Canadian Tire Corporation, Limited at CIBC Retail & Consumer Conference
Mar 26, 2014 AM EDT
CTC.A.TO - Canadian Tire Corporation Ltd
Canadian Tire Corporation, Limited at CIBC Retail & Consumer Conference
Mar 26, 2014 / 12:45PM GMT
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Corporate Participants
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* Michael Medline
Canadian Tire Corporation, Limited - President
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Conference Call Participants
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* Mark Petrie
CIBC World Markets - Analyst
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Presentation
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Mark Petrie, CIBC World Markets - Analyst [1]
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Okay, we're going to keep moving here. Good morning and welcome to the retail and consumer conference. For those that I haven't met, my name is Mark Petrie, and along with Perry, cover the consumer and retail space here at CIBC.
As Perry highlighted earlier, 2013 was a very dynamic year not only in terms of the competitive landscape, but also for the share prices. And I don't know that there is a company that exemplified that anymore then Canadian Tire, with the launch of their REIT, some very strong retail results, and of course a pretty dramatic rise -- a 43% increase in their share price.
Our presenter today is Michael Medline, the President of Canadian Tire. Michael has been with the Company for more than 13 years, and as an executive touched nearly every piece of the business: dealer relations, automotive, and also led the M&A strategy for both Mark's work warehouse and for FGL and provided leadership for that organization for the last number of years.
So with that unique perspective, I think Michael is a great presenter. And with that, we're just going to jump right into some Q&A.
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Questions and Answers
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Michael Medline, Canadian Tire Corporation, Limited - President [1]
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Thanks, Mark. Thanks everyone for being here.
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Mark Petrie, CIBC World Markets - Analyst [2]
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So Michael, I think the first topic we should probably touch on is FGL. And there's been some pretty remarkable sales results there. But for the growth strategy, I know you guys are pretty keen on adding square footage. Can you just talk about the strategy of those new stores and what those new stores are delivering that you don't think the old stores were fulfilling?
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Michael Medline, Canadian Tire Corporation, Limited - President [3]
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Yes, so we've owned -- we bought the Forzani Group in August 2011 and we had high hopes obviously for the division, and it's actually been better than we would've hoped. So as Mark alluded to when he was speaking, we've seen very strong results.
We have had 10 straight quarters positive comps. Last year, we had double digit comps in our main brand, which is Sport Chek. And at the same time, we were accomplishing synergies. We took over CAD30 million out of the costs in the organization.
So all in all, very pleased with it. But what we are especially pleased with is the runway of growth we have with FGL Sports. It is our fastest-growing business. It is the business where we can put up the most stores.
So we had a five-year plan to put up 50% more square footage in Sport Chek. And that's about 2 million square feet, and luckily we have a great real estate team that can find us this land. In fact, we are spending as much as we can and getting as much land as we can, because the results of the new stores have been so strong.
Sport Chek and the other banners at FGL Sports have historically been under-stored in Ontario, under-stored in urban markets, and especially the GTA. And so when I say that we have a five-year plan and we're now entering -- we're now in the middle of the third year of that five-year plan putting up these stores. It's only because we didn't look out further than five years. We have more room to put up stores than that.
What's really working for us is -- well, it's working on over the place, but our ability to try new things at Sport Chek which can be brought across our whole list of banners across Canadian Tire Corporation. So we have a lab store on Yonge Street near Eglinton. We just opened up about a month ago I would say the finest sporting goods store in the world in West Edmonton Mall. And if we have time I'll show a short clip of that later, where it is the most digital sporting goods store.
But it also allows us to highlight the great brands we have at Sport Chek. So this flagship store opened about a month ago. It is the best start to a store FGL has ever had in its history.
So we have a different demographic at FGL and that's why we can get more into the urban sites. It's younger, it's a wealthier demographic than most banners. It is digitally savvy. But what I really like, as we put up these stores and we grow this banner, is that we are taking learnings that we can try out at Sport Chek and take them to our other banners at FGL, but to Mark's and to Canadian Tire.
