Q3 2011 Canadian Tire Corp Ltd Earnings Conference Call
Nov 10, 2011 AM EST
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
CTC.A.TO - Canadian Tire Corporation Ltd
Q3 2011 Canadian Tire Corp Ltd Earnings Conference Call
Nov 10, 2011 / 09:30PM GMT
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Corporate Participants
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* Angela McMonagle
Canadian Tire Corporation Limited - VP - IR
* Stephen Wetmore
Canadian Tire Corporation Limited - President, CEO
* Marco Marrone
Canadian Tire Corporation Limited - CFO/EVP - Finance
* Michael Medline
Canadian Tire Corporation Limited - President FGL Sports
* Glenn Butt
Canadian Tire Corporation Limited - EVP - Customer Experience & Automotive
* Mike Arnett
Canadian Tire Corporation Limited - President, Canadian Tire Retail
* Paul Wilson
Canadian Tire Corporation Limited - President, Mark’s Work Wearhouse, Ltd.
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Conference Call Participants
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* Mark Petrie
CIBC World Markets - Analyst
* Patricia Baker
Scotia Capital - Analyst
* Keith Howlett
Desjardins Securities - Analyst
* Irene Nattel
RBC Capital Markets - Analyst
* Wayne Hood
BMO Capital Markets - Analyst
* Jessy Hayem
TD Newcrest/Waterhouse Securities - Analyst
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Presentation
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Operator [1]
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Good afternoon. My name is Alicia and I will be your conference operator today. At this time, I would like to welcome everyone to the Canadian Tire Corporation Limited third-quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions) Thank you.
I will now turn the call over to Angela McMonagle, Vice President of Investor Relations. Angela?
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Angela McMonagle, Canadian Tire Corporation Limited - VP - IR [2]
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Thank you, Operator. And thanks, everyone, for joining us today for the Canadian Tire Corporation third-quarter results conference call. Here with me today are Stephen Wetmore, President and CEO; Marco Marrone, Chief Financial Officer and EVP of finance; and all of our business leaders, Mike Arnett from Canadian Tire Retail; Glenn Butt in charge of Customer Experience & Automotive; Paul Wilson from Mark's Work Wearhouse; Michael Medline from FGL Sports; and Dean McCann from Canadian Tire Financial Services.
Earlier today we released the financial results for the third quarter of 2011. A copy of the earnings disclosure is available on our website and includes cautionary language about forward-looking statements, risks and uncertainties, which also apply to the discussion during this conference call.
With that, I'll turn the call over to Stephen Wetmore. Stephen?
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Stephen Wetmore, Canadian Tire Corporation Limited - President, CEO [3]
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Thank you, Angela. Good afternoon, everyone. As far as the flow of our call goes today, I'll provide you with the business overview for the quarter. And Marco will take you deeper into the numbers, as there are various factors to understand this quarter, including taxes, a restructuring charge taken last year, and of course, the impact of the Forzani acquisition, or FGL Sports, as we have named it. We're also going to take a few minutes and ask Michael Medline, the President of FGL Sports, to give you the highlights of our new business unit, as we incorporate the results for the first time.
First, let me say that we are pleased with our board of director's decision to announce another increase in our quarterly dividend. It reflects the ongoing confidence in our business, the strength of our cash flows, and is supported by some very good performance numbers this quarter. Our top line revenue was positively impacted by the inclusion of FGL Sports and by Canadian Tire Petroleum. But regardless, we saw good growth across all our operations. At Canadian Tire Retail, we achieved growth in all our major categories of living, playing, and fixing, and automotive compared to the third quarter of 2010. We are well aware of the economic environment we are operating in. Yet our CTR team was able to increase retail sales by 3.2% and same-store sales by 2.3% over the prior year.
I believe we did an excellent job of staying in the summer season and our backyard business saw the benefit of a strong in-stock position, which allowed us to capitalize on the extended warm weather in the quarter. However, I believe the real strength in the quarter came from our assortments, our key brands and unique products in areas such as our kitchen business, which helped our living category lead all categories in growth this quarter. Virtually every area of CTR is benefiting from improvements to our flyer presentation, which is also featuring the depth and breadth of our key brands. And we are continuing to invest in marketing programs and in growing our share in frequently shopped product categories like household cleaning and pet food, which generated strong traffic in the quarter that lifted sales across the entire store.
I should also mention that automotive recorded positive sales growth for the fourth consecutive quarter. But as I've said before, we are only seeing the very early signs of the potential for this business over the coming years. My colleagues, including Glenn Butt, who is in charge of our automotive business, are here to answer any specific questions you may have, as it's been another active few months across the organization. But just in automotive, we saw the activation of our online tire site, the recent opening of four auto concept stores, and the final stages of our automotive infrastructure rollout, which will be completed in Q1 of next year. This focus, along with the many initiatives being driven by Mike Arnett's team in living, playing and fixing, initiatives like home services, pro shop trials, revamp of our paint category, and innovation in pet food and pet care, are all leading to an exciting year ahead.
