DBRS Morningstar Confirms Canadian Tire Corporation at BBB with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Canadian Tire Corporation, Limited's (CTC or the Company) Issuer Rating and Medium-Term Notes rating at BBB with Stable trends. While CTC's operating performance was materially stronger than expected in 2020, DBRS Morningstar forecasts that operating results and credit metrics will moderate as the distribution of Coronavirus Disease (COVID-19) vaccines gains momentum, pandemic-related containment measures are lifted, and the economy reopens. That said, DBRS Morningstar believes that the Company's credit metrics will remain well placed for the current rating category, and, as such, has confirmed the ratings with Stable trends.

In 2021, DBRS Morningstar forecasts consolidated EBITDA to be less than $2.1 billion, of which more than $1.75 billion should be generated by the Retail segment and CT Real Estate Investment Trust (CT REIT; rated BBB with a Stable trend by DBRS Morningstar). (In 2020, EBITDA generated by the Retail segment and CT REIT was approximately $1.8 billion.) DBRS Morningstar's modestly softer EBITDA forecast is based on the expectation that margins will be constrained by the Company's ongoing investments relating to its e-commerce channels and digital strategy, coupled with increasing costs, which could more than offset the benefits from cost-saving and efficiency-improving initiatives, and CTC's continued development of private brands. Furthermore, DBRS Morningstar anticipates that Canadian Tire Financial Services (CTFS) provisioning will remain conservative in 2021. In the medium term, CTC's consolidated operating income growth may be more muted as it faces tough year-over-year growth comparables. As the impact of the coronavirus pandemic on consumer mobility normalizes and the economy reopens, DBRS Morningstar anticipates that sales volume and mix across the Company's retail banners should revert to prepandemic trends and that petroleum volumes should improve. Furthermore, the CTFS segment should benefit from higher credit card sales and more favourable provisioning. Consequently, DBRS Morningstar forecasts consolidated EBITDA to be higher than $2.05 billion in the medium term, of which approximately $1.67 billion should be generated by the Retail segment and CT REIT.

The anticipated reversion in operating income and corresponding cash flows will moderate CTC's medium-term financial profile. That said, DBRS Morningstar believes that the Company's financial profile will remain well placed within the BBB rating category. DBRS Morningstar forecasts that consolidated free cash flow (FCF) after changes in working capital will be minimal in 2021. This view is based on the expectation that operating cash flow, which will continue to trend in line with earnings, will be fully absorbed by (1) increased capital expenditure (capex) as the Company resumes capex that was temporarily deferred in 2020 and also invests in IT enhancements and real estate and supply chain expansion; (2) a higher cash dividend outlay; and (3) an uptick in credit card loan receivables as Canadian government support programs aimed at partially mitigating the economic turmoil caused by the coronavirus pandemic come to a close, resulting in subdued customer payments. As consolidated FCF after changes in working capital will be minimal, DBRS Morningstar anticipates that the Company will finance share buybacks (for anti-dilutive purposes) and IFRS 16 principal lease payments with available liquidity. As such, DBRS Morningstar forecasts leverage attributable to the Retail segment and CT REIT to be 2.46 times (x) in 2021. In the medium term, DBRS Morningstar forecasts leverage attributable to the Retail segment and CT REIT to heighten to 2.60x because of the anticipated reversion in operating income. That said, leverage will remain well placed within the 3.0x threshold considered appropriate for the current rating category. Should leverage increase above 3.0x as a result of weaker-than-expected operating performance and/or more aggressive financial management, the ratings will be pressured. Although unlikely, a positive rating action could be influenced by a sustainable improvement in operating performance over an extended period, combined with a reduction in leverage below 2.50x on a normalized and sustainable basis.

CTC’s ratings continue to reflect its strong brands and leading market position, geographic diversification, and real estate ownership and control through CT REIT. The ratings also reflect the intense competition, risks related to the Company's ambitions for growth, and CTC’s cyclical financial services business.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Merchandising Industry (July 30, 2020; https://www.dbrsmorningstar.com/research/364692) and Global Methodology for Rating Banks and Banking Organisations (June 8, 2020; https://www.dbrsmorningstar.com/research/362170), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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