DBRS Confirms Canadian Tire Corporation at BBB (high) Following Announcement to Acquire Helly Hansen

DBRS Limited (DBRS) confirmed the Issuer Rating, the Medium-Term Notes and the Debentures ratings of Canadian Tire Corporation, Limited (CTC or the Company) at BBB (high) with Stable trends. The confirmations follow CTC’s announcement that it has entered into an agreement to purchase the company, controlled by the Ontario Teachers’ Pension Plan, which owns and operates the Helly Hansen (Helly) brands and related businesses. CTC is acquiring Helly for $985 million, and is assuming approximately $50 million of operating debt, net of cash. The acquisition is expected to close in Q3 2018 and is subject to usual closing conditions. DBRS expects CTC to initially fund the acquisition with cash on hand and existing bank lines.

Founded in 1877, Helly, headquarter in Oslo, Norway, is a designer and distributor of outdoor adventure and industrial work wear apparel with wholesale and retail distribution capabilities across more than 40 countries. Helly’s core categories include sailing, skiing, mountain, urban, rainwear and workwear. Helly generated approximately $500 million of revenue and $50 million of EBITDA during the last 12 months ended March 31, 2018.

DBRS believes the acquisition is consistent with CTC’s focus on the development of private label/owned brands. This includes the well-established Mastercraft, MotoMaster and Yardworks brands in more traditional categories, and newer or less traditional category brands such as Denver Hayes at Mark’s and CANVAS, Woods, Frank, NOMA and Paderno at Canadian Tire Retail stores (CTR). CTC is one of Helly’s largest customers (currently sold at Mark’s and FGL) and has in-depth knowledge of Helly’s brand offerings and good insight into the potential for extensions and growth. The acquisition of Helly allows CTC to acquire a vendor with an emerging multi-national brand, a proven growth record and the potential for continued international growth. DBRS believes CTC will aim to leverage the Helly brand by increasing its assortment of products in existing banners as well as possibly introducing Helly products at CTR. In addition, DBRS believes that over the longer term CTC could seek to use Helly’s multi-national platform to introduce existing owned brands into other international markets. DBRS notes that CTC will keep Helly’s current management team in place to continue to build on Helly’s international growth.

DBRS recognizes the possible benefits of the acquisition, such as improved geographic diversification and future growth potential. However, such benefits are not expected to be sufficient to materially improve the Company’s business risk profile over the near term due to the relative size of Helly in comparison to CTC. That said, over the longer term, with successful investment, growth and integration, the acquisition could result in a more meaningful improvement to CTC’s business risk profile.

In terms of CTC’s financial risk assessment, DBRS expects capital expenditures (capex) to peak in 2018 before moderating in 2019, with capex focused on improving the Company’s digital technology, as well as renovating and modestly growing the store network and on CT Real Estate Investment Trust (CT REIT; rated BBB (high) with a Stable trend by DBRS). CTC’s dividend policy is expected to remain unchanged (targeting the payout of approximately 30% to 40% of prior-year net income). As such DBRS believes free cash flow after dividends but before working capital to be in the approximately $100 million to $300 million range in 2018 and 2019. DBRS expects that the Company will continue to use free cash flow, cash on hand and incremental debt to return capital to shareholders, including the existing 2018 $550 million share repurchase plan. Absent the acquisition, DBRS would have expected leverage to increase, from 2.00 times (x) times at the end of the fiscal year ended December 30, 2017, but remain acceptable for the current rating category (i.e., lease-adjusted debt-to-EBITDAR attributable to the retail operations and CT REIT below 2.50x).

At the time of the acquisition, because of the increase in debt and the relatively modest EBITDA contribution from Helly, DBRS expects pro forma credit metrics to weaken temporarily (i.e., lease-adjusted debt-to-EBITDAR attributable to the retail operations and CT REIT toward 3.0x). However, as the Company approaches peak cash periods in the year, borrowings on the facility are expected to be repaid and leverage should end 2018 at approximately 2.60x. Going forward, DBRS expects credit metrics to continue to improve in 2019 and 2020, primarily based on growth in earnings and some debt repayment (DBRS notes that Helly is not a capital intensive business and is currently free cash flow positive), returning toward a level considered appropriate for the current BBB (high) rating in 2019 and 2020 (i.e., lease-adjusted debt-to-EBITDAR attributable to retail and CT REIT toward and below 2.50x). However, if this does not occur because of weaker-than-anticipated operating performance and/or more aggressive-than-expected financial management, a negative rating action could result.

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.

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 under Related Documents 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 for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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