Credit ratings company Fitch affirmed the BBB+ rating for Nordstrom but downgraded both Macy’s and Kohl’s on Friday. All retained their stable outlook.
Nordstrom was set apart from its retail peers with its recent sales growth as well as sales growth projections. Analyst Monica Aggarwal noted that even though there had been a general slowdown in apparel and accessories sales, with only 2 percent sales growth in 2015, Nordstrom’s overall sales grew 7 percent — indicating strong share gains.
She also pointed out that although Nordstrom’s comp sales declined from 4 percent in 2014 to 2.7 percent in 2015, it was still better than other Fitch-rated department stores that saw comps decline approximately 0.5 percent in 2015. Looking ahead Aggarwal wrote, “Positive sales growth projections for Nordstrom distinguish the company from most of its department store peers.”
The challenge for Nordstrom is that its investments to support online sales growth will put pressure on earnings before interest, taxes, depreciation and amortization, or EBITDA, margins. This is expected to decline to a range of 11 to 11.5 percent from 12.8 percent in 2015.
Nordstrom’s growth investments are also expected to limit the free cash flow over the next 24 months. “While Fitch views positively Nordstrom’s continual investment in its business, negative to low free cash flow limits the company’s financial flexibility in the medium term,” wrote Aggarwal.
Macy’s and Kohl’s both got downgraded from BBB+ to BBB as both suffer from weakness in the mid-market apparel category.
Fitch was prompted to lower Macy’s rating due to a lack of visibility into sales acceleration that would meaningfully improve profitability. Macy’s comp store sales dropped over the course of 2015 from negative 0.1 percent in the first quarter to negative 4.3 percent in the fourth quarter. Fitch expects the general malaise in apparel sales, particularly in the mid-tier space and declines in international tourist traffic to persist in 2016.
As a result, Fitch expects Macy’s comps to be in the negative 1 to 1.5 percent range in 2016. “Macy’s would have to generate top-line growth of 2 percent or above to prevent share loss to other channels such as specialty, discount and online,” Aggarwal wrote.
The plan to monetize its real estate holdings would be credit neutral at best said Fitch and could even result in the addition of rent payments. On a positive note, Fitch still views Macy’s as well-positioned in the mid-tier department store space and believes the company will benefit from its My Macy’s and growth initiatives.
Kohl’s was also downgraded from BBB+ to BBB due to its essentially flat sales comps over the past 5 years and in-store level comps that have been running in the negative 2.5 percent to 3 percent over the past 3 years. Fitch expects the weakness in the mid-market apparel category to continue limiting Kohl’s comp growth.
When it comes to free cash flow after dividends, Kohl’s is expected to generate between $750 million to $800 million in 2016. Annually, free cash flow is expected to be between $400 and $450 million in 2017-18. This strong free cash flow generation is viewed favorably by Fitch.
Fitch also believes Kohl’s benefits from its off-mall real estate base and its strong market share position as the third largest department store retailer.