And I'll give you an example, so I'm not too general on it. So this quarter -- anybody who knows me knows I don't like fliers that much. I don't think they're very efficient. You can't be flexible. So we could have bathing suits on the flier this week which wouldn't do very well -- pray for spring.
So we tried something this quarter. We took a two-week flyer and we just pulled it. We just pulled the flyer and we spent the exact amount of money digitally, and we didn't just put the flyer in. We didn't just put the whole flyer in. We took each component of the flyer, and if you were searching on Google or Yahoo or wherever you were searching, different parts of that flyer would show up.
And I'm told I can't give exact numbers except to say that I am extremely happy with the results of those -- of that test. And of course that test we will test some more and that will spread across CTC.
In terms of being digital in-store, we can try new things like at Yonge Street West Edmonton Mall -- what we're doing to retrofit other stores and that will spread across the banners as well. So I think this has not only been a good acquisition obviously financially and culturally, it's been a great acquisition in terms of being able to try new things and spread it across CTC.
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Mark Petrie, CIBC World Markets - Analyst [4]
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And you touched on the test store at Yonge and Eg, and some of the new technologies you put in at the West Edmonton store and the cool toys. I've been up to the Yonge and Eg store and it's fun to play with some of those technologies. But can you just talk about how you believe it really serves the customer and how it improves the customer experience and actually drives sales?
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Michael Medline, Canadian Tire Corporation, Limited - President [5]
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So I'm less concerned about bricks and mortar competitors than I am about digital competitors. We know how to compete at Canadian Tire against the largest retailers in the world. We can be nimble.
We know what we're good at. We have a good brand in this country. We understand this country.
But I am concerned and we are concerned at Canadian Tire -- and five years ago, we started being very concerned about showrooming in the stores and stores becoming less exciting. And that you can sit on your couch and you can order a hockey stick and you don't have to go out. So, to be a good bricks and mortar retailer, you had to get better at certain things. You have to get better at online and you have to be way more exciting in-store.
And that doesn't always mean digital. You look at a Bass Pro Shop, you look at a Canadian Tire store: it's always digital that makes the difference. It can be a unique experience. It can be customer service which we ratcheted up.
But what we are seeing is that if a store has action in it, if you are giving more value than just people browsing, looking for the product, it is having a huge impact on how long they stay in the store, whether they buy a product online or in a store. And in terms of really connecting with your brand, the more action, the more connection they have with the staff, the more movement there is in terms of digital and more knowledge imparted to them, we're seeing extraordinary results.
So with the success of a West Edmonton Mall, which is 80,000 square feet, we're already talking yesterday how quickly can we get some of that technology into our other Hero stores at FGL? How do we spread that across?
So it really came from a feeling that shopping to a consumer is not separating things out. They don't separate the online experience out from the in-store experience. It's all just shopping. And I would say that the more we can be exciting in all aspects as we touch the customer, the better we will do and the better we are doing.
I will say that I think that our online experience is not where it needs to be. And so you're going to see a huge emphasis over the next 12 to 24 months across every banner at Canadian Tire Corporation, and getting online and the feel of it, the best in class feel of it.
And the brand feel has to be what is at the banners or in store. You can't be off on that. And I think our online experience, although we are growing online sales, is not where it needs to be.
And online, by the way, I think we'll do well in online. I think we'll make lots of money and sell things. I think the beauty for Canadian Tire, with 1700 sites across the country, it's not just making money online. It's when you go into a store, we don't have customers walking.
So if you need a particular running short from Nike in a certain color that we don't have in a store, we can get it for you next day. And I think the customers are going to get more and more used to that. And so there's a huge upside in terms of market share by being good in online. And as I said, I don't separate them. I just think of it as shopping.
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Mark Petrie, CIBC World Markets - Analyst [6]
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And it's clear that FGL has been the vehicle for you guys to sort of test some new things and be more aggressive in terms of online and e-commerce. It's been a little slower developing at CTR and the sort of core Canadian tire banner. Can you just talk about the strategy there, specifically for Canadian Tire, and some of the challenges in terms of execution?
