Q4 2012 Canadian Tire Corporation, Limited Earnings Conference Call
Feb 21, 2013 AM EST
CTC.A.TO - Canadian Tire Corporation Ltd
Q4 2012 Canadian Tire Corporation, Limited Earnings Conference Call
Feb 21, 2013 / 09:30PM GMT
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Corporate Participants
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* Stephen Wetmore
Canadian Tire Corporation Ltd - President and CEO
* Marco Marrone
Canadian Tire Corporation Ltd - COO
* Dean McCann
Canadian Tire Corporation Ltd - CFO
* Mary Turner
Canadian Tire Bank and Financial Services - President and COO
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Conference Call Participants
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* Irene Nattel
RBC Capital Markets - Analyst
* Jim Durran
Barclays Capital - Analyst
* Brian Morrison
TD Securities - Analyst
* Vishal Shreedhar
National Bank - Analyst
* Mark Petrie
CIBC - Analyst
* Keith Howlett
Desjardins Capital - Analyst
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Presentation
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Operator [1]
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Good afternoon my name is Candace, and I will be your conference operator today. At this time, I would like to welcome everyone to the Canadian Tire Corporation Limited, fourth quarter and 2012, full year conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.
(Operator Instructions)
Earlier today Canadian Tire Corporation Limited, released their financial results for the fourth quarter of 2012, as well as the full year. A copy of the earnings disclosure is available on their website, and includes cautionary language about forward-looking statements, risks and uncertainties, which also apply to the discussion during today's conference call. I will now turn the call over to Stephen Wetmore, President and CEO. Stephen?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [2]
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Thank you operator and good afternoon everyone. Thanks for joining us in what I know has been a busy day for you. My colleagues are here to answer your questions in the back half of the call, but I've asked Marco Marrone to take a portion of our time with you and provide a brief update on Canadian Tire Retail. He and his team recently met with dealers and vendors to discuss business plans for 2013 and beyond. So he can share some of this information with you. Dean will then walk you through the financials for the fourth quarter and the full year.
Overall I'm very pleased with how we finish the year. On a normalized basis, EPS was up nearly 3% in the quarter, and 13% for the year. Excluding restructuring charges, tax and prior year adjustments. In 2012, the Company generated CAD13 billion in sales, more than 10% higher than 2011. Considering the challenges we were up against in our busiest quarter, we delivered fairly strong results across the board. A big part of the Company's growth story in 2012 can be attributed to FGL Sports, comparable sales at FGL were almost 3% higher in the fourth quarter versus the prior year.
And when we isolate the impact from the NHL lockout on the sale of licensed goods, we estimate that comparable sales growth would've been nearly 1% higher. Sport Chek was in with 6.8% comps for the year, which is good performance. As you know we have begun an ambitious five-year growth plan for FGL that will increase retail square footage by more than 1 million square feet. FGL and CTR together announced significant partnerships with the Canadian Olympic team, and other Canadian sports federations. We've introduced a new advertising campaign at Sport Chek that's inspiring Canadians to become more active, we've announced our plans to acquire Pro Hockey Life, and we expected the transaction to be completed within the first half of this year, and we've exceeded our stated synergy target for 2012. These are all significant milestones.
At Mark's, Harry Taylor and his team, executed well against the 2012 plan, and delivered extremely strong full-year same-store sales fueled mainly by industrial wear.
However, we believe there's still more work to be completed to achieve the right assortment and positioning in men's and women's casual wear. In the fourth quarter margins improved with less promotional activity, heading into the holiday's shopping season. A better buying process overall helped to ensure that the stock in the store was very appealing to our customers, even at regular prices. The Mark's store network renewal continued with more than 80 store projects completed during the year, for a total of 159 converted locations across Canada. In Calgary, where we completed the convergence in 2011, we saw a healthy initial sales jump and ongoing evidence that this trend will continue. The success of the store conversions is in large part driven by the inspiring and interactive in-store displays that our customers have responded very well to. But merchandising improvements are also a significant factor. Mark's Online was re-launched during the year, and now has 700 additional products available for purchase.
At Canadian Tire Retail we advanced all are operational initiatives during the year, with a specific focus on store concept renewal, and our digital strategy. From a financial performance perspective, we saw an improvement in margins and earnings quality over the course of the year, with modest year-over-year sales growth. I'll walk you through some of the key drivers now, and Marco will speak to this in more detail in a moment. Within the living category, we continued to roll out the strategy in the most competitive areas of the country, with great success. Especially in kitchen, where results have been exceptional. Due in large part to our product selection, and new in-store displays.
In playing we saw similar success with our hunting and fishing pro shops, located inside select CTR stores, with double-digit sales growth for outdoor recreational products in 2012. Within fixing we are applying a renewed focus on tools in 2013 in order to rejuvenate this heritage category. Although sales in 2012 did not hit our targets, this years strategy will work to improve assortment, innovation, and we will market tools inside and outside of our stores. Within automotive and in auto service specifically, we are starting to see positive results in our efforts to strengthen our capabilities in this core category. The delay in weather did impact sales in automotive where winter tire sales were negatively impacted.
