Q2 2013 Canadian Tire Corporation, Limited Earnings Conference Call
Aug 08, 2013 AM EDT
CTC.A.TO - Canadian Tire Corporation Ltd
Q2 2013 Canadian Tire Corporation, Limited Earnings Conference Call
Aug 08, 2013 / 04:00PM GMT
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Corporate Participants
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* Stephen Wetmore
Canadian Tire Corporation Ltd - President & CEO
* Dean McCann
Canadian Tire Corporation Ltd - CFO & EVP of Finance
* Mary Turner
Canadian Tire Corporation Ltd - COO of Canadian Tire Financial Services
* Michael Medline
Canadian Tire Corporation Ltd - President of FGL Sports and Mark's & EVP, CTC
* Allan MacDonald
Canadian Tire Corporation Ltd - COO of Canadian Tire Retail
* Harry Taylor
Canadian Tire Corporation Ltd - COO of Mark's
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Conference Call Participants
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* Irene Nattel
RBC Capital Markets - Analyst
* Peter Sklar
BMO Capital Markets - Analyst
* Jim Durran
Barclays Capital - Analyst
* Brian Morrison
TD Securities - Analyst
* Mark Petrie
CIBC World Markets - Analyst
* David Hartley
Credit Suisse - Analyst
* Keith Howlett
Desjardins Capital Markets - Analyst
* Chris Li
BofA Merrill Lynch - Analyst
* Vishal Shreedhar
National Bank Financial - Analyst
* Patricia Baker
Scotiabank - Analyst
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Presentation
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Operator [1]
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At this time, I would like to welcome everyone to the Canadian Tire Corporation Limited second-quarter earnings 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)
Earlier today, Canadian Tire Corporation Limited released their financial results for the second-quarter of 2013. 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.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [2]
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Good afternoon and thank you everyone for joining us today. Dean McCann will update you with our second-quarter results in a moment. But first, let me touch on the performance we saw this quarter, and highlight some important operational initiatives that the team here has been working on. As you saw in our earnings release this morning, our second-quarter results had quite impressive top line performance across the Retail segment, with a good balance in both our seasonal and non-seasonal categories at CTR. It is the strength in the non-seasonal categories that I am most pleased with, as it validates the investments we've been making in some key initiatives, particularly in automotive parts and service and our living strategy roll-out.
Our automotive business is seeing some great momentum across the complete offering and it's all for the right reasons. Better employee training, better tools, correct assortments, and substantially improved customer satisfaction. I believe the success we are now seeing in the automotive business was based on a ground-up, innovative process to change how things were done. That same approach is now being applied to our digital strategy initiatives. Capitalizing on a revitalized IT team and a dealer network that is embracing change, we are now driving initiatives that will differentiate us from our competitors.
One the most exciting initiatives in digital is the roll-out of our product locater touch screens in our CTR stores. These fast-find devices are a product of efforts led by dealers, IT, and store operations that can be used by customers and store employees to quickly and efficiently find products. While it's still early days, we can already see a tangible sales lift at stores that have the devices installed, and will continue to roll out these devices to all CTR stores over the next few months. This technology will not only provide our customers with an enhanced in-store shopping experience, but will also strengthen in-store operations, resulting in improved customer satisfaction, employee satisfaction, and of course, our in-stock position. In addition, we're on track for the launch of our CTR e-Commerce site. And we plan to have the first phase of our offering go live later this year.
We are also noticing positive results from our new store concepts. First, we continue to see positive sales and shipments in our key living categories, and are pleased with the initial results we are seeing from the improved assortments and shopping experience in the 272 stores that have adopted some variation of the new living concept. Second, we continue to see positive year-over-year sales results in our outdoor recreation categories, primarily due to the hunting and fishing pro shops that we've been adding to our stores. Based on the results we've seen to date, we'll continue with the roll-out to locations where it makes sense to do so.
Third, our CTR Smart stores continue to deliver strong result when compared to some of our older store formats. At the end of the quarter, 57% of our network had been converted to the Smart store format, with plans to convert an additional 30 stores, or approximately 6%, in the remainder of the year. And fourth, you may have heard that just last week we opened our first Express store in Toronto. This store concept is the first of its kind for Canadian Tire, and represents a new way of thinking about our retail model.
The stores bring us closer to our urban customers, while increasing our presence across the country. The new operating model provides us with the opportunity to test several new processes throughout the entire transaction cycle, including assortment and fulfillment to a satellite location. We expect it will take some time to test the store format before we decide if this new concept actually adds value to the network.
Before I move away from CTR, I would like to update you on one last item. In May, when Allan MacDonald came on as Chief Operating Officer at Canadian Tire Retail, he started looking for the right people to fill the marketing and automotive responsibilities that he had previously held. And I'm pleased to announce that TJ Flood has been promoted to Senior Vice President of Marketing and Gregg Hicks has rejoined Canadian Tire in the role of Senior Vice President of Automotive. Both individuals have a solid understanding of our retail sector and a strong background in the CTR business. We are confident that they will continue to deliver on the initiatives that are currently underway, allowing Allan time to focus on his strategic mandate within CTR.
Moving on to FGL Sports banner, this business continues to out-perform all our expectations. We saw positive year-over-year retail sales growth, despite the closure of over 80 stores related to the Banner rationalization initiative that was completed last quarter. At Sport Chek, the core FGL Sports banner, we experienced impressive retail sales growth that was up 16% and same-store sales growth of 10%. We saw traffic increases in stores, and launched innovative and effective advertising campaigns, which helped to drive the impressive top line results. As such, we continue to focus on our growth strategy and the related network expansion of our core Sport Chek and Atmosphere banners.