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Michael Medline, Canadian Tire Corporation, Limited - President [7]
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In terms of online --
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Mark Petrie, CIBC World Markets - Analyst [8]
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Executing online at Canadian Tire.
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Michael Medline, Canadian Tire Corporation, Limited - President [9]
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Yes, so last couple of months we went back online with Canadian Tire and we are seeing good results. But I think what you're going to see in the next 12 to 24 months at Canadian Tire is we are going to lift that online experience quite a bit.
Right now, we have a great advantage over most retailers, which is we have almost total national reach, and that most Canadians live within 10 or 15 minutes of our stores. And so what we're doing now is that you can go online, you can see whether we have the inventory, and you can reserve that inventory and go in and have an assured shopping experience.
I think the site is okay. I think the experience is okay. But it needs to get better and better. What we're doing now is we're getting the bones of it, especially in the in-store pickup in the store right, before we go to that next level.
But the things that were trying in each division and each banner can then be translated to other banners. We're trying different things in different banners.
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Mark Petrie, CIBC World Markets - Analyst [10]
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And at Canadian Tire specifically, can you just talk about sort of the dealer model and their views on e-commerce, and the advantages or disadvantages of trying to execute an e-commerce strategy in that model versus the corporate stores of Sport Chek or Mark's?
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Michael Medline, Canadian Tire Corporation, Limited - President [11]
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Sure. So I've been -- as you pointed out, I've been around Canadian Tire quite a while. We've gone through our ups and downs in terms of our relationship with the dealers. I can tell you that the dealer relationship today is probably the best we've ever had in our history, and it's making all the difference in the world.
So then when we want to look at doing things in data or loyalty or online, working with our dealers now is a breeze compared to what it used to be. And they see the future. So there's more of an alignment between the dealers who are so important to us and who are really our frontline at Canadian Tire.
Does it take a little longer to get things done because you have to work with the dealers? Yes. But I think we don't give -- I don't think we've historically given our dealers enough credit for our success over 92 years.
I was in a meeting on paint. Paint is a big business for us in terms of our most loyal customers we found out through our data. Paint is very important to them.
So we had the meeting and we had dealers there. And you would never get the kind of feedback from an integrated retailer, from a store manager that we get from our dealers. It was an unbelievable meeting, where we were figuring out with our dealers how to improve the customer experience in an area like paint. So I'm just using paint as an example here.
So our dealers make us better. Now having integrated retailers like Mark's, where I think we have lots of growth, and FGL, we can do things in those integrated banners really quickly and test them, and go to the dealers and say here's what works, here's what doesn't work. So I think we have now almost the best of both worlds. So I'm very pleased with how that's going and the dealers aren't slowing us down in any respect at this point.
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Mark Petrie, CIBC World Markets - Analyst [12]
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And can you just talk a bit about the new dealer contract that you guys agreed to and sort of what changes -- broadly speaking obviously, what changes or improvements that brings the organization?
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Michael Medline, Canadian Tire Corporation, Limited - President [13]
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Sure. To go through our dealer contract would take probably the entire session you have today. So I'm not going to go through all of it. I will say that we're going to have an Investor Day in the fall, and all of you are invited, and that we're going to go through in more detail some of the aspects of that dealer contract because it's important.
Now, the contract's only the contract. It has nothing to do with the relationship. But what a difference it makes to have an 11-year deal with the individuals who touch our customers.
And so what this -- in broad strokes, it gives us the ability to be more flexible, to be more innovative in working with the dealers. But it also -- it says to the dealers, too, that there are certain standards that we expect and that dealers should expect across all their compatriots and that we expect from dealers much more clearly than it ever has before.
So I don't think it is world-changing in terms of the contract changes everything. But this very good contract -- the best we've ever had in place, lasting for at least 11 years, has changed the relationship. And we'll go through more detail on that in the fall.
