DBRS Morningstar Places Canadian Tire Corporation Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) placed the Issuer Rating and Medium-Term Notes rating of Canadian Tire Corporation, Limited (CTC or the Company) Under Review with Negative Implications. The rating action reflects DBRS Morningstar’s view that the Coronavirus Disease (COVID-19) outbreak will have a negative impact on CTC’s earnings profile, although the duration and extent thereof remains uncertain.

CTC's near-term earnings will be negatively affected by the coronavirus outbreak, as DBRS Morningstar anticipates that the reduction in in-store foot traffic due to temporary store closures could more than offset earnings generated by curbside and/or e-commerce home delivery. In the medium term, DBRS Morningstar believes that the Company could be challenged to maintain earnings at 2019 levels, as it will likely face heightened pressure due to a weaker macroeconomic environment. This would have a particularly negative effect on CTC's discretionary banners/product categories and Canadian Tire Financial Services (CTFS). Both Retail and consolidated EBITDA margins are expected to contract materially as a result of CTC's high operating leverage, which could more than offset benefits from cost savings initiatives. Additionally, a significant increase in net write-offs in the CTFS segment would put further pressure on consolidated operating income.

These pressures would in turn weaken CTC's financial profile based on the decline in operating income and corresponding contraction in free cash flow (FCF) generation, and cause key credit metrics to further deteriorate beyond what is considered appropriate for the current rating category. DBRS Morningstar notes that the Company has taken steps to conserve capital through the deferral of discretionary capital expenditure and by pausing share buybacks. While the Company may use capital conserving measures in an attempt to defend credit metrics through debt reduction, DBRS Morningstar notes that any future rating action will be more influenced by the degree of impact on operating income.

In its review, DBRS Morningstar will assess the duration, magnitude, and extent of the impact of the coronavirus outbreak on CTC’s earnings profile and aims to resolve the under review status as soon as possible.

The adoption of IFRS 16 and the impact thereof on the credit metrics did not materially change DBRS Morningstar’s view of CTC’s overall credit risk profile.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Merchandising Industry, Global Methodology for Rating Non-Bank Financial Institutions, and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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 info@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

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