NEW YORK, Dec. 5, 2019 /PRNewswire/ -- Report entitled
"Kicking The Tire Down The Road" outlines how Canadian Tire
Corporation ("CTC") faces 35-50% downside risk to approximately
C$77 to C$100 per share. The full contents of the report
can be reviewed at www.sprucepointcap.com. Spruce Point believes that Canadian Tire is a
challenged brick-and-mortar retailer perceived as a dependable
mid-single-digit grower on an increasingly precarious foundation of
unsustainable debt and recent financial results dependent on
aggressive accounting practices. We also believe the market has
failed to realize multiple signals of financial stress.
- Mature Business With Growing Signs Of Strain: While Canadian
Tire appears to participate in nearly every retail category,
Canada's retail environment
continues to become increasingly competitive as U.S. retailers
expand in the market and offer lower cost, and free, shipping
options. Our research shows CTC is not price competitive and is
often located in close proximity, or sometimes in the same shopping
center as, competitors. Canadian Tire store count continues to
decline while competitors grow their footprints. The market is
blissfully ignorant to the Amazon displacement effect that our data
shows is accelerating. On CTC's most recent earnings call,
management announced a new cost reduction effort. We believe this
program is too little and too late and it cannot forestall CTC's
inevitable decline. Our analysis illustrates that, based on the
Company's current and projected financial situation, CTC may
struggle to meet its capital return promises.
- Risk Of Credit Downgrade Due To Overleveraged And Misunderstood
Balance Sheet: Multiple rating agencies have warned of a credit
downgrade if leverage is not reduced. Our analysis supports the
view it will be nearly impossible to delever while maintaining
current levels of dividends and share repurchases without selling
assets that could reduce earnings. Current leverage of ~3.5x is
significantly above rating agency guidance of 2.5x needed to
prevent a downgrade and requires debt reduction of ~C$1,600m, but CTC has no free cash flow after
promised dividends and buybacks.
- Risky Credit Card Business With Rapidly Deteriorating Credit
Card Portfolio: CTC Triangle Rewards Program has been an effort to
boost retail sales and drive store traffic at the expense of higher
risk lending practices. 68% of recent loan growth has come from
moderate and high-risk customer classifications. Net charge-offs
for "seasoned" loans, a leading indicator for an increase in future
credit losses as loans begin to mature, is at historic highs
despite the majority of high-risk growth occurring over the past 12
months. Relative to other Canadian banks, CT Bank delinquencies
have performed worse over the past 2 years.
- Aggressive Accounting Practices Are Potentially Misleading
Investors By Masking Poor Organic Earnings Growth: CEO Stephen Wetmore has commented on earnings calls
about the importance of hitting numbers. Various one-time benefits
including altered expected credit losses by modifying model
assumptions, changed estimates affecting the present value of loss
recoveries, and changes in its depreciation method, have allowed
CTC to hit its 10% EPS growth target.
Despite these clear risks, the sell-side has only one sell
recommendation on CTC and sees only 11% upside to C$167 in the next 12 months. We believe that
investors will be surprised and disappointed by the risk to capital
return plans and the poor underlying earnings growth of the
business. Spruce Point sees 35% -
50% downside risk in CTC shares when each of these factors is
considered.
Spruce Point Capital has a short position in Canadian Tire
Corporation (CTC) and stands to benefit if its share price
falls.
About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic
fundamentally-oriented investment manager that focuses on
short-selling, value and special situation investment
opportunities.
Contact
Sean
Donohue
Spruce Point Capital Management
sean.donohue@sprucepointcap.com
212-519-9813
Spruce Point Capital Management, LLC is a member of the
Financial Industry Regulatory Authority, CRD number 288248.
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SOURCE Spruce Point Capital Management, LLC
