Q1 2012 Canadian Tire Corporation, Limited Earnings Conference Call
May 10, 2012 AM EDT
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
Q1 2012 Canadian Tire Corporation, Limited Earnings Conference Call
May 10, 2012 / 08:30PM 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 - COO, Canadian Tire Retail
* Harry Taylor
Canadian Tire Corp Ltd - Chief Operating Officer, Marks
* Mary Turner
Canadian Tire Corp Ltd - COO, Canadian Tire Financial Services
* Dean McCann
Canadian Tire Corp Ltd - CFO, EVP Finance,
* Glenn Butt
Canadian Tire Corp Ltd - EVP - Customer Experience & Automotive
* Mike Medline
Canadian Tire Corp Ltd - EVP and President, FGL Sports
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Conference Call Participants
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* James Durran
Barclays Capital - Analyst
* Vishal Shreedhar
National Bank Financial - Analyst
* Mark Petrie
CIBC World Markets - Analyst
* Wayne Hood
BMO Capital Markets - Analyst
* Keith Howlett
Desjardins Securities - Analyst
* Derek Dlay
Canaccord Genuity - Analyst
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Presentation
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Operator [1]
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Good afternoon. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Canadian Tire Corporation Limited first quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' reMark's, 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 CEO and Dean McCann, Chief Financial Officer and Executive Vice President of Finance. And all of our business leaders are also present for today's call. Earlier today, we released the financial results for the first quarter of 2012. A copy of the earnings disclosure is available on our website, and includes cautionary language about forward-looking statement, risks, and uncertainties, which also apply to the discussion during this conference call.
With that, I will turn the call over to Stephen -- Stephen Wetmore.
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [3]
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Thank you, Angela. Good afternoon, everyone. We are going to do things a little differently on today's call.
I will start things off, but I have also asked Marco Marrone, Harry Taylor and Mary Turner, who are in their new roles to provide you with updates from their respective businesses. You have heard from Michael Medline on FGL Sports recently, and he is here to answer your questions. After the business updates, Dean will walk you through our first quarter results, before we open it up to the Q&A.
The lack of winter continued to impact our sales in January and February. However, the arrival of spring, in comparison to 2011, has helped us bring in a good quarter and top line performance. The weather did impact our regular promo mix in the quarter, and Marco will touch on that in a few minutes. However, we have started the year on a very positive note. So overall, a fairly good performance. Revenue was up 23% on a consolidated basis versus the same quarter in 2011. This reflects the inclusion of FGL Sports, but it also reflects revenue growth across all our retail banners. We saw a 21.5% growth in the bottom line, due in large part to strong performance and a healthy contribution from Financial Services, as well, at the inclusion as of FGL Sports.
And the Retail segment specifically, sales were up 23% and revenues were up 27% in the first quarter. The decline we saw in income before taxes was driven, in part, by some margin investment as customers continue to respond to our promotional activity and look for a deal, similar to the behavior we saw in the fourth quarter. A planned increase in spending in the quarter also led to the decline in IBT. However, to put this in perspective, remember that the first quarter is typically the retail segment's smallest quarter, and we expect solid growth throughout the rest of the year, similar to what we saw in 2011 from a trend point of view.
Earlier today, we held our Annual General meeting, where I took the opportunity to update our shareholders on many of the achievements we made last year. A 2011 highlight was adding FGL Sports to the Canadian Tire family. It's a tremendous compliment to the team to think that only a year ago, we announced a proposed acquisition. And today, the business has been integrated exceptionally well into the enterprise, representing an important future growth driver, in line with our original expectations.
The sales momentum continues at FGL Sports, with retail sales increasing 5.6% in the first quarter, and same-store sales increasing 7%, driven by strong sales of footwear, apparel, and hard goods. Both corporate and franchise stores contributed to this strong sales performance, and momentum continues into the second quarter.
Moving on, cost synergies at FGL are being realized, as we had expected. We are at about CAD20 million now, and expect to meet the CAD25 million run rate that we targeted for 2012. Key to FGL's ongoing success, is maintaining healthy and mutually beneficial relationships with vendors, and making a strong connection with customers by offering them inspiration to lead healthier, more active lives. All in all, a lot is going on at FGL Sports, which Michael can expand upon later, if you wish.
Overall, our first quarter results were strong. And I believe we are on track for the balance of the year. Although the unique environment that we are operating in, with a dynamic, competitive, economic and consumer landscape, presents it's fair share of challenges. It also offers many opportunities. I'm satisfied that we have identified the right opportunities, and will successfully execute against them, building a stronger, more productive and customer-centric organization.
Before I turn it over to the others, let me leave you with three of my focus areas for the year. First is, skill in execution is a message you have consistently heard from me. It's absolutely essential that the good ideas we cultivate, are implemented and implemented well. The management changes that were made earlier this year, are directly related to aligning CTC's executive team's collective skill against our business needs at this time, maximizing ROI in a sense. The transition has gone very smoothly, and I am confident in this team's ability to achieve the goals we set for 2012, in relation to each of our four strategic objectives.
