
Nordstrom's comparable store sales (comps) growth has moderated in 2013 at
projected 2.5%, versus high-single digit growth over the prior three years. The
deceleration is partially due to the shift in consumer spending away from
apparel and general merchandise. However, Fitch expects Nordstrom'€™s comps to
grow in the low-single digits and for its EBITDA margin to continue to lead the
sector over the next three years. Fitch expects Nordstrom's strong growth in
online sales and continued growth in its Rack business remain important drivers
for consolidated top-line growth of mid-single digits.
Rack (23% of year-to-date sales) has seen its comps growth decelerate to 2.3% in
the first three quarters in 2013, versus 7.4% in 2012, as competition in the
off-price channel has stepped up significantly. Nordstrom expects to grow the
Rack store base to more than 230 stores by 2016 from the current base of 140
units, or an average of 25'30 openings annually, given the conceptâ€™s attractive
profile of generating high investment returns and fitting into the macroeconomic
environment. Fitch expects overall Rack sales to grow in the mid to high-teens
over the next two to three years, even if comps remain in the low single-digit
Direct channel (including Hautelook) continues its double-digit growth momentum
in 2013. Fitch estimates the direct channel will contribute more than $1.6
billion in sales and represent 13% -14% of total net sales. Fitch expects
Nordstromâ€™s direct channel will grow by 15%-20%, given the companyâ€™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 EBITDA margin has improved to the 15% range over
the past four years due to an improved mix of full-priced selling and strong
inventory control. The increased investments to support online sales growth and
other business initiatives will likely cap further margin expansion in the near
term. However, return on invested capital should remain at healthy and industry
Fitch expects Nordstromâ€™s adjusted debt/EBITDAR to remain in the low to mid-2.0x
range, or 1.7x-1.9x for core retail business if adjusted for the more leveraged
credit card business over the next 24 months. The leverage calculation for the
core retail business assumes the companyâ€™s credit card receivables are financed
using a mix of 80% debt and 20% equity.
Fitch expects Nordstrom to generate modest free cash flow (FCF; after dividends)
over the next two years, as capital expenditures are expected to increase
significantly to the $900 million level to support new store openings, remodels
and technology investments. Fitch expects future share repurchases will be
conducted within the context of maintaining the companyâ€™s stated leverage target
of 1.5x-2.5x (equivalent to 1.75x-2.75x using Fitch's methodology of 8.0x gross
rent expense) and adequate liquidity.
The companyâ€™s liquidity is supported by a cash balance of $947 million as of
Nov. 2, 2013 and its $800 million senior unsecured revolver scheduled to mature
in March 2018.
A positive rating action is unlikely at this time as Fitch anticipates Nordstrom
will manage its capital structure to its publicly stated target of 1.5x-2.5x
consolidated 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.
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 ratings for Nordstrom:
--Long-term Issuer Default Rating (IDR) at 'A-';
--$800 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.