Our rollout of major appliances continues, with over 400 of our stores carrying our current product range. 2011 was planned for a limited product offering and to gather some learnings. And we're pleased with where we are and where the category will take us. Obviously, we still have to make a decision on food. Economics versus traffic driving on a national scale is the issue, so we are continuing to look at all the options, and we'll obviously keep you posted.
In terms of our network, our product and marketing innovation will continue to be supported by an aggressive program for our smart store format. We expect 170 completed stores by year end, and plan to complete approximately 100 capital-light projects in the coming year. We are continuing to push forward with our online strategy. And as I mentioned, we turned up our tire site. And last week Mark's also re-entered its online eCommerce business. We're not in a position to announce any further online applications at the moment, as it's a function of affordability and logistics, as we keep our eyes focused on the total economic environment.
Return on invested capital remains a primary goal for us. Therefore, all decisions have to be considered in that context. Initiatives such as our merchandise productivity are meeting all our expectations. And we said the initiative would pay for itself in 2011, and it will. We have set some aggressive targets for the project next year. However, it's all part of our balance of cost savings, growth, new projects, and our aspiration to achieve a 10% return on invested capital.
Now, a few comments on Mark's. I think Paul Wilson and his team also did an excellent job in the third quarter. In fact, July and August saw an excellent year-over-year start to the quarter, which was tempered by a tough comp in the September, with the early cold weather change we had last year. So on a comparative basis, categories like men's and women's outerwear were down, but for no other reason other than weather. Industrial wear remains strong, primarily due to the Alberta economy. I'll let Paul address any questions you may have on the status of Mark's and Marco will comment on retail margins in a minute, including Mark's.
Another very good performance quarter for Financial Services, with continued tight management of operating expenses, coupled with favorable variances in write-off rates and loan loss provisions. Financial Services continues to be a significant contributor to CTC's success. And they have managed well through numerous changes in government regulations this year. Dean McCann and his team have also been tremendous supporters of new retail programs throughout the year, and are running businesses like our home services offerings, and test marketing a number of new service offerings, which could form part of our complete customer experience in the future.
So with that, thank you, and I'll turn the call over to Marco.
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Marco Marrone, Canadian Tire Corporation Limited - CFO/EVP - Finance [4]
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Thank you, Stephen, and good afternoon, everyone. For those of you reviewing the slides accompanying our call, please turn to Slide 5. Please be reminded that this is our third quarter reporting under International Financial Reporting Standards, or IFRS. As a result of the transition, we have restated the Q3 2010 comparative financial information in accordance with IFRS.
Please also be reminded that effective Q1 2011, we made several changes to the presentation of the financial results. The impact of these adjustments have been highlighted for you in the MD&A and further explanation is provided therein. The adjustments relate to three items. First, the accounting treatment and alignment of certain transactions with Canadian Tire associate dealers and Mark's franchisees. Second, reporting the auto club business in the Retail segment, which was previously reported in the Financial Services segment. And third, rebalancing the capital structure of Financial Services segment to be more reflective of industry norms. For all of these changes, prior year financials were not restated.
Before getting into the quarterly results, I would like to briefly explain the accounting implications of our recent acquisition of the Forzani Group, now our fully consolidated and controlled subsidiary, FGL Sports. Regarding the accounting for the Forzani Group acquisition, the total consideration of CAD800.6 million was transferred to acquire all of the shares of Forzani. Upon acquisition, we were required to allocate the purchase price to the Forzani Group's identifiable assets and liabilities, so as to record each asset and liability at its fair value at time of closing. Any excess of the purchase price over this allocation is recorded as goodwill on the balance sheet, which amounted to CAD308.4 million.
Slide 5 lists the key FGL Sports items impacting results this quarter. Briefly, the Company realized a gain of CAD10.4 million on the Forzani Group shares that were acquired prior to the acquisition announcement. The gain was recorded in other income. Expenses of CAD6.3 million were incurred in the third quarter in connection with the close of the transaction, which are included in other operating expenses. Net income after-tax for the period since the close of the acquisition, amounts to CAD3.5 million, which includes amortization of inventory write-up to fair value.
We made a CAD13 million adjustment to increase the cost of the Forzani Group's inventory to reflect its fair value at the date of acquisition. As this inventory is sold, the revised cost will be charged to cost of producing revenue, which will decrease gross margin as compared to pre-acquisition margin. In the current quarter, approximately CAD4.3 million of the CAD13 million adjustment was recorded in costs of producing revenue resulting in a reduction of FGL Sports margin rate. Depending on actual inventory turns, the adjustment may be fully amortized by the end of the year.
With that, I will now discuss the results of the third quarter. Turning to Slide 6, consolidated revenue increased 19.4% in the quarter. Consolidated net income totaled CAD136.5 million in the quarter versus CAD100.5 million last year. Basic earnings per share were CAD1.68 in the quarter versus CAD1.23 last year. Net income and earnings per share increased as a result of a number of items. First, higher sales across the retail segment, as Stephen outlined. Second, improved performance of Financial Services. Third, the inclusion of FGL Sports. And fourth, a reduction in tax expense.
