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

DBRS Limited (DBRS) 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 and acceptable credit metrics in the face of intense competition. The ratings continue to be supported by CTC’s strong brands and market positions, geographic diversification, real estate ownership and control (through CT Real Estate Investment Trust (CT REIT; rated BBB (high) with a Stable trend by DBRS) 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.

CTC’s earnings profile should remain relatively stable in the near to medium term, benefiting from the Company’s continued focus on improving efficiency and developing private brands. Revenue (excluding fuel) should grow in the low- to mid-single digits over the near to medium term, based primarily on low-single-digit same-store sales growth at Canadian Tire Retail and low- to mid-single-digit same-store sales growth at Mark’s and FGL Sports. Canadian Tire Financial Services’ operating performance should continue to benefit from ongoing investments aimed at growing the credit card portfolio. Retail EBITDA margins should improve moderately over the medium term, as the Company seeks to continue to improve efficiencies and develop private brands, which should more than offset increasing costs. As such, DBRS expects consolidated EBITDA will increase to over $1.7 billion and toward $1.9 billion over the near to medium term.

CTC’s financial profile is expected to remain acceptable for the current ratings based on its cash-generating capacity and acceptable leverage level despite a continued focus on increasing shareholder returns. Cash flow from operations should continue to track operating income, and consolidated (incl. CT REIT) capital expenditures (capex) are expected to end 2017 in the $700 million range, well below DBRS’s previous expectation of approximately $850 million. As a result of changes in timing and opportunity, DBRS expects capex to now peak in 2018, before moderating in 2019. Capex is expected to focus on improving the Company’s digital technology, as well as renovating and modestly growing the store network. CTC’s dividend policy is expected to remain stable; as such, free cash flow after dividends but before changes in working capital should be in the $350 million range in 2017. DBRS believes that CTC will use free cash flow, cash on hand and possibly incremental debt to complete share repurchases and/or to invest in growth. Should credit metrics deteriorate beyond a level considered appropriate for the current ratings (i.e., lease-adjusted debt-to-EBITDAR attributable to the retail operations and CT REIT above 2.50 times) for an extended period 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 principal methodologies are Rating Companies in the Merchandising Industry and Global Methodology for Rating Finance Companies, which can be found on dbrs.com 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.

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