Morningstar DBRS Confirms Nordstrom, Inc. at BB with Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of Nordstrom, Inc. (Nordstrom or the Company) at BB with Stable trends.

KEY CREDIT RATING CONSIDERATIONS

The credit rating confirmation acknowledges Nordstrom's weaker-than-expected operating performance during the last 12 months ended October 28, 2023 (LTM Q3 F2023) but reflects Morningstar DBRS' view that the Company's overall credit risk profile continues to be commensurate with the current BB credit rating category. Despite our expectation that headwinds related to weakened consumer demand, particularly for more discretionary products, will persist in the near term, Morningstar DBRS maintained the trend as Stable. This reflects Morningstar DBRS' expectation that the Company has sufficient headroom within the current credit rating category to absorb further earnings pressure to some extent, while remaining prudent with its capital allocation priorities.

On February 28, 2023, Morningstar DBRS confirmed Nordstrom's Issuer Rating at BB but changed the trend from Positive to Stable, based on a weakened earnings outlook for the Company amid a challenging macroeconomic backdrop. Since then, Nordstrom's revenue declined by 7.6% to $14.6 billion during the LTM Q3 F2023 from $15.7 billion during the LTM Q3 F2022. This was primarily driven by volume declines, due to decreased consumer purchasing power, which more than offset an increase in the average price per unit sold. The decline in revenues also incorporates an approximately 250 basis points negative impact from the wind-down of the Company's Canadian operations. EBITDA margins continued to remain below historic levels but improved marginally to 7.4% in the LTM Q3 F2023 compared with 7.2% in the LTM Q3 F2022, as gross margin declines and wage pressure were balanced by supply chain efficiency initiatives. Consequently, EBITDA declined marginally to approximately $1.1 billion for the LTM Q3 F2023 compared with $1.2 billion for the same period last year.

In terms of the Company's financial profile, despite earnings pressure, Nordstrom continued to generate a meaningful level of cash flow from operations (before changes in working capital and lease payments), which remained relatively stable at $1.1 billion during LTM Q3 F2023. With higher capital expenditure and increase in dividend payments, free cash flow (FCF, after dividends but before lease payments) declined to $438 million for the LTM Q3 F2023 compared with $514 million for the LTM Q3 F2022. The Company primarily used its FCF for lease payments of $270 million and approximately $100 million in net debt repayments. As such, for the LTM Q3 F2023 debt-to-EBITDA remained relatively flat at 3.3x compared with 3.2x for the prior period.

CREDIT RATING DRIVERS

A positive credit rating action could occur if Nordstrom's operating performance over the next six to twelve months (including the 2023 holiday season) is stronger than Morningstar DBRS' expectations, such that key credit metrics stabilize at levels that are commensurate with a higher rating category on a normalized and sustained basis (i.e., financial leverage remains below 3.5x). Conversely, although less likely, a negative credit rating action could occur should key credit metrics deteriorate further (i.e., the debt-to-EBITDA ratio rises to above 4x) as a result of weaker-than-expected operating performance and/or more aggressive financial management.

EARNINGS OUTLOOK

Morningstar DBRS expects Nordstrom's earnings profile to remain appropriate for the current BB credit rating, despite the expectation that consumer discretionary spending will remain subdued at least in the near term. Morningstar DBRS forecasts revenues to decline in the low-single digits in F2024 (period ending in January 2025) compared with F2023, driven by continued volume pressures and pricing pressure in both the Nordstrom full-price and Nordstrom Rack segments. That said, Morningstar DBRS anticipates revenues could grow in the low-single digits in F2025, benefitting from some volume recovery, as well as contribution from new Nordstrom Rack stores. Additionally, Morningstar DBRS expects EBITDA margins to remain pressured and well below pre-pandemic levels of 9% to 10%, because of likely price markdowns and discounts, particularly in the first half of F2024, as well as operating deleverage and ongoing wage pressures. As such, Morningstar DBRS forecasts EBITDA to remain at around $1.0 billion in F2024, relatively lower compared with Morningstar DBRS' expectation of $1.1 billion for the full year F2023, and improve only marginally in F2025.

FINANCIAL OUTLOOK

In terms of Nordstrom's financial profile, Morningstar DBRS expects earnings pressure to continue to weigh on cash flow from operations (before changes in working capital and lease payments), which Morningstar DBRS forecasts to be in the $900 million to $950 million range in F2024 and F2025. Morningstar DBRS expects the Company's capital expenditures to be in the $525 million to $550 million range annually, continuing to be primarily focused on technology and supply-chain improvements. Cash dividend outlay is also anticipated to modestly grow toward $130 million and $140 million in F2024 and F2025, respectively. As such, Morningstar DBRS believes FCF after dividends (but before changes in working capital and net principal operating lease payments) to decline toward approximately $300 million in F2024 and F2025. Adjusting for net principal operating lease payments, Morningstar DBRS anticipates the Company will have limited FCF available for debt reduction and consequently forecasts debt-to-EBITDA to be above 3.5x in F2024 and F2025 compared with Morningstar DBRS' expectation of approximately 3.4x at the end of F2023.

CREDIT RATING RATIONALE

Nordstrom's credit rating continues to be supported by its well-established reputation for customer service, size, market position, and leading digital capabilities, as well as its increasingly diverse customer base and retail channels. The rating also considers Nordstrom's exposure to intensifying competition, cyclical consumer trends, and operational execution risks.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors

In the analysis of Nordstrom, Inc. the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors

In the analysis of Nordstrom, Inc. the relative weighting of the FRA factors was approximately equal.

Weighting of the BRA and the FRA

In the analysis of Nordstrom, Inc. the BRA and the FRA carry approximately equal weight.

Notes:

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Merchandising Industry (July 21, 2023), https://dbrs.morningstar.com/research/417461

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

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 [e-mail].

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at [e-mail].

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