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

Fitch Ratings has affirmed its ratings on Nordstrom, Inc. (Nordstrom, NYSE: JWN), including the Issuer Default Rating (IDR) at 'A-'. The Rating Outlook is Stable. A full list of rating actions appears at the end of this press release.

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 and high operating margins relative to its industry peers.

Nordstrom's comparable store sales (comps) growth has moderated in 2013 at projected 2.5%, versus high-single digit growth over the prior three years. The deceleration is partially due to the shift in consumer spending away from apparel and general merchandise. However, Fitch expects Nordstrom's comps to grow in the low-single digits and for its EBITDA margin to continue to lead the sector over the next three years. Fitch expects Nordstrom's strong growth in online sales and continued growth in its Rack business remain important drivers for consolidated top-line growth of mid-single digits.

Rack (23% of year-to-date sales) has seen its comps growth decelerate to 2.3% in the first three quarters in 2013, versus 7.4% in 2012, as competition in the off-price channel has stepped up significantly. Nordstrom expects to grow the Rack store base to more than 230 stores by 2016 from the current base of 140 units, or an average of 25-30 openings annually, given the concept's attractive profile of generating high investment returns and fitting into the macroeconomic environment. Fitch expects overall Rack sales to grow in the mid to high-teens over the next two to three years, even if comps remain in the low single-digit range.

Direct channel (including Hautelook) continues its double-digit growth momentum in 2013. Fitch estimates the direct channel will contribute more than $1.6 billion in sales and represent 13% -14% of total net sales. Fitch expects Nordstrom's direct channel will grow by 15%-20%, given the company's investments in its online fulfillment capacity, increased product selection, and free shipping/free returns policy.

Nordstrom has industry-leading sales productivity and profitability among the major department stores. Its EBITDA margin has improved to the 15% range over the past four years due to an improved mix of full-priced selling and strong inventory control. The increased investments to support online sales growth and other business initiatives will likely cap further margin expansion in the near term. However, return on invested capital should remain at healthy and industry leading levels.

Fitch expects Nordstrom's adjusted debt/EBITDAR to remain in the low to mid-2.0x range, or 1.7x-1.9x for core retail business if adjusted for the more leveraged credit card business over the next 24 months. The leverage calculation for the core retail business assumes the company's credit card receivables are financed using a mix of 80% debt and 20% equity.

Fitch expects Nordstrom to generate modest free cash flow (FCF; after dividends) over the next two years, as capital expenditures are expected to increase significantly to the $900 million level to support new store openings, remodels and technology investments. Fitch expects future share repurchases will be conducted within the context of maintaining the company's stated leverage target of 1.5x-2.5x (equivalent to 1.75x-2.75x using Fitch's methodology of 8.0x gross rent expense) and adequate liquidity.

The company's liquidity is supported by a cash balance of $947 million as of Nov. 2, 2013 and its $800 million senior unsecured revolver scheduled to mature in March 2018.

RATING SENSITIVITIES

A positive rating action is unlikely at this time as Fitch anticipates Nordstrom will manage its capital structure to its publicly stated target of 1.5x-2.5x consolidated 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.

A negative rating action could result if a more aggressive financial posture leads credit metrics to come in worse than targeted levels.

Fitch has affirmed the following ratings for Nordstrom:

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

--$800 million bank credit facility at 'A-';

--Senior unsecured notes at 'A-';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'Evaluating Corporate Governance' (Dec. 12, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=817951

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Fitch Ratings
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Isabel Hu, CFA
Associate Director
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Fitch Ratings, Inc.
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Monica Aggarwal, CFA
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