The Company's effective tax rate for the quarter was 19.7%, which is reduced from the Q3 2010 rate of 27.6%. Our normal practice is to annually review estimated tax payables in the third quarter. The rate decreased due to the adjustments to prior year's estimated tax payable and the estimated federal and provincial reassessments related to the dividends received matter, which was settled with CRE during the fourth quarter of 2010. In the third quarter, income tax expense was reduced by CAD13.8 million as a result of these adjustments.
We continue to maintain our strong financial position with a solid cash balance and strong liquidity. Our cash and cash equivalents totaled CAD493.4 million at the end of the quarter, down from CAD658.3 million as at Q3 2010. As you'll recall, we retired CAD300 million of corporate debt in October 2010. Currently, our backup lines of credit total CAD1.37 billion. Capital expenditures totaled CAD120.2 million for Q3 2011, which is up CAD24.7 million from expenditures of CAD95.5 million in Q3 2010. Included in the current quarter were CAD9.2 million of capital expenditures incurred by FGL Sports, which represents our typical CapEx spending of store renovation expansion and ongoing IT projects. The main reason for the increase beyond the FGL Sports expenditure is a continued investment in key strategic initiatives, such as automotive infrastructure and loyalty. We continue to expect capital expenditures, excluding FGL Sports, to be approximately CAD320 million for the year.
Turning to Slide 7 and the Retail segment, total retail segment sales for the segment were up 16.3% for the quarter compared to the prior year. And total revenues for the segment were up 21.9%. Excluding FGL Sports, retail sales and revenues were up 7.6% and 11%, respectively. Sales increased across all of our retail banners. Gross margin dollars were up 14.7%. Our gross margin rate fell 158 basis points to 25.3%.
The decrease in gross margin rate was a function of four items. One, the impact of the accounting changes referenced earlier in my comments. Two, the item that had the largest impact is the unfavorable mix, with the petroleum business sales growing at a faster rate than the other retail banners due to increased gasoline prices. As you are aware, the petroleum business has a lower margin than the other retail businesses. Third, the markdown of Mark's spring and summer merchandise. And fourth, lower margins at CTR as a result of sales mix. In other words, categories with a lower margin enjoyed a greater year-over-year sales increase as compared to higher margin categories.
Operating expenses, including depreciation and amortization in the Retail segment were up CAD74.1 million in the third quarter. The majority of this increase relates to the six weeks of operating expenses of FGL Sports that were not included in 2010, and the acquisition costs related to the FGL acquisition. Recall that there was a restructuring charge in Q3 2010 of CAD14.7 million. Normalizing Q3 2010 operating expenses for the CAD14.7 million restructuring charge and auto club expenses, and then removing all of the FGL-related items from Q3 2011, we see that the normalized operating expenses in Q3 2011 were up CAD13.1 million, or 3.1%. The bulk of the increase is due to the accounting for long-term incentive compensation expense, which is a result of the change in the stock price and the equity hedges in place. Income before taxes in the Retail segment increased 25.6%, or CAD21.6 million to CAD105.8 million. The rolling 12-month Retail return on invested capital, or ROIC, was 8.46% at the end of Q3 2011, compared to 7.63% a year ago. The increase in ROIC is driven by a lower tax rate, the impact of the tax settlement in Q4 2010, and the inclusion of FGL Sports in the current quarter.
Moving on to Slide 8, Financial Services posted a solid third quarter. Financial Services revenue increased 0.5%. However, normalizing for auto club revenues that were included in the Financial Services segment results in Q3 2010, Financial Services revenue would have increased 2.7%. Gross average credit card receivables increased by 0.7% year-over-year, impacted by the new credit card regulations and a cautious consumer. Positive trends in the write-off rates continued as the rolling 12-month credit card write-off rate was 7.33% at the end of the third quarter, down from 7.72% a year ago.
Gross margin dollars increased 3.1%, or CAD4.5 million in the third quarter of this year compared to last. The increase was the result of a reduction in loan loss allowance due to improved aging of the receivables portfolio. Operating expenses declined as the auto club business expenses were reported in the Retail segment in the current year. Adjusting for the impact of the auto club business, operating expenses were still down compared to the prior year due to lower personnel costs. Pretax income to Financial Services increased 18.3%, or CAD9.9 million in the quarter compared to 2010. Our return on receivables on a rolling 12-month basis was 5.1% at the end of the third quarter of 2011 versus 5.02% last year.
With that, I'll now hand it over to Michael. Michael?
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Michael Medline, Canadian Tire Corporation Limited - President FGL Sports [5]
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Thank you, Marco, and good afternoon, everyone. Let me begin by saying the integration process at FGL Sports is going well. As you know, the acquisition closed on August 18, and FGL Sports is now a 100% wholly-owned subsidiary of CTC. We've retained key operators at FGL Sports, and inherited strong teams in Calgary and Laval. And just as we did with the Mark's acquisition, CTC will provide resources and capabilities, particularly in areas such as real estate and marketing to drive performance and growth.
Turning to FGL Sports' three current priorities. One, we are focused on our momentum in driving sales. Two, we are working to realize synergies. And three, we are putting together the Company's longer-term growth strategy.
