DBRS Confirms Sears Canada Inc. at BB with Stable Trends

DBRS has today confirmed the ratings of Sears Canada Inc. (Sears Canada or the Company) at BB with Stable trends.

Vigorous cost-cutting initiatives enabled the Company to display significant improvement in its retail operating margins, which led to increased profitability and cash flow from operations. This, along with a further decrease in capital expenditures, contributed to a boost in free cash flow which was used for debt reduction.

DBRS expects that Sears Canada’s retail revenue will only grow modestly as a result of intense competition with larger department stores and specialty retailers. DBRS also expects that further margin improvement from cost-cutting initiatives will be more difficult to achieve.

While free cash flow is expected to remain stable in the short term, DBRS is apprehensive over Sears Canada’s ability to grow free cash flow over the long term given the Company’s relatively weak sales growth and cost-cutting strategy. DBRS is also concerned about Sears Holdings Corporation’s (Sears Holdings) intentions with regards to its investment in Sears Canada. The challenges facing Sears Holdings increases the possibility that cash and/or future free cash flows at Sears Canada will be removed for the benefit of shareholders. In addition, the build-up of cash combined with the current economic/industry environment, increases event risk (M&A).

DBRS will continue to monitor Sears Canada with a particular emphasis on any transaction which may result in significant erosion of Sears Canada’s financial position. In addition, DBRS will focus on the impact that cost and capex reductions at Sears Canada will have on the long-term condition of the business operations, with a particular regard for key performance areas such as the appliance sector and/or overall service levels, which have been historical strengths.

Notes:
All figures are in Canadian dollars unless otherwise noted.
Sears Canada has granted security rateably to the outstanding debenture and medium-term noteholders.