OREANDA-NEWS. S&P Global Ratings today said it affirmed its ratings on Canadian Tire Corp. Ltd., including its 'BBB+' long-term corporate credit rating and senior unsecured debt rating on the company. The outlook is stable.

At the same time, S&P Global Ratings revised its financial risk profile on the company to intermediate from modest to incorporate its base-case expectation that adjusted debt-to-EBITDA will be in the low-2x area and funds from operations (FFO)-to-debt will be about 35% through 2018.

In addition, we revised our financial policy and comparable rating analysis modifiers on Canadian Tire to neutral from negative.

"The affirmation reflects our view of Canadian Tire's strong operating performance, with positive same-store sales growth and improving EBITDA margins in the first half of 2016 despite challenging market conditions in Alberta and currency headwinds from the strong U. S. dollar," said S&P Global Ratings credit analyst Alessio Di Francesco.

We believe that Canadian Tire's multiple platforms--including Mark's, SportChek, and Canadian Tire Bank (CT Bank)--augment the strong market position of the company's core Canadian Tire Retail business by adding some earnings diversity to a customer base that ranks among the broadest in Canadian retail. The company's financial services segment has a portfolio of about C$4.8 billion of credit card receivables that is funded in part with more than C$2.2 billion of bank deposits. We believe this segment provides the company with strategic consumer data and an important relationship with cardholders, in addition to a source of earnings diversity. The creation of CT REIT in 2013 preserves the company's ownership and control of the high-quality assets that we view as core to the retailer, while improving the company's unusually strong financial flexibility. Although Canadian Tire's ownership percentage could decline over time, we expect that the company would retain effective control over the REIT and the real estate that we view as integral to its retail operations.

Our intermediate financial risk profile on the company is supported by our base-case expectation that adjusted debt-to-EBITDA will be in the low-2x area and FFO-to-debt about 35% through 2018.

The stable outlook on Canadian Tire reflects S&P Global Ratings' expectation that adjusted debt-to-EBITDA will be in the low 2x area and FFO-to-debt about 35% over the next couple of years. The outlook also incorporates our expectation that the company should generate positive same-store sales growth and a modest improvement in adjusted EBITDA margins.

We could lower our ratings over the next couple of years if we expect the company to sustain adjusted debt-to-EBITDA approaching 3x or if its business risk profile deteriorates. This could occur if we expect negative same-store sales growth due to a confluence of weak macro-economic indicators and competitive pressure that might suggest a decline in discretionary spending within Canadian Tire's key markets. This could also occur if the company announces an acquisition with poor prospects of returning leverage below 3x, or it deploys significantly more capital for share repurchases than our base-case assumption.

We are unlikely to raise the ratings over the next couple of years. However, we could raise the ratings if the company demonstrates a financial policy consistent with a sustained adjusted debt-to-EBITDA ratio below 2x and FFO-to-debt above 45%.