And Mark's also performed very well in the quarter, with strong sales growth resulting from the re-branded Mark's stores and new assortments. They contributed to significantly fewer clearance sales compared to the prior year. Our customer satisfaction surveys show overall improvement to the in-store customer experience, which validates the good work that the team is doing to improve in-store presentation and product assortment. To summarize, I'm extremely pleased with our results this quarter, and our disciplined management of a balance between sales and margins, despite an increasingly competitive Canadian marketplace.
Before I pass it over to Dean, I would like to update you on a few of the corporate initiatives underway. First, as you would have read in our earnings release this morning, we intend to seek a financial partner for the credit card assets and related funding liabilities of our Financial Services business. In recent years, the team at Financial Services has worked hard to integrate with our Retail operations to both support them and perfect ways to grow together. As a result of that work, we now feel that we're well-positioned to explore an arrangement that would increase our financial flexibility while continuing to enjoy the substantial contributions of our Financial Services business. Any arrangement that we pursue must meet our strategic and financial conditions and preserve the significant benefits we derive from the integration between our Financial Services and the Retail operations.
Second, our loyalty programs. We continue to run our existing nationally-recognized Canadian Tire money loyalty offering, which we continue to enhance with great offers from the Financial Services business, while at the same time refining the loyalty pilot program currently running in Nova Scotia. Analyzing the data is not an easy process, but we continue to see the value in the information we have gathered and the insight into our high-value customers' buying patterns. As we mentioned last quarter, we continue to evaluate this pilot program to ensure that, when we launch it nationally, we will achieve our objectives of offering customers the optimal level of rewards while allowing Canadian Tire more opportunities to offer customers an improved shopping experience.
Third, we're proud to report that all of our dealers have signed a new dealer contract, which was ratified in April of this year. This reinforces the strong relationship we continue to build with our dealers and Canadian Tire, and our shared commitment to grow the Enterprise together. We have begun the process of implementing the new terms of the contract, and will continue this work through the rest of this year and into 2014.
Fourth, I said in January when we announced our partnership with Canada's Olympic and Paralympic teams that sport was part of Canadian Tire's DNA. This quarter, we proved yet again that the power of sport is a key business driver for us, as we continue to partner with leading sports organizations and world class athletes. Complementing our existing relationships with Hockey Canada, Skate Canada and the NHL, in June we announced a new long-term partnership with Senators Sports and Entertainment, that saw the home of the Ottawa Senators' re-named Canadian Tire Center. In addition to the on site branding opportunities and consumer activations for Canadian Tire, Sports Chek, Sports Experts, Jumpstart Charities, and Mark's, the partnership also reinforces our shared values with the team, a commitment to communities and family, and a deep-seated love of hockey.
I am also pleased to report that our already-strong relationship with the Canadian Olympic Committee is getting stronger as we find new and innovative ways to work closely together. This quarter alone, we signed endorsement contracts with nine Canadian Olympic athletes across a range of winter and summer sports, including partnerships with Christine Sinclair, Meaghan Mikkelson, and Jon Montgomery. We also announced that Sport Chek will be the lead retailer of the Adidas Canadian Olympic Team High Performance Collection.
The new High Performance Collection will be available in all 170 Sports Chek stores, and CTR and Sports Experts will carry select items across Canada this fall. These strategic partnerships have led to over 1.2 billion media impressions for our banner since the start of the year. This is more earned media coverage in the past six months than Canadian Tire received for corporate news for the whole of 2012.
And finally, as you know, last quarter we announced our intention to create a REIT, a real estate investment trust. We believe the creation of a REIT aligns with our longstanding objectives of retaining control over our real estate properties while surfacing the value of that real estate for shareholders and providing the Company with additional financing flexibility, access funds to invest in and grow our business over the long-term. We continue to work towards completing the IPO in the fall of this year. In addition, I'm pleased to announce that a highly experienced Senior Management team for the REIT is now in place. Ken Silver, who serves as President Canadian Tire Real Estate Limited, has been selected as Chief Executive Officer for the REIT. Ken has more than 20 years of real estate experience, both in Canada and the United States.
In addition, Louis Forbes has been appointed as Chief Financial Officer for the REIT. Louis is an experienced executive with over 20 years in the real estate industry and has served as the Executive Vice President and Chief Financial Officer of Primaris, a Canadian based REIT organization. With that, I'll now pass things over to Dean, who will walk you through our financial results for the quarter.
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP of Finance [3]
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Thank you, Stephen, and good afternoon, everyone. For those following along with the presentation slides, I'll begin with our consolidated results on slide 4, and in the interest of time, will touch only briefly on a few factors that influenced our results in the quarter. Before I do that, however, I'll remind everyone that included in our prior year results are the costs associated with the FGL Sports banner rationalization initiative, which are also highlighted in this quarter's MD&A that was released earlier today.
Looking first at our top line performance, we were extremely pleased to see the strong sales results from our key retail businesses during the quarter, and to see the positive impact the sales results had on our consolidated revenue in Q2. We also saw another strong quarter for the Financial Services business, where the increase in revenue was largely attributed to 6.6% growth, and a receivables portfolio stemming from targeted account acquisition efforts. This is particularly impressive given the current consumer lending environment, and the low credit card growth levels experienced across the industry.
Consolidated operating expenses, or Opex, increased over the prior year, which, as you will see in our disclosure documents, was largely due to the timing of marketing expenditures and planned incremental marketing and advertising expenses tied to a number of our major initiatives. This includes the launch of the new CTR digital catalogue, and the new Sport and Olympic partnerships Stephen discussed earlier. In addition, we saw an increase in Opex for planned investment in areas that related to our digital strategy, and the infrastructure to support these initiatives, as well as the cost associated with the roll-out of the living strategy concept.
