Morningstar DBRS Comments on the Completion of Canadian Tire Corporation, Limited's Strategic Review of Canadian Tire Financial Services

DBRS Limited (Morningstar DBRS) notes Canadian Tire Corporation, Limited's (CTC or the Company; rated BBB with a Stable trend) announcement that it will retain its 100% stake in CTFS Holdings Limited (CTFS) following the completion of a strategic review. This comes after CTC reacquired The Bank of Nova Scotia's (rated AA with a Stable trend) 20% stake in CTFS on October 31, 2023 (the Reacquisition), for $895 million. The Reacquisition, which restored CTC's full ownership of CTFS, was funded by the Company's existing short-term credit facilities, supplemented by a $400 million 18-month term loan. At that time, Morningstar DBRS confirmed CTC's Issuer Rating and the credit rating on the Company's Medium-Term Notes at BBB, both with Stable trends.

Morningstar DBRS subsequently confirmed CTC's credit ratings at BBB with Stable trends again on June 3, 2024. At that time, Morningstar DBRS commented that it expected the Company to take a balanced approach to its financial management practices, such that debt-to-EBITDA attributable to the Retail segment and CT Real Estate Investment Trust (CT REIT, rated BBB with a Stable trend) improved toward the 3.0 times (x) threshold considered appropriate for the current credit rating category in 2024, compared with 3.6x at the end of 2023. Combined with at least some recovery in EBITDA in 2025, Morningstar DBRS projected the Company would return debt-to-EBITDA attributable to the Retail segment and CT REIT to below 3.0x in that year.

Since then, CTC reported its financial results for the nine months ended September 28, 2024 (Q3 2024). In the last 12 months (LTM) ended Q3 2024, EBITDA attributable to the Retail segment and CT REIT remained relatively flat on the 2023 level of approximately $1.6 billion, as persistent weakness in demand for CTC's discretionary product offering, combined with the effect of unseasonable weather, was offset by moderating supply chain costs and cost-savings initiatives. Combined with stable debt levels, debt-to-EBITDA attributable to the Retail segment and CT REIT in the LTM ended Q3 2024 was relatively stable at the 2023 level of 3.5x, persisting materially outside the threshold considered supportive of the current BBB credit rating category. That said, Morningstar DBRS acknowledges that debt levels attributable to the Retail segment and CT REIT are typically the highest in Q3 as CTC begins to build up its inventory in preparation for Q4, which is the Company's seasonally most important quarter.

As the strategic review of CTFS did not result in a partial or full monetization thereof to facilitate deleveraging, Morningstar DBRS expects CTC to undertake other capital conserving measures to improve credit metrics through debt repayment. In this regard, Morningstar DBRS acknowledges the Company's announcement of its intention to substantially reduce the borrowings associated with the Reacquisition through the allocation of internally generated cash flows, which should benefit from cost-saving initiatives and efficient working capital management, combined with the $258 million proceeds from the November 2024 sale of CTC's Brampton industrial property. Furthermore, as CTC has not repurchased shares in 2024, Morningstar DBRS expects that the resulting available cash flows could also be directed toward debt repayment. That said, if Morningstar DBRS becomes increasingly concerned that debt-to-EBITDA attributable to the Retail segment and CT REIT were to remain above 3.0x in 2025 because of weaker-than-expected operating performance and/or more aggressive financial management, a negative credit rating action will result. Furthermore, weaker-than-expected operating performance for a sustained period, resulting in a more permanent shift of the Company's business risk profile, could also result in the requirement to maintain stronger credit metrics to support the same credit rating. Morningstar DBRS believes that CTC's 100% ownership of CTFS, in and of itself, should have a neutral effect on the Company's credit risk profile. That said, Morningstar DBRS acknowledges that CTC's ownership and control of the Triangle rewards loyalty program remains strategic to the Company's core retail business and should catalyze further earnings growth over the medium term.

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

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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

For more information on this credit, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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