Q3 2012 Canadian Tire Corporation, Limited Earnings Conference Call
Nov 08, 2012 AM EST
CTC.A.TO - Canadian Tire Corporation Ltd
Q3 2012 Canadian Tire Corporation, Limited Earnings Conference Call
Nov 08, 2012 / 09:30PM GMT
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Corporate Participants
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* Angela McMonagle
Canadian Tire Corporation Ltd - VP of IR
* Stephen Wetmore
Canadian Tire Corporation Ltd - President & CEO
* Dean McCann
Canadian Tire Corporation Ltd - CFO & EVP, Finance
* Marco Marrone
Canadian Tire Corporation Ltd - COO, Canadian Tire Retail & EVP
* Harry Taylor
Canadian Tire Corporation Ltd - COO, Mark's
* Mary Turner
Canadian Tire Corporation Ltd - President, Canadian Tire Bank & COO, Canadian Tire Financial Services
* Michael Medline
Canadian Tire Corporation Ltd - EVP and President, FGL Sports Ltd
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Conference Call Participants
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* Irene Nattel
RBC Capital Markets - Analyst
* Keith Howlett
Desjardins Securities - Analyst
* Jim Durran
Barclays Capital - Analyst
* Mark Petrie
CIBC World Markets - Analyst
* Patricia Baker
Scotiabank - Analyst
* Brian Morrison
TD 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 Jay, and I will be your conference Operator today. At this time, I would like to welcome everyone to the Canadian Tire Corporation Limited third-quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session.
(Operator Instructions)
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 Ltd - VP of 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, Finance, and all of our business leaders are also present on today's call. Earlier today, we released the financial results for the third 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 Corporation Ltd - President & CEO [3]
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Thank you, Angela, and good afternoon, everyone. The second half of the year is off to a solid start, with good progress made across our retail businesses and continued strength in financial services. I'd like to remind you that our third-quarter results include a full quarter of FGL Sports performance versus six weeks for the comparable quarter last year. Consolidated sales were up 8% percent in the quarter. As you know, retails sales represent the actual made at the till during the quarter. The sales growth we saw across the businesses was a reflection of the great summer conditions we had, that extended right through September.
Consolidated revenue was up 4.6% to CAD2.8 billion, with increases at all businesses except Canadian Tire Retail, which saw a decline in the quarter compared to last year. At CTR, recall that revenue and of course corporate profits reflects product shipments to our stores, and not consumer sales. The slower seasonal transition was particularly pronounced at CTR, where fewer shipments in the quarter of winter products such as snowblowers and winter tires resulted in our revenue decline. Overall consolidated net income was up 3.5% in the quarter, excluding the tax and acquisition benefits from the FGL transaction, which were finalized in the prior year.
In the retail segment, we continue to make progress across our core categories. Sales were up at all businesses. Overall, revenue was up in the quarter due primarily to the inclusion of FGL Sports and growth at Mark's, and petroleum. Income before taxes in the segment was essentially flat, as sales and margin gains were offset by reduced shipments to our dealer network. At CTR, retail sales were essentially flat in the quarter. Sales growth in the summer seasonal and outdoor recreation, kitchen and home organization categories was offset by expected declines in categories that we are de-emphasizing, such as electronics, home decor and household cleaning. In automotive, although sales in the category overall were down in the quarter, we did see some strength in light automotive parts and car maintenance products, but auto service sales and sales of heavy auto parts were soft compared to the previous year. While there continues to be some industry-wide softness, our auto service sales did improve versus our previous quarter. As was mentioned last quarter, change management and ongoing training efforts related to the rollout of automotive infrastructure continue, and we're seeing operational improvements.
Revenue at CTR was down 6.7% or approximately CAD100 million, primarily due to lighter shipments of winter seasonal products as I mentioned. Some stores have sufficient winter inventory to start the season, due to carry-over from last year's mild weather, while other stores have been cautious about moving too aggressively into the season. While we may not recover the entire revenue shortfall by the end of the calendar year, we expect to see a solid performance over the course of the full winter. The quality of CTRs contribution to earnings is improving, as we continue to refine our approach to balancing sales and margin. Our focus is producing results, as our margin rate at CTR increased over the prior year in the living, fixing, playing, and automotive categories, the core categories at CTR, reflecting strong assortments of higher-margin products within each of these categories.
During the third quarter, Marco Marrone and his team continued to advance our strategic initiatives at CTR, so let me comment briefly on our Loyalty, store projects and digital strategy. With Loyalty, the pilot in Nova Scotia continues to provide us with critical insights that would be incorporated into any larger program. To date, more than 250,000 Nova Scotians have enrolled in the program, and membership continues to grow at a strong pace every week. Customer data that we now have access to gives great insights into how our customers shop at our stores. It allows us to not only identify our most loyal customers, but also use targeted marketing programs for each customer based on their shopping patterns, price sensitivity, or other information unique to them. We are using the analytics collected from the program to identify our regular shoppers. We've already learned that the average basket size is more than 30% higher when the Canadian Tire Money Advantage card is used, and we're now able to track about 40% of all transactions going through our Nova Scotia stores. Although we are still in the test-and-learn phase of the pilot, we will continue to update you on the key items and insights as we move forward.