Second, our excellent and unprecedented working relationship with our associate dealers continues. Although the dealer contract is not up for renewal until 2014, we are working collaboratively to structure the foundational elements, crystallizing our mutual alignment and focus on the customer. The outcome will be a more efficient framework that will allow both parties to execute on an initiatives that make sense for our customers, because what made sense for our customers, makes sense to both CTC and our dealers.
Third, on our enterprise-wide digital strategy. The future of retailing often comes up when I meet with the investment community, and that conversation immediately leads to what we are doing in the digital space. I think the opportunity for us is limitless. We characterize digital, as everything from e-commerce to customer service via the social channels, and everything in between. In the mobile space, the Canadian Tire app has been a huge success, with more than 1 million downloads and growing, and over 7 million individual product scans to date.
And across all of the social channels, where we are interacting with our customers, we collectively have more than 500,000 fans, and a number that is growing every day. On e-commerce specifically, we have done much of the essential planning, and we are now focused on paced implementation. We have identified the common platform that will be used across the enterprise, laid out the various stages in the projects evolution, and we now know what capabilities we want to turn on, at each one of our retail banners.
We will gradually activate the pieces as it makes sense for our customers. We have got skills marketing, IT, merchandising, and communications talent working in this space. The evolution, as well as the customer response, will be an exciting one to see unfold, as we advance our work in this space.
With that, let me turn the call over to Marco.
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Marco Marrone, Canadian Tire Corp Ltd - COO, Canadian Tire Retail [4]
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Thank you, Stephen.
I will start by providing CTR's performance highlights in the quarter and also touch on a couple of our focus areas, where I am quite pleased with the good work that has been done. Beginning with performance, sales increased a healthy 3.8% in the quarter at CTR. We saw particularly strong sales growth in the Prairies and Quebec, in both our rural and urban store locations. The early spring-like weather in March resulted in strength in the areas you would expect, namely backyard living, cycling, and gardening.
We also experienced growth in our everyday core businesses, such as home organization, household cleaning, paint, tools, and pet care. Auto maintenance, tires and car care and accessories were the sales drivers in automotive, with some softness early in the quarter in winter-related products. Revenues were also strong in the quarter, reflecting steady shipments to dealers.
Margins were down in the quarter, for a couple of reasons. Automotive was a smaller part of the mix, given the mild winter weather -- during the mild winter weather. And we have made some margin investments to drive traffic with promotional activity in household consumables, and select seasonal merchandise categories. Going forward, we are focused on continuing to drive sales, while managing margins.
Looking ahead, I am excited to see how customers respond to our spring and summer offerings. We have lined up an exceptional mix that reinforces our unique and exclusive product offering, and commitment to deliver quality, value, and selection to our customers. The Umbra Loft brand patio furniture is a perfect example of how we are augmenting our product selection to satisfy the wide variety of customers that come through the doors. The Umbra Loft line is unique because it's modular, and can be used in both small and large -- larger spaces, perfect for a condo or homeowner.
The Cuisinart barbeque line is exclusive to Canadian Tire retail. The previous line was huge success with our customers, and has been redesigned and relaunched, a true testament to the solid working relationship we have with Cuisinart, a valued partner in the living category. And launched just recently, was the Origins by Benjamin Moore paint line, which includes interior and exterior paint. It's exclusive to Canadian Tire. In fact, outside of the branded Benjamin Moore stores, CTR is the only national retailer that will carry a line of Benjamin Moore paint across all of it's stores. As you may recall, paint is one of CTRs focus areas, where we have set our sights on improving the customer experience, and product selection in this high-value category. I look forward to the customer response for a product that certainly raises the bar for us.
The first quarter has been a busy one for us, with respect to customer experience. We began the enhanced loyalty program, piloted in Nova Scotia, rolled out a new refund card policy nationally, and updated our customer satisfaction tracking platform. It's too early to go into much detail on the enhanced loyalty program, what we are referring to as the Canadian Tire Money Advantage program. But enrollment has far exceeded our expectations. I am pleased with the progress we have made on loyalty. Over the coming months, the team will work to perfect every aspect of the program, and get a firm handle on what we can do with the insights we've gathered, in order to generate top line sales and refine our product assortments.
Looking at key category strategies. You are familiar with the work that has already been completed in the Automotive business. Work there continues, as we evolve all of the foundational elements already put in place. We have already started to realize benefits from them, namely completing the automotive infrastructure project, reworking our complete tires and parts businesses, offering a better product assortment and accessories, and training our automotive staff to be better front-line ambassadors. Overall, I like what I see. The team is in place, and ready to go. It's now all about execution.
Living is another key category, where we have made a lot of noticeable progress. It's undoubtedly one of the most competitive categories for any retailer operating in Canada today. But we continue to do our homework, through trials and research, in order to implement tactfully, striking a balance between what our customers want, and what makes sense for our business mix. The results in the category are signaling that we are definitely doing something right. The implementation of our strategy is winning us customers, and further building the CTR brand to be top of mind for the household manager, when it comes to the kitchen, cleaning, and organization solutions.
