Ratings agency Moody's lowers Nordstrom's credit rating.

Nordstrom Faces Challenges as Moody's and UBS Downgrade Ratings

In a series of recent assessments, Moody's Investors Service and UBS have downgraded Nordstrom's financial outlook, citing a variety of factors affecting the department store giant.

Moody's Investors Service downgraded Nordstrom's senior unsecured rating and issuer rating to Baa2. The rating agency noted the company's concentration in California and its focus on fashion apparel, which faces secular change challenges in the department store industry. However, Moody's moved its outlook on Nordstrom from negative to stable, citing significant investments in technology and accelerated capital projects.

UBS downgraded its rating for Nordstrom's stock to "sell" from "neutral". UBS analyst Jay Sole anticipates a rough holiday season for Nordstrom, further disrupted by tariffs, e-commerce, and a consumer not particularly drawn to Nordstrom's high-touch service strategy. UBS analysts also contend that for Nordstrom, declining margins are an "especially acute problem".

UBS analysts warn that labor costs could rise at Nordstrom, citing evidence that employee satisfaction with their compensation has dropped, implying the company may need to raise wages to avoid big turnover. UBS set a target price of $30 for the retailer's stock; shares currently trade at more than $35.

One factor mitigating Nordstrom's business risk is its off-price segment, which accounts for approximately one-third of its sales. Retail analysts expect this segment to relatively outperform as it continues to grow. Nordstrom leads the off-price channel in e-commerce penetration with sales of approximately $1 billion.

In a positive development, Nordstrom's board and co-Presidents Erik and Pete Nordstrom are no longer pursuing a bid for a controlling stake in the company. The company is accelerating its merchandise-free Local strategy with new stores in its top 10 markets next year, starting with Chicago, San Francisco, and Dallas ahead of the holidays this year.

Moody's Vice President Christina Boni stated that excess cash has been allocated to share repurchases. UBS analysts suggest that Nordstrom's prices are too high and its effort to differentiate on service may fall flat since the consumer is very focused on value.

Wednesday's UBS note wasn't the first gloomy assessment of Nordstrom from those analysts. In July, Sole's team deemed Nordstrom a "no-growth retailer" in light of drastically changing consumer spending on apparel. UBS analysts also criticised Nordstrom's prices, suggesting they may need to be adjusted to remain competitive.

Despite the challenges, Nordstrom remains a significant player in the retail industry, and its strategic decisions will be closely watched by investors and analysts in the coming months.