For store projects, during the quarter we continued rolling out the capital-light Smart Store concept with two openings, which brings the total number of Smart Stores at our CTR network to 221 at the end of the third quarter. On a year-to-date basis we've completed more than 50 projects, and expect to complete another 30 Smart Store projects in the fourth quarter, bringing us to over 80 for the year. As we continue to focus on our local markets in order to better serve the communities we operate in, we have introduced outdoor recreation Pro Shops in key markets across the country. More than 20 Fishing Pro Shops were rolled out in the spring of 2012, and in the last quarter we opened more than 30 new Hunting Pro Shops within CTR stores at selected locations. The customer response to these offerings has been very good, with sales increases that are double the national average in stores that include Pro Shops. Based on this success, we plan to roll out more of these shops where it makes sense in 2013, with more than 30 Pro Shops planned for completion.
And with digital strategy, we made good progress during the quarter, enhancing the delivery of product information using web applications. And we will continue to roll out web tools that provide product information and choice according to how our customers want it and need it. Another key step for our digital strategy is the development of a full digital catalog that will allow customers to access extensive product information, make purchase decisions, and of course share that information with others. This work is being completed now, and by spring 2013 we plan to deliver product information to our customers anywhere, anytime, on any device and always on. It's been roughly a year since we launched our Tires and Wheels e-Commerce site. Although online sales remain a small part of CTR's total tire and wheel sales, the e-Commerce platform provides us with access to new customers who are shopping growing segments, such as ultra-high performance tires. Online sales also have delivered larger overall order sizes than what we typically see in our stores today, and resulted in incremental service center visits and installations at Canadian Tire retail stores.
Turning to Mark's, growth in retail sales of 2% and same-store sales of 1.7% was driven by women's wear and industrial footwear. The economic strength in Western Canada continued to drive healthy sales in that region. However, sales of fall seasonal items such as jackets, vests, and sweaters were impacted across the country, due to an extended summer season. During the quarter, Harry Taylor and his team worked to refresh and update the Mark's store network, with a total of 56 projects completed, focusing primarily on the GTA, similar to the rollout that took place last year in the Calgary area market, where 14 stores were rebranded. More than 40 stores in the Toronto area were updated in the quarter. The consumer response to the renewed store design and associated advertising campaign has been quite good. In Calgary, after we saw a strong initial sales lift, about 15% over the first five weeks, it has settled to about 5% one year out, and we would expect to see a similar trend in the newly-rebranded Toronto area stores. Marks.com, Mark's e-Commerce platform, was enhanced during the quarter in order to bring customers a better online shopping experience. Previously limited primarily to flyer items, the new site now gives customers access to over 3,000 different styles. It's still early days yet, but we expect to see incremental traffic to the enhanced site with the upcoming holiday season.
FGL Sports saw strong performance during the third quarter, with retail sales and same-store sales both coming in at more than 4% on a comparable basis. At Sport Chek in particular, consumer demand drove strong sales across-the-board in equipment, footwear and apparel. The FGL Sports banner rationalization and growth strategy continues to progress well. During the quarter, 18 non-strategic banner store locations were closed, and four Sport Chek stores and one Atmosphere location were opened. The planned store closures are on track to be completed by the end of first quarter of next year. Although not a big factor in the third quarter, we do expect the NHL work stoppage to affect our licensed product sales in the fourth quarter. If the lockout persists through the end of the year, we estimate that fourth quarter comp store sales could be negatively impacted by about 1%.
In the Financial Services segment, income before taxes increased almost 15% compared to the third quarter in 2011. Credit card receivables growth, and favorable portfolio aging and write-off rates all contributed to the year-over-year increase. Continued management of expenses, which decreased compared to the prior year period, also contributed to growth in IBT. We are beginning to see good traction from our expanded efforts to support our retail businesses. At CTR, instant credit events are being redefined and becoming more effective. One measure that we use to gauge effectiveness is the rate at which customers use the instant credit they have been approved for within the 30 days of activation. This rate increased by more than 40% during the quarter. Deferred and installment financing offers have been extended to additional product categories at CTR, which has helped drive the use of these offers by more than 60% in the third quarter versus the same period last year. In October, a Sport Chek-branded MasterCard was launched. Although it is too early to provide much detail on this product, it is clearly an opportunity area for the Financial Services business, and one that allows us to incrementally grow receivables in a competitive credit environment. As Mary Turner said on the last quarterly call, this is a game of inches, and we will continue to work away at this quarter by quarter.
So, overall we had a strong start to the second half of the year, and are well-positioned for the fourth quarter. The 17% dividend increase we announced today also reflects the health and confidence that Management and the Board collectively have in the business. So in summary, a good consolidated performance in the quarter, mainly due to FGL Sports and Financial Services. FGL Sports and Mark's are executing their plans very well. CTR was affected by below-planned shipments to our dealers, and a soft automotive market, but we are pleased with all other aspects of the business, including our overall expense management. We have good positioning heading into our busiest quarter. And with that, I'll pass things over to Dean.
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP, Finance [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 Q3 results. Consolidated pretax earnings were up 5.5% in the quarter. That earnings growth was slower than the 22.7% increase experienced in Q3 2011, and was impacted by a couple of factors. This is the first quarter that we have comparative results for FGL in Q3 2011, albeit for only six weeks, and given it was the acquisition quarter, there was some noise in last year's numbers, i.e. the toehold share gain, acquisition costs and some tax interest that tempered the retail segment growth by almost 500 basis points or 5%. This factor, combined with a slower start to winter seasonal shipments for CTR muted the overall growth rate, and matched the strong performances from FGL, Mark's, and Financial Services in the quarter. Overall, our operating expenses have continued to be well controlled, with expenses essentially running flat year-over-year, when allowing for the additional of FGL to the retail segment. That said, given the increasingly competitive retail environment, we continue as a matter of course to be vigilant in identifying operational efficiencies to permanently remove costs.
Now, 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 Q3 2012 for 13 weeks, compared to 6 weeks in Q3 '11. Diluted EPS for the quarter was CAD1.61, down 3.8%; however, this number is affected by non-operating items I mentioned previously, including the gain related to the FGL acquisition, acquisition-related costs as well as interest income, also lower tax expense related to a tax settlement, all of which were included in the Q3 2011 results. Excluding these items, our Q3 2012 net income increased 3.5% compared to last year. As is our practice, we have updated our effective tax rate in the third quarter for planning purposes to 27.4% for 2013.
Capital expenditures were CAD68.1 million, down CAD52.1 million versus the prior year, which reflects spending on projects in 2011 such as automotive infrastructure and the new Loyalty pilot, which were substantially completed prior to 2012. Also, some of the decrease is due to the timing of real estate projects compared to when they were completed last year. We expect that our capital spending will come in at the lower end of our published range of CAD360 million to CAD385 million for 2012. We are forming our view on capital expenditures for 2013, and expect that normal operating capital will run about CAD400 million to CAD425 million in 2013, primarily due to increased capital spending on FGL Sports' expansion strategy. We are also considering the purchase of land for a future distribution center, which would be in addition to the range quoted above.
Moving to page 5, the retail segment performed well in the quarter, with all banners generating sales growth over the prior year. Revenue grew 4.9%, including the impact of FGL Sports and the offsetting impact of the slow start to seasonal shipments at CTR. Margin growth in dollars was up 11.7%, and the gross margin percentage for retail expanded to 26.9%, up from 25.3% last year. The retail segment margin rate improvement was partly influenced by the inclusion of FGL, and also margin rate expansion at CTR and Mark's. Overall, CTRs margin was up with all categories reflecting the continued focus on managing the balance between sales and margin. Retail margin also benefited from a good performance by Mark's, as they discounted less in the quarter versus a year ago.
Retail EBITDA grew 5.2% over last year. EBITDA benefited from revenue and margin growth discussed above, as well as relatively flat non-FGL operating expenses compared to the prior year. As you know, expenses were increased last year to fund new strategic initiatives like Loyalty, which is now in pilot, and automotive infrastructure, which was substantially completed last year, all of which contributed to our improved EBITDA performance in the quarter. Retail ROIC, calculated on a rolling 12-month basis, was 6.99% for the quarter, down 147 basis points from year ago. The majority of the decline is explained by two factors. First, a significantly lower tax rate in Q3 2011, due to one-time tax provision adjustments made last year. And second, the impact of the FGL banner rationalization plan charge, some CAD23 million, taken in Q2 2012. Unfortunately, these factors, along with the delayed start to the winter season for CTR, masked some positive momentum in the quarter for ROIC that was the product of solid earnings and ongoing efforts to manage our capital spending. Adjusting for these factors, retail ROIC was 7.17%, up 34 basis points compared to Q3 2011, and has improved sequentially in three of the last four quarters.
Turning to page 6 and the Financial Services segment, income before taxes grew 14.8%, a good 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 an improvement in the write-off rate to 6.92%, down from 7.33%. Return on receivables remains elevated at 6.68%, compared to 5.1% 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 higher-cost debt more effectively. And one last item in the housekeeping category, for the folks on the phone, we note in the news release that we will move to align the release of our Q4 and year-end results with the regulatory filing of our annual documents beginning in 2013, with an expected release date of February 21, 2013. And with that, I'll turn it back 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)
Irene Nattel, RBC Capital Markets.
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Irene Nattel, RBC Capital Markets - Analyst [2]
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Thanks, and good afternoon, everyone. It seems like last year, or as I recall, last year in Q4 you guys did really an outstanding job of delivering solid consumer sell-through and decent -- and good shipments, even without the benefit of weather. It seems as though consumer spending has slowed yet again since then, and we do have this issue of the inventory at retail -- through the network, which I believe you said was about CAD100 million. So I was just wondering if you could just walk us through some of the key initiatives that you might have in place that might help drive results against that challenging comp?
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Marco Marrone, Canadian Tire Corporation Ltd - COO, Canadian Tire Retail & EVP [3]
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Irene, it is Marco. At the beginning of your question, you said Q4; are you actually referring to Q4 or to Q3?
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Irene Nattel, RBC Capital Markets - Analyst [4]
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No, I'm referring to Q4.
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Marco Marrone, Canadian Tire Corporation Ltd - COO, Canadian Tire Retail & EVP [5]
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Q4, specifically --
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Irene Nattel, RBC Capital Markets - Analyst [6]
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No, I'll continue, as we look ahead, given what has happened, Marco, in -- as we have seen -- as we've seen consumer spending decelerate through the year, and overall cautious consumer spending, we're dealing with a tough comp relative to Q4 last year, and of course this is a very important quarter for you guys. So --
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Marco Marrone, Canadian Tire Corporation Ltd - COO, Canadian Tire Retail & EVP [7]
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Right, no, we have made some changes, as Dean has mentioned, or Stephen as well, as we've been trying to manage the sales on the margin. We have deemphasized certain categories that last year we did utilize, but it did have an impact on our margin. Drove sales, drove POS, but did impact our margins. So we are -- for example, household cleaning is a good example where we have been deemphasizing that from about the end of the first quarter onwards, and we're seeing -- we can quantify the impact on our sales, and we can quantify the impact on our gross margins, and so it's been a planned, measured approach to doing that. We've deemphasized electronics, which has low margin as well. So a number of actions we've taken.
Now with respect to Q4, last year we did have some good sell-through in our key categories such as kitchen, which we would expect to continue this year, and what we are waiting for is for some weather in the eastern part of Canada. We have it out west, and were waiting for some of that in the eastern part of Canada.
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Irene Nattel, RBC Capital Markets - Analyst [8]
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And I know that it's early on, but where we have seen weather already, are you seeing the sales trend respond the way we would hope they would?
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Marco Marrone, Canadian Tire Corporation Ltd - COO, Canadian Tire Retail & EVP [9]
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Yes, we have.
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Irene Nattel, RBC Capital Markets - Analyst [10]
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Okay, that is great. And then the other question that I wanted to ask was on the Loyalty pilot. Now that you are getting more color, I think you said you're able to track 40% of your transactions, what are some of the key insights and learnings that you are getting?
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Marco Marrone, Canadian Tire Corporation Ltd - COO, Canadian Tire Retail & EVP [11]
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One of the great things is we are getting a tremendous amount of demographic information on the consumers. We are able to now link their baskets, what they're buying, how much of it is on promo, how much is at reg, time that they are shopping in our stores; there is just a wealth of information that we are clawing through by category, by customer, by date, so it is a tremendous amount. As Stephen mentioned, it really is providing us some very good insight into our business.
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Irene Nattel, RBC Capital Markets - Analyst [12]
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That's great, thank you.
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Operator [13]
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Keith Howlett, Desjardins Securities.
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Keith Howlett, Desjardins Securities - Analyst [14]
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I just wanted to ask about some of the deemphasized categories, which I gather are typically low margin, but I wonder if you could speak as to other factors that go into the decision to deemphasize the -- are they shrinking in space allocated, or what else are you doing there?
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Marco Marrone, Canadian Tire Corporation Ltd - COO, Canadian Tire Retail & EVP [15]
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Keith, it is Marco. Yes, for example electronics, I think we mentioned in the past our living strategy. As we roll that out, it does shrink some of the square footage we are providing for electronics, and really putting that square footage back into some key categories such as kitchen. The household cleaning is just a deemphasis of using that as a traffic driver, and just trying to be a little bit more balanced with respect to that. And also I think home decor is another area that we have deemphasized again with some of the square footage, pointing to some of our key categories in -- as we look at our format and where we want to be positioned relative to our competition.
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Keith Howlett, Desjardins Securities - Analyst [16]
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And in terms of the food test in Ottawa, have you come to a conclusion on that?
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Marco Marrone, Canadian Tire Corporation Ltd - COO, Canadian Tire Retail & EVP [17]
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No, we always said that we would run it into next year, probably midway through the year, and then make what I will call a well-informed decision at that point.
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Keith Howlett, Desjardins Securities - Analyst [18]
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And then just on the income statement and the breakdown of operating expenses, there was a fairly sizable decline in the distribution costs item. I was wondering if that is something of note, or something to -- that would be recurring or --?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP, Finance [19]
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Keith, it is Dean. You mentioned that earlier. We actually looked at that. That is really more of a real estate issue on the income statement. We did some clean-up with respect to the location of some of the distribution costs, moving some of that up into cost of sales for FGL and Mark's and it has -- it had a little bit of an impact on a year-over-year basis in terms of the quarter, but it really is just about kind of real estate in terms of location in the income statement. Angela and Andrea can provide you the detail of that.
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Keith Howlett, Desjardins Securities - Analyst [20]
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Great, and then just in terms of the automotive business, are you able to tell whether it's just broad industry weakness or -- you know, you've put a lot of effort into that area, so I'm just wondering if you are pretty confident that is just industry conditions or there is somebody in the market that is improving their position?
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Marco Marrone, Canadian Tire Corporation Ltd - COO, Canadian Tire Retail & EVP [21]
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Keith, it is Marco. A couple points on that. One, we believe it is an industry issue, and if you look at some of the comments coming from some of the players in the US, the Northeast is tending to be soft. And as we have mentioned all year long, we have had an implementation of our automotive infrastructure system, where we're -- made the conversion to that system, and now working with our stores on training and making sure we realize all aspects of that new technology, and that is now starting to come and show some good progress in that area.
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Keith Howlett, Desjardins Securities - Analyst [22]
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Great. And then just finally on the conversion of Mark's, the -- Stephen mentioned that there was a 5% growth a year later on a Mark's store, was that it's absolute number or is that the increment over the Mark's -- the average Mark's store?
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Harry Taylor, Canadian Tire Corporation Ltd - COO, Mark's [23]
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That was the increment over the control group -- this is Harry Taylor speaking to you. That was the increment that we experienced last year over the control group in Calgary. Out of the gates, we are seeing very positive performance in the stores in the GTA.
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Keith Howlett, Desjardins Securities - Analyst [24]
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Great, thanks very much.
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Operator [25]
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Jim Durran, Barclays Capital.
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Jim Durran, Barclays Capital - Analyst [26]
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Sorry, just turning to CTFS, I just wanted to look -- the LTM write-off rate was down quite materially in the quarter. I assume part of it was the early part of the year, in that LTM being so high relative to where the run rate is now, but you are now below what your best guess was on run rate. So I am interested in understanding your view on that. And then secondly, given the drop in write-off rate on an LTM basis, the gross margin lift was not as great this quarter as it was last quarter. So I'm just trying to understand if there was something else with respect to insurance and warranties, or something that might have impeded the lift?
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Mary Turner, Canadian Tire Corporation Ltd - President, Canadian Tire Bank & COO, Canadian Tire Financial Services [27]
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So it is Mary, let me talk about write-offs first. So we continue to see some very nice reductions in insolvencies, which is happening across the industry, so not sure when that will level off, but we definitely have been benefiting from that in the last six months or so. We have had some good improvements in our recoveries as well, which is helping the write-off rates, that's recoveries we make after write-off on accounts that may have been written off last year or the year before. So I think there's a lot of good things happening in the write-off line and we have had some improvements in ordinary write-offs as well. So I think as long as the economy continues to get slightly better, as people are a bit more cautious about spending, there is I think a fair bit of optimism on that trend continuing for a while.
I think on the -- nothing really unusual happening in the gross margin line. As we continue to work at growing our receivables, we are getting into more channels, certainly in-store, where the margins might be a little bit lighter, and I think that's more the explanation about what is happening in the margin line. So in order for us to show growth, we are focusing on our normal credit card channels, but we are also getting more into new financing products in retail, and the margins are a little lighter.
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Jim Durran, Barclays Capital - Analyst [28]
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Okay, and Marco, I just wanted to go back to the obvious important topic for Q4, and the deemphasis on products. As we think about the revenue outlook for Q4, it sounds like -- and I don't want to put words in your mouth, but just to paraphrase, obviously improved winter weather in the East would be extremely helpful, and help you address the excess inventory. Then on the deemphasized products, sounds like if winter doesn't materialize in the East, we may have to assume that revenues might be still weak courtesy of the deemphasized products year-over-year in Q4, but hopefully see some superior margin management as at least a partial offset; is that a fair presentation of what the Q4 challenge might be?
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Marco Marrone, Canadian Tire Corporation Ltd - COO, Canadian Tire Retail & EVP [29]
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Jim, and when you say revenues, you're referring to our shipments to dealers, essentially?
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Jim Durran, Barclays Capital - Analyst [30]
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That is correct.
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Marco Marrone, Canadian Tire Corporation Ltd - COO, Canadian Tire Retail & EVP [31]
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Yes, I think you characterize it fairly well.
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Jim Durran, Barclays Capital - Analyst [32]
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Okay. So, you mentioned though that in the West you did see a lift when winter finally showed up. I assume that would've been quite late though, or either late in this quarter or at the beginning of Q4, is that correct?
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Marco Marrone, Canadian Tire Corporation Ltd - COO, Canadian Tire Retail & EVP [33]
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It'll be more in the beginning of Q4, or the last several weeks, and I actually spoke to some dealers out west, and they were telling me what was happening in their stores with respect to the winter weather, and what they were seeing was positive if that kind of weather would come east.
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Jim Durran, Barclays Capital - Analyst [34]
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Okay. And then when we go further into next year, just on the sort of retail-level inventory carryover, I want to make sure I've got my correct recall on this, but it was a year ago I guess that they were benefiting from doing that in the spring seasonal side of the fence, with the outdoor lawn and garden stuff. And so I would assume that given that we had a strong March, spring start, and a pretty solid spring season/summer season in outdoor, that we wouldn't be facing retail -- the retail-level inventories being ample, and therefore hopefully if we get another decent spring start we won't be dealing with a similar dynamic to what we just saw happen in this quarter with respect to the winter seasonal?
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Marco Marrone, Canadian Tire Corporation Ltd - COO, Canadian Tire Retail & EVP [35]
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The stores left the summer season in really good shape, with respect to their inventory of summer seasonal goods. So if we can get a normal weather pattern next year, I think that bodes well for us.
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Jim Durran, Barclays Capital - Analyst [36]
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Okay. And FGL synergies, any update there? I know we are all eager to see it blow through the original targets you set. Be interested in knowing how might you be doing on that front?
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Michael Medline, Canadian Tire Corporation Ltd - EVP and President, FGL Sports Ltd [37]
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Hello, Jim, it is Michael. Yes, we share the same interests. (Laughter) So as you know, we had a $25 million run rate to achieve by the end of the year, and as I said before on these calls we are confident that we will go through that number, and that we will continue to bring in the synergies. And we got to it early, and there were some, let's say, low-hanging fruit, and we continue to work away at it, so it is going well.
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Jim Durran, Barclays Capital - Analyst [38]
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Good, congrats.
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Operator [39]
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Mark Petrie, CIBC World Markets.
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Mark Petrie, CIBC World Markets - Analyst [40]
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Good afternoon. Actually, just on that topic, do you mind just giving us what the synergy number is thus far through the year, and maybe a bit of a breakdown in terms of the categories, where you've been able to achieve or over-achieve?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP, Finance [41]
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Yes, we haven't provided that, Mark. All we have been saying publicly, and as Mike just reiterated, is that on an annualized basis, we are actually through the $25 million, so we are very comfortable in getting it. The types of things that it is, is obviously, as Mike said, some of the low-hanging fruit, some of the early changes around rationalization of management, public company costs, those types of things.
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Mark Petrie, CIBC World Markets - Analyst [42]
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Okay, thanks. You guys have clearly been very successful in terms of striking the balance between sales and margins, and earnings have responded, outside of revenue issues. Can you just talk about that in the context of 2013, particularly as dead retail space moves into a new competitor, and how we should think about that balance strategically in the next 12 to 18 months?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [43]
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Mark, it is Stephen. Well, the interesting look that we are having at 2013, as we continue to finalize our plans, is how are you going to manage that during the course of the year, given new entrants and how aggressive that they are. So in our own planning, while our positioning in our core categories has to remain extremely strong, in other words you don't want to lose your market share, I don't -- we're staying focused on trying to manage our margins as we're doing during the current year. I think it is extremely important to do that. We got value add in our products. I think we have some unique products. Innovation is key to us, and the experience of shopping at Canadian Tire, we believe, is second to none. So don't give that up, simply by discounting out in the marketplace at all cost. To drive top line with really -- if you can drive the traffic with it, fair enough, but if you're simply driving it with low to negative margin product, which is really what Marco is saying in many areas in terms of deemphasizing, then that's not good. So we will stay strong, stay strong in our categories and manage them well, and see what takes place in the marketplace, and it's virtually impossible to predict at this point in time.
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Mark Petrie, CIBC World Markets - Analyst [44]
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Okay, that is helpful, thanks. And just actually following up on the automotive, clearly there is industry issues and you flagged that, but are there incremental things that you guys can be doing to drive your share and be potentially taking share? Is it -- do you think a marketing campaign to drive some attention to the improvements that you've made there would be possible or helpful, or is it just a matter of just cycling through the difficulty?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [45]
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It Stephen again, I've got the mic, I will just keep it here. The short answer is yes, but what we wanted to do is to get the stores up and getting them running at full speed, if you will. The comments that I made earlier in terms of change management within the store continues, because it is a modern way of taking care of our customers, and everybody has to learn it, which has affected our staffing in many of the stores. So as we get that to the level that we want, and in many cases it is, but it has to be done nationally as far as I'm concerned, then I think it opens up a huge opportunity for us to be able to start advertising and promoting service as a much greater component of our offering, even within the flyer content.
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Mark Petrie, CIBC World Markets - Analyst [46]
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And how far along in that process do you think you are, like in terms of getting to full speed, as you said?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [47]
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Well, I would think that 2013 across-the-board, we should be able to -- because we're seeing some of the operational improvements now, which I referenced, so we are -- but across the network, during the course of 2013, I think we are affected as much this year by a soft market as we are from the implementation of this program. But this really, really I think ups our game, and we are capable of competing with anybody, and so we will see it every quarter.
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Mark Petrie, CIBC World Markets - Analyst [48]
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Okay, thanks very much.
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Operator [49]
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(Operator Instructions)
Patricia Baker, Scotiabank.
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Patricia Baker, Scotiabank - Analyst [50]
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Thank you, good afternoon. I have a couple of questions on the trends at Mark's, and first, I'm either missing something or seeing things, but did you guys restate your comp for the Q3 of last year?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP, Finance [51]
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I don't think so -- well, we have to look at that, Patricia, but I don't think so off the top of my head.
