Q4 2011 Canadian Tire Corp Ltd Earnings Conference Call
Feb 09, 2012 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
Q4 2011 Canadian Tire Corp Ltd Earnings Conference Call
Feb 09, 2012 / 09:30PM GMT
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Corporate Participants
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* Angela McMonagle
Canadian Tire Corp Ltd - VP, IR
* Stephen Wetmore
Canadian Tire Corp Ltd - President and CEO
* Marco Marrone
Canadian Tire Corp Ltd - CFO, EVP - Finance
* Mike Arnett
Canadian Tire Corp Ltd - President, Canadian Tire Retail
* Dean McCann
Canadian Tire Corp Ltd - President, Canadian Tire Financial Services
* Mike Medline
Canadian Tire Corp Ltd - Chief Corporate Officer and President, FGL Sports
* Paul Wilson
Canadian Tire Corp Ltd - President, Mark's Work Wearhouse, Ltd.
* Glenn Butt
Canadian Tire Corp Ltd - EVP, Customer Experience & Automotive
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Conference Call Participants
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* Patricia Baker
Scotia Capital - Analyst
* Irene Nattel
RBC Capital Markets - Analyst
* Jim Durran
Barclays Capital - Analyst
* Wayne Hood
BMO Capital Markets - Analyst
* Mark Petrie
CIBC World Markets - Analyst
* Keith Howlett
Desjardins Securities - Analyst
*
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Presentation
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Operator [1]
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Good afternoon. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Canadian Tire Corporation Limited fourth 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 Corp Ltd - VP, IR [2]
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Thank you, operator, and thanks, everyone, for joining us for today's financial results conference call. Here with me today are Stephen Wetmore, President and Chief Executive Officer, Marco Marrone, Chief Financial Officer and Executive Vice President of Finance, and all of our business leaders, Mike Arnett from Canadian Tire Retail, Glenn Butt with Customer Experience and Automotive, Paul Wilson, Mark's Work Warehouse, Michael Medline, FGL Sports, Dean McCann, Canadian Tire Financial Services.
Earlier today, we released the financial results for the fourth quarter and full year 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 the conference call today. With that, I'll turn the call over to Stephen Wetmore. Stephen?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [3]
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Thank you, Angela, and good afternoon, everyone.
In a moment, Marco will walk you through our fourth quarter and full year results in detail. But let me take the next few minutes to reflect on the quarter and the year as well as provide some views on 2012. First, looking at the quarter, overall I'm quite pleased with our performance considering what we're up against. Thanks to all of you in the national press, I don't think I have to inform everyone about the lack of winter. I do feel a bit like the person who's all dressed up and nowhere to go, however, because we were so well prepared across all our lines of business to meet a need that never materialized. Having said that, we still delivered very positive results. Revenues were up 21% on a consolidated basis in the quarter versus the same period in 2010. Excluding the impact of a large tax settlement in the fourth quarter of 2010, earnings per share were up 43% year-over-year, primarily due to the inclusion of FGL Sports and the performance of our Financial Services business.
Looking at the retail segment, retail sales were up 21% and revenues were up 24% in the fourth quarter versus the same period in 2010. At Canadian Tire Retail, sales increased 2.7% in the quarter with same-store sales up 1.8%, or over 2% excluding the impact of a natural decrease in automotive service. We had good performance in the living, fixing, and playing categories, with continued strength in kitchen, housewares, home organization, outdoor recreation and exercise, and tools. Sales were weaker in all winter-related categories, including light automotive parts such as wipers and batteries, winter tires and outdoor tools, such as snow blowers and shovels. Although automotive sales including auto service were down slightly in the quarter, we delivered positive sales growth for the full year and reversed the two-year trend. Sales at Canadian Tire Petroleum increased by 10.3% in the quarter, largely the result of higher gas prices. I know the automotive team was looking forward to delivering a strong finish to the year. But when categories like wiper blades are down almost CAD10 million this year versus Q4 of 2010, then they will have to wait and really impress us in 2012.
Marco will provide the details regarding gross margins, but let me provide a high level view. Margins at CTR were down during the quarter, due in part to the mix shifts I mentioned, with growth in the lower margin living and playing categories, and softness in our traditionally higher automotive business. Promotional activity also contributed to a slightly lower margin rate at CTR as consumers responded well to promotional programs early in the holiday shopping season and again in late December for the Boxing Day sales. In fact, sales patterns seem to indicate that while consumers were buying, they remained cautious and were much more sensitive to discount pricing.
Turning to Mark's, sales grew by 3.1% in the quarter, compared to the same period in 2010 driven mainly by strength in the industrial wear category although weather-related products were slow to sell, particularly outerwear, which also slowed traffic to stores well into December. As a result, promotional activity started earlier than normal and continued through the end of the quarter in order to mediate inventory levels which in turn impacted gross margins. FGL Sports experienced a similar dynamic with sales growth of 0.6% in the quarter reflecting the impact of less snow in central Canada, particularly Quebec, where some areas saw 40% less than the historical average, which resulted in same-store sales declines of 5% at franchise stores, which are mostly located in Quebec, compared to the same-store sales growth of 3.8% at corporate stores, which are located in the rest of the country. I wouldn't normally highlight a particular geography in commenting on our results, however, I feel this significant difference is worth highlighting. Across all stores, the weather delayed sales that would normally take place during the fourth quarter. So we're now focused on clearing winter inventory that should not be carried over with a close eye on protecting profitability.
Turning to the Financial Services segment, a strong quarter overall. Income before taxes increased 34.6% over the prior year due to increased revenue and continued excellent management of our credit card portfolio and operating expenses. So looking at the whole year for CTC weather was unfortunately a regular theme and undoubtedly influenced our performance. A late start to the spring, a warm fall, and little to no winter is not life in Canada. However, we've held our own, driven sales growth, remained relevant to our customers, and achieved or made significant progress on our objectives. Looking at what we accomplished against the plan we laid out in early 2010, we continue to strengthen core retail. The majority of our investments in 2011 were made at Canadian Tire stores with the customer experience in mind. At the top of the list is the automotive infrastructure program, which is now fully rolled out one quarter ahead of our latest plan. The program offers customers vastly improved service through world class technology on par with what you would find in the best automotive garages in the world.
