Capital Markets

Defying Gloom, Nordstrom to Add Debt, Buy Back Shares

The company is getting ready to put its repurchase program into the fast lane.
Stephen TaubNovember 20, 2007

Going against the grain of currently gloomy forecasts for the economy, Nordstrom said on Monday that it plans to add “a moderate amount of leverage” in advance of increasing its share-repurchase program by $1 billion.

The upscale department store chain asserted that it has a greater capacity for debt, citing its strong credit-card business and the generally under-leveraged position of its balance sheet relative to operating cash flows.

In less forboding economic times, of course, it’s widely considered a good idea for companies with little debt to take on some additional borrowing if they can handle it. But with some economists forecasting a recession in the early part of next year, this is a curious time for a cyclical company to consider adding debt.

Nordstrom, however, is planning to set up a new balance-sheet leverage target. It believes the new target will lower its weighted average cost of capital and still support its credit rating. Nordstrom’s credit currently is rated low single A by Standard & Poor’s and Baa1 by Moody’s.

The plan to repurchase more shares will bring the total authorization to $2.5 billion. Nordstrom spent about $750 million to repurchase about 16.4 million shares during the third quarter.

Nordstrom also reported that fiscal third-quarter earnings per share increased 14 percent to $0.59, excluding the gain from the sale of its Faconnable apparel-and-retail business to M1 Group.

In a note to clients Tuesday morning, Lehman Brothers noted that the results came in 6 cents above its estimate, excluding a 9-cent gain from the sale of the product line.

The news excited investors, who have been worried that well-heeled people might slow down spending ahead of the critical holiday shopping season. The company’s stock rose about 10 percent after Nordstrom’s announcements.