S&P Global Ratings affirmed the ratings of Canadian Tire Corp. Ltd. at ‘BBB+’ due to expectations management will focus on improving debt leverage. The rating outlook is stable.
S&P said in a statement, “The stable outlook reflects our expectation that CTC’s financial policy will focus on lowering leverage below 2.75x by year-end 2020. CTC’s debt-to-EBITDA (on an S&P Global Ratings’ adjusted basis) has been above our downside threshold since the Helly Hansen acquisition in third-quarter 2018. The combination of the C$1 billion acquisition, two-quarters of unseasonable weather and a focus on CTC’s omnichannel growth strategy, including the company’s loyalty program, has kept CTC’s leverage elevated. However, in light of the company’s recent focus on operating efficiency, we now expect CTC’s management to focus on reducing leverage. We expect credit metrics to improve compared with last year; we now forecast around 0.25x improvement in the first quarter compared with 2019 levels, with incremental improvement in consecutive quarters compared to the previous year. By year-end 2020, we expect a sharp decline in leverage not only due to gross margin improvements but also due to significant improvements in working-capital savings in the fourth quarter, and we expect the company to continue to exhibit an improving trend through 2021. Should CTC pursue any acquisitions during the next 12 months, we would still expect management to focus on improving leverage to below 2.75x by 2020.
“The stable outlook on CTC reflects S&P Global Ratings’ expectation that the company’s leverage will improve to below 2.75x by the end of 2020, reflecting the growth of private-label brands with differentiated offerings as well as a simultaneous focus on operating efficiency. We also expect leverage trends to continue to exhibit an improving trend through 2021 and funds from operations (FFO)-to-debt will be about 25 percent to 30 percent over the next couple of years. The outlook also incorporates our expectation that the company would continue to generate positive same-store sales (SSS) growth and stable adjusted EBITDA margins.
“We could lower our ratings within the next 12 months if we forecast CTC to sustain adjusted debt-to-EBITDA above 2.75x, absent any improving trend through 2020, or if the company’s business prospects deteriorate in our view. This could occur if SSS declines due to underperformance, disruption from online retailers, or a confluence of weak macroeconomic indicators that might suggest lower discretionary spending within CTC’s key markets. Alternatively, we could lower our ratings on the company if CTC pursues shareholder returns or acquisitions with poor prospects of subsequent deleveraging, such that adjusted debt-to-EBITDA remains above 2.75x by year-end 2020, or we do not expect an improving trend through 2021.
“Consideration for an upgrade will reflect a sustainably improved market position against emerging conventional and online competitors, combined with a financial policy that we view as commensurate with a higher rating. In this case, we would expect CTC to keep its adjusted debt-to-EBITDA ratio below 2.25x and FFO-to-debt above 45 percent on a sustained basis for a few years.”
Canadian Tire’s businesses include Canadian Tire, Mark’s, Pro Hockey Life, Sport Chek, Hockey Experts, Sports Experts, National Sports, Intersport, Atmosphere, and Party City Canada. The company has more than 1,700 retail and gasoline outlets. In addition, CTC owns and operates Helly Hansen, the maker of sportswear and workwear based in Oslo, Norway.
Photo courtesy Canadian Tire