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Patricia Baker, Scotiabank - Analyst [52]
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Okay --
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP, Finance [53]
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If you are seeing that then we'll follow that up with --
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Patricia Baker, Scotiabank - Analyst [54]
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I did think I saw that, yes, that it was 2.5 last year and 1.7 in this release?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP, Finance [55]
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I think we did some reclass -- so we will have to take that off-line and get back to you.
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Patricia Baker, Scotiabank - Analyst [56]
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Okay, it would be good to know how you reclassified it, because I couldn't find any explanation of it in the MD&A?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP, Finance [57]
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Yes, that's communicated, so --
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Patricia Baker, Scotiabank - Analyst [58]
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Then secondly, just again on the Mark's, I think you called out that workwear was one of the strong categories, and part of women's apparel, but that men's underperformed or was weak; can you talk about what you think is going on there?
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Harry Taylor, Canadian Tire Corporation Ltd - COO, Mark's [59]
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Well, let me -- it's Harry Taylor. Women's and footwear were strong for us in the quarter. Workwear was actually just okay for us in the quarter. It started out strong but then in September, when we see the shift into rainwear and some early purchases of fall/winter workwear, didn't materialize, as we were unseasonably warm and dry. So workwear did not stand as tall for us in the third quarter. Men's underperformed. We were short of plan, and short of where we wanted to be, primarily in the bottoms business. Our tops business is doing well but in our bottoms business, which we've struggled with during the year, we had some supply issues. The warm weather didn't help trying to sell long bottoms, and we've had some fit issues, which we are struggling with to work through. And we are doing the best we can, it's going to take us the whole year to get that ship righted, but men's was the underperformer for us.
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Patricia Baker, Scotiabank - Analyst [60]
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Okay, so just again on the bottoms, you weren't able to do what you needed to do for the customer, or you think it was a demand issue, you think they went somewhere else for the bottoms?
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Harry Taylor, Canadian Tire Corporation Ltd - COO, Mark's [61]
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In some cases they went somewhere else, in some cases there just wasn't demand. We were selling shorts like crazy.
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Patricia Baker, Scotiabank - Analyst [62]
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Okay.
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Harry Taylor, Canadian Tire Corporation Ltd - COO, Mark's [63]
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But the long bottoms, we were not selling nearly as well.
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Patricia Baker, Scotiabank - Analyst [64]
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Okay, thank you.
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Operator [65]
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Brian Morrison, TD Securities.
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Brian Morrison, TD Securities - Analyst [66]
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If I can just do a follow-up on FGL, perhaps this is for Michael. You've got your real estate plans in place for next year, looks like you are on track to complete the closures in Q1. Are you able to provide any sort of color on the number of new store openings for next year?
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Michael Medline, Canadian Tire Corporation Ltd - EVP and President, FGL Sports Ltd [67]
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Yes, I think the way to look at it is we talked about putting in -- starting January 1, 2013, putting in 2 million square feet over the next five years. And we will put in -- we're looking at putting in over 400,000 square feet next year, mostly in Sport Chek of course, so we are on track in terms of getting our real estate plan going to get to that 2 million square feet.
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Brian Morrison, TD Securities - Analyst [68]
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So is it safe to assume then you should just prorate it over the five-year period?
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Michael Medline, Canadian Tire Corporation Ltd - EVP and President, FGL Sports Ltd [69]
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Yes, I think that's the best way to do it right now for modeling purposes. Obviously, I think as we get the real estate plan going, I think 2014 could be an interesting year in terms of getting Sport Cheks up and getting even more flagships up.
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Brian Morrison, TD Securities - Analyst [70]
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Okay, and then just a question for Dean, I know we discussed this a little bit earlier, but if you look at the Glacier finances, you've achieved some really attractive paper here, and should add a little bit of tailwind to the funding costs in 2013. With the current interest rate environment, how do you look at the right mix and the balance of these funding alternatives going forward, and is there any opportunities to capitalize on them?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP, Finance [71]
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So, Brian, I think as -- we had a brief chat about is. So we look at it to make sure that we've got, if you will, all of the taps, and taps being sources of funding, all of them at least trickling. And the balance that we look for is -- the rule of thumb is kind of one-third/one-third/one-third, but we're always evaluating that as to what the right mix is, and the rate obviously was terrific in terms of that recent Glacier deal that we did. But we are also getting terrific rates on our broker deposit funding, we are also getting terrific rates on our high-interest savings funding, we're also getting terrific rates on any inter-company funding that we do. So from a bank perspective, the important thing is to ensure that all of the sources of funding are, if you will, being exercised, right. So you keep all of those available taps open, but obviously we were pretty happy with that securitized deal and the rate on it.
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Brian Morrison, TD Securities - Analyst [72]
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Thanks very much.
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Operator [73]
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Vishal Shreedhar, National Bank.
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Vishal Shreedhar, National Bank Financial - Analyst [74]
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Thanks very much. Just reflecting on the weather, the challenges with weather and the market, which I think Dean noted is going to become more competitive as we go forward, how would you drive growth in your core retail business if the weather isn't there, and when the market becomes more competitive? What should investors be looking at, in terms of levers that you can pull if those two drivers aren't there?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [75]
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Are you primarily talking about Canadian Tire retail or--?
