Canadian Tire Corp Ltd Conference Call to Discuss Accelerated Growth Strategy for FGL Sports
May 30, 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
Canadian Tire Corp Ltd Conference Call to Discuss Accelerated Growth Strategy for FGL Sports
May 30, 2012 / 02:00PM GMT
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Corporate Participants
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* Angela McMonagle
Canadian Tire Corporation - VP, IR
* Stephen Wetmore
Canadian Tire Corporation - President, CEO
* Michael Medline
Canadian Tire Corporation - President, FGL Sports
* Dean McCann
Canadian Tire Corporation - CFO
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Conference Call Participants
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* Irene Nattel
RBC Capital Markets - Analyst
* Patricia Baker
Scotiabank - Analyst
* Jim Durran
Barclays Capital - Analyst
* Wayne Hood
BMO Capital Markets - Analyst
* Mark Petrie
CIBC World Markets - Analyst
* Chase Bethel
Desjardins Securities - Analyst
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Presentation
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Operator [1]
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Good morning. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the 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) I will now turn the call over to Angela McMonagle, Vice President of Investor relations. Angela?
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Angela McMonagle, Canadian Tire Corporation - VP, IR [2]
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Thank you operator, and thanks everyone for joining us today for the conference call to discuss FGL Sports' growth strategy. Here with me today are Stephen Wetmore, President and CEO, Canadian Tire Corporation; Michael Medline, President, FGL Sports; and Dean McCann, CFO, Canadian Tire Corp. Earlier today, we issued a news release outlining the growth strategy. A copy of the release is available on our website and includes cautionary language about forward-looking statements, risks, and uncertainties, which also apply to the discussion on this call. I will now turn the call over to Stephen Wetmore. Stephen?
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Stephen Wetmore, Canadian Tire Corporation - President, CEO [3]
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Good morning. Over the past two or three quarterly results calls, I have mentioned that we have been looking to update you on the progress at FGL Sports and that we are working on our longer-term strategy and would share it with you when our plans were more formalized. Today, we issued a news release that highlights our approach to focus on our premium brands and to grow an extensive national network to meet the needs of our customers across the country.
The FGL acquisition has truly met all our expectations, and its experienced Management Team, led by Michael Medline, is now ready to announce an exciting growth story that will be implemented over the coming years. With that, let me turn the call over to the President of FGL Sports, Michael, and he will provide you with further details of today's announcements.
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [4]
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Thank you, Stephen, and thanks to everyone on the call for joining us on short notice given the nature of the announcement. Keith Lambert, head of our supply-chain and merchandise management, is also with us today. Keith quarterbacked all to the day-to-day logistics of executing on our banner closure strategy. Since the acquisition of FGL Sports, we have been focused on driving sales and delivering on our synergy targets. We are very pleased with our sales results to date and are on track to meet the CAD25 million CTC synergy run rate target we announced last year. Additionally, we have been working on a five-year strategic plan for FGL Sports. I want to give you some more details, expanding on the press release we issued earlier this morning.
Our vision for FGL Sports is to create unparalleled access and customer connections to make our brand -- to make our core banners the conduit to the best sports brands in the world. We are doing this by super branding Sport Chek and by growing Atmosphere as the outdoor lifestyle brand. We plan to add more than 100 new stores, or more than 2 million square feet of new retail space, equivalent to more than 50% more retail space under these two banners. As part of today's announcement, a number of underperforming, non-strategic corporate banners will be closed. Our franchise banners, including Sports Experts, will not be affected by any store closures.
Our brand strategy in its simplest terms is to build a deep emotional connection with our customers using sports and active living to inspire our customers. Everything we do has to communicate to our customers the inspiration for a better you, all the while making our stores to place where the best brands are proud to be displayed and sold. The reasons we acquired FGL Sports in the first place are even more important to us today. It compliments our CTC heritage business, namely sports, and gives us strength in apparel, footwear and equipment, it is financially attractive, and is a platform for growth. CTC is bringing capabilities such as best-in-class real estate management and global sourcing to build on strengths already inherent at FGL Sports.
Our strategy falls out of this vision for the Company. Our growth plan for FGL Sports a three key elements. One, focus on core strategic banners. Two, expand FGL's footprint. Three, build customer and improve the overall customer experience. First, focusing on core strategic banners, and closing down non-strategic, unprofitable banners. It is important to note that banner closures will only impact our corporate banners and not our franchise banners, which we are very comfortable with.