Starting with sales, FGL Sports had strong sales for the six-week period since the acquisition closed, which included the important back-to-school and prime hockey selling seasons. Comp store sales for the period from August 21 to October 1 were up 7.3%. Both the corporate and franchise stores performed well, with Sport Chek and Sports Experts performing extremely well during the period
. Digging in a little deeper at Chek and Experts we had strong results in each of hard goods, apparel, and footwear. Hockey sales were very strong for us in this crucial period. In fact, the strong results in hard goods were led by hockey. We attribute our strength in this category to a few things. The rollout of our hockey experts shops within stores, investments in our service shops, and an overall increased level of staff knowledge in our stores. All of our apparel categories were up strongly with the exception of outerwear, which was impacted by the milder weather we saw during the period, similar to the comment Stephen just made on Mark's quarter. Footwear performed very well, especially in the juniors category.
In terms of our shops inside Sport Chek, we've added year-to-date 30 Nevada Bob's, 27 hockey experts, 25 soccer shops, and 42 sunglass shops. We're pleased with the results in all of these shops. We're able to gain access to the top products in areas like hockey and golf, and we are achieving good comps. We have similar growth plans for these shops within our stores for 2012. As you know, we also added 31 S3 shops to our stores in 2011.
In the significant November-December months, our stores are well positioned to build on the momentum that we've seen to date. And when you go into our stores, you'll notice an increased focus on skis, sports and accessories in key markets, as well as increased rent and depth in outerwear. Decisions were made to increase inventory coming into the year at Chek, so the stores are more densely merchandised than a year ago.
Moving on to synergies, we've already realized cost savings in areas such as executive head count, elimination of public company costs, and rate efficiencies. And we have turned our attention to the next phase of synergy realization. Cost saving opportunities in areas such as purchasing, transportation, marketing, and advertising.
I'll now talk a bit about strategy. While we're not yet ready to share our specific plans, let me share some of our thoughts. FGL Sports is clearly a growth story. Our goal is to build a sports superbrand. From a banner perspective, you can expect to see a heightened focus on three banners in particular; Sport Chek, Sports Experts, and Atmosphere. And within those brands, you'll see more of the store-within-the-store concept. We see opportunities for growth in square footage in our core banners and improvements in in-store performance.
Leveraging CTC's expertise, FGL Sports is now in a better position to evaluate and look for real estate opportunities, where access to certain properties, especially urban, would have been difficult for FGL Sports in the past. We believe we are under-stored, especially in terms of Sport Chek in Ontario and in urban markets. We've also seen significant gains at FGL Sports in customer service and on customer satisfaction metrics, particularly over the last couple of years. Our training programs for new hires and future managers have been extremely successful. This is reflected in significantly less employee turnover in the stores. Over the last year, FGL Sports has invested in people and technology in our service shops. We've seen excellent results from this initiative and believe that our service shops are a key differentiator.
In summary, I'm pleased with our progress at FGL Sports in the early days. We're off to a good start. The team is engaged. We know where we want to go and we're focused on doing what we need to do to get there.
On that note, I'll turn it over to the operator moderating the
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Questions and Answers
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Operator [1]
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(Operator Instructions) Mark Petrie with CIBC World Markets.
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Mark Petrie, CIBC World Markets - Analyst [2]
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Just in terms of Forzani, I wonder if you can just talk a bit about -- I know you've covered this -- but a little more detail on maybe some adjustments to the assortment that you're planning in the coming quarters, shifts potentially in terms of square footage from footwear or apparel into hard goods.
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Michael Medline, Canadian Tire Corporation Limited - President FGL Sports [3]
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Thanks, Mark. Right now, to be honest with you in Chek, we're extremely happy with the setup of the store in terms of our mix of hard goods and apparel and footwear. We've seen very good growth, not just in this stub quarter period, but in periods before that, in the store. We will be looking at making changes to the store in terms of improving design, adding brands, and reconfiguring. But all in all, the basics of the store are in very good shape. And we've got the good product in the store in all areas -- footwear, apparel, and hard goods. So you will not see in the next little while big changes in the store. We're happy with it.
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Mark Petrie, CIBC World Markets - Analyst [4]
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And can you give us some indication of the sales performance at Forzani overall in the May to August period, before you guys bought it, but after the last time we heard from them?
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Stephen Wetmore, Canadian Tire Corporation Limited - President, CEO [5]
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Mark, it's Stephen. We don't have that, to tell you the truth. There's some performance numbers that we've put in the financials in terms of performance year to date, but we haven't gone back to accurately calculate the month by month out of FGL.
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Mark Petrie, CIBC World Markets - Analyst [6]
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So just on the new concept, the auto renewal store, I'm just wondering how, if at all, the financial arrangement on the auto category and specifically around the service has changed at all from a typical Canadian Tire store.
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Glenn Butt, Canadian Tire Corporation Limited - EVP - Customer Experience & Automotive [7]
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It's Glenn. Thanks. The financial arrangement -- we've done four stores. Each store is a little bit different. Bowmanville was a brand-new build from the ground up. Cambridge was a conversion of what was a retail outlet. Another store is a retrofit of one of our own stores. In fact, it was probably the highest volume automotive store we had in the chain. And the fourth store is a small version. So we wanted to try various types of treatments.
