Fitch Ratings has affirmed Nordstrom, Inc.'s ratings, including its Long-Term Issuer Default Rating (IDR) at 'BBB-' with a Negative Outlook, and simultaneously withdrawn its ratings.
The ratings reflect the significant business interruption from the coronavirus pandemic and the implications of a downturn in discretionary spending that Fitch expects could extend well into 2021, as well as increased leverage from the recent $600 million secured bond offering.
Fitch anticipates a sharp increase in adjusted leverage to over 10.0x in 2020 from 3.0x in 2019, based on EBITDA declining to below $0.5 billion from $1.6 billion on a revenue decline of over 20% to $11.7 billion. Adjusted leverage is expected to decline to the mid-3.0x range in 2021, assuming revenue declines of around 10% and EBITDA declines of about 20% in 2021 from 2019 levels. Leverage could return to under 3.5x in 2022, assuming a sustained top-line recovery.
Should Fitch's projections come to fruition, Nordstrom has sufficient liquidity to manage operations through this downturn. The company ended 2019 with $850 million of cash and recently drew down fully on its $800 million unsecured revolver; pro forma for the new $600 million in secured debt, the company had $2.2 billion in liquidity as of the end of 2019. The company suspended its dividend ($1.48 per share, or close to $250 million annually) and share-buyback program (originally targeted at $300 million-$400 million annually), and reduced its capex by 30% from its original target of $600 million.
Fitch has withdrawn Nordstrom's ratings for commercial reasons. Fitch reserves the right in its sole discretion to withdraw or maintain any rating at any time for any reason it deems sufficient.
Withdrawal due to commercial reasons.
KEY RATING DRIVERS
Coronavirus Pandemic: The impact on revenues for the consumer discretionary sector from the coronavirus pandemic is expected to continue over the medium term given both retail store closures and consumer spending declines which are expected to last through 2021. Numerous unknowns regarding the pandemic remain including the timeframe for a full reopening of retail locations across North America; and economic conditions exiting the pandemic including unemployment and household income trends, the impact of government support of business and consumers, and the impact the crisis will have on longer term consumer behavior.
Discretionary retailers in North America, including Nordstrom's locations, were essentially closed beginning mid-March, yielding sales down a forecasted 80%-90% despite some sales shifting online. With most malls and stores reopening within the May/June timeframe, Fitch expects a slow rate of improvement through the summer. Given an increased likelihood of a consumer downturn, discretionary sales could decline in the mid-to-high single digits through the holiday season. Fitch anticipates significant growth in 2021 against a weak 2020 but expects total 2021 discretionary sales could remain 8%-10% below 2019 levels. Given the typical timing of a consumer downturn (four to six quarters), revenue trends could accelerate somewhat exiting 2021, with 2022 projected as a modest growth year.
Assuming this scenario, Fitch expects Nordstrom's revenue to decline over 20% in 2020, with EBITDA declines over 80%. Fitch expects revenue to decline 10% in 2021, compared with 2019, with EBITDA down around 20% over the two-year period.
Actions Taken by Nordstrom: Nordstrom announced it has fully drawn on its $800 million credit facility, suspended its share repurchases and suspended its dividend beginning 2Q20. The company also announced further reductions of more than $500 million in operating expenses, capex and working capital. The company priced a $600 million 8.75% secured first-lien notes due April 2025 to support liquidity on April 8, 2020. Nordstrom plans to permanently close 16 of its 110 full line stores and three Jeffrey stores, which in total account for less than 2% of total company sales.
Diversified Channels Support Top-Line Growth: Nordstrom has a well-developed offering and footprint in the full-price, off-price and online channels. The company is differentiated from other department stores by its presence primarily in the top premium malls; higher end positioning that aligns with a more affluent customer, and significant investment in omnichannel and off-price items. Nordstrom has been ahead of the curve with its strategic investments in the online and off-price (stores and online) channels, with each representing one-third of total revenue. The company's merchandise strategy involves a sharp focus on product newness and uniqueness, and adding features-such as buy online, pickup in store-to both generate customer excitement and limit direct merchandise overlap with key peers. Over time, Fitch expects these strategies will drive overall top-line growth.
Through 2017, Nordstrom broke out its business segments as follows: U.S. full-line stores (45% of revenue in 2017); Nordstrom.com (19%); Canada, Trunk Club and Jeffrey (4%); Nordstrom Rack (26%); and Nordstromrack.com/HauteLook (6%). Nordstrom simplified its segment reporting beginning in 1Q18 to Full-Price and Off-Price in a move to align its sales presentation to how operations are viewed internally and by customers, as the business is increasingly managed primarily through its two largest brands (Nordstrom and Nordstrom Rack), rather than by channel.