Today, we announced the closure by the end of Q1 2013, of our Sport Mart and Athletes World banners. Currently, we have 48 Sport Mart and 53 Athletes World stores. As well, we will be closing our remaining corporate stand-alone stores in Hockey Experts with two stores; Fitness Source, 10 stores; Nevada Bob's, one store; and Econosports, one store. Mitigating the number of overall store closures, approximately 20 Sport Mart and Athletes World stores are planned to be converted to Sport Chek or Atmosphere stores for a net closure of 95 stores. Nevada Bob's and Hockey Experts will continue to evolve as concept shops within Sport Chek, an initiative that has been well underway for several years. These banners are expected to be generating unprofitable sales at the time they are closed and do not have a sustainable, strategic positioning in the market.
It became clear to us during our planning phase prior to purchasing Forzani that focusing on key banners and rationalizing the underperforming ones was necessary for the long-term success of the Company, as we mentioned on our conference call last May. However, we had to take the time to carefully consider the strategic, financial, and operational implications of consolidation. As well, due to our buying cycles, there were only two timing windows to announce significant banner closures, in January and the end of May. Although we had a pretty good idea of what we wanted to do back in January, we took the extra months to get this buttoned down so we could execute it flawlessly. We strongly believe that our focus and resources need to go into banners that are well differentiated.
Our plan will reduce our number of corporate banners from nine to three, Sport Chek, Atmosphere, and National Sports. However, we are not making this decision solely with a view to achieving a specific number of banners. If we were to feel that there was a strategic and financially attractive opportunity to strengthen our position, including by expanding our portfolio, we would look at it, whether it be through a new banner development or acquisition. The pretax costs associated with the banner closures are estimated to be approximated CAD26 million. The majority of the costs, which relate to lease exit costs, inventory, retention, and severance, will be recognized this quarter. We will be using our stores and marketing vehicles to migrate customers to those Sport Chek, National Sports, and Canadian Tire retail locations which are in proximity to the closing stores.
Second, I want to talk about our strategy to expand FGL's footprint. Outside of Quebec, Sport Chek will be our super brand. We will also grow our Atmosphere banner as our outdoor lifestyle banner across the country for both corporate and franchise. This will be achieved by a deliberate focus on two priorities, by strengthening these banners through what we call a hyper-growth real estate program and creating an unparalleled connection with our customers. We believe under our strategy that there is room to grow substantially the square footage of Sport Chek and Atmosphere. Our plan is to add more than 50% more square feet in these two core banners over the next five years.
After factoring in the planned closures and conversions, we plan to add over 1.4 million square feet of net retail space. Our strategy calls for more than 100 additional stores over the next five years to drive coverage of this country. Most of this growth is expected to come from our Sport Chek banner. Much of the growth will come in Ontario, where we believe FGL Sports is significantly under stored. As well, there's an opportunity to fill in major metropolitan areas, especially the GTA, more in line with population density. For instance, currently in the GTA, there is only 0.11 square feet of FGL retail space per capita. In Calgary, that number more than doubles to 0.24 square feet per capita. And Calgary is not stored out.
The real estate expansion strategy is expected to add approximately 10 new concept, large, urban flagship Sport Chek superstores. The stores will be between 50,000 to 80,000 square feet in size. It is particularly in these stores where we can show off wider assortments of the best sport brands in the world. We are quickly lining up the real estate and expect to be operating our first flagship stores in 2013. In addition to the flagship stores, we expect to fill in the market with Sport Chek stores between 25,000 and 35,000 square feet. As well, Sport Chek is not build out in small markets. We intend to opportunistically expand the number of stores in small markets. The average size for these stores will be 10,000 square feet. The small market stores we have opened to date have performed well.
We also intend to build out more Atmosphere stores as part of our growth strategy. We see great potential for this active outdoor lifestyle banner. Some of these new stores will be through Sport Mart conversions. These stores will average between 7,000 and 8,000 square feet. The outdoor recreation market is large and is growing, and we are pleased with the performance of our Atmosphere stores. We are pleased with the National Sports stores we have. They don't fit into our hyper-growth strategy, but National is extremely strong in teams sports, is well differentiated, and positions us well in the key Ontario market.