As you heard earlier, we continue to believe that by putting our resources towards these partnerships, we are cementing our place as the designation for the sports apparel -- for sporting goods and apparel in Canada and showcasing our brand. And it is the best use of our marketing funds -- our marketing efforts and budget. That said, we still aspire to keep operating expenses in line with revenue growth and continue to look for opportunities to take costs out of other areas of the business and to identify operational efficiencies to permanently remove costs.
Turning to the Retail segment on slide 5. We continued to see positive year-over-year margin growth, even after adjusting for the one-time costs associated with the FGL Sports banner rationalization last year. In my view, when I see margin growth outpacing our retail sales growth, it indicates that we are not chasing sales in order to achieve our top line aspirations, but instead working to ensure that sales we generate are quality sales. Once again, this was largely due to Management's efforts to manage the balance between driving top line and margin improvements, especially in our CTR and Mark's businesses during the quarter. This result also stands out, given the strong sales performance achieved across the key retail banners in the quarter, and despite the increasingly competitive Canadian retail environment.
As expected, once we saw more seasonal weather in the latter part of the quarter, we saw a reduction in our inventory levels across individual retail banners. Overall, income before income tax for the Retail segment increased 5.5% versus Q2 '12. However, excluding the one-time costs associated with the banner rationalization initiative, Retail income before income taxes was down 11.8%. Positive Retail segment revenue growth and gross margin performance was negatively impacted by the increase in operating expenses I referred to a moment ago, and lower year-over-year contribution to earnings from the petroleum business.
Turning to slide 6, as both Stephen and I mentioned earlier, Financial Services posted another very strong quarter, reflecting gross average receivable growth and improved credit portfolio metrics. Throughout the quarter, we continued to see improvements in the rolling 12-month write-off rate, due to improving bankruptcy rates compared to a year ago. In addition, our return on receivables remains at levels above our aspirational range and our expected 2013 range of 5.5% to 6.5%, which I mentioned in the last quarter.
Reported ROIC was 7.34%, flat to the previous quarter and lower than Q2 2012. As you know, our ROIC calculation uses rolling 12 numbers. And as such, the acquisition of FGL Sports continues to weigh on the calculation and is the main contributor to the year-over-year decline. Versus Q1 2013, ROIC was essentially flat, and I continue to look for a steadily improving quarter-over-quarter trend in the metric as retail initiatives and investments that are included in the calculations cycle through.
Our cash position remains strong, with our balance sheet continuing to get stronger. We used about CAD36 million of our cash in the quarter to re-purchase roughly 439,000 of our Class A shares, including shares purchased for anti-dilutive purposes, as part of our 2013 share buyback program. Our capital spending was on plan in the quarter, and we remain on track for CAD400 million to CAD425 million of CapEx for 2013. Subsequent to the quarter, we completed the purchase of a parcel of land in Bolton, Ontario, which we intend to use for future distribution capacity. We will undertake some preliminary site work over the balance of the year, so we will spend approximately CAD90 million to CAD100 million on this land purchase by the end of the year.
And with that, I'll change direction and speak briefly about the announcement we made earlier today regarding our intent to seek a financial partner for our credit card portfolio. As you can appreciate, we are only announcing our intent to seek a partner today, so we will have a lot of work ahead of us, and are not able to provide a lot of detail at this time. That said, we believe the continued strong performance of the credit card portfolio, and current capital market conditions, make this the right time to consider our partnership of this nature. As Stephen alluded to, a new arrangement for this business would achieve the three key benefits for Canadian Tire.
Namely, first, Canadian Tire would continue to enjoy a majority of the meaningful financial and strategic benefits of its highly successful Financial Services business, but would further reduce our financing risk associated with funding the credit card assets. Second, it would allow us to release cash that's tied up in capital associated with funding the portfolio. And third, it would ultimately position us with a less complex balance sheet. Obviously, an arrangement of this kind would have an impact on our consolidated statements and our external disclosure documents, but the nature of the changes can only be determined once the structure of the arrangement is in place. All that is to say that it's early days, but we will provide you with the implications for our consolidated financial results once we have more information.
Lastly, Steven mentioned on last quarter's call that we were planning an Investor Day for this fall. Due to the initiatives we currently have underway, we have decided to push the timing out to mid-2014. However, we do intend to hold a series of smaller education sessions related to some of the initiatives we are working on, and we'll be reaching out to tell you about those shortly. With that, I'll turn it over to the operator 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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Two questions, please, if I might.
First of all, could you tell us what, for you, the financial and strategic benefits of the credit card business are? And secondly -- and this is related -- you've already highlighted the degree of progress that you're making in terms of reducing overall balance sheet leverage. If we assume that you do, in fact, proceed with this partnership, and your balance sheet becomes even cleaner, how should we think about the potential use of proceeds, both from the REIT IPO and from this transaction?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [3]
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Irene, it's Stephen.
Well, firstly, the financial and strategic benefits of the Financial Services business is in reference to the fact that they contribute greatly to our earnings per share at Canadian Tire Corporation, and we would like to maintain that contribution. And so that's simply to say that, that's part of any agreement that we would be looking at. And strategically, starting with when Dean McCann ran our Financial Services business and then really put into high gear by Mary when she took over, is the focusing of our Financial Services business to support our retail operations. And I must admit it's been extremely successful, and I think Mary would probably echo these comments to say that it's the tip of the iceberg, if you will, as to what can be done in the future. And so strategically, an extremely important asset. And therefore, it's really to give a clear indication of the importance of this business, when we start the process of trying to find a financial partner.
