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

DBRS Limited (DBRS) confirmed the Issuer Rating and the Medium-Term Notes of Canadian Tire Corporation, Limited (CTC or the Company) at BBB (high) with Stable trends. DBRS also discontinued the Debentures rating as all Debentures have been repaid. The confirmation of the ratings is based on the Company’s stable operating performance in 2018 and the anticipation of deleveraging following the partially debt-financed acquisition of Helly Hansen. The ratings continue to be supported by CTC’s strong brands and market positions, geographic diversification, and real estate ownership and control through CT Real Estate Investment Trust (CT REIT; rated BBB (high) with a Stable trend by DBRS). The ratings also reflect intense competition and risks related to CTC’s ambitions for growth and increasing shareholder returns, as well as its more cyclical financial services business.

CTC’s earnings profile should remain relatively stable in the near to medium term, benefiting from the Company’s diverse banners/products, continued development of the Company’s private brands and investments in e-commerce and analytics. Revenue should grow in the low- to mid-single digits, primarily based on low-single-digit same-store sales growth at Canadian Tire Retail (CTR) and low- to mid-single-digit same-store sales growth at Mark’s and Sport Chek. Canadian Tire Financial Services’ operating performance should continue to benefit from the new Triangle Rewards program and associated credit cards. Retail EBITDA margins should improve modestly, benefiting from efficiency improvements and CTC’s continued development of private brands, partially offset by investments related to the e-commerce business. As such, DBRS expects consolidated EBITDA will increase to approximately $1.8 billion in 2019.

DBRS expects CTC’s credit metrics to return to a level considered acceptable for the current ratings based on the growth in operating income and stable debt levels. DBRS also expects CTC to continue to generate strong free cash flow and to apply it toward shareholder returns. Operating cash flow should continue to track operating income, and consolidated capital expenditures (capex) are anticipated to be in the $475 million to $550 million range. Capex will likely focus on refreshing the store network, specifically at CTR, and IT investments in data, loyalty and digital capabilities. CTC’s dividend policy is expected to remain stable, and as such, free cash flow after dividends but before changes in working capital should be in the $700 million range in 2019. DBRS expects CTC to apply its free cash flow toward $300 million to $400 million of share repurchases and to invest in growth. DBRS believes that any acquisitions would be aimed at growing the Company’s portfolio of private brands. As a result of the increasing operating income and stable debt levels, credit metrics should improve to a level considered more appropriate for the BBB (high) rating in 2019 and 2020 (i.e., lease-adjusted debt-to-EBITDAR attributable to retail and CT REIT toward and below 2.50 times). However, if this does not occur because of weaker-than-anticipated operating performance and/or more aggressive financial management, a negative rating action could result.

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

The principal methodologies are Rating Companies in the Merchandising Industry and Global Methodology for Rating Non-Bank Financial Institutions, which can be found on dbrs.com under Methodologies & Criteria.

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 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.

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada