Q2 2012 Canadian Tire Corporation, Limited Earnings Conference Call
Aug 09, 2012 AM EDT
CTC.A.TO - Canadian Tire Corporation Ltd
Q2 2012 Canadian Tire Corporation, Limited Earnings Conference Call
Aug 09, 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
* Dean McCann
Canadian Tire Corp Ltd - Pres. - Canadian Tire Financial Services
* Michael Medline
Canadian Tire Corp Ltd - President, FGL Sports
* Harry Taylor
Canadian Tire Corp Ltd - COO Mark's
* Marco Marrone
Canadian Tire Corp Ltd - CFO/EVP - Finance
* Mary Turner
Canadian Tire Corp Ltd - COO
* Glenn Butt
Canadian Tire Corp Ltd - EVP - Customer Experience & Automotive
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Conference Call Participants
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* Jim Durran
Barclays Capital - Analyst
* Patricia Baker
Scotiabank - Analyst
* Irene Nattel
RBC Capital Markets - Analyst
* Brian Morrison
TD Securities - Analyst
* Mark Petrie
CIBC World Markets - Analyst
* Keith Howlett
Desjardins Securities - Analyst
* Vishal Shreedhar
National Bank Financial - Analyst
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Presentation
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Operator [1]
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Good afternoon. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the Canadian Tire Corporation Limited second-quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.
(Operator Instructions)
Thank you. I will now turn the call over to Angela McMonagle, Vice President of Investor Relations. Angela?
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Angela McMonagle, Canadian Tire Corp Ltd - VP - IR [2]
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Thank you, operator, and thanks, everyone, for joining us for today's financial results conference call. Here with me today are Stephen Wetmore, President and CEO, and Dean McCann, Chief Financial Officer and EVP of Finance. All of our business leaders are also present at today's call. Earlier today we released the financial results for the second quarter of 2012. A copy of the earnings disclosure is available on our website, and includes cautionary language about forward-looking statements, risks and uncertainties, which also apply to the discussion during this conference call.
With that, I'll turn the call over to Stephen.
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [3]
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Thank you, Angela, and good afternoon, everyone. As you know, we got off to a strong start in the first three months of this year, and that momentum has followed through into the second quarter, with positive growth in the retail segment, and another excellent quarter for Financial Services. Although weather and an extra selling day were both on our side this quarter compared to last year, our overall performance across the businesses for the most part was strong, and we finished the first half in a very good position. As you can see, revenue was up more than 16% in the quarter, to almost CAD3 billion, which reflects the inclusion of FGL Sports, and net income grew more than 26%, and included almost CAD23 million of costs associated with the FGL Sports banner rationalization plan, which was announced earlier in the quarter.
In the Retail segment, while we achieved revenue growth across all banners, we also saw some margin improvement, which was a focus coming out of the first quarter. Expenses for the non-FGL businesses were down compared to last year, and income before taxes in the Retail segment increased more than 17% compared to the prior year, to CAD115 million.
Canadian Tire Retail in particular showed good progress, balancing sales growth and margins since the first quarter. In this retail environment, preserving margin is not an easy task. As you would expect, there was strong sales growth in the seasonal categories such as backyard fun, backyard living, outdoor recreation, and gardening. Performance in these areas was driven by strong assortments and a good in-stock position.
Kitchen was also a very strong performer, and additionally showed margin improvement since the first quarter. Customers responded well to the new assortments in cookware and kitchen tools in particular, and an increase in category-specific advertising space in the weekly flyer also drove sales. The early Spring weather did affect performance in the quarter in some categories such as cycling and tires where sales were pulled into the first quarter.
In automotive we saw growth in key seasonal categories such as automotive maintenance and car care accessories. The mild Winter weather generally meant less wear and tear on cars, leading to less traffic at auto service shops, as well as slower sales of auto parts and all-season tires, which appears to be a common story across the auto industry in North America, and particularly in the Northeast. However, vehicles will require maintenance at some point, and we view this as a delay in auto service sales more than a permanent loss of business.
Revenues at Canadian Tire Retail, which is primarily the shipments to our dealers, grew 3.3% in the quarter and reflected themes similar to those seen for sales with strong replenishment orders in many of the obvious categories such as backyard living, backyard fun, outdoor tools, and gardening.
In addition, we saw double-digit revenue growth in the paint category, as dealers built their in-stock position in order to satisfy customer demand for our new paint line. The margin rate was flat overall to last year as a result of sales growth in living, fixing, and playing, and sales and rate improvements in the seasonal and gardening categories. This was offset by declines due to product mix effect of promotions in car care and accessories, and lower revenue from auto parts and tires that I already mentioned.
During the second quarter, CTR continued to progress in a number of key areas. We continued to enhance the customer experience. On the heels of the new refund card rollout in the first quarter, we implemented an updated policy that simplifies the returns policy for customers and dealers, and provides consistency across the store network. We completed more than 50 Canadian Tire store projects, primarily smart stores that have consistently improved sales productivity at a low capital cost. More of these projects will come in the second half of the year.
We are learning from our loyalty pilot in Nova Scotia. Sign-ups are well above what we had forecasted. We have completed several personalized mailings based on the analytics that have been collected to-date. And we are evaluating the results. Our loyalty deep dive is scheduled in a few weeks, which will include feedback from the local dealers and customers, and the findings will be embedded into the program.
And finally, the transition to our new automotive infrastructure system continues. You'll recall that the system is designed to provide a platform to take our automotive parts and service businesses to the next level, and provide a customer experience far beyond what we had been capable of delivering previously. While many stores have embraced the new system with very good results, in some areas the transition has been slower. Our field support teams continue to work on staff training in order to successfully capitalize on the full potential of the new system and its capabilities across the entire store network.
At Mark's, the strong regional economies in the western provinces continued to be the primary performance driver for sales of industrial wear. Sales of men's and women's casual wear were also strong, as customers responded favorably to our seasonal assortment, which was aided by the favorable weather. The strong sales resulted in very little carryover of Spring and Summer goods. Margins improved compared to last year, driven by sales growth and less clearance activity versus the prior period. Margins also benefited from lower supply chain costs, as the team capitalized on opportunities to be more efficient with material handling.
In the second half of the year, we plan to launch almost 60 rebranded Mark's stores that will have regionally focused assortments. In central Canada, many of the rebranded stores will emphasize casual clothing, which we see as a real opportunity, and I'll talk more about this in a minute. This is not to say industrial wear won't be actively marketed in that geography, but it will be less of a focus compared to Mark's stores in Western Canada where sales have historically been driven by the resource sector.
In men's casual wear, Harry Taylor and his team are focused on combining lifestyle and commodity clothing and accessories to better satisfy our target male customer. We are currently piloting this refined merchandising strategy in about 150 Mark's stores across the country with good results. In women's casual wear, the team has been working with industry experts to assess and redefine the strategy for the women's line overall. In the Fall, we will showcase casual women's clothes that provide more versatility around three areas -- work, life, and weekend. The objective here is to be more current by offering trend-conscious and "basics" clothing that presents good value to our target female customer.
Turning to FGL Sports, Michael Medline and his team have been very successful in sustaining and building performance momentum. Top line results were strong across all product categories, including hard goods, soft goods, and men's, women's, and children's footwear. Sales growth at Sport Chek was particularly strong, as Canadians across the country reacted well to the unparalleled product selection, and healthy active lifestyle positioning that the banner stands for. Inside Sport Chek stores, the Nevada Bob's Golf concept shops continued to capture the attention of golfers, and drove strong sales in the category. Apparel sales were strong with good response to our athletic offerings across all brands.
Poor performance of Canadian hockey teams in the post-season compared to the prior year did affect sales of licensed apparel specifically in the quarter. However, this was partly offset by growth in Euro Cup and Toronto Blue Jays branded goods. I should also mention that if there is a disruption to the start of the NHL season, we would expect sales of licensed goods to be impacted later in the year.
At the end of May, Michael outlined the FGL Sports strategy, including corporate banner rationalization and accelerated growth of the superbrands. As was mentioned at the time, the FGL Sports strategy is centered on customer experience. The primary theme for new store openings is the same, with a specific focus on building more inspirational store designs and in-store displays, as well as employing knowledgeable and passionate store staff. More to come in this regard as we begin to open stores across the country that exemplify these characteristics. Although the bulk of the conversions and new openings won't begin until next year, there is new store activity planned for the second half of the year, and Michael is here to answer any questions you may have in this regard. Finally, work continues on acquisition synergies, and we are on track to realize the CAD25 million run rate by the end of the year.
In the Financial Services segment, income before taxes increased almost 42% compared to the second quarter of 2011. As Dean will outline in a moment, this reflected continued improvement of the credit card portfolio, which has been aided by the stabilizing economy, and also the impact of new credit card terms that were implemented in the quarter. In addition, the Financial Services team continued to prudently manage expenses.
Mary Turner and her team have also made good progress supporting the retail businesses. Canadian Tire Home Services has been busy with installations, especially of air-conditioning systems. And the new Canadian Tire Drivers Academy was announced during the quarter. While these initiatives are ultimately an extension of CTR's strategy, the best-in-class call center infrastructure at Financial Services is used to put them into operation. In the second half of the year, Financial Services will extend its product line further to support FGL Sports with a Sport Chek-branded MasterCard.
We are well-positioned for what promises to be a highly competitive retail environment in Canada in the second half of the year, with continued liquidations and closures by some players, and new store openings by others. We expect heightened competitive intensity as we head into the Fall and Winter selling seasons, as we usually do, and it's nothing we haven't seen before.
We continue to be on offense, focused on our long-term strategic imperatives, making good progress quarter-by-quarter, and preserving market share in our key categories. At Canadian Tire Retail especially, that means constantly evaluating and enhancing our assortments by offering the best options to our customers in our key leadership categories. And across all banners, that also means making our customers aware of the exciting offers and our solid value proposition.
As I said last quarter, we are focused on excellence in execution, which in part means having the right bench strength. To that end, two seasoned executives recently joined the leadership team in senior merchandising and technology roles. David Mock joined as the Lead Merchandiser for Canadian Tire Retail, and is focused on enhancing our merchandising capabilities. Eugene Roman joined as CTC's Chief Technology Officer, and is focused on, among other things, implementing our enterprise-wide digital strategy.
So, with that, let me turn the call over to Dean.
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Dean McCann, Canadian Tire Corp Ltd - Pres. - Canadian Tire Financial Services [4]
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Thanks, Stephen. Before I review the results in detail, I'd like to make a couple of overall comments to set context for the Q2 results, and to provide some perspective on the balance of the year in light of what was a very strong earnings performance by both our operating segments. The Retail segment's earnings rose 17.3%, including the cost of the FGL banner rationalization cost of CAD22.7 million. Without this cost, our earnings in the retail segment would be up over 40%, or almost CAD40 million. Contributing to the increase was the inclusion of FGL, which represents about 30% of the earnings growth in the Retail segment, given there was no comparative earnings included in Q2 '11.
In addition, the quarter also benefited from lower operating expenses for the non-FGL Retail businesses versus a year ago, when expenses were elevated to fund new strategic initiatives like the loyalty initiative, and merchandise productivity before settling into a more normalized run rate in the balance of the year. The balance of the growth in the quarter is due to good performance of Mark's, a turnaround in margin at Petroleum versus the first quarter of 2012, and a balancing of sales and margin by CTR that led to an overall growth in margin dollars in the quarter. As a result, we view the Retail results in Q2 as very positive, obviously. But we do anticipate that the competitive landscape will intensify in the balance of the year, and the consumer will remain cautious about their spending, which may impact both segments of our business over the balance of the year.
Turning to a review of our results, which are summarized in the slides provided, I will start with the consolidated results presented on slide 4. Note that all consolidated and Retail segment figures reflect the impact of the inclusion of FGL Sports results in Q2 2012, without a corresponding comparative, given the business was acquired in August 2011. Diluted EPS for the quarter was CAD1.63, up 26.4%, and included the cost for FGL banner rationalization of CAD22.7 million, which were booked in the quarter. Effective tax rate for the quarter was 27.3%, down from 27.8% a year ago. As you will recall, we typically update our tax rate in Q3, and will do so for 2012 in the next quarter. Capital expenditures were CAD68.8 million, up CAD10 million primarily due to the inclusion of FGL Sports capital spending. We are still on track to spend CAD360 million to CAD385 million in capital in 2012, but likely falling at the higher end of the range.
Moving to page 5, the Retail segment performed very well in the quarter. All banners generated sales growth over the prior year, and this contributed to strong revenue growth of 17.8% in all banners, including the impact of FGL. Margin growth in dollars was 25.5%, and the gross margin percentage for Retail expanded to 26.6%, up from 25%. This was influenced by the inclusion of FGL, but also reflected solid margins in all banners.
Overall, CTR's margin rate was flat as it balanced sales and margin in the quarter, with a recovery in living margins versus the experience of Q1 '12, when we saw some margin investment that drove sales. Automotive margins were weaker in the quarter, as Stephen mentioned earlier. Margin also benefited from a good performance by Mark's, as they discounted less in the quarter versus a year ago. In addition, margins for Petroleum, our lower-margin business, represented a lower share of the margin mix. Petroleum generated about a quarter, or 39 basis points of the 162 basis points in total margin rate improvement versus last year.
Retail EBITDA rose 18.3% for the quarter, and includes FGL's Q2 '12 EBITDA contribution, offset by the cost for the FGL banner rationalization. EBITDA benefited from the revenue and margin growth already discussed, as well as a decline in non-FGL Retail operating expenses versus the prior year. As mentioned earlier, we had increased expenses last year to fund new strategic initiatives like loyalty, which is now in pilot, and merchandise productivity, which has contributed to our improved margin performance in the quarter.
Retail ROIC, calculated on a rolling 12-month basis was 7.3% for the quarter, down 41 basis points from a year ago. The decline is explained by three factors. First, the impact of the acquisition of FGL, which has increased our invested capital in advance of a full year of FGL's earnings. Second, the favorable tax settlement recorded in Q3 2011. And third, the impact of the FGL banner rationalization provision taken in Q2 2012. Unfortunately, these factors mask some positive momentum in the quarter for ROIC. It was a product of good growth in earnings, and ongoing efforts to manage our capital spend.
Turning to page 6, in the Financial Services segment, income before taxes grew 41.6%, an exceptional performance generated primarily by the continued improvement in portfolio quality metrics. Write-offs due to bankruptcies and regular charge-offs continued to decline, and led to a decline in the write-off rate to 7.16%, down from 7.33%. In addition, improved aging of accounts, that is, a reduction in the dollar amount of accounts that are past their payment due date, led to a decline in the allowance provided for future write-offs.
During that quarter, a change in customer minimum payment terms for outstanding credit card receivables was also implemented. This resulted in further improvement in account aging, and also reduced the allowance requirements for future receivable write-offs. Fundamentally, the change reduced the required minimum payment for credit card customers, and as a result, more of them were able to meet their payment obligations and remain current.
Return on receivables remains elevated at 6.47% compared to 4.86% a year ago. The ROR is above our target range of 4.5% to 5%, primarily due to stubbornly low receivables growth that is an industry-wide phenomenon, as consumers are managing their high-cost debt more effectively.
And with that, I'll turn it over to the operator for the question-and-answer period.
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Jim Durran, Barclays.
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Jim Durran, Barclays Capital - Analyst [2]
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Just wondering if you could just give us an idea, do you sense any deceleration in consumer spending? I did notice that the competitive environment is pretty intense, but we're hearing from a number of retailers that there's been a slowdown in the recent months.
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [3]
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Hi Jim, it's Stephen. I wouldn't say that we have, but certain of the categories I think have been, like automotive for example, we did see some fairly rapid tailing off if you will, and we're trying to perfectly attach that to the change in climates in the past winter. And that seems to be what the auto industry is saying. But nonetheless we have seen some kind of erratic transactions and purchasing in that category.
Just about everything else though that we presented for the quarter across our lines, consumers responded extremely well to. We always see slight regional differences but continued strength in the West for sure, and the industrial side of Mark's would be a great indicator. I don't think Mary Turner would tell you that she's seen anything radically different in consumer spending from Financial Services side. So no obvious indicators anyway.
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Jim Durran, Barclays Capital - Analyst [4]
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As far as you've identified some core categories across your businesses that you are trying to strengthen, notably sporting goods with the Forzani acquisition. What other categories do you deem beyond auto and sporting goods to be strategically important and differentiating that you want to bolster them in some way, shape, or form?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [5]
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Well I think our main categories that we've always promoted and promoted on the front of the store, remain pretty critical to us in living, playing, fixing, and driving. But having said that, we have a leadership position in tools, which we always have to continue to strengthen where our hardware business beyond doubt. We've had a leading position and a strong position for a variety of different reasons in living, which I think we are continuing to strengthen, and we have a new strategy in terms of in-store display as well and strong supplier exclusivities.
Outdoor rec I think is an area that we have to pay particular attention to over the coming quarters. We don't allocate a great deal of space to that category if you will in-store, so we are going to pay particular attention to it. But that would be in addition to. Our paint business we knew we had to go after that about 1.5 years, 2 years ago, and I think we've made great strides in relation to that. Within a CTR environment I don't think I've missed anything there.
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Jim Durran, Barclays Capital - Analyst [6]
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Okay, that's great. Thank you.
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Operator [7]
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Patricia Baker, Scotiabank.
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Patricia Baker, Scotiabank - Analyst [8]
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In the press release Stephen you give some details on the sales per square foot trend at CTR, also at Mark's. That's quite useful. Can you give us just some perspective on whether FGL Sports, I understand why you didn't give it to us now, but would the sales per square foot have seen much change year on year, or could you even tell us what sales per square foot was in the second quarter in that business?
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Michael Medline, Canadian Tire Corp Ltd - President, FGL Sports [9]
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It's Michael. And obviously we look at sales per square feet on the corporate business and in the franchise business. Over the past year we have seen improvement particularly in the corporate side of the business. As you probably know, we had much stronger sales per square feet on the franchise side of the business and some of that is attributable to smaller store size. And but some of that also had to do with servicing the customer and also inventory intensity. We've seen over the last couple years but especially over the last year, and especially Chek an increase in our sales per square feet.
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Patricia Baker, Scotiabank - Analyst [10]
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Okay, that's quite useful. While I've got you Michael, this is just a clarification and it's my ignorance, but in the banner rationalization plan and you break down the line items, and there's CAD6.2 million associated with cost of producing revenue, just what does that really mean?
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Dean McCann, Canadian Tire Corp Ltd - Pres. - Canadian Tire Financial Services [11]
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It's Dean, Patricia, what that is is a provision for inventory.
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Patricia Baker, Scotiabank - Analyst [12]
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Okay, okay. Perfect.
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Dean McCann, Canadian Tire Corp Ltd - Pres. - Canadian Tire Financial Services [13]
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It's the expected if you will, the estimated value of what we'll have to take as a hit when we clear out inventory.
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Patricia Baker, Scotiabank - Analyst [14]
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Okay that makes perfect sense now. If I may ask another question on this is Mark's Work Wearhouse, Stephen you've said a lot about Mark's in your remarks, and sounds like there's a lot going on there. And it sounds like Mark's Work Wearhouse is going to look a lot different 12 months from now, or at least a little bit different. What will it look like? Is it that different regions are going to have different models? I was a little confused about exactly what you are doing there.
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [15]
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Okay well Harry is here and I'm trying to give -- I mentioned his name two or three times too because he had such a good quarter. (laughter) So I will hand it off to Harry.
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Harry Taylor, Canadian Tire Corp Ltd - COO Mark's [16]
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Thanks Stephen. Patricia we are going to look -- we are talking right now about the greater Toronto area market where we're in the midst of remodeling our stores, not just changing the sign on the front, but changing the experience inside. A combination of fixtures, visuals, and the merchandising, so we are remerchandising the stores. It is not different from what we did in Calgary last year. So if you go to Calgary, have a look, that's what we're going to look like. We've tweaked it a little bit, but not extensively.
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Patricia Baker, Scotiabank - Analyst [17]
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Okay, so it won't be different from Calgary then.
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Harry Taylor, Canadian Tire Corp Ltd - COO Mark's [18]
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No it will not. It's bringing the rest of the chain up to that standard.
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Patricia Baker, Scotiabank - Analyst [19]
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Okay.
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Harry Taylor, Canadian Tire Corp Ltd - COO Mark's [20]
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And we're very bullish on what that will mean for us.
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Patricia Baker, Scotiabank - Analyst [21]
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Okay, thank you. I'll get back in the queue and let someone else have a chance.
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Operator [22]
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Irene Nattel, RBC Capital Markets.
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Irene Nattel, RBC Capital Markets - Analyst [23]
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In recent calls we've talked a little bit about the progress you've made on sales of non-seasonal categories. And clearly with the lovely summer weather and the sell-through seasonal I would assume would be the star of the show for the quarter, but if you could just update us on how some of those efforts in the non-seasonal categories are coming along.
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Marco Marrone, Canadian Tire Corp Ltd - CFO/EVP - Finance [24]
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Sure. Hi Irene, it's Marco here. You are right, the weather really helped and actually broke early in the first quarter and helped a lot in the seasonal categories. But even in some of the seasonal categories we're looking at how do we take the leadership position even throughout the year, and a good example is some of our sports business cycling, and looking at even beyond the summer time how can we extend that category into other parts of the year. We see an opportunity there.
In what I would call non-seasonal categories, you look at our, as Stephen mentioned, our tools business where we want to have a leadership position, we continue to work at it. It's a competitive marketplace but we believe we are making strides. And in -- you look at sports even though it is seasonal, overall you look at sports, to us it's something that we have to also -- have a leadership position in throughout the year. And it just means that certain sports for certain seasons but overall we like to be in a leadership position in that space.
