Nordstrom’s Lowest-Yield Debt Show Recession Resistance: Corporate Finance
Bond investors awarded Nordstrom Inc. (JWN) its lowest borrowing cost ever on a sale of 10-year bonds this week as the high-end U.S. department-store chain founded in 1901 shows that it’s able to withstand slowing economic growth.
The retailer sold $500 million of 4 percent senior unsecured notes Oct. 5 that yielded 2.12 percentage points above similar-maturity Treasuries, according to data compiled by Bloomberg. That compares with the 4.75 percent coupon on Seattle-based Nordstrom’s 10-year bond sale in April 2010 and the 6.25 percent rate it paid in November 2007.
Nordstrom is benefiting from spending by wealthier U.S. consumers who haven’t cut outlays even as financial markets fluctuate and economic growth slows. The retailer, which also operates private sale website HauteLook Inc. and discount Nordstrom Rack stores, reported a 10.7 percent increase in same- store sales for the five-week period ended Oct. 1 from a year ago, beating the average analyst estimate of 5.1 percent.
“They’re in the right place at the right time,” Richard Jaffe, a New York-based analyst at Stifel Nicolaus & Co., said in a telephone interview. “In this economic downturn, the rich folks haven’t been as impacted.”
Even as Europe’s debt crisis worsens and the U.S. unemployment rate holds above 9 percent, sales at retailers’ stores open at least a year may climb 3.5 percent in November and December, the International Council of Shopping Centers said in a forecast for about 30 chains it tracks. That’s faster than the 3 percent gain last year.
Luxury retailers will have the biggest increase, with a 7.5 percent gain, and wholesale clubs will improve 6 percent, the New York-based trade group said. Department stores will see sales rise 4 percent, and apparel chains and discounters 2.5 percent, the group said.
Where rivals define store space by brand, Nordstrom breaks it up into so-called lifestyle sections. The “Individualist” corner offers midpriced contemporary goods from Theory to Trina Turk, while the “Narrative” section features less costly classic styles from labels such as Lauren by Ralph Lauren and AK Anne Klein.
Nordstrom, which said in its latest quarterly filing with the U.S. Securities and Exchange Commission that it opened one full-line store and nine Nordstrom Racks in the first half of this year, has opened at least 43 department stores since 2000. The company said in its 2010 annual filing that it had 207 U.S. Stores in 28 states as of March 18.
Proceeds from the offering will be used for general corporate purposes, Nordstrom said in an Oct. 5 prospectus. On July 30, the company had $2.8 billion of long-term debt and $1.09 billion of cash and cash equivalents, according to the document.
“We’re pleased with how the offering went and continue to be encouraged by our overall results and how customers are responding to our efforts to improve the shopping experience,” said Colin Johnson, a spokesman for Nordstrom, who declined to elaborate on the bond offering.
The company, which has maintained an investment-grade credit rating since at least 1980, is ranked above rivals Neiman Marcus Group Inc., Saks Inc. and Macy’s Inc. (M), which owns Bloomingdale’s. Nordstrom, founded as a shoe store in Seattle in 1901, is rated Baa1 by Moody’s Investors Service and A- at Standard & Poor’s.
“We love our credit rating,” Chief Financial Officer Michael Koppel said last month at a Goldman Sachs Group Inc. conference. “We like to be single A. We think that’s very important for our brand.”
Investors demanded yields of 1.87 percentage points more than similar-maturity Treasuries to hold Nordstrom debt on Oct. 6, compared with the 1.62 percentage point spread on all investment-grade U.S. non-food retailers, according to Bank of America Merrill Lynch index data. Spreads on bonds from split- rated Macy’s in Cincinnati average 3.16 percentage points and those from Dallas-based Neiman Marcus, which is speculative- grade, are 9.06 percentage points.
The average A graded company has a spread of 2.56 percentage points, the index data show.
Nordstrom and Kohl’s Corp. are the highest-rated companies in S&P’s department store peer group, according to an Aug. 26 note from the ratings company. Nordstrom competes “somewhere between the focus of Bloomingdale’s and Neiman Marcus, or Saks Fifth Avenue,” S&P analysts David Kuntz and Ana Lai wrote in the note.
‘Great Market Position’
“Even though Nordstrom is a very cyclical retailer, it’s one of the healthier ones,” William Larkin, a fixed-income money manager at Cabot Money Management Inc. in Salem, Massachusetts, said in a telephone interview. “It has a great market position, and people are going to be very interested in that.”
The retailer’s ratio of debt to earnings before interest, taxes, depreciation and amortization is expected to “remain in the low-one time area,” during the next two years, S&P said in the August note. That compares with debt to Ebidta ratios of 2.8 times at Saks, 6.7 times at Neiman Marcus and 2.9 times at Macy’s, according to S&P.
The newly issued bonds rose yesterday, showing investors saw fair value for the Nordstrom bonds was higher than the level at which they were priced, said Joscelyn MacKay, a senior securities analyst with Morningstar Inc. in Chicago.
The debt gained 0.97 cents to 100 cents on the dollar with a spread of 190.7 basis points as of 11:11 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
“Nordstrom Rack stores are growing, and that’s going to be something that’s going sustain them through a slower economic recovery,” MacKay said in a telephone interview. “We’ve been happy with how Nordstrom has performed, really being able to go towards that affordable luxury.”
The retailer, which said in its most recent annual filing it has announced plans to open six full-line stores and 18 Nordstrom Rack locations, the majority by 2012, raised its earnings per diluted share estimate for fiscal 2011 to $2.95 to $3.10 in August from $2.80 to $2.95.
Nordstrom Racks serve as outlets for clearance merchandise from the namesake stores in addition to directly buying brand- name merchandise from vendors. Combined with the purchase of HauteLook and the company’s overall higher-end consumer base, Nordstrom may be largely insulated from a slowing economy. The company only has North American locations, protecting it from Europe’s worsening debt crisis.
“If you look at the retail universe, it’s broken up into super safe and super high risk,” Cabot’s Larkin said. “Nordstrom straddles those two groups.”
Spreads on Nordstrom’s bonds are within 50 basis points of discount retailers Kohl’s and Target Corp.
Nordstrom reported fiscal 2011 revenue of $9.7 billion, more than twice the sales of $4 billion reported by competitor Neiman Marcus for its latest year, Bloomberg data show. Saks posted revenue of $2.8 billion for 2011. Nordstrom also saw sales grow 12.4 percent from 2010 to 2011, while Neiman Marcus and Saks had increases of 8.4 percent and 5.9 percent.
U.S. economic growth is expected to slow this year to 1.6 percent from 3 percent in 2010, according to 66 analysts surveyed by Bloomberg.
Financial-market volatility hasn’t affected Nordstrom’s sales, Koppel said at the Goldman Sachs conference last month.
“Keep in mind the perspective of what happened in 2008 where the markets dropped like 50 percent,” he said. “It hasn’t been nearly as dramatic as what we saw last time and so, as a result, we have not seen a ratable change.”
Nordstrom has risen 14.7 percent in consolidated New York Stock Exchange trading this year to $48.62, while the S&P 500 Index has tumbled 7.4 percent and consumer discretionary stocks have declined 2.7 percent. Nordstrom fell as low as $7.81 in November 2008.
“A lot of the retailers have really improved their operating performance since the last downturn and can better manage through any possible slowdown in the economy,” said Sara Grove, an analyst at Principal Global Investors in Des Moines, Iowa. “We think most of the investment-grade retailers are well positioned.”
-- With assistance from Cotten Timberlake in Washington. Editor: Mitchell Martin
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