Moody’s Investors Service downgraded Nordstrom Inc.’s senior unsecured rating to Ba1 from Baa3, its commercial paper rating to Not Prime (“NP”) from Prime-3, its senior unsecured shelf rating to (P)Ba1 from (P)Baa3, and its issuer rating to Ba1 from Baa3. At the same time, Moody’s assigned Nordstrom a Ba1 corporate family rating, Ba1-PD probability of default rating and an SGL-1 speculative grade liquidity rating. The outlook was changed to stable from negative.
Moody’s said the rating action reflects that although Nordstrom’s operating performance has sequentially improved, it has lagged the recovery demonstrated by many of its department store and off-price peers in 2021. Despite the current strength in consumer spending and the recent acceleration in demand of key categories that were depressed during the pandemic, both Nordstrom’s sales and operating margin improvement have been relatively slower largely driven by its off-price product mix and inventory constraints.
Moody’s said credit metrics remain elevated for an investment-grade profile and Moody’s expects a normalization of consumer demand and industry inventory levels in 2022 which poses an additional headwind to improvement. Nonetheless, Nordstrom has many urban and professional customers who have still not returned to pre-pandemic traffic patterns. These customers may accelerate their spending as pandemic conditions improve. Nordstrom also remains well-diversified with its breadth of full-price and off-price apparel offerings and is a leader in digital penetration, a critical element to its strong history of superior customer service and loyalty.
The downgrade of the senior unsecured notes one notch to Ba1 reflects its relative size as the preponderance of debt in the capital structure and its junior position behind Nordstrom’s secured revolving credit facility. The notes are also at the parent holding company and lack subsidiary guarantees. The assignment of an SGL-1 rating reflects Nordstrom’s very good liquidity supported by its solid cash balances with approximately $487 million of cash at July 31, 2021, an undrawn $800 million revolver, and Moody’s expectation that cash will be in excess of $900 million of at the end of fiscal 2021. Nordstrom’s very good liquidity is also supported by its unencumbered real estate portfolio.
Moody’s said, “Nordstrom’s Ba1 corporate family rating is supported by its governance considerations in response to the disruption caused by the pandemic which included its conservative financial strategy which has prioritized debt reduction and paused dividends and share purchases. The company has maintained very good liquidity reflected in its $800 million secured revolving credit facility that is fully available and its cash balance of $487 million as of July 31, 2021. The rating also reflects its solid market positioning in both the full price and off-price segments. The company has made significant investments historically to provide superior service at all customer contacts points whether in-store, online, or through mobile and continues to invest to provide integrated experiences. Its seamless experience is evidenced by its rollout of buy online pick up in-store to all of its Rack locations and its leading online penetration in off-price. Over one-third of Nordstrom’s sales are from its off-price segment which has historically fared better than full price in periods of weaker consumer demand, despite its weak performance during the pandemic.
“The rating is constrained by Nordstrom’s focus on fashion apparel and the secular challenges that face the department store industry. Ratings are also constrained by the company’s concentration in California. The company must also manage its vendor partners globally and navigate the changing demographic, lifestyle and workplace trends which may ultimately impact purchasing patterns and have weaken demand for its products.
“The stable outlook reflects that Nordstrom is poised to continue to experience sales and margin improvement in the second half of 2021 given the robust consumer environment despite the ongoing pandemic and the risks posed by the Delta variant. Credit metrics are expected to improve with leverage levels returning to pre-pandemic levels. The outlook also reflects that its financial strategy is expected to remain conservative until operational performance returns to more normalized levels.”
Photo courtesy Nordstrom/Getty