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. The rating confirmations acknowledge that CTC's 2021 operating performance in the second year of the Coronavirus Disease (COVID-19) pandemic exceeded DBRS Morningstar's expectations because of the Company's wide product assortment and favourable mix, growing e commerce penetration, and efficient supply-chain management in a challenging operating environment. Looking ahead to the near to medium term, DBRS Morningstar believes that rising inflation and interest rates will pressure consumer purchasing power and a reversion of consumer behaviour in a reopened economy will curb any material structural improvement in CTC's overall credit risk profile, particularly in the context of an ambitious capital investment plan and increasing returns to shareholders. That said, DBRS Morningstar believes that CTC's earnings and financial profile will remain well within the threshold considered appropriate for the current rating category and, as such, has confirmed the ratings with Stable trends. 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 its cyclical financial services business.
DBRS Morningstar forecasts consolidated revenue to grow in the low single digits in 2022 (compared with high-single-digit growth in 2021) based on low single-digit same-store sales growth in the Retail segment, which is expected to benefit from market share gains supported by a growing penetration of owned brands and the Company's ongoing investment in expanding its Triangle Rewards membership base. However, DBRS Morningstar believes that this growth will be tempered by (1) the impact of broad-based inflation and rising interest rates on consumer spending, which could moderate the performance of CTC's discretionary banners/product categories, and (2) a reversion of consumer behaviour in a reopened economy. In 2022, DBRS Morningstar anticipates that Retail EBITDA margins will be pressured by the challenging operating environment presented by rising inflation and freight costs, which could more than offset the benefits from potential pricing actions, the growing penetration of higher-margin owned brands, and cost-saving and efficiency-improving initiatives, including the Operational Efficiency Program. While Canadian Tire Financial Services' (CTFS) operating income should benefit from higher credit card charges as loans receivable rebound, DBRS Morningstar expects operating performance to be moderated by more conservative provisioning levels. Consequently, DBRS Morningstar forecasts consolidated EBITDA to be approximately $2.5 billion in 2022, of which around $2.0 billion is attributable to the Retail segment and CT REIT. (In 2021, consolidated EBITDA was approximately $2.6 billion, of which more than $2.1 billion was generated by the Retail segment and CT REIT). In the medium term, Retail and consolidated EBITDA will continue to benefit from the expansion of the Triangle Rewards membership base through the ongoing investment in the enhancement of the Triangle Rewards program, investments in CTC's omnichannel capabilities, growing penetration of owned brands, and cost-saving and efficiency-improving initiatives. While the uncertainty surrounding the macroeconomic outlook presents a significant downside risk to these forecasts, DBRS Morningstar believes that CTC will have sufficient headroom to cushion the effect thereof within the current BBB rating category.
In terms of the financial profile, DBRS Morningstar forecasts 2022 consolidated free cash flow (FCF) after changes in working capital and IFRS 16 principal lease payments to contract materially below 2021 levels, primarily attributable to capital expenditure (capex) of more than $800 million compared with the average capex of approximately $600 million per annum over the past five years. Over the next four years, CTC will invest $3.4 billion to bolster its omnichannel capabilities and drive long-term growth, comprising investments of $1.2 billion to improve the Retail store network, $1.1 billion to personalize and improve the Triangle Rewards user experience and accelerate CTC's digital transformation, $675 million to strengthen the Company's supply chain fulfillment infrastructure and automation, and $500 million to modernize the Company's IT infrastructure and drive operational efficiencies. DBRS Morningstar also expects that (1) operating cash flow will continue to trend in line with earnings, (2) the Company will maintain its dividend policy of 30% to 40% of normalized prior year income, and (3) loans receivable will trend upward as the economy reopens and customer payments on outstanding credit card loan balances subside as Canadian government pandemic support programs wind down. DBRS Morningstar expects that CTC will direct its available cash on hand and FCF toward share buy-backs and to invest in growing the Company's portfolio of owned brands. Consequently, DBRS Morningstar forecasts debt-to-EBITDA attributable to the Retail segment and CT REIT to display some reversion and increase moderately from 2021 levels of 2.04 times (x) but remain well within the threshold considered appropriate for the BBB rating category (i.e., debt-to-EBITDA attributable to the Retail segment and CT REIT below 3.0x). A protracted economic downturn may further pressure CTC's operating performance and cash flow generation, and could result in increased borrowings to finance the Company's capex initiatives and returns to shareholders. While this could moderate credit metrics below DBRS Morningstar's forecasts, DBRS Morningstar believes that the Company will have sufficient headroom within the current BBB rating category to absorb such potential downward pressure. That said, should 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. Although unlikely, 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 improve on a normalized and sustainable basis.
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.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Merchandising Industry (July 26, 2021; https://www.dbrsmorningstar.com/research/382073 ) and Global Methodology for Rating Banks and Banking Organizations (July 19, 2021; https://www.dbrsmorningstar.com/research/381742) 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 03, 2021; https://www.dbrsmorningstar.com/research/373262 )
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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.
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