DBRS Confirms Sears Canada at BB and BBB (low)

DBRS has today confirmed Sears Canada Inc.’s (Sears Canada or the Company) Issuer and Medium-Term Notes ratings at BB and BBB (low), respectively. The trends remain Stable. The confirmation takes into account Sears Holdings Corporation’s (Sears Holdings) purchase of approximately 18.7 million shares of Sears Canada, raising its ownership to approximately 90% from 73%. While this transaction itself has no immediate credit implications, there is an increased likelihood that it may trigger related events that could in turn have credit implications. Any such events will be considered at the time at which they occur.

At this point, the largest overhang on Sears Canada’s rating is the implicit credit profile of its parent, Sears Holdings. Were it not for this, Sears Canada’s Issuer Rating would likely be investment grade. This view is supported by the Company’s seasoned retailing business, cash on hand and the fact that all outstanding debt matures this year. Sears Canada is one of the largest and longest-standing retailers in Canada, until recently generating sales of approximately $6 billion annually. It offers a number of successful private-label brand names, including Kenmore (appliances), Craftsman (tools) and DieHard (batteries). These products help provide more stability during economic downturns. Sears Canada has also launched off-mall store formats in addition to its traditional mall store format (i.e., department stores). While the recent economic downturn has pressured the Company’s profitability, Sears Canada has responded with various cost-containment programs that have helped to limit the full impact. As a result, while EBITDA fell by 4.3% in 2009, the EBITDA margin rose slightly and adjusted debt-to-EBITDAR remained little changed at 1.7 times.

DBRS expects little change in the Company’s profitability during 2010, as the economic downturn subsides. Same-store sales growth will continue to be challenged until (i) consumer confidence improves and (ii) the Company boosts investment in stores to drive more traffic and improve its competitive position. The Company is facing intense competition from big-box retailers and wholesale clubs that continue to expand into Sears Canada’s product lines, such as appliances. Finally, as noted, the Company’s rating remains below investment grade due to its parent’s credit profile and its influence on Sears Canada’s day-to-day decision-making, operations, performance, capital allocation and market position. As a result, there is the possibility that Sears Canada could decide to issue additional special dividends or take other actions that could materially reduce cash on hand or increase leverage.

Note:
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.