Spruce Point Capital Management Releases A Strong Sell Research Opinion On Canadian Tire Corporation (TSE: CTC.A)

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.

Sean Donohue
Spruce Point Capital Management

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