Although we are more built out in Quebec than in any other province today, we see opportunities to expand the average store size of our Quebec franchise locations and opportunistically add stores to increase the number of sites and to increase product assortment. We are already underway in terms of executing on our real estate plans. We are not having any difficulty finding prime real estate. This is helped by our best-in-class CTC real estate group. Our pipeline is full for 2012, and we are close to finalizing all 2013 real estate builds.
I would like to turn, now, to the third key element of our strategy, which entails building the customer connection and improving the experience. Today is primarily to tell you about banner closures and core banner growth, not to take you through all our customer and marketing efforts. However, our vision, as I articulated earlier, is to create a customer experience that surpasses the expectations of our customers and the world's leading brands, knowledgeable and passionate store staff, new store designs and in-store displays that are more productive and inspirational, consistent brand [managing] across all channels with an emphasis on excellence, and digital marketing. All of our efforts will become apparent over the coming quarters, and I look forward to giving you more insight as our programs unfold.
As you can tell, we've got a lot going on at FGL Sports. Obviously, we want to grow our market share, but the bigger prize lies in growing the overall customer spend in sports. In order to do that, it is important to recognize that we are not just competing with other sports retailers for consumer dollars. In the end, we are competing for share of the consumers' overall spend. Fortunately, sports, with its emotional connection to many consumers, lends itself well to our goals. In short, as we like to say at CTC, we are going on offense. Now, I'd like to turn it back to the operator to take your questions. Operator?
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Questions and Answers
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Operator [1]
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(Operator Instructions) Your first question comes from the line of Irene Nattel from RBC Capital Markets. Your line is now open.
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Irene Nattel, RBC Capital Markets - Analyst [2]
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Thanks, and good morning, everyone. Mike, you mentioned that you have secured many of the locations. Could you give us an idea if these are existing store locations that you are taking over leases, whether they are purpose built boxes, and also whether as part of all the expansion you are anticipating expanding the brand's lineup and offering?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [3]
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Thanks, Irene. I will take those in order then. In terms of the real estate plan and securing the real estate, as you probably know, about 75% of our Sport Chek stores are located in malls. We are looking to expand the size of the Chek stores in many malls, especially because we are in almost all the A malls in Canada. A big part of the growth will come in terms of off mall growth, and our hypergrowth will come there. And we are not finding any sort of issues in terms of growing in-mall or outside of the mall. Can you explain a little bit in terms of what you meant by the question about brand?
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Irene Nattel, RBC Capital Markets - Analyst [4]
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Well, I'm just wondering, as you are expanding, as you are looking at these flagship stores, are you thinking about refining the offering and any way, Mike? Are there any brands that you don't have now that you would like to have? Just sort of wondering about how you are thinking about the positioning overall?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [5]
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That's a great question. You are absolutely correct that we are thinking in terms of going to 50,000 to 80,000 square feet. This will not -- these flagship stores will not just be larger Chek stores that we currently have today. They're going to be able to showcase a wider assortment of the best brands in the world. They'll be more interactive in terms of interacting with our customers, both in terms of service, but also importantly, as we go forward, in terms of technology and digital in-store.
So we'll be featuring more brands and a wider assortment of brands, but it's going to be a very exciting store that we open in terms of flagship. But it will also have elements that will then migrate also to our other Chek stores, the 150 that we have today and the big growth, the hypergrowth, that we are talking about. So yes, the flagship stores going to be quite different.
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Irene Nattel, RBC Capital Markets - Analyst [6]
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Can you give us any hints as to what we might expect to see there that we don't see the other Chek stores?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [7]
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I would love to, actually, but, given -- for competitive reasons, right now, I'd rather hold on until we open those stores. And we have real estate plans already for '13 to open some of those stores. Some elements of what we're thinking about the flagship stores will start to crop up in existing Cheks or Cheks that we're opening later this year as well.
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Irene Nattel, RBC Capital Markets - Analyst [8]
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That's great. Thanks, Mike.
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Operator [9]
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Your next question comes form the line of Patricia Baker with Scotiabank. Your line is now open.