One thing that was consistent with all four in the part of the new concept that we're most pleased about, was the customer experience and all of the training and systems and processes that went into the store. With any brand-new concept store, there is an investment in some added fixtures, because you're talking about prototypes now. And often a building a one-off fixture will require much bigger investments than they would in a rollout. But we did assist a little bit in covering off some of those costs to not burden the specific dealer of that one store with what would essentially be development costs. But other than that, there's been no financial arrangements, no changes. And in fact, I would say that our dealer in our one store that was the brand-new one was exceptional in making some very big and bold investments in improving the customer experience for his customers in the Bowmanville market.
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Mark Petrie, CIBC World Markets - Analyst [8]
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And where are the retro for the third and fourth stores, the retrofit and the small version?
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Glenn Butt, Canadian Tire Corporation Limited - EVP - Customer Experience & Automotive [9]
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We've put stores in, as I said, the brand-new store was Bowmanville. The second, which is also a new store for us, but a conversion of an existing box, is Cambridge. The next one is in Orleans. That was our large volume store that we have that was completely updated. Then the other one is a new store, but a small version, which is in Port Coquitlam.
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Operator [10]
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Patricia Baker with Scotia Capital.
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Patricia Baker, Scotia Capital - Analyst [11]
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I have two questions. First of all, just a very quick one for you, Marco. Can you update us on what the capital spending plans would be for the fourth quarter to round out the year?
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Marco Marrone, Canadian Tire Corporation Limited - CFO/EVP - Finance [12]
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We said we're going to come in excluding FGL Sports at about CAD320 million. I don't have it handy what the year to date is here.
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Patricia Baker, Scotia Capital - Analyst [13]
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But you still think you're going to spend the full CAD320 million?
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Marco Marrone, Canadian Tire Corporation Limited - CFO/EVP - Finance [14]
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Yes, that's our plan.
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Patricia Baker, Scotia Capital - Analyst [15]
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And then my second question, and it's for you, Stephen, and it's on Canadian Tire Financial Services. And it's not an operational question. It's more of a philosophical question. There's a lot of chatter on CTFS. The nature of the business has changed certainly from a top line perspective. There's not a lot of growth out there. Can you talk generally about how you feel about CTFS and the whole Company does, and about how it fits into your whole view of Canadian Tire as a whole? And how you see it as supporting the core over the longer term?
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Stephen Wetmore, Canadian Tire Corporation Limited - President, CEO [16]
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Hi, Patricia. It's Stephen. Dean McCann is sitting on the edge of his chair at the moment while I field that question.
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Patricia Baker, Scotia Capital - Analyst [17]
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He can tell us his view.
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Stephen Wetmore, Canadian Tire Corporation Limited - President, CEO [18]
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Along with 3,000 CTFS employees. Financial Services continues to do extremely well with what I would call their traditional business. Had another display of it this quarter. Operating expenses down as a percent of revenue. And Dean and his team continue to do a fantastic job of that. And excellent credit metric management across the board.
Yes, the market slowed obviously. But it's a matter now of ensuring that you can pick up the required new accounts that Dean is in search of and is doing quite well, in fact, with that, regardless of the changes in some of the government regulations. So I think going forward in '12 and '13 and '14, his business looks healthy from that perspective. And so as far as Financial Services is concerned, they are also driving a lot of added services to Canadian Tire Retail, which is having benefits in terms of those products on a standalone basis. I think Dean would also say that those products are driving acquisition opportunities, as well, and closer connections to many new customers. So we'll continue to take advantage of those. And there's a number of other opportunities we can do. I don't see any reason why he can't extend those range of services to other CTC properties as the opportunities present themselves. But he'll continue with that.
As you know, he's also taken on the organization's delivery of home services, which I believe is going extremely well. A lot of them, while we've launched a lot of them, too, that Dean's keeping his eye on, is the future potential of additional services across the board that he could offer to our retail organizations. So I think the combination of what I just said adds to a very healthy business.
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Patricia Baker, Scotia Capital - Analyst [19]
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And I think it also makes it clear, maybe I'm over-reading into this, but it is integral, if not inextricably linked to the core retail business.
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Stephen Wetmore, Canadian Tire Corporation Limited - President, CEO [20]
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It is. It's a brand that our customers, and a service offering that our customers want from us. It's very obvious when you go in and Dean puts installment or deferred payment plans in place for CTR customers, that the take-up indicates that it's what our customers want from us. So, I think he's proving it every day. As it's more pointed and directed towards our retail businesses, the more important Financial Services actually becomes to Canadian Tire. So I think he's even tighter this year than he would have been last year.
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Patricia Baker, Scotia Capital - Analyst [21]
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And home services is going to make them even tighter.
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Stephen Wetmore, Canadian Tire Corporation Limited - President, CEO [22]
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Exactly.
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Operator [23]
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Keith Howlett with Desjardins Securities.
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Keith Howlett, Desjardins Securities - Analyst [24]
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Yes, I had a question on the progress related to loyalty program and a pilot launch maybe early next year.
