Dive Brief:

• S&P Global this week lowered its outlook for Nordstrom to negative as analysts with the ratings agency expect continued pressure on the department store chain's operating results.
• S&P maintained Nordstrom's BBB+ credit rating, but analysts said in an emailed press release the change in outlook "reflects the risk that profitability may not rebound sufficiently to maintain the rating given recent execution issues, heavy investments, and intense competition at both its full-price and off-price businesses."
• The change in S&P's outlook follows a weak quarter for the department store retailer, with sales falling at its mainline and off-price stores.

Dive Insight:

S&P's revision signals a possible downgrade if Nordstrom comes up short of expectations again this year, or if it fails to improve in fiscal 2020. And this from a retail player that, amid the intense consolidation of 2017 and 2016, was a stand-out success story among department stores.

Analysts with the ratings firm currently expect the department store's investments in its omnichannel capabilities and operations to push up its top-line sales and expand margins by about 0.3%. Risks come from fierce competition across retail and lingering effects of execution missteps in prior periods.

Nordstrom Co-President Erik Nordstrom acknowledged the flubs during the first quarter in a call with analysts. He said that its transition to a digital-first marketing strategy for its new "Nordy Club" loyalty program led the retailer to cut paper mailings, thereby hurting traffic. Digital marketing also lagged, and has since been ramped up. The marketing issues came on top of style misses in women's apparel and out-of-stock and other merchandising problems in beauty. Cowen & Co. analyst Oliver Chen noted that Nordstrom's Q1 sales were "well below already low expectations."

"[W]e believe it may take [Nordstrom] longer to solve issues at Full-Price, while surprisingly Off-Price significantly decelerated and may take several quarters to improve performance," Chen wrote in a May client note.

Neil Saunders, managing director of GlobalData Retail, called Q1 a "gloomy" quarter, noting the sales slowdown in Nordstrom's off-price business (with a 0.6% decline for the Rack unit) was "more troubling" than the more than 5% sales decline in the full-line business. "In our view, a lot of the issues come down to product mix, which has been more fragmented and less compelling over the past half year," Saunders said at the time.

The company carries total long-term debt of about $2.2 billion, and S&P analysts now expect the retailer's leverage ratio to increase slightly with a weaker operational outlook, and as competition and long-term investments eat into Nordstrom's cash flow. A downgrade could come if "management's action plan fails to correct recent operational missteps or broader industry challenges intensify, which could erode our view of the company's competitive position relative to peers," the analysts wrote.

For its part, Nordstrom is betting that the future lies largely in its merchandise-free Local stores, which re-orient its physical spaces as a place to try on merchandise and hang out rather than storehouses for inventory customers can take home with them. Nordstrom has expanded Local in Los Angeles and recently announced two more stores in New York.