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Patricia Baker, Scotiabank - Analyst [10]
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Thank you. Good morning. Mike, just one point clarification, a minor point of clarification. You indicated that you had done all the work previous to making the Forzani acquisition and had taken store closures into consideration. So I would assume that the benefits from the store closures and removing the not optimal profitable banners would in fact already been included in your synergy targets?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [11]
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Actually, they were not included in the synergy targets because we had not made a final determination of what we were going to do in terms of banner consolidation. For instance, the CAD25 million which we made such progress on this year does not include any synergies related to the banner closures, today. Any synergies that we realize, and remember, over 80% of these stores are not going to close until Q1 2013.
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Patricia Baker, Scotiabank - Analyst [12]
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Right.
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [13]
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Synergies on that won't occur until 2013. So basically, we did not that those into our synergy numbers, but I know that they will help in terms of reducing costs as we go forward.
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Patricia Baker, Scotiabank - Analyst [14]
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You don't want to give us any ballpark?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [15]
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No.
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Patricia Baker, Scotiabank - Analyst [16]
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Okay. I didn't think so. And then secondly, can you give us just a ballpark figure on what the total sales are associated with the stores that are closing?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [17]
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Yes. It's approximately CAD165 million.
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Patricia Baker, Scotiabank - Analyst [18]
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Okay.
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [19]
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And that's 2011 full year.
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Patricia Baker, Scotiabank - Analyst [20]
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Okay.
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [21]
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Now some more stores, we closed -- the Sport Marts have been closing as we go forward, so in 2012 so far, 11 Sport Mart stores have closed actually as leases have come up. Those have closed previously, obviously, to this announcement. So it would be lower run rate currently than the CAD165 million, but last year, it was CAD165 million.
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Patricia Baker, Scotiabank - Analyst [22]
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Okay. That's helpful. Thanks.
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Operator [23]
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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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Jim Durran, Barclays Capital - Analyst [24]
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Mike, I want to go back to your reference points on square footage per cap in the GTA versus Calvary. So do believe, then, that you are significantly under stored in most urban centers?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [25]
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Hi, Jim. Thanks for the question. No, I don't think it's all urban centers. Like most retailers, where you grew up is where you are usually strongest and most heavily stored and most densely stored. Sport Chek grew up in Calgary. And so, although I said today, and I believe we are not stored out in Calgary, we are more dense there than in almost any place.
And Sports Experts, which also is one of the founding companies of FGL Sports, grew up in Montréal, where I think that we are very will covered in Montréal. But that's not to say that we don't have growth in Montréal our Calgary. So in those areas where we're more stored, I'd say other large metropolitan areas, we have significant room to grow. It has been difficult for FGL Sports to get into the core of the cities. We do have some stores, as you know. But with the real estate group, we have a CTC and FGL Sports now. We are going to be making a lot of progress and have already made progress getting into the core of the cities, which we've had trouble with before.
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Jim Durran, Barclays Capital - Analyst [26]
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Okay. A core focus of Forzani prior to the acquisition, and you as well, subsequently, has been to try to and improve the sales per square foot at Sport Chek, because at instead of CAD220 a square foot it was probably deemed to be unacceptably too low, and well below that of the franchise stores in Quebec. How do you see the sales per square foot at Sport Chek evolving over the course of the next five years?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [27]
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That's a great question. First of all, the CAD220 quoted is pretty light. We are currently at a higher number than that, and it's trending upwards. Obviously, our strategy, especially on the marketing side and store design and making a more exciting experience, is to get that square footage up from where it is today. And sports is not historically the highest sales-per-square-foot business. But I think that everything we are doing that we are going to be trending upwards.
And yes, we have higher -- we still have higher sales per square foot in Quebec. Sports Experts is higher than Sport Chek still. But corporate is closing that gap. And our corporate stores, our Sport Chek stores, are actually larger, significantly larger, than our average Sports Experts store. So that also lets Sports Experts in many ways have higher sales per square foot. So yes, we are getting better. It's not where we need to be, and the strategy is all about getting that sales per square foot up and putting in more square foot, as you can tell.