Full-Price includes U.S. full-line stores, Nordstrom.com sales and its Canadian full-line, Trunk Club and Jeffrey businesses. Off-Price includes its U.S. Rack business (both physical and online) and Hautelook.com. The company stopped reporting comparable sales (comps) figures in 1Q19, as comps were expected to approximate net sales growth.
Nordstrom's total revenue declined 2.2% in 2019, versus positive growth of 4.8% in 2018 and 4.4% in 2017. Full-Price sales declined 3.5% in 2019 to $9.9 billion from $10.3 billion in 2018. Management cited executional misses in digital marketing, the Nordy Club rewards program and merchandise assortment as the primary headwinds. Sales trends improved in 2H19 based on ongoing actions to address these areas.
Digital sales increased almost 6% in 2019 to approximately $5.0 billion, or 33% of total sales, from $4.6 billion, or 30% of total sales, in 2018. Digital sales include sales generated at Nordstrom.com (Fitch estimates this at about $3.4 billion-$3.5 billion and is reflected in Full-Price sales); sales at Hautelook.com and Nordstromrack.com (Fitch estimates this at around $1.3 billion-$1.5 billion) and digitally assisted store sales, which include Online Order Pickup, Ship to Store and Style Board, a digital selling tool.
Investments in New Business Pressure Margins: EBITDA has been on a decline since 2014, with EBITDA margin declining to 10% in 2019 from 14% in 2014. This reflects Nordstrom's investments in digital capabilities (acquisitions of HauteLook and Trunk Club in addition to foundational investments in marketing, technology and supply chain), new markets (Canada and the opening of its first New York City flagship store), local market strategy and the significant top-line decline in the company's U.S. full-line stores dovetailing secular challenges across mall-based apparel retailers.
DERIVATION SUMMARY
Fitch anticipates a sharp increase in Nordstrom's adjusted leverage to over 10.0x in 2020 from 3.0x in 2019, based on EBITDA declining to under $0.5 billion from $1.6 billion on a revenue decline of over 20% to $12.0 billion. Adjusted leverage is expected to decline to the mid-3.0x range in 2021, assuming sales declines of around 10% and EBITDA declines of about 20% in 2021 from 2019 levels. Leverage could return to under 3.5x in 2022, assuming a sustained top-line recovery. Nordstrom's ratings reflect its position as a market share consolidator in the apparel, footwear and accessories space, with its differentiated merchandise and high level of customer service enabling the company to enjoy strong customer loyalty. The company has a well-developed product offering across a diverse portfolio of full line department stores, off-price Nordstrom Rack locations and multiple online channels.
Nordstrom's department store peers include Macy's, Kohl's, and Dillard's, Inc.
Macy's (BB/Negative): Fitch anticipates a sharp increase in leverage to over 15.0x in 2020 from 2.9x in 2019, based on EBITDA declining to around $200 million from $2.2 billion on a sales decline of nearly 30% to $17.6 billion. Spring 2020 markdowns and heightened promotional activity in 2020 could yield downside to Fitch's 2020 EBITDA projections; in this case, Macy's ability to sustain its 'BB' rating would depend on the operating rebound potential through 2022. Leverage could return to under 4x in 2022 assuming a sustained topline recovery.
Macy's ratings continue to reflect its position as the largest department store chain in the U.S. and Fitch's view of a prolonged timeframe for the company's operating trajectory to stabilize on a lower EBITDA base, given weak mall traffic and heightened competition from alternate channels that include online and off-price. This follows sustained low single digit comparable store sales declines, recent EBITDA margins well below expectations and increased management urgency to address secular challenges, as evidenced by the announcement of 125 store closures and $1.5 billion in cost reductions to support business reinvestment, prior to the recent downturn.
Kohl's (BBB-/Negative): Fitch anticipates a sharp increase in leverage to 8.0x in 2020 from 2.3x in 2019. This reflects EBITDA declining to approximately $0.5 billion from $2.0 billion on a sales decline of 20% to just under $16.0 billion, the full drawdown on its $1.5 billion credit facility and recent $600 million bond issuance. Adjusted leverage is expected to be high-3x in 2021, assuming revenue declines of around 15% and EBITDA declines of around 40% in 2021 from 2019 levels and paydown of revolver borrowings. Leverage could decline to under 3.5x in 2022 assuming a sustained topline recovery.