Automotive merchandise sales were up slightly in the fourth quarter. However, when you include auto service, automotive sales were down marginally. I'm very pleased with the progress we've made over the past five quarters. You'll recall at our 2010 Investor Day that we set sales targets for specific areas, namely for tires, parts, and accessories. We're well on our way to meeting the targets for tires and parts. Sales in accessories have a ways to go although they were stronger in the fourth quarter and gained momentum in the second half. But clearly, the weather challenges that we faced influenced our full year results. That being said, I look forward to what the coming year brings in automotive knowing that we are positioned more competitively in the space than ever before.
We continue to be focused on improving the in-store shopping experience for our customers. We continue to roll-out our Smart Stores and launched our new automotive concept stores in four locations across Canada. We expanded our field team to work with stores and provide advanced training to staff. We followed our in-store tire kiosks with online e-commerce to offer our full suite of 8,000 tires and wheels, all delivered to our customers' closest store. Our living strategy is starting to take hold as we build authority in this category and transform the way customers experience these products in our stores. We continue to expand our product offering for top brands like Cuisinart and KitchenAid and are seeing good results through increased traffic to our stores and additional sales in this key category.
Similar to the automotive category, I'm extremely encouraged with the progress we've made in living, since we first outlined our sales goals and key categories at the 2010 Investor Day. Our performance in the kitchen category has been nothing less than extraordinary with double-digit sales during the year. We've also seen excellent momentum in each of the home organization, backyard, and fitness equipment categories. And in the paint category, we're starting to see very good momentum. I'm also pleased with the success we've seen in the pet care and household cleaning categories, both core elements to driving more traffic to our stores.
Much of the good work that was completed at CTR in 2011 was due to the excellent working relationship we have with our associate dealers. In fact, it's one of the most collaborative relationships we've ever had. From strategy development to project planning and implementation, we're working well together with the mutual objective of delivering an improved customer experience. As you know, we are working towards a renewal of the dealer contract with a focus on simplifying our relationship to be more efficient and agile in delivering excellence in execution. As we continue with this process, I remain very optimistic that our business model will meet our future needs. Another of our strategic goals is that we strengthen all brands as we strive to operate as one company. At Mark's, we continue to roll out our new store format and brand to reflect our full product offering that extends beyond our cornerstone industrial wear category, into men's and women's casual wear. We also provided customers with another convenient shopping channel with the relaunch of Mark's e-commerce business.
We implemented a new order management system that provides the technology to serve our customers better and increase our operating efficiency. Through our Financial Services business, we now offer extended and interest free payments on major purchases at Canadian Tire stores and the award-winning call center and solid infrastructure at Financial Services is being utilized to support Canadian Tire's home services offering. From garage door openers and central VAC installations, to auto club road assistance and customer support, we continually find ways to deliver value from our Financial Services business that extends well beyond banking alone.
In 2011, we continued to build a high performance culture. I've spoken before about finding efficiencies and productivity throughout the enterprise, effectively putting together our back offices within our corporate functions to serve the needs of the whole enterprise, using a shared services model and during the year we made very good progress. We also continued our progress in buying smarter, as work on our merchandise productivity project began to deliver results. Core to the project are the supporting processes, controls, and training that better position our buyers for working with our global suppliers. And finally, we continue to evaluate and pursue new platforms for growth. The acquisition of the Forzani Group was the result of significant due diligence and evaluation and represents a very strong pairing with CTR. The addition of FGL Sports not only immediately strengthened a core business category for us, sports, but also expanded the demographic range of our customer base and put us into malls where we've historically had less of a presence.
Despite the unfavorable weather conditions that muted sale in the fourth quarter, I'm very pleased with how well businesses have come together. FGL's management team together with employees and franchisees are off to a great start as we collectively focus on driving sales, delivering the synergies that we've identified, and moving the business forward. As we entered 2012, our main operational priorities remained relatively unchanged. At Canadian Tire Retail, we are focused on two objectives, enhance our unprecedented working relationship with our associate dealers, and secondly, execution. We have the initiatives to provide CTR with superior growth. Therefore we must focus on execution, monetizing our investment in automotive infrastructure, initiating our loyalty and CCR trial with the official launch announcement coming over the next few weeks, advancing our digital strategy, executing our detailed strategies for living, playing, and fixing and automotive, significant advancement of our in-store customer experience, delivering on our merchandise productivity targets and the continued roll-out of our Smart Store concepts.
For Mark's, 2012 will see the following; increasing online revenues including enhancing Marks.com, continued store concept renewal with 56 stores scheduled during the year, and the growth of Mark's B2B business called Imagewear. For FGL Sports, we will stay totally focused on top line growth, obtaining our cost synergies and commencing to execute on our strategic initiatives for long-term growth. I know you're interested in our banner rationalization strategy and of course, we will disclose this to you as soon as we can. Finally, our mandate at Financial Services will be to continue to expand and to support our retail businesses like CTR, Mark's, Sport Chek, and Sports Expert through credit and financing products. And we'll continue to explore opportunities to provide additional home services across the country.
Overall, what we delivered in 2011 was a solid year. Consolidated revenues and sales up over 12% versus 2010. EPS for the year totaled CAD5.71, up 5.3% versus 2010, and up more than 17% normalizing for the 2010 tax settlement. We controlled what we could, adjusted when it made sense, and stayed focused on our priorities, and we now look forward to the coming year. With those comments, I'll hand the call over to Marco.
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Marco Marrone, Canadian Tire Corp Ltd - CFO, EVP - Finance [4]
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Thank you, Stephen. And good afternoon, everyone.
