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

DBRS Limited (DBRS) has today confirmed the Issuer Rating, and the Medium-Term Notes and Debentures ratings of Canadian Tire Corporation, Limited (CTC or the Company) at BBB (high) with Stable trends. The confirmation of the ratings is based on the Company’s solid operating performance in 2015 and H1 2016 in the face of continuing foreign exchange headwinds and a challenging economic environment in Alberta. The ratings continue to be supported by CTC’s strong brands and market positions, geographic diversification, real estate ownership and control (through CT REIT) and reasonable stability through economic cycles. The ratings also reflect intense competition and risks related to CTC’s ambitions for growth and/or increasing shareholder returns as well as the Company’s more cyclical financial services business.

Going forward, CTC’s earnings profile should remain relatively stable in the near to medium term, benefitting from the Company’s strong private brands and diverse product offering. Revenue (excluding fuel) should continue to increase in the low-single digits through the end of 2016 and 2017 based on continuing same-store sales trends and modest growth in selling square footage. Canadian Tire Financial Services’ operating performance should improve as it begins to benefit from recent investments aimed at growing the credit card portfolio. Retail EBITDA margins should continue to be pressured by foreign exchange headwinds and continuing investments in the Company’s IT infrastructure and digital offering, partially offset by cost reduction initiatives. As such, DBRS expects that EBITDA will continue to increase modestly, rising above the $1.5 billion level in 2016 and toward the $1.6 billion level in 2017.

CTC’s financial profile is expected to remain acceptable for the current rating based on its cash-generating capacity and acceptable credit metrics. Cash flow from operations should continue to track operating income, while capex remains elevated through the end of 2016 and 2017 at approximately $800 million and $850 million, respectively, with a focus on the Bolton distribution centre, its digital platform and store network. CTC’s dividend policy is expected to remain stable, targeting a payout of 25% to 30% of prior-year net income. As such, DBRS believes that free cash flow after dividends, but before changes in working capital, will remain low relative to historical levels near the $100 million level in 2016 and 2017 before increasing as capex normalizes in 2018. DBRS believes that CTC will use any free cash flow as well as cash-on-hand and possibly incremental debt to invest in growth and/or complete share repurchases. Should credit metrics deteriorate beyond a level considered appropriate for the current rating (i.e., lease-adjusted debt-to-EBITDAR attributable to retail and CT REIT 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.

For analytical purposes, DBRS makes adjustments to reflect the Company’s separate business units in order to better assess the Company’s credit quality.

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 and the Global Methodology for Rating Banks and Banking Organisations, which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

DBRS will publish a full report shortly that will provide additional analytical detail. If you are interested in receiving this report, contact us at info@dbrs.com.