As far as our balance sheet leverage is concerned, this is -- what's very important in doing this transaction, in my mind, is not necessarily at all the use of the freed-up capital, if you will, from doing such a transaction. And therefore I wouldn't associate the action with a need for cash. I would associate it with the fact that now it's been enough time to strategically align the business with our retail operations to where we're comfortable with the long-term strategic direction of that business. So that we feel comfortable in trying to negotiate an agreement with a financial partner, and we will truly have to see. This is a many-month process, which we wanted to go public with the announcement so that we could open up the negotiations rather than trying to do them behind confidentially and all these sort of things.
So it will be a long time before we actually see any potential cash in the transaction. But going forward, Irene, as you well know, this carrying that type of obligation and requirement on a retailer's balance sheet, if all conditions are proper, would perhaps, we believe, be the best setup to have a financial partner carry that requirement as opposed to us. And that's really what we're trying to set ourselves up for, for the future.
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Irene Nattel, RBC Capital Markets - Analyst [4]
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That's great. But looking ahead a year, it still looks like you're going to have ample balance sheet capacity to, for example, pay a special dividend or perhaps make an acquisition?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [5]
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Yes. I think we're generating enough cash to do a lot of things with, even now. I also believe that there's many other things, Irene, that the Company has to look at. I believe that tens of millions of dollars have to come out of our operations, and we are very focused on it. They don't just come out. To save money costs money. You have to invest in other things, and we have to grow this business.
So we tried to show, and I think we have very clearly, that we are very conscious of our shareholders' requirements. Very conscious of the competition that there is for capital out in the marketplace, with a number of things we've done in increasing our dividend and share buybacks and moving towards doing things that we believe enhance shareholder value. But we also have to be very clear that the long-term sustainability of the brand requires us to invest in it, not simply to only buy back shares. Financial engineering doesn't take you very far in the long-term sustainability of the brand.
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Irene Nattel, RBC Capital Markets - Analyst [6]
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That's great.
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Operator [7]
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Peter Sklar, BMO Capital Markets.
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Peter Sklar, BMO Capital Markets - Analyst [8]
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Back on this seeking of a financial partner for your Financial Services business. Can you be a little bit more specific on what kind of structure you're contemplating? Would it be more of selling a partnership or an equity interest? Or would they acquire the credit card portfolio and Canadian Tire would re-orient itself more as a origination business? Can you provide a little bit more of the framework you're trying to reposition yourself into?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP of Finance [9]
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Peter, it's Dean.
I think the elements of what we're looking for -- it doesn't necessarily have to be with this type of a partner. We're going to cast a broad net as we go ahead and look at the marketplace. But if you'd like to familiarize yourself with the elements that we're looking for in this type of transaction, the recent transaction done with TD and Target US is an example. Or Kohls department stores in the US with CapOne, are examples of the elements that are important in such a transaction. And what I mean by elements is, what we're looking for, as Stephen alluded to, is somebody to basically take the balance sheet risk and the balance sheet funding side of this equation, and share with us in the revenue produced out of the credit card portfolio, with us continuing to enjoy the lion's share of that on a go-forward basis. And continuing to do all of the front end.
We want to manage our customer relationships, and we want to basically run the business and allow Mary to run the business and integrate with the retail division and gather all those strategic benefits that Stephen alluded to in terms of how we operate the business on a go-forward basis. But those elements are actually in the two transactions I just mentioned, so that's what's appealing to us.
Now, our arrangement may end up being something different than that. We don't know yet. That's the downside of going out and telling people that we're going to go out and talk to folks, because we haven't talked to folks yet. So we'll work through that, and if we can meet the criteria that we've got internally for an appropriate arrangement that accomplishes those objectives, then we'll be back to you with whatever that is. But as I said, the elements are similar to what happened in those particular transactions.
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Peter Sklar, BMO Capital Markets - Analyst [10]
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So Dean, when you talk about this potential partner taking on the balance sheet risk, do you mean by that, that Canadian Tire may be able to lay off the credit risk onto the partner?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP of Finance [11]
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No. It depends on what you mean by credit risk. By laying off the financial risk, I mean the funding risk -- the liquidity risk, if you will. And this is to further reduce the risk of funding for Canadian Tire Corporation. I want to make that very clear. We're not worried about funding the credit card business. The team has done a fantastic job in terms of identifying multiple sources of liquidity for the funding of our business.
That said, we think a financial partner that can provide that funding and could be the, if you will, holder of those assets as opposed to Canadian Tire holding those assets, would be a great thing. The flip side, with respect to credit risk, which is what you're referring to -- in other words, the risk of the portfolio and losses in the portfolio -- we see that on a go-forward basis as being something we'd share in. So we would continue to share in that with the partner. And that's how that division, if you will, of the profitability of the portfolio would be worked out on a go-forward basis. So we would continue to share in the financial benefits and risk of the portfolio from a P&L point of view on a go-forward basis. That clear?
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Peter Sklar, BMO Capital Markets - Analyst [12]
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Yes. It is. Just one more question.
There was much improved credit metrics in your Financial Services business during the quarter. I'm just wondering what's underlying that? Are you having better discipline in terms of implementing your credit policy? Or is something fundamentally changing the consumer? Can you talk a little bit about what's underlying these improved credit metrics?
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Mary Turner, Canadian Tire Corporation Ltd - COO of Canadian Tire Financial Services [13]
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It's Mary.
I think there is a number of things going on right now in our business that are really driving favorable results. So we're certainly seeing benefits from an improving economy, and you see that in bankruptcy rates and things like that. But I think one of the things we're just very good at, and we continue to work very hard to get better at, is what I would call credit card fundamentals. I think we're just really quite good at managing credit risk. Customer service, collections, marketing, customer acquisition -- we've made a lot of efforts to improve our business on all fronts, and we're really starting to see that take hold on our business. So I think there's no one single factor I could point to.