Today, we issued our unaudited interim fourth quarter and full year results for 2011. Please be reminded this is our fourth quarter and first full year reporting under International Financial Reporting Standards, or IFRS. As a result of the transition, we have restated the Q4 2010 and full year comparative financial information in accordance with IFRS. An explanation of the transitional adjustments is included in the notes to our financial statements. Please also be reminded that effective Q1 2011, we made several changes to the presentation of the financial results. The adjustments relates to three items; first, the accounting treatment 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 the Financial Services segment to be more reflective of industry norms. For all these changes, prior year financials were not restated.
In my comments this afternoon, I will first discuss the fourth quarter performance and then I will discuss the results for the full year 2011. For those of you reviewing the slides accompanying our call, please turn to slide 6. For the quarter, consolidated revenue increased 21.1% compared to Q4 2010, reflecting the inclusion of FGL Sports and higher sales across the retail banners. Consolidated net income totaled CAD166.3 million in the quarter, versus CAD169.3 million last year. Diluted earnings per share were CAD2.03 versus CAD2.07 last year. You may recall that we recorded a CAD42 million tax recovery and an CAD18 million in interest income in the fourth quarter 2010, in relation to a dividends received tax matter which was settled with the CRA at that time. Additional tax recoveries relating to this matter were received throughout 2011, with CAD1.9 million tax recovery and a CAD0.5 million in related interest received in Q4 2011. Normalizing for this tax settlement in both to 2010 and 2011, diluted earnings per share were up 43.1% in the fourth quarter of 2011. I will discuss the performance drivers in the fourth quarter in more detail when I review the segment results in a few moments.
Looking at the full year, revenues were CAD10.4 billion representing an increase of 12.7% versus 2010. Consolidated net income was CAD467 million versus CAD444.2 million in 2010, and diluted earnings per share were CAD5.71, an increase of 5.3% compared to 2010. Normalizing for the tax settlement and associated interest income in 2011, diluted earnings per share were up 17.4% on a full year basis.
Our fourth quarter and full year performance was driven by a number of items; first, solid sales performance in the retail segment, especially within the automotive and living categories; second, the inclusion of FGL Sports for the 19 weeks since the acquisition closed in late August, which included income from operations, and a gain on the FGL shares held in advance of the acquisition, which were partially offset by acquisition related costs and the incremental interest cost for funding the purchase, and third, improved performance of Financial Services, driven in large part by the prudent portfolio and expense management. The Company's effective tax rate in the quarter was 28% versus the Q4 2010 rate of 13.5% which reflected the impact of the tax settlement I referenced a moment ago. The full year tax rate for 2011 was 25.9%, compared to 24.3% in 2010. The 2012 tax rate is estimated to be 27.1%.
We continue to maintain a strong financial position with a solid cash balance and strong liquidity. Our cash and cash equivalents totaled CAD325.8 million at the end of the quarter, down from CAD568.9 million at the end of the Q4 2010, in part reflecting the cash outlay related to the FGL Sports acquisition, which you may recall consisted of both cash and short-term debt financing. I should also note that our committed lines of credit totaled CAD1.37 billion at the end of the fourth quarter. We have no corporate medium term notes maturing in 2012.
Gross capital expenditures totaled CAD131.9 million in the fourth quarter versus CAD132.5 million in the prior year. For the full year, gross capital expenditures were CAD364.7 million, compared to CAD339.8 million in 2010. Excluding FGL Sports, capital spending was in line with our 2011 target. Capital expenditures in 2012 are expected to be in the range of CAD360 million to CAD385 million. Excluding FGL Sports, capital spending in 2012 is expected to be in line with the 2011 target.
Turning to slide 7 in the retail segment. In the quarter, total retail sales for the segment were up 21% compared to the same period in 2010. Total revenues were up 23.6%. Excluding FGL Sports, retail sales and revenues were up 4% and 5.3%, respectively. As Stephen mentioned, sales increased all across all of our retail banners during the quarter. Gross margin dollars were up 27.7% in the quarter versus the prior year, and the gross margin rate increased 88 basis points. The increase in the gross margin in the quarter was mainly due to the inclusion of FGL Sports. Excluding FGL Sports, gross margin dollars were up 1% on higher revenues, however, the gross margin rate declined by 108 basis points, primarily due to the following items. First, mark-downs at Mark's that took place in order to drive sales of winter wear as a result of unseasonable weather.
Higher sales of lower margin categories at CTR, and higher sales in the petroleum business, which as you know, has a lower margin than our other retail businesses. It should also be noted that the gross margin FGL Sports was negatively impacted by the amortization of the remaining CAD8.7 million of the CAD13 million fair value adjustment that was made to inventory as part of the purchase price accounting treatment at the time of the acquisition. Operating expenses including depreciation and amortization in the retail segment increased 30.5% in the fourth quarter over the prior year, primarily due to the inclusion of FGL Sports. Excluding FGL Sports, operating expenses, and acquisition related items, operating expenses increased only 2.2% which reflects a change of reporting for the auto club into the retail segment in 2011, as well as continued spending on the strategic and productivity initiatives such as the roll-out of automotive infrastructure and the upcoming loyalty pilot. You may recall that in the first and second quarters of 2011, our retail segment operating expense run rate was higher. We committed to reduce that run rate in the second half of the year and I'm pleased to see that we accomplished that objective. Income before tax in the retail segment increased 13.5% to CAD175.2 million in the quarter versus 2010. Excluding FGL Sports operating income before tax and acquisition related items, as well as adjusting for the impact of interest income received in relation to the Q4 2010 tax settlement, income before tax increased 4.3% in the quarter.
