S&P Lowers Outlook on Nordstrom (JWN) to Negative Following Q2 Results; Ratings Affirmed

August 12, 2016 11:12 AM EDT

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S&P Global Ratings today revised its outlook on Nordstrom Inc. (NYSE: JWN) to negative from stable. At the same time, we affirmed all ratings, including the 'BBB+' corporate credit rating.

"The outlook revision reflects our expectation that the company's soft operating performance trends will likely persist over the next 12 to 24 months, resulting in leverage weakening to the mid-2.0x area, and that operating performance and leverage could be worse than our base-case scenario. Along with many department stores, Nordstrom has seen profitability increasingly pressured by competition from online, fast-fashion, and off-price retailers," said credit analyst Helena Song. "These retailers have consistently taken market share in recent years as they offer customers with speed and convenience, fresh on-trend merchandise, and compelling value that traditional department stores have not been able to match. We believe the operating environment for department stores will remain difficult as these competitive threats become increasingly prevalent. We think department stores must create a more compelling brick-and-mortar experience to drive traffic back into stores while also continuing to invest meaningful capital into omni-channel initiatives to protect market share in an increasingly digital marketplace."

The negative outlook reflects our expectation that operating performance at Nordstrom will continue to be pressured as a result of increased competition from online, fast-fashion, and off-price retailers. While we still view Nordstrom as the leader in the department store industry in terms of off price presence and omni-channel capabilities, we expect that costs related to the omni-channel platform will further pressure margins over the next 12 to 24 months. As a result, we expect leverage to weaken to the mid-2.0x area over that time period.

We could lower the ratings if operating performance continues to deteriorate beyond our base-case forecast, and the company is unable or unwilling to manage leverage from further weakening to the high-2.0x area. Under this scenario, gross margin would fall 75 bps below our current forecast and sales would grow in the low-single digits (compared with our current forecast of low- to mid-single digit growth). We could also lower the rating if we believed competitive strengths were no longer a sufficiently differentiating factor versus other department store peers as a result of persistently weak performance, causing us to lower the comparable rating analysis score to neutral.

A higher rating is unlikely in the near term, given our expectation of the challenging operating environment and our belief that the company will remain focused on returning capital to shareholders. Still, we could raise the ratings in the longer term if meaningful margin improvement and topline growth result in debt leverage sustaining in the mid- to high-1.0x range. This could happen if sales grow in the mid- to high-single digits and margins expand meaningfully by 200 bps while debt remains generally consistent. We would also need to believe that the company is committed to a financial policy that supports a sustained lower leverage.

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