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Short-seller Spruce Point believes Canadian Tire's shares have significant price downside.


U.S. short-selling firm Spruce Point Capital Management has set its sights on Canadian Tire Corp. Ltd., announcing it has made a bet that the retailer’s shares are poised to fall.

Spruce Point, based in New York and run by a Yale-trained mathematician named Ben Axler, has launched several prior short-selling campaigns targeting Canadian companies. It issued a 108-page “strong sell” report on Canadian Tire early Thursday before markets opened.

Spruce Point stands to profit if investors accept its thesis that Canadian Tire faces a potentially large share-price decline. Short-selling shares is a bet that shares will drop, with an investor borrowing shares, selling them, and repaying the loan by returning new shares, preferably bought at a lower price.

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Mr. Axler declined to say how large the firm’s short position is.

In 2018, Spruce Capital issued reports on Maxar Technologies Inc., which fell by more than 90 per cent in the months following the August report, and Dollarama Inc., which dropped by a few dollars per share before strongly recovering this year. The average return on the Canadian stocks subject to four Spruce Point short reports since 2015 – also including Intertain Group Ltd. and medical device maker TSO3 Inc. – is a drop of 57 per cent, the firm says.

Spruce Point believes the shares have a downside of as much as 50 per cent, suggesting Canadian Tire faces rising competitive challenges and has a poor e-commerce strategy. Its loans to customers and to the owners of its stores add risk, its report argues. It also believes the company’s profit margins are declining, Canadian Tire’s accounting choices are making profits seem better than they truly are, and the company is spending money on stock buybacks and dividends that it should be using to pay down debt.

Canadian Tire shares were down nearly 3 per cent in trading Thursday .

“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,” company spokeswoman Joscelyn Dosanjh said. “It would be extremely unfortunate if investors took action based on the report.”

Canadian Tire, Spruce Point wrote in its report, “is a challenged brick-and-mortar retailer perceived as a dependable mid-single-digit [revenue] grower on an increasingly precarious foundation of unsustainable debt.” Recent cost-reduction measures and return-of-capital policies to investors are ill-fated, too little and too late.”

Spruce Point’s view is sharply at odds with the company’s outlook. Canadian Tire said it is ahead of its own expectations for sales growth this year and is investing in its business while also being able to buy-back stock and increase its dividend by 9.6 per cent, the 11th boost in 10 years.

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“With our loyalty program and our data management and analytics stronger than ever and with great products on offer supported by our digital and in-store experience, I believe we are in a powerful position to grow and compete,” CEO Stephen Wetmore said in an investor call Nov. 7.

In the case of Canadian Tire, Spruce Point is running against the tide. The company’s shares hit a 52-week high of $157.36 on Nov. 15, and four analysts raised their price targets on Canadian Tire shares after the company’s November earnings announcement. The shares closed at $151.11 on Wednesday.

Yet other critics have also raised some questions about Canadian Tire’s accounting practices and financial risks. Toronto’s Veritas Investment Research made some of the same points about Canadian Tire’s accounting in a report published earlier this year, while U.S. short-seller Steve Eisman said in August he was short Canadian Tire, saying he saw its financial-services subsidiary, Canadian Tire Bank, as even riskier than Canada’s major financial institutions, several of which he was also shorting.

Spruce Point believes Canadian Tire’s prices are higher than at brick-and-mortar competitors such as Walmart and Costco and home-improvement chains Home Depot and Lowe’s. At the same time, those retailers, along with online-only retailers such as Amazon and Wayfair, all offer cheaper shipping options for online purchases than Canadian Tire does.

But in the November investor call, Canadian Tire executive vice-president of retail Allan MacDonald said “we’re not going to relent any [market] share. We are not going to give up share in categories that are important to us.”

Spruce Point cites a report from debt-ratings agency Moody’s that says Canadian Tire’s credit-card customers “are higher risk than peers” because they use the cards as a source of financing, rather than payment – in other words, they carry balances rather than pay them off every month.

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In the November conference call, however, Mr. Wetmore said the company’s financial-services division continues to have “great performance” and there are “no signs from our data on a weakening economy or credit-card portfolio.”

Spruce Point puts it all together and produces a “high side” estimate that values the shares at $99.70, a 34 per cent discount to Wednesday’s closing price, and its “low price” valuation of $77.42 is a discount of nearly 49 per cent. “Canadian Tire’s declining margins and weak competitive positioning to U.S. retailers and online competitors deserves a valuation multiple at a significant discount to its peers.”

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