Canadian Tire in sights of U.S. short seller
TORONTO A New York-based firm with a history of shorting Tsx-listed stocks made Canadian Tire Corp. its latest target on Thursday, outlining the challenges the company faces in its “antiquated” retail stores and in eliminating its debt.
In a report, Spruce Point Capital Management argues that Canadian Tire’s issues begin at the retail level, where it faces a threat from Amazon.com Inc. and is at a disadvantage due to its higher prices, lack of free shipping and “old-fashion promotion” strategy, which relies on fliers and Canadian Tire money.
Spruce Point believes that Canadian Tire is saving face by making its earnings appear better than they actually are with “accounting tricks.”
But that struggling retail narrative isn’t unique to Canadian Tire. What makes the situation more pressing, the report argues, is the company’s over-leveraged balance sheet.
“In the case of Canadian Tire, the debt has been rising, and in fact, there doesn’t seem to be a complete understanding of how much debt the company has,” Spruce Point founder Ben Axler said.
In an emailed statement through a spokesperson, Canadian Tire disputed the report’s findings. “We do not agree with the conclusions in this report, as it contains numerous inaccuracies, which we believe are solely intended to benefit its author,” the statement read. “It would be extremely unfortunate if investors took action based on the report.”
In September, Canadian Tire reported having $7.9 billion in debt. Axler argued that when factors such as lease liabilities, dealer loan guarantees and third-party bank guarantees are added, that number rises to above $11 billion and eclipses the retailer’s market cap.
According to the report, both Moody’s and S&P have warned Canadian Tire that it could downgrade its credit ratings should it fail to deleverage itself. Its management has a goal to reduce leverage to 2.5 times by the end of 2020, and to do so, Axler said, would require the company to pay off $1.6 billion.
Axler doesn’t believe they have enough money to deleverage themselves without selling off assets.
The business’s bank division puts Canadian Tire at an even greater threat, Axler said, because its credit card customers are higher risk lenders.