With that, I will now turn the call over to Harry.
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Harry Taylor, Canadian Tire Corp Ltd - Chief Operating Officer, Marks [5]
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Thank you, Marco.
Q1 was a solid quarter for Mark's. Total sales were up 7% for the quarter, and comparable store sales were up 6% for the quarter. All of our sales growth was driven by increases in traffic and transactions, as our average basket size was flat compared to 2011. Footwear was our strongest performing merchandising division, growing 15% from 2011. Industrial footwear was up, reflecting strong demand, and casual footwear was up, due to strong clearance sales. Workwear sales were strong versus last year, again reflecting very strong industrial demand, while we were disappointed with our Men's Wear and Women's Wear business, which were marginally up year-over-year.
Looking across the country, the Prairie provinces and Quebec were our strongest performing regions, led by double digit sales growth in Alberta, Manitoba, and Saskatchewan. I am also encouraged by the strong growth in our spring summer merchandise, which was up more than 11% in the quarter, as well as a 240 basis point increase over last year in our customer satisfaction scores. Finally, our stores rebranded from Mark's Work Wearhouse to Mark's continue to outperform the rest of our chain.
Looking ahead, we need to grow our Industrial Apparel and Footwear businesses, and at the same time, significantly expand our Men's and Women's apparel and Footwear businesses. Doing so, requires achieving the following. First, significantly improving our apparel and footwear merchandise offering, making it more appealing to a larger customer base, keeping it fresh over the year, and being fashionable, as well as functional. Second, significantly increasing apparel shoppers awareness of our merchandise offering. Third, continuing to roll out re-branded, re-merchandised Mark's stores. Fourth, building our Business-to-Business division, which currently accounts for 10% of our sales, to take advantage of our depth and breadth in workwear and industrial footwear. Finally, enhancing and expanding our small, but growing e-Commerce business.
I am excited to be leading this terrific organization, and I look forward to reporting our progress in future quarters. Let me now turn the call over to Mary.
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Mary Turner, Canadian Tire Corp Ltd - COO, Canadian Tire Financial Services [6]
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Thanks, Harry. Financial services had another good quarter.
We continue to successfully execute on the same themes that Dean has outlined in recent quarters. First, the aging of our portfolio continues to improve, reflecting the economic recovery, but as well, our strength in credit risk management. Secondly, we continue to tightly manage our operating expenses. And finally, we successfully managed through the impact of changes in government regulations over the past few years.
Our Business is in great shape, and in all my15 years at Financial Services, I have never been more optimistic about the opportunities before us. We are working more than ever with CTR, to provide better financing options for our customers. We are exploring opportunities to provide financial services at FGL. We have successfully piloted several new home services, leveraging capabilities that already existed at financial services, and CTR. I am very pleased with the results, and we have already moved ahead, with some national rollouts. Working together with our retail partners is creating exciting growth opportunities, not only for us, but for the rest of the enterprise, as well.
With that brief review, I will handle -- I will hand the call over to Dean.
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Dean McCann, Canadian Tire Corp Ltd - CFO, EVP Finance, [7]
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Thanks, Mary.
Results for the quarter were very strong, as you have heard. So, let me just make a couple of comments upfront. Financial Services segment was the primary contributor to earnings growth, which is typical for us in the first quarter, and is a reflection of the seasonality of the Retail business. Seasonality has become more pronounced with the acquisition of FGL Sports, which generates stronger sales and earnings in the second half of the year.
Also, as you know, the inclusion of FGL Sports is driving high growth rates in the retail segment, since it was only acquired in August of 2011. Retail segment earnings declined about CAD7 million. But as I mentioned, the quarter is quite small overall, and going forward, will be smaller, as a share of expected full-year earnings. That is, even smaller than the 7%-ish, that the quarter contributed in 2011.
With respect to gross margins in the retail segment, we saw dollar margin growth aided by the inclusion of FGL Sports, but offset by the CAD3.1 million reduction in Canadian Tire petroleum. Gross margin rate, excluding petroleum, declined 93 basis points. This reflects strong growth in the lower margin Living category at CTR, and margin investment to drive traffic in categories such as household cleaning and seasonal merchandise, partially offset by the inclusion of the higher margin FGL Sports business. These effects were expected, and we are still tracking to our planned margin levels for the year.
Operating expense increased in the retail segment due to expenses such as severance, employee incentive programs, increased property taxes and maintenance costs, higher amortization and incremental personnel cost to support new Mark's stores. Some of these increases are non-recurring, but over all, our expenses are in line with our plan, and in line with strong sales and revenue growth. We are watching our expenses closely, and insuring that we're -- the spending we are doing is giving us traction towards meeting our goals for the year. This is of particular focus, as we look to generate strong EBITDA growth going forward.
On the inventory and the capital fronts, I am comfortable with our position at this point. As Marco mentioned, we are poised for strength, which means we have more product on hand to take advantage of a solid spring season. The quality of inventory is very good, and even the carryover from the weak winter season is of good quality in all our banners. As for capital expenditures, we remain comfortable with our stated range of CAD360 million to CAD385 million for the year. Capital expenditures in Q1 were CAD64.1 million, up from the last year, primarily due to the inclusion of FGL.