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Jim Durran, Barclays Capital - Analyst [28]
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As part of this five-year strategic plan build, did you do some consumer research? And what were some of the opportunity areas that were identified from that research if you did some?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [29]
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I think, you can see today, we haven't talked a lot yet about Atmosphere. We see a real opportunity in terms of outdoor lifestyle in our Chek stores and in Atmosphere. Many times, when you think about sports, you think about just team sports. But outdoor is a bigger spend than what you would see in team sports, even. And fitness is growing a lot, too. So a lot more emphasis on different kinds of sports, not just sports where you have a score. We also, as we looked across through our research, it was clear we have an opportunity in Ontario to expand our sales and our square footage. That came across very, very clearly in the research, as well as what we knew in our gut and from touring the country.
When we also talked to our customers, and we did a lot of research prior to making acquisition, and then, if you remember, we had a little bit of a hiatus while we waited for the Competition Bureau to approve the deal, we did a lot of customer research in terms of who are the customers we want to target and what they're looking for in our store and across all channels. And it became very clear to us that we have an opportunity, especially in sports, to really connect with the customers, in-store and in other channels.
Also, as we looked at the customer base, it's obvious that we want to appeal to anyone who wants to participate in sports and recreation but that our customers were significantly younger and more digitally savvy than customers at large. It's a whole other conversation to go through everything with the research that we did, and also what the Team that we have at FGL Sports is obviously one of the best, and they understand the business as well as anybody. So, we have a lot of knowledge, and that's really what drove the strategic plan was all this input. So, at some point, we can talk to you more about it, but it's a lot there.
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Jim Durran, Barclays Capital - Analyst [30]
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Great. Thanks, Mike, and best of luck.
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Operator [31]
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Your next question comes from the line of Wayne Hood with BMO Capital Markets. Your line is now open.
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Wayne Hood, BMO Capital Markets - Analyst [32]
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Yes, Michael. I have actually three questions. One was when you look at the capital requirements to accelerate growth in here, is the business free cash flow positive when you look at it on a stand-alone basis, and will most of those locations be leased or owned? And does this affect the overall corporate capital spending number that is in the CAD360 million to CAD385 million range?
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Dean McCann, Canadian Tire Corporation - CFO [33]
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Wayne, it's Dean. I'll do the capital piece. For 2012, the CAD360 million to CAD385 million is still okay in the context of what this plan is. This plan is really focused on the spending kicking in for 2013, post the closures. So, you are fine in terms of the capital spend for this year. And I will let Mike deal with lease versus --
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Wayne Hood, BMO Capital Markets - Analyst [34]
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What about next year, Dean, while you are on it, though. You are talking about accelerating growth. Does accelerate that number into '13 higher?
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Dean McCann, Canadian Tire Corporation - CFO [35]
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I guess the way to answer that is we'll have some conversion capital, but we're still thinking it's not materially higher, I guess is the way I would describe it right now, Wayne. Obviously, we've still got to put all the plans together, but there's nothing to indicate that it's going to be materially higher than what we've been trending at for this year.
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Wayne Hood, BMO Capital Markets - Analyst [36]
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And you --
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [37]
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On the other two questions, we expect it to be free cash flow positive even after capital. We almost always lease our properties. We have one owned property across our whole network. So I think you can expect to see heavy lease unless in further years, and we don't have one at this point, we see the opportunity to develop a piece of land for a flagship store. But I think you can look at least locations as we go forward.
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Wayne Hood, BMO Capital Markets - Analyst [38]
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Okay. You kind of related to this, I guess, is that there was a need there that they needed an upgrade in their merchandise systems to support growth, so you are really not allocating by group of stores but by store in POS. How does that fit into the capital that's going to be required in '13 and '14 and its potential impact on margins due to higher D&A and so forth. So I'm more concerned about gain over your skis where you've got accelerating growth but you need systems to support that growth so you don't blow your stuff up.
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [39]
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Yes. And that's obviously something we looked at carefully before we made the acquisition. We continue to analyze it. Fortunately for us, Forzani had made a lot of investment, and those of you who covered Forzani prior to us coming along, Project Paradigm, which is almost complete and really helps us in terms of assortment and replenishment, so that's good. Like any retailer, we are going to have to continue to invest in base technology to improve our systems going forward. But in terms of our capital plan, we are not looking at significantly higher technology costs to run our stores. I think we inherited a Company that was in pretty good shape, and we've done a lot of work in that area.
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Dean McCann, Canadian Tire Corporation - CFO [40]
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And Wayne, it kind of goes back to the same thing. We are not looking at a material increase relative to the target we have given you for capital this year.
