DBRS Comments on Canadian Tire 2009 Results

DBRS last commented on the performance of Canadian Tire Corporation, Limited (CTC or the Company) on August 13, 2009, following the release of Q2 2009 results. At that time, DBRS stated that it remained satisfied with the ratings and trends currently assigned to CTC. The opinion was based on our view that CTC management would continue to take appropriate measures to protect the credit risk profile of the Company within the context of a difficult operating environment (i.e., we felt that CTC would remain focused on preserving capital and use its increasing free cash flow to strengthen the balance sheet). DBRS also reiterated its view that the economic environment in Canada would continue to deteriorate and remain difficult through 2009.

Specifically, DBRS had forecast full-year 2009 EBITDA of approximately $875 million (based on our estimate of negative same-store sales in the low single-digit range) and free cash flow before any benefit from changes in working capital of approximately $200 million. Yesterday, CTC announced full-year 2009 results that included EBITDA of $874 million (same-store sales were down 1.1% on calendar-comparable basis) and free cash flow before changes in working capital of approximately $400 million ($124 million after working capital requirements). These results enabled CTC to moderately lower the level of net debt and keep key credit metrics fairly level on a full-year basis (adjusted for financing associated with loans receivables and cash associated with deposits). As at January 2, 2010, CTC had a cash, equivalents and short-term investments balance of $850 million, loans receivables balance of $2,275 million, $2,060 million in deposits and $1,411 million in debt.

That said, DBRS notes Q4 2009 performance specifically (after considering calendar differences and some other one-time items) was weaker than our expectations because of abnormal weather conditions; however, the weak economy may also have had a more negative effect on Retail and Financial Services than we had anticipated. This quarter has raised DBRS’s concern that operating performance may remain sluggish for a larger part of 2010 than originally thought. DBRS continues to believe CTC’s good brand name, market position and prudent management should keep it well positioned to grow earnings as employment and consumer spending improve. Although we continue to believe that 2009 was the bottom of the cycle and the economy should grow in 2010, we are tempering our expectations in terms of the degree and pace of recovery in CTC’s performance for 2010.

Although DBRS expects 2010 retail sales to grow from weak 2009 comparables, we are now preparing for less-robust growth than previously anticipated. With charge-off rates in Financial Services likely remaining elevated for most of 2010, DBRS believes EBITDA growth may be modest in 2010. As far as DBRS is concerned, the lack of meaningful rebound in operating income would have to be met with continued prudent financial management on CTC’s part. DBRS would look for continued focus on preserving capital and using free cash flow to strengthen the balance sheet. As for its outlook for 2010, DBRS will provide more specifics following meetings with management and/or the April 7, 2010, Investor Conference.

If CTC performs according to these expectations, the trend should remain Stable. Should credit metrics deteriorate as a result of weaker-than-expected operating performance through 2010, inadequate leverage management and/or a deeper- or longer-than-expected economic downturn (which 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 $1.17 billion until the end of 2010 and beyond, its commercial paper program of $800 million (none outstanding at the end of 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) and notes that the tenuous securitization market is showing signs of improving.

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 (Consumers) rating.