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Peter Sklar, BMO Capital Markets - Analyst [14]
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Okay.
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Operator [15]
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Jim Durran, Barclays.
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Jim Durran, Barclays Capital - Analyst [16]
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I'm just wondering, Dean, if you could comment, directionally at least, on how the broker deposits would be affected in a potential sale of the accounts receivable to a financial partner?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP of Finance [17]
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I don't even want to go there, Jim.
With any -- as I said, that's the risk of talking about this before you have sat down with people through stuff. Maybe I'll talk about securitization as an example, just in terms of funding. You get -- the likelihood is, you have some sort of runoff with respect to the liabilities over time. On the Canadian Tire balance sheet with somebody else stepping in to the shoes to replace that funding. So there's a way to think about it.
But let's be very clear. Any arrangement here is going to ensure that our customers come first, both on the credit card side, on the deposit side. That's absolutely paramount in this. It is just a non-negotiable kind of thing. So that's absolutely critical. But the mechanics or plumbing necessary to execute this thing -- I'm being straightforward with you -- we have not gone through how that would exactly work with somebody on the other side of the table. We've got in our heads some ideas, but we've got to sit down and vet those with the potential partners, as I said.
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Jim Durran, Barclays Capital - Analyst [18]
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Okay. And just on the Forzani comp store sales results for the quarter -- how much of that lift would you attribute to the closing of stores?
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Michael Medline, Canadian Tire Corporation Ltd - President of FGL Sports and Mark's & EVP, CTC [19]
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It's Michael.
We attribute between 2% and 2.5% of the 10% to the unified closures.
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Jim Durran, Barclays Capital - Analyst [20]
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And the closures -- when were they all completed by? So how many more quarters should we see contribution from that?
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Michael Medline, Canadian Tire Corporation Ltd - President of FGL Sports and Mark's & EVP, CTC [21]
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They all are closed now. Most of them closed in the first quarter, and 110 of them were closed down.
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Jim Durran, Barclays Capital - Analyst [22]
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Great. Okay.
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Operator [23]
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Brian Morrison, TD Securities,
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Brian Morrison, TD Securities - Analyst [24]
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I just had a couple follow-up questions on the potential for teaming up with a financial partner on your credit card portfolio. Dean, I think you answered this already in terms of discussions -- but has any partner reached out to you to date with respect to this announcement?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP of Finance [25]
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No.
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Brian Morrison, TD Securities - Analyst [26]
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Okay.
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP of Finance [27]
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I haven't been back to my desk in the last three hours, but no.
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Brian Morrison, TD Securities - Analyst [28]
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I'm sure there's a few calls by now. In terms of just summarizing the strategy here -- I want, if it's possible, for you to confirm. It appears what you are doing here is, you preserve a large portion of the earnings stream and you are pulling out your equity, correct?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP of Finance [29]
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That would be some of the elements I referred to in a transaction like a Kohls transaction or a Target US transaction.
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Brian Morrison, TD Securities - Analyst [30]
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Right. So Dean, what is the book value of the credit card portfolio? Can you share that with us?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP of Finance [31]
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I think you can figure that out, so if I can figure it out, you can figure it out. But it's roughly speaking, I think, around CAD700 million of equity in that business.
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Brian Morrison, TD Securities - Analyst [32]
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Fair enough.
And then in terms of available portfolios, I assume there is very few such as yours that are available today. Is that correct?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP of Finance [33]
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I think there's five of us -- five retailers in North America that still have a similar approach to their Financial Services business as well.
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Brian Morrison, TD Securities - Analyst [34]
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Okay. Just turning gears here for a second. Clearly Sport Chek, FGL, are performing very well. I think the plan was to bring on 2 million square feet, evenly distributed, over five years. With how well you are doing, are there any plans here to accelerate this, based on your success? And in terms of the synergies achieved to date, where do we stand on that front?
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Michael Medline, Canadian Tire Corporation Ltd - President of FGL Sports and Mark's & EVP, CTC [35]
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It's Michael. I can take your question, Brian.
First of all, on the synergies -- yes, we've achieved over CAD30 million of synergies, and we had said we would achieve -- our goal was CAD25 million of synergies, so we've exceeded that number. And as we go forward, we continue to look for synergies, but now it's mostly in terms of operating the business.
In terms of accelerating our growth plans, this is a very aggressive growth plan, with growing Sport Chek by 50% over those five years. We are making great progress with a very strong real estate team we have here at Canadian Tire to find very good real estate for the new stores going on. We especially have room to grow in Ontario and urban markets. So as we go forward, we'll continue to look to see whether we can speed that up and get those stores in the market quickly, because we are performing well. But 2 million square feet in five years is a lot of square feet, so right now we're still on that plan.
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Brian Morrison, TD Securities - Analyst [36]
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Understand. Just one last small question as well.
Can you just give us the status of Pro Hockey Life? I realize it's tiny, but it's been delayed a great deal here, it seems.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [37]
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Yes, it's ongoing, I must admit, and we would like to have completely wrapped up the transaction before this. But it's ongoing, and I remain very optimistic about it.
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Brian Morrison, TD Securities - Analyst [38]
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Great quarter.
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Operator [39]
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Mark Petrie, CIBC,
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Mark Petrie, CIBC World Markets - Analyst [40]
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I just wanted to follow up on a couple of the topics that have already been discussed.
Mary, on the Financial Services -- consumer bankruptcies did tick up a little bit in April, although back down in May. What's the outlook on credit losses and allowance rate and all that kind of stuff?