We are not alone though, lackluster sales were an industry wide phenomenon, so holding our market share was a good accomplishment. Although we were down slightly in auto service sales during the quarter, December was a strong month and it's continued into 2013. I think we have made great progress in providing additional training and support to our stores and in a targeted basis, we will continue our efforts through 2013. Overall, the work that Marco and his team have completed on the margin side must be acknowledged. They've demonstrated a measurable improvement in margins during the course of the year, quarter by quarter, driving better quality earnings. As a value retailer, we are constantly striving to achieve the sales and margin mix that optimizes the quality of our earnings. The category specific strategies that have been and continue to be implemented in heritage categories such as living and playing, are key to driving profitable sales growth.
Improving margins are also reflective of the progress we are making and expertise we've built on the procurement side. Knowledge that is now being built into the standard practices that our buyers employ.
At financial services, Mary Turner and her team have done an excellent job executing on their operational priorities and financial targets in 2012. The financial services business has continued to successfully support the retail business, through an ever-growing offering of credit and purchase financing options for retail and home services customers. Including a Sport Chek branded MasterCard that was rolled out last October. Receivables growth year-over-year reflects the success of recent acquisition efforts, which included a successful bonus CT money offer in the fourth quarter. Expenses continue to be well-managed, the financial service business remains an important contributor of revenue and earnings growth within the CT family of companies.
Overall, our last year's score card looks very good. And we've made significant progress in 2012 across all of our banners. However, we have a lot yet to accomplish in 2013. This year, we are focused on the customer experience, inside and outside of our stores, and on building relationships with our many stakeholders. First, what it means to be a bricks and mortar store. The separation between digital and in-store is not a realistic mindset when there are 18 million smartphone users in Canada. People arrive in our stores everyday armed with the data -- with data and therefore an infinite level of information at their fingertips.
We need to inspire them in-store now more than ever. That means different things across our banners. At FGL it means allowing customers to digitally design their custom running shoe in-store, at Marks it means interacting with a touch panel display to coordinate an entire outfit that will keep you warm in minus 20 degree weather, and at CTR it means providing sales staff with tablets and arm them with all the knowledge they require to answer a customer's question quickly and effectively. Second, we have been and remain committed to enhancing the customer experience, and taking care of the people that walk through our doors. Across our banners, we are focused on having the right assortment of innovative products, that are priced appropriately and presented well. For those of you in Toronto, I urge you to visit FGL's new Sport Chek store, what Michael's team is referring to as a retail lab. It represents all of the characteristics I just mentioned.
The store is truly inspiring and elevates the customer experience to an unparalleled level. Attributes from this store will be included in future Sport Chek stores across the country. At Marks the refresh that's taking place there also speaks to assortment and presentation. And at CTR, store in the store kitchen boutiques motivate customers to interact with the product before making the purchase. In fact, the same concept applies to multiple categories at CTR, and will be extended across additional heritage categories in 2013. Enhancing the customer experience also means improving information access, and taking it to the next level. We must be there for our customers before their store visit, at the store, as well as after they leave.
At CTR our digital catalog, a reference that really doesn't do the new platform justice, will provide customers with an entirely new way to learn about, evaluate, and buy the products offered at CTR. Marco will talk more about this in a moment. It is also important to note that the way we evaluate how best to enhance assortment and pricing, is increasingly being driven by customer data. Although the loyalty program is still being perfected, it is providing Marco's team with incredible insights. It has now been a full year since the program was first put in place, so we're starting to cycle on 12 months of data. Analyzing and drawing conclusions is a complex process, but our analytics team now has deeper insights, down to the individual store level. Although we don't expect to roll out the national program this year, we should be in a position to move the program Nova Scotia by early next year.
Although the environment that we are operating in is more complex than ever before, we are making significant advancements, and we are focusing where it makes sense, spending wisely, and invigorating our customers and employees alike, about all that we offer across the Canadian Tire family of companies, and with that I'll turn the call over to Marco.
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Marco Marrone, Canadian Tire Corporation Ltd - COO [3]
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Thank you Stephen and good afternoon everyone. As Stephen mentioned a moment ago, we recently met with our dealers and vendors to discuss what I would conservatively characterize, as some of the most exciting plans we've put into action for some time. Before I highlight a few of these key initiatives, I'd like to discuss performance, and give context to how we have been managing the business for the past year. The short story for the quarter is that we are obviously disappointed with CTR's fourth quarter retail sales decline of 0.5%. The late arrival of winter weather, underestimating Christmas demand, and planned changes to how we manage promotions were all factors. However, the decline was partially offset by our successful sales driving initiatives, and corresponds with a healthy improvement in gross margin.
To explain the details it's easiest if I review the year in the context of my 2012 objectives. Which were first, strengthen CTR's core capabilities, second, improve margins, and third focus on building out our merchandising and marketing efforts. Let's look at the first objective of strengthening CTR's overall capabilities which includes key elements such as store concepts, our heritage categories, and our digital strategy. A critical area of focus remains the living strategy. This initiative completely revamped our kitchen area, and expanded our assortment to cover the good, better, best spectrum. Provided inspirational merchandising, and incorporated excellent in-store displays.