And then automotive, which you look at we've had some challenges in the last quarter only because of some of the impacts of the weather and other items Stephen mentioned. That is one area we've put a lot of time and effort, and really starting to for example tires is a good example of what we've done in our tire business to take a leadership position. Special order tires and national brands, that's all working well for us in the future, and so far.
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Irene Nattel, RBC Capital Markets - Analyst [25]
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That's very helpful Marco. And just continuing on automotive obviously that's a core heritage category for Canadian Tire, it's a leadership category. It's also a category in which some of the intensifying competition is less likely to play. And you've invested a great deal in that automotive initiative in the automotive infrastructure, and it sounds as though the benefits are coming unevenly shall we say. Can you give us an update on how they are coming, how you are addressing that, and how hard you can push to really ramp that up, and have that be a real center of excellence and differentiator for Canadian Tire.
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Marco Marrone, Canadian Tire Corp Ltd - CFO/EVP - Finance [26]
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Sure. Irene, I think if you look at the automotive category overall in the second quarter, Stephen mentioned there is some parts that grew, and the one part that we were impacted in is our automotive hard parts. And two/three major reasons for that. One, was the mild winter weather did not cause the impacts that it normally would have on vehicles. And we scoured other organizations that have released publicly their results and a common theme runs through there about the lack of winter weather, especially in the Northeast having an impact on their volumes. So we think that's part of it in the second quarter.
The other is we've seen a decline in, I'll call, it our auto service, and we spent a fair amount of time conducting analysis to figure out why, and here's an interesting stat. 10% of our stores account for 50% of decline. We've actually had a good number of stores that are actually up in auto service. What we're triangulating is that there are a small number of stores that are having some issues, and we're working with those stores as we speak around is it a systems issue. And as Stephen mentioned, we did move to a new automotive system.
And the other is what is happening with the automotive personnel in that store. So we have engaged our team on it, we're on it, and we are confident we will fix the issue and as Stephen mentioned as well, we expect that things will improve over the back half of the year.
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Irene Nattel, RBC Capital Markets - Analyst [27]
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That's great. And just finally if I might, I am assuming that based on the continued weather in July and August that you would've had very good sell-through through the summer months, and you have to be ending this quarter that we're in currently with very clean inventory on seasonal.
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Marco Marrone, Canadian Tire Corp Ltd - CFO/EVP - Finance [28]
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Well if you look at the end of June the information we published, our inventory and I'll speak about CTR specifically, it was up. For a couple of reasons. One was intentional. As you recall, I think at the end of the first quarter, we mentioned that we were bringing in additional inventory in some of the key seasonal categories, air conditioning -- air conditioners, fans, patio furniture, barbecues. And of course the warm weather does help the sales of those categories. So we went into the quarter again knowing that we would have higher inventories than the previous year.
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Irene Nattel, RBC Capital Markets - Analyst [29]
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That's great. Thank you Marco.
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Operator [30]
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Brian Morrison, TD Securities.
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Brian Morrison, TD Securities - Analyst [31]
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Dean, I wonder if you could backtrack on your commentary just on the Retail performance for a moment. I'm not sure that I caught it and I apologize, but can you clarify once you took out the banner rationalization, the Retail performance EBT I think you mentioned was up 40%, which makes sense. And then you mentioned what proportion was attributable to FGL, and I'm wondering if you can just repeat that, or elaborate.
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Dean McCann, Canadian Tire Corp Ltd - Pres. - Canadian Tire Financial Services [32]
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Basically I said about 30% of that, so if you go into the MD&A, there is actually a note at the back end of the MD&A, which is required disclosure when you have an acquisition during the year. And Brian what it will tell you is the percentage of consolidated earnings that are represented by FGL, so I'm not going to do the math for you, but you can do it.
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Brian Morrison, TD Securities - Analyst [33]
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Fair enough. But just tracking a date, just following up on synergies with respect to that, I know you said you are well on track to achieving the CAD25 million today. Where do we stand after this quarter? I think you said CAD20 million last quarter, and things appear to be going quite well.
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Michael Medline, Canadian Tire Corp Ltd - President, FGL Sports [34]
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Hi it's Michael, Brian. We are highly optimistic that we will be reaching that CAD25 million target prior to year end. We've been working really hard to bring the numbers up forward, and I think there's a chance that we will be able to go over that CAD25 million in the first year. But it won't be much more than the CAD25 million I don't think at this point. But that's going really well on all aspects of it and it's going a little quicker than we would've thought, so we're feeling pretty good about it.
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Brian Morrison, TD Securities - Analyst [35]
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That's great. Does that change your CAD35 million target by 2014 at all?
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Michael Medline, Canadian Tire Corp Ltd - President, FGL Sports [36]
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(laughter) I haven't had a sit down and negotiate my 2014 budget yet. Now it will I'm sure.
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Brian Morrison, TD Securities - Analyst [37]
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It was worth a try. And just turning to Mary on the Financial Services side. Last quarter you were extremely bullish on the outlook for GAR growth, clearly it's competitive environment. I'm wondering if you can just elaborate whether your outlook has changed at all and whether -- what initiatives you're undertaking and what is a reasonable time lag between these initiatives being implemented to actually seeing fruition of GAR growth coming through.