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Wayne Hood, BMO Capital Markets - Analyst [41]
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Okay.
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Dean McCann, Canadian Tire Corporation - CFO [42]
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And that would encompass anything we have to from a systems point.
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Wayne Hood, BMO Capital Markets - Analyst [43]
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And then my last question relates to as you think about the Business over the next several years, given the various formats and mix within those formats, how are you thinking about the EBITDA margin shakes out for this, because if you look at Dick's, it's 11.5%, and Hibbett, it's at 15%, and you are probably trending somewhere in between? How do we think about the overall consolidated EBITDA margin for the Business as it forms itself over the next several years?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [44]
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I don't think you are going to see -- obviously, we're going to be trying to get that EBITDA margin up, but I don't think you'd be seeing any significant change in the next couple of years. We remain -- we are going to remain our round 28% hard goods mix in our larger stores, in our Chek stores, which are higher margin at the till than our other banners, so that will help the mix. And we'll continue to develop our Businesses where there is good margin. But overall, like any retailer, we're going to be meeting our customers' needs, and that's how we will decide to fill the store. But I don't think you're going to have any issues in terms of our EBITDA margins, in terms of the strategic plan.
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Wayne Hood, BMO Capital Markets - Analyst [45]
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All right. Thanks.
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Operator [46]
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Your next question comes form the line of Mark Petrie with CIBC World Markets. Your line is now open.
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Mark Petrie, CIBC World Markets - Analyst [47]
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Yes, good morning. Just in terms of the larger flagship stores, does the sales mix -- or does the targeted sales mix change at all? I know you said hard goods right now about 28% overall at Sport Chek. Apparel is probably 40% and the balance footwear.
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [48]
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We are right now finalizing what we are going to be putting into the flagship stores. I would believe that they will, because of their size, heavier in footwear and apparel than a normal Chek store.
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Mark Petrie, CIBC World Markets - Analyst [49]
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And does your targeted spend on labor or occupancy as a percentage of sales, does that change at all?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [50]
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I think as you get to a larger store, you become more efficient. In our system, that's the way it works. And so a Chek store which is 35,000 square feet is more efficient than the one that is 20,000 square feet. And so as we move to larger stores, I think you will see, in terms of labor, more efficiency.
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Mark Petrie, CIBC World Markets - Analyst [51]
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Okay. Thanks. And then just in terms of the strategy for the GTA or urban stores, did you say that it's mostly going to the flagship stores that serve that? Or is there an opportunity to do some of the smaller, real urban fill in?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [52]
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You're absolutely right. There will be flagship stores in urban areas like the GTA, but we are looking at filling in the market with Chek stores -- normal size Chek stores, as well. Not just flagship.
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Mark Petrie, CIBC World Markets - Analyst [53]
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Okay. Thanks.
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Operator [54]
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(Operator Instructions) And we have a follow-up from the line of Jim Durran with Barclays. Your line is now open.
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Jim Durran, Barclays Capital - Analyst [55]
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Hi, Mike. I assume you're not going to give us this detail now, but do you foresee a time, maybe late next year, where you'd be prepared to talk about some of the granularity on the mix of stores you will be bringing to the market? So, you know, the larger flagships versus the smaller stores?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [56]
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Yes, for sure. It's no big secret right now that we are going to be looking to put up the 10 flagship stores over the next 5 years starting in 2013. Obviously, the most stores we are going to putting in are between that 25,000 and 35,000 square-foot range. We currently have seven small market stores. We like them.
And I think you can see -- so you're going to see a mix of, obviously, two to three flagship stores per year, and as quickly as we can put them -- find the right real estate, we will be putting those up. We really like that. You'll be seeing 5 to 10 small market stores a year, and you'll be seeing a larger number of our normal, what that 's going to look like in the future. We'll be change our normal Sport Chek stores as well as the Atmosphere stores we're putting up.
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Jim Durran, Barclays Capital - Analyst [57]
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Would there be any --
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [58]
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We could give you more granularity, yes, but I think we have a pretty good idea now of what --
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Jim Durran, Barclays Capital - Analyst [59]
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Sure, that's very helpful. Would you be considering putting Sport Chek stores on the same pad as a Canadian Tire store?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [60]
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Yes is the short answer. There is very little overlap between Canadian Tire Sports and FGL Sports. It's a different customer at a different time and a different decision to make. So yes, we will. When you think about the Canadian retail landscape, Canadian Tire is everywhere. And so many of our stores are going to be near, in the same area, or where it makes sense, we will have them close to Canadian Tire stores. Just the way it works.