Before I go through the detail, let me point out a couple of changes to the presentation of the results, beginning this quarter, which are outlined in the MD&A. First, in the financial services segment, we have reclassified certain items within the income statement that are directly related to the funding of receivables, to better reflect the nature of the business from a segmented perspective.
Second, we have realigned that allocation of fringe benefits, which were previously classified as that administrative expenses within operating expenses. These benefits have now been aligned with the personnel costs they related to. In both cases, the 2011 comparatives have been restated. We provided 2011 financial information for all quarters, reflecting these changes made this quarter, and posted this information on our corporate website for your reference.
With that, I will now discuss the results for the quarter. For those of you reviewing the slides accompanying our call, please turn to slide 5. Consolidated revenue increased 23.4% to CAD2.4 billion in the quarter, driven primarily by the inclusion of FGL Sports revenue, and growth across all of our other retail banners, as well as our financial services. Diluted earnings per share increased 21.6% to CAD0.87 per share, The corporate -- the Company's effective tax rate in the quarter was 27.3%, down from 29.2% in the prior year. The 2012 tax rate is now estimated to be 27.3%.
Turning to slide 6, in the retail segment financial results, retail sales increased across all banners, and consolidated revenue increased 26.5%, primarily due to the inclusion of FGL Sports. Excluding FGL Sports, sales and revenues in the retail segment were up 4.5% and 6.7% respectively. Retail gross margin increased 27.1%, due to strong revenue growth. Gross margin rate increased 12 basis points to 27.1%, for the reasons that I have already discussed.
Retail segment operating expenses increased 31.9%, due primarily to the inclusion of FGL Sports, and as I mentioned, the increase also related to planned recurring and some non-recurring expenses. Retail income before taxes declined CAD7.1 million to CAD24.5 million, as a result of reduced petroleum margin, margin investments, and the increased operating expense. The rolling 12-month retail return on invested capital or ROIC, was 7.41%, down from the 8.44% in the prior period.
However, the prior period ROIC calculation included a large tax settlement, and related interest that was received in the fourth quarter of 2010, which is not included in the determination of current period ROIC. In addition, the acquisition of FGL Sports, also increased the denominator of the equation, invested capital. But has not yet included -- has not yet contributed to a full 12 months earnings to the numerator. As you will recall, FGL Sports was acquired midway through the quarter -- third quarter of 2011.
Touching on merchandise inventory, the increase of CAD522.5 million compared to Q1 2011 was primarily due to CAD478 million of the FGL Sports inventory. The remaining increase is due to the planned increased in inventory levels to support a strong in-stock position at CTR stores. We are well-positioned to meet customer demand for an extended spring and summer season.
Moving on to slide 7, the Financial Services segment posted another strong quarter, as Mary mentioned. Revenue increased 2.6%, primarily due to higher interest income and service fees. Portfolio aging improvement resulted in an CAD8 million reduction in the impairment of loans receivable, which increased gross margin in the quarter. Positive trends in the write-off rates continued, and the rolling 12-month credit card write-off rate was 7.28% in the first quarter, down from 7.38% in the prior-year. Operating expenses declined in the quarter, due in part to timing of marketing expenses, which are planned to be spent later in the year.
Income before taxes increased CAD22.2 million or 43.8%, as a result of the reduction in the impairment of loans receivable, increased revenue and lower operating expenses in the quarter. The rolling 12-month return on receivables increased to 5.98%, compared to 5.09% a year ago. This increase is a function of the strong earnings growth, compared to stubbornly flat receivables growth. We continue to expect this metric to come down to a more normal level of 4.5% range, as we work to grow the receivables portfolio.
And with that, I'll turn it over to the operator for the question and answer period. Operator?
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Questions and Answers
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Operator [1]
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(Operator Instructions).
And your first question comes from line of Jim Durran from Barclays. Your line is open.
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James Durran, Barclays Capital - Analyst [2]
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Good afternoon. Just wanted to know if there were there any synergies in the quarter. You indicated you were reiterating your 5-year CAD25 million target for this year. Can you give us some idea as to when we might hear more about banner rationalization which I know is a key tenet of what Forzani was working on before the acquisition?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [3]
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Hi, Jim, it's Stephen. I, yes, we know it's topical. And obviously, we are doing a fair amount of work on it, and it's our intent to take it to you, as soon as we complete the work. So but, I think I said last time, it was months away type thing. So I -- we recognize -- we will be taking it to you ASAP. Okay. And then, just on the automotive side, with the infrastructure backbone in place now, what indication should we be looking for, in terms of further improvement in that business? Well, let me give you an overview, and then either Marco or Glenn can kick in. Jim, it's Stephen. The automotive infrastructure, which is kind of the backbone here, to obviously run our business, and offer the customer a greater customer experience, was fully installed in all our stores, about a quarter early, in fact. So, now the system is there. We have done initial training. And Glenn has his field team out there, working with all the stores on a priority basis to upgrade their skills and talent, and using the system to maximize it's potential. That is kind of the focus for 2012, is to maximize the system. So, all other aspects though, of automotive, I'm very pleased with in fact. I think we are on our game plan there, and we are seeing a lot of the great results coming out of it. And so, very pleased, but that is sort of the stage of the IT infrastructure investment, at least.