Kohl's ratings reflect its position as the second largest department store in the U.S. and Fitch's expectation that the company should be able to able to accelerate market share gains post the discretionary downturn. Kohl's, Nordstrom and Macy's continue to invest aggressively in their businesses while maintaining healthy cash flow. These retailers have well developed omnichannel strategies, with online sales contributing close to 25% of total revenue (over 30% at Nordstrom), which should benefit their top-line as retail sales continue to move online. Kohl's off-mall real estate footprint provides some insulation from mall traffic challenges.
Dillard's (BB/Negative): Fitch anticipates a sharp decline in EBITDA to under $50 million in 2020 from $392 million in 2019 on a revenue decline of over 20% to $5 billion. Adjusted leverage is expected to be over 2x in 2021, assuming sales declines in the low-teens and EBITDA of approximately $300 million or around 30% lower compared to 2019 levels.
Dillard's ratings reflect the company's below-industry-average sales productivity (as measured by sales psf), operating profitability and geographical concentration relative to its larger department store peers, Kohl's, Nordstrom and Macy's. The ratings consider Dillard's strong liquidity and minimal debt maturities, with adjusted debt/EBITDAR expected to return to the 2x range in 2021.
KEY ASSUMPTIONS
Fitch projects Nordstrom's 2020 revenue could decline over 20% to $11.7 billion and EBITDA could decline to under $0.5 billion, given store closures from mid-March through late June and a slow recovery in customer traffic for the remainder of the year. While 2021 revenue and EBITDA should significantly rebound from depressed 2020 levels, Fitch expects 2021 revenue of approximately $14.0 billion and EBITDA of around $1.3 billion to be approximately 10% and 20% below 2019 levels, respectively, given our expectations of a likely downturn in discretionary spending that could extend well into late 2021. Fitch's revenue expectations reflect its views that retail discretionary spending will decline 40% in 1H20 and decrease by mid to high single digits in 2H20, and sales in 2021 will decline 8%-10% from 2019 levels.
Beginning in 2022, Nordstrom could resume mid-single-digit top-line and EBITDA growth.
FCF is expected to be approximately negative $500 million in 2020, largely due to the material reduction in EBITDA, somewhat mitigated by lower cash taxes, reduced capex, suspension of dividends and potential working capital benefit. FCF in 2021 could be approximately $500 million as EBITDA improves.
Adjusted debt/EBITDAR, which was 3.0x in 2019, could climb to over 10.0x in 2020 and decline to the mid-3.0x range in 2021 on EBITDA swings.
RATING SENSITIVITIES
Rating sensitivities are no longer relevant given Fitch's rating withdrawal.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Nordstrom had a cash balance of $1.3 billion as of May 2, 2020. The company announced on March 16, 2020 it fully borrowed on its $800 million revolver (which went secured in April) to enhance liquidity. It also announced it would suspend its share-repurchase program and suspend its quarterly dividend beginning in 2Q20.
The company priced a $600 million 8.75% secured first-lien note due May 2025 on April 8, 2020. The notes are secured by a first-priority lien on the equity interest of Nordstrom Real Estate Holdings (PropCo), with real estate assets encompassing the Seattle headquarters, six distribution centers and five owned stores. The assets have been appraised at $1.0 billion-$1.1 billion, based on internal assessments and historical third-party brokers. Concurrently, the revolver lenders were provided security over working assets, principally inventory, accounts receivable and intellectual property. The notes and the credit facility will also be supported by a guarantee by all material operating subsidiaries of Nordstrom, Inc. and the PropCo entity, representing over 90% of revenues and EBITDA. As part of the revolver amendment, certain covenant headroom and allowances will also be granted.
Under the existing unsecured bond covenants, the company could provide liens on up to 15% of consolidated net assets, which Fitch calculates at approximately $930 million (based on $9,737 million total assets minus $3,520 million in current liabilities at the end of 2019). Nordstrom still has two owned fulfillment centers and 28 owned stores that remain unencumbered.
Nordstrom has $500 million of debt maturing in October 2021, which Fitch expects it can pay down with cash on hand.
SUMMARY OF FINANCIAL ADJUSTMENTS
EBITDA adjusted to exclude stock-based compensation and other restructuring/impairment/one-time charges.
Operating lease cost capitalized by 8x to calculate historical and projected adjusted debt.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
ENTITY/DEBT RATING PRIOR
Nordstrom, Inc. LT IDR BBB- Affirmed BBB-
LT IDR WD Withdrawn BBB-
ST IDR F3 Affirmed F3
ST IDR WD Withdrawn F3
senior unsecured
LT BBB- Affirmed BBB-
senior unsecured
LT WD Withdrawn BBB-
senior secured
LT WD Withdrawn BBB
senior secured
LT BBB Affirmed BBB
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
NORDSTROM, INC. 
