OREANDA-NEWS. Fitch Ratings has downgraded its long-term ratings on Nordstrom, Inc. (Nordstrom), including the company's Issuer Default Rating (IDR) to 'BBB+' from 'A-'. The Rating Outlook is Stable. A full list of ratings is provided at the end of this release.

Nordstrom expects to conclude the review process of its credit card receivables (\$2.3 billion as of Jan. 31, 2015) in the first half of 2015 and use the potential proceeds primarily towards reinvestment in its business and share buybacks, rather than paying down debt which Fitch had allocated to the credit card business. Post the transaction, total retail adjusted debt/EBITDAR is expected to increase to the low to mid-2.0x range, versus 1.5x currently for the core retail business stripping out credit card related debt and income.

Nordstrom's consolidated leverage including the more highly levered credit card business stood at 2.3x at the end of 2014. To date, Fitch's ratings on Nordstrom incorporated a retail adjusted leverage after assigning a portion of the company's debt to the more highly leveraged credit card business. This assumed the company's credit card receivables are financed using a mix of 80% debt and 20% equity, which translated into \$1.8 billion in credit card-related debt based on Nordstrom's 2014 year-end receivables. Therefore the amount of adjusted debt allocated to the retail business would be \$2.9 billion (including \$1.3 billion of book debt and \$1.6 billion capitalized leases using 8x rent expense) which had resulted in a retail adjusted leverage of 1.5x.

Implicit in this assumption was that if Nordstrom ever sold its receivables portfolio, it would pay down debt both directly secured by credit card receivables as well as allocated unsecured corporate debt to a level consistent with Fitch's assumption. If the ultimate allocation of proceeds differs from Fitch's assumption and is used for purposes other than paying down debt proportionately, the consolidated leverage ratio for the remaining retail business post the deal would be higher leading to a negative rating action.
KEY RATING DRIVERS
The ratings reflect Nordstrom's position as a market share consolidator in the department store sector, differentiated merchandise and a high level of customer service which have enabled the company to enjoy strong customer loyalty. This has resulted in industry-leading sales productivity, with EBITDA margins that are in line with other industry leaders in the department store space such as Macy's Inc. and Kohls Corp. Fitch expects Nordstrom's increased investments to support online sales growth, and other business initiatives, including its entry into Canada, is to likely cap or put some modest pressure on EBITDA margin over the next 12-24 months.

Nordstrom's comparable store sales (comps) growth in 2014 was 4% compared to 2.5% in 2013, at the higher end of Fitch's expectations of low-single digit growth. Overall sales grew 7.8% given three full line (including Canada) and 27 Nordstrom Rack store openings, as well as the addition of Trunk Club. The performance is strong relative to Fitch-rated department stores, which grew comps at approximately 0.5% in 2014, and the overall department store industry sales decline of 2%.

Additionally, there has been a general slowdown in apparel and accessories sales which grew 2% in 2014, indicating strong share gains for Nordstrom. Fitch expects Nordstrom's comps to grow in the low single digits and overall top line to grow 6% to 7%, primarily driven by continued growth in its online sales and Nordstrom Rack (Rack) businesses with segment forecasts below.

Full-line stores (58% of total sales): Fitch expects full-line stores comps to be flat to modestly negative due to the increased demand in the off-price channels and ecommerce sales. Total sales growth for full line stores is expected to be flat to modestly positive in the low single digit range, given a handful of new full line store openings over the next few years, including its expansion into Canada.

Nordstrom Rack (24% of total sales): Fitch expects overall Rack sales to grow in the mid to high teens over the next two to three years, driven by strong store growth (230 stores by 2016 from the current base of 167 units) contributing 10% - 12% to Rack's top line, and moderate comps growth in the low single-digit range.

Direct Channel (15% of total sales): The direct channel, or Nordstrom.com, continued its double-digit growth in 2014 and ended the year with approximately \$2 billion in sales. Fitch expects Nordstrom's direct channel to grow by 10%-15% annually as consumers continue to shift spending towards the online channel.

Other (3% of total sales): Nordstrom has also been growing its online presence through various channels including NordstromRack.com, Trunk Club (a subscription-based personalized clothing service for men acquired in 2014), and HauteLook (a flash discount sales Web site acquired in early 2011). Fitch expects Nordstrom's other online channels to grow by 15%-20% annually.

Fitch expects FCF to be negative \$200 million in 2015, as capex is expected to increase significantly to \$1.2 billion level from \$860 million in 2014, to support new store openings, remodels, and technology investments. FCF is expected to be positive \$300 million annually thereafter as Fitch expects capex to return to a more normalized \$800 million to \$900 million range.

Nordstrom's liquidity is supported by a cash balance of approximately \$827 million as of Jan. 31, 2015 and an \$800 million senior unsecured revolver due March 2018. Upcoming maturities include \$325 million of asset-backed senior secured notes due October 2016, which Fitch expects will be paid off post the sale of the credit card receivables and \$650 million of senior unsecured notes due January 2018.

KEY ASSUMPTIONS
Fitch expects total retail adjusted debt/EBITDAR to increase to the low to mid-2.0x range, post the sale of the credit card receivables, versus 1.5x currently for the core retail business stripping out credit card related debt and income.

Fitch expects Nordstrom's comps to grow in the low single digits and overall top line to grow 6% to 7% annually over the next 24 months, primarily driven by continued growth in its online sales and Nordstrom Rack (Rack) business. Fitch expects full-line stores comps to be flat to modestly negative; overall Rack sales to grow in the mid to high teens with comps growth in the low single-digit range, and online revenue to grow in the mid-teens.

Fitch expects retail-only EBITDA margin to decline modestly from 12.9% in 2014, due to Nordstrom's increased investments do support online sales growth, and other business initiatives, including its entry into Canada.

Fitch expects FCF to be negative \$200 million in 2015, reflecting an increase in capex to the \$1.2 billion level from \$860 million in 2014 to support the business initiatives. FCF is expected to be positive \$300 million annually thereafter as capex returns to a more normalized \$800 million to \$900 million range.

RATING SENSITIVITIES
A positive rating action is unlikely at this time as Fitch anticipates Nordstrom will manage its capital structure in the mid-range of its publicly stated target of 1.5x-2.5x debt/EBITDAR leverage using 8.0x net rent expense. This roughly equates to a leverage target of 1.75x-2.75x using Fitch's methodology of 8.0x gross rent expense or 2.3x at the mid-range.

A negative rating action could result if a more aggressive financial posture leads credit metrics to come in worse than targeted levels with adjusted leverage above 2.5x on a prolonged basis.

Fitch has downgraded the following ratings for Nordstrom:

--Long-term Issuer Default Rating (IDR) to 'BBB+' from 'A-';
--\$800 million bank credit facility to 'BBB+' from 'A-';
--Senior unsecured notes to 'BBB+' from 'A-'.

Fitch has affirmed the following ratings:

--Short-term IDR at 'F2';
--Commercial paper at 'F2'.

The Rating Outlook is Stable.