We converted over 70 stores in 2012, bringing the total converted to 83. By the end of Q1, we plan to have an additional 320 stores, with our new assortment in stock, and 188 stores will have completed full store merchandising changes. In the fourth quarter 2012, key categories such as kitchen appliances were up 8%, and storage and org were up 4.4% versus the prior year. And these results were accomplished with less than 20% of the network converted to the new format. The same thinking was used when we looked at our hunting and fishing categories, where we introduced the concept of pro shops. This concept, similar to the living strategy, expanded our assortments, enhanced our in-store displays and customer experience and resulted in strong performance. With hunting up 25.4% versus the prior year, fishing up 9.4%, and camping up 13.4%. In 2013, we will continue to implement this strategy and we are localizing the assortment by market.
We continue to open our capitalized smart start concept across Canada. This has been our most successful concept, with over 247 stores converted into 2012, and at least 50 additional stores to be converted in 2013 which reflects about 80% of the stores that we plan to convert to the smart store format. Stores that were converted and are opened in 2012, experienced full-year sales growth of 2.7% over 2011, and stores converted prior to 2012, continue to perform better than the network at 1.3%. We have made great strides in our digital initiative, our website remains one of the most visited retail websites in Canada, and we have continued to enhance our tires and wheels e-commerce site, making CTR the leading online tires and wheels retailer in Canada.
We also launched an innovative automotive extension to the CTR mobile app, what we call My Garage. That allows customers to add their vehicles to a digital garage, in order to keep track of preventative maintenance, scheduling, and to search for the parts specific to their vehicle, and be notified when they go on sale. We have a new technology team supporting CTR, and I believe you will continue to be impressed with our innovation over this coming quarters.
The second objective of focusing on improving margins was and is, an important element to bottom-line performance and market positioning. We knew that as we focused on margins, there would be an impact on top line sales, and CTR's fourth quarter retail sales decline of 0.5% reflects this in part. However, the actions we have taken reflect that our focus is not on driving top line at all cost.
We are a product driven retailer in that is what our customers want from us. In the first quarter of 2012, CTR's gross margin rate had declined versus the prior year, and was well below our planned levels. Through various efforts, we have improved our gross margin performance. The retail segment finished 2012 with a strong gross margin performance over the prior year, of which CTR's contribution represented a significant portion of the improvement. However, our work on margins is not complete. We are analyzing promotions to an extent not seen before.
With the data generated by our loyalty product, we are able to gain valuable insights. For example, the recent product promotion that we analyzed, shows that approximately 40% of purchases of the product on promotion included no additional purchases. Through our loyalty data, we are able to determine if those customers are high-value customers, and we are able to look at prior purchases as well as understand the correlation across categories. All of this will sharpen our ability to target and focus promotional activity that will help in improving sales and margins.
A third objective revolved around building our merchandising and marketing efforts. In 2012, we hired David Mock a seasoned merchant who compliments the talents of Allan MacDonald, who heads up our automotive and marketing areas. Within merchandising, we are not only adding additional roles that focused on key categories, we are also adding experienced talent that complements our existing team.
For example, our new Associate Vice President of kitchen has over 15 years of retail experience in house wares and is a culinary product expert. Our Category Business Manager for hunting and fishing, an avid hunter and angler, and has been instrumental in helping to develop our pro shop strategy. We will continue to build our merchandising capabilities this year. In 2013, we will also apply a targeted merchandising and marketing emphasis in the important heritage categories of tools and hockey. Where we were disappointed in performance for 2012 and in the fourth quarter especially. We also underestimated consumer response to our exceptional Christmas offering. We have taken the learning, and are preparing another strong Christmas offering for 2013, and will not leave sales on the table in 2013.
All of what I talked about so far has allowed us to position CTR extremely well, within the Canadian retail marketplace and has provided us with the flexibility needed to operate successfully, in a highly competitive environment. The same three objectives remain our focus in 2013 as we continue to strengthen CTR's core capabilities, improve margins, and build out our merchandising and marketing efforts. Before I pass the call over to Dean, I'd like to highlight a few key initiatives that we are excited about implementing in 2013, and that we believe will aid us in achieving our objectives.
First off, our digital catalog. The catalog will be a go to place for shoppers to learn of our products. Not by just reading manufacturer provided descriptions, but through videos and stories that have been submitted to us by our customers through social media channels such as Facebook, YouTube, and Twitter. Our customers will be able to evaluate products using this digital platform which will be viewable on virtually any device and ultimately, place their order through an integrated e-commerce platform. The first phase of the catalog is set to be launched next month. The first phase of the e-commerce platform will be launched in the second half of the year. First, focused on the specific product lineup, and then expanded incrementally across additional categories over time. The key element of the launch of our digital catalog will be the deployment of 7,000 in-store devices that will allow customers and store staff to access the catalog anywhere in the store.
In 2013, store staff will increasingly have access to state-of-the-art technology, that will allow them to locate products anywhere in the store, while remaining on the sales floor. Saving time, improving their ability to find the right product quickly, and delivering an exceptional customer experience inside the store. We are in the process of rolling out the technology to stores, and where it's been implemented, we've seen customer satisfaction increase by approximately 4% on average.