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Vishal Shreedhar, National Bank Financial - Analyst [76]
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That's right.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [77]
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Yes, CTR. Well, I think we displayed it, for example, just to give you a flavor for it, in the fourth quarter of 2011. I think when you take a look at what we have to do, and what we've been concentrating on, is ensuring those businesses that aren't driven solely by weather, but certainly fit into a seasonal pattern, things like exercise equipment and our living categories like kitchen, storage and org, et cetera, have to be extremely strong, and you -- so that they will take some slack away from the seasonal aspect or selling of winter products. What you also have to do in a business like this is ensure that your operating expenses and infrastructure is not built based on your peak within a given high season, if you will, you have to build your infrastructure based on your lowest quarter of transactions, and try to make things as variable as possible against your revenue generation. That is something we are trying to concentrate on a lot. We did it considerably in areas like IT, where you can -- and we do a lot of it within our distribution centers, where we have the flexibility to move up and down with traffic. So very important to keep that variable nature, but from a sales point of view, you have to focus on what I said earlier.
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Vishal Shreedhar, National Bank Financial - Analyst [78]
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Okay, now on the OpEx side in retail in particular, the number that you posted this quarter is CAD567 million, if I recall; is that a run rate number that we can use? Or is there seasonality in there that we should consider?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP, Finance [79]
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There is probably some seasonality, there is an element of seasonality, but if you're asking me from a -- for modeling purposes, it wouldn't be that terribly far off. It would vary probably a little bit from the first quarter to the fourth quarter, mostly in areas like marketing and advertising, those kinds of things, but you wouldn't be wildly off if you use that.
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Vishal Shreedhar, National Bank Financial - Analyst [80]
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Okay, and Dean, on the flat OpEx within -- I think you said CTR, was that right?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP, Finance [81]
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Right, and basically everything except FGL. The retail segment ex-FGL is sort of obviously quarter-over-quarter, because you've got 6 weeks in '11 and 13 in '12, right?
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Vishal Shreedhar, National Bank Financial - Analyst [82]
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Fair enough. Is that a trend that you can sustain in terms of keeping the costs down, or have you implemented some initiatives which would impact you for a certain period of time?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP, Finance [83]
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If we do our job, yes.
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Vishal Shreedhar, National Bank Financial - Analyst [84]
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And so the answer is, flat OpEx outside of FGL for the foreseeable future?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP, Finance [85]
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From my perspective, that would be really good.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [86]
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He doesn't have a lot of friends here at the moment. (Laughter)
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP, Finance [87]
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I'm getting some dirty looks.
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Vishal Shreedhar, National Bank Financial - Analyst [88]
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Fair enough, thanks a lot.
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Operator [89]
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Keith Howlett, Desjardins Securities.
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Keith Howlett, Desjardins Securities - Analyst [90]
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I had a question on Loyalty program in terms of male/female. I was wondering if -- whether the take-up is much stronger for males and females, and whether you are getting some information on female frequency, female basket, female categories of interest, and what you might learning there?
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Marco Marrone, Canadian Tire Corporation Ltd - COO, Canadian Tire Retail & EVP [91]
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Keith, it is Marco. On the split by gender, it is fairly consistent with what we had seen in the past. It is just slightly over half I think, if I remember correctly, it's about 50/50, say, and we're getting -- we are able to get the purchasing behavior via the card, so it is right down to the individual. So we can track the differences between the genders, and in terms of their basket, shopping behavior, shopping times, all of that, we have access to all of that.
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Keith Howlett, Desjardins Securities - Analyst [92]
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And is it -- is there anything coming out of it much different than you had previously thought or --?
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Marco Marrone, Canadian Tire Corporation Ltd - COO, Canadian Tire Retail & EVP [93]
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Keith, I can't remember offhand, I've seen so much data from the Loyalty program, I just can't remember.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [94]
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I think, Keith, too, it is a matter of having the data, right? So now that we have it, and it's fascinating, as Marco mentioned earlier, but it is fascinating to compare it on a store-by-store basis, and a control group basis, so we can tell the store itself where it is off, why it is off, gives us more analytics. We can tell based on its demographics what it should be doing. The relationship between automotive and automotive frequency, and spend versus the rest of the store, we've got. In terms of understanding where we should put Pro shops, expand categories, it gives us -- so if our high-value customers are heavily shopping given categories, then we know what to do. So there is nothing now that we can't in fact analyze based on the data, within the store, and comparatively speaking, and nationally.
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Keith Howlett, Desjardins Securities - Analyst [95]
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Great, thanks very much.
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Operator [96]
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As there are no further questions at this time, I'll turn the call back over to Angela McMonagle, Vice President of Investor Relations, for any closing remarks.
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Angela McMonagle, Canadian Tire Corporation Ltd - VP of IR [97]
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Thanks, Operator, and thanks everyone for participating in our conference call today. 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 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.
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Operator [98]
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This concludes today's conference call. You may now disconnect.
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