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Mike Arnett, Canadian Tire Corporation Limited - President, Canadian Tire Retail [25]
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Keith, it's Mike. Not a lot to say about that at this stage. We're not really saying a lot about what the program is going to look like, but we're continuing to build towards a pilot in the early part of next year.
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Keith Howlett, Desjardins Securities - Analyst [26]
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And maybe I could ask Marco, just on Page 5 of the slides that he went through, the purchase price allocation amortization on that slide of CAD4.5 million, is that the inventory another or is that another item?
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Marco Marrone, Canadian Tire Corporation Limited - CFO/EVP - Finance [27]
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That consists of CAD4.3 million of the inventory item plus CAD200,000 of other amortizations.
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Keith Howlett, Desjardins Securities - Analyst [28]
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I noticed they were different numbers. And just on the appliance program, it sounds like that you might have more expansive ideas in mind other than the 10 or 11 stock keeping units that you currently present. Can you speak a bit about what your thoughts are on the appliance business?
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Stephen Wetmore, Canadian Tire Corporation Limited - President, CEO [29]
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Yes, I think there's some opportunity to increase the assortment, but not dramatically. We think the strength of the offer is in the tightness of the assortment. In a couple of the stores that Glenn mentioned, the Cambridge store and the Bowmanville store, in addition to what we've done in automotive, we've made some enhancements to the home and kitchen area of the store. And you'll see the addition of some stainless steel SKUs in those stores. So you'll likely be seeing more of that in the early part of next year, but not a dramatic change.
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Operator [30]
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Irene Nattel with RBC Capital Markets.
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Irene Nattel, RBC Capital Markets - Analyst [31]
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I guess this question really covers all of the banners. But certainly we're starting to hear a lot more chatter about consumer spending really slowing down again, being very cautious, tight hand on the wall. And wondering how you're feeling about inventory levels. Mike, you mentioned that certainly FGL is carrying more inventory. And just how you're monitoring that as we go through the critical next six-week period.
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Stephen Wetmore, Canadian Tire Corporation Limited - President, CEO [32]
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Irene, I'll give you a couple -- it's Stephen -- comments across all the banner. And then if the gents want to kick in here individually, then they are more than welcome to. I think across CTC, our inventory control is extremely good. We entered the FGL acquisition with slightly more inventory than we had probably predicted. But it's not an issue. Michael can expand on it. But we're handling it extremely well. In this business, as you know, especially within the CTR, if you buy, you can't increase your top line. But I think we're well stocked, extremely well stocked from that point of view. But we don't have any worries across any of the lines. I think Mark's has done extremely well. In addition, Paul put a big thrust on in the quarter, as we mentioned, in terms of his spring carry-over. So we don't see any issues. Is there something in particular? Michael will give you a little bit more on FGL, Irene.
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Michael Medline, Canadian Tire Corporation Limited - President FGL Sports [33]
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When we were touring the stores last year looking at FGL Sports as an acquisition candidate, one thing we noticed very clearly was that the franchise stores were more densely merchandised than the corporate stores. And they were looking much better. And coming into the year, FGL Sports plans on increasing inventory in the stores, in order to serve our customer better. And you can see in our stores right now that they are looking fantastic, looking a lot better than they were a year ago. So I think that more inventory in the store is really going to pay off for us, as we get some weather and as we move into the Christmas season. That inventory was planned. But, at the same time, spring was a little weaker than planned and we did promote bikes in the stub quarter that I was talking about and moved out some casual apparel and some footwear, as well. But nothing extraordinary there. Business as usual.
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Stephen Wetmore, Canadian Tire Corporation Limited - President, CEO [34]
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Irene, you gave Michael an opportunity to use the word fantastic associated with FGL. So we're all sitting here smiling at his self promotion.
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Irene Nattel, RBC Capital Markets - Analyst [35]
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And if I could, just another question. You've targeted CAD25 million in synergies for next year. How should we think about those synergies evolving over the course of the four quarters?
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Stephen Wetmore, Canadian Tire Corporation Limited - President, CEO [36]
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We had very good line of sight -- I'm try to do it numerically for you -- probably over half of those synergies out of the gate, Irene really. And so the rest of them are now Michael and his team going about putting them all in place. We said a run rate, I think, of CAD25 million by this time next year, so we've got line of sight to them all.
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Operator [37]
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Wayne Hood from BMO Capital Markets.
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Wayne Hood, BMO Capital Markets - Analyst [38]
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Mark, I had a question for you around inventory and cash flow. And then I had another question related to the outlook for merchandise mix in the fourth quarter. In the first one, Marco, can you talk a little bit about where you think the absolute level of inventory will be at the end of the year, following the write-up of the FGL inventory? And then around that a little bit, can you talk about the impact FGL will have on your payable inventory, given the term structures are different with vendors and the churn's a little bit slower in that business, as we think about how to model that out over the next year, inventory and turns as it begins to become more important?
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Marco Marrone, Canadian Tire Corporation Limited - CFO/EVP - Finance [39]
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Wayne, when you refer to the write-up of the inventory, we expect that. We've taken CAD4.3 million in the quarter. We wrote up the inventory by CAD13 million. We expect, depending on how sales are generated over the next quarter, but our expectation is that the balance, the remaining amount of that write-up, will be amortized in the fourth quarter of this year.