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Jim Durran, Barclays Capital - Analyst [61]
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Yes. I guess you can hear a lot of us are a bit surprised that you are going after so much square footage, only because we keep hearing from so many retailers, especially those south of the border that want to come here, that it's tough to find locations, while acknowledging, obviously, that Canadian Tire's got real estate expertise that some don't have. I guess that's kind of our intrigue in terms of the significant growth over next five years.
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [62]
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We keep reading about it and hearing about that with so many retailers competing for space, which is true, that it's difficult to find locations. And that doesn't mean it doesn't take a lot of hard work, but that our real estate group, especially consolidated CTC and FGL Sports, is out there pounding the pavement. For '12 and '13, we are done, really. And now we are moving on.
And so you've got to find the best locations, and you can't settle. We have a -- I believe that the strategy we have here will be attractive to landlords because the stores are going to be more exciting. The in-store design is going to be more exciting. It's going to be multichannel. Landlords like that and vendors like that. I think this will help us, even, as we go forward finding the best locations, especially for those -- the big flagships.
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Jim Durran, Barclays Capital - Analyst [63]
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That's great. Thanks, Mike.
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Operator [64]
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Your next question comes from the line of Chase Bethel with Desjardins Capital. Your line is now open.
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Chase Bethel, Desjardins Securities - Analyst [65]
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Hello. Good morning. Chase Bethel filling in for Keith. I was hoping that maybe you could give a bit more color on some of the background work that you did when you were looking at how will differentiated the Sports Mart and Athletes World centers were. Are there any statistics, such as how customers were shopping between the different formats or how consumers viewed them?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [66]
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Yes. We did do quite a lot of work, and a lot of work's been done over a number of years in terms of looking at Sport Mart and Athletes World banners. So I'm going to answer it two ways. One, I'm going to talk about what we found when we looked at it, what customers are seeing. And obviously, these banners did CAD165 million of sales, so there's customers who enjoy these stores and will continue to enjoy them.
Sport Mart was just strategically problematic in the long term for us. It was not clearly differentiated in terms of positioning with Sport Chek, so we could do a lot of what we wanted to do for consumers in Canada through Sport Chek. The stores average about 8,000 square feet. It's down from its peak number of stores to about 48 stores, down from 99. So, the real estate and the coverage across all the markets wasn't that great.
We believe that -- and we are going to be working very hard prior to these stores closing down to transfer as much of the business from Sport Mart to Sport Chek to National, but also to Canadian Tire retail stores. Canadian Tire retail stores do a lot of equipment, especially in the low to mid-point price range that Sport Mart plays in. So we have a whole detailed plan in terms of being able to transfer those sales over to our CTC banners.
In terms of Athletes World, those of you who have been covering Forzani for a while, it was purchased in 2007 out of bankruptcy. It just didn't have a niche, and it's very difficult for a store that size which is mall-based, to be at the number of stores it currently is. So, we just didn't feel that that was going to be -- that was going to be logical, long-term, in terms of being differentiated from a lot of other players who are in the mall. So that was the thinking that went into the Sport Mart and AW decision making. And the fact is that even given that sales, because of the number of stores, and really the overhead to cover those number of stores, they just weren't profitable enough.
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Chase Bethel, Desjardins Securities - Analyst [67]
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Great. Thanks. And I was wondering if you had some internal estimate in terms of what sales capture rate might be realistic of the CAD165 million that's up for, in terms of the closed stores.
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [68]
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We do. But I think for -- again, I'm sorry, the second time I've said it, for competitive reasons I'd rather not divulge at this time. But yes, we do have a -- we've done some research, as well. We had a pretty good idea of what we thought it was, and then we talked to our customers. So, I think will be significant movement from Mart, especially, to our Canadian Tire, and to our Sports Chek banner.