Turning to the full year, total retail sales increased 12.3% to CAD11.6 billion and total revenues increased 14.5% to CAD9.5 billion over the prior period. Excluding FGL Sports, retail sales increased 5.1% and these were up 6.6% for the full year. Gross margin dollars increased 13.1% in 2011, versus 2010 mainly driven by the inclusion of FGL Sports. Excluding FGL Sports, gross margin dollars increased 2.3% due to revenue growth. The gross margin rate declined 31 basis points in 2011. Excluding FGL Sports, the rate declined 107 basis points. The drivers for the full year margin rate decline are similar to those I outlined for the fourth quarter. Operating expenses including depreciation and amortization were up 16.1% for the year. Excluding the operating expenses at FGL Sports and acquisition related items, retail operating expenses increased 4.1% in 2011 due to a number of factors such as the change in reporting for auto club into the retail segment, spending on the strategic initiatives throughout the year, and increased occupancy costs due additions to our store and gas for our network.
Income before tax increased 6.4% to CAD410.8 million for the full year. Excluding FGL Sports, operating income before tax and acquisition related items, which include the gain on FGL shares, interest, and other acquisition related costs, as well as adjusting for the impact of interest income received in relation to the tax settlement, income before tax increased by 1.2% in 2011. However, in Q3 2010 we did record a restructuring charge of CAD14.7 million. If we normalize for this, then income before tax in the retail segment would be lower by approximately CAD10 million in 2011. The decrease is a function of the gross margin rate decline and higher operating expenses I outlined a moment ago. The rolling 12-month retail return on investor capital, or ROIC, was 7.68% at the end of 2011 compared to 8.32% a year ago. The ROIC calculation through to the third quarter of this year included the tax settlement and related interest received in Q4 2010 that I referenced earlier. The year-end 2011 ROIC figure no longer includes the results of the fourth quarter 2010.
Let me take a moment to comment on inventory. Excluding FGL Sports, inventories were up 12.8%, or CAD115 million across retail versus prior year. As Stephen mentioned, higher inventories at year end were planned in order to maintain a strong in stock position over the holiday shopping season. However, softer than anticipated sales in winter related categories meant that our inventory levels remained elevated at the close of the year.
In automotive, more than 50% of the increase over the prior year was a planned increase in tires and certain parts to ensure supply and provide better network coverage to meet demand. Additionally, weather related product inventory was higher which will be sold through the remainder of the winter season or carried over until the fall of 2012. In the rest of CTR, including the living, fixing, and playing categories, inventory was up in winter related products as lower retail sales of these products resulted in fewer replenishment orders from the dealers. We expect to sell through the winter related items over the balance of the season and expect very little carry over to the next winter season. At Mark's, we immediately carried over the higher levels of inventory in the industrial wear category, which is experiencing strong sales growth. At FGL Sports, a planned inventory increase of Sport Chek, to improve the customer experience and ensure products are on hand to meet customer demand and the impact of the late onset of winter pushed inventories up over planned levels. Promotional activities in certain seasonal categories in the first quarter will bring inventories back to planned levels.
Now moving on to slide 8, Financial Services posted another solid quarter. In the quarter, revenue in the segment increased 1.6% compared to the same period in 2010. As previously disclosed, auto club services results were included in Financial Services in 2010 are now reported in the retail segment. Gross average credit card receivables increased by 0.9% in the quarter versus the prior year. As you know, receivables growth has been impacted by the new credit card regulations and a cautious consumer.
Gross margin dollars increased 0.4% in the fourth quarter compared to the same period in 2010. Gross margin rate decreased by 66 basis points in the quarter. The decrease in the quarter was due to the reporting of the auto club gross margin in the retail segment, beginning 2011, and slightly higher impairment loss on loans receivable compared to the prior year. Operating expenses declined 15.9% in the quarter, compared to the prior year, mainly due to the change in the reporting of auto club expenses and reductions in personnel and marketing expenses. Income before tax of Financial Services increased 34.6% to CAD55.7 million in the quarter compared to 2010. Another excellent quarter for the Financial Services segment.
Turning to the full year, revenue was flat compared to 2010. Gross average credit card receivables increased by 0.3% for the year. Gross margin dollars decreased by 0.8% compared to prior year. A decrease in the year is primarily due to the reporting of the auto club gross margin in the retail segment beginning 2011 and the loan impairment allowance reduction in 2010 that was not repeated in 2011. Operating expenses were down 6.2% in the year, due to reporting of auto club expenses in the retail segment. Otherwise, operating expenses were flat reflecting continued strong expense management of Financial Services. On a full year basis, income before tax increased 9.2% to CAD219.1 million. The rolling 12-month credit card write-off rate was 7.32% at the end of the 2011, down from 7.49% a year ago. The return on receivables on a rolling 12-month basis was 5.45% at the end the fourth quarter, versus 4.97% at the end of the 2010, above our aspirational range of 4.5% to 5%.
All in all, I believe we had a solid fourth quarter and year. With that, I'll turn it over to the operator, moderating the Q&A. Operator?
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Questions and Answers
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Operator [1]
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(Operator Instructions) We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Patricia Baker with Scotia Bank. Your line is open.
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Patricia Baker, Scotia Capital - Analyst [2]
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Good afternoon. Just first of all, a very quick question, and we all read in the paper this morning that perhaps there's speculation that you've ended your food trial. Did you or didn't you?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [3]
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No, that's speculation. We haven't made any decision on the food trial. It continues in the 17 stores. This is a trial that's lasted longer than many that we do because quite frankly the results of the trial are not obvious. While it's been very successful in generating traffic into the stores the results in terms of converting that increased traffic into higher sales across the store have been mixed. So, we continue to work that but it's just speculation.
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Patricia Baker, Scotia Capital - Analyst [4]
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Okay. Great. I'm actually glad I asked the question, so we wouldn't all leap to the conclusion that you have decided to stop that trial.
Just another quick question, a broader one for, I guess, Stephen, Marco, or anyone. But you did note, you did talk about the quarter being one in which certainly at Canadian Tire Retail that you saw the consumer much more cautious and sensitive to discount pricing, much more promotional. Can you just talk about 2012 and your view on the consumer?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [5]
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Hi, Patricia, it's Stephen. Well, statistics are out today too echoing the same position I guess that we're seeing.
