Fitch Affirms Nordstrom's IDR at 'A-'; Outlook Revised to Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed the following ratings for Nordstrom, Inc. (Nordstrom):

--Long-term Issuer Default Rating (IDR) at 'A-';

--$650 million bank credit facility at 'A-';

--Senior unsecured notes at 'A-';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

The Rating Outlook has been revised to Stable from Negative.

The Outlook revision reflects better than expected same store sales trends, operating profitability and free cash flow in 2009 and improved outlook for 2010. Adjusted debt/EBITDAR is expected to be flat to 2008 levels at around 2.7-2.8 times (x) and should improve to 2.2x on Fitch's expectation of low single-digit same store sales growth in 2010. This is better than Fitch's prior expectations that leverage could approach 3.0x-3.1x in 2009/2010. Fitch expects the company to manage its capital structure to its publicly stated target of 2.0x -2.5x consolidated debt/EBITDAR leverage (using 8x net rent expense net of property incentives). This roughly equates to a leverage target of 2.25x -2.75x using Fitch's methodology of using 8x gross rent expense. At these levels, core retail credit metrics, excluding the more leveraged credit card business, would be between 1.1x to 1.5x which would be consistent with its current ratings based on peer comparisons.

The ratings also reflect Nordstrom's position as a consolidator in the department store sector, differentiated merchandise and a high level of customer service which have historically enabled the company to enjoy strong customer loyalty and operating margins relative to its industry peers. The overall weakness in the luxury market and its geographic concentration in California - which accounts for close to 30% of the company's footprint - remain a concern and are incorporated in the low single digit same store sales assumption for 2010.

Same store sales trends turned positive in October 2009 after two years of negative same store sales trends. Nordstrom was one of the first luxury retailers to experience sales weakness given its more moderate or affordable luxury price points and concentration in California. Sales trends have improved markedly since October against easier year ago comparisons and due to the company's strong merchandise presentation at sharper price points. Based on holiday sales, Fitch expects fourth quarter same store sales trends to be in the positive mid-single digit range. These trends could continue through at least the first half of 2010 against easy comparisons and result in a same store sales increase of 4%-5% for the year. However, Fitch remains cautious in its outlook given overriding macroeconomic concerns and is therefore building in expectation of a low single digit increase for 2010 and 2011. Overall sales growth, including contribution from new stores, should be in the mid-single digit range. This should enable Nordstrom to strengthen its #5 market share position (of department store sales using NAICS codes with 2009 estimated share of 4.2%) as industry sales are expected to decline 1%-2% in 2010.

Recent improvements in same store sales trends and strong inventory control should result in increased operating EBIT dollars in 2009 on projected operating margin of 9.5% versus 9.0% in 2008. Fitch expects operating margins to continue to improve from these levels on top line sales growth over the next two years, but still be shy of the 13% plus margins reported in 2007. These assumptions incorporate a modest EBIT loss (similar to 2008) for its credit card business in 2009 based on a 10% chargeoff rate. Credit card EBIT is expected to be in the range of a profit of $50 million to a loss of 20 million for 2010 if chargeoffs are in the 10%-12% range.

Adjusted debt/EBITDAR is expected to remain flat at 2.7x-2.8x in 2009 and improve to 2.2x in 2010. Fitch notes that Nordstrom and Target Corporation are the only two publicly rated companies in its U.S. retail coverage that still own their credit card receivables and these credit metrics are encumbered with the full amount of debt associated with the more highly leveraged credit card business. Assuming Nordstrom's credit card receivables are financed using a mix of 80% debt and 20% equity, core retail debt/EBITDAR is expected to be 1.5x in 2009 and 1.1x-1.2x in 2010/2011. Fitch also calculates an adjusted retail leverage ratio, which incorporates the risk of how much potential loss the retail business would have to absorb from the credit card business on base and stress writeoff levels. On this basis, Fitch estimates that the adjusted retail leverage ratio in 2009 and 2010 would be only marginally higher. (Please see Fitch's report, 'Spotlight on Retail-Owned Credit Card Portfolios' published on Oct. 5, 2009 for a more detailed analysis of Nordstrom's and Target's credit card business).

Free cash flow for 2009 should be well in excess of the $300 million Nordstrom expected at the end of its third quarter. In addition to aligning inventory more appropriately to anticipated sales levels, Nordstrom had taken other steps to strengthen cash flow. The company suspended its share repurchase program in the third quarter of 2008, reduced its gross capital expenditure budget to under $400 million in 2009 from $563 million in 2008, and controlled retail operating expenses, offset by increased bad debt expense in its credit card business. As the company enters 2010 with a significantly improved cash position and positive same store sales trends, Fitch would expect the company to step up capital expenditures, build up inventory and potentially resume share repurchases within the context of staying within its stated leverage targets. As a result, free cash flow in 2010, while strong, is expected to be lower than 2009 levels, in line with Fitch's expectation for the department store retailers.

Nordstrom's liquidity is also supported by a $650 million senior unsecured revolving bank credit facility that is scheduled to mature in August 2012. The company had no outstanding borrowings under the revolver as of Oct. 31, 2009 and has ample room under its leverage covenant of 4.0x adjusted debt/EBITDAR (using 6x rent), and coverage covenant of 2.0x. The company has a 364-day $300 million variable-funding facility backed by Nordstrom private-label card receivables and a 90% interest in the co-branded Nordstrom VISA credit card receivables which was recently extended out to January 2011. In addition, the company has a 364-day $100 million variable-funding facility backed by a 10% interest in the co-branded receivables which is scheduled to mature in May 2010. There were no outstanding borrowings under these facilities as of Oct. 31, 2009.

Upcoming debt maturities include the $350 million in accounts receivable secured notes in April 2010 and $500 million in secured notes in April 2012. Fitch expects the company to pay down these maturities with a combination of cash and debt.

These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include:

-- 'Corporate Rating Methodology', dated Nov. 24, 2009;

-- 'Operating Leases: Updated Implications for Lessees' Credit', dated Aug. 13, 2009;

-- 'Evaluating Corporate Governance', dated Dec. 12, 2007;

-- 'Liquidity Considerations for Corporate Issuers', dated June 12, 2007;

-- 'Short-term Ratings Criteria for Corporate Finance', dated June 12, 2007.

Additional information is available at www.fitchratings.com.

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