Second, store formats as always, remain a primary focus. This year, we will be working in two areas. First, refining and extending our store within a store initiative into other categories and, two, testing the express store concept. We intend to open a number of store within a store concepts during 2013, and test one or two express stores. Our express format will be smaller store formats, about 10,000 square feet, that are suited for urban areas, and also gives CTR access to new retail outlets such as mall type locations.
Both formats will be highly customizable. Either focused on a specific category, in the case of the specialty store within a store, or assorted to reflect the buying habits and demographics of shoppers in a particular geographical location, in the case of an express store. Both store concepts will also be designed to act as pickup locations, for orders placed via the digital catalogs as will all CTR locations.
With that, I'll now turn the call over to Dean.
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Dean McCann, Canadian Tire Corporation Ltd - CFO [4]
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Thanks Marco. Our consolidated results were strong for 2012 and I'll walk through them in a moment. Against the backdrop of a weak economy, a cautious consumer, and an increasingly competitive market, we have come out of 2012 very strong and well prepared to take on 2013. In 2012 we controlled our expenses, and this remains an ongoing focus for us. Essentially working to find ways to do more with the same amount or less. We controlled capital spending, and focused on improving the returns on our capital spend. And we increased our financial flexibility, coming out of 2012 with an increased cash position, improved balance sheet metrics, and plans to increase capital being returned to shareholders.
Now turning to a review of our results. Which are summarized in the slides provided, I will start with slide four, covering consolidated results. Note that we've summarized the one-time or unusual items that affected our earnings performance in 2012 and '11 in a table in the fourth quarter MD&A, which we released this morning, so please refer to that for additional detail. Looking at the full year, revenues increased 10% versus 2011, and diluted EPS was CAD6.10, an increase of 6.9% compared to 2011. Normalizing for the unusual items I referred to earlier, diluted EPS were up 12.9% on a full-year basis. Overall, our operating expenses have continued to be well controlled. With expenses slightly higher in the fourth quarter, largely due to the restructuring charge taken in Q4, and due to timing of advertising and marketing expenses at CTR, Mark's and financial services.
On a full-year basis, expenses were essentially running flat from the prior year, after allowing for the addition of FGL Sports results, and excluding the fourth quarter restructuring charge in the retail segment. With respect to the restructuring charge of CAD19.6 million booked in Q4, both Stephen and Marco commented on our focus on controlling our costs. And this charge will translate into ongoing savings of about CAD10 million pretax for 2013, which is net of some reinvestment by Marco, into the merchandising area, to enhance the existing team. Our results typically include CAD15 to CAD20 million of normal cost for severance associated with personnel changes, and this was substantially exceeded in 2012, with the addition of this charge in Q4. We will continue as a matter of course, to be vigilant in identifying operational efficiencies, to permanently remove costs.
We ended 2012 in a strong financial position, with healthy liquidity and cash equivalents totaling CAD929.5 million. Up from CAD201 million at the end of 2011. In part, reflecting cash accumulated to fund the repayment of CAD635 million in Glacier Credit Card Trust debt, that matured February 20, 2013. Gross CapEx came in at CAD335 million, which is below our forecasted 2012 CapEx range, due to the deferral of certain real estate projects and IT initiatives where deployment was pushed into 2013. CapEx in 2013 is expected to increase to a range of approximately CAD400 million to CAD425 million. Largely reflecting costs associated with the FGL Sports expansion strategy, which we announced earlier in the year. As I highlighted in the third quarter, the 2013 CapEx range excludes costs associated with the potential land purchase for our future distribution center.
Managing our capital allocation remains an ongoing key priority for me. And you've heard me speak about our capital priorities a fair bit over the past year. I remind you that they remain number one, investing in the business, number two, paying down debt and maintaining our credit ratings, and three efficiently managing our cash. Coming out of 2009, our balance sheet remains strong and it was largely effective cash management during the economic downturn that ensured that our balance sheet remained strong, allowing us to take advantage of new opportunities, and which ultimately led to the purchase of FGL Sports.
As you may know, over the past two years, we've allocating capital to all areas within our capital management priorities, including increasing our dividend by 17% in the third quarter of this year, and buying back almost 300,000 shares above our normal anti-dilutive policy in Q4 2012. Today we filed our normal course for up to 2.5 million shares. As in the past, we intend to purchase shares to offset dilution, but also announced our intention subject to a number of conditions, to repurchase up to CAD100 million of our class A non voting shares over the course of 2013.
Turning to slide six in the retail segment. In the quarter, retail segment sales and revenues were up year-over-year, due to sales increases across our Mark's and petroleum banners, and a strong quarter at FGL Sports. CTR sales and revenue declined in the quarter, reflecting the weather issues and the decisions taken to manage margins, described earlier by Marco. During the quarter, we continued to see improvement in gross margins across all our retail businesses. Particularly at CTR, where management of the balance between sales and margin growth was an important focus as Marco alluded to earlier.