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Patricia Baker, Scotia Capital - Analyst [6]
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We can see lots of evidence of it, that's for sure.
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [7]
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Yes. So, we don't see a lot of that changing. I think the offers have to be extremely relevant and you have to be totally prepared for great offers to be jumped on by the consumer. There's absolutely no doubt about that. We saw a bit of it starting, actually in the third quarter of last year, with some great offers in our flyers that were actually taken up much more aggressively by the consumer than we had even anticipated. So, saw a bit of that trending at Christmastime, so that will continue. So we're anticipating it I guess through 2012.
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Patricia Baker, Scotia Capital - Analyst [8]
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Okay. Then, if I may, a final question and perhaps this is more directed at 2013. But if we look at your Living category, are there some specific things that you're probably doing in 2012 to prepare for Target's entry? Because if there's any category in which they might be more competitive with you, it would be that Living category? I would imagine.
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [9]
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Well, of course, we are, right? We remain extremely focused with all the competitors that are in the marketplace and are coming to our marketplace. But we feel very confident in our positioning across the Living strategy and it's one of the reasons that I singled out the fact that they had an extraordinary year. I think we're very, very well positioned in terms of products. We're trialing some things. We're thinking more towards the latter part of next year, in terms of getting even more strength in the category. So, we believe we have the best offering in the country and we'll continue to offer that excellence to our customers well into 2013.
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Patricia Baker, Scotia Capital - Analyst [10]
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Okay. Thanks a lot. I appreciate the answer. Thanks.
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Operator [11]
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Your next question comes from the line of Irene Nattel with RBC Capital Markets. Your line is open.
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Irene Nattel, RBC Capital Markets - Analyst [12]
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Thanks and good afternoon, everyone. Just looking at the results in Canadian Tire Retail in Q4, you did a very good job of driving traffic through the stores. Although, yes, margins were down, they weren't down as much as they have been in the past when we've had no winter and we haven't had the sales of those very high margin products. So, can you talk to us about how you adapted your strategy as you went through Q4 and it became evident that there wasn't going to be much winter?
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Mike Arnett, Canadian Tire Corp Ltd - President, Canadian Tire Retail [13]
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Irene, it's Mike. Yes, it was another challenging year in terms of lack of winter weather and that was, I think, partly reflected in our results in that we were coming off a fairly poor year in the previous year, Q4 of '10 was also really lacking weather. So, we weren't coming off of a particularly strong season, unlike the situation we were in, in the spring of '11 against a very strong year, a year ago.
We're focused on driving traffic into the stores so we reflected that in the mix of products that we included, heavier emphasis on consumables and the like. Our Christmas business was quite strong. To state the obvious, the two key drivers of Q4 business are winter and Christmas. Winter was much more of a challenge than Christmas. Christmas performed very well. The categories that we previously identified as being important to us were well represented in our stores, in our inventories, in our promotional programs, and they performed quite well for us.
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Irene Nattel, RBC Capital Markets - Analyst [14]
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That's great. Now, I appreciate the discussion around inventory levels by banner at the end of the year. Should we be looking -- I guess the question is, how much margin erosion should we be looking to in Q1 as you clear some of that inventory? Or should we?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [15]
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Well, Irene, it's Stephen. I think CTR's pretty well positioned for that. So obviously, Glenn's having some activity in winter tires, which you've probably seen. But across the board, it's not an issue CTR. I think as Marco explained as well, Mark's moved early in December to ensure that they cleared out as much of the seasonal product as they could. It affected their margins but are carrying over industrial wear, which is a very high growth category for Paul and his team, so they're positioned well. Michael at FGL will have a strong quarter in terms of ensuring that he can clear out what he wants in winter and outerwear. So, it really varies across the organization but I think anybody that's heavy into outerwear is going to see more discounting in the first quarter than those that aren't.
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Irene Nattel, RBC Capital Markets - Analyst [16]
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That's great. Thank you. Then finally, just one last question. So, last year you ended the year at CAD497 million in terms of return on receivables in Financial Services. This year you built on that. Any consideration to revising upwards your targeted range?
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Dean McCann, Canadian Tire Corp Ltd - President, Canadian Tire Financial Services [17]
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Irene, it's Dean. Not really, no. Because over the course of the next couple of years, we want to -- I don't see that target range moving up because as we move forward. I think our metrics are settling in now, in terms of where we plan to operate, in terms of low 7%s on write-off rate. Our yield's settling in. But really that, if you will, overperformance or, if you will, extended period of being over that 5% is really more a function of the flat growth. Really what I want to see is, is that growth number with respect to receivables start to materialize, because it's a bit of a myth, right, to have it that high at this point. That's not where we want it and it's really the denominator that is the issue. It's not from an EBT point of view, making sense to stay that high. Really what we need to see is that growth in the denominator going forward.
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Irene Nattel, RBC Capital Markets - Analyst [18]
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So for, so perhaps if I'm hearing you right, Dean. What we should expect is maybe we'll see a little bit of return on receivables backing up a little bit but the offset will be some growth at the top line. So, that net-net we should still continue to see nice returns from Financial Services?
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Dean McCann, Canadian Tire Corp Ltd - President, Canadian Tire Financial Services [19]
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Couldn't have said it better.
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Irene Nattel, RBC Capital Markets - Analyst [20]
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Excellent, well thank you. I'll hand it over to someone else now.
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Operator [21]
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So, our next question comes from the line of Jim Durran with Barclays Capital. Your line is open.
