DBRS Comments on Canadian Tire Performance

DBRS last confirmed the Debentures, Medium-Term Notes and Commercial Paper ratings of Canadian Tire Corporation, Limited (CTC or the Company) at A (low) and R-1 (low), respectively – all with Stable trends – on December 15, 2008. As of the mid-point of 2009, DBRS remains satisfied with the ratings and trends currently assigned to CTC. Our view is based on the following rationale:

DBRS’s December 2008 confirmation reflected our opinion that CTC management would take appropriate measures to protect the credit risk profile of the Company within the context of a difficult operating environment. At that time, DBRS said that it believed the economic environment in Canada would continue to deteriorate and remain difficult for most of 2009. In terms of financial management, we thought that CTC would focus on preserving capital and utilize increasing free cash flow to strengthen the balance sheet.

As of the mid-way mark of 2009, CTC’s overall performance is in line with our overall expectations, despite a very difficult Q1 2009 for the Financial Services segment. H1 2009 Retail sales increased +0.8% year-over-year (yoy), while same-store-sales declined by –0.8% yoy. Retail EBITDA increased in the first 26 weeks of 2009 ($260 million vs. $245 million yoy), and consolidated EBITDA increased slightly, to $419 million from $405 million yoy, as corporate-wide gains more than offset the cyclical weakness in Financial Services. In terms of financial profile, cash flow from operations before changes in working capital of $314 million is well on track with our forecast, while capital expenditures of $119 million is lower than DBRS’s expectations for H1 2009. This has led to moderately lower net debt (adjusted for financing associated with loans receivables and cash associated with deposits) and credit metrics that remain fair for the current rating category. As at July 4, 2009, CTC had a cash, equivalents, and short-term investments balance of $1,518 million; loans receivable of $1,688 million; deposits of $2,165 million; and debt of $1,582 million.

After disappointing results in the Financial Services division at the end of Q1 2009, DBRS became increasingly concerned about CTC’s ability to maintain its overall credit risk profile through the year. DBRS began to intensify its focus on the Company’s Financial Services division beginning in Q2 2009. With that, Financial Services displayed some resilience in Q2 2009, with earnings before income taxes increasing to $42.3 million versus $32.5 million on a quarter-over-quarter basis. Higher revenues, improved expense management, and above-industry-average performance (in terms of write-offs and provisions) have alleviated some of DBRS’s concerns for now. That said, DBRS recognizes that the second half of the year will remain difficult for both the Retail and Financial Services segments.

DBRS believes that 2009 should represent the bottom of the economic cycle – as we expect the economy to begin to show signs of recovery toward the end of the year – and CTC’s good brand name, market position, and prudent management should keep it well positioned to grow earnings when employment and consumer spending begin to improve next year. DBRS still expects that CTC will come close to our original 2009 estimate for operating income (EBITDA of approximately $875 million), based on our estimate for negative same-store sales in the low single-digit range. We also still expect that the Company will generate free cash flow before any benefit from changes in working capital of approximately $200 million, which should enable it to maintain key credit metrics in a difficult 2009.

If CTC continues to perform according to the expectations that we set at the end of 2008, the trend should remain Stable. Should credit metrics deteriorate as a result of weaker-than-expected operating performance in the second half of 2009, inadequate debt reduction and/or a deeper- or longer-than-expected economic downturn (that would erode the Company’s capacity to manage its credit metrics), the ratings and/or trends would be pressured.

In terms of liquidity, CTC benefits from its positive free cash flow position, committed bank lines totalling approximately $1.22 billion until close to the end of 2009, its commercial paper program of $800 million (none outstanding at the end of Q2 2009), and its manageable corporate debt maturity schedule. DBRS has also become more comfortable with how CTC has been funding its operations (the Financial Services segment in particular), despite the fact that the state of the securitization market remains somewhat tenuous.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Merchandisers, which can be found on the DBRS website under Methodologies.

This is a Corporate Rating.