Overall, income before tax for the retail segment decreased 11.6% to CAD154.9 million versus 2011, or was down 5.3% on a normalized basis. Turning to the full year, a reminder that the results reflect the inclusion of FGL Sports results for a full year compared to 19 weeks in 2011, total retail sales and total revenues increased roughly 10% due to the inclusion of a full year of FGL Sports results, and the same factors I referenced in the quarter. Income before income tax decreased 2.6% to CAD400.3 million for the full year, but was up 4.8% on a normalized basis. The rolling 12 month return on invested capital was 6.67% at the end of 2012, compared to 7.68% a year ago. The ROIC calculation includes several of the normalizing items I highlighted before, as well as the addition of the FGL Sports capital base. The net impact of which negatively affects the ROIC calculation. Adjusting for those unusual items, ROIC was 7.12% at the end of Q4 2012. Improvement in this metric remains the focus for me and the management team.
Moving to slide seven, financial services posted another solid quarter. Financial services had another strong quarter and full year with results reflecting gross average credit card receivable growth, higher margins, improved credit portfolio metrics, and continued strong expense management. The rolling 12 month credit card write-off rate continued to decline throughout 2012 due to improving bankruptcy rates, and was 6.58% at the end of 2012, down from 7.32% a year ago. The return on receivables on a rolling 12 month basis was 6.76% at the end of the fourth quarter, versus 5.45% at the end of 2011, and continues to be above our aspirational range of 4.5% to 5%.
At this time, given the improved outlook for both write-offs and interest costs, it is reasonable to expect the ROR to remain elevated in the 5.5% to 6.5% range throughout 2011. All in all, I believe we had a solid fourth quarter and year, and with that I'll turn it back over to the operator for moderating the Q&A.
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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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Clearly you guys were very busy throughout 2012 preparing yourselves for the imminent arrival or the imminent opening of a target store in 2013, just wondering if you can talk a little bit about what you may have done to the stores specifically where you know you have overlap, and what you think the impact is going to be?
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Marco Marrone, Canadian Tire Corporation Ltd - COO [3]
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Irene it's Marco. One of things we've been working on for a number of years now is I always look at our assortment and our concepts irrespective of any one particular competitor, I look at the competitive environment total, one of things we have done is our living strategy rollout, which we're seeing tremendous results and I outlined some of them today. We have mapped the openings of the various competitor outlets, and making sure our stores within the vicinity of those stores, have the latest concepts and the latest assortments. So we're ready for the competition and have been planning that for a while.
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Irene Nattel, RBC Capital Markets - Analyst [4]
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That's great, thank you, and just moving over to financial services, it seems as though there was a bit of an acceleration in receivables growth in Q4, and just wondering how much of that might have been related to the launch of the Sport Chek card and what kind of uptake you're seeing with the FGL customer, and whether we might actually see that continue through 2013?
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Mary Turner, Canadian Tire Bank and Financial Services - President and COO [5]
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Hi Irene it's Mary. So there's a number of factors for the accelerated growth in GAR and a big one was the change in terms for minimum payment that were introduced earlier in 2012. That really helped us drive balance growth throughout 2012, and that will continue to work for us. We also had some very nice improvements in, in-store acquisition processes in CTR, that really started to accelerate new account acquisition in the back half. We also invested quite a bit of marketing -- marketing investment and some new offers, particularly late in Q4, to drive new accounts and to also accelerate sales on the card, including a bonus Canadian money offer that we did in December. We also had good growth in our in-store financing offers at CTR, so those also drove receivables. The FGL card will help us drive receivables, but it was pretty early on, so I think that's more of an opportunity for this year and ongoing, so we had a nice launch of that card and some good acceptance, but it really isn't a significant factor in our receivables growth in Q4.
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Irene Nattel, RBC Capital Markets - Analyst [6]
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That's great and just one final question if I may. Was there in the release of provisions in the Q4 results?
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Mary Turner, Canadian Tire Bank and Financial Services - President and COO [7]
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Yes, I'm going back and thinking about it. Essentially, the releases in the provision or in the allowance, actually happened more earlier in the year, a lot of the improvement in write-offs and in the drive down in insolvency's occurred throughout the year so a lot of that already occurred.
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Irene Nattel, RBC Capital Markets - Analyst [8]
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That's great thanks Mary.
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Operator [9]
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Jim Durran, Barclays Capital.
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Jim Durran, Barclays Capital - Analyst [10]
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Just wondering as you went through the quarter, trying to ignore the weather factor obviously, did you see any change in the consumer spending habit in the quarter, versus what you'd seen throughout the year?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [11]
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Hi Jim, it's Stephen. I don't think so particularly, the aggressiveness of discounting happened early. Which obviously changed kind of the annual pattern from what we've been used to a bit. I think others reported really kind of weak performance Boxing Day on and things like that, so it is changed. I don't believe though that we would say that from a discretionary point of view that we saw a significant change when you isolate the weather related categories.
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Jim Durran, Barclays Capital - Analyst [12]
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When you looked at auto specifically, there was very different weather experiences depending on what time of the Q4 we're talking about, in Quebec versus Ontario versus the West, did the business performance reflect those differences?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [13]
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Yes, wherever -- I think Marco and his team are extremely well prepared in automotive, and wherever we see the perfect conditions, we see the traffic and we see the category lift up that are really quite impressive. So throughout the year we've seen it as well, so but a very obviously as you mentioned, a very mixed reaction overall winter tires in the fourth quarter are down. I mean it is just one of those categories you can't do a lot with without getting early winter weather. But it's responded extremely well when the weather conditions are there.