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Wayne Hood, BMO Capital Markets - Analyst [40]
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Which is what you said earlier.
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Marco Marrone, Canadian Tire Corporation Limited - CFO/EVP - Finance [41]
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That's our expectation based on what we see currently. And then your next question had to do with the payables?
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Wayne Hood, BMO Capital Markets - Analyst [42]
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Yes, my experience has been that's typically a slower term business, and the term structures are a little bit different than other vendors you may be doing business with. Not that you're not doing business with them now but in a more significant way. And I was wondering to what extent, as that becomes bigger, does that affect -- or maybe it doesn't -- affect the payable or turn ratio on a consolidated basis?
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Marco Marrone, Canadian Tire Corporation Limited - CFO/EVP - Finance [43]
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In the MD&A we have disclosed what the increase or decrease in working capital is because of bringing the Forzani acquisition onto our statements. At this point, we don't see any major changes. Given the size of the inventory and payables, we don't expect any major movement in those metrics.
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Wayne Hood, BMO Capital Markets - Analyst [44]
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And then my last question related to, you had 158 basis point decline in gross margin rate in the third quarter. Do you expect a similar margin hit in the fourth quarter due to mix? I know it's difficult to predict, but can you cut that in half? Or how should we be thinking about the impact of mix in the fourth quarter given all the metrics that are moving various directions?
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Marco Marrone, Canadian Tire Corporation Limited - CFO/EVP - Finance [45]
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I think two things are going to remain anyway. The accounting adjustments are going to remain next quarter. And the price of gas is not coming down, so that will impact now. I think the fourth quarter last year, gas prices were beginning to rise. So we may not be as large, but those are still expected. And then the rest of the business, we won't comment on at this point. But those two items, my first two items, are going to be there in the fourth quarter.
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Operator [46]
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Jessy Hayem with TD Securities.
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Jessy Hayem, TD Newcrest/Waterhouse Securities - Analyst [47]
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Your same-store sales growth at CTR was pretty good in the context of the current environment. Just curious again if there was anything particular that drove the strength in the quarter and how things are trending so far this quarter.
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Mike Arnett, Canadian Tire Corporation Limited - President, Canadian Tire Retail [48]
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I think Stephen called out, and the press release called out, some of the categories that did well. We talked about kitchen. We talked about the continued strength in some of the seasonal businesses. Quite frankly, we had some catching up to do from a challenging spring. And we were in a good inventory position to capitalize on those over the balance of the season. So not a lot more to that in terms of the key drivers there.
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Jessy Hayem, TD Newcrest/Waterhouse Securities - Analyst [49]
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And then I believe you mentioned that you're on track for 171 smart stores by the end of the year. If I have the year-to-date number correct, that's about 30 store openings in the fourth quarter. Is that realistic?
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Mike Arnett, Canadian Tire Corporation Limited - President, Canadian Tire Retail [50]
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Yes, most of those have already opened.
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Jessy Hayem, TD Newcrest/Waterhouse Securities - Analyst [51]
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And then similar question on FGL with regards to the same-store sales. I realize it's a stub period, but 7% seemed quite strong. Again, I know you've called out some of the items, particularly hockey. I'm looking to see if there's anything that you deem non-recurring in any way that drove this kind of strength.
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Michael Medline, Canadian Tire Corporation Limited - President FGL Sports [52]
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No, I called out hockey because that was our strongest category, and it's such a big category in that season. It was a big back-to-school time of year, as well, and we performed very well in terms of apparel and footwear. We saw a lot of strength in footwear through some of the new brands we've got in the store, especially the lightweight natural motion kind of shoes. Nike Free, Adidas Climacool, Reebok Realflex. And Livestrong continues to perform well for us. And it's been 16 months and Livestrong footwear and apparel is doing great. You'll see a refresh in our stores in the spring. And in hard goods that time of year, it's hockey. And that's what we're concentrating on.
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Jessy Hayem, TD Newcrest/Waterhouse Securities - Analyst [53]
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So again, nothing in the non-recurring?
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Michael Medline, Canadian Tire Corporation Limited - President FGL Sports [54]
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No.
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Operator [55]
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(Operator Instructions) Keith Howlett with Desjardins Securities.
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Keith Howlett, Desjardins Securities - Analyst [56]
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Yes, I wanted to ask about the Mark's real estate and rebranding project. I wonder if you could just amplify a bit what's going on there.
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Paul Wilson, Canadian Tire Corporation Limited - President, Mark’s Work Wearhouse, Ltd. [57]
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Sure. Hi, it's Paul speaking. The rebranding project we're talking to, for those people who maybe aren't as familiar with it as you are, really just talks to a renewed store concept that's a better expression of the brand in some of the specialty merchandise and innovative assortments that are in there. So these stores are designed to show that off in a more literal way to customers. So we've now completed three markets in the past year. And then what Stephen was referring to is this past September launched the entire Calgary market. Of course, these things take months and then quarters and then years to unfold properly, but certainly in the first number of weeks the results have been exceptional. We look for customers to accept some new assortments in the store, and some new ways of communicating that, and to respond to the environment. And all those things have happened right on cue. But, as I said, it will take a while before we can be definitive, but so far, so good.