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Mary Turner, Canadian Tire Corp Ltd - COO [38]
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Sure. So one of our key initiatives to generate GAR growth is our renewed focus on in-store financing. This is an area that we've not really placed much emphasis on in the past, so it's really in some ways virgin territory for us. So we've spent the last one to two years building out our product base to support sales within the Retail store environment, and we're rolling that out with quite a bit of gusto and seeing some really good year-over-year growth rates. So it will take some time to generate GAR and to generate revenue, but I'm feeling very, very confident that we're on the right track there, and that is going to be a significant source of GAR growth for us in the future.
I think there's some other things that we're doing as well. We're really going through every aspect of our business looking for ways where we can find some additional ways to increase GAR growth and increase revenue. So we are focusing even more than in the past on customer retention, particularly high-value customer retention. We are looking at how we are acquiring customers in the store, and really fine-tuning how we do that and coming up with new ways of attracting high-value customers. And we continue to work very hard on our analytical models, which help us maximize, optimize the relationship with our customers. So to understand better which customers are interested in more credit, and which ones are a good risk-reward balance for us.
So I think there is a whole lot of different levers that we pull in our business in order to keep moving forward. So I think although our GAR growth is fairly modest in the second quarter, I think if you look at the industry, our performance is much better than the industry. We are taking a bit of share. And that is really what we are going to keep focusing on, keep pounding away. It's a bit of a game of inches but I think we are in really great shape to make good progress.
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Brian Morrison, TD Securities - Analyst [39]
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And just lastly, that Sport Chek branded MasterCard that you mentioned. Is that implemented today already or is that forth coming and when?
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Mary Turner, Canadian Tire Corp Ltd - COO [40]
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It's coming in the third quarter, October. So trying to get it out as fast as we can for our back to school and Christmas.
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Brian Morrison, TD Securities - Analyst [41]
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Got it, thanks very much. Good quarter.
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Operator [42]
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Mark Petrie, CIBC World Markets.
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Mark Petrie, CIBC World Markets - Analyst [43]
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Actually I just wanted to follow up on that GAR growth comment about the in-store financing. Is that one of the key variables in terms of bringing return on receivables back into the kind of range that you guys have guided to? Because obviously you're way over that at this point.
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Mary Turner, Canadian Tire Corp Ltd - COO [44]
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I think where we really are, because our growth is so modest and because a lot of things are going our way, the economy is improving so our write-offs are improving, insolvencies are down, recoveries are up, our expenses are well-controlled. So everything is going our way on a percentage basis, but I still have to deliver a bottom line.
So I think we will certainly get back to a more normal if you will rate of return when growth picks up more to be in line with historical trends. I think it's just going to take a bit of time. The economy is still uncertain and customers' reactions to putting on more debt on their card, they're being careful. So I think we just need to keep pushing on all the different initiatives that we're working on to improve the effectiveness of our overall program.
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Mark Petrie, CIBC World Markets - Analyst [45]
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Okay. Dean you had mentioned a change in the credit card terms affecting the allowance rate or pushing that down somewhat. How material was that in terms of the overall move of I guess it was down 46 basis points?
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Dean McCann, Canadian Tire Corp Ltd - Pres. - Canadian Tire Financial Services [46]
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Yes it was a portion of it Mark, but by far and away the biggest driver of it is as Mary mentioned credit metrics where the majority of the impact on the provision line. I mean the terms change did help in the quarter, but I would focus on the credit metrics first and that as a secondary impact.
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Mark Petrie, CIBC World Markets - Analyst [47]
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Okay, thanks. In terms of CTR it seems like this quarter marked a bit of a reversal of the trend in terms of how sales growth and gross margins were balanced. Was that dictated by the different facets of the quarter, be it weather or sales mix. Or does it mark a bit of a change of philosophy in terms of prioritizing those two metrics?
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Marco Marrone, Canadian Tire Corp Ltd - CFO/EVP - Finance [48]
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Mark, it's Marco. I think the first thing is in the second quarter our sales growth was impacted by the issues, or the softness in automotive, so put that aside the rest of our business -- what we have been trying to do since the first quarter is how do we balance off the need to drive traffic and sales against the margin. And looking at some categories where margins may have been slim or nonexistent, and to what degree do we utilize them to drive footsteps.
So it was a conscious effort to make some changes and see the reaction of the consumer, look at the sales increases and the margin. And I think in the second quarter given what has transpired, we are pleased with the progress, but it's something we continue to work at and try to find that right balance between margin and the sales line.
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Mark Petrie, CIBC World Markets - Analyst [49]
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Okay, that's very helpful. Thanks. And then just one last question. Last year you guys had spoken about some improvements in terms of operational efficiency and speed to market. I think tires was one initiative that you guys were pretty pleased with.
How have you progressed with that? And are there new examples of your ability to move things through the network more quickly? And then maybe just on a related note for you Stephen, how does improved operational efficiency rank in your priority list when it comes to issues that you want to address with the new dealer contract?
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [50]
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Good question. Let me take a shot at the three components here and then Marco and anybody wants to kick in, then great. It's an ongoing. We have two productivity streams going and one directly relates to merchandise productivity, I wouldn't say that is just simply buying. There is more to it than that, much more to it than that. Because it involves a lot of process change too in training of our buyers.
But that's a huge thrust for this year, and in fact earlier on here I made a note to make sure that I traced through on everything that we had estimated that we were going to buy better this year and make sure that we actually kept the money. Because often that can go right out into the marketplace, so there's a few things I still have to follow up on that. But we've done extremely well on that side.
