DBRS Morningstar Confirms Canadian Tire Corporation, Limited at BBB with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Medium-Term Notes rating of Canadian Tire Corporation, Limited (CTC or the Company) at BBB, both with Stable trends. These rating actions acknowledge the Company’s robust financial performance in 2022, underpinned by the breadth of its product offering, growing penetration of owned brands, and effective pricing and promotional management in a challenging operating environment. The Stable trends reflect DBRS Morningstar's expectation that the Company has sufficient headroom within the current rating category to continue to navigate this challenging operating environment. CTC's ratings continue to reflect its strong brands and leading market position, geographic diversification, and real estate ownership and control through CT Real Estate Investment Trust (CT REIT; rated BBB with a Stable trend by DBRS Morningstar). The ratings also reflect the intense competition, risks related to the Company's ambitions for growth, and CTC’s cyclical financial services business.

Given the negative effects of inflation and high interest rates on consumer behaviour, DBRS Morningstar forecasts negative low single-digit comparable sales in the Retail segment and consolidated revenues to decline to less than $17.7 billion in 2023 from more than $17.8 billion in 2022. DBRS Morningstar projects Retail and consolidated EBITDA margins to contract in 2023, as DBRS Morningstar believes that persistent inflationary pressure, higher operating costs associated with CTC's investment strategy, and foreign exchange headwinds could more than offset the benefits from higher owned-brands penetration, moderating freight and supply chain costs, and cost-saving and efficiency-improving initiatives. Furthermore, DBRS Morningstar expects higher credit loss allowances in the Canadian Tire Financial Services (CTFS) segment to also pressure consolidated EBITDA margins. Consequently, DBRS Morningstar forecasts consolidated EBITDA to decline to approximately $2.4 billion, of which around $2.0 billion is attributable to the Retail segment and CT REIT, from approximately $2.7 billion and $2.1 billion, respectively, in 2022. That said, DBRS Morningstar forecasts consolidated EBITDA and EBITDA attributable to the Retail segment and CT REIT to return to growth in 2024, and to grow toward $2.8 billion and $2.3 billion, respectively, over the medium term.

In 2023, DBRS Morningstar forecasts free cash flow (FCF) (after dividends and before changes in working capital and lease principal payments) to moderate below the 2022 level of $500 million as (1) operating cash flow continues to trend in line with earnings, (2) capital expenditure increases toward $1.0 billion, and (3) the Company maintains its dividend policy. DBRS Morningstar expects CTC to apply its available cash and incremental debt to further pursue its strategic growth objectives as well as for share buybacks of between $500 million and $700 million. Consequently, DBRS Morningstar forecasts debt-to-EBITDA attributable to the Retail segment and CT REIT to increase toward 2.5 times (x) in 2023 from 2.2x in 2022, but stabilize at these levels over the medium term.

Should credit metrics deteriorate for a sustained period (i.e., debt-to-EBITDA attributable to the Retail segment and CT REIT increase above 3.0x) as a result of weaker-than-expected operating performance and/or more aggressive financial management, the ratings will be pressured. Conversely, DBRS Morningstar could take a positive rating action should CTC's business risk profile meaningfully strengthen and credit metrics attributable to the Retail segment and CT REIT materially improve on a normalized and sustainable basis.

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

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/396929 (May 17, 2022).

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

DBRS Morningstar applied the following principal methodology: Global Methodology for Rating Companies in the Merchandising Industry (https://www.dbrsmorningstar.com/research/402334; September 2, 2022).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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