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Jim Durran, Barclays Capital - Analyst [14]
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My last question just a little bit of a clarity question on the express stores versus the pro shop. Marco can you just give me a little bit more granularity, so if I potentially going into maybe a mall in an urban center, there's a chance I'm going to see a Canadian tire express store, what role do you see it playing for the consumer?
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Marco Marrone, Canadian Tire Corporation Ltd - COO [15]
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Jim, I think the way we're thinking about it is, inside a mall most likely a specialty type of offering, and a good example is what we had done, in store concept was our kitchen category. We may be testing a few in terms of stand-alone kitchen store potentially. The express store, what we're looking at is urban markets where our current footprint may not be conducive to acquiring the requirement in terms of the land. When we put in a smaller store, and we're thinking about a 10,000 square foot store, and then modifying the assortment to meet the neighborhood that we will be in, the demographics of the neighborhood, so right now we have a couple in mind, and over the next several months we will be finalizing our plans, but we plan to have one probably in market by third quarter.
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Jim Durran, Barclays Capital - Analyst [16]
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And so would you define that as like a hardware convenience store?
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Marco Marrone, Canadian Tire Corporation Ltd - COO [17]
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Convenience, yes. Depending on the market, will drive the assortment.
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Jim Durran, Barclays Capital - Analyst [18]
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Okay. Thank you for that.
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Operator [19]
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Brian Morrison, TD Securities.
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Brian Morrison, TD Securities - Analyst [20]
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Good afternoon question for either Marco or Dean, can you talk about on the loyalty program, just about the pros and potentially some of the cons as well that you've seen from the rollout that led you to identify that you should focus on additional markets rather than a national rollout at this time?
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Marco Marrone, Canadian Tire Corporation Ltd - COO [21]
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I'll take a shot at this it's Marco. I think we're seeing some tremendous value in the data were collecting, right down to the customer level. And an example is the one I outlined in my previous comments around the analytical capability we are now obtaining to understand which customers are buying what products, and how they're actually buying those products. That's one part of the data. The second part of the data, how does it impact our operation, not only in-store but also here at the corporate level, in terms of a product having it in stock what times and even how it impacts the design of our flyer. So, a tremendous amount of analytical horsepower there. We actually joke around here for every question that we answer, we have another five that we would like to answer, keep digging and drilling down. Where we're really thinking through now is, as we begin to expand, the initial investment or cost that you have with the loyalty program, and the lag between the investment and the benefits come through, and how best to manage that so that we can manage our performance to that expansion.
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Brian Morrison, TD Securities - Analyst [22]
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So on the timing side it's really a matter of, I guess it's just a matter of timing before you can roll it all out?
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Marco Marrone, Canadian Tire Corporation Ltd - COO [23]
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As Stephen mentioned in his commentary, our plan is not at this point during 2013 to roll it out. We're looking beyond 2013.
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Brian Morrison, TD Securities - Analyst [24]
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Okay just a follow-up question for Mary, congratulations on the impressive GAR growth during the quarter, and also the customer base increase over 1%. I guess not surprisingly you did have a slight increase in the operating expenses this quarter, I assume to support that growth. Is this a trend that we should see slightly increasing on a going forward basis, or is this just a one-off increase in marketing during the quarter?
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Mary Turner, Canadian Tire Bank and Financial Services - President and COO [25]
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Hi Brian, it's Mary. So, that increase it is all marketing as I think you've figured out. And I think as we continue into this year, we're going to be investing more in marketing to drive growth.
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Brian Morrison, TD Securities - Analyst [26]
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So it's fair to say that it's a sustainable trend going forward?
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Mary Turner, Canadian Tire Bank and Financial Services - President and COO [27]
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I think so for a while, I think we need to get -- as you and I talked before, we need to get our growth going and we seem to have momentum, and I think that's something we want to continue to capitalize on.
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Brian Morrison, TD Securities - Analyst [28]
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That's great, I appreciate it.
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Operator [29]
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Vishal Shreedhar, National Bank.
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Vishal Shreedhar, National Bank - Analyst [30]
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Just continuing on the line of operating expenses, Dean I was hoping you could give us some thoughts in terms of 2013, and how we should think about operating expenses, and maybe also the marketing budget and how that fits in there?
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Dean McCann, Canadian Tire Corporation Ltd - CFO [31]
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I guess the best I can do for you Vishal is on OpEx, it was a little bit of a noisy quarter obviously because of across all the businesses really, we did spend some incremental marketing dollars as you just heard Mary talk about, and certainly the retail businesses did. We didn't get as rewarded as we would have liked to, because we didn't get the weather and some of the other things that you have heard. But if I was to step back, I mean, I take peace in that fact that if I step back and take a look at operating expenses over the total year, and then pull FGL out which is what you have to do to kind of think about it sort of logically, our run rate year-over-year is very solid, it's very kind of inflation based. And as I look out to next year, that is what I would expect us to do at the worst case if not better than that. So I'm looking at the faces around the room here and that is certainly the objective as we are sort of planning going forward. So I realize that the fourth quarter kind of messes up that trend a little bit, but if I step back to give the guys credit, with respect to even marketing, if I step back and look at what they were planning with respect to the year, nobody is really out of whack as to what they expected to spend in terms of the full year, there was just some timing in the fourth quarter, so I hope that helps.