The bringing in Eugene Roman to head up Technology and be our Chief Information Officer has allowed us -- it took me two months to get Kristine Freudenthaler who had been in that role to accept the role of continuing to study our processes. And I think there's an enormous amount of money in becoming more efficient with our processes. There is absolutely no doubt about that. But we also have to get out ahead of the processes. So the world is changing in retail, and when it changes, it changes your processes, and it changes you internally. And Kristine is going to get out ahead of that, so two substantial areas of focus for us.
Efficiency to me you are not quite seeing it, but I'm hoping over the next few quarters, you're going to see ROIC moving a little bit. Now what's happening here in our disclosures this quarter is that you've got a full balance sheet of FGL Sports and not a full rolling 12 months of earnings. So I want to see that coming through. We all do. And it's a big focus, and in the end it's one of the true efficiency measures from our perspective. So let's keep a close eye on that one so you can see how efficient we are.
The dealer contract itself and our dealer negotiations. I guess in some ways our ability to work together will allow us to be the most efficient that we can become. I think we are at a stage where we have implemented a number of things between us that perhaps never got implemented before, because we never had the relationship that exists today.
So I think we can accomplish it regardless of the contract itself, but the contract we are going to make sure that we are more aligned if you will in our long-term view of the enterprise, which will help us all cost that together. But we are working very, very closely together, whether it's inventory turns within stores within our DCs, and transportation costs and efficiencies right across the board. We really are pleased on that side of it. I don't know Marco if I've --
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Marco Marrone, Canadian Tire Corp Ltd - CFO/EVP - Finance [51]
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One comment maybe back to even Irene's. In terms of the non-seasonal categories. One area you did not mention was kitchen. And the work we have done with our dealers in looking at that business, and moving that forward, and preparing ourselves for the competition, we have moved very, very quickly. And you will see the execution beginning in our stores. And we will be ready for the competition, so I think that's another example of us working with the dealer partners in a method that was quick and great results.
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [52]
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Is that helpful?
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Mark Petrie, CIBC World Markets - Analyst [53]
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It is. Thanks.
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Operator [54]
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Keith Howlett, Desjardins Securities.
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Keith Howlett, Desjardins Securities - Analyst [55]
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I was wondering if you could comment if you think there's been any impact from the Zellers liquidation on your numbers in the second quarter, and whether you are seeing any benefit or detriment in Canadian Tire centers that are near to a closed Zellers store.
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Marco Marrone, Canadian Tire Corp Ltd - CFO/EVP - Finance [56]
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Hi Keith, it's Marco. We haven't seen anything precise at this point given the nature of some of those closings. We're keeping an eye on it, we have expected some things to unfold differently, but we are still keeping a close eye on it. To date we have not seen any real negative or positive to be honest at this point.
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Keith Howlett, Desjardins Securities - Analyst [57]
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And when you look at your same-store sales growth of 0.4%, how would your traffic have been relative to your basket?
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Marco Marrone, Canadian Tire Corp Ltd - CFO/EVP - Finance [58]
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We never disclose traffic, but I think what I would say, lets not forget in the second quarter the softness in automotive did impact that same-store sales number. So that was -- what I'd like to see that number a little higher given the quarter, however we did manage our margins and made some adjustments and that had a slight impact on the sales line. The customers that are visiting us, we continue to have some growth in the average basket. But it's not big numbers, so it's a slight increase year over year.
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [59]
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If we did disclose traffic, one thing we'd probably highlight is the time of year as well, garden centers create a lot of traffic, constant traffic; you will get some customers who will have to go three times in one day. So you have to really sort out the comparative numbers here from a quarter-to-quarter basis.
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Keith Howlett, Desjardins Securities - Analyst [60]
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Just given the year-over-year weather, 0.4% didn't seem particularly robust to me but --
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Marco Marrone, Canadian Tire Corp Ltd - CFO/EVP - Finance [61]
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Keith lets not forget the first quarter. The weather pattern this year for us given where our quarter ends at the end of March, we had a very strong March. At the time, we did say we felt that there could have been some sales pulled forward. I'll give you a good example of that. Cycling. Bicycles. In the second quarter based on what was not as strong as we had expected, however year to date we're up, because we had a tremendous first quarter. So we're looking at it in the full six months and not just a second quarter alone. Because the weather pattern this year was different than last year.
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Keith Howlett, Desjardins Securities - Analyst [62]
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And just on the food trial that I guess you have in Ottawa, what is the latest thinking there?
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Marco Marrone, Canadian Tire Corp Ltd - CFO/EVP - Finance [63]
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Latest thinking around that is we continue to evaluate it. We are seeing some interesting results vis-a-vis the customer traffic. We are continuing to do the analysis on whether that is resulting in general merchandise sales. Made a couple of decisions and that is to reduce the assortment, that go down, in terms of the number of SKUs and some of the square footage that's allocated. And assess the impact of that on traffic.
And we are going to actually test a couple more stores with a much reduced offering down to about 40 top SKUs, to see if we can generate the kind of traffic gains we see in the other stores. And then from there make an assessment of whether we should continue or exit the program.
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Keith Howlett, Desjardins Securities - Analyst [64]
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The highest level I guess on the big initiatives of customer service and auto service, and I don't know whether you're rolling out the 1 800 number call Stephen Wetmore if you liked your brake job or not, but I'm just wondering where we are on customer service and auto service.
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Glenn Butt, Canadian Tire Corp Ltd - EVP - Customer Experience & Automotive [65]
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Yes it's Glenn Butt speaking. So as you recall, early last year we ramped up our efforts in support through the building of a team of experts, 30 plus folks that we for the most part we went to industry, although some of them were inside the Canadian Tire group of very knowledgeable experience automotive, but 60% of that team we built we went to industry.