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Mary Turner, Canadian Tire Corporation Ltd - COO of Canadian Tire Financial Services [41]
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I'm looking at Dean. I'm never sure how to answer these questions.
So I think we're feeling quite optimistic about the go-forward on our write-offs. We track to the national performance on insolvencies and we see that they're still folding in quite nicely compared to last year.
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Mark Petrie, CIBC World Markets - Analyst [42]
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Okay. And Mike, back on the FGL -- great same-store sales numbers.
Can you talk a bit about, as was commented on in the overall retail portfolio, comment on the balance of sales and margin? And wondering if there are specific categories within FGL that you feel like there's a real opportunity for you to be gaining market share?
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Michael Medline, Canadian Tire Corporation Ltd - President of FGL Sports and Mark's & EVP, CTC [43]
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Yes. To comment on Q2 in terms of what we saw -- we saw strength across equipment, across apparel, and in footwear. So we've seen, over the last two years, strength in all of them. I'd say we still have room to grow in all of them, but apparel seems to be the place where we have maybe even more room. As we continue to improve our brand image out there, as our -- I think we have very good store Ops right now in customer service in the store. And as we do that, we're attracting more and more brands that we weren't able to attract before. So you saw in the last quarter, if you were in our store, that we now have Roxy in the store, we have Quiksilver in the store. So that is, I think, an area where it may grow faster than the other areas as we go forward, but I see strength in all of it.
And also as we go forward, we're seeing very good growth, albeit right now off a small base, in our online business. E-Commerce is somewhere where we're really targeting over the next year, 1.5 years, to grow that business. And so we have very aggressive plans that we're going to be putting forward. And I think you'll see the results of that in late 2014 as we roll out a new online platform.
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Mark Petrie, CIBC World Markets - Analyst [44]
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Great. And just a comment -- if you could comment on the balance of sales and margin in FGL? And clearly you're prioritizing sales at this point. Is that going to be the thrust as you look forward 18 to 24 months?
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Michael Medline, Canadian Tire Corporation Ltd - President of FGL Sports and Mark's & EVP, CTC [45]
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No. We haven't made any trade-offs in 2013. We have made no trade-offs between sales and margin. Our margins are being very steady in 2013, and our sales have not been, because we have not bought any sales. In fact, I would say our discounting is actually down, and any move in our margin is mostly to do with product mix due to weather. So are we seeing margins stay extremely steady, and the sales have been on everyday products, not because of our clearance.
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Mark Petrie, CIBC World Markets - Analyst [46]
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Okay. Great. And one last question -- in terms of the retail inventory within CTR, both for you guys and for the dealers -- how does that look coming out of spring?
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Allan MacDonald, Canadian Tire Corporation Ltd - COO of Canadian Tire Retail [47]
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Mark, it's Allan MacDonald here.
We're really pleased with where we are. We've been -- it was an interesting second quarter in terms of balance of weather. We saw wet weather, dry weather. And for us, strong performance across the board both in seasonal and non-seasonal categories meant we were left with a very good inventory position at the end of the quarter, so we're quite pleased with where we are.
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Operator [48]
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David Hartley, Credit Suisse,
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David Hartley, Credit Suisse - Analyst [49]
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I just want to ask you a little bit about advertising costs. They've been elevated the last quarter or two. And it seems to be, you've got a lot of announcements around the Olympics and key relationships out there. Do you see that trending down as the year goes on, or do we see that happen in 2014, if at all?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [50]
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I think overall, as far as trending is concerned, we have been positioning ourselves for third and fourth quarter of this year to ensure that we maintain our market position. So I think that's extremely important -- that we get across our brand attributes and why customers should continue to shop throughout the whole CTC family. Now, there were some timing issues related to some of our marketing expenditures in terms of them moving into the second quarter. But overall, that's the expense category, that if the team comes back and asks for a little bit more, that I think -- I haven't cleared this with Dean yet -- but I think we get some more money for.
And looking at the cash generation per share, looking at how we're doing on the top line, increasing our margin -- our margin growth is where I like to see our aspirational targets to be in retail for this quarter. I think that's exceptional. If the team needs some extra funds for great marketing efforts, which I believe that we're actually executing on extremely well, then they'll get it.
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David Hartley, Credit Suisse - Analyst [51]
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Okay. And with that question, obviously, Target is opening stores in various parts of the country. Could you talk a little bit about how or what the impact has been that you've seen in stores close to your stores? In particular, the Canadian Tire flagship?
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Allan MacDonald, Canadian Tire Corporation Ltd - COO of Canadian Tire Retail [52]
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Yes. It's Allan here, Mark.
Yes. With the opening of the Target stores, of course, you see an increase in activity across the board. The good news is that the work that we've done re-invigorating the brand, as Stephen just talked about, and the roll-out of our living strategy has, for the most part, minimized any impact from the new Target openings.
That being said, it's early days. So we're being cautious, and we're watching it very closely. But at this point there was a negligible impact.
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David Hartley, Credit Suisse - Analyst [53]
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Okay. That's helpful.
And just last question, if I may, on the talk about loads and loads of cash here, potentially, going forward. How do you feel, even independent of that, about potential acquisitions? I think in the past, we've talked a little bit about extending your strengths in key product areas that you compete in today. Could you talk a little bit about that?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [54]
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Yes. I think that, if you go back to the acquisition announcement around the Forzani acquisition, this is what we outlined to everybody -- that there are areas that we can expand in. But even more importantly, the brand -- the triangle, and the brands associated with the triangle -- have to become stronger. And any acquisition has to strengthen the offering of the family in terms of life in Canada.
