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

DBRS Limited (DBRS) has today confirmed the Issuer Rating as well as the Medium-Term Notes and Debentures ratings of Canadian Tire Corporation, Limited (CTC or the Company) at BBB (high) with Stable trends. DBRS has also discontinued CTC’s Commercial Paper (CP) rating at the request of the Company. DBRS notes that the discontinuation of the CP rating is unrelated to CTC’s credit risk profile. The confirmation of the ratings reflects CTC’s solid operating performance across banners despite margin pressure from a weaker Canadian dollar and a challenging consumer environment in Alberta balanced by the Company’s ambitions for growth and/or increasing shareholder returns. The ratings continue to be supported by CTC’s strong brands and market positions and reasonable stability through economic cycles within an intensely competitive environment.

Going forward, CTC’s earnings profile should remain relatively stable in the near to medium term despite continuing pressure on margins from a weaker Canadian dollar and the challenging economic environment in Alberta. Revenue (excluding fuel) should continue to increase in the low-single digits based on flat to low single-digit same-store sales growth at Canadian Tire Retail (CTR) and Mark’s and mid-single digit same-store sales growth at FGL Sports (FGL) and meaningful new square footage (FGL and 12 gross new CTR stores). Retail EBITDA margins are expected to remain pressured in the near term attributable to a weaker Canadian dollar as well as rising investments in information technology and infrastructure, which should be at least partially offset by CTC’s cost-savings initiatives. As such, DBRS expects EBITDA will continue to increase modestly over the near to medium term.

CTC’s financial profile is expected to remain stable going forward based on its cash-generating capacity and relatively stable leverage level. Cash flow from operations should continue to track operating income while capital expenditures (capex) will rise in the near term toward a peak of $800 million as the Company invests in the construction of the new distribution centre as well as expanding the store base. CTC’s dividend is expected to continue to increase steadily. As such, DBRS believes that CTC’s free cash before changes in working capital should decline notably toward break-even in the near term, but should improve toward the $300 million level as capex moderates over the medium term. DBRS believes that CTC will use any free cash flow generated, cash on hand, other sources of liquidity (ownership in CT Real Estate Investment Trust and the put option available on 29% of Canadian Tire Financial Services) and possibly incremental debt to invest in growth. Should opportunities for growth by acquisition not be present in the near to medium term, DBRS believes that the Company could further increase shareholder returns. 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.

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

The applicable methodologies are Rating Companies in the Merchandising Industry (August 2015), Global Methodology for Rating Banks and Banking Organisations (June 2015) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015), which can be found on our website under Methodologies.

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.