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James Durran, Barclays Capital - Analyst [4]
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Okay. And then, last question. You talked about expenses being up in the quarter to support some of the initiatives that are being pursued. Should we expect that to continue throughout the entire year?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [5]
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Not as a percent of revenue, Jim. But what I think one of the things that I have gone on about this before -- I would prefer not to have a calendar year end, because it cuts our seasons off, and is not how we should, in effect, plan our business. But so we start our projects at the beginning of the year, against the smallest quarter, and run it in that way. So the trending, I think, will be very similar to last year. We do have a few costs running through the first quarter, some severance costs, et cetera that are nonrecurring. But for the most part, what we end up, with is margin catching up with the operating expenses. So, the same sort of trending as last year.
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James Durran, Barclays Capital - Analyst [6]
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Okay. Thank you.
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [7]
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You're welcome.
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Operator [8]
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Your next question comes from the line of Vishal Shreedhar from National Bank. Your line is now open.
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Vishal Shreedhar, National Bank Financial - Analyst [9]
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Hi, thanks a lot. I just want to get a better sense on the ROIC. It's been declining for several quarters, now. I know you comment that you added Forzani, but Forzani would have almost fully contributed last year in H2. I just want to get a sense of what activities you have underway to help improve the retail ROIC, and perhaps what we should expect as we go through the year?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [10]
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Yes, well, firstly, just I think what -- where the decline is occurring, is primarily because of the increase in the return on invested capital calculation which occurred in the fourth quarter of 2010, which was bumped up by that large tax settlement. And so, but excluding that, then we are kind of performing been doing quite well think, on the ROIC side. It's a long journey, as you know, and we do want a full year of -- we have taken in the total capital base of Forzani, but not against a full year of earnings. And certainly, last year had it's share of noise in the total earnings calculation, because of the acquisition. I think this is the full year that you will see The Forzani kick in, against that capital base.
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Vishal Shreedhar, National Bank Financial - Analyst [11]
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And just a follow-up. In terms of costs, I recall, perhaps a year or plus ago, Stephen, you said that it is easier to save CAD1 million in costs, than it is to generate CAD10 million in sales -- I am paraphrasing -- is that still your view? And what costs programs do you have underway, which would help reduce the pressure on that line?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [12]
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Yes, it is much easier to do that. We have pretty much completed all our kind of non-merchandising review, in terms of process review. All our major contracts have been renewed -- reviewed from that sense, from travel, and right across the board in IT communications, et cetera. This is the second year of our merchandise productivity program. And it's -- we had intended that in 2011 that program would at least pay for the cost of implementing it, which it did. And we are going to see those benefits flow through in 2012. We are tracking them in terms of product categories, and we will do our best not to lose that margin gain, from being able to purchase smarter, if you will.
So, the issue that happens in the industry during a transition time, is that what becomes difficult is that, while you are transitioning to new -- and take customer connections, customer complaints for example, or something like that, that would drive into our call centers. Now you are getting them, very many of them are happening within the social media channel. So you have employed more people to take care of the social media channels, and you haven't been able to adjust your cost base in other places where -- so in many cases, that is what's occurring. You have to be vigilant in going after and getting the old cost base out, and flipping over to the new one as fast as possible. So we have our sights totally set on that, as well.
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Vishal Shreedhar, National Bank Financial - Analyst [13]
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Okay. Along the same lines, over the last year or so, the core retail business -- I am talking ex Forzani, hasn't been growing. It seems that from the commentary you gave earlier that, that trend is going to reverse. Did I get that right or?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [14]
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Well, in the last number of years, I mean, top line growth in the core retail business has not been stellar, because of the economy primarily. Comparatively speaking, in the industry, I think we have done extremely well -- and we have gone through some periods -- certainly 2011 was a great one, where we lost spring and we lost winter, yet performed very well. So the secret for us is to be extremely vigilant on trying to take the costs out of the business, drive the top line, and maintain those margins. And so we have everything going at that.
The buildup of our automotive business is a side of the business that has a higher margin contribution, and therefore, we are pushing that hard, watching our promo regular mix on virtually a daily basis. That is a combination, if you will, and we are after all those elements.
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Vishal Shreedhar, National Bank Financial - Analyst [15]
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Thanks.
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [16]
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Okay.
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Operator [17]
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Your next question comes from the line Mark Petrie with CIBC World Markets. Your line is now open.