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Vishal Shreedhar, National Bank - Analyst [32]
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Let me know if characterize this correctly, so outside of FGL and 2013, it was relatively flat, I'm sorry 2012, in 2013 you look to continue that trend, and is there any other discrete items that we should consider? Such as marketing or any other events that could come and might impact that, or is that pretty much the way we should think about it, and also I should mention the inflation trend as well?
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Dean McCann, Canadian Tire Corporation Ltd - CFO [33]
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That's as much as I can give you Vishal, but there's nothing else that I'm thinking of as a bogey out there. Always there's -- you've got to respond to the marketplace and all those kind of things with respect to marketing and what comes out is from a business point of view, so that's certainly the way we're thinking about it is, we've got a big focus on containing our operating cost structure.
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Vishal Shreedhar, National Bank - Analyst [34]
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Okay and on the share repurchase, I might've misheard you but in your prepared remarks did you say a maximum of CAD100 million or a minimum of CAD100 million?
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Dean McCann, Canadian Tire Corporation Ltd - CFO [35]
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Actually, my lawyer friend had sent me a note, I think I said up to, it actually is a minimum of CAD100 million that we expect to spend that we've allocated out of our cash, with respect to repurchase of shares, so my apologies.
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Vishal Shreedhar, National Bank - Analyst [36]
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That's fine, and lastly on the weather trend and how that impacts, presumably you have some positive offsets from a warmer climate as well, so how do you determine net, net that it was a negative impact, do you go category by category and figure out this one was plus and this one was negative?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [37]
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So you have to go across the businesses, I mean Michael Medline or Marco can pick it up from there in actual operations, but if you look at outerwear, outerwear -- winter outerwear is going to be a comparison on a year-over-year basis, but we do all our categories that way Vishal in terms of our planning and budgeting. I mean we do -- we take everything you could possibly imagine and we have a forecast for it, and so we can instantly tell whether wiper blades are down in the quarter and why they're down or washer fluid or winter tires or you know boots et cetera, so it is very, very much a category by category analysis.
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Vishal Shreedhar, National Bank - Analyst [38]
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Thank you.
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Operator [39]
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Mark Petrie, CIBC.
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Mark Petrie, CIBC - Analyst [40]
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Hi, good afternoon could you talk a little bit about inventory levels, corporate and dealer, and how you feel coming out of winter and heading into next year?
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Marco Marrone, Canadian Tire Corporation Ltd - COO [41]
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Mark, it's Marco, I'll give you a perspective on CTR. I think our inventories are in really good shape, both at the corporate level and both at the and at the dealer level, the retail level. When we look at the winter categories in terms of the inventory levels, where we ended up the year, I think what's happened with the weather was in excellent, excellent shape and Christmas, our seasonal inventory is in great shape as well, and so I have no issues with respect to our inventory, I think weren't really good shape for 2013.
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Dean McCann, Canadian Tire Corporation Ltd - CFO [42]
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I think as a general comment with respect to inventories, I think across all the businesses it's very clean so the accountant talking, but from the perspective of kind of seasonal clear out and those kind of things, I think we are very clean going into 2013. Now we will have obviously we're going in heavy on tires as an example right because we were soft on sales in tires, but you know that sort of one-off kind of stuff, if I look at it on an overall basis, we're very clean.
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Marco Marrone, Canadian Tire Corporation Ltd - COO [43]
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One comment on tires, we had planned an increase because of our distribution methodology this year putting it closer to our store network, so we had planned an increase anyway, but overall inventory I went through it the other day, it's in good shape.
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Mark Petrie, CIBC - Analyst [44]
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Okay thanks. In terms of the online business or e-commerce, should we, I mean is there any reason why the profitability for the corporation would be materially different than when goods are sold through the traditional method of through the dealers?
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Marco Marrone, Canadian Tire Corporation Ltd - COO [45]
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Let me take a shot at that Mark. Our intent is, in our e-commerce model is to use the stores as the fulfillment center or the pickup center. So the stores will have the inventory and provide it the consumer. So, when we look at our model, what we're looking at trying to do is how do we take advantage of the capital we already have in our business, versus investing additional capital, and look at the convenience for the customer as well, and how we minimize our operating costs. So there'll be some change in cost structure, but overall our objective is to try to make it look like a regular scale in terms of the profitability of it.
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Mark Petrie, CIBC - Analyst [46]
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Okay, so home delivery is not part of the equation, at least in the initial stages?
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Marco Marrone, Canadian Tire Corporation Ltd - COO [47]
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What I can tell you at this point we're the middle of working a number of details which that is one of the details we're working out. It may not be available first phase, our intent is to implement our e-commerce offering in phases and somewhere along the line we will address that.