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Mark Petrie, CIBC World Markets - Analyst [14]
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And I just wanted to come back to one comment you made around flyers and their role going forward and your view on flyers, and relate that back to your e-commerce strategy, because e-commerce is all about everyday low price. And at Canadian Tire, the flyer is a crucial part of what you guys offer and obviously a crucial factor in terms of driving traffic to the stores and very important for the dealers.
Can you just reconcile the high low positioning or strategy for Canadian Tire and the pricing positioning of online being sort of an EDLP type environment?
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Michael Medline, Canadian Tire Corporation, Limited - President [15]
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I do think that there is no flyer on earth that is more loved than our flyer at Canadian Tire. So that has its pros and cons, which is wow, that's amazing. We can drive business.
But you also heard me earlier say that the flyer is not exactly my preferred flexible tool going forward. Something for a while here -- I always say this is a weird time in retail. We're in the old world and we are in the New World. And we are going to -- you know where we are going to end up. We are going to end up in the New World.
But we've got to be very, very careful in terms of our flyer -- in terms of moving that along, in terms of working with our dealers, and bring our customers along. So I think we've got to get way better at Canadian Tire digitally while not losing that unbelievable strategic advantage we have in our paper flyer. Yes, it's not that flexible, but it works.
I don't see a problem with EDLP or high low in terms of going digital. I think what we're trying in FGL, and what you're going to see in Sport Chek in the next year, is going to show that. I don't see that problem whatsoever.
I think that we can take the best aspects of what we do in a flyer and make them way more exciting, give way more content, and we can be a high low retailer or any ELP online. I don't think that's an issue.
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Mark Petrie, CIBC World Markets - Analyst [16]
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Okay. So clearly, FGL has been a big success for you guys. You've been very successful with your new sponsorships around the Olympics and everything else around sports in the country, but I still see automotive as the single biggest opportunity for Canadian Tire, as it is an underutilized asset, and I would say in that space, an under-leveraged brand. What do you think are the biggest opportunities for you in automotive?
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Michael Medline, Canadian Tire Corporation, Limited - President [17]
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Automotive -- not everyone knows our Company as well. Automotive is our biggest category and it's our highest margin category. So it's a very, very important business to us.
But even more than its size, it is really what differentiates Canadian Tire from many of our large competitors. So you've got to look around the world. There's nothing like Canadian Tire. You bring someone from Europe over to see Canadian Tire, they can't fathom it. It's grown up in Canada and we get it. But to have automotive and such a big presence in automotive in our store is absolutely important to us.
We took our eye off the ball for a number of years in automotive because we took it for granted. We had number one market share in accessories and parts and tires and service. And so when we faced the first wave of US retailers coming up, we invested in our fixing businesses, but especially our living businesses and our playing businesses and our seasonal. And we didn't put enough money and effort and expertise into our automotive business.
And five years ago, when I went in to run the automotive business, it was clear that everywhere we looked other than accessories, that we had a model that was not working and it was broken. We didn't have the right systems, the right distribution, we didn't have the right parts in the right stores, we didn't have the right tires, and the service and service base was not up to what our branches stand for.
And that was sort of five years ago, four years ago. We started to hit bottom. We've been coming off what I called the bottom since then and it's taken a lot of effort and it's taken investment.
And we're through the heavy investment in automotive, which was mostly on the system side. So we had to put in a whole new system in the store where we touched the customer. We were using green screens in automotive. We now have best in class technology.
We now have a distribution system that is way better, not exactly where we'd like it, but we are getting there. And we brought the service up. And our scores in automotive in terms of customer service, and we track this obviously monthly, have gone through the roof.
But the issue to me is I still don't think we're getting the market share that we can get in automotive. And this is not a mature business for us. But with what we've put in, in terms of infrastructure, the change management we've gone through, 40% of the people who worked in our service base at the front counter had to turn over. They couldn't get used to the system of being able to serve customers with more information, more data. And so we had a little bit of a blip there for about six months, a lot of turnover, but we came out of that much stronger.