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Jim Durran, Barclays Capital - Analyst [22]
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Yes. I guess some similar questions, but it sounds like there's some thought that depending upon how you make it through Q1, that on some seasonal merchandise you'll carry it over to next year. You mentioned auto parts. Would you do the same with the rest of the extension of auto product categories? Would you do anything like that on the Forzani side -- on the hard goods business?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [23]
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Well, I think, Jim, in general -- I mean, the guys can kick in on their individual businesses -- it's Stephen. But certain inventories that we know are not going out of fashion, if you will. Mark's industrial wear is a great example of it probably, that is going to be just as applicable this time next year as it is now, so those products easily carry over. Same with a lot of the automotive products, unless Glenn thought there was a substantial change to something, which we don't foresee at the moment. Michael on the hard goods at FGL, I'll leave it up to you but I can't see much of a difference there.
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Mike Medline, Canadian Tire Corp Ltd - Chief Corporate Officer and President, FGL Sports [24]
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No, I mean, you always carry over some of the skis and boards into the next year. So, we always do that every year. We never sell everything. There could be a little bit more carry over this year but I wouldn't say it will be significant.
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Jim Durran, Barclays Capital - Analyst [25]
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What role is the Canadian dollar playing in this thinking? Is your expectation of the Canadian dollar that it's not going to be an assist to lower product costs as we move through 2012?
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Marco Marrone, Canadian Tire Corp Ltd - CFO, EVP - Finance [26]
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Well, Jim, it's Marco. As you know we have a fairly extensive hedging program and we're hedged for most of the year, so we're pretty much locked into the rates where they are today.
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Jim Durran, Barclays Capital - Analyst [27]
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Okay. I guess a lot of this impressed, but also scratching our heads a bit of how successful you've been. We saw two quarters in a row now, some pretty strong growth at CT Retail relative to what we've seen and yet not a massive investment on the margin side. How much of that has been a function of being able to buy pretty attractive cost of good sold and passing that through on price but being able to protect gross margin?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [28]
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Jim, it's Stephen. Mike can comment as well but I attribute the last two quarters, and also our performance against the lack of seasonal weather, as much in the strength of categories that are not dependent on it. I think for example, Mike and Glenn have done a very good job with that. So, the strength in exercise or fitness right across CTC, in fact, when you take a look at FGL and you take a look at Canadian Tire is a very strong area for us. The kitchen business has done extremely, extremely well. PartSource had one of its best quarters and areas where we offer great products regardless of it, in auto products like brakes, et cetera, strength in Mark's and industrial wear. That's not particularly up against weather, and petroleum. So we've got, I think across the board, a very good foundation and if, in fact, we could build our cost structure against that type of continued stream revenue, if you will, and take seasonal blips and use it more as gravy in margin, I think you'll see even better performance at Canadian Tire going forward.
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Jim Durran, Barclays Capital - Analyst [29]
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Thanks, Stephen. Just one question on CTFS. In the quarter, did I hear you correctly talk about higher impairment charges?
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Dean McCann, Canadian Tire Corp Ltd - President, Canadian Tire Financial Services [30]
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I think what Marco is referring to was the over -- and Jim, it's Dean.
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Jim Durran, Barclays Capital - Analyst [31]
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Hi, Dean.
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Dean McCann, Canadian Tire Corp Ltd - President, Canadian Tire Financial Services [32]
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-- the overall provision costs. So, that's write-off and allowance, if you look at that grand total in the quarter, it's a bit higher. But you've got to remember in 2010 there was more release of reserves as obviously the credit situation was improving over the course of the year.
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Jim Durran, Barclays Capital - Analyst [33]
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Yes. So, as we sit here right now proposals and bankruptcies are still down year-over-year. What's your sort of read on 2012?
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Dean McCann, Canadian Tire Corp Ltd - President, Canadian Tire Financial Services [34]
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I think as I mentioned a little earlier, we're settling in, is the way I would describe it to what we had hoped or had expected. By that I mean, with respect to the write-off rate, that we're settling into that low 7%, which is about where we are right now. So, that's certainly what we expected to happen and it seems to have in the fourth quarter.
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Jim Durran, Barclays Capital - Analyst [35]
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Sure. Okay. Last question. Marco, I don't know if I missed this earlier, but have you got a directional comment on what your tax rate's likely to be in 2012?
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Marco Marrone, Canadian Tire Corp Ltd - CFO, EVP - Finance [36]
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Yes, 27.1%.
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Jim Durran, Barclays Capital - Analyst [37]
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Approximately?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [38]
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Roughly. (laughter)
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Marco Marrone, Canadian Tire Corp Ltd - CFO, EVP - Finance [39]
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Roughly. (laughter)
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Jim Durran, Barclays Capital - Analyst [40]
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Okay, great. Thanks very much.
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Operator [41]
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Your next question comes from the line of Wayne Hood with BMO Capital. Your line is open.
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Wayne Hood, BMO Capital Markets - Analyst [42]
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Yes, thank you. Dean, just to go back to CTF one second and as you look at the quarters as they roll-out over the coming year and the initiatives you have underway, so we can hold your feet to the fire, if you will. At what quarter should we be, or should we expect to see, some noticeable improvement in balance growth as you look at the initiatives impacting that? Then is there an opportunity in your mind to go deeper into the files, given where the credit metrics are now to activate inactive accounts or get new account growth? How should we think about that as you roll-out the year?
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Dean McCann, Canadian Tire Corp Ltd - President, Canadian Tire Financial Services [43]
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So, the consumer has an impact on this, right? So, as Stephen said, there was stuff in the paper today about the cautious nature of consumers. So, that's a factor in what's going to happen for us with respect to spending and balance. But our focus as we talked before is about growing our number of active customers. That's what we're focused on.
We've got a bit of room in balance. We still lag the overall industry balance in terms of standard cards, so we've got a little bit of room there. But really the job one is, continues to be, to grow the number of active accounts and that's what we're focused on and that takes time. That continues to be the strategy. The focus on retail programs is working well. But we also get a bit impacted by some of the struggles, with respect to weather and so on, will impact us as well. So, if we see that a little better next year, then that'll translate for us -- help for us from a balance point of view as well.