A lot of their time, effort, and intention went into working with our stores on the implementation execution of the automotive infrastructure. I'm not sure people really understand or appreciate the degree of change. This was massive change for some long-term front counter staff. Some even for our technicians, so a big change lots of support, lots of help required. That team spent a lot of time on that.
What we're doing now is we are looking for that team to go to the next level, so even though there is more training that's needed on AI, there is still some pieces to be picked up. Not in all stores, some stores are up and live running on the system and maximizing it and optimizing the total performance of it. Unfortunately not all are, so there is still some AI training. However we think that the next round of training for these folks is to get back to the basics. We were seeing some good when we first put that team on the road, some very good results on the basic maintenance checkup, as well as on some of the best practices. The team was focused on that, although we do think that training and development of technicians and front counter staff is also a key area.
We're not going away on the automotive. We invested heavy in the support, and the tools, we have the technology now. And nobody said this was going to be an easy journey. This is something we are absolutely committed to, a bit of a speed bump in this quarter. And I want to remind everybody seven of eight quarters -- the past seven of eight quarters we have seen positive growth in automotive. It is a bump in the road. If anything this will cement and even strengthen our resolve to go harder and faster on things that need to get done.
I could mention and should mention on the customer service front that the rest of the store, we have a 95% attendance rate right now on what we're calling our in-store in stock equity training program. That is a very good example of moving with velocity, moving to get our dealers involved. And then the other one was we talked for years and complained about our return policies and customers, and that is now executed flawlessly in every single store, one policy, one Company. And I'm very pleased with that. So anyhow I could go on, there's a lot more but that's two or three of the most important ones.
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Stephen Wetmore, Canadian Tire Corp Ltd - President and CEO [66]
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Sorry, just from my level, I think we got our tire business just about exactly -- it is on track. Extremely pleased with it. I think we've done all the back end work on parts. And we are in stock and firing on all cylinders here. And accessories I think we've reignited with innovation, and in-store is extremely good. Auto service is always, always going to be the issue. You will never get where you want to get to, but we will become every quarter a better and better Company. And we will be relentless because this is to Irene's question earlier, this is maybe the biggest pillar we have underneath our brand and we will be superior in it.
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Keith Howlett, Desjardins Securities - Analyst [67]
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Actually I was going to ask how you were looking at it. Thanks for that. And on the loyalty card, both the build expenses, how does the back half of the year look? Are there any unusual year-over-year expenses on the loyalty side? And then going forward have you sort of -- do you need any payback on the loyalty, or is it -- is it similar to prior programs, and doesn't require you to sort of seed it at the beginning in some way?
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Marco Marrone, Canadian Tire Corp Ltd - CFO/EVP - Finance [68]
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Keith, it's Marco. With respect to expenditures on the loyalty program, we are now running the pilot in the province in Nova Scotia. Back half of the year, right now we're in the normal operations or normal operations of that program. There is no build cost the we have scheduled for the back half of the year. It's maybe some minor enhancements, but nothing of any large consequence. Our thinking is we were in the pilot, and we are learning a great deal from the pilot, and we will continue to operate that pilot until we feel that we have perfected it to a state where we believe we may want to take it to another market. So I don't know have the timing on that at this point.
So to your question, feels like normal operations back half of the year, and we continue to learn. Stephen mentioned of a deep dive coming up the next two weeks, we're just learning a tremendous amount from our customers, from our dealers, and looking at how to enhance the programs more.
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Keith Howlett, Desjardins Securities - Analyst [69]
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And would you contemplate any sort of the programs, like a very high rebate to your best customers? Like 5% cashback or those sort of programs that some American retailers have put in?
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Marco Marrone, Canadian Tire Corp Ltd - CFO/EVP - Finance [70]
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(laughter) We have a current concept in market as I mentioned. We are doing consumer research, we're doing an analysis of the data, and we will make adjustments as we see fit or appropriate. And we will look at what stimulates the consumer behavior that we are looking for, and what that offer will be. Remember it's a pilot, so we're really using it as a tester to learn a lot out of that market.
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Keith Howlett, Desjardins Securities - Analyst [71]
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Thanks very much.
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Operator [72]
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Vishal Shreedhar, National Bank Financial.
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Vishal Shreedhar, National Bank Financial - Analyst [73]
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Just an easy one here. Dean you highlighted that in H2 you see the potential for increasing competition in your Retail business. Is this something that you anticipate or is this something that you are all ready seeing?
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Dean McCann, Canadian Tire Corp Ltd - Pres. - Canadian Tire Financial Services [74]
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Neat way to ask a question. Obviously we are in competition, but I think as Marco alluded to, we see more competition coming, we know whether there's going to be a lot of store openings by one of our competitors. There's just a lot of things going on in the market and we all know Target is coming next year. We talked a lot about our preparation for that. I think it's just the general sense that the market is not -- retail is not getting any easier. It's hard work every single day and we're up for it, but my comment is just that it's going to be an ever increasingly competitive market.
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Vishal Shreedhar, National Bank Financial - Analyst [75]
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Great. That's it. Thank you.
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Operator [76]
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There is no further time for questions and I will now 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 [77]
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Thanks everyone for participating in the call today. We appreciate your continued interest in Canadian Tire. The telephone replay of today's call will be available for one month, and the webcast will be archived on our IR website for 12 months. If there are any follow-up questions from today's call or the materials provided, please feel free to contact me or any member of the IR team. Thank you.
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Operator [78]
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This concludes today's conference call. You may now disconnect.
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