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Keith Howlett, Desjardins Securities - Analyst [58]
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And is this what you did in some stores in Edmonton, as well?
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Paul Wilson, Canadian Tire Corporation Limited - President, Mark’s Work Wearhouse, Ltd. [59]
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That is exactly correct. And, of course every time we do it, we think we get better at it. And we're looking forward to doing quite a few more next year, as well.
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Keith Howlett, Desjardins Securities - Analyst [60]
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Has the switch to the Mark's name caused any noticeable reaction at all with the customer or not?
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Paul Wilson, Canadian Tire Corporation Limited - President, Mark’s Work Wearhouse, Ltd. [61]
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In the stores that have changed to Mark's, I can tell you that all of the categories in all of the world's, industrial included, are stronger. They are stronger than they used to be, and they are stronger than the control groups they're against, particularly industrial wear. You can imagine we were nervous about that. But the biggest growth category is women's. It's probably not a secret, that's one of the goals of doing a re-Mark's in the first place. So, as I said, so far, so good, but it does include that name change.
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Keith Howlett, Desjardins Securities - Analyst [62]
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And then I had a question on the Forzani Group. I was wondering how the S3 (inaudible) were doing and also how the Atmosphere of boutique areas were doing.
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Michael Medline, Canadian Tire Corporation Limited - President FGL Sports [63]
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Thanks a lot. I'll talk about S3 first. And for those of you who aren't as familiar with S3, it's really apparel footwear, which really relates to action sports. We're really able to showcase brands in our stores now through S3 that we couldn't before. And they appeal to a younger demographic. We continue to experiment, though, in this zone. We just started, so the setup in the stores, we're still working on. We're looking for more brands, and we've got great brands in the store like Burton and O'Neill. But it's new and customers need to know it's there. It's performing well, and we believe it's going to continue to perform even better. And then we'll roll it out. As I said, we have 31 S3s in our stores right now.
In terms of Atmosphere, we are very happy with the Atmosphere. That's our outdoors banner. We have standalone Atmospheres and we have Atmospheres within the store. And they are performing very well. Outdoors is a critical market for us and will continue to grow in that market as we go forward and really focus on that. I would say the more we can differentiate Atmosphere from the rest of the store, the better we do. So we'll be looking at ways to do that. But very pleased with that.
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Keith Howlett, Desjardins Securities - Analyst [64]
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And just finally I had a question on paint, both paint and automotive, which I'm wondering whether you'll eventually look at collision or paint services in automotive. And then just on the other side of the house, what your plans are on the paint inside the store.
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Stephen Wetmore, Canadian Tire Corporation Limited - President, CEO [65]
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Sorry, the second paint question, was that also automotive paints?
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Keith Howlett, Desjardins Securities - Analyst [66]
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No, that was for general paint.
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Stephen Wetmore, Canadian Tire Corporation Limited - President, CEO [67]
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You never say never in terms of opportunities that may present themselves. I think we touched the paint business a couple of times in the earlier days in the part stores when there were some acquisitions that we did. But to be honest, our focus is on the customer, it's on building our auto parts business and tires and auto accessories, new concept stores, online, to staff training, customer experience in our stores. That's really where we're focused and we've made a lot of progress. But we've still got a lot of runway ahead of us in that regard. Mike?
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Mike Arnett, Canadian Tire Corporation Limited - President, Canadian Tire Retail [68]
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Yes, Keith, it's Mike. On the traditional paint business inside Canadian Tire, we've put a lot of focus on the paint business over the course of this year. We've trained about 1,800 staff quite extensively on paint to make them better at product knowledge and better at serving the customer. And our sales, and the dealers in particular, have invested quite heavily this year in technology getting state-of-the-art paint tinting and mixing into the stores. And as a result, we've seen actually quite a nice uptick in the last quarter. I didn't call that one out, but we're very pleased with the results so far.
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Operator [69]
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Jessy Hayem from TD Securities.
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Jessy Hayem, TD Newcrest/Waterhouse Securities - Analyst [70]
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Just a quick one. Wondering if you can give us what the Forzani EBITDA was in the quarter, trying to reconcile what your organic Retail EBITDA was.
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Marco Marrone, Canadian Tire Corporation Limited - CFO/EVP - Finance [71]
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We don't disclose that. As you know, in the segment reporting, we provide an EBITDA number overall for the Retail segment, but not by banner.
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Operator [72]
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There are no further questions at this time. I will turn the call over to Angela McMonagle, Vice President of Investor Relations, for any closing remarks.
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Angela McMonagle, Canadian Tire Corporation Limited - VP - IR [73]
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Thanks, Operator. And thanks, everyone for joining us today on the Q3 conference call. We appreciate your continued interest in Canadian Tire. The telephone replay of today's call will be available for one month, and the webcast will be archived on our IR website for 12 months. If there are any other follow-up questions from today's call or the materials we issued today, please feel free to call me or any member of the IR team. Thanks.
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Operator [74]
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This concludes today's conference call. You may now disconnect.
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