DBRS Confirms Canadian Tire Corporation, Limited at BBB (high) with Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating, Medium-Term Notes and Debentures ratings of Canadian Tire Corporation, Limited (CTC or the Company) at BBB (high), and its Commercial Paper rating at R-2 (high), all with Stable trends. The confirmations are based on CTC’s solid operating performance across all retail banners in the nine months ended Q3 2014, as well as continued growth in financial services, and a relatively stable financial profile.

On October 1, 2014, subsequent to the end of Q3 2014, CTC completed a strategic partnership transaction in which Bank of Nova Scotia (Scotiabank; rated AA with a Stable trend by DBRS) acquired a 20.0% interest in the Company’s financial services business for net proceeds of $479 million. DBRS previously confirmed the ratings of CTC on May 8, 2014, at the time the strategic partnership with Scotiabank was announced.

Going forward, CTC’s earnings profile should remain relatively stable based on its solid brands and diversified product offering, despite intense competition. Top-line growth is expected to be in the low-single-digit range over the medium term based primarily on low-single-digit same-store sales growth at Canadian Tire Retail, low- to mid-single-digit same-store sales growth at FGL Sports and Mark’s Work Wearhouse and a meaningful number of new FGL Sports store openings. Canadian Tire Financial Services’ operating performance should remain relatively stable but could benefit from the Company’s new strategic partnership with Scotiabank. Retail EBITDA margins could be pressured from rising costs of goods sold, at least partially attributable to a weakening Canadian dollar, as well as elevated expenses related to strengthening its digital offering. As such, DBRS expects EBITDA will continue to increase modestly over the near to medium term.

CTC’s financial profile is expected to remain relatively stable based on its free cash flow-generating capacity and acceptable financial leverage. Capital expenditures should remain elevated in the near term, while dividends are expected to continue to grow, as the Company remains focused on steadily increasing shareholder returns. As such, free cash flow before changes in working capital should be in the $500 million range in the near term. CTC is expected to use free cash flow generated to complete $400 million of share repurchases by the end of 2015. Over the longer term, DBRS believes that CTC will continue to use free cash flow generated, other sources of liquidity and possibly incremental debt to invest in growth. Should credit metrics deteriorate beyond a level considered appropriate for the current rating (i.e., lease-adjusted debt-to-EBITDAR attributable to the retail operations well above 2.50 times) for an extended period of time as a result of weaker-than-expected operating performance or more aggressive-than-expected financial management, a negative rating action could result.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Merchandising Industry (October 2014), Global Methodology for Rating Banks and Banking Organisations (June 2014) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2014), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com