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Mark Petrie, CIBC World Markets - Analyst [18]
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Hi, good afternoon. Could you just talk about your attitude toward gross margin investment in the core retail business for the balance of the year?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [19]
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Well, our attitude -- (Laughter), Mark, would be that the -- we have it planned out, I believe, very well, from our promotional activity, our new product introductions, and to bring our margin -- maintain our margins, I should say, in-line with our expectations. Now if you hit a period -- and I guess the last quarter gave you some example of it -- you hit a period of time where, some of our core categories if you will, that would be expected to be sold during that period i.e., automotive. If that did not occur in the first quarter, you have thrown your mix off. You have thrown your margins calculations off, because not only do they drive the higher-margin sale in their own right, but they are bringing in customers, and who are also -- you are reducing your traffic load. And you are not able to sort of combine higher margin product sales with it. So they will for you off on a quarter by quarter basis. But we feel at this stage of the game, fairly confident in the control of our margins during the rest of 2012.
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Mark Petrie, CIBC World Markets - Analyst [20]
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Okay, thanks. At CTFS, it seemed like you have some good momentum, in terms of the number of active accounts in Q3 and Q4 of last year. That has slowed a bit in Q1. Is that something going on there, and how are you thinking about that?
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Mary Turner, Canadian Tire Corp Ltd - COO, Canadian Tire Financial Services [21]
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So it's Mary. I would say, there's nothing going on, and I think we are very optimistic about the run rate for the rest of the year. We had a bit of a hiccup on a marketing program, but nothing significant, and really, we are feeling very, very confident. We have a lot of effort going on with in-store financing, which we see as a key driver for growth going forward into the future, so really, feeling very confident about, both our growth and our ability to add additional new customers.
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Mark Petrie, CIBC World Markets - Analyst [22]
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Okay. Mary, could you just quantify the timing of that marketing impact in OpEx for CTFS, and maybe just any other color you can add, in terms of the run rate on that? Obviously, the cost control there was -- took a real turn for the better in Q1 of this year.
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Mary Turner, Canadian Tire Corp Ltd - COO, Canadian Tire Financial Services [23]
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So a bit of the cost control is, as Dean referred to, some marketing spend that we are going to do in the balance of the year, mostly in the second quarter that we intended to do it in Q1. So that's what I was referring to, and I wouldn't characterize it as material. And it's not indicative of any underlying problem.
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Mark Petrie, CIBC World Markets - Analyst [24]
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No, no, no, certainly not a problem, I just mean with expenses almost CAD6 million lower, just sort of wondering, like is that -- is this kind of the run rate, and is that sustainable outside of a small marketing move into Q2?
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Dean McCann, Canadian Tire Corp Ltd - CFO, EVP Finance, [25]
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I am going to jump in here. From a run rate point of view, like what you saw in the first quarter, I think you will see a bit higher over the balance of the year. But I don't think we want to go in any more deep than that.
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Mark Petrie, CIBC World Markets - Analyst [26]
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Okay. Thanks.
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Operator [27]
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Your next question comes from the line of Wayne Hood from BMO Capital. Your line is now open.
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Wayne Hood, BMO Capital Markets - Analyst [28]
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Yes, I had just a couple of questions. I just wanted to see if you could give us some sense of the personnel costs in the first quarter in the retail segment, that you might characterize as one-time, due to severance and so on, so we can get a real apples-to-apples comparison of what that expense number would have looked like year-over-year?
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Dean McCann, Canadian Tire Corp Ltd - CFO, EVP Finance, [29]
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Probably CAD8 million to CAD10 million, Wayne.
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Wayne Hood, BMO Capital Markets - Analyst [30]
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Okay. The other question I have, was back to the pricing question that came up a minute ago. If you think about your pricing gap in things like household chemicals, and looking at the direction of some of those businesses, and some of the seasonal categories, maybe eroding a little bit more than what you may have thought even going into the quarter. And you mentioned that you have got it planned out. But is there -- as we look at pricing comparisons and so on, are you trying to maintain a certain gap? And as prices go down, you will maintain that gap? Or how should we think about that integrity of that gap, in some of those key items?
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Marco Marrone, Canadian Tire Corp Ltd - COO, Canadian Tire Retail [31]
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Hi Wayne, it's Marco. So I think what -- a couple of comments with respect to pricing. We do have a pricing strategy, we do follow and track extremely closely. We track both the every day -- what I'll call our regular pricing, and then even our promotional pricing. What we looked at in the first quarter, is just that balance between the price and the margin.
And to Stephen's comment before around, lack of winter impacting some of our higher margin areas of our business, and really being an impact, so that's the mix. And then also, we continuously look at making sure we drive traffic to our stores, and utilize certain categories in our household cleaning categories to drive the traffic, and invest margin in that. So I think, it's best to say that we do have a pricing strategy that we follow fairly closely.
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Wayne Hood, BMO Capital Markets - Analyst [32]
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Okay. And my final question relates to the alignment of Forzani's supply chain with Mark's. As you have gotten deeper into Forzani, are those systems going to be able to talk to Mark's? How does that integration work as you look into '013? And I guess, Harry could speak to maybe, where does Mark's systems need to go from in the future, with automated markdowns and so on. How does all of that come to play, to really optimize the margin structure, actually for both those businesses?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [33]
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Well, I will comment a bit on the supply chain, and Harry can down the road, in terms of Mark's side. But the -- we are not looking at huge potential short-term savings in supply chain between Marrk's and FGL, in particular. I think there is a benefit there, which we are looking at. But, it is somewhat of a different system, here with -- very much so. As far as the systems themselves, I think we are very much aligned. So but, it's not where the big supply chain savings will come from.