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Chase Bethel, Desjardins Securities - Analyst [69]
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All right. Thanks. In terms of -- I was wondering what the workforce reduction might be at the beginning of 1Q '13. Presumably, you have to open stores to -- as you open stores, you will be adding back some of the labor. But what will it look like as of that point?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [70]
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Obviously, it's a tough decision to close down stores, because it affects a large number of employees. However, in this case, I think there is some bright news there. First of all, we are treating the employees very respectfully in terms of retention, and if there is severance, in terms of severance as well. 20 of the stores will be converted, so there will be jobs there in 20 of the stores.
At the same time, we are going to be placing as many employees as possible into our other banners. Obviously, that is a Chek and -- Sport Chek and National Sports. But also, as you said, and you're absolutely right, that we're going to be opening so many stores at the same time that there will be lots of opportunity for these employees to be transferred to our other stores. And we have, again, a very detailed plan. I've got to commend Keith and the rest of the Team for doing that. And so at the end of the day, by the end of 2013, as I said before, we are going to -- well, I'm not sure I said before -- but we're going to have employed -- we're going to be employing more people by the end of 2013 than we do today. Quite a few more. Even with the store closures.
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Chase Bethel, Desjardins Securities - Analyst [71]
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Okay. Thank you very much.
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [72]
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Sorry, just to add one other thing, too. It's not just that -- we are also going to be talking to our associate dealers in each of the markets, and we have a plan to talk to the dealers in each of those markets about taking on some of our employees if they are looking for great employees because the employees in these banners have done a great job. We have great customer satisfaction scores here.
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Angela McMonagle, Canadian Tire Corporation - VP, IR [73]
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Operator, are there any more questions?
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Operator [74]
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Yes. Your last question comes from the line of Wayne Hood with BMO Capital Markets. Your line is open.
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Wayne Hood, BMO Capital Markets - Analyst [75]
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Yes, Michael. I just wanted to come back to your comment a second. You mentioned that you didn't expect material improvement in the EBIDTA margin as you looked at the Business over the next several years. I find that a little bit surprising because typically you don't buy a Company -- you talked about synergies, and you wouldn't buy a Company if you didn't think there weren't some modest to material improvement in EBITDA margins. Can you just explain to me why you would not expect much improvement?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [76]
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Thanks for coming back on that. Let me clarify that. Obviously, we do plan on EBITDA margin improvement. I thought the question related to the banner closures. That's why I thought, given the size and CAD165 million in sales and the size of those, I didn't think that would have a great impact on EBITDA margins.
However, you're absolutely right. We do, in terms of mix in the store, productivity, the real estate, and the synergy numbers we're looking at, obviously, we are looking at EBITDA -- margin and EBITDA growth as we go forward.
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Dean McCann, Canadian Tire Corporation - CFO [77]
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And Wayne, if I can just jump in there. It's Dean. As you know, we disclosed the total retail segment. So suffice it to say, we are expecting FGL to be a positive contributor to growth in EBIDTA for the overall retail segment. That's the way we are looking at it. And Mike's absolutely right. The CAD165 million in sales that goes away with the closures was a very unproductive CAD165 million from an EBITDA point of view.
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Wayne Hood, BMO Capital Markets - Analyst [78]
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Right. And I would think, Michael, too, that you would expect your EBITDA margins over time to be in the low to mid double-digit, call it anywhere from a 10% to 15% range depending on how the mix shakes out and what kind of synergy you achieve. Is that correct, the way to think about it?
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [79]
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Yes, I think that is. Obviously, we bought this Company, and we have this -- we're very happy nine months in. So our goal is to obviously gross sales and to grow our EBITDA margin. So as Dean said, this is a big growth play for Canadian Tire. That's why and we announced this today. So I think you are absolutely right.
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Wayne Hood, BMO Capital Markets - Analyst [80]
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Thanks for clearing that up. Thank you. Good luck.
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Michael Medline, Canadian Tire Corporation - President, FGL Sports [81]
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Thank you so much.
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Operator [82]
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There are no further questions at this time. I will turn the call over to Angela McMonagle, Vice President of Investor Relations, for any closing remarks.
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Angela McMonagle, Canadian Tire Corporation - VP, IR [83]
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Thanks, operator, and thanks, everyone for joining us today. Should you have any additional questions, feel free to call the Investor Relations Team. That concludes our call for today.
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Operator [84]
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This concludes today's conference call. You may now disconnect.
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