We've had -- in 2013, we saw the best automotive results we'd had in at least five, six, seven years at Canadian Tire. So we've seen an upswing in that business. And now the trick to us is get that even better -- get that upswing stronger which I think will do this year.
And where else in our Company do we have an automotive issue? And it's not going to be as expensive. It's not going to be as systems driven. But I can tell you that when we look at our fixing business, and you can break that down -- it's paints, home repair, and tools. It is not where we want that business. Playing sports, which is dear to my heart, it's not where I would like that to be.
And some of this is you get into the mood of being a general merchant. So when you classify us -- everybody in this room, you think of us as a general merchant. And that's okay, we have a lot of different categories, I agree. We're probably a general merchant.
But the day start thinking like a general merchant, you're in trouble. And that's what we started doing with automotive, and I think we're in danger of doing it in our fixing business but we are now fixing that. And so we're getting to be more of a specialty retailer under one roof.
And what does that mean? It means things like bringing in the best talent in the world to run these businesses. Not everyone can run automotive. So we just brought in a guy, Mike Broderick, who has huge leadership experience at AutoZone and General Parts. He was CEO at Federal-Mogul.
He just came in a couple of months ago to run our automotive business. He's going to take that business up, because what happens when you get someone like that, they say look, we've got to be better here. We need a better person here, we've got to be more specialized here, and by the way, I know how to bring customer service up in our base.
And we've done that in our fixing business. We just brought in one of our best merchants from Sport Chek to run sports at Canadian Tire. And we're doing it across the business.
We have to think more like a specialty retailer under this big roof of a general merchant. So long answer, but I get excited about some of these things.
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Mark Petrie, CIBC World Markets - Analyst [18]
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I think that sort of segues to the other big topic that I wanted to make sure we cover, which is deployment of cash and capital allocation. Obviously you guys have taken some pretty big steps over the last year in terms of the REIT and a potential Financial Services deal to get those credit card receivables carved out. And it leaves the Corporation with a very clean balance sheet and a lot of capital to allocate.
Can you talk about the strategy for that capital, particularly as it relates to potential M&A? And then bringing that back to your comments about approaching the business as more of a specialty retailer, the categories where you feel like there could be opportunities?
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Michael Medline, Canadian Tire Corporation, Limited - President [19]
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Well, I'm going to start with the last part first, which is I obviously think that our fixing business, which isn't broken. It's always trendy to say fixed means broken. It's not broken. But it's not growing as fast as the rest of Canadian Tire.
And we're working with our dealers and we're working with the people we brought in to get those businesses back up. And I'm not going to go into details, because I don't want to give away our game plan.
Our sports business at Canadian Tire is now going to ratchet up as we bring the learnings in from FGL. That's certainly clear. Those will be to businesses I think you're going to see a lot of movement in the next 12 to 24 months, positive movement.
We are -- we have the great problem of being cash positive. We have a lot of cash being generated from our core business, and actually from our other businesses as well. But Canadian Tire is in a good shape.
Our real estate is strong. We're going to put up new stores and we'll expand and we'll relocate, but we're not in the situation we might have been five or 10 years ago where we weren't covering the country or we did have the right size stores. So we don't have to spend a ton of money.
The key to Canadian Tire Retail -- Canadian Tire, is to get more to those boxes. We've got right-sized boxes, let's get more out of them. And that's what you'll hear us do, get better return out of that box. And that's what we're emphasizing right now.
At the same time you are right, we have cash. We've done a successful REIT. The CEO of the REIT is Ken Silver sitting over there. He also negotiated our dealer contracts, so he's multifaceted. And so we are exposing value in our Company.
So let me talk about, first of all, the cash and how we think about the cash that we're generating and what will do with it, and then talk maybe about valuation of our Company. So the cash -- there aren't that many uses of cash in this world.
We can -- we're going to invest in our core businesses, that's clear. But there's only so much we need to invest in those core businesses. That doesn't take up all our cash.