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Harry Taylor, Canadian Tire Corp Ltd - Chief Operating Officer, Marks [34]
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And Wayne, it's Harry. Following up on Stephen's comments, in terms of -- there's lots of opportunities, but we are trying to quantify with FGL where the best synergies are and lie, and supply chain is thorny, as we go through it. We think we have got some reads on some other things that could be helpful for us. In terms of systems overall, we have made some investment in our systems. We are digesting those right now. Automated markdowns wasn't high on that list. At this point we are making some fundamental changes, and working through those. Fairly optimistic for the benefits that we will reap from those, but it's going to take us a little while as we digest what we have implemented today.
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Wayne Hood, BMO Capital Markets - Analyst [35]
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Thank you.
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Operator [36]
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Your next question comes from the line of Keith Howlett from Desjardins Bank Securities. Your line is now open.
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Keith Howlett, Desjardins Securities - Analyst [37]
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Yes, I have a question on the Zellers stores that have gone into liquidation. I know that's not too many of them, yet, about 50 or so. And I am wondering what your experience is in your nearby stores. Are you feeling any impact?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [38]
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Keith, not that -- not from a system point of view. I think they would be potentially one-off, in maybe some category movement but absolutely nothing from a materiality point of view.
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Keith Howlett, Desjardins Securities - Analyst [39]
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And how many stores would you have that are in the same plaza as a Zellers store?
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Glenn Butt, Canadian Tire Corp Ltd - EVP - Customer Experience & Automotive [40]
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We are not very populated from -- (Multiple Speakers). When it comes to the actual plaza, that's not where our traditional strengths are, our locations are. I think its safe to say, that every Zellers market would have a Canadian Tire store in that same market, but not likely, necessarily side-by-side.
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Keith Howlett, Desjardins Securities - Analyst [41]
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Must have been a lot of unusual one-offs, then. In any event, just on the inventory situation, the winter carryover -- can you sort of quantify what you are carrying over at Mark's or Forzani or Canadian Tire?
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Dean McCann, Canadian Tire Corp Ltd - CFO, EVP Finance, [42]
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Keith, it's Dean. So as I said, we have gone through the various banners, in terms of the winter carryover. And it's very consistent with kind of where we were a year ago, is one way that I would describe it. So it's not unusual, is the way I would lay it out, and I don't want to get into totally quantifying it. But the stuff that is carrying over is the stuff that I may have said to you earlier is, a red snowblower is still a red snow blower next year, as is a pair of winter work boots.
So we are very comfortable with what we have carried over. And if you look at the inventory growth, year-over-year, I think it is around CAD111 million or something this quarter -- this quarter versus the end of the year. And that reflects all of the spring build-up and the carryover. So we are pretty comfortable with the position that we are in.
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Keith Howlett, Desjardins Securities - Analyst [43]
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And there's just one thing that seemed unusual, that it mentioned that the outdoor tools was a slow category. But, it was also one of the categories that was mentioned that the dealers were active in reordering. Are those two different items within outdoor tools or?
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Marco Marrone, Canadian Tire Corp Ltd - COO, Canadian Tire Retail [44]
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Outdoor tools -- includes snow blowers, and a lot of the winter tools that we just, there were no reordering of that this year, because there was no winter, lack of winter. That is one of the areas that we are carrying over, snow blowers, as Dean mentioned.
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Keith Howlett, Desjardins Securities - Analyst [45]
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But in the section that talked about the shipments to dealers, it mentioned that the dealers were actively reordering things, including outdoor tools.
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Marco Marrone, Canadian Tire Corp Ltd - COO, Canadian Tire Retail [46]
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So, Keith, what that would be, is as we go into the summer, it's the lawn mowers.
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Keith Howlett, Desjardins Securities - Analyst [47]
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Okay.
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Marco Marrone, Canadian Tire Corp Ltd - COO, Canadian Tire Retail [48]
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Those kind of things -- because we had, early in the year, lack of winter, no snowblower sales. Spring came little early, and we were able to generate sales then of lawn mowers.
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Keith Howlett, Desjardins Securities - Analyst [49]
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I see. Great. Thanks. And then, just on the refund card -- I hadn't actually heard that before. Can you just explain what you are doing there?
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Glenn Butt, Canadian Tire Corp Ltd - EVP - Customer Experience & Automotive [50]
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Keith, it's Glenn. Yes, so what we have done is we have launched a new refund card in every store in the country. We have also worked with the dealers to develop training programs, as well as in-store signage that will help consumers, if it -- when it comes to their customer returns, the whole process, if there is an issue or concern, how best for them to contact us. More importantly, our best to contact the store itself and the dealer. So it's a combination of in-store training, signage in the store, as well as the actual automated card. So rather than the stores doing what they used to do, which is write refund slips for customers, it is now all automated.
