Moody’s Investors Service changed Nordstrom, Inc.’s debt ratings outlook from stable to negative, reflecting Nordstrom’s continued operating challenges, particularly in its off-price Nordstrom Rack chain.
At the same time, Moody’s affirmed Nordstrom’s long-term ratings including its corporate family rating (“CFR”) at Ba1, its probability of default rating (“PDR”) at Ba1-PD, its senior unsecured notes rating at Ba1, and its commercial paper rating of Not Prime (“NP”). Nordstrom’s speculative grade liquidity rating remains (“SGL”) SGL-1 and its Ba1 issuer rating was withdrawn.
Moody’s noted that Nordstrom’s operating margins remain below its pre-2020 historical levels and low relative to its peers despite expected improvement in 2023. Although the company has taken decisive action to improve its inventory position, adjust its Nordstrom Rack strategy, and divest its unprofitable Canada business, a rising wage environment and uncertain economic backdrop pose a significant risk to returning its credit profile to be reflective of the Ba1 corporate family rating. The withdrawal of Nordstrom’s Ba1 issuer rating is for administrative reasons as Nordstrom already has a corporate family rating in place.
Moody’s wrote in its analysis, “Nordstrom’s Ba1 corporate family rating is supported by its solid market positioning in both the full price and off-price segments as well as its conservative approach to funded debt. The company has maintained very good liquidity reflected in its $800 million secured revolving credit facility that is fully available, cash balance of $687 million as of January 28, 2023, and unencumbered real estate. The company has made significant investments historically to provide superior service at all customer contact points whether in-store, online or through mobile and continues to invest. Nonetheless, the company had to contend with excess inventory as consumer demand particularly for its Rack and entry-level Nordstrom customer slowed. Nordstrom Rack products must also be refocused on core brands, a reversion from its effort to broaden the assortment. The company is taking significant steps to improve profitability as evidenced by its exit from the Canadian market, changes to Nordstrom Rack’s strategy and improvements to its supply chain. Nordstrom Rack’s strategy will include a refocus on new store development, key designer brands, and termination of the fulfillment of digital sales at its locations. Nordstrom’s focus on fashion apparel and the secular challenges that face the department store industry remain credit challenges as well as its concentration in California. The company must also manage its vendor partners globally and navigate changing demographic, lifestyle and workplace trends which may ultimately impact purchasing patterns.
“The negative outlook reflects the risks that Nordstrom faces in stabilizing its market position and expanding operating margins through cost containment, better inventory management, and supply chain efficiencies in the face of an uncertain economic environment. It also reflects the risk that its off-price business could remain volatile as its business strategy is modified.”