You have seen us consistently up our dividend. 10 years ago I think was CAD0.40. It's now CAD1.75. Nine of the last 10 years, we raised our dividend. So we're using our cash to return to shareholders in forms of dividend.
Last year, we said that we would purchase over CAD100 million of shares back, do a share repurchase. We did that. We have also said that we would like to do that and intend to do that this year as well, so share buyback is going to be part of it.
We have a good balance sheet and we'll continue to take care of that balance sheet.
But we're also looking at acquisitions and we'll continue to do that. We are extremely choosy. We don't do a lot of acquisitions. We did Mark's in 2002; we bought Mark's for CAD116 million, we're pleased with that. 2.5 years ago, three years ago, we purchased Forzani Group. We're pleased with that. And we will look at acquisitions that fit us.
There is no compunction to do acquisitions; nothing worse than a bad acquisition. But we will do it in a heritage business I believe. So what is a heritage business for us? It's automotive, it's sports. Think about it like that.
We don't bet the farm. We look for acquisitions where they're strong companies. So they already have good cash flow growth. There's nothing completely broken, but we see a huge opportunity to grow them. You could see that in what we did at Mark's and the capabilities that we brought to bear on Forzani.
So we believe that a balanced approach to cash -- people just call it excess cash, but that's not quite right. It's cash. A balanced approach is the right way to do it. And in forms of dividends and share buybacks, that's the right way to do it, while also investing in our core business and being very choosy in terms of inorganic growth.
Now in terms of the value of the Company, and I wish I had a dollar for every time some company came to you guys and said they were undervalued. Everyone must say it. But I think over done in the last while is uncovered some value that we knew was there, but I don't think it was completely recognized.
So we trade with a market cap today of CAD8 billion. So we just did a REIT, and if you look at that REIT, we value our real estate that we vended in at about CAD3.5 billion approximately. I think I'm being a bit conservative. We haven't vended in all our real estate yet.
So let's say -- Mark, you can do the math better than I can probably. CAD3.5 billion, CAD4 billion, let's even be conservative in terms of real estate. We have announced that we intend to do something strategic with our financial services business. That business, Mark, can tell you with the value that it is.
When you break down those -- when you put just those two things in and the cash on our balance sheet, we're not trading at a very high multiple on our retail business. Our retail business is very, very cheap. So even though we have been hitting high share prices and you pointed out we're up 43%, 43% last year, I'm not sure that's the way to look at the stock price.
The sum of the parts for Canadian Tire, we believe will prove out that the stock price, even though it's touching a high, is nowhere near where it should be. But that's up to us to keep putting up the results. The best thing we can do quarter after quarter, keep putting up those results, keep strengthening our brand, and that's what we're up to.
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Mark Petrie, CIBC World Markets - Analyst [20]
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Well, thanks for getting your view on the share price on the record and we'll let these guys decide what happens from here. Michael, thanks a lot for your time. Really appreciate it.
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Michael Medline, Canadian Tire Corporation, Limited - President [21]
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We have a two-minute video because I talked about West Edmonton Mall. Not everyone gets to Edmonton every day. But I wouldn't mind if we just ran the video and you got a little bit of a taste of what this store is actually about.
Thank you very much, Mark. Thanks guys. (video playing)
This store is the culmination of a dream. We set out three years ago to rebrand Sport Chek: your better starts here. And this store shows that. It combines the best brands in sports with digital, with the best customer experience in the world. And this is our first flagship store.
We're going to be building these stores across the country. We believe we can put 10 or 12 flagships across Canada. And we can take elements of this store and retrofit our current stores and each new store build.
We're trying to excite our customers, make them more excited about sports. Get the more active, get them more healthy, and allow them to experience sports in the best retail atmosphere. (video playing)
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Mark Petrie, CIBC World Markets - Analyst [22]
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Thanks, Michael.
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Michael Medline, Canadian Tire Corporation, Limited - President [23]
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Thanks.
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