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Keith Howlett, Desjardins Securities - Analyst [51]
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We'll just -- there used to be -- sort of a problem, if you buy something at one store and then go to another store and the dealer doesn't happen to carry that item in his store, will this refund card sort of smooth that issue?
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Glenn Butt, Canadian Tire Corp Ltd - EVP - Customer Experience & Automotive [52]
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Exactly. So the training I refer to in the policy review was to improve our consistency, and the training programs are designed to do just that. So we're -- it was a big day for us, and it's important improvements.
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Keith Howlett, Desjardins Securities - Analyst [53]
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And then, I just had a question on the smart store. I think there's probably no change to your plan for the year, but I noticed there wasn't much move in the first quarter in the number of smart stores.
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Marco Marrone, Canadian Tire Corp Ltd - COO, Canadian Tire Retail [54]
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Keith, it's Marco. Normally, our busy season is now, in terms of opening smart stores or opening stores. They tend to fall more the second quarter versus the first. The first is very little activity. So you will see movement in that the second quarter.
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Keith Howlett, Desjardins Securities - Analyst [55]
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Great. Thanks very much.
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Operator [56]
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Your next question comes from the line of Jim Durran from Barclays. Your line is now open.
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James Durran, Barclays Capital - Analyst [57]
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Thank you. I just wanted to go back to the sales progression through the quarter. Can you give us some idea as to how the comps or sales CT Retail progressed as we go through the quarter? And can you provide any commentary about how it held up in the month of April?
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Marco Marrone, Canadian Tire Corp Ltd - COO, Canadian Tire Retail [58]
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Jim, it's Marco. I think you can -- no surprise that January and February were not the best of months, given the lack of winter weather, and March was an extremely good month. And I won't comment on April, at this point, as we rarely comment on the current quarter. But let's say March was -- March was really a big chunk of the quarter, and the early spring weather helped in many, many categories.
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James Durran, Barclays Capital - Analyst [59]
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And how material would the early spring sales -- I assume that pretty healthy margins have mitigated the margin erosion the retail?
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Marco Marrone, Canadian Tire Corp Ltd - COO, Canadian Tire Retail [60]
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Well, I am not going to get into a lot of detail on the margin. But, let's just say that -- as you heard in the speeches today, there were some seasonal categories that we were also in clearance on, so that muted some of the benefits of the regular priced merchandise. It was, call it, a quarter of managing various elements of our margin, to try to deliver the best margin, at the same time tried to deliver the best top line sales.
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James Durran, Barclays Capital - Analyst [61]
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Okay. That's great. Thank you.
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Operator [62]
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Your next question comes from the line of Derek Dley from Canaccord. Your line is now open.
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Derek Dlay, Canaccord Genuity - Analyst [63]
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Yes, hi. Just on CTFS, we have had a few quarters in a row where you have had a return on receivables above 5%, and close to 6% this quarter. Just wondering if there is any update on your sort of target range, when it comes to the return on receivables?
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Dean McCann, Canadian Tire Corp Ltd - CFO, EVP Finance, [64]
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Well, Derek, I am going to answer that one for Mary because I have continually said that, where we should be is in the 4.5% to 5% range. I think, as I have said before, the issue there is growth. So, where we should be is lower than where we are right now, because the denominator hasn't been growing the way we would all like to see it grow. So it should come back.
But, it will take a while for it to come back, given the stubbornness, with respect to receivable growth. As Mary said, there are programs and plans in place that are going well, in terms of driving new customer growth and ultimately driving that denominator. But, we are sort of unusually high right now, and probably will be for a little while, just by virtue of the denominator.
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Derek Dlay, Canaccord Genuity - Analyst [65]
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Okay. No, that's great. Got you. And then just on regionally, which parts of the country performed better than others? Was the West is stronger than East, or was it pretty uniform throughout?
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Harry Taylor, Canadian Tire Corp Ltd - Chief Operating Officer, Marks [66]
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(Multiple Speakers). Well, the smaller business here -- West definitely outperforming the East. We have some strength in Quebec, but by and large, Alberta and Manitoba, Saskatchewan were the stars, regionally -- for Mark's.
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Mike Medline, Canadian Tire Corp Ltd - EVP and President, FGL Sports [67]
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And FGL, it was the West and Ontario.
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Marco Marrone, Canadian Tire Corp Ltd - COO, Canadian Tire Retail [68]
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And for CTR, very similar to Mark's.
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Derek Dlay, Canaccord Genuity - Analyst [69]
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Okay. Great. That's some good color. Thanks.
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Operator [70]
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At this time, as there are no further questions, 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 [71]
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Thank you, operator, and thanks to everyone for participating in the call today. The replay of the call will be available for one month, and the webcast will be archived on our IR website for 12 months. If you have any follow-up questions from either the call or the materials we provided today, please feel free to call me or any member of the IR team. Thanks. That concludes the call.
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Operator [72]
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And this concludes today's conference call. You may now disconnect.
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