I think that it was clearly evident with the FGL acquisition that, that's where our heads were. And if you see how much, I believe, that it has actually positively affected the perception of our brand, the triangle, the building of its own super brand, which I know they're doing, I think from all accounts it's been extremely positive. It shows that the family of companies are on the move; that we're staying on offense; that we're aggressive; and that we can capture the market.
So from those aspects, that's the most important part of an acquisition strategy -- is to continue to build the brand. And obviously to be in an area that we know extremely well. So the consideration of any other companies that we would ever consider to buy or to invest in would have to have those criteria behind them.
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David Hartley, Credit Suisse - Analyst [55]
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And so when you talk about tip of the iceberg with Financial Services/loyalty, et cetera, is that what you're getting at? That's where the upside resides? Or do you see something beyond that?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [56]
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I think it resides -- yes. In that particular one, I was being more specific to how Mary views her offerings in terms of the support to drive increased top line sales in retail in addition to all her Home Services offerings, and every way that she's looking at her business. Binding the brands together is something also that I wasn't necessarily referencing that in my comment. But I think Mary would say that, that would be the strength of the value proposition of her cart and her offerings going forward.
So stay tuned, as she's got some exciting things going on. But that's what will bind the family together and take our customer links together, which is why I want to get this loyalty program out nationally, because we're going to be able to bind our high-value customers together in a way we've never been able to do it before.
But anyway, you're bang on. That's the right approach, yes.
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David Hartley, Credit Suisse - Analyst [57]
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Okay.
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Operator [58]
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Keith Howlett, Desjardins Capital Markets.
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Keith Howlett, Desjardins Capital Markets - Analyst [59]
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On the credit card proposal or initiative, what would you estimate that the financial partner's funding costs would be relative to your own? How much lower their cost would be to your cost?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP of Finance [60]
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Keith it's Dean.
I can't answer that. It would just be a wild guess on my part. I have a guess, but it would be a wild guess, but you could figure that out as well as I can figure that out.
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Keith Howlett, Desjardins Capital Markets - Analyst [61]
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I'm sure your guess would be a lot better than mine.
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP of Finance [62]
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We haven't talked to folks yet, so we need to work through that. But we fund at a very good rate. It is conceivable -- it is fully conceivable -- that somebody who's in the business of funding would have an opportunity, potentially, to fund it at a cheaper rate than us. But I'm not going to give you a figure.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [63]
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Entering negotiations, though, Dean, it would be fair to say that we would expect a financial partner would fund considerably less than us.
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP of Finance [64]
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Right.
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Keith Howlett, Desjardins Capital Markets - Analyst [65]
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Thought I'd give you a chance to get that out.
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Keith Howlett, Desjardins Capital Markets - Analyst [66]
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In terms of the marketing spending -- when we hit 2014, are we at a new level of marketing spending? Or is it possible it might go down?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [67]
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No, I wouldn't say that, Keith. I think what we're very much attempting to do, and I think we've been quite successful, in fact, in doing it, that Dean has outlined a number of times on a number of calls, where his expectations are in terms of the growth of our operating expenses in relation to our revenue. And it's never a great formula to have your operating expenses growing in a faster rate than your top line.
So that's the mandate that the CFO's office has put on us. Within that, if there's opportunity to strengthen the brand, grow revenue, and grow trackable margin, then some money would be released. But it's released only based on really focused efforts here.
This year -- a bit of an anomaly, because we did take quite a giant leap within the sports arena, but a variation on our marketing. We're not talking a great deal of money when you look at the increased spend in the quarter, really, when you look at our total operating expenses. So I don't think it's a new norm. But I do believe that you're going to have to market hard and market well in this competitive environment.
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP of Finance [68]
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And we try to look at, Keith, in the overall basket of OpEx, as Stephen says. It's a great problem to allocate more to marketing as long as you're dealing with the rest of the nut at the same time and controlling that overall growth.
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Keith Howlett, Desjardins Capital Markets - Analyst [69]
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In terms of the digital initiative, is that a large one-time expense? Or is that really an ongoing expense, just part of the business now?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [70]
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I would see it as part of the business. I know we're doing an awful lot now, but I think the world of retail is in digital, and it's inseparable. I think you have to mention both words in almost every sentence. One digital investment gives you the opportunity to see where others should be made to strengthen your business.
And I also think, Keith, that the money that we want to extract from the operating base of our operations is going to be digitally-based. It's going to be technology investments as well. I think Michael Medline was hinting at that. Given the proper tools in place, he can drive his online business like crazy; and I think Harry Taylor would tell you the same. So now -- it's part of our world now for foreseeable -- forever.
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Keith Howlett, Desjardins Capital Markets - Analyst [71]
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And on the Target impact -- are there any Mark's that are nearby a Target that you've had a chance to see if there's any noticeable impact?
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Harry Taylor, Canadian Tire Corporation Ltd - COO of Mark's [72]
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Keith, it's Harry Taylor.
We have -- we're watching those closely. We have 40-some-what stores that are within the catchment area, and we're having zero impact so far. As Allan mentioned, it's early days, so we're not going to declare victory. There are two that look like they may have been negatively impacted, but the bulk of them are either neutral or positive to how they were performing before the Target opened.
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Keith Howlett, Desjardins Capital Markets - Analyst [73]
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Great.
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Operator [74]
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Chris Li, Bank of America Merrill Lynch.
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Chris Li, BofA Merrill Lynch - Analyst [75]
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In the performance in automotive -- as you know, has been quite volatile in the past and you had a very good quarter. How confident are you that the strong performance is sustainable for the remainder of the year?
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Allan MacDonald, Canadian Tire Corporation Ltd - COO of Canadian Tire Retail [76]
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Hi, Chris, it's Allan.
