Canadian Tire's sale-leaseback deal a 'net neutral' move: analyst

By Kristine Owram, The Canadian Press

TORONTO - Canadian Tire Corp.'s (TSX: CTC-A.TO) deal to sell and lease back 12 of its store properties for $174 million is a "net neutral" move for a company that really doesn't need the cash, an analyst said Tuesday.

The hardware and household goods retailer made the announcement late Monday, and said it expects to book a pre-tax gain on the sale of about $70 million.

But Edward Jones analyst Brian Yarbrough said Canadian Tire has a "strong balance sheet" and obviously isn't desperate for the money.

"It's not like (they) need to do this to try and raise the cash to pay off debt or something," said Yarbrough.

"It's $174 million, they're well capitalized, there's no issues with their balance sheet, they're in great shape."

Earlier this month, Canadian Tire reported a second-quarter profit of $97.7 million, down from $122.5 million a year ago, on $15.1-million worth of charges related to a relaunch of its branded Options MasterCard and inventory writedowns at its Mark's Work Warehouse clothing stores.

Its earnings for the second quarter amounted to $1.20 per share, versus earnings of $1.50 per share in the year-earlier period, and gross operating revenue was $2.45 billion, up from $2.31 billion.

Yarbrough said the company has made similar sale-leaseback deals in the past when they felt they could get a good price for their real estate, but there are upsides and downsides to such a decision.

"You don't have that debt of owning that store but you also don't own the store, and if you want to make wholesale changes to the store, it's up to the landlord if they're going to let you do that," he said, adding that the company may use the cash to pay down some debt that's coming due.

The transaction is subject to Competition Act approval and is expected to close in September.

The properties to be sold are located across Canada and include recently built or expanded Canadian Tire stores. Six of the properties also have a Mark's Work Wearhouse outlet.

Canadian Tire owns about 74 per cent of its store network and leases the rest of its other retail properties. The properties sold Monday represent about four per cent of Canadian Tire's total real estate portfolio.

"While we continue to see real value in owning the majority of our real estate assets, carefully selected sale-leasebacks enable us to monetize the value of select properties creating financial flexibility while maintaining our overall operating flexibility," said Tom Gauld, president and CEO of the company, in a statement.

"The properties included in this transaction are locations featuring stores that are either new or recently expanded so we do not see a need to relocate these stores in the foreseeable future. This enables us to monetize these sites at attractive rates while creating financial flexibility."

Canadian Tire said it won't identify the buyer or buyers of the retail properties until the deal is closed.

Earlier this summer, the company sold an Ottawa store property for $40 million to RioCan Real Estate Investment Trust (TSX: REI-UN.TO), Canada's largest shopping mall owner, in a sale-leaseback deal. But RioCan said Tuesday that it was not the buyer.

In its release late Monday, Canadian Tire said it will continue to selectively look at cashing in on its extensive real estate assets, including two urban Canadian Tire stores and an Eastern Canada warehouse announced earlier this year.

Canadian Tire operates 1,170 general merchandise and apparel retail stores and gasoline stations across Canada. The company, with 57,000 employees, sells auto parts, sports and leisure equipment and home products.

The sale-leaseback deal was announced after the close of stock trading Monday. On Tuesday, the retailer's shares rose 40 cents to close at $51, an increase of nearly one per cent.