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Mark Petrie, CIBC - Analyst [48]
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Okay that's helpful. And sorry Dean just to clarify your comment about return on receivables, and the range of sort of 5.5% to 6%, that's for 2013 and should we be thinking about that as kind of an exit rate for 2013, or just in terms of trajectory where do you think you end up hitting that range?
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Dean McCann, Canadian Tire Corporation Ltd - CFO [49]
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Mark I finally had to give in and come off our 4.5% to 5%, which is really what this is about, so the reality is 5.5% to 6% is a pretty very, very safe range for all of 2013.
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Mark Petrie, CIBC - Analyst [50]
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But I just mean you're well above that now, so even to come down --?
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Dean McCann, Canadian Tire Corporation Ltd - CFO [51]
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We're likely to be at the high end of it.
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Mark Petrie, CIBC - Analyst [52]
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Okay thanks.
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Operator [53]
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Keith Howlett, Desjardins Capital.
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Keith Howlett, Desjardins Capital - Analyst [54]
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Just to go back on the return on receivables, what is it that you anticipate is going to bring it down, is it higher write-offs, or higher marketing, or what's going to bring it back to the range from where it is now?
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Dean McCann, Canadian Tire Corporation Ltd - CFO [55]
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As I've talked about before, the thing that will bring it down is when we get back to meaningful receivable growth. That's really it's too high. Like, so as I've said more than once. What we need to get to is meaningful receivable growth, and Mary is turning the corner with that right so with the increase in marketing spend that she's putting against it, she's starting to see the results of that. So that's over time what is the proper way for it to come down. But it's not like we're expecting problems with respect to write-offs or anything like that it, and in fact another factor is just the cost of money right. We've got to sustain the low cost of money that we're in right now.
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Keith Howlett, Desjardins Capital - Analyst [56]
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Just on the operating expenses, we don't have the benefit of those numbers that you can see so all we see is Q4 this year included Forzani and Q4 last year included Forzani. So why are the operating expenses so high this year in the fourth quarter?
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Dean McCann, Canadian Tire Corporation Ltd - CFO [57]
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First thing you've got to do is back out the restructuring charge for the fourth quarter, and then basically the vast majority of that increase is marketing spend, which goes to primarily goes to timing. As Mary talked about, some incremental spend in financial services. But the vast majority of it is marketing, and there's a bit of higher occupancy cost for the store openings and across the various businesses.
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Keith Howlett, Desjardins Capital - Analyst [58]
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Just on what normalized EPS, I did -- we've had a busy day, I did look at 7.1 on the chart there, and there was CAD19.6 million pretax restructuring and the tax provision which was positive 2.1, that seems, that would result in greater than 2.8% EPS growth even adjusting the prior year, is there something I'm missing there?
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Dean McCann, Canadian Tire Corporation Ltd - CFO [59]
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I think the best thing to do with that Keith is we will take that off-line and go back and I'll kind of walk you through it. Andrea and the guys can do that, we've done that for other folks too.
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Keith Howlett, Desjardins Capital - Analyst [60]
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Okay great. And then just on the express stores, is that a dealer store or a corporate store?
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Marco Marrone, Canadian Tire Corporation Ltd - COO [61]
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No, that will be run by our dealers.
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Keith Howlett, Desjardins Capital - Analyst [62]
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And then on the PartSource, there have been rumors that Auto Zone's looking at Canada, can you just talk to whether you've heard that and what you might be specifically doing with PartSource?
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Marco Marrone, Canadian Tire Corporation Ltd - COO [63]
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Keith this is Marco, I have not heard that specifically with PartSource we continue to evaluate the opportunity in terms of distribution of auto parts to our Canadian Tire stores, and in certain markets what the opportunity is beyond our store network, and we're in the middle of that analysis right now. So I really don't -- can't comment any further at this point.
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Keith Howlett, Desjardins Capital - Analyst [64]
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And then just on the dealer contract can you update us where discussions are, or whether they're at a fever pitch or they're or just starting or where they're at?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [65]
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Hi Keith, it's Stephen, they're progressing, they're progressing very well, I guess would be my take on it. I shouldn't give you timelines and I shouldn't give you current status, but you don't have to use fever pitch or anything like that, so you can take those ones off. But I would just say that they're proceeding extremely well, very well.
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Keith Howlett, Desjardins Capital - Analyst [66]
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Great thanks very much.
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Operator [67]
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Irene Nattel, RBC Capital Markets.
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Irene Nattel, RBC Capital Markets - Analyst [68]
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Sorry, I was going to ask about the dealer contract. Thank you.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [69]
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Operator is there any other questions?
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Operator [70]
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And we have no further questions at this time.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President and CEO [71]
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All right operator then that's great, can I turn it over to you to close a call. I'd just like to say thank you to everybody joining us and we do know you've had a long day so thank you again.
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Operator [72]
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Thank you ladies and gentlemen, a telephone replay of today's conference call will be available for one month, and the webcast will be archived on the Canadian Tire Corporation Limited IR website for 12 months. Please contact Lisa Greatrix or any member of the IR team, if there are any follow-up questions regarding today's conference call or the materials provided. This concludes today's conference call, thank you for your participation, you may now disconnect.
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