The automotive business turnaround, I think -- and it's probably early days to call it a turnaround. But as Stephen mentioned in his comments, we worked on some pretty fundamental things that were projects over the course of the last couple of years -- addressing customer issues, the implementation of AI, getting our inventory right, quality -- you name it. And I think the sum total of that has meant that we're still a very reliable, and in fact a leading, I believe, destination for Canadians for their automotive needs. Which effectively, I would characterize, as being open for business.
The conditions in the second quarter were really conducive to automotive sales, so when Canadians turn to their vehicle needs, they look to Canadian Tire. And I think that what you're going to see on an ongoing basis is that, as the economy is there, and as the weather conditions are there, Canadian Tire is going to continue to be very strong. But we'll move with the weather, and how things go from a demand generation standpoint.
What we're not doing is gaining share by sacrificing margins. We're seeing still strong margin growth in automotive, and so we're very pleased. So in terms of forward looking, we're very pleased with where we are in terms of the minds of consumers, and as demand grows, so too will Canadian Tire.
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Chris Li, BofA Merrill Lynch - Analyst [77]
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Okay. And with respect to the FGL Sports, how far along are you in terms of finding real estate to house the new Sport Chek stores that you are planning over the next year or two?
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Michael Medline, Canadian Tire Corporation Ltd - President of FGL Sports and Mark's & EVP, CTC [78]
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It's Michael.
Obviously, '13, we had good success finding the real estate. We're always working one and two years ahead, so we are almost completely locked in -- I'd say 95% locked in on our real estate for 2014, and we're starting to lock in on 2015 as well. So I can respond with quite a lot of confidence in terms of being able to find the real estate we need.
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Chris Li, BofA Merrill Lynch - Analyst [79]
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Okay. That's great.
And maybe a quick one on Target. I apologize, I think you answered this already. But with respect to the impact, can you give us some insight into, for the Canadian Tire Retail stores, maybe, similar along the line how Harry answered the question on Mark's. How many stores were within the catchment area and what has been the experience on the Canadian Tire Retail store so far?
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Allan MacDonald, Canadian Tire Corporation Ltd - COO of Canadian Tire Retail [80]
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Yes. In terms of Target impact, there have been around about 60 Canadian Tire stores that have been impacted -- or that are in the catchment areas with Target. And similar to Harry, we've seen a negligible impact. The stores are continuing to perform as they have before the Target openings.
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Chris Li, BofA Merrill Lynch - Analyst [81]
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Okay. And this last question is, would you ever consider doing a stock split to improve the trading liquidity?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [82]
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We would never discount doing anything. We consider everything that would be beneficial. At the moment, though, I would admit it's not at the top of the list. We're too focused on operations here and growing the place. But I hear you.
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Chris Li, BofA Merrill Lynch - Analyst [83]
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Okay.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [84]
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Operator, we should take, say, two more calls, and then maybe call it a day, if we could.
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Operator [85]
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Vishal Shreedhar, National Bank.
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Vishal Shreedhar, National Bank Financial - Analyst [86]
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On the retail business -- obviously very strong gross margin performance, strong sales. However, for the last couple of quarters, call it EBT when you get down to that line -- negative, maybe flattish. For the balance of the year, given the view of investments that you've given us, is that the cadence that we should expect? Or could you provide us with some color on that?
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP of Finance [87]
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Vishal, we're not going to give you the forward-looking. I think what I would say is, you've heard what we said about managing our overall operating expenses, and subject to appropriate investments that we think are necessary in marketing. And obviously we're very pleased with what we've seen in top line and margin management by all of the retailers in the room. So that's as far as I would go. I'm not going to give you our forecast.
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Vishal Shreedhar, National Bank Financial - Analyst [88]
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Understood.
And another question on the credit card arrangement. Hopefully this doesn't fall in the realm of guidance, but Financial Services for the last several years has been a very strong contributor to growth for Canadian Tire, and I understand that potential arrangement might contemplate some sort of profit sharing arrangement between the partner. So as we look at this potential partnership, is the implication that retail will be a stronger driver for growth in the future? Is that the implication that investors should take away from this?
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [89]
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No. The retail is our primary business. It is the core of what CTC is all about. What Mary's business does, is supports our retail operations with financial products, if you will -- ability to pay, making life easier for our customers. And within that framework, on an allocated segmented basis, she does extremely well and makes a lot of money. And I think that's extremely beneficial.
So we would, as Dean highlighted, and if you reference some of the transactions that he did point you towards, we don't want to give up revenue streams and profit streams. Our objective here is that we could find a partner that would offer us some flexibility and -- in balance sheet requirements, et cetera. So that's not the objective of the exercise.
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Operator [90]
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Patricia Baker, Scotiabank.
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Patricia Baker, Scotiabank - Analyst [91]
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And Dean's going to be very happy to hear this -- my questions have been answered.
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Dean McCann, Canadian Tire Corporation Ltd - CFO & EVP of Finance [92]
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Great. Thank you, but I'm glad you got on the line. I didn't want to --
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Patricia Baker, Scotiabank - Analyst [93]
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No worries.
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Stephen Wetmore, Canadian Tire Corporation Ltd - President & CEO [94]
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That's great. Operator, we're pressed for time from our end, so I -- it's Stephen Wetmore speaking.
So I'd just like to say thank you to everyone for joining the call. We appreciate it very much, and appreciate the questions. And as usual, if anybody needs additional information, you know who to contact within the organization and we'll be pleased to address them. So thank you all from all of us. Good afternoon.
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Operator [95]
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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 Canadian Tire Corporation Limited's Investor Relations 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 call or the materials provided. This concludes today's conference call. You may now disconnect.
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