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Wayne Hood, BMO Capital Markets - Analyst [44]
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So, back to the point about the quarter. Should we be thinking about 1% growth throughout the quarters? Or some of these will impact more and it's more than 1%? Or how should we think about rolling-out receivable growth or balance growth in '12?
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Dean McCann, Canadian Tire Corp Ltd - President, Canadian Tire Financial Services [45]
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I've got a lot of shaking heads here, Wayne.
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Wayne Hood, BMO Capital Markets - Analyst [46]
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Just ignore them. (laughter) All right, I'm moving onto my next question. I guess the bad news is, you had to take the markdowns to clear winter goods. The good news, that's an opportunity for '12. So, just for us modelers, if you will, how much of that unplanned markdown -- assuming it's normal weather in '12 -- would be you able to recoup and therefore, there's a margin opportunity in '12?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [47]
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I think there's a great margin opportunity for Paul at Mark's. That would be the biggest, I believe, when you take a look at our Q4 margin. It's very difficult, Wayne, in this market to know exactly where the competition is going to be at any given time and against delayed seasons or early seasons. But I think, clearly, Mark's would be looking at margin improvement in 2012.
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Wayne Hood, BMO Capital Markets - Analyst [48]
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Okay. My last question is related to Mark's. While weather certainly had an impact this year, the last few years the numbers haven't been particularly strong on the comp line. Some of it economy, I give you that. But I guess when we think about a growth vehicle, you think about stronger comps than they put up now over the last few years, or even be able to weather some of the cycles. So, at what level of comp do you think -- putting weather aside for a second -- would you expect them to be at, to be deploying future capital into that side of the business?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [49]
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Well, I'll -- Paul can speak to this as well. But when you look at the fourth quarter, Mark's was doing extremely well through October, comped very well. We saw the same happening through the month of November. In fact, I think even to the first week of December, it looked to be a quarter where they can really show off their stuff. Then, along came no winter. So, I'm pleased with the comp growth.
I'm very pleased with what Paul and his team have done with the new concept stores and new branding. Assortments are great. We spent a lot of this year and will next year, with an order management system that I think will benefit them tremendously as they become efficient and be able to use it on a go-forward basis to what that system was intended to be. Another almost 60 stores scheduled for re-branding in the coming year. It's been quite a few years that we have not refreshed and done a concept renewal at Mark's. So, I think this will really bolster their performance going forward.
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Paul Wilson, Canadian Tire Corp Ltd - President, Mark's Work Wearhouse, Ltd. [50]
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I'll add -- it's Paul here -- I'll just add a couple comments about our comps. We actually had inside of the quarter nearly 3% comp growth and that was actually our number for -- or close to our number for the entire year. There's been a couple of difficult years inside of apparel and what we've done in there is specifically focused in on items and categories in regions of the country to give us that comp growth. So, the combination of those specific categories, the combination of the areas of the country, and now, the addition of that specific store format. So, the new store format done a few of-- two years ago, we did the entire Calgary market this past year. We plan 60 next year. Those are all existing stores and those are triggering large, large hiccups as well. So, the combination of all of that causes us to think that there's still comp store growth across all the categories that Mark's is in.
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Wayne Hood, BMO Capital Markets - Analyst [51]
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All right. Thank you.
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [52]
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Okay.
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Operator [53]
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Your next question comes from the line of Mark Petrie with CIBC World Markets. Your line is open.
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Mark Petrie, CIBC World Markets - Analyst [54]
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Hi, good afternoon. Just wanted to talk about the automotive infrastructure project and the roll-out of the IT system into the stores. I was wondering, if you can just talk about the success of that and what you think the impact has been? How you feel about the training of employees, and the adoption so far?
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Glenn Butt, Canadian Tire Corp Ltd - EVP, Customer Experience & Automotive [55]
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Yes, it's Glenn, thanks. Well, here's what I would tell you. It's too early to give you any details around the actual performance as it relates to sales, and margins, and all that good stuff. But I think I can tell you that the actual execution and implementation was excellent. In fact, so good that we found a way to ramp up, add stores to the weekly list, and get it done a full quarter early. So, it's in, it's up, it's operating and that's great news.
But with any major change, keep in mind where our stores were coming from, relative to the kind of technology that they had and what we gave them. In some of our stores we have folks working the counters that have been there for 15, 20 years using the old system, in some cases even catalogs and books. So, we have a lot of work to do on continued training. The actual training program to get them up and running, I thought was excellent. However, it's going to take a while for them to really get into a groove and understand all of the features and benefits of the new system. We're excited about it and I'm so pleased that we have an automotive support team. As you recall, we added that team last year and we're in great hands. I'm very comfortable that they'll get out there and do all that's required to support our stores and really get this system firing on all cylinders.
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Mark Petrie, CIBC World Markets - Analyst [56]
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Okay. Thanks and I guess this is probably a related question, and probably for Stephen. On your 2012 operational priorities, you called out advancing the customer experience at CTR stores. Can you just go into a bit more detail on that, and maybe give us a couple specific examples of what that might entail?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [57]
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Yes. I'll give you the overview of it. Glenn's actually driving the program, so he can give you some details. But we, in fact, about a year and a half ago, came up with a really quite detailed work plan on customer experience within Canadian Tire Retail. Recognizing that I don't think we ever probably got to where we wanted to get because it's a long, hard journey and other priorities would divert the efforts and that sort of thing. So, we made a real commitment to it about a year and a half ago, laid out a plan, started investing in technology that we needed in order to help our stores with their in-stock positions, and in-store service, product knowledge, all these sort of things.
I'll let Glenn give you some details. But it has been a project that I've followed with great, great interest. I believe that we're going to start seeing some real measurable benefits during 2012 and carrying into 2013. But it does take a long time and it's a great effort. His field team is adding to that expertise as well, so we've made a great investment. We started a We Care Program here just a while ago. So Glenn, you might want to give four or five of those examples.
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Glenn Butt, Canadian Tire Corp Ltd - EVP, Customer Experience & Automotive [58]
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Yes. So just to add to what Stephen talked about, we have -- I don't believe we've ever worked as hard and as close to our associate dealers, in particular the CTDA, in coming up and developing customer-focused training programs. So, I'm thrilled at that. We've had a number of breakthroughs in particular in the last several months. We are launching what we are classifying internally as the We Care Program. I'll give you some details about what that is.
First of all, we've completely revamped our customer service index, our surveys that we're doing, which by the way, for Canadian Tire, we just got that started. We've only been doing these kinds of surveys for the last, say, two years. But we think there's a better way for us to do this and we think there's a much better way for our dealers to get that information. So, now customers will have the ability to direct their concerns or compliments directly to the head of the store, the dealer or the general manager, depending on how we set it up for each individual store. So, we think that, that's important. We think that the adoption rate of that will be at the highest levels both from a customer point of view as we relaunch the CSI, as well as the adoption of the dealers. Because I think the original CSI was maybe a little too complicated, far too many questions, and didn't really get at the heart of the issues where the new CSI will.
We've also done a thorough review of our customer returns desk, customer service counter. Compared it, benchmarked it against not only what's happening in Canada but the best in the world. We are launching and, in fact right as I speak, we're testing and piloting in our stores a new returns card complete with training and programs, and that will be launched in the coming months. That will I think go a long way in improving the overall customer experience.
Then on top of that, we've put an online tracking team in place. So, if there are customers who have not necessarily reached out to us directly, either through our award-winning customer center call desk, then if there's an issue, we want to know about it. We want to address it so our online tracking capabilities are put in place to do just that. Then, I can go on, but I'll leave with one other one. We've developed a people plan that really is going to, I think, help us dramatically improve the customer experience. Which will be a Retail 101 training for all the new employees entering a store, a leadership training program that we're currently working on, and then of course as I mentioned, the customer return. We classify that as a hot zone in the store. That's going to receive all kinds of expertise and training and support.
So, it's heavy lifting stuff. It's a journey. I don't think we'll ever be satisfied with where we are today but I'm very satisfied that we have solid plans in place and we are making progress.
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Mark Petrie, CIBC World Markets - Analyst [59]
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Okay. Thanks, good luck with all that.
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Glenn Butt, Canadian Tire Corp Ltd - EVP, Customer Experience & Automotive [60]
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Thank you.
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Operator [61]
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Your next question comes from the line of Keith Howlett with Desjardins Securities. Your line is open.
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Keith Howlett, Desjardins Securities - Analyst [62]
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Yes, I just wanted to clarify a few things on the inventory. The CAD150 million of excess inventory, excluding Mark's, did you identify the percent that was planned versus unplanned?
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Marco Marrone, Canadian Tire Corp Ltd - CFO, EVP - Finance [63]
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Keith, sorry, that was CAD115 million increase in inventory versus prior, excluding FGL Sports, not Mark's.
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Keith Howlett, Desjardins Securities - Analyst [64]
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Sorry, excluding. Sorry, I meant FGL. (multiple speakers) I was trying to -- versus the plan versus unplanned in that.
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Marco Marrone, Canadian Tire Corp Ltd - CFO, EVP - Finance [65]
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First thing, I have to be careful. It's CAD115 million, not CAD150 million. I want to make sure. It's probably a little bit more than half was planned in that. As I mentioned in my commentary, we wanted to take advantage of the opportunities that sales would present so we had planned to go higher in inventory, probably more than half of it was planned.
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Keith Howlett, Desjardins Securities - Analyst [66]
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Great. Then just in terms of Forzani, is it a similar balance there that most of it -- greater half, is planned versus carry over at this point?
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Mike Medline, Canadian Tire Corp Ltd - Chief Corporate Officer and President, FGL Sports [67]
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Yes. It's Michael. Yes, it's exactly the same story, the same. It's more than half was planned.
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Keith Howlett, Desjardins Securities - Analyst [68]
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Then just on the accounts receivable balances past due, how is that trending?
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Marco Marrone, Canadian Tire Corp Ltd - CFO, EVP - Finance [69]
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Similar to overall write-off rate, as I mentioned, settling in to where we expected. Our PD2+ has settled in, it's very similar, I think, to the prior quarter. So, we're basically very happy with how our customers are performing in terms of past due.
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Keith Howlett, Desjardins Securities - Analyst [70]
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Great. Then just a question on the auto club, just because it shifted segments. But the auto club does generate a positive EBITDA. Is that correct?
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Marco Marrone, Canadian Tire Corp Ltd - CFO, EVP - Finance [71]
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Yes, it does.
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Keith Howlett, Desjardins Securities - Analyst [72]
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Yes. Then, I just had a question on if you would know how many Canadian Tire stores are co-located in the same mall as a Zellers?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [73]
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Co-located with Zellers. I don't think I can answer that off the top.
It would be a low number but I don't have that
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[74]
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I'm sure our real estate folks know but I can't rattle it off.
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Keith Howlett, Desjardins Securities - Analyst [75]
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Okay. Just on Mark's, can you directionally say how the same-store sales growth was of the stores that have been re-branded Mark's -- how they did in the fourth quarter, re-branded and reformatted, versus the balance of the chain?
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Paul Wilson, Canadian Tire Corp Ltd - President, Mark's Work Wearhouse, Ltd. [76]
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Sure, if we were to roll the model out, what I would tell you is they did significantly better than the balance of the chain.
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Keith Howlett, Desjardins Securities - Analyst [77]
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Great. I think that's it for me. Thanks.
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Angela McMonagle, Canadian Tire Corp Ltd - VP, IR [78]
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Okay. Thanks, Keith. Operator, we'll take one last question if there is one.
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Operator [79]
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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 Corp Ltd - VP, IR [80]
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Thanks, operator. Thanks everyone for participating in our call today. 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 